Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Third Quarter 2022 Earnings Conference Call. Today's call is being recorded and an audio webcast and presentation are available on 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 any time during the next two weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 797-7872. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.
Thank you. Good morning and welcome to Ardmore Shipping's Third Quarter 2022 Earnings Call. First, let me welcome our new CFO, Bart Kelleher, to the Ardmore team and wish him all the best on this, his first earnings call. Of course, ask him to describe the format for the call and discuss forward-looking statements.
Thanks, Tony, and welcome everyone. It's great to be here. Before we begin our conference call, I'd like to direct all participants to our website, ardmoreshipping.com, where you'll find a link to this morning's third quarter 2022 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation, 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 2022 earnings release, which is available on our website. Now I would like to turn the call back over to Tony.
Thank you, Bart. In terms of the format of today's call, I will discuss highlights for the quarter, market outlook, and changes to our capital allocation policy. After which Bart will provide an update on fundamentals and financial performance, and then I'll conclude the presentation and open up the call for questions. Turning first to slide 4. Products and chemical tanker markets remain at elevated levels, driving Ardmore's adjusted earnings to $61.6 million or $1.59 per share for the third quarter, which represents an annualized book ROE of 59%. Our MRs earned $47,000 per day for the third quarter, up from $31,000 last quarter, and are running at $45,000 per day for the fourth quarter so far with 40% booked.
Our chemical tanker on a capital adjusted basis earned $35,000 per day for the third quarter, up from $22,000 last quarter, and are running at $36,000 per day for the fourth quarter with now 50% booked. These rates suggest that our strong earnings from the third quarter are continuing well into the fourth quarter and we believe could strengthen further this winter as the market tightens. Consistent with the company's capital allocation policy, we're pleased to announce the initiation of a quarterly cash dividend with effect from the fourth quarter. The dividend payment will be one-third of adjusted earnings, so that if the fourth quarter continues at similar levels to what we've so far based on our stock price in recent days.
These volatile but elevated market conditions, Ardmore is benefiting from a strategic focus and optimization of its spot trading performance, including taking advantage of the overlap between products and chemicals. We're also seeing very clearly the result of the operating leverage embedded in our business, where every $10,000 a day increase in rates results in another $2.40 in earnings per share. Moving to slide 5. The outlook for product and chemical tanker remains positive in a tightly balanced market. The Russia-Ukraine war continues to cause dislocation and upside volatility as well as what we believe is a more persistent reordering of global product trade. As the most recent example of this reordering, Europe plans to replace a further 1 million barrels a day of Russian refined product imports prior to February 5 of next year as part of the EU oil embargo.
This is in addition to the ban on crude, which takes effect just 1 month from now. Industry analysts estimate that this could equate to a potential 7%-8% increase in global product tanker demand, which in our view would be a game changer for our markets. The next point to make is that the seasonally strong winter market typically commences in late November, when weather delays and increased refined product consumption adds another layer to underlying demand this year in addition to an already tight market. On top of this, global refined product inventory levels are currently very low, most notably U.S. and European diesel stocks, which will require Europe to import from regions further away, thus extending voyage durations and increasing ton-mile demand.
Chemical tankers have naturally lagged MRs, as is typical in a rising market, but are now catching up, and demand is expected to remain similarly robust for the rest of the fourth quarter and into 2023. Although there are macro headwinds and recessionary concerns for next year, we believe they're currently being outweighed by these positive demand factors. A final but important note, even at today's elevated freight levels, shipping costs remain well under 10% of the underlying cargo value that we transport, creating substantial headroom for further rate increases without the risk of demand destruction. Moving on to slide 6. Our capital allocation policy was introduced in March 2020, with the objective of building long-term shareholder value through the cycle. As a consequence of improved market conditions, we can now pursue our objectives simultaneously, which were previously considered ranked priorities.
These objectives being maintaining the fleet over time, reducing and now sustaining our leverage below 40%, growing accretively, and returning capital to shareholders. In terms of growth prospects, we continue to develop and evaluate potential transactions, but we remain committed to approaching this in a patient and disciplined manner. As mentioned at the beginning, we're pleased to announce the initiation of a cash dividend with the fourth quarter, consistent with our capital allocation policy. On that note, I'll hand the call back over to Bart.
Thanks, Tony. Building upon Tony's comments on the market outlook, we'll examine the industry fundamentals. Overall, the supply-demand dynamics remain highly favorable. On slide 8, we highlight the strong demand outlook for product and chemical tankers. On the oil consumption front, the IEA forecasts an overall increase of 1.7 million barrels a day for next year. The supportive trend for ton-miles is anticipated to remain strong with continued growth in export-oriented refinery capacity in both the Middle East and Asia, along with refinery closures in the west. As discussed, the additional demand as a result of the dislocation of trade caused by the Russia-Ukraine war is unlikely to change in the near term. In addition, chemical tanker demand is also accelerating, similarly bolstered by new plants opening in Asia, as well as expanding edible oil trade flows and the recovery of China's economy.
While historically, product tanker demand has grown 3%-4% annually over the long term, demand is estimated to have grown approximately 7% in 2022 compared to the pre-COVID levels in 2019. On top of this 7% growth, an incremental 7%-8% ton-mile growth is possible as a result of the EU oil embargo. We should start experiencing this uptick the end of this year and is likely to be persistent. Turning to the supply side on slide 9. The supply outlook remains very favorable, and the robust demand levels we have discussed are expected to exceed supply for the coming years. Estimated average net fleet growth for the next two years is very low for both product tankers and chemical tankers, and order books remain at record low levels of 5% of the existing fleet.
New ordering activity is expected to be subdued due to the very limited berth availability until at least 2025, and the continued lack of clarity on emissions regulations and propulsion technology, does dampening speculative ordering. While a resurgent market is slowing scrapping in the near term, an aging fleet will ultimately drive scrapping levels to increase. With this, it is important to point out that currently 9% of the product tanker fleet and 13% of the chemical tanker fleet are over 20 years of age. Moving to slide 11. We continue to invest in the fleet and optimize performance. On the one hand, we've been buying back leased vessels, and on the other hand, we've been selling older tonnage to take advantage of the strong S&P market, while at the same time chartering the ships back at favorable rates.
Here you can see our statutory dry dock schedule for the fourth quarter and next year, which also gives Ardmore the opportunity to engage in retrofits to increase operating performance and fuel efficiency. Turning to slide 12 for financial highlights. As you can see again on this page, the company is really pleased with the results this quarter. Obviously a function of the high market, but also all the hard work that has gone into building durable performance, which we believe will continue to pay off as this market gathers momentum through the winter and into next year. As noted on the slide, we are reporting strong EBITDA on the quarter and continue framing EBITDAR as an important metric to compare our results to IFRS peers. I would encourage everyone to review the full reconciliation presented in the appendix on slide 19.
Some other notable items from this quarter include the previously mentioned sale and time charter back of our older three vessels has led to reduction in vessel operating expenses and favorable time charter in levels at about $13,000 a day. On the back of our previously announced refinancings, we had a one-off reduction in interest expense during the quarter from unrealized gains in interest rate hedging. For indicative guidance for the fourth quarter, we've included a detailed slide in the appendix on page 22. Just emphasizing the benefits of the recent refinancing, guidance for interest expenses is expected to come in at $3 million in the fourth quarter as a result of the improved terms from our refinancings, flexibility provided by our large revolving credit facility, and the benefit gained from our interest rate swaps. Turning now to slide 13.
This highlights the robust markets that we're in as we continue to see strength in the fourth quarter already in advance of the typical winter uptick and the forthcoming EU oil embargo. In addition, as discussed earlier, TCEs from chemical tankers are also improving. On slide 14, we're highlighting our significant operating leverage. This slide intentionally looks different than it has in the past, but is reflective of the robust markets we are experiencing today, particularly as we enter the seasonally strong winter market and also anticipate the large uptick as the EU oil embargo takes effect. Similar to other industry participants, we have already seen a number of fixtures in excess of $100,000 per day over the past few months. Moving to slide 15. Ardmore continues to build upon its strong financial position.
Net leverage at the end of September stood at 34%, and we have a very strong liquidity position of over $190 million, $50 million of cash and $140 million of undrawn revolving facilities. All refinancings are now completed and have supported a reduction of cash break-even levels to around $14,500 per day. We utilized our ATM, selling 2.3 million shares and raising $21 million in net proceeds during the third quarter to build further financial strength, thus completing our ATM issuance for the foreseeable future. Among other things, raising these funds when we did was instrumental in accelerating the refinancing process and getting favorable terms, which substantially lowers our interest expense and break evens going forward.
As always, the Ardmore team is focused on optimizing performance on a relative as well as absolute basis in driving results in these elevated markets. We are also closely managing costs in this inflationary environment. With this, I'd like to hand the call back over to Tony.
Thank you, Bart. To sum up, product and chemical tanker rates continue at elevated levels, resulting in very strong operating returns. In the fourth quarter, earnings of $61.6 million and EPS of $1.59, equating to an annualized book ROE of 59%. Based on our stock price in recent days, an annualized current earnings yield of about 47%. So far, the fourth quarter is looking at you know, same or even stronger levels. The unfolding energy crisis, including the incremental ton-mile impact of the forthcoming EU oil embargo, has the potential to continue boosting demand in an already tight market, which we expect will persist into 2023, essentially until geopolitical circumstances change.
Meanwhile, underlying supply- demand fundamentals continue to look favorable given these strong demand drivers against a very low order book and limited berth availability for the next few years. In line with our capital allocation policy, we're announcing the initiation of a quarterly cash dividend commencing with the fourth quarter, representing one-third of adjusted income and expected to provide an initial annualized dividend yield of about 15%. In summary then, after several tough years in which we've worked hard to preserve cash, control costs, and maintain and even improve earnings upside for our shareholders, we're very pleased to now deliver significant value through our operating results, a return of capital in the form of cash dividends, and strong total returns from a rising share price. With that, we're pleased to open up the call for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. The first question is from Jon Chappell with Evercore. Please go ahead.
Thank you. Good afternoon. Tony, I think as people try to understand the duration of what's been happening so far and even trying to maybe poke holes in the sustainability of it. You know, as we approach February 5th for the refined product sanctions, I think there's some views that, you know, there could be just a pure shortage of ships, which, you know, we've talked about the ton-mile benefits of it, but could potentially kind of crimp total exports and also potentially worsen a global diesel shortage.
I know it's still several months away, and it's an evolving issue, but as you look to February and the ability of the product tanker fleet to move what needs to be moved at a very vital time for the economy, how do you kind of foresee shortages and the pros and maybe even a couple of potential cons to your business from that?
As always, Jon, a deep question. I guess haven't thought about it this way, but I'm a big believer in the overall efficiency of markets and this market as well. I think pricing will allocate the resources appropriately to get product where it needs to go. Honestly, I can't imagine a situation where there's just simply a shortage of ships and you can't move cargo, but it might price out certain trades, you know, to allocate resources elsewhere. I don't know if that
Mm-hmm.
That's a proper answer, but.
Yeah, I mean, I don't think anybody has.
To me, those conditions spell, you know, sky-high rates. Again, I just, you know, I think, you know, we've not had to think about these kind of scenarios for a long time in our business. To me, you know, it's where the inelasticity of shipping, you know, rates to demand, you know, comes into play. I think rates could go very high.
Okay. That's helpful. Second question, maybe not as deep, but for Bart to pull you in here.
You know, Ardmore's gone through a lot of defensive capital structure initiatives over the last couple years and put the company in this place now where you can introduce something like the dividend policy you just rolled out. A third of the earnings is certainly generous given the yield that you laid out. That means there's two-thirds of record earnings still left, and you're already at a situation where the leverage seems pretty sustainable through cycles.
Is this the time where Ardmore maybe shifts to more the aggressor and starts to add tonnage or, you know, because asset values have run so exceptionally strong and there's really no new building slots available for the next couple of years, you look outside of, you know, that, silo of growth and look to do other things with the remaining, cash flow?
Thanks, Jon. I think I'll kick this one off, and I'm sure Tony will add in color. Looking at you know the M&A or the vessel front, I think we always have been and will continue to be patient and take a disciplined approach and you know we turn over a lot of stones and you know frankly there are a lot of deals that don't look so attractive today and it has to be accretive and meet our requirements. Coming back to your initial part of the question on the dividend, you know we see it as one that's sustainable. We want it to be sustainable through the cycle, but also maintain resources so that we could meet our other capital allocation priorities simultaneously.
You know, we always have room to further pay down debt. If we're in a really strong market for a prolonged period of time, we can also look at returning more capital. I think, you know, we have the benefit that we can look at all of these capital allocation priorities simultaneously now. Tony, anything else?
No, I think that's good. I think, you know, we do have a substantial amount of further debt we could pay down. If we were to do that to a degree, we'd have capacity for significant growth. Then it's a matter of just being patient and getting the timing right and finding the right opportunity. But to underscore Bart's point, I think we'd be very happy under those circumstances to return a lot more capital to shareholders.
Okay. Thanks, Tony. Thanks, Bart.
The next question is from Turner Holm with Clarksons. Please go ahead.
Yeah, good morning. Good afternoon, gentlemen. Thanks for taking the call. I wanted to ask about the five ships that you have taken in on time charter. Obviously, you managed to secure those in a very well-timed manner. How long do those charters run and how do you see the chartering position developing as we move into next year?
Yeah, I'll just answer that briefly. Out of the five, three are the vessels we sold and chartered back for three years at $13,000 a day. That started, you know, six months ago. The other two are one-year TCs that we've extended through options, and I think they're an average of, like, $15,000. They have about a year to go.
Just turning back to the sort of the fleet perspective. I guess asset values have now moved over new build parity, which is certainly understandable, given where the rates are and the strong outlook. You know, is new builds, you know, is that something that you all would consider and given that you still, I guess as you indicated, you're gonna be distributing a lot of cash and dividends, but you'll have quite a lot left over and how do you consider new builds at this point?
I don't wanna state anything categorically, because we do look at projects, for example, that might be, you know, 10-year time charter business for a vessel that's got a renewable type of fuel feature to it, et cetera. You know, beyond that kind of thing, which so far hasn't materialized, might be, you know, still pretty far away in the future. You know, just looking at the delivery dates and the pricing for new builds, it doesn't look right. I think that's the broad consensus in, you know, the sector. You know, I think there's probably a bias against ordering, you know, what do you order? When do they deliver? Very high price right now, pushed up by other sectors.
Okay. Thank you. I'll turn back.
Next question is from Benjamin Nolan with Stifel. Please go ahead.
Hi, good morning, afternoon. This is Michaela Rogers on for Ben today. Thank you all for taking our questions. I know you guys have given a lot of clarity on the capital allocation policy. We just wanted to kind of get a little more color, given the activity under the ATM program. Just maybe would you provide some insights on the capital needs, using those proceeds for, I know you mentioned you'd stop the issuance for the foreseeable future, but just maybe a little extra color there and that'll be great. Thank you.
Sure. Yeah. You know, we've completed our program, as we said, for the foreseeable future. Our balance sheet is in excellent shape. One of the reasons why we decided to initiate the ATM for that, you know, period of time to raise about $40 million was because it allowed us to, you know, really accelerate the discussion with the banks and take out all of our lease debt. I think we arguably got a head start of maybe six months. We had it all lined up, for example, in June, but it's actually taken just until last week to execute on the refinancing of the final sale-leasebacks.
Arguably, in that period alone, you know, we saved several million dollars and gotten very favorable rates at a time when I think the banks were, you know, particularly keen. So that I think that's just one facet to the value of, you know, doing what we did with the ATM, understanding that, you know, there are more shares in the share count now. But even looking at our returns on equity and yields, you know, compared to our peers, even with that additional issuance, we think, you know, we compare very favorably.
You know, I think the final point I would make is that I think it's, you know, the move we made there is part and parcel of a larger, you know, kind of a broader, you know, approach to, you know, financial strategy, which, you know, you could argue is kind of put the company in the position it is today, to generate the kind of returns it has.
That's very helpful. Thank you. If we could just ask one more. You know, given your strong liquidity position, we kind of wanted to ask about call rights for the preferreds and if that is something you would consider down the line.
Yeah, it's not no call for three years and then at par, I believe. You know, we're not quite there yet. That's a possibility. You know, of course, in a rising interest rate environment, the dividend rate there begins to look more and more attractive, and it's very flexible capital. I think there, you know, the headline rate looks a little bit expensive compared to everything else right now, but we still like it. But we do have rights to call it in. It's perpetual. The rate remains the same, but we do have rights to call it in after three years.
Great. Thank you guys for the time.
We remind participants, if they want to ask a question, you have to press star then one on the telephone keypad. The next question is from Omar Nokta with Jefferies. Please go ahead.
Hey, thank you. Hey, Tony. Hi, Bart. Yeah, nice to have you, Bart, on the call today. I wanted to follow up on Jon's question about the, you know, next steps with the potential or, you know, potential next steps with your free cash flow, the remaining two-thirds that you have. I think you guys are pretty clear. You know, Tony, you mentioned looking. I guess effectively it's pay down debt, even though your debt's gotten down to a nice low threshold. Looking to pay down debt is obviously very good. As you think then about the potential for acquisitions, wanted to ask, with the platform as it is now, when it is time to deploy that capital, what do you wanna do?
Do you look to further expand the MRs, or do you try to now look to scale up the chemical business?
Let me start, and then I'll ask Bart to join in after I make a couple points. I think the first thing is that as we continue to build liquidity, pay down debt, reduce our breakevens, build more substance in the company, I think it actually does, you know, improve the quality of the dividend, you know, prospective dividends going forward. I think there's a lot of benefit to that alone from a dividend policy standpoint. You know, we do, you know, we've been very patient, you know, in terms of looking for opportunities. We're very clear about what our strategy is, which is MR products and chemicals.
you know, in accordance with our energy transition plan, over time, we'll be doing more and more non-CPP cargo, which is, you know, code for chemicals and veg oils and things like that. Whether that's M&A or, you know, single ship acquisitions or block acquisitions, you know, will remain to be seen. you know, we're constantly looking at opportunities and, you know, keeping abreast of, you know, what's out there and what that could do for us. you know, probably as much as I can say right now. Bart, can you add anything?
I'd just say it's also a natural extension to the fleet today and the fleet that we trade, where we see our chartering team being able to, you know, trade the spectrum of refined products through to chemicals and switch in and out and see that does optimize our results. When the time's right to layer in, you know, additional assets from an M&A perspective or the vessel S&P market, we'll follow the strategy Tony outlined.
Yeah. I'll just finish by saying that, look, when the conditions are right, we'll be very happy to return a lot more capital to shareholders.
Yeah, makes sense. Thanks, guys. Just to follow up, apologies if you addressed this already, but just in terms of what we're seeing in the time charter market, obviously there's been a good amount of volume we've been seeing. You guys have been predominantly spot and look to be here in the fourth quarter, which is paying off clearly. How do you guys think about that? What's the appetite today on the part of charters for some medium to long-term contract? What's your appetite to enter into those?
Yeah, look, I mean, this is something that Gernot, you know, focuses on every day. We talk about it constantly, and it's a topic of discussion at the board level as well. I think, you know, the real liquidity in our market in time charters is usually out to one year. After that, it tends to get pretty thin. When we think about charters beyond a year, we think about a kind of a term structure and think about, okay, what are we really buying if we, if we put a ship out on, let's say, a two- or three-year TC beyond the one-year period. So far, to us, those rates seem to be fairly low, compared to what we think we should be able to earn in the spot market or on a TC basis later on.
I think in particular, the you know the winter market is potentially so robust that it you know we just are very reluctant to leave any money on the table at this point in time. We've had a lot of success in the past in chartering out. In the end, it's a fairly you know intuitive trading decision rather than a strategic policy type of approach.
Okay. Tony, that's clear, and it makes sense. I'll turn it over.
Thanks, Omar.
The next question is a follow-up from Turner Holm with Clarksons. Please go ahead.
Yeah, thanks. In a minute. Just to follow up a little bit on Omar's questions around time charters. I mean, I guess if you look into what analyst estimates are for next year, there seems to be a pretty big disconnect with what the time charter market is. I mean, just looking at analyst consensus, you know, on EPS for all of 2023, it's less than what you just reported in the third quarter. You know, how do we think about our models going into 2023? Is your market view consistent with the time charter market? Is that the kind of the best metric for us as analysts to look at as we think about 2023?
I think the one-year rate now is arguably $30,000 a day. You know, we're currently running at $45,000 a day. You know, that. If you have the visibility for a few months or even six months at that level, then the back half of even the one-year rate doesn't look all that great. You know, you can extend that logic for future periods. Our view is that, look, there's obviously a lot of uncertainty around, you know, the bulk of 2023. The winters, we seem to have pretty good visibility on the winter now, which does run until March, usually.
You know, it's really a tug of war between, you know, economic, you know, macro headwinds impacting oil demand versus oil market dynamics and disruption and reordering of trade driving up ton-mile demand.
Okay. Thanks, Tony.
This concludes today's conference call. You may now disconnect.