Ardmore Shipping Corporation (NYSE:ASC) Q1 2024 Earnings Call Transcript May 8, 2024
Ardmore Shipping Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen and welcome to Ardmore Shipping’s First Quarter 2024 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, ardmoreshipping.com. [Operator Instructions] A replay of the conference will be available any time during the next 2 weeks by dialing 1-888-660-6345 or 1-646-517-4150 and entering the passcode 95017. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.
Anthony Gurnee: Good morning, and welcome to Ardmore Shipping’s first quarter 2024 earnings call. First, let me ask our CFO, Bart Kelleher, to discuss forward-looking statements.
Bart Kelleher: Thanks, Tony. 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 first quarter 2024 earnings release, which is available on our website. And now, I will turn the call back over to Tony.
Anthony Gurnee: Thanks, Bart. So first, let me outline the format for today’s call. To begin with, I’ll discuss highlights, the near-term market outlook and our capital allocation policy. After which, Bart will provide an update on product and chemical tanker fundamentals and our financial performance, and then I’ll conclude the presentation and open up the call for questions. So, turning first to Slide 4 for highlights. We are seeing strong momentum continuing well into 2024, reflecting positive fundamentals, along with ongoing geopolitical impacts. Our first quarter performance reflects robust market conditions, with adjusted earnings of $38 million or $0.92 per share and with further strength building into the second quarter.
Our MRs earned $38,400 per day for the first quarter and $40,500 per day so far in the second quarter with 60% booked. And our chemical tankers on a capital-adjusted basis, earned $29,100 per day for the first quarter and are now up to $39,000 per day for the second quarter with 60% booked so far. As you can see from the chart on the upper right, the strength of the market is evident. TCE rates are showing a sequential increase, which is notable given that we are coming out of the stronger winter period. Meanwhile, we continue to execute on our longstanding capital allocation policy. Today, we are declaring another quarterly cash dividend of $0.31 per share, consistent with our policy of paying out one-third of adjusted earnings. And we also continue to invest in the fleet to improve performance and reduce carbon emissions while also taking a gradual and opportunistic approach to fleet modernization.
And as a final point on this slide, it’s important to note that our scheduled drydockings and upgrades are already largely complete for this year. This means that we will have increased revenue days and a more productive fleet, which will boost earnings and allow us to fully capture these strong market conditions. Moving to Slide 5. The near-term outlook continues to be very positive as a result of geopolitical events and other disruptions. But of course, it’s underpinned by very strong supply/demand fundamentals. The EU refined products embargo responsible for splitting the global tanker fleet continues to drive higher ton-mile demand. In addition, the routing of vessels away from the Red Sea and around the Cape of Good Hope is significantly extending those voyage lengths.
But it’s worth noting that for product tankers, the Red Sea is largely an LR story. Prior to the Red Sea disruption, 20% of the LR fleet transited the Suez Canal and contrast to just 5% of the MR fleet. So while this is positive from a demand standpoint overall, it’s not nearly significant a factor for MRs as it is for LRs. Furthermore, while Panama Canal congestion showed some signs of easing, daily product tanker transits remained 20% below the prior year, further contributing to ton mile demand. But similar to the Red Sea impact, this is not the major driver for MRs, Russia-Ukraine is. Meanwhile, underlying oil consumption continues to grow. The global economy remains resilient and with potential for further upside in the second half.
As you can see from the chart on the lower right, global refinery runs are projected to increase by 5% in 2024 to an all-time high of 85 million barrels a day, driven by activity in Asia and Middle East and increases in Chinese refined product export quotas as compared to the prior year adds to this constructive outlook. Moving now to Slide 6 where we highlight our longstanding capital allocation policy. Given our strong financial position, we’re now able to pursue all of our priorities simultaneously as shown on this slide. To this end, we’re pleased to declare another dividend of $0.31 per share. And it’s also worth noting that since the resumption of our quarterly dividend in the fourth quarter of 2022, we’ve now paid $70 million in total dividends, representing about 10% of our market cap, a substantial return of capital in just over 1 year.
At the same time, we continue to invest in our fleet to improve performance and reduce emissions while also gradually modernizing over time. As already reported, but now executed, in April, we completed the sale of our 2010-built Ardmore Seafarer and the acquisition of the Ardmore Gibraltar, a 2017 Korean-built Eco-Design MR, which has much better fuel efficiency and also greater cargo flexibility than the outcoming Seafarer. But I’m also pleased to say that we more than doubled our money on the Seafarer, which we have purchased at a low point in the market in September 2020. And with that, I’m happy to hand the call back over to Bart.
Bart Kelleher: Thanks, Tony. Building upon Tony’s comments on the market outlook, we’ll further examine the industry fundamentals. As we have been discussing, the supply/demand dynamics remain highly favorable. On Slide 8, we’ll highlight the significant supply/demand gap, and I’ll address each component in more detail on subsequent slides. We can see from the green bars in this chart, the strong forecasted ton-mile growth which is a result of the positive underlying demand fundamentals and ongoing market dislocation. In contrast, we can see the limited net fleet growth across both product and chemical tankers, and in particular, MRs as indicated in the gray and blue bars. So overall, we believe the limited net fleet growth across these sectors, combined with increasing ton miles supports ongoing market strength.
Moving to Slide 9, where we highlight how the low MR tanker order book contrast sharply with a rapidly aging fleet. The chart on the left provides a visual representation of the changes in the MR fleet. 15 years ago, as highlighted in the red quadrant, we observed a modern fleet with a large order book. However, over time, the order book has declined while the fleet has aged. Currently, as highlighted in the green quadrant, we have a low order book and the oldest fleet in two decades with an average age of greater than 13 years. Looking at the graph on the right side, the current MR order book is at 9% of the existing fleet. And as we have previously mentioned, it is important to point out the impact that Aframax crude tankers have on the overall product tank order book, which stands at 14%.
Currently, the Aframax crude tanker fleet is shrinking while still experiencing demand growth. This implies that an increasing proportion of LR2s, most likely older vessels will naturally transition to the crude trades to cover the shortfall in the Aframax fleet. In addition, as vessels reach 15 to 18 years of age, their trading capabilities typically become restricted, further contributing to the supply tightness in the younger modern global fleet where Ardmore’s vessels operate. In fact, within the next 5 years, close to half of the MR fleet will surpass the 20-year age mark and enter the scrapping zone. The current order book at 9 million deadweight tons is just a fraction of the 50 million deadweight tons that will fall within the scrapping age profile in the next 5 years.
Slide 22 in the appendix highlights this phenomenon. Turning to Slide 10, where we address demand drivers in greater detail. As we have discussed earlier, the Russia-Ukraine conflict and the EU refined products embargo has led to a persistent reordering of global product trades, boosting overall ton miles. Concurrently, the energy transition is being tempered by energy reality and market projections continue to show year-on-year growth in oil demands. Meanwhile, the long-term trend in refinery dislocation between East and West, supported by forecast for increasing consumption, will continue to drive incremental ton miles. Please reference Slide 21 in the appendix for additional details. In summary, these robust long-term demand drivers point to continued strength in the product and chemical tankers market.
Moving to Slide 12. Ardmore continues to build upon its financial strength. As a reminder, the chart on the bottom left highlights our achievement of reducing our cash breakeven levels by over $3,000 per day in an elevated interest rate environment. This accomplishment is a result of our effective cost control, lower debt levels and access to revolving credit facilities. Looking ahead, we see a potential pathway to further reduce our breakeven to a level below $11,500 per day. With this aim, we provided notice to execute purchase options on 2 leased vessels for a total of $41 million and expect to close this transaction in June and further reduce our debt cost. And as always, Ardmore is focused on optimizing performance, closely managing costs and preserving a strong balance sheet.
Turning to Slide 13 for financial highlights. As noted, we are very pleased with our performance as we report results of $0.92 per share for the first quarter. We are correspondingly reporting strong EBITDAR for the quarter and continue to frame EBITDAR as an important comparable valuation metric against our IFRS reporting peers. While I won’t go into the detail here, there is a full reconciliation of this presented in the appendix on Slide 25. Also, please refer to Slide 26 in the appendix for our second quarter guidance numbers. Moving to Slide 14. As Tony mentioned earlier, our drydocking schedule for this year is largely complete. And as highlighted by the chart in the upper right, this will lead to increased revenue days and enhanced earnings power for the rest of the year.
In accordance with our energy transition plan, we have made some significant investments in our fleet during the recent drydockings to further improve operating performance, reduce emissions and enhance earnings. Total CapEx for 2024 is anticipated to be $17 million, including $11 million related to scrubber installations and other efficiency upgrades as well as ballast water treatment systems. It’s worth noting that we now have more than half of our MR fleet outfitted with second-generation carbon capture-ready scrubbers, which are set to further enhance our earnings power. Moving to Slide 15. Here, we’re highlighting our significant operating leverage. As you can see in the chart, for every $10,000 per day increase in TCE rates, earnings per share would increase by approximately $2.30 annually, with free cash flow generation increasing by nearly $100 million over the same time period.
This is why the current market outlook is so exciting, and Ardmore’s position is very compelling. With that, I’m happy to hand the call back to Tony and look forward to answering questions at the end.
Anthony Gurnee: Thank you, Bart. So to summarize, first, regarding the market. TCE rates remained elevated through the first quarter and have strengthened further into the second quarter, boding well for the full year. These rates are being supported by the geopolitical events we’ve discussed, most notably for MRs being the persistent reordering of the product tanker trade as a result of the EU refined products embargo. And of course, underlying supply/demand fundamentals remain highly supportive. And regarding the company, we’re continuing to achieve strong TCE performance and effective cost control, generating excellent returns and continuing to bolster our financial position. This enables us to pursue all of our capital allocation priorities simultaneously.
In particular, returning capital to shareholders in the form of our quarterly dividend now accumulated to 10% of market cap in just over 1 year while also gradually and opportunistically investing in fleet modernization. And with that, we’re pleased to open up the call for questions.
See also American Politicians are Buying These 10 AI Stocks and 30 Cities with the Highest Number of Veterans in the US.
To continue reading the Q&A session, please click here.