Ardmore Shipping Corporation Q1 2023 Earnings Call
Good morning, ladies and gentlemen, and welcome to Ardmore shipping first quarter 'twenty twenty-three earnings conference call.
Today's call is being recorded and an audio webcast and presentation are available in the Investor Relations section of the company's website Ardmore shipping dotcom.
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 187734475 to nine or 141 to 3170088 and entering pass code 312.
6595.
At this time I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore shipping.
Good morning, and welcome to Ardmore shipping first quarter 2023 earnings call first let me ask our Chief Financial Officer, Bart Kelleher to discuss forward looking statements.
Thanks, Tony.
Turning to slide two please.
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 first quarter 2023 earnings release.
Which is available on our website.
Now I will turn the call back over to Tony.
Thank you Bob Let me first outline the format for today's call to begin with I'll discuss highlights market outlook and updates on our capital allocation policy.
After which mark will provide an update on product and chemical tanker fundamentals at our financial performance and then I'll conclude the presentation and open up the call for questions.
So turning first to slide four for highlights.
We've seen strong momentum and positive volatility being sustained in the first quarter and ended the second quarter with TCE rates remaining at extremely elevated levels compared with historical norms.
First quarter results reflect continued strength of the product and chemical tanker markets with adjusted earnings of $43 million or $1 four per share equating to an annualized return on equity of 35%.
On a TCE basis, our Mr's earned 37500 per day for the first quarter and so far we're running at 34000 per day for the second quarter with 50% booked.
Our chemical tankers on a capital adjusted basis or 32000 per day for the first quarter and are running at 38000 for the second quarter also with 50% booked.
Hardware continues to deliver on its capital allocation policy and we're very pleased to declare a quarterly cash dividend of 35 per share representing one third of adjusted earnings and equating to an annualized current yield of approximately 10%.
Overall ardmore is benefiting from its strategic focus and optimization of its spot trading performance, while tightly managing costs and maintaining a low breakeven level at 14500 per day.
Importantly, our full fleet exposure to the spot market, including our time charter in vessels allows ardmore to fully capture the benefits of the currently strong market.
And as a final note we highlight the operating leverage we have to charter rates, where every $10000 per day increase in rates resulted in an incremental $2 30 per share and annualized earnings.
Moving to slide five the outlook for product and chemical tankers remains very compelling in a tightly balanced market.
You refined product embargo, which came into effect on February 5th has resulted in about a bifurcation of the product tanker fleet driving root inefficiencies and thus higher ton mile demand.
Notably the number of product tankers into the Russian trade increased by 50% to over 330 and it is worth emphasizing that there is a stickiness to this trade with these tankers typically not being able to reenter the global fleet at least not easily.
We're also seeing China's economic recovery, gaining strength with GDP growing by four 5% in the first quarter and expect it to accelerate further through the year.
In fact, China is forecast to be more than one half of the projected 2% increase in global oil demand in 2023.
Meanwhile, chemical tanker demand is forecasted to grow by seven 5% in 2023.
Strengthening economic activity.
Furthermore, and importantly, the product and chemical tanker order books remain at historically low levels. So that supply growth is expected to be very low versus the robust demand outlook.
So although there are macro headwinds in a recessionary concerns which are impacting overall market sentiment and argue these concerns continued to be outweighed by the positive demand factors mentioned above.
Moving to slide six where we discussed the embargo in more detail.
We believe the impact of the EU embargo has yet to fully play out and there could be a potential coiled spring effect, leading to further ton mile demand growth.
As you can see from chart, one ton miles relating to European imports are only up 15% year on year in contrast to the 114% increase in Russian export ton miles.
The reason is highlighted in the chart too is the European inventory build prior to the embargo.
As inventories are drawn down and we expect to see European refined product imports increase of note diesel inventories are already down 10% since February .
There are three highlights we expect the differential in European product in Port voyage lengths and suggests that there is another leg of ton mile demand you have to be realized from the embargo once inventory drawdowns gateway to higher imports.
Turning to slide seven we remain fully focused on our capital allocation policy because as we said before at.
At Ardmore capital allocation is what anchors our ambition to reality and frames, how we approached decision making.
As a result of our ongoing very strong chartering performance low breakeven levels and net leverage of 21%. We're now in a position to pursue all of our priorities simultaneously.
These priorities are maintaining our fleet overtime, which we're doing by continuing to invest in our shifts to optimize their performance.
<unk> low leverage.
Although 40% as mentioned we're currently at just over 20% on a net debt basis.
Well timed accretive growth, we continue to evaluate and develop potential transactions in a patient and disciplined manner.
And finally, returning capital to shareholders were consistent with our dividend policy of paying out one third of adjusted earnings were pleased to declare a quarterly cash dividend of 35 per share which will be paid on June 15th.
The key point is that this is a highly cyclical business, where financial strength can pay off hugely if the permits well timed investment and growth, but we also must balance reinvestment timing and growth with returning capital to shareholders, which is the cornerstone of our capital allocation policy and on that note I'll hand, the call back over to Bart.
Thanks, Tony.
Building upon tonys comments on market outlook, we will further examine the industry fundamentals overall, the supply demand dynamics remain highly favorable and.
Slide nine we highlight the widening supply demand gap is.
The strong ton mile growth, which is highlighted in the green bars on the chart is driven by robust underlying fundamentals further enhanced by the ear embargo in 2023 and by the full year impact of the European import ton mile story on 2024 that we just discussed.
The widening <unk> supply demand gap is accentuated by the deceleration in net fleet growth to effectively zero with the potential for a contraction in the near future.
Even under a range of different demand scenarios. This is a very wide supply demand gap by historical standards and one that we don't delve into your on the subsequent slides.
On slide 10, we highlight the favorable structural shifts in the product and chemical tanker markets.
I've touched on the Russia, Ukraine conflict and the EU refined products embargo have resulted in a persistent reordering of the global product trade driving demand.
The long term trend refinery dislocation between the east and west.
With an expected additional seven 6 million barrels per day of expert acquainted capacity to come online in Asia and the Middle East through 2026 continues to have a positive impact on the product and chemical tanker market.
All while the IEA continues to note a multiyear trajectory of consumption demand growth.
And also highlighted on this slide is the strong chemical tanker demand forecasted to grow at levels in excess of global GDP.
Projected to increase by over 5% annually driven by both growing consumption and increased voyage length.
Moving to slide 11, where we highlight how the low product tanker order book contrast, sharply with a rapidly aging fleet.
Currently the order book is just 6% of the total fleet.
As mentioned in the past.
The order book is mainly due to very limited shipyard berths availability as a consequence of crowding out by other shipping sectors and the continued lack of clarity on emissions regulations and propulsion technology, which is deterring investment.
To put this further into perspective and while there has been some moderate recent ordering there is currently only 10 million deadweight tons of quarters versus nearly 70 million tons within the scrapping age profile in the next five years.
Naturally in the higher chartering rate environment scrapping levels reduce but the global fleet's age profile in particular with the large group of vessels. Originally built in the early to mid two thousands provides future support to supply dynamics over the medium to long term.
Moving to slide 13.
Ardmore continues to build upon its financial strength net leverage at the end of March stood at just over 20%, which is down from 55% at the end of the same period last year.
We have a strong liquidity position.
With $53 million of cash on hand, and over $190 million in undrawn revolving facilities at the end of the quarter.
As noted in the chart on the bottom left we have managed to reduce our cash breakeven levels by $2000 per day in a rising interest rate environment. As a result of effective cost control reduced debt levels and access to revolving debt facilities.
As always Ardmore remains focused on optimizing performance and continuing to closely manage costs in this inflationary environment.
Turning to slide 14 for financial highlights.
As noted we're very pleased with our performance as we report results of $1.04 per share for the first quarter of 2023.
We are correspondingly reporting strong EBIT for the quarter and continued to frame EBITDAR isn't important comparable valuation metric against our ifr S reporting peers.
Please note that there is a full reconciliation of those presented in the appendix on slide 25.
Although our very favorable floating to fixed interest rates swaps will roll off this summer we have reduced our debt level significantly mitigating the impact of prevailing higher interest rates.
And please refer to slide 26 in the appendix for our second quarter 2023 guidance numbers.
Moving to slide 15.
We continue to invest in the fleet to optimize performance.
This year, we have eight scheduled dry dockings plans and this reduces to for next year.
We've expanded our plans to install a second generation carbon capture ready scrubber technology onboard nine of our vessels. Following our recent order for three additional units for installation in 2024.
As a reminder, these modular units as highlighted in the picture on the slide are fitted with the latest technology, which filters neutralizes and reduces water discharge and there is no anticipated additional downtime as these installations are planned to occur within the time constraints of normal drydocking.
Also noteworthy we had on higher availability of almost 100% for the first quarter as a result of the continued close coordination of our teams at sea and onshore.
Moving to slide 16.
Here, we're highlighting our significant operating leverage.
The Blue bar on the left notes our reported EPS of $3.74 in 2022.
In comparing this to the green bars, which represent what our 2023 EPS would be based on current market run rate levels as well as upside cases for the remainder of the year.
In 2022, we reported our most profitable year to date, but as you can see from this chart and considering the current TCE market, we have the potential to deliver even higher earnings this year.
Finally, I'd also like to highlight that even without increases to vessel values and simply based on accrued cash generation, our net asset value would increase by approximately $1 50 per share annually post dividend for every $10000 per day increase in TCE rates.
These dynamics along with the various supportive supply demand fundamentals are keeping us really excited about the outlook and our compelling positioning.
With that I'm happy to hand, it back over to Tony and look forward to answering any questions at the end.
Great. Thanks Bart.
In summary regarding the market TCE rates remained extremely elevated relative to historical norms.
In fact with <unk> refined products embargoes, playing out with increased ton miles and a potential further leg of demand yet to come.
In the medium term outlook also remains positive for both product and chemical tankers based on the widening supply demand gap with very low net fleet growth being far outstripped by anticipated demand growth.
And regarding the company.
We're achieving continued strong <unk> performance and our matching this with effective cost control in an inflationary environment.
In fact, we completed the rest of 2023 at the same rate levels as our performance year to date, we would beat last year's record earnings.
Meanwhile, our robust balance sheet and low cash flow break evens are enabling us to pursue all of our capital allocation priorities simultaneously.
And to finish with an important recent announcements and keeping with our longer term strategic focus our board has formed a sustainability committee to oversee and advise on environmental social and energy transition matters, which will ensure our board focus and support for the company as we make progress in these complex and extremely important areas of our business.
And with that we're pleased to open up the call for questions.
We will now begin the question and answer session too.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Jon Chapell with Evercore ISI. Please go ahead.
Thank you good afternoon.
Tony you want to start with you I know that the long term outlook that you laid out looks pretty attractive but of course, there's a lot of focus currently on the short term.
You've mentioned some of the inventory Destocking in Europe . There is typical seasonality. Although you did mention kind of defying seasonality in your last slide you just speak to what's kind of going on in the market today, how that kind of compares to two to three months ago. When the market was really flying and how that shapes your second half outlook as well.
Hey, John .
No.
Look I think we are.
We're very positive even in the near term from where we are today.
Thank the supply constraint is impactful not just longer term, but but currently.
Secondly, we think there's a lot of a lot of positive demand factors.
That should emerge in the second half of the year.
When it comes to seasonality.
Rates are okay. We did 37000, a day for Q1 and so far in Q2 or like 34000 to me that's like within the margin of error in isolation that would suggest to me that the market is about the same level clearly views, but this is at a level, where we're off where we were in this.
Third and fourth quarters last year.
I think at that point, we were dealing with kind of maximum disruption and a lot of the disruption that's gone away, but we're still dealing with significant and perhaps increasing dislocation for example, as we kind of laid out with regard to.
Diesel imports into Europe . So overall we're.
And.
Can you remind me kind of pinch ourselves here and you know kind of reflect on the long faces that we've got because we're only earning 34000 a day right now. So we think it's a pretty good pretty good set up for continued strong performance.
Okay and then my follow up for you, Tony but I'd also like to hear about us given his experience at other.
Firms through other cycles.
You mentioned, you're hitting all your capital allocation targets yields close to 10% you really de levered pretty aggressively to the point where.
Maybe more of the Leverages kind of unnecessary, but asset values are still really elevated to so how do you kind of think about the next three to five years on prioritizing our capital allocation and do you think youre going to get an opportunity to kind of replenish or even expand the fleet or is it going be stuck in this kind of rock and a hard place the basket values are really strong and the return.
Maybe don't make sense at this point.
Okay.
I'm tempted to let Marco first but I'll mention that it's a pretty comfortable rock and a hard place right now.
So you know there are a lot more things to happen to a shipping company.
We also I believe very firmly that this is going to continue to be a cyclical business.
I think that the you know what.
I think the high asset values today are reflective of you know.
People that are in the market every day their estimates of what cash flow is going to.
Looked like in the next the next couple of years. So you know.
<unk>.
We are positioning the company to benefit through the cycle.
From buying opportunities when they arise.
We're continuing to look at opportunities even as we speak nothing is attractive at the moment, but but that doesn't mean that.
Even in a relatively strong conditions he can't find something that makes sense.
Bart I don't know if you want to.
No I mean, I would echo that and just I mean, we're always turning over stones or rocks, maybe as were putting it and and even if we're not consummating deal Youre definitely.
Gaining key intelligence is an organization that you can drive into your business today, and then that gives you greater conviction for when the right deal may emerge and and then like Tony said.
We can address the other capital allocation policy simultaneously and you'll keep a very dynamic approach to it in this strong market.
Can I just add one more thing which is set at a time when interest rates have risen sharply in the last year.
Breakeven has come down a lot and that's that's because of the lower debt levels.
And that of course translates into better earnings higher quality earnings more solid NAV.
At a higher quality dividend yield.
Yep makes complete sense I appreciate it Tony Thank you thanks, Bob.
The next question is from Omar <unk> with Jefferies. Please go ahead.
Thank you, Hey, guys, Hi, Tony Hi, Bart.
Hey, Thanks for the update and maybe just sort of on the last point of discussion you were having with John about values being elevated in the returns potentially not looking at as exciting obviously, the you know theres no rush to do anything and you like being in this rock and a hard place.
Just sort of the the perspective that you have I guess, we broadly see in and that is that sort of product market centric does that carry over into chemicals as well do you see better opportunities. There any way you can sort of qualify how you're seeing the opportunities.
Whether it's more advantageous look at chemicals versus product or not.
Generally speaking.
Our sector is much more homogenous chemical sector is a lots of different ship sizes and types and kind of pockets.
And therefore, just by that very nature, there there are probably more opportunities on.
On the chemical side at the moment.
But but you know.
Again, I want to emphasize the fact that you know the.
The values are underpinned by.
You know by market player estimates of our near term cash flow.
So.
Yeah, Okay. Thanks for that and then maybe just a bit broadly kind of on the as you mentioned right 37 in the first quarter at 34. Currently obviously, we've seen you know the shift in the market at least in the the Vlccs with OPEC cuts starting to have an impact.
Are there you know in the past there has been a view of a trickle down effect across all segments. When you. When you have an OPEC cut like we've seen how.
How do you see the production the production changes from OPEC impacting product or do you feel that the sector is well insulated.
Or are there other important drivers that are driving the strength.
Relative to say a large cruise ships.
So over the past year that that typical link.
Linkage hasn't really held.
And.
We do think that there are particular specifics to the product tanker sector that are you know that.
Do you like it.
To you know to the to the crude market at the moment.
And we also believe as you know as we've said we think that there may be there may be more of a demand impact to come from the U.
You have oil embargo.
And again, you know our business is driven by refinery throughput and output.
And therefore, you know very much linked to consumer demand.
OPEC is making decisions based on crude.
You know I'm trying to drive crude pricing and manage crude inventories.
So there is a at the moment there.
We believe they are decoupled.
Okay. Thanks, and maybe just as a quick follow up to that you know we've seen crack spreads come off and so that sort of does dictate to an extent throughput, but it seems that refining margins potentially are still somewhat elevated relative to history.
Sort of.
Maybe in your Crystal ball or maybe just in your discussion with charterers or how youre seeing that the market as it is now.
Have you seen any noticeable shift in refinery habits as a result of the lower margin.
You know I think the there's always this dynamic of refinery turnarounds and you know when they happen and it's a it's a well kept industry secret because it's competitive Intel you know in that in that business, but.
But.
We are we are in a phase where there is an elevated level of refinery turnarounds in China.
However, the U S Gulf is back up to over 95% throughput for utilization.
So you know overall.
It is true this crack spreads and refinery margins are off the peaks well off the peaks, but theres still more than double where they were before the conflict.
And we think that's still could go kind of compelling and driving profitability for our refineries.
Yeah that makes sense, thanks, Tony I'll turn it over.
Sure.
Again, if you have a question. Please press Star then one.
The next question is from Ben Nolan with Stifel. Please go ahead.
Yes, I have a couple so.
First maybe to capital allocation type questions.
Yeah, we we've seen a fair bit of people converting.
Leases that were done a few years ago into more traditional bank debt I'm curious if that something that you might be looking to do and then also as it relates to the capital return policy.
As you said, Tony I mean, our balance sheets.
21% leverage any thoughts about maybe adjusting that one third of net income ratio as it relates to the dividend.
So so this is Bart thanks Ben.
So in terms of the the leases converting to a to think that that was actually something that the company tackled a mid 2022 and and so today, we only have two remaining vessels on lease and and the initial purchase options don't come until mid next year.
Here.
But that was the key shift to to the revolving facilities, which then we subsequently have continued to pay down so that addresses the lease question.
On the capital.
Capital allocation in terms of that level.
You know the the capital allocation policy is set for a through the cycle approach over the course of time you Delever when you're in a strong upmarket. So that you have opportunity and inherent dry powder for for as the cycle plays out and we.
So we see that well we're below 40% and that's the stated goal. We have we still have additional runway to actually delever further.
And and also continue with the one third dividend, which again is a policy for through the cycle.
And I think we've been vocal before that.
That you know if if we see a continued cash build in a strong market.
And and different accretive growth opportunities don't emerge.
We're also supportive of additional return of capital to shareholders and that's a conversation we frequently have with their board and most likely that would be in the form of a special dividend.
Okay.
Yeah, I appreciate that in and in the for what it's worth Department I'd I agree there's no need to go crazy the.
My next question relates to the and the carbon capture ready scrubbers that you have.
Appreciating that they're ready and so Theyre not act activewear wouldn't if I understand it correctly wouldn't be actively capturing carbon I'm curious what would need to what would need to be implemented in order to enable that in both in terms of.
Incremental capex.
In order to capture the carbon and also just generally speaking I mean, do you need to see more and more infrastructure in place around the world or or you know how do we think about sort of those moves.
Moving from simply a a a ready state to something that's active.
Yeah, So hey, Ben.
So on the incremental capex would be probably less than the $300000.
It's essentially an additional component that gets it gets mounted on the back.
I think that any any carbon capture technology and application is still a very nascent in the shipping industry.
This is a very very straightforward simple method.
Methods of capturing carbon, but it doesn't have to be linked to a kind of a shoreside infrastructure and kind of predictable trade routes to to make it effective and that's actually the case with any and any ship based carbon capture system. Okay. So they I assume these are amine right. So you need access to yeah. Okay.
Alright.
We shouldn't expect it it doesn't sound like the and that infrastructure is really close at this point. So it's not something we should expect soon I guess, that's what you're saying correct yeah.
And I think that it's it's very good for the environment I think very good for our carbon reduction compliance.
No I don't think it'll have a big impact on.
On our earnings unless the ships on time charter to somebody that's willing to really pay up for that future, but but we like we like that we think it's taking the company in the right direction.
And and it could actually be implemented very quickly if if the.
You know it it it's not it wouldn't be years away it could be it could be relatively quick if the if the demand were there.
Gotcha, Alright, I appreciate it thank you guys.
Sure.
This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
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