Q3 2022 Ardmore Shipping Corp Earnings Call

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Good morning, ladies and gentlemen, and welcome to organize shipping third quarter 2020 earnings conference call.

Today's call is being recorded and an under webcast and presentation are available on the Investor Relations section of the company's website at.

<unk> Dot com.

We will conduct a question and answer session. After the opening remarks.

Instructions will follow at that time.

A replay of the conference call will be accessible anytime during the next two weeks by dialing 18773 full full seven five to nine or 14121.

One seven O O H eight and entering passcode 797, seven 870.

This time I will turn the call over to Anthony Gurnee, Chief Executive Officer, Mark shaping. Please go ahead.

Thank you good morning, and welcome to Ardmore shipping 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 this 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 Ardmore shipping dot com, where youll 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 then open up the call to questions.

Turning to slide two 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.

<unk>, which is available on our website and now I would like to turn the call back over to Tony.

Thank you Bart.

The format of today's call I will discuss highlights for the quarter market outlook and changes to our capital allocation policy after which mark 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 four.

Product and chemical tanker markets remain at elevated levels driving Ardmore is adjusted earnings to $61 6 million or $1 59 per share for the third quarter, which represents an annualized book Roe of 59%.

<unk> earned 47000 per day for the third quarter up from 31000 last quarter and are running at 45000 per day for the fourth quarter, so far with 40% booked.

Our chemical tankers on a capital adjusted basis earned 35000 per day for the third quarter up from 22000 last quarter and are running at 36000 per day for the fourth quarter with now 50% booked.

Okay.

These great suggests that our strong earnings from 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.

Dividend payment will be one third of adjusted earnings so that if the fourth quarter continues at similar levels to what we so far achieved.

We estimate a dividend payment of <unk> 50, a share with an annualized dividend yield of about 15% based on our stock price in recent days.

In these volatile, but elevated market conditions Ardmore is benefiting from our 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 $10000 a day increase in rates resulted in another $2 40 in earnings per share.

Moving to slide five.

Yeah.

The outlook for product tankers for product and chemical tankers remains positive in a tightly balanced market.

The Russia, Ukraine work 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 5th of next year as part of the EU oil embargo. This is in addition to the ban on crude which takes effect just one month from now.

Yes.

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 mris 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.

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 todays 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 six our.

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 cannot 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.

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 Barbara.

Thanks, Tony.

Building upon tonys comments on the market outlook, we will examine the industry fundamentals overall, the supply demand dynamics remain highly favorable.

On slide eight we highlight the strong demand outlook for product and chemical tankers.

On the oil consumption front, the IEA forecasts, an overall increase of one 7 million barrels a day for next year.

And the supportive trends 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 addition, additional demand as a result of the dislocation of trade caused by the Russia and 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 China's economy.

Well 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-19 levels in 2019.

But on top of the 7% growth and incremental 7% to 8% ton mile growth is possible as a result of the EU oil embargo.

We should start experiencing this uptick the end of this year and is likely to be persistent.

Turning to the supply side on slide nine.

The supply outlook remains very favorable and the robust demand levels. We've discussed are expected to exceed supply for the coming years.

Estimated average net fleet growth for the next two years is very low for both product tankers and chemical tankers and.

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 in propulsion technology.

Theres dampening speculative ordering.

While a resurgent market is slowing scrapping in the near term and 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 have 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 drydock schedule for the fourth quarter and next year, which also gives <unk> the opportunity to engage in retrofits to increase operating performance and fuel efficiency.

Turning to slide 12 for our 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 this slide we are reporting strong EBITDA in the quarter and continue framing EBITDAR as an important metric to compare our results to <unk> peers.

I would encourage everyone to review the full reconciliation presented in the appendix on slide 19.

Other notable items from this quarter include the previously mentioned sale and time charter back of our older. Three vessels has led to reduction in vessel operating expenses.

And favorable time charter in levels at about $13000 a day.

Yes.

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.

Yes.

For indicative guidance for the fourth quarter. We have 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.

As we continue to see strength in the fourth quarter already in advance of the typical winter uptick.

In the forthcoming EU oil embargo.

In addition, as discussed earlier Tce's 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 have already seen a number of fixtures in excess of $100000 per day over the past few months.

So 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 14500 per day.

We utilized our ATM selling two 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 and getting favorable terms.

Which substantially lowers our interest expense and breakeven going forward.

As always the Ardmore team is focused on optimizing performance on a relative as well as absolute basis and driving results in these elevated markets.

We're also closely managing cost in this inflationary environment.

And with this I'd like to hand, the call back over to Tony.

Thank you Bart.

On the 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.

<unk>.

And so far as the fourth quarter is looking.

At the 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 the 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 one third of adjusted income is 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 and 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. Our return on capital in the form of cash dividends and strong total returns from our rising share price.

And with that we're pleased to open up the call for questions.

Yeah.

We will now begin the question and answer session to ask a question you May press one on your telephone keypad.

Your question please.

Next question from Jon Chappell with Evercore. Please go ahead.

Thank you and good afternoon.

Tony I think as people try to understand.

The duration of what's been happening so far and.

<unk> been trying to maybe poke holes and the sustainability of it.

We approached it.

February sat for the refined product sanctions.

I think there is some view that there could be just appear shortage of ships.

<unk>.

We've talked about the ton mile benefits of it but could potentially kind of Caribbean.

<unk> 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.

The product tanker fleet to move what needs to be moved at a very vital time for the economy. How do you kind of Christie's shortages and the pros and maybe even a couple of potential con to your business from that.

As always drawn to deep questions.

I guess haven't thought about it this way but.

Im 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 to get product, where it needs to go so honestly I can't imagine.

A situation, where there's just simply no shortage of ships and you can't move cargo, but it might price out certain trades.

Okay.

Two to allocate resources elsewhere, so I don't know if that.

That's a proper answer but yes.

Yes, I mean, I don't think anybody to meet those conditions fell sky high rates and again I just.

Zinc.

We've not had to think about these kind of scenarios for a long time in our business.

But but to me we are.

The elasticity of shipping.

<unk>.

<unk> rates to demand comes into play.

I think rates could go very very high.

Okay. That's helpful.

Second question, maybe not a deep but for Bart the pull you in here.

Ardmore has gone through a lot.

<unk> capital structure initiatives over the last couple of years and puts the company in this place now you can introduce something like the dividend policy this rolled out.

A third of the earnings certainly generous given the yield that you laid out but that means there's two thirds of record earnings to loft and you're already in a situation, where the leverage seems pretty sustainable through cycles.

Is this the time where our.

More 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 slots available for next couple of years.

Look outside of that.

Silo of growth and look to do other things with the remaining cash flow.

Thanks, John 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 fronts I think we always have been and will continue to be patient and take a disciplined approach.

We turned over a lot of stones.

And frankly, there are a lot of deals that don't look so attractive today.

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 March.

For a prolonged period of time, we can also look at.

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.

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 would have capacity for significant growth.

And then it's a matter of just being patient and getting the timing right and finding the right.

Opportunity.

But to underscore Barts point, I think we'd be very happy under those circumstances to return a lot more capital to shareholders.

Okay. Thanks, Tony Thanks, Bob.

Yes.

Yes.

The next question is from Karen at home platforms. Please go ahead.

Yes. Good morning, good afternoon, gentlemen, thanks for taking the call I wanted to ask about the pace you have taken in on time charter.

<unk>.

So let's take care of those.

And a very well timed manner.

But.

How long do those do those charters Ron.

Please see the charter and position developing next.

Next year.

Yeah.

Yes, I'll just answer that briefly so out of the five three are the vessels that we sold in chartered back for three years at 13000 today.

And that started six months ago.

Other two are one year Tcs that we've extended through options and I think an average like 15000.

They have about a year ago.

Okay.

Okay.

And then just turning back to those levels.

The fleet perspective.

I guess asset values have now moved over Newbuild parity, which is.

Understandable.

Given given where the rates are and the strong outlook.

Is new builds.

Is that something that you all would consider given that you still I guess as you.

You indicated you're going be distributing a lot of cash dividends budget, we'll have quite a lot left over and.

How do you consider newbuild at this point.

I don't want to state anything categorically.

Because we do look at projects for example that might be 10 year time charter business for.

A vessel that Scott.

Our renewable type of fuel future to it et cetera, but beyond that kind of thing, which so far hasn't materialized might be still pretty far away in the future.

Just looking at the delivery dates on the pricing for new build.

It doesn't doesn't look right.

And I think I think that's the broad consensus in the sector.

So I think there's probably a bias against ordering.

What are your order when do they deliver very very high price right now pushed up by the other sectors.

Okay. Thank you I'll turn it back.

And then Scott Sanborn Jimi Mall with Stifel. Please go ahead.

Hi, Good morning afternoon. This is <unk> on for Ben today.

Thank you all for taking our questions. I know you guys have given a lot of clarity on the capital allocation policy.

We just wanted to kind of get a little more color.

The activity under the ATM program.

Just maybe would you provide some insights on <unk>.

Our capital needs.

Using those proceeds for I know you mentioned it.

Shop, the issuance for the foreseeable future.

Just maybe just a little extra color there and.

Great. Thank you.

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.

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 that I think arguably got a head start of maybe six 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.

Several million dollars.

And gotten very favorable rates at a time when I think the banks were particularly team. So so I think that's just one facet to the value of.

Doing what we did with the ATM understanding that there are more shares and 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.

The final point I would make is that I think it's.

The move we made there is part and parcel of a 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.

To generate the kind of returns it has.

That's very helpful. Thank you and if I could just ask one more.

Kevin given your strong liquidity position.

Kind of wanted to ask about call rate spread the preferreds and if that is something you would consider down the line.

Yes. It is.

No call for three 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.

Right there begins to look more and more attractive.

And it's very flexible capital so I think they are.

The headline rate books, a little bit expensive compared to everything else right now, but we still we still like it.

But we do have rates, calling in as perpetual the rate remains the same.

But we do have rights to call it and after three years.

Great. Thank you guys for the time.

Okay.

I will remind participants.

I wanted to ask a question.

100000 people.

The next question is from Omar Saad.

With Jefferies. Please go ahead.

Hey, Thank you, Hey, Tony Hi, Bart and nice to have you got 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 that remaining two thirds that you have.

I think you guys are pretty clear, yes, Tony you mentioned looking I guess effectively it's pay down debt.

Even though your debts.

Got it down to at a nice low threshold looking to pay down debt is obviously very good and as you think then about the potential for acquisitions 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 amas or do you try to now looked to scale up the chemical business.

Let me start and then I'll ask <unk> to join in.

After I make a couple of points. So I think the first thing is that.

As we continue to build liquidity and pay down debt reduce our breakeven spilt more substance in the company.

I think I think it actually does improve the quality of the dividend perspective dividends going forward. So I think I think there's a lot of benefit to that alone.

From a dividend policy standpoint.

<unk>.

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.

Our products and chemicals.

In accordance with our energy transition plan over time, we will be doing more and more non CPP cargo which is.

Code for chemicals in 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 keeping abreast of what's out there in with.

What that could do for us so.

Probably as much as I can say right now partner with you on it.

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's right to what to layer in additional assets from an M&A perspective, or the vessel S&P market will follow this strategy.

Tony outlined.

Yeah, and I'll just finish by saying that look when the conditions are right. We will be very happy to return a lot more capital to shareholders.

Yeah makes sense. Thanks, Thanks, guys and then just a follow up and I apologize to you addressed this already but just in terms of what we're seeing in the time charter market. Obviously, there has been a good amount of volume. We can see I mean, you guys have been predominantly spot and look to be here in the fourth quarter.

Is paying off cleanly, but how do you guys or how do you guys think about that whats the appetite today on the part of charters for some medium to long term contract and then also what's your appetite to enter into those.

Yes, well look I mean, this is something that <unk> focuses on every day, we talked about it constantly and it's a topic of discussion at the board level as well.

I think.

The real liquidity in our market and time charters is usually out to one 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 if we put a ship out on let's say two or three year Tc.

On the one year period, 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 TCE basis later on I think in particular, the winter market is potentially so robust.

We just are very reluctant to leave any money on the table.

At this point in time.

And we've had a lot of success in the past and TC chartering out.

In the end it's fairly.

<unk>, a trading decision rather than a strategic policy type of approach.

Okay.

Tony that's clear and it makes sense I'll turn it over.

Thanks Omar.

The next question is a follow up from <unk> at home.

Please go ahead.

Yeah. Thanks, just to follow up a little bit on Omar questions around time charters.

I mean I guess.

If you look into what analysts estimates are for next year are there seems to be a pretty big disconnect with what the time charter market is I mean.

Just looking at the analysts' consensus.

On the EES for for all of 2023 less than what you just reported in the third quarter.

So how do we think about.

Our model going into 2023, and then as your market view consistent with with the time charter market.

Is that the economy.

Metric for us as analysts to look at it as we think about 2000.

I think that the one year rate now is arguably 30000 a day.

But we're currently running at 40 to 45000 a day so.

That.

So if you have visibility for a few months or even six months that level then the back half of even the one 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 winters, we seem to have pretty good visibility on the winter now.

It does run until March usually.

So it's really a tug of war between economic.

Macro headwinds impacting oil demand versus oil.

Oil market dynamics and disruption in reordering of trade driving up ton mile demand.

Okay. Thanks, Tim.

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

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