Ardmore Shipping Corporation (ASC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Third Quarter 2022 Earnings Conference Call. Today's call is being recorded and an audio webcast and presentation are available on the Investor Relations section of the company's website, ardmoreshipping.com. [Operator Instructions] At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Thank you. Good morning, and welcome to Ardmore Shipping's Third Quarter 2022 Earnings Call. First, let me welcome our new CFO, Bart Kelleher, to the Ardmore team and wish him all the best on his first earnings call and, of course, ask him to describe the format for the call and discuss forward-looking statements.

Thanks, Tony, and welcome, everyone. It's great to be here. Before we begin our conference call, I'd like to direct all participants to our website, ardmoreshipping.com, where you'll find a link to this morning's third quarter 2022 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and open up the call to questions. Turning to Slide 2. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2022 earnings release, which is available on our website. And now I'd like to turn the call back over to Tony.

Thank you, Bart. So in terms of the format of today's call, I will discuss highlights for the quarter, market outlook and changes to our capital allocation policy. After which Bart will provide an update on fundamentals and financial performance, and then I'll conclude the presentation and open up the call for questions. So turning first to Slide 4. Product and chemical tanker markets remain at elevated levels, driving Ardmore's adjusted earnings to $61.6 million or $1.59 per share for the third quarter, which represents an annualized book ROE of 59%. Our MRs earned $47,000 per day for the third quarter, up from 31,000 last quarter and are running at $45,000 per day for the fourth quarter so far with 40% booked. Our chemical tankers on a capital adjusted basis earned $35,000 per day for the third quarter, up from $22,000 last quarter and are running at $36,000 per day for the fourth quarter with now 50% booked. These rates suggest that our strong earnings in the third quarter are continuing well into the fourth quarter, and we believe could strengthen further this winter as the market tightens. Consistent with the company's capital allocation policy, we're pleased to announce the initiation of a quarterly cash dividend with effect from the fourth quarter. The dividend payment will be 1/3 of adjusted earnings, so that if the fourth quarter continues at similar levels to what we so far based on our stock price in recent days. these volatile but elevated market conditions, Ardmore is benefiting from strategic focus and optimization of its spot trading performance, including taking advantage of the overlap between products and chemicals. We're also seeing very clearly the result of the operating leverage embedded in our business, where every $10,000 a day increase in rates resulted in another $2.40 in earnings per share. Moving to Slide 5. The outlook for product and chemical tankers remains positive in a tightly balanced market. The Russia Ukraine war continues to cause dislocation and upside volatility as well as what we believe is a more persistent reordering of global product trade. As the most recent example of this reordering, Europe plans to replace a further 1 million barrels a day of Russian refined product imports prior to February 5 of next year as part of the EU oil embargo. This is in addition to the ban on crude, which takes effect just 1 month from now. Industry analysts estimate that this could equate to a potential 7% to 8% increase in global product tanker demand, which, in our view, would be a game changer for our markets. The next point to make is that the seasonally strong winter market typically commences in late November when weather delays and increased refined product consumption adds another layer to underlying demand this year in addition to an already tight market. On top of this, global refined product inventory levels are currently very low, most notably U.S. and European diesel stocks, which will require Europe to import from regions further away, thus extending voyage durations and increasing ton mile demand. Chemical tankers have naturally lagged MRs as is typical in a rising market, but are now catching up, and demand is expected to remain similarly robust for the rest of the fourth quarter and into 2023. We -- so although there are macro headwinds and recessionary concerns for next year, we believe they're currently being outweighed by these positive demand factors. And a final but important note, even at today's elevated freight levels, shipping costs remain well under 10% of the underlying cargo value that we transport, creating substantial headroom for further rate increases without the risk of demand destruction. Moving on to Slide 6. Our capital allocation policy was introduced in March 2020 with the objective of building long-term shareholder value through the cycle. As a consequence of improved market conditions, we can now pursue our objective simultaneously, which were previously considered ranked priorities. These objectives being maintaining the fleet over time, reducing and now sustaining our leverage below 40%, growing accretively and returning capital to shareholders. In terms of growth prospects, we continue to develop and evaluate potential transactions, but we remain committed to approaching this in a patient and disciplined manner. And as mentioned at the beginning, we're pleased to announce the initiation of a cash dividend with the fourth quarter, consistent with our capital allocation policy. And on that note, I'll hand the call back over to Bart.

Thanks, Tony. Building upon Tony's comments on the market outlook, we will examine the industry fundamentals. Overall, the supply-demand dynamics remain highly favorable. On Slide 8, we highlight the strong demand outlook for product and chemical tankers. On the oil consumption front, the IEA forecasts an overall increase of 1.7 million barrels a day for next year. And the supportive trend for ton miles is anticipated to remain strong with continued growth in export-oriented refinery capacity in both the Middle East and Asia, along with refinery closures in the West. As discussed, the additional demand as a result of the dislocation of trade caused by the Russian-Ukraine war is unlikely to change in the near term. And in addition, chemical tanker demand is also accelerating, similarly bolstered by new plants opening in Asia as well as expanding edible oil trade flows and the recovery of Chinese economy. While historically, product tanker demand has grown 3% to 4% annually over the long term, demand is estimated to have grown approximately 7% in 2022 compared to the pre-COVID levels in 2019. -- but on top of this 7% growth, an incremental 7% to 8% ton-mile growth is possible as a result of the EU oil embargo. We should start experiencing this uptick at the end of this year and is likely to be persistent. Turning to the supply side on Slide 9. The supply outlook remains very favorable and the robust demand levels we have discussed are expected to exceed supply for the coming years. Estimated average net fleet growth for the next 2 years is very low for both product tankers and chemical tankers. And order books remain at record low levels of 5% of the existing fleet. New ordering activity is expected to be subdued due to the very limited birth availability until at least 2025 and the continued lack clarity on emissions regulations and propulsion technology as dampening speculative ordering. While a resurgent market is slowing scrapping in the near term, an aging fleet will ultimately drive scrapping levels to increase. With this, it is important to point out that currently 9% of the product tanker fleet and 13% of the chemical tanker fleet are over 20 years of age. Moving to Slide 11. We continue to invest in the fleet and optimize performance. On the one hand, we've been buying back leased vessels. And on the other hand, we've been selling older tonnage to take advantage of the strong S&P market, while at the same time chartering the ships back at favorable rates. And here, you can see our statutory dry dock schedule for the fourth quarter and next year, which also gives Ardmore the opportunity to engage in retrofits to increase operating performance and fuel efficiency. Turning to Slide 12 for financial highlights. As you can see again on this page, the company is really pleased with the results this quarter, obviously, a function of the high market, but also all the hard work that has gone into building durable performance, which we believe will continue to pay off as this market gathers momentum through the winter and into next year. As noted on the slide, we are reporting strong EBITDA in the quarter and continue framing EBITDA as an important metric to compare our results to IFRS peers. I would encourage everyone to review the full reconciliation presented in the appendix on Slide 19. We Other notable items from this quarter include the previously mentioned sale and time charter back of our older 3 vessels has led to reduction in vessel operating expenses and favorable time charter-in levels at about $13,000 a day. On the back of our previously announced refinancings, we had a one-off reduction in interest expense during the quarter from unrealized gains in interest rate hedging. For indicative guidance for the fourth quarter, we've included a detailed slide in the appendix on Page 22. And just emphasizing the benefits of the recent refinancing, guidance for interest expense is expected to come in at $3 million in the fourth quarter. As a result of the improved terms from our refinancings, flexibility provided by our large revolving credit facility and the benefit gained from our interest rate swaps. -- and turning now to Slide 13. This highlights the robust markets that we're in. As we continue to see strength in the fourth quarter already in advance of the typical winter uptick and the forthcoming EU oil embargo. In addition, as discussed earlier, TCEs from chemical tankers are also improving. On Slide 14, we're highlighting our significant operating leverage, and this slide intentionally looks different than it has in the past, but it is reflective of the robust markets we are experiencing today, particularly as we enter the seasonally strong winter market and also anticipate the large uptick is the EU oil embargo takes effect. Similar to other industry participants, we've already seen a number of fixtures in excess of $100,000 per day over the past few months. Moving to Slide 15. Ardmore continues to build upon its strong financial position. Net leverage at the end of September stood at 34%. And we have a very strong liquidity position of over $190 million, $50 million of cash and $140 million of undrawn revolving facilities. All refinancings are now completed and have supported a reduction of cash breakeven levels to around $14,500 per day. We utilized our ATM selling 2.3 million shares and raising $21 million in net proceeds during the third quarter to build further financial strength, thus completing our ATM issuance for the foreseeable future. Among other things, raising these funds when we did was instrumental in accelerating the refinancing process in getting favorable terms, which substantially lowers our interest expense and break-evens going forward. As always, the Arbor team is focused on optimizing performance on a relative as well as absolute basis and driving results in these elevated markets. We are also closely managing costs in this inflationary environment. And with this, I'd like to hand the call back over to Tony.

Thank you, Bart. So to sum up, product and chemical tanker rates continue at elevated levels, resulting in very strong operating returns. In the fourth quarter, earnings of $61.6 million and EPS of $1.59, equating to an annualized book ROE of 59%. And based on our stock price in recent days and annualized current earnings yield of about 47%. And so far, the fourth quarter is looking at same or even stronger levels. The unfolding energy crisis, including the incremental ton mile impact of the forthcoming EU oil embargo has the potential to continue boosting demand in an already tight market, which we expect will persist into 2023, essentially until geopolitical circumstances change. Meanwhile, underlying supply/demand fundamentals continue to look favorable given the strong demand drivers against a very low order book and limited birth availability for the next few years. In line with our capital allocation policy, we're announcing the initiation of a quarterly cash dividend commencing with the fourth quarter, representing 1/3 of adjusted income and expected to provide an initial annualized dividend yield of about 15%. So in summary then, after several tough years in which we've worked hard to preserve cash, control costs and maintain and even improve earnings upside for our shareholders, we're very pleased to now deliver significant value through our operating results, a return of capital in the form of cash dividends and strong total returns from a rising share price. And with that, we're pleased to open up the call for questions.

[Operator Instructions] The first question is from Jon Chappell with Evercore.

Tony, I think as people trying to understand the duration of what's been happening so far. And you've been trying to maybe poke holes in the sustainability of it. As we approach February 5 for the refined product sanctions, I think there's some views that there could be just a peer shortage of ships, which we've talked about the ton-mile benefits of it, but could potentially kind of crimp total exports and also potentially worse in a global diesel shortage. I know it's still several months away, and it's an evolving issue. But as you look to February and the ability of the product tanker fleet to move what needs to be moved at a very vital time for the economy, how do you kind of foresee shortages in the pros and maybe even a couple of potential cons to your business from that?

As always, Jon, a deep question. I guess, I haven't thought about it this way, but I'm a big believer in the overall efficiency of markets in this market as well. And I think pricing will allocate the resources appropriately to get product where it needs to go. So honestly, I can't imagine a situation where there's just simply a shortage of ship and you can't move cargo, but it might price out certain trades to allocate resources elsewhere. So I don't know if that's a proper answer.

Yes. I mean I don't think anybody...

So to me, those conditions sell sky high rates. And again, I just -- I think we've not had to think about these kind of scenarios for a long time in our business. But to me, it's where the elasticity of shipping rates to demand comes into play. I think rates could go very, very high.

Okay. That's helpful. Second question, maybe not as deep, but for Bart, to pull you in here, Ardmore has gone through a lot of defensive capital structure initiatives over the last couple of years and put the company in this place now where you can introduce something like the dividend policy you just rolled out. 1/3 of the earnings is certainly generous given the yield that we laid out. But that means there's 2/3 of record earnings still left and you're already at a situation where the leverage seems pretty sustainable through cycles. Is this the time where Ardmore maybe shifts to more of the aggressor and starts to add tonnage? Or because asset values have run so exceptionally strong, and there's really no new building clock available for the next couple of years, you look outside of that silo growth and look to do other things with the remaining cash flow.

Thanks, Jon. I think I'll kick this one off, and I'm sure Tony will add in color. Looking at the M&A or the vessel front, I think we always have been and will continue to be patient and take a disciplined approach. And we turn over a lot of stones. And frankly, there are a lot of deals that don't look so attractive today, and it has to be accretive and meet our requirements. But coming back to your initial part of the question on the dividend, we see it as one that's sustainable. We wanted it to be sustainable through the cycle, but also maintain resources so that we could meet our other capital allocation priorities simultaneously. And we always have room to further pay down debt. If we're in a really strong market for a prolonged period of time, we can also look at returning more capital. But I think we have the benefit that we can look at all of these capital allocation priorities simultaneously now. Tony, anything else?

No, I think that's good. I think we do have a substantial amount of further debt we could pay down. If we were to do that to a degree, we'd have capacity for significant growth. And then it's a matter of just being patient, getting the timing and right and finding the right opportunity. But to underscore Bart's point, I think we'd be very happy under these circumstances to return a lot more capital to shareholders.

The next question is from Turner Holm with Clarksons.

I wanted to ask about the 5 ships that you have taken in on time charter. Obviously, you managed to secure those in a very well-timed manner. But how long do those charters run? And how do you see the charter in position developing as we move into next year?

Yes, I'll just answer that briefly. So out of the 5, 3 are the vessels we sold and chartered back for 3 years at $13,000 a day. and that started 6 months ago. The other 2 are 1-year TCs that we've extended through options, and I think they're an average of like 15,000. So they have about a year ago.

Okay. And then just turning back to the sort of the fleet perspective. I guess asset values have now moved over eval parity, which is certainly understandable given where the rates are and the strong outlook. Is new builds? Is that something that you all would consider and given that you still -- I guess, as you've indicated, you're going to be distributing a lot of cash for dividends, but you'll have quite a lot left over. And how do you consider newbuilds at this point?

I don't want to state anything categorically because we do look at projects, for example, that might be a 10-year time charter business for vessel that's got a renewable type of fuel, feature to it, et cetera. But beyond that kind of thing, which so far hasn't materialized, it might be still pretty far away in the future. Just looking at the delivery dates and the pricing for new builds, it doesn't look right. And I think that's the broad consensus in the sector. So I think there's probably a bias against ordering what you order, when do they deliver very, very high price right now pushed up by other sectors.

Next question is from Benjamin Nolan with Stifel.

This is Macalla Rogers on for Ben today. I know you guys have given a lot of clarity on the capital allocation policy. So we just wanted to kind of just get just a little more color given the activity under the ATM program. Just maybe would you provide some insights on the capital needs using those proceeds for? I know you mentioned you stopped the issuance for the foreseeable future, but just maybe just a little extra color there, and that would be great.

Sure. Yes. So we've completed our program, as we said, for the foreseeable future. Our balance sheet is in excellent shape. One of the reasons why we decided to initiate the ATM for that period of time to raise about $40 million was because it allowed us to really accelerate the discussion with the banks and take out all of our lease debt. And I think we arguably got a head start of maybe 6 months. We had it all lined up, for example, in June, but it's actually taken just until last week to execute on the refinancing of the final sale leasebacks. And so arguably, in that period alone, we saved several million dollars and gotten very favorable rates at a time when I think the banks were particularly keen. So that -- I think that's just one facet to the value of doing what we did with the ATM, understanding that there are more shares in the share count now. But even looking at our returns on equity and yields compared to our peers, even with that additional issuance, we think we compare very favorably. So I think the final point I would make is that I think it's -- the move we made there is part and parcel of the larger -- kind of a broader approach to financial strategy, which you could argue is kind of put the company in the position it is today to generate the kind of returns that it has.

That's very helpful. And if we could just ask one more, given your strong liquidity position, we kind of wanted to ask about call rights for the preferreds. And if that is something you would consider down the line.

Yes. It's not no call for 3 years and then at par, I believe. So we're not quite there yet. That's a possibility. Of course, in a rising interest rate environment, the dividend rate there begins to look more and more attractive and it's very flexible capital. So I think there -- the headline rate looks a little bit expensive compared to everything else right now, but we still like it. But we do have rights to call in. It's perpetual, the rate remains the same, but we do have rights to call it in after 3 years.

[Operator Instructions] The next question is from Omar Nokta with Jefferies.

Tony, Hey Bart, nice to have you, Bart on the call today. I wanted to follow up on John's question about the next steps with the potential -- or potential next steps with your free cash flow, the remaining 2/3 that you have. And I think you guys are pretty clear. Tony, you mentioned looking -- I guess, effectively, it's pay down debt, even though your debt's gotten down to a nice low threshold. Looking to pay down debt is obviously very good. And as you think then about the potential for acquisitions, I wanted to ask with the platform as it is now, when it is time to deploy that capital, what do you want to do? Do you look to further extend the MRs? Or do you try to now look to scale up the chemical business?

Let me start, and then I'll ask Bart to join in after I make a couple of points. So I think the first thing is that -- as we continue to build liquidity, pay down debt, reduce our break-evens, build more substance in the company, I think it actually does improve the quality of the dividend, prospective dividends going forward. So I think there's a lot of benefit to that alone from a dividend policy standpoint. -- we do -- we've been very patient in terms of looking for opportunities. But we're very clear about what our strategy is, which is MR products and chemicals. And in accordance with our energy transition plan, over time, we'll be doing more and more non-CPP cargo, which is code for chemicals and veg oils and things like that, whether that's M&A or single ship acquisitions or block acquisitions will remain to be seen. But we're constantly looking at opportunities and keeping abreast of what's out there and what that could do for us. So probably as much as I can say right now, Bart, do you want to...

No. And I'd just say it's also a natural extension to the fleet today and the fleet that we trade where we see our chartering team being able to trade the spectrum of refined products through to chemicals and switch in and out and see that, that does optimize our results. And then when the time is right to layer in additional assets from an M&A perspective or the vessel S&P market will follow the strategy, Tony outlined.

Yes. And I'll just finish by saying that, look, when the conditions are right, we'll be very happy to return a lot more capital to shareholders.

Yes, makes sense. And then just a follow-up, and apologies if you addressed this already. But just in terms of what we're seeing in the time charter market, obviously, there's been a good amount of volume we've been seeing. You guys have been predominantly spot and look to be here in the fourth quarter, which is paying off clearly. But how do you guys -- how do you guys think about that? What's the appetite today on the part of charters for some medium- to long-term contracts? And then also, what's your appetite to enter into those?

Yes. Look, I mean, this is something that Gernot focuses on every day. We talk about it constantly, and it's a topic of discussion at the Board level as well. I think the real liquidity in our market in time charters is usually out to 1 year. After that, it tends to get pretty thin. When we think about charters beyond a year, we think about a kind of a term structure and think about, okay, what are we really buying if we put a ship on, let's say, a 2- or 3-year TC beyond the 1-year period. And so far, to us, those rates seem to be fairly low compared to what we think we should be able to earn in the spot market or on a TC basis later on. I think in particular, the winter market is potentially so robust that we just are very reluctant to leave any money on the table at this point in time. But we've had a lot of success in the past in chartering out. In the end, it's a fairly intuitive trading decision rather than a strategic policy type of approach.

Your next question is the follow-up from Turner Holm with Clarksons.

Just to follow up a little bit on Omar's questions around time charters. I mean, I guess, if you look into what analyst estimates are for next year, there seems to be a pretty big disconnect with what the time charter market is? I mean just looking at the analyst consensus on EVS for all of 2023, it's less than what you just reported in the third quarter. So how do we think about our models going into 2023? I mean is your market do consistent with the time charter market? Is that the kind of the best metric for us as analysts to look at as we think about 2022?

I think the 1-year rate now is arguably 30,000 a day. But we're currently running at 40,000, 45,000 a day. So that -- so if you have the visibility for a few months or even 6 months at that level, then the back half of even the 1-year rate doesn't look all that great, and you can extend that logic for future periods. Our view is that look, there's obviously a lot of uncertainty around the bulk of 2023, the winter. We seem to have pretty good visibility on the winter now, which does run until March, usually. So -- and then it's really a tug-of-war between economic macro headwinds impacting oil demand versus oil market dynamics and disruption and reordering of trade, driving up ton-mile demand.

This concludes today's conference call. You may now disconnect.