Ardmore Shipping Corporation
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good day everyone and welcome to the Ardmore Shipping’s Third Quarter 2014 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 Web site at ardmoreshipping.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 888-203-1112. Again that’s 888-203-1112; or 719-457-0820. That’s 719-457-0820 and entering the passcode 6821251. That’s 6821251. At this time, I will turn the call over to Mr. Anthony Gurnee, Chief Executive Officer for Ardmore Shipping. Please go ahead sir.

[Anthony Gurnee:]

Thank you very much. Good morning and welcome to Ardmore Shipping’s third quarter earnings call. First, let me ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.

[Paul Tivnan:]

Thanks, Tony and welcome everyone. Before we begin our conference call, I would like to direct all participants to our Web site at ardmoreshipping.com, where you will find a link to this morning's third quarter 2014 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 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 2014 earnings release, which is available on our Web site. And now I will turn the call back over to Tony.

[Anthony Gurnee:]

Thank you, Paul. On the call today, we will highlight our third quarter performance and recent market activity, discuss our chartering outlook and newbuilding program, provide an update on the product and chemical sectors. Paul will then discuss our financial results and I will talk about share repurchase plan and then we'll recap and open up the call for questions. So turning first to Slide 5, we are reporting a net profit of $117,000 for the third quarter, our second profitable quarter in a row, which we’ve achieved in an otherwise challenging charter market environment. The results reflect strong chartering performance with Eco-design MRs earning $15,237 per day and Eco-mod’s $13,919 at the lower end of escalating rates. As we’ll mention later on, due to escalating rates in the charter parties, the same charters in the fourth quarter for Eco-Mod’s will yield $14,400 per day. The other main driver of our results is our efficient operations and low corporate overhead which adds meaningfully to earnings. The big news though is that the MR charter market is now improving rapidly, with Atlantic triangulation now at $20,500 and the Pacific at $17,900. Reflecting this strength are three spot trading vessels earning an estimated average of $18,500 on voyages in progress. Market outlook for MRs is now very positive and Ardmore is well positioned to benefit from strengthening rates through our spot vessels, charter renewals over the next three or four months and five newbuildings delivering in the first quarter of 2015. Turning now to Slide 6, ironically over the last six weeks, our stock prices moved in the opposite direct to our improving business prospects and our shares are now trading at what we believe is a significant discount to their inherent value. Accordingly we’re initiating a share repurchase plan for up to $20 million over three years as a means to capitalize on opportunities that arise during the current or in the future stock market dislocation. On the financing front, we’ve executed a term loan for the Ardmore Seamariner, which now completes bank financing for the entire 24 ship fleet, including all newbuildings. We took our time to put all the financing in place to ensure we got the best terms and pricing and we’re very pleased with the results. Our fleet growth program is ongoing. We took delivery of the Ardmore Sealeader in July and the Sealifter in August and we deployed both ships in the spot market alongside the Ardmore Endeavour in order to take advantage of the strengthening charter market. We are reporting EBITDA of $5.8 million and net profit of $117,000. Adjusting for non-cash overhead items, EBITDA was $6.1 million and our net profit $465,000. On a fully delivered fleet, at the same rates as we achieved in the third quarter, we estimate that net income would have been approximately $3.2 million or $0.12 per share. And on October 15th, we declared a cash dividend of $0.10 per share for the third quarter yielding 4% per annum at our current stock price. Turning next to Slide 8, Ardmore’s chartering outlook for the fourth quarter is positive and largely locked in with two thirds of our ship days on time charter, but with the ability to take advantage of further stock market upside. There is a lot of information on this slide, but two points to highlight are firstly that the Eco-design time charter numbers are before profit share, which could add another $400 a day across those ships. And secondly, that the higher Eco-mod TC number compared to the third quarter, as I mentioned is reflective of escalating rates built into the contracts negotiated last summer. It’s also important to point out that Ardmore is well positioned to exploit a strengthening market going into the first quarter of 2015 as well. In addition to its spot exposure for one third of our fleet, we have positioned time charter renewals into the winter months to benefit from a strengthening market. On top of that, all five of the new buildings delivering in the first quarter of 2015 are either going into a spot cooling arrangement with a major oil trader or are presently open for employment in a rising market. Turning to Slide 10, our new building program is on track and we expect to take delivery of five vessels in the first quarter of 2015 with the remainder spread out over the rest of the year. Now turning to Slide 12, let’s take a closer look at the Product Tanker market. The MR Spot market is improving rapidly. As we mentioned, as of yesterday the Atlantic Triangulation was $20,500 and the Pacific $17,900. As you can see on the chart to the right, the Pacific Triangulation has been stable and rising throughout the year on the back of solid tonne mile demand growth from new refineries such as Jubail which reached full capacity in August. The Atlantic Triangulation was under pressure in the first nine months of the year, largely due to lower refinery utilization in the U.S. Gulf, reduced demand from Europe for U.S. Gulf exports and correspondingly more short haul voyages from the U.S. Gulf to Caribbean and Central America. However the Atlantic market, Atlantic basin has recovered in recent weeks which sets a stage for a good winter market in all regions. Time charter rates are steadily increasing as charterers' confidence returns on the back of improving spot performance with Eco-design MRs in the region of $16,250 and Eco-mods around $14,500 for one year. The outlook for U.S. product export is positive. October and early November is refinery turnaround season and Pad 3 utilization was down to 88% as of October 24. Utilization should recover in the coming weeks as refineries come back online and is anticipated to rebound to as much as 95%. The [indiscernible] refinery expansion in the Middle East continues with two refineries coming online in the near future. Yanbu, located in the Red Sea is a new 400,000 barrel a day refinery and tends to export diesel and commodity chemicals to Europe and Asia, which just commenced later this month. The Ruwais refinery located in the Arabian Gulf is completing a major expansion project which will take it from 400,000 to 800,000 barrels per day and is expected to start ramping up output in January of 2015. On the supply side, the MR order book is declining as deliveries exceed new orders and now stands at 291 vessels or 16.4% of the fleet. In the first ten months of this year 89 MRs have delivered and 22 have been scrapped, possibly more due to the typical reporting lag of the scrapping. So depending on the final scrapping numbers, this implies net fleet growth of around 3.5% to 4% against an estimated 4% to 5% demand growth. So the fundamental outlook remains positive. In terms of asset values, the most transparent and reliable indicator is the new building price at Main Stream yards which is holding a $36.5 million and which corresponds to a fully delivered cost of $38 million. Turning now to Page 13, on the chemical market, we believe that the chemical tanker market is poised for meaningful improvement this winter, possibly in line with the product tanker market as seasonal demand picks up and supply growth remains low. Commodity chemical tanker rates generally track the product tankers in the first nine months of the year but year-on-year rates continue to improve with our fleet performance up by about $400 a day. Consistent with our operational strategy, our chemical tankers continue to trade in the overlap between products and chemicals and year-to-date around two thirds of cargoes have been commodity chemicals and veg-oils and one third clean petroleum products. Our chemical tanker fleet will expand from three to nine vessels over the next year, with four of our six new units delivering in the first quarter alone. We're actively engaged in employment negotiations and there is considerable interest given that these are among the very first Eco-design chemical tankers as well as being commercially versatile new features. Longer term the demand drivers for chemical tankers remain strong, continuing U.S. petrochemical expansion driven by shale gas, Middle East Gulf export growth and underlying demand growth driven by emerging economies. The chemical tanker order book is currently low at 11% of the existing fleet and with deliveries telescoped out to 2018 the pace of fleet growth net of scrapping should be moderate at around 2% or even less. On top of this a number of stainless steel chemical tanker orders are at non-core shipyards in China. So we should expect delays given the complex nature of the ships and the expertise required to build them. And with that I’ll hand the call back to Paul to discuss our financial results.

[Paul Tivnan:]

Thanks Tony. Starting with Slide 15, as Tony mentioned we are pleased to confirm that we have secured bank finance for entire fleets following the facility at NIBC for the Seamariner. In doing so we have further extended our Bank group to six leading shipping banks affording us considerable support and financial flexibility for further growth. Our total debt as of September 30, was $219 million and we have approximately $210 million in committed finance available for our new building program. Moving on to Slide 16, the Company’s earnings continue to grow in line with seek [ph] growth and improved charter rates. Our rates have improved year-on-year despite the softness in the spot markets illustrating the importance of having a balanced employment strategy. The Company reported adjusted EBITDA of $6.1 million which represents an increase of $2.7 million from the third quarter of 2013. Revenue was $18.9 million, an increase of $8.3 million from the same period last year. Operating cost for Eco-design vessels were $5,782 per day and our Eco-mod vessels were on average for both products and chemicals $6,660 per day for the nine months ended September. Depreciation and amortization for the third quarter was $4.6 million and we expect depreciation and amortization in the fourth quarter to be approximately $5.9 million. Corporate overhead costs were $2.1 million in the third quarter, which is on target and on a per ships basis is amongst the lowest of the peers. Our interest and finance costs were $1.1 million, in line with the third quarter of last year. Interest and finance costs are a measure of capitalized interest costs related to the newbuildings in the quarter of $1 million. We expect the capitalized interest cost in the fourth quarter to be around $1.3 million. The above results showed a net profit for the third quarter of $117,000 which is around $0.05 per share. After adjusting for non-cash stock based compensation, the net profit was $465,000 or just under $0.02 per share. As you can see on Slide 17, our charter rates are improving year-on-year. We now have five Eco-design MRs in operations which earned an average of $15,550 per day for the nine months. Our Eco-mod MRs earned $14,400 per day on average, which represents a $600 increase over the same period last year. We have three ships trading in the spot market right now and reflecting the significant stronger market, vessels are earning an average of $18,500 for voyages in progress and the outlook for the winter looks very positive. Chemical market remains high with their three ships earnings $11,400 per day on average, which is an increase of approximately $900 per day from the same period last year. It is important to point out that Ardmore has substantial operating leverage and every $1,000 a day increase in rates across the full fleet equates to $0.34 per share in EPS. To put that context, if our MR charter performance were to settle at $18,500 a day, we estimate that our earnings will be around $1.65 per share annually. We believe this operating leverage on a per share basis is the highest of our peers. On slide 18, we have our summary balance sheet and at the end of September, our total debt was $219 million compared to total capital of $557 million leaving our leverage at 40%. Our cash in hand was $66 million. And finally, let me emphasize Ardmore’s substantial leverage to asset values. With 24 ships and 26 million shares, every $1 million increase in vessel values equates to $0.92 in additional NAV per share for our shareholders. Again, similar to operating leverage, we believe this is the highest of our peers. And now I’d like to turn the call back over to Tony to discuss the share repurchase and for some closing comments.

[Anthony Gurnee:]

Thanks Paul. So if you turn to Slide 20, as you can see on the graph, our stock prices have undergone a remarkable disconnect from the MR charter market and our business prospects. We believe that Ardmore shares are now trading at a very large discount to their impact value and that this presents an opportunity not just for savvy investors that just got in, but also for the company to build value for shareholders by essentially investing in its own fleet at a knocked down price. Accordingly, we’re instituting a share repurchase program of up to $20 million over a three year period in order to capitalize on any continuing or future stock market dislocation. Turning to Slide 22 then and summary, we’re pleased to report strong financial results in the third quarter resulting from superior chartering performance and efficient operations along with low corporate overhead, all of which adds meaningfully to shareholder value. The MR Spot market is improving rapidly moving into the winter months and Ardmore is well positioned to benefit from this through a combination of spot vessels, well planned T3 renewals and our newbuilding employment strategy. On top of this, I’d like to emphasize again the point Paul made regarding operating leverage. Everyone $1,000 today across the fleet adds $0.34 to earnings per share, which we believe is the highest among our peers and signifies outsized earnings upside for Ardmore. Bank debt is now in place for the whole fleet including newbuildings which is a milestone for the company. We took our time on financing and feel we achieved excellent pricing in terms and we now have a strong bank group to support further growth. Our conservative balance sheet reflects good corporate stewardship and signifies capacity for continued growth as a means to build shareholder value. We’re announcing a $20 million share repurchase plan to capitalize on any continuing or future stock market dislocation. And finally, we declared our quarterly dividend of $0.10 per share on October 15th which yields 4% per annum at the current share price. Thanks for your time. And we’re now pleased to open up the call for questions.

[Operator:]

Thank you sir [Operator Instructions]. And for our first question we go to Jon Chappell with Evercore ISI.

[Jon Chappell:]

Quick technical question on one of the newbuilds. I noticed in the press release that two of the late ’14 deliveries are pushed back into January '15. Was that your call, just to get a 2015 stamp on the assets or was there some delays with the shift yard that forced the delay?

[Anthony Gurnee:]

No, it's our call to put them into 2015.

[Jon Chappell:]

Okay, and you don’t have to pay any penalties or merge type fees for that?

[Anthony Gurnee:]

No.

[Jon Chappell:]

Okay, with the Eco-chemical new build, you had mentioned that there had been significant interest from charterers. How are you kind of looking at the duration of any potential time charters for those ships, vis-à-vis the optimism you talked about in the market?

[Anthony Gurnee:]

We’re really in discussions on a range of structures and durations. So we’re just going to settle on which one we feel is going to maximize value. But it ranges from kind of spot arrangements to one year TC.

[Jon Chappell:]

Okay, so one year tops. And what kind of premiums relative to the Eco-mod ships are you expecting and are you approaching in those discussions?

[Anthony Gurnee:]

We expect that these ships are a little bit smaller than MRs. So I think you could scale back the premium that you see between standard and Eco-design MRs but it’s probably two thirds to three quarters of that level, may be $1,500 a day.

[Jon Chappell:]

Got it, last thing, and probably a two parter. When you look at the use of your capital, now you’re fully financed, you mentioned in the press release you’re still looking at ships, whether they are in kind of one offs or blocks. Then also obviously with the new buyback program, how do you kind of weigh the desire to continue to grow the fleet versus the complete dislocation in your stock versus the asset values and just the final part of that, the $20 million starting point, do you view that as just the starting point or is $20 million basically all the liquidity you have at this point to pledge towards buybacks?

[Anthony Gurnee:]

Well, I mean to answer the last part first, I think we -- the Board has approved a $20 million plan and as we work into that, if the opportunity continues and the resources exist for us to continue acquiring shares, I think we would expand the program. But it’s really something that we’ll just address at the time. In terms of do we buy ships or shares, it really depends on the relative attractiveness at the time, which is the function of stock -- the share price as well as the other acquisition opportunities.

[Operator:]

And for our next question we go to Noah Parquette with Canaccord.

[Noah Parquette:]

I have kind of a question on the broader industry actually. With -- following the oil price and bunker levels coming down, as the calculation for the optimal to be changed and you see any of the vessels start to speed up? Are your ships going faster as the Eagle class type vessel kind of keeping things lower?

[Anthony Gurnee:]

I think we’re beginning to see a little bit of speeding up but not really very much. To answer the question relatively briefly it’s -- we’ve seen some instances but it’s hard to tell whether it’s a function of just cancelation dates or timing of deliveries as those two pure economic calculations.

[Operator:]

And we go next to Omar Nokta with Clarkson Capital Markets.

[Omar Nokta:]

Just wanted to ask about the charter strategy going forward. You sound obviously very optimistic. The market has been very strong. You have a handful of charters that rollup around year end, early next year. What’s your thinking redeployment for those ships?

[Anthony Gurnee:]

Again, it depends on what the alternatives are at the time. These are existing and strong relationships which we would like to continue with and expand and it’s a matter of tracking the right price in the market but I think they appreciate the service we provide and the relationships I expect, most of those will continue. And in some cases we might even expand them. But it’s really very much a market driven negotiation and depends on what's happening at the time.

[Omar Nokta:]

Okay, so it's something like maybe a continued 70-30 split, something on that lines or something to think about going forward?

[Anthony Gurnee:]

Well, it'd probably be less because as you know the four MR new buildings delivering next year all go in with a major oil trader into a commercial spot trading arrangement. And so I'd say our balance of TC versus Spot will lean more heavily towards Spot going into 2015. Part of that is just a way we have designed the portfolio and part of it is we just see more opportunity in the Spot market now.

[Omar Nokta:]

Okay, thanks and then just one financial question for Paul. Can you just give us a sense of what the -- I know all the CapEx is financed but I just want to get a numbers basis for what’s expected for the fourth quarter and what’s remaining to be paid in 2015?

[Paul Tivnan:]

So, the total CapEx for the new building program from the end of September is about $230 million and because we now have the two ships that were expected to deliver in early December now being pushed back to January. That’s pretty much a 2015 number. I think there might be about maybe $10 million in the fourth quarter but the bulk of it is all 2015 now.

[Omar Nokta:]

And then just maybe on that -- the push out to 2015, is that simply just -- or it could be a 2015 built vessel or is there any other reason you wanted to delay it?

[Anthony Gurnee:]

No, I mean it’s having 2015 [indiscernible] arguably out as the couple of million dollars to the value. So it’s very much an opportunity for us and a way to create additional value and a ship in January is better than a ship in December.

[Operator:]

[Operator Instructions] We’ll go next to Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis:]

Most of my questions have been answered but I want to ask on the agreement that you have with Vitol. You have some vessels in that pool with then. How is this going? How is it performing versus the rest of your fleet and if there are any further discussions compared to what we had about a year ago?

[Anthony Gurnee:]

Yes, so that you [indiscernible] it, the Vitol is the major oil trader we refer to. So we will have -- when all four ships deliver, we’ll have a total of six ships on the Vitol. Currently we have two on time charter, and then four will be go into spot commercial arrangement. That was the deal that we set with them from the start. It was going to be that ratio of time charter and spot. So far we don’t have ships spot trading with them but operationally the performance of the two ships that have gone on to TC is good and a great relationship and we’re looking forward to the new ones delivering. As you know Vitol is the world’s largest oil trader. I think last year they controlled 10% of all the world’s oil movements, and so as consequence, they’re in a great position to maximize returns on their fleet through superior information and higher utilization. And our four ships will be part of that.

[Fotis Giannakoulis:]

One more question about the change in oil price system. Obviously the first impact for you and your customer sees the decline in fuel expenses. If with Bunker [ph] fuel is having decline in the last three-four months over $100 per tonne, that should be around $3,000 of benefit for your customers. How much of this benefit is being transferred to you and how much the ship owners of product carriers, they can negotiate higher rates and when do you expect this to be able to happen?

[Anthony Gurnee:]

Good question and I’d like to address that little more broadly as well but firstly regarding Bunker [ph] pricing, I think as a rule of thumb in a rising market the benefit of the decline in the price of fuel accrues to the owner but in a declining market the charter has the upper hand and they'll squeeze that out of the negotiation. So right now because we’re in a rising market we think it’s additionally benefiting and we’re not getting the sense that it's a major component in discussions in terms of setting spot rates at the moment.

[Fotis Giannakoulis:]

And can you also address how the overall decline in oil prices and we heard that the [indiscernible], where it used to OSP [ph] to the U.S. and increased slightly the OSP [ph] to Asia, how does this change the trading routes and what are the implications if there are any for the product tanker market and the trade?

[Anthony Gurnee:]

Yes, so that’s the really I think the key question and our view and our answer is that it’s all positive for product tankers and the reason why the price of oil has dropped is not because of significant a decline in demand. It’s maybe a little bit more muted demand growth than expected but it’s really largely over supply. So the drop in prices has created a essentially [indiscernible] oil which then provides arbitrage opportunities on a long haul basis not just for crude but also for product. So we’re seeing a lot of long haul wagers taking place, now not just with MRs but bigger product tankers as well, driven by price arbitrage. And then so I think that also calls in not so much necessarily increased fluidic [ph] storage but also delays on arrival in terms of scheduling discharge. So a lot of ship days have been used up right now on long haul voyages than waiting to discharge and that’s definitely helping the market at the moment, and we believe that will continue as long as the low oil price and the circumstances surrounding that continue, which seems to be pretty persistent. The third point though is okay, so basically we’re benefitting from lower bunker prices, from increased demand created by long haul arbitrage opportunities and delays in discharge. So the third thing I think that is evident is that as the price of oil remains low, it is going to spur greater economic activity, which is going to increase demand. So I think, in particular in emerging economies that could make a big difference. So we view that the current situation in terms of global oil supply and demand and price is all positive for the business.

[Operator:]

And with that ladies and gentlemen, we have no further questions on our roster. And this will conclude today’s conference. Thank you for your participation. [Call Ended Abruptly]