Ardmore Shipping Corp (ASC) 2014 Q4 法說會逐字稿

Ladies and gentlemen, please stand by. We're about to begin. Good morning and welcome to Ardmore Shipping's fourth-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 website, ardmoreshipping.com. (Operator Instructions). A replay of the conference call will be accessible any time during the next two weeks by dialing 719-457-0820 or 888-203-1112 and entering passcode 165-2188.

At this time, I would like to turn the call over to Mr. Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Good morning and welcome to Ardmore Shipping's fourth-quarter earnings call. First, let me ask our CFO, Paul Tivnan, to describe the format of 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 to this morning's fourth-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 the results projected from those 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 fourth-quarter 2014 earnings release, which is available on our website.

Now I will turn the call back over to Tony.

Thank you, Paul. On the call today, we will highlight our fourth-quarter and full-year performance and recent market activity, discuss our chartering outlook and our new building program, provide an update on the product and chemical sectors. Paul will then discuss our financial performance, and then we will recap and open up the call for questions.

Turning first to slide 5, we are reporting a net profit of $1.9 million for the fourth quarter of 2014 and $1.7 million for the full year, the result of an improving charter market and the impact of our growing fleet.

Ardmore delivered strong chartering performance in the fourth quarter with our spot MR product tankers earning $18,500 per day net, and overall, our Eco-design and Eco-mod MR are turning $16,900 and $15,800, respectively, which is up significantly year on year.

In fact, the fourth quarter was expected to strengthen anyway, given the favorable fundamentals in the product tanker sector, but the oil price drop, which we will discuss later in detail, has provided -- proved to be icing on the cake, driving charter rates to seven-year highs. These strong product tanker spot rates have extended so far into the current quarter, with Atlantic triangulation in January averaging $22,800 and Pacific triangulation $19,900.

The Company is set to undergo significant well-timed fleet growth in 2015 with 10 deliveries, one of which has already delivered and commenced deployment, and boosting revenue days by approximately 70% by the end of the year.

In the fourth quarter, Ardmore returned capital to shareholders at an annualized rate of 5% through a combination of a $0.10 per share quarterly dividend and repurchase of 119,400 shares at an average price of $10.71.

Turning to slide 6, there has been a lot of buzz about the impact of low oil on the crude tanker rates, but the impact has been equally significant for product tankers. The oil price collapse, which was caused largely by persistent oversupply, has resulted in more refined products moving at sea, oil price volatility driving an increase in long-haul arbitrage trade, port congestion tying up product tanker tonnage, and bunker costs dropping by almost 50%, thereby boosting TCE performance further.

As a consequence, MR spot rates in the fourth quarter, east and west, averaged 49% higher than a year ago and in December averaged in the mid-$20,000s per day, and that, by the way, is the equivalent of around $65,000 per day on a VLCC, if it's scaled on the basis of invested capital.

In addition, we believe that low oil pricing should boost oil demand growth later in 2015, resulting from the positive impact it should have on global growth, cheap oil replacing other energy sources on the margin, and change in consumer behavior -- for example, lower sales of hybrid cars and more SUVs, with similar trends taking place worldwide.

It's worth adding that there are now reports of oil traders in Asia who, in anticipation of a rebound in oil pricing, but with short tanks filling up in locations such as Singapore, are now looking to take on product tankers for storage, which would logically involve LRs, but could also include MRs.

To take full advantage of the anticipated strong market and provide earnings stability, we are deploying ships in the spot market in both the Atlantic and Pacific basin. Continuing on that theme, on slide 8, Ardmore's chartering prospects for the first quarter of 2015 are positive, given the continued relative market strength. In terms of our spot time charter mix, roughly half of our revenue days should be spot for the first quarter, up significantly from one year ago, and looking further into 2015, as most of our new deliveries will engage in pools or spot commercial arrangements, we expect that our mix will swing even more towards spot.

One important note is that the Eco-design TC number we are displaying on this slide is before profit share, which could add another $400 per day across those ships. On top of this, we are expecting our newbuilding deliveries to make a strong contribution to our TCE performance in the first quarter.

Going forward, we will continue with our versatile chartering strategy, which enables us to adjust the mix of spot and time charter business, depending on how we see the market developing. This, we believe, is a differentiated, value-maximizing strategy.

Turning now to slide 10, our newbuilding program is on track, and we expect to take delivery of six more vessels by midyear and a total of 10 for the full year. These ships will increase our fleet revenue days, as mentioned, by 70% by the end of the year, thereby substantially boosting earnings and cash flow capacity.

Four of the 10 newbuildings are MR tankers, and they will enter into a proprietary spot trading arrangement with a leading oil trading firm, and six of the 10 are IMO 2 coated product and chemical tankers, which have the ability to engage in both markets, depending on their relative strength at the time.

The Ardmore Cherokee, the first of our 25,000 deadweight ton chemical tanker newbuildings, delivered in January and entered into a chemical tanker pool where we estimate it would have earned $15,500 through 2014, given the terms of entry, and we're anticipating similar or better performance in 2015, which is a good level for a ship of this size.

Let's take a closer look now at the product tanker market on slide 12. First, it's important to highlight the strong demand growth fundamentals arising from ongoing secular drivers, namely refinery capacity relocation closer to oilfields and further away from industrial centers, which means more refined products moving at sea; continued growth in US Gulf product exports, augmented now by the relaxation of rules for export of clean condensate; and increasing business complexity from oil trading activity and regulatory tightening; for example, sulfur emissions regulations, which is boosting demand by creating significant cargo blending activity, often involving three ships for one cargo instead of one.

The unexpected oil price drop in the fourth quarter has added an extra layer of demand, which has driven rates to seven-year highs and is expected to continue impacting the product tanker market so long as oil pricing remains volatile. Just to clarify that point a bit further, while there are demand growth benefits from low oil prices for all tanker classes, MRs benefit more directly from the volatility itself rather than the specific direction of the price movement, as this opens up arbitrage opportunities for oil traders who are our customers.

Time charter rates are lagging spot performance, but this is a typical phenomenon at the beginning of charter market recoveries and should begin to follow spot rates later in 2015. Spot rates themselves will continue to be volatile, but should be at far higher levels on average than prior years, as they are today.

Turning now to page 13, the chemical market continues to improve gradually, as indicated by the Company's own fleet of chemical tankers, where TCE performance has increased about 10% in the fourth quarter as compared to a year ago. The Ardmore chemical fleet consists of coated IMO 2 combined product and chemical tankers capable of carrying a range of cargoes, currently roughly equal one-thirds of refined products, veg oils and biofuels, and commodity chemicals.

Refined product performance is improving for these ships with a broader market, while veg oils and biofuels have been relatively steady. The chemical market has lagged product tankers in charter performance, but we believe it, too, is set to improve.

As ship capacity is being drawn on the margin into the refined product trade, a strengthening of the global economy in 2015 should boost demand. Ongoing petrochemical expansion in the Mideast and US Gulfs is having an impact on tonne miles, comparable to the refinery shift for product tankers. And the newbuilding delivery schedule for 2015 is still relatively light, so supply growth will continue to be muted. Ardmore's coated IMO 2 type ships should, therefore, fare very well in the anticipated charter rate environment for 2015 and into 2016.

With that, I will hand the call back to Paul to discuss our financial performance.

Thanks, Tony.

Starting with slide 15, we are pleased to report a strengthening financial performance, with a net profit of $1.9 million for the quarter and $1.7 million for the full year. This is our third successive profitable quarter, reflecting both our fleet expansion and an improved charter market.

The Company reported adjusted EBITDA of $8.3 million, which represents an increase of $6.5 million from the fourth quarter of 2013. Revenue was $22.3 million, an increase of $12.7 million from the same period last year.

Net operating costs for the Eco-design vessels were $5,835 and our Eco-mod vessels were, on average for both products and chemicals, $6,373 per day for the full year.

Depreciation and amortization for the fourth quarter was $4.9 million and we expect depreciation and amortization for the first quarter to be approximately $6.3 million.

Corporate overhead costs were $1.9 million in the fourth quarter, which continues to be one of the lowest of our peers on a per-ship basis. Our interest and finance costs were $1.2 million, and this is net of capitalized interest related to the newbuildings in the quarter of $[1].2 million. We expect capitalized interest cost in the first quarter to be around $1 million.

The above results in a net profit for the fourth quarter of $1.9 million or $0.07 per share.

As you can see on slide 16, the charter rates continue to increase. In the quarter, we had five Eco-design MRs in operation, which earned an average of $16,855 per day for the quarter. Our Eco-mod MRs earned $15,750 per day on average, which represents an increase of $1,800 over the same period last year.

We have three ships trading in the spot market right now, and in line with the stronger market, the vessels are earning an average of approximately $18,800 for voyages in progress.

The chemical market continues to improve, with her three ships earning $11,400 per day, on average, which is an increase of approximately $900 per day from the same period last year.

Again, it is important to point out that Ardmore has substantial upside potential and every $1,000 a day increase in rates across the fully delivered fleet equates to $0.34 per share in EPS. At current MR spot rates, we estimate that our earnings will be around $1.65 per share annually. We believe this upside potential is, on a per-ship basis, the highest of our peers.

On slide 17, we have our summary balance sheet, and at the end of December, our total debt was $234 million, as compared to total capital of $570 million, even our leverage is 42%. Our cash on hand was $59 million.

I would like to highlight Ardmore's NAV upside to increasing ship 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.

Turning to slide 18, as noted on our last call we have committed bank financing in place for all of our newbuildings. We drew down $19.5 million for the Ardmore Cherokee prior to year-end, leaving us with $192 million available for drawdown for the remaining newbuildings in 2015.

Our leverage currently stands at 41%, and while this will increase modestly as vessels deliver, we expect our leverage to remain low. Our weighted average interest on our debt was 3.77% for the quarter.

With that, I would like to turn the call back to Tony for some closing comments.

Thanks, Paul.

In summary, then, on slide 20, our earnings performance is gaining momentum on the back of strong business fundamentals and well-timed fleet growth. The product tanker market has been at seven-year highs now since October and the chemical market, we think, should strengthen in 2015 with an improving global economy.

Meanwhile, we are maintaining our focus on cost advantage and fuel efficiency and service excellence, which is our core operational strategy and underpins our strong financial performance. As a management team, we are focused on vessel deliveries, which will boost our capacity by 70% by year-end, and extracting maximum value from the charter market where, as we've mentioned a few times, every $1,000 a day is $0.34 a share.

Finally, the Company returned capital to shareholders at an annualized rate of 5% in the fourth quarter as a combination of our cash dividend and our share repurchase program.

With that, we are pleased to open up the call for questions.

(Operator Instructions). Doug Mavrinac, Jefferies.

Just a few follow-up questions for you guys. First, as it pertains to the current market, Tony, in your commentary you mentioned how rates had hit seven-year highs, and interestingly from our standpoint when we started seeing the beginning of the move last year, it started in the LR market around last March and then it started to trickle down to the LR1s and the MRs. For 2015, last week we started seeing LR2s popping up 35% presumably as Yanbu was ramping up.

My question is, is what happened last year -- should we expect a repeat of what happened, I guess, as things play out in 2015 with the LR starting to lead and then trickling down to the LR1s and MRs, and if so, why does it work that way?

Generally speaking, I think what's good for LRs is good for MRs. They do compete on the margin. There is a side effect of LR2s interacting with LR1s and LR1s with MRs. It draws competition out of the MR space. But also, it might just take a little bit longer for the same fundamentals or the same market dynamics to get to the MR fleet (multiple speakers)

Do you see cargo splitting or anything like that, Tony, in the product space?

Not, I think, not at this rate differential, to be honest, but it is a signal of greater demand (multiple speakers)

Right, right.

That draws all the ships up.

Getting to that interaction, right now average LR2s are $30,000 a day and MRs are $19,000-$20,000-ish. If you started seeing additional upward pressure on the LRs where you cross $40,000, is that what you're talking about in terms of potentially pulling up the smaller ships?

I think if you get to those kind of levels, you could start seeing cargo splitting.

Got you, got you, got you. Okay, helpful. Then as it pertains to US exports, that was prior to last year the only game in town for the preceding four or five years them, but obviously that game is much smaller compared to what's happening in the Middle East right now.

But when you think about the prospect of US exports maybe slowing with US production, given what's happening in the Middle East, would that be a good thing or a bad thing from a tonne mile demand standpoint if you look at where those US exports are going, and if they don't get satisfied by the US, presumably from the Middle East, so would slowing US exports, given what's happening in the Middle East, be a good thing or a bad thing?

There is a lot of new refinery capacity coming on stream right now in the Middle East, in the Red Sea and the Middle East Gulf, and that, generally speaking, that's very good for the business for LRs and MRs.

We actually think that there is going to be continued growth in US exports. Part of it is just that the refining complex in PADD 3 has just got a tremendous advantage in terms of feedstock competitive pricing, and that will continue. The other thing is that it's just a fairly modern competitive refinery base, so we think that continuing.

It's also important to point out that with the year-end de facto relaxation of rules on export of clean condensate, which prior to this was classed as crude oil and couldn't be exported, that -- we are waiting to find out details on people's plans, but that will boost exports for clean tankers because most of that will go on refined product tankers.

Got you, very helpful. Then final question before turning it over, you mentioned in your commentary as well that spot rates have obviously done very well, but we have seen some lag in the time charter market, and it's normal, I guess, to -- for the market to really say, look, spot rates are going to stay here for a while, so let me start paying up in the time charter market.

My question is, have you guys started to see the beginnings of any sort of increasing interest on the part of charterers that say, hey, look, what would you be willing to let this MR go for? So have you seen an increase in that just yet or is it still to come?

Our view is that it is still to come, but we would expect to start seeing that in March, April.

Got you, got you. Okay, perfect. That's all I had, thank you, and great job on the quarter.

Jon Chappell, Evercore ISI.

First, I just want to talk about the first-quarter soft guidance that you gave. You mentioned the [18.8] thus far. When we think about lead or lag times as far as chartering ships, you said that those are in the current voyages today. How much of your first-quarter operating days would you say have been booked at those levels that you have disclosed?

We could be getting toward 60% of the quarter.

Okay.

Yes, I think that's on our guidance we have given, the time charter days for the first quarter, about 53%, about 740 days, and then of these spot days, about 50% of the remainder are probably fixed.

Okay. Then another market question, it seems like, for better, for worse, the Atlantic Basin is the one that is most focused on TC2/TC14 probably the easiest to track. TC14 has taken a huge step down, but it seems like east of Suez everything is going really well. Outside of the brief mention you made, Tony, of traders maybe starting to store some products in the Eastern Hemisphere, could you talk about the difference in the markets? And I guess you are positioned basically 50-50, but why it's important to look at the other side of the world as well?

Just to balance it out. But obviously, most of the attention has been on the Atlantic Basin for a while now, but the reality is that most of the growth in export capacity for refined products is happening in the Middle East and India, so that's where we see the fundamentals really, really driving the market.

In terms of the Atlantic Basin, TC14 is traditionally a backhaul and it's behaving like a backhaul at the moment, so refinery output from PADD 3 is down a little bit. Part of that is scheduled turnarounds, part of it is outage, and we think it will come back pretty quickly. There is talk about the strike -- the steelworkers strike, which doesn't appear like it's going to have a big impact on refinery operations.

All right. Two quick ones. Paul, what's the remaining capital expenditure budget for 2015?

Sure, so the yard installments for the remainder of 2015, about $250 million, and we have got debt coming on in the remainder of those facilities about $[190] million, so about $20 million to be used up from cash on the balance sheet.

Right. Then, so outside of that, obviously, you completely funded for the newbuild program. Tony, what other opportunities are out there to acquire ships, whether onesies, twosies, or types of fleets, and how do you guys balance that with the capital return that you spoke about in the presentation as well?

We're really just focused on -- every time when we feel we have a choice to make, we're just focused on maximizing value.

There are a range of alternatives for growth and returning capital through the share repurchase and dividend program. It is really a matter of just deciding what's the right thing to do at a point in time, given alternative uses for that capital.

But I just want to underscore again that we are growing our revenue base by 70% by the end of the year. We are in a very exciting charter market environment and we're really focused on extracting maximum value from it. And if on top of that we find ways to -- if on top of that we can find ways to grow accretively, that would be great.

Right. Just to follow up, one last follow-up on that, obviously there were a lot of orders placed late 2013, I guess mostly through 2013 in this market, and maybe some people who weren't historical product tanker or MR players didn't have the platform in place. Do you see any opportunities there from people who may be looking to get out of that investment before they even take delivery of the ships?

I think certainly that's the market buzz and we think it's an interesting time to consider acquisitions, but as I said, we have got a lot going on and we are really pleased with the growth that we have built into the fleet, and if nothing else happens, we're really pleased with that.

Okay, thanks, Tony. Thanks, Paul.

Omar Nokta, Clarkson Capital Markets.

I just wanted to follow up on Jon's question maybe a bit more and just ask have you guys considered maybe selling off maybe the pre-2005 built ships. I know you have maybe two or three of those. Would you consider or have you considered maybe selling those off and using those proceeds to buy more modernized ships?

It's something we do -- it's something we will consider. In principle when you get into strong markets, it's a good time to start shedding ships that you don't think are long-term keepers, but we think we are still well away from basically momentum in the charter market and not just charter, but time charter and therefore S&P, which would call that -- make it the right timing to do that. It's probably a little early days for that.

Okay.

Meanwhile, the ships are going to generate a lot of cash flow.

Yes, we have been surprised that they have lagged and maybe that's where the value is at this point in the market.

Yes, I would agree with that.

Then just wanted to get some clarity, Tony, you were mentioning the Cherokee, how that was delivered, and did you mention that could get about $15,000 a day on a one-year charter, or what exactly were you referring to there? Sorry, I joined a little late.

That's okay. That ship has been entered into a pool, which does products and chemicals, and based on the pool points it has been allocated, which are very high because it's a Eco-design ship, one of the first chemical tanker Eco-designs, it would have earned $15,500 last year or thereabouts. We think that she will continue to earn that level or more this year.

Okay, all right, thank you. Then just finally, wanted to ask also about the charters in place. You have the table that shows the minimum expiration of those charters. If you were to put maximums, would you say that's roughly, what, two to three months from there?

Paul, do you want to comment on (multiple speakers)

Yes, the latest -- we have got a bunch of those. In terms of the maximum for the ones that are coming up in the first quarter or in general? The ones that are coming up in the first quarter, it really does vary in terms of ship position, so maximum from there would probably be probably another 10 or 15, 30 days from (multiple speakers)

Okay, all right, thank you. That's it for me.

Fotis Giannakoulis, Morgan Stanley.

Congrats for the good quarter. I would like to ask you how much of this big surge that we saw in product tanker rates at the end of the fourth quarter and early this quarter is driven by the lower oil prices and how much is by fuel gains that -- to the time charter rate? How much by trade, and if you can specify which areas and which products they have been moved much stronger this last few months?

Our view of this is that the big driver for product tankers has been price volatility, and it's not just the volatility on the WTI or Brent, but it's really physical regional price volatility, which creates trading opportunities. We have seen exceptionally long-haul trading activity and that obviously boosts tonne miles.

Generally speaking, there is just more refined products moving at sea as well. The fuel gain is probably worth a few thousand dollars a day, so that's not to be ignored. It's really -- the other thing is that we have been observing our ships are generally taking longer to load and longer to discharge, and that ties up ship time as well and they get paid while they are waiting.

It's really those key things, and it's not so much simply the fact that the price of oil is low. It's that there is volatility and the majority of our business is done by oil traders and that's their bread and butter.

In terms of specific cargoes or types of refined products, it's across the board. We moved -- we had one instance where we moved low sulfur diesel all the way from, I think it was, Galveston to Taiwan on an MR, and then the ship went across and loaded jet fuel in Ningbo, China, and brought it all the way back to New York. It's all just price driven.

Okay, thank you. I want to go on the asset prices and we have seen the ways they have moved higher the last couple of months. It doesn't seem that the asset prices have increased at all. Is this because of the pressure from other sectors, like dry bulk? What do you attribute that, and given where the asset values are and your market outlook, where would you focus more on potential expansion? Would it be secondhand vessels in the water or you will be tempted to play some additional newbuilding orders?

It's clear that asset values haven't really started moving yet, and I think if you think back to -- it's a little bit hindsight, right, but if you go back to other upturns, the vessel values typically lag the charter market recovery.

The reality is that vessel values are still relatively low. That means that there is a lot of NAV upside in our stock as well, but what it means is that there aren't a lot of willing sellers at the moment, so it's still pretty thin. There is not a lot of activity and the sellers are selling for very specific reasons, as opposed to they like that level and they are pleased to sell at that level. We are in that category, for example, with some of our older ships.

We would expect that as we get further into a strong market environment, you're going to see time charters follow, and vessel values as well.

In terms of what we would like to do, obviously, we would prefer to have ships that are in the water or ones that are delivering imminently. I don't want to say never say never, but it's unlikely that we will be ordering fresh newbuildings anytime soon.

Okay, thank you, Tony. That's all I had.

(Operator Instructions). Magnus Fyhr, GMP Securities. (Operator Instructions). No response. (Operator Instructions).

There are no further questions in queue. I would like to turn the conference back over to management for closing remarks.

Thank you, and just thank you all for joining us on the call. Obviously, we are pleased with the progress of the Company and we are looking forward to continued improvement. Thank you.

Ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.