Ardmore Shipping Corporation (ASC) Q2 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to Ardmore Shipping’s Second Quarter 2017 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. 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 week by dialing 877-344-7529 or area code 412-317-0088 and entering passcode 10111083. At this time, I will turn the conference call over to Mr. Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Mr. Gurnee, the floor is yours sir.

Thank you. Good morning and welcome everyone to our second quarter earnings call. First, I will ask Paul, our CFO to describe the format for the call and discuss forward-looking statements.

Thanks, Tony and welcome everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com where you will find a link this morning’s second quarter 2017 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 the results projected from those forward-looking statements and additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the second quarter 2017 earnings release, which is available on our website. And now, I will turn the call back over to Tony.

Thank you, Paul. So, on the call today, we will follow our usual format, first discussing our performance in recent activity, then an update on the product and chemical tanker markets, after which Paul will provide an update on the fleets and review our financial results and then we will conclude with some remarks and open up the call for questions. So, first turning to Slide 5 on our performance and recent activity, we are reporting EBITDA of $12.9 million and a net loss of $1.9 million for the quarter. That equates to $0.06 per share and that’s the same as actually for the first quarter this year also $0.06 loss. Our 6 eco-design MRs acquired last year continue to contribute positively to earnings increasing operating income by 17% in the quarter over the pre-acquisition fleet and will be significantly accretive to EPS in a rising market. During the second quarter, we delivered satisfactory chartering results. Spot rates were firmer with overall MR performance of 13,800, representing an increase of 600 over the first quarter of the year. The underlying fundamentals of the MR sector remain firmly intact and highly compelling, which we will discuss in a minute. Against this backdrop, we continue to execute effectively on our long-term strategy. During the quarter, we continued to take steps to strengthen our balance sheet completing the refinancing of the Ardmore Sealeader and Sealifter under a sale leaseback arrangement resulting in net proceeds of $12.3 million. Throughout the quarter, we continued to focus on maintaining tight control of costs with our operating and overhead expenses running under budget year-to-date. And as the final point, we are maintaining our dividend policy of paying out 60% of earnings from continuing operations. Consistent with that policy, the company is declaring no dividend for the second quarter. Turning to Slide 6 for a quick look at our fleet profile. There has been no change to the fleet since the last earnings call, but as a reminder, this is a modern high-quality fuel-efficient fleet all built in top-tier yards, with significant earnings power in a rising market. So, turning now to Slide 8 on the product tanker market, MR rates firmed in the Atlantic Basin in the second quarter driven by record U.S. refinery output and continued strong demand from Latin America for U.S. exports coupled with steady demand from West Africa for both U.S. and European exports. Global refined product inventories drew down in April and May, but healthy refining margins, specifically in the U.S. and Europe resulted in high utilization of throughput in June and July, keeping refined products inventories high on a historical basis. However OPEC and its nonmember partners remain committed to maintaining or even raising production cuts as needed in order to rebalance the oil market within the first quarter of 2018. The ensuing decline in inventory should naturally result in increased oil trading activity and cargo flows. Looking ahead, the outlook remains positive and the short-term refinery throughput is expected to increase by 800,000 barrels a day in the third quarter supporting cargo volumes in a more robust charter market in the coming autumn and winter. Longer term, the underlying positive fundamentals remain unchanged. Oil consumption is growing at 1.4 million barrels a day a year matched by refinery capacity additions away from points of consumption. This combined with ever increasing trade complexity continues to drive demand growth in the 4% to 5% range. Meanwhile, turning to supply, the order book is now at a historical low of 4.4%. So far this year, 40 MRs have delivered and 9 have been scrapped. We expect 24 vessels to deliver for the remainder of the year when taking to account slippage. As a consequence, we anticipate net fleet growth for the remainder of 2017 should now be well below 2% and then 1% or lower in 2018 and beyond until ordering activity resumes on a large scale which we don’t believe will happen until charter rates rise significantly and then of course there will be a minimum 3-year delay before these orders begin to really impact supply growth. So the fundamentals of supply and demand are very compelling, which we believe will set the stage for a return to stronger charter market conditions, the exact timing of which is a more function of oil market dynamics most importantly inventory levels. Turning to Slide 9, on the chemical tanker market, during the quarter, our chemical fleet was employed carrying 36% CPP, 24% chemicals and 40% veg oil cargos. Overall, chemical cargoes accounted for only 7% of our total revenue. Global demand for chemical transportation was particularly weak in the quarter impacted by a softer U.S. Gulf as unexpected production outages and maintenance reduced exports. Southeast Asian palm oil cargoes were also week at limiting triangulation opportunities. Looking ahead, we expect continued solid demand growth in the chemical trades driven by improving global GDP and industrial protection. This coupled with more general ongoing petrochemical plant expansion in the U.S. Gulf and Middle East should result in overall chemical tanker demand growth of around 5% for the foreseeable future. We also expect the palm oil trade to strengthen through the remainder of the year driven by seasonal increases in demand. And in addition an improving product tanker market will increase demand for chemical tankers in CPP trade. Looking at supply, the chemical tanker order book currently stands at moderate levels, but there continues to be a difference between stainless and coated type sheets. The total order is 10% of the existing fleet, but within that percentage, the percentage of order for stainless steel amounts to 16%, whereas the coated tankers on the order amount to only 6%. So, the situation for coated tankers such as those we own is more favorable than the headline figure suggests. Overall, net of strapping, we expect chemical tanker fleet growth of around 4% to 5% in 2017 broadly in line with tanker group – with demand growth that is pointed out more favorable for coated tankers, where the dynamics are more similar to MRs. And with that, I will hand the call to Paul to provide an update on our fleet and financial performance.

Thanks, Tony. Moving to Slide 11, we will through the fleet days. Starting with the chart on the right, you will see that revenue days have increased by 13% for the full year to 9,747 days. We had two drydockings in the second quarter with the Ardmore Defender and Seafarer both completing intermediate surveys and we expect to have 45 drydock days in the third quarter. Then, turning to Slide 13, we will take a look at the financials. As you will see on the second and third line, we reported a net loss of $1.9 million or $0.06 per share for the second. Total overhead costs were approximately $3.8 million in the quarter, comprising of corporate expenses of $3.2 million and commercial and chartering cost of just $650,000. As mentioned before in many companies, the commercial and chartering costs are incorporated into void expenses, which means that our corporate cost is the comparable overhead. Our full year corporate costs are expected to be $12.3 million, which works at $1,250 per ship per day across the 27 ship fleet. Overall, we expect total overhead that’s corporate and commercial can be approximately $3.8 million for the quarter for the remainder of 2017. Depreciation and amortization for the second quarter was $9.1 million and we expect depreciation and amortization in the third quarter to be approximately $9.3 million. Our interest and finance costs were $5.2 million comprised of cash interest cost of $4.5 million, unamortized deferred finance fees of $650,000. This does not include one-time deferred finance fees write-off related to the refinance of these Sealeader and Sealifter of $500,000. We expect interest and finance costs in the third quarter to be approximately $5.5 million, which includes unamortized deferred finance fees of $650,000. Now, moving to the bottom of the slide, our operating cost for the quarter came in at $15 million or 6,071 per day across the fleets, including technical management. OpEx for the eco-design MRs were $6,006 per day. Eco-mod MRs came in at 6,107 per day while eco-design chemical tankers came in at 6,212. Looking ahead, we expect total OpEx for the third quarter to be approximately $16.4 million. Finally, based on the company’s policy of paying our dividends equal to 60% of earnings from continuing operations, we have not declared the dividend for the quarter following a net loss of $1.9 million. Now, turning to Slide 14, we will take a look at charter rates for the quarter. And starting on the left overall across the fleets, we saw a slight improvement in charter rates with the fleet earning an average of $12,996 for the second quarter compared to $12,919 for the first quarter. And moving on to various ship types, we had 15 eco-design MRs in operation, which earned an average of $13,452 per day for the quarter, while the six eco-mod MRs earned $13,960 per day. The six eco-design chemical tankers earned an average of $10,736 per day. And looking ahead to the third quarter as of today with 40% of the days booked, our spot MRs are earning approximately $13,250 today – per day for voyages in progress and our chemical tankers are earning approximately $10,500 per day. Overall, we are satisfied with our chartering performance in the second quarter. Our fleet continued to perform well in spite of a softer charter market. On to Slide 15, we have our summary balance sheet which shows at the end of June, our gross debt was $464 million, which net of deferred finance fees was $454 million. We have total capital of $873 million and cash on hand of $55 million, again a gross leverage of 54% at the end of the quarter. And turning to Slide 16, as mentioned earlier we completed the refinancing of the Ardmore Sealeader and Ardmore Sealifter under a sale and leaseback arrangements which release net proceeds of $12.3 million for general and corporate purposes. Our balance sheet remained strong and with our gross leverage of 53.8% and with total cash and net working capital of approximately $81 million at the end of the quarter. And finally as you all know all of our debt is amortizing with principal repayments of $45 million annually, so we are continuing to de-lever and strengthen the balance sheet. And with that, I would like to turn the call back over to Tony.

Thanks Paul. So to sum up and we are reporting a net loss of $0.06 per share in the second quarter, in line with our first quarter results. Our six eco-design MRs acquired last year contribute – are contributing positively to earnings, increasing operating income by 17% in the quarter and they will be significantly accretive to EPS in a rising market. Our spot MR rates improved in the second quarter as strong demand from Latin America and West Africa refined product imports provided support to Atlantic Basin rates. In the short-term high levels of refined inventories continued to negatively impact demand, however OPEC and Russia appear to be very committed to rebalancing the oil market within the first quarter of 2018, which would increase oil trading activity and cargo flows. Fundamentals remain strong with demand growth estimated to be in the 4% to 5% range, underpinned by 1.4 million barrels a day per year oil consumption growth, ongoing refinery development away from points of consumption and increasing trade complexity. Meanwhile supply growth continues to decelerate resulting in anticipated net fleet growth of well under 2% for the remainder of 2017 and 1% or lower in 2018 and beyond. And as the final point, through a combination of our fully delivered to high quality fleet, our ongoing focus on spot charter and performance and cost efficiency Ardmore has significant earnings power for every $1,000 a day increase in rates equates to $0.29 in EPS and $0.17 in dividends. And with that, we are now pleased to open up the call for questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question we have will come from Doug Mavrinac of Jefferies. Please go ahead.

Thank you, operator. Good afternoon guys. I just had a few follow-ups for you all this morning, with the first being a two-part question on the sale and leaseback of the Sealeader and the Sealifter, so for that particular transaction, are you guys able to provide us some of the terms of the transaction, particularly on the leaseback side such as the leaseback rate, the duration and whether or not there is a repurchase option. And then the second part to that question is this is the second and third I think refinancing that you all have done year-to-date and are there any additional opportunities for further refinancing such as these last two?

Well, so the terms are fairly typical Japanese tax leases. This one happens to be a 6-year lease. The impeded cost of capital is very attractive. I will – Paul if you want to add anything to that?

No, I mean its attractive financing for us both in terms of the overall cost of funds, but also the implied mezzanine components. And there are purchase options started near three and on a purchase obligation at the end. And with an attractive transaction for us entered into the access the Japanese markets. And I think once [indiscernible] opportunities should be there for us to grow if we have ships to finance.

Okay. And then Paul, as I think this is the second, third transaction of this type year-to-date, is that right and then would there be any additional opportunities for additional refinancing facilities?

Yes. This would be the – this is the third including the one that we competed in December on the Ardmore Seatrader. But in terms of opportunities it’s [indiscernible], yes, I think look, it’s something that I don’t think we are going to go crazy doing Japanese sale and leasebacks now, but it is an ongoing new tool in our toolkit. And they tend to be very relationship driven. So I think you can expect us to gradually expand our presence in that market over time.

Okay, got it, very helpful. Thank you. And then second question, when you look at the performance of your fleet during the quarter, the MRs continue to perform very well, the IMO2 vessels continue to do pretty good as well, when you look at kind of your employment distribution between for the IMO2 vessels between the CPP trade, the chemicals trade and the veg oils trade, is that mix something that you expect to maintain as we head into the second half of the year, because the CPP trade looks pretty good as we are heading into the second half, so would you want to maybe shift more into that, are you good with kind of how you have those vessels deployed in anticipation of maybe something happening on the chemicals side going forward?

In reality those ships just [indiscernible] in chartering you follow the money, so these ships will do rotations in and out of CPP, veg and chemicals depending on what’s the most attractive cargo at the time. And very often that’s part of an overall pattern of consecutive voyages or of voyages in triangulation if you wish. So the actual percentage is a fallout of a really just the result of just finding what’s going to pay best at the time. But it is notable that when the CPP market was strongly a year ago, those ships were spending more than half their time in CPP. And of course if that happens across the – that at least that piece of the chemical fleet that’s a tremendous boost to overall demand for that ship type. And we would expect under those conditions to see rates dramatically higher.

Right, got it, very helpful. And then final question, more modeling related, one thing I noticed was vessel OpEx was down sequentially from 1Q down year-on-year, you are down to about $6 a day, which was obviously very good, should we think about that as a go forward run rate from a modeling perspective. And two, you mentioned that you will have 45 days worth of drydocking in the third quarter, how should we think about the distribution between the MR vessels and the IMO2 vessels for that?

Hi Doug, on the – specifically on the OpEx, I think we are running well below budget. It was a pretty good quarter in terms of OpEx. I think we would expect it to normalize, so some slight increases in the third quarter. We are guiding $16.4 million for the third quarter and probably something similar for the fourth quarter. And then in terms of drydocks they are all MRs for the third quarter.

That is outstanding. Thanks again for the time guys.

Thanks Doug.

And next we have Jon Chappell of Evercore.

Thanks. Good afternoon guys. Actually my first two questions are follow-ups to the answers you just gave, a little more detail on that last question Paul, $16.4 million is a pretty large jump up from the $15 million in the second quarter, so how much of that is expensing of the drydockings, how much of that is maybe the higher costs associated, I am assuming the costs are running to their – of the sale and leaseback and how much of it is just kind of budget expenses moving up?

I mean I think you are – our fleet average in the first quarter was about $6,300 per day in OpEx, second quarter were around just under – just over $6,000. I think overall, we expect the year – budget for the year for cost of fleet of $6,450. So I think one should expect in the third and fourth quarter that it would normalize come back in towards budget. It’s mostly going to timing of operating expenses quite frankly. So it wouldn’t relate to drydockings, drydockings are we capitalize our drydocking costs. So it’s purely run to the mill operating cost, happen that 2Q was good in terms of cost management, but also in terms of timing of crude changes and picking up, etcetera. So I think $16.4 million is not necessary a jump, I think it’s reverting back to more – more normal and we would expect the full year to be around 64.50 across the fleet for OpEx per ship.

Okay. And then Tony to one of your recent answers as well, the substitutability if you will of the chemical tankers in the MR fleet, in the chemical tankers slide you have kind of put that out there as a positive improving product tanker market will take some of those out of the chemical trade, but from an MR perspective which is still the majority of the fleet, everything looks so good right now with the demand versus supply just hasn’t translated into rates yet, how much do we have to fear in chemical tankers or other types of ships going in kind of cannibalizing some of that demand, it looks to far exceed that the supply growth over the next 18 months or so?

Yes. Well, I think on the chemical fleet, it’s actually just a very small fraction of the MR fleet. So I think it’s like one-sixth of the MR fleet. So if a marginal amount of that comes in and takes away CPP cargos, I think it would be very much on the margin, would be overly concerned about it. In terms of bigger ships stepping in and let’s say doing CPP on the major voyage the crude carriers that kind of thing that is happening, but it’s really de minimis at this stage. There is some cannibalization going on with LR1s and LR2s in the MR market. But again that seems to have its limits. It’s specific to certain trades. So overall, we feel that look it’s not an impregnable mode, but the MR ships have a very specific function in life and they seem to be very much in demand.

Great, okay. And then finally, it seems like up until the last couple of days or week or two weeks, things have been turning out in a favorable direction with the MR rates, once again when you layout the supply-demand outlook that it seems to be expected and now of course here we are in a pretty weak environment as we stand today, has anything meaningfully changed in the last couple of weeks or so, is this a seasonal blip, is it an impact of maybe the Shell refinery fire or anything like that, why can’t we seem to kind of keep the momentum in a higher high environment?

It seems that – I was talking to [indiscernible] about this earlier today and it seems that a lot of cargos have been held back in the Gulf, for example right now. But at some point they have to move. So we think that we might see a more robust market in the fairly near-term.

Okay. I appreciate it. Thanks Tony. Thanks Paul.

Thanks Jon.

[Operator Instructions] Next we have Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Yes. Hi, gentlemen. Thank you. Tony, you mentioned that your view – overall demand is growing by 4%, 5%, can you give us an overview of how the market, how demand has expanded in the last quarter on a year-over-year basis and if you have seen any diversion from this 4%, 5%, that can create potential opportunities in terms of certain owners that they will be willing to sell vessels, if you have seen this demand last quarter being lower for any reason, and if this lower demand of the last quarter is related to arbitrage opportunities, lack of arbitrage opportunities or ton-mile diversions?

Okay. So I think the way I would think about it anyway is that if you look at 1.4 million barrels a day of oil consumption growth, if you compare that to the amount of seaborne transport of products which is about 21 million barrels a day. If you look where that ongoing incremental refinery capacity is being built, you very quickly build up to a number of 4% or 5% in terms of ton miles and that’s without even thinking too much about increasing trade complexity, which is hard to quantify. If you then look at the AIS analysis that people are doing now on a long-term basis, the demand growth has actually been according to that in the 5% to 6% range up until the spring of 2016. And since then it’s been pretty flat. And we think it’s been pretty flat not because the underlying fundamentals aren’t good, but because the oil market dynamics have just taken that out that, that component of demand growth out of the market. And we think that at some point when those oil market dynamics change, you are going to see a resumption of oil trading activity and then you are going to see full force of that kind of cumulative fundamental supply demand growth. So, it’s interesting I have in front of me the trafficker first half of the year statement. And just on Page 2, their CEO says with the oil market, it was characterized by chronic oversupply and low levels of realized volatility with prices largely ranged down from December. This reduced profitable opportunities for trading and accordingly gross profit from oil and petroleum products trading. So, clearly this is what’s happening to our oil trader customers and that means there is less demand for the ships. So, we think that there is almost a pent-up element of demand growth that could come back to the market fairly quickly when oil trader activity resumes to the normal levels.

Thank you, Tony. That’s very helpful. Do you think that part of this weakening trading – weaker trading activity is because of the lack of trade financing, if the financing market has put any pressure consequently to the product tanker trade? And also if you see any signs that the traders are increasing or decreasing their books in terms of chartering or less, it’s even buying more ships right now that asset values we are at quite attractive levels?

Okay. Well, so the first question about trade financing, I mean, we do believe we have talked about this in prior quarters that we do believe that non-OECD inventories are continuing to decline. We think part of that might be trade finance related. Again that could change. I think overall the oil market seems to be fairly immune to trade finance impact, but that’s just a fairly lose opinion I have. So, I don’t know, but well it’s something worth looking into. But in terms of I guess the second question was oil trader activity and chartering in, it does seem that they are at very, very low levels of kind of chartered and control fleets. In a way that’s good for us. That means that when cargos have to move, they don’t have as many of their own ships to carry them. And so we could see that benefit a lot quicker than otherwise we might normally see it. In terms of traders buying ships, I mean, obviously [indiscernible]did a deal a few months ago now, which is kind of across the spectrum. It’s fairly optimistic, but we also just ordering VLGCs. So, clearly that’s something that they are prepared to do if they see the right conditions, but at this point other than the [indiscernible] order, which is a spectrum of sizes, there hasn’t really been a significant step by oil traders.

Thank you, Tony. One last question about a number of private equity control fleets that they have been discussed widely about potential mergers or combinations of fleets. Do you see this caption continuing right now? Is this something that your company would be interested in expanding in such a way?

We only hear the rumors that you hear. So, we tend to do it. I would like to say we tend to just chip away at [indiscernible] of the coal phase and we are focused on mostly on operating performance and just trying to maximize earnings here. If we defined opportunities of any sort that we thought would meaningfully improve our EPS, our earnings power and a rising market entity per share or quite frankly trading liquidity in our shares we would of course look at that seriously.

So – and in terms of expansion, buying vessels organically from the market, do you think that this is the right time, are you considering of putting more capital to work at this point of the cycle?

Yes. No, it’s a possibility. I think the challenge always for us is to find good ships at the right price.

Okay. Thank you very much, Tony.

Thanks Fotis.

And next we have Amit Mehrotra of Deutsche Bank.

Hey. Thanks Tony. Thanks Paul. I hope you guys are doing well. I joined the call a little bit late, so excuse me if I guess this has already been asked, just as a little bit of a follow-up I guess Fotis’ question, I mean you guys run a pretty tight shift from a risk management standpoint at least and it looks like hopefully we are kind of in the sunset period of a weak market that would benefit some while, so in that context, is there a potential for you guys to maybe move out a little bit further out on the risk curve, whether that means increasing the size of the balance sheet and related to that, are there opportunities out there for sizable transactions given I am sure relatively wide bid outspread especially at this point of the cycle, so not really a question about acquisitions, but really a question about potential size of deals and your willingness to maybe go out a little bit on the risk curve and expanding the size of the balance sheet? Thanks a lot.

Thanks Amit. Well, I just don’t think that we feel that there is a lot of narrator value and doing something significant with leverage right now. Whatever we would do would be fairly incremental and wouldn’t be particularly needle moving, it would be building on what we already have, but it would be in any way transformative. I am not [indiscernible] some kind of an M&A project but that would have a different flavor to it. So the answer is I think our bias is to play it relatively safe and focus on quality ships and things that are weld in our wheelhouse and synergistic and additive to what we are already doing that’s those MRs.

That’s very clear. Let me just ask you follow-up on I mean yesterday, we had a lot of U.S. E&P companies that reported earnings and it seems like at these oil price levels at least the strip hovering around high-$40s, low-$50 levels the U.S. oil production or supply is probably going to continue unabatedly, certainly for the rest of this year and prospectively potentially in 2018, can you just talk about how that impacts your view on demand, I mean if we do get this supply led decline in oil prices, I guess maybe it could create 2015 like conditions, maybe I am wrong, I am just wondering if you can just talk about some of the moving parts there as it relates to the product trade under those conditions. And then maybe are you Tony more optimistic than maybe you would have been just a few months ago given the evolution of what’s happening on the supply side in the U.S.? Thanks.

Sure and that’s really good question Amit. And anything that I mean really the short answer is an anything that turns out to be good for oil traders is good for us. And oil traders like volatility and complexity and that’s good for our market. So all [indiscernible] being equal that that’s what’s going to really move things for us. So the reality is that either a reduction of inventory through success by OPEC and Russia resulting in more kind of vibrant oil trading activity is good. On the other hand a price collapse and extra production resulting in a steeper forward curve in the oil market, better refinery margins heavily resulting in more throughput for congestion, regional volatility that obviously is another scenario that would be very good for oil traders and it would be great for us as well. So you are absolutely right there. I think the medium case where there is low volatility and we are just kind of motoring along is the least attractive case. But the point I was trying to make earlier is that eventually just the fundamentals of supply and demand in our sector we will address that. Alright, so it’s really a matter of timing.

Right, okay guys. Thanks so much for taking my questions. Have a great summer.

Okay. Thanks.

Thanks Amit.