Ardmore Shipping Corporation

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's fourth quarter and full year 2020 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 any time during the next two weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 10151864. This time, we've turned the call over to Anthony Burney, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Good morning, and welcome to Ardmore Shipping's fourth quarter and full year 2020 earnings call. First, let me ask our CFO, Paul Tibman, to describe the format for the call and discuss who are looking to save us.

Thanks, Tony, and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at artmoreshipping.com where you will find a link to this morning's fourth quarter and full year 2020 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 two, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from the 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 fourth quarter and full year 2020 earnings release, which is available on our website. And now I'll turn the call back over to Tony.

Thanks, Paul. So first to outline the format of today's call, to begin with, I'll discuss financial highlights and market developments, then some comments on the energy transition. Paul will discuss product and chemical tanker fundamentals and provide a detailed performance update. And then I'll conclude the presentation and we'll open up the call for questions. I'm turning first to slide four. Last year started off strong with IMO 2020, rose to record highs with the Saudi oil price war and pandemic disruption, then to new lows by year end, nevertheless resulting in overall positive adjusted net earnings of $0.5 million or two cents per share and Ardmore spot MR performance of just under $16,000 a day. Fourth quarter financial results are reflective of a trough in product tanker rates, with an adjusted loss of $13 million, or $0.39 per share, and spot MR performance of $9,600 per day. Chemical tankers didn't enjoy the same volatility as MRs earlier in the year, but rates appeared better in the second half, earning just under $11,000 a day, or $11,800 on a capital-adjusted basis to the cost of an MR. Meanwhile, Ardmore had been active in taking advantage of these volatile market conditions. We completed the sale of the Ardmore Sea Mariner just at the end of the year. This was replaced by the 2010-built Ardmore Seafarer, which we purchased in the third quarter at an attractive price and a much lower break-even rate of $11,700 per day. We completed financing for the Ardmore Seafarer with EO Bank at Libra Plus 225, our lowest bank spread to date. We took advantage of weak market conditions by carrying out six stockings in the fourth quarter. We just recently fixed three MRs on one-year time charters to partly de-risk near-term cash flow. We repurchased just under 100,000 shares in the fourth quarter at a weighted average price of $2.91 per share. And we've maintained a strong liquidity position and balance sheet with year-end cash of just over $58 million and corporate leverage on a net debt basis of 50%. Turning to slide five on the market outlook. Ardmore MR spot performance has enjoyed a partial rebound so far this year on the back of winter market activity and a modest economic recovery. We expect continued challenging market conditions until a full economic recovery is underway, largely dependent on the effectiveness and timing of the vaccine rollout. Thereafter, we expect a rebound in charter rates along with our financial performance in a recovering market. with above-trend ton-mile demand growth characterized by a demand-pull recovery, with refined product draws leading the way over crude activity, and oil market disruption and trading activity creating longer voyages in getting refined products to the markets where they're needed. Beyond the post-pandemic recovery, we expect continued product anchor demand growth to 2030, with global economic growth and refinery activity away from points of consumption, offsetting the initial impact of the energy transition. As already mentioned, chemical tankers have fared better than product tankers since the beginning of the rebound, which we expect to continue in a full recovery. Meanwhile, product tanker supply growth remains constrained, with net fleet growth of 1% to 2% per annum for the foreseeable future, and upcoming energy transition regulations keeping a lid on new building activity. While we're cautious about the first half of 2021, we believe the second half will bring improved conditions and should continue to build thereafter. Turning then to slide six. The global energy transition will have a profound impact on the shipping industry, including our segments. While this will unfold over years, the impact has already been felt through anticipated regulations and constraints on new building ordering activity. Our view is that the transition represents more opportunity than compliance challenge. As reflected in our energy transition plan, the main elements of which are as follows. First, we see significant opportunity for continued improvements in fuel efficiency, as well as early adoption of zero-carbon fuels, which Ardmore will pursue in keeping with our current strategy. Second, many of our customers have similar incentives to decarbonize, and we'll approach this through closer collaboration with shipping companies such as Ardmore, who are able to assist them in achieving their aims. And third, over time, our chartering activity will migrate more toward non-fossil fuel cargoes, for which demand will continue to grow along with the global economy. In fact, already 25% of our business is non-fossil fuel cargo. The energy transition plan is a progressive initiative, but at the same time, it's strategically consistent and focused on performance, which we will describe more fully in our upcoming 2020 sustainability report due out next week. And on that note, I'll hand the call back over to Paul.

Thanks, Tony, and starting off with the market fundamentals. The outlook for the product and chemical tanker demand remains very positive. An economic rebound is widely expected post-pandemic. Both the World Bank and the IMF are expecting the global economy to expand by 4% this year, with China alone forecast to grow by 7.9% in 2021. The IEA are forecasting global oil demand to increase by 8% or 7.4 million barrels a day, getting back to pre-COVID levels of 99 to 100 million barrels a day towards the end of this year. and to grow by approximately 0.85% per annum thereafter out to 2030. Low refining throughput is expected to increase this year by 6%, or 4.5 million barrels a day, further boosting cargo volumes. And the ongoing trend in refinery dislocation is accelerating as smaller refineries give way to new mega-scale export-oriented refineries. 1.9 million barrels a day of refinery capacity closed in 2020 in Europe, America, Japan, Philippines, and Australia, while 5.8 million barrels of new capacity is coming online between the end of 2020 through 2024 in the Middle East and China, resulting in greater voyage distances and time-wise demand. Meanwhile, product and chemical tanker supply is looking increasingly attractive. The energy transition looks set to accelerate a significant turnover in the global fleet, as increased emissions and efficiency targets put pressure on older, less efficient ships, resulting in more scrapping. And to put this into perspective, over 800 ships or 26% of the product anchor fleet will be over 20 years old and within the scrapping zone in the next five years. The current order book is already at all time lows. Product anchor order book is 6.3% or 193 ships delivering over the next three years. And we expect a fleet growth net of scrapping to be approximately one to 2% per annum for the next two years. Chemical tanker order book is 3.6% for 64 ships and net of scrapping, the expected fleet growth is less than 1% per annum for at least the next two years. New ship ordering is expected to remain low until there is further clarity on propulsion technology and emissions regulations as well as an economic justification for ordering. Moving to slide 10 for a summary of our quarter league performance and our financials. We're reporting a profitable full year 2020 a very strong first half characterised by market volatility and oversupply, followed by a weaker second half reflecting the impacts of the pandemic on oil demand. As Tony mentioned, charter rates have improved in the first few weeks of this year and we're currently trending higher than the fourth quarter. For the full year end 2020, we're reporting adjusted earnings of $500,000, or two cents per share, which excludes the losses on the sale of the Ardmore scheme ironer. Looking at our expense items, operating expenses came in at 62.5 million for the year, in line with last year, which was an exceptional performance given the challenges managing COVID. Total overhead costs were 17.9 million for the year, comprising corporate cash expenses of 11.9 million and commercial and chartering expenses of 3 million. Costs were down year-on-year, primarily related to travel and other COVID-related cost savings. As mentioned before, in many companies, the commercial and charging costs are incorporated into voyage expenses, which means that our corporate cost is the comparable overhead. For a direct comparison, our internal commercial overhead costs are running at approximately 50% of market rate prevailing pool fees. Interest costs came in well below budget for the full year, reflecting lower interest rates and completion of the fixed floating swap in May of this year, or last year. Currently, 305 million or 75% of our debt is fixed at a margin plus 32 basis points through May 2023. Depreciation and amortization total 38.4 million for the year. In terms of guidance for the first quarter, we expect operating expenses to be approximately 16 million. We expect overheads incorporating commercial and corporate to be 4.5 million, including cash and non-cash items. We expect depreciation and amortization to come in at 10 million. Interest and finance costs are approximately 4 million, including deferred finance fees amortized at 400,000. And finally, we have one chip on time chart terrain, and we expect chart terrain expenses to be 1.2 million for the first quarter of 21. Overall, Ardmore's cost structure is amongst the lowest of our peer group, despite our smaller size, with significant incremental improvement possible through scale. Turning to slide 11, we take a look at charter rates. As mentioned earlier, 2020 was a year of two halves. A very strong first half, followed by a much weaker second half. And in spite of the challenges in the second half, EcoDesign MRs earned 15,990 for the full year, while the feed average came in at 15,355. It's important to point out that none of our MRs have scrubbers fitted. So ignoring capital or operating costs associated with the scrubbers, Our estimate is that a scrubber fit in MR should generate a premium to TCE of $600 a day for the fourth quarter and $1,200 a day for the full year based on the spread between HSFO and VLSFO over the period. And looking across the quarterly performance with various ship types, EcoDesign MRs reported TCE of 9,600 in the fourth quarter, while EcoMod ships reported 9,050. The chemical tankers performed very well on a relative basis, and as with prior quarters, we presented the charter rates on the chemical ships on an actual and a capital-adjusted basis. The purpose here is to present the rates for the various vessels on a comparable basis to an MR. The methodology is simple. We establish a bare boat equivalent rate for the ships each quarter based on TCE. We then make an adjustment to the bare boat for the relative value of a ship to an MR, and then this is added or subtracted to the TCE rates. Again, this is one of the methods we use internally to assess relative TC performance, and it's very useful for contextualizing rates across different asset classes. Looking down at rates, the chemical tankers reported 10,900 for the quarter, and 11,700 on a capital adjusted basis. And looking ahead, as of today and already mentioned, for the first quarter we have 45% of our days booked on the MRs, at an average of 11,500 per day, and 11,000 per day on the chemicals, with 75% of the days booked. Moving to slide 12 for fleet and operations update. Our fleet continues to perform well, with all COVID-19 challenges being carefully managed. Crewing and seafarer welfare remains a top priority. Ardmore, along with other leading ship owners, strongly supports the recently announced Neptune declaration in an effort to build awareness of the issues and push to accelerate crew changes and vaccinations for our seafarers. In terms of fleet performance, Ardmore's modern, highly fuel-efficient fleet continues its strong performance on emissions reduction, and we remain well ahead of targets set by the industry. Our fleet carbon emissions for 2020 were 11% better than Poseidon principal targets, and we have a continued focus on further improvements and investments in technology. In addition, all of Ardmore's fleet significantly outperforms the EXI targets currently under discussion by the IMO. Meanwhile, we continue to invest in the feed to optimize operating performance. We completed dry dockings on six vessels in the fourth quarter, taking advantage of the weaker charter market. And all of the dockings were completed in the east, enabling more cost-effective dry dockings. Total capex for the full year 2020 was 10.6 million, comprising nine dry dockings and advanced payments for ballast water systems. And we're forecasting capex of seven and a half million for 2021 on dry dockings, ballast water system, treatment system installations, and performance-enhancing upgrades. Finally, we're forecasting 9,300 revenue days for 2021, and as Tony mentioned with some recent fixtures, we currently have 12.5% of our 2021 days fixed on time character at market rates. Turning to capital allocation and financial activity on slide 13. We're continuing to focus on financial strength and liquidity, and reporting cash at $58.4 million at the year end. Total net debt at the end of December was $347 million, and net leverage was 50.2% down year on year. We completed the sale of the 2006 Philips E-Marner for $10 million in January, and net cash proceeds from the sale of the vessel were $5.4 million after prepayment of debt. We closed the five-year, 10 million loan facility for the Ardmore Seafarer with EO Bank at LIBOR plus 2.25% in December. And we repurchased 100,000 shares under our new share repurchase plan at a weighted average price of $2.91 per share during the open period in the fourth quarter.

Debt reduction and financial strength remain . quality and quality credit facilities for financial flexibility. We have very healthy credit levels. The first terrific match of 2.25 million for OTEP at the year end, which is one of the highest in our peer groups. And with that, I will turn the call back over to Tony.

Thanks Paul. So to tell Ross then, 2020 overall was approximately the year that we rolled out the best record for performance. But Europe ranks the potential, with our best story at 277,000 a day over 50 days. While the market remains challenging, rates have improved with winter conditions and the beginnings of economic recovery. We expect to have a weekly market resistance to persist until the full level of economic recovery is underway, which makes us able to occur in the second half of 2021.

Any time we bring in attention to this... Pardon me, Paul, your line is chopping off. No, your line is breaking off.

Okay.

Could you try dialing back in?

Yeah, okay.

I would suggest you to reconnect to the call again. Ladies and gentlemen, please stand by while we reconnect. Thank you for your patience. Thank you. . . . . Thank you.

Okay, operator, are we back on?

Pardon me, this is the operator. We have reconnected the speakers and will continue. Please proceed.

Okay, thanks. So, I think Paul was almost done. And the good news is I had a chance to completely rewrite the summary. So, here we go. So, anyway, so to summarize, again, 2020 overall was a year. but a roller coaster in terms of performance and a reminder of our earnings potential with our best voyage coming in at 77,000 a day over 50 days. While the market remains challenging, rates have improved with winter conditions and the beginnings of economic recovery. We do expect generally weak market conditions to persist until a full global economic recovery is underway, which we anticipate will occur in the second half of 2021. In the meantime, we remain financially conservative with strong cash reserves and keeping the focus on performance and cost control. At the same time, we're also looking beyond the immediate challenges to future opportunities in a full market recovery and in the energy transition. And as a final point, while we all want to look forward to a brighter future, we must not forget the hardships that the ongoing pandemic presents, most of all to our seafarers, but also to short staff in lockdown and in travel-related quarantine on our behalf. We want to acknowledge their sacrifices and thank them for their perseverance and their professionalism. And on that, we're happy 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 touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from John Chappell with Evercore. Please go ahead.

Thank you. Good afternoon, everybody. Tony, first question is a little bit shorter term, and then I'll switch to a longer term one. The time charter outs, certainly not something you guys have done recently, and given your outlook for the market, it seems to be somewhat bottom-ticking. Maybe you can just give us, first of all, the numbers around the time charters, three, one years, what the rate is roughly. And then also the thought process behind locking in for a year, given your kind of two-time horizon theme on 2021 with the second half being much better.

Hey, John. Just luckily Tradewinds has helped us out with an article today on MR time charter rates, and the rates that we've booked are consistent with that. The reason why we're doing it is that we do think that there is – it's going to be choppy for, you know, the next number of months. We think the rate probably reflects how, you know, how on average the year is going to turn out, which would suggest, you know, rates in the high teens, you know, later in the year on a spot basis. So we're pretty happy with the rates. I think it helps us out, and we don't think we're leaving a lot on the table.

Okay. And then just to be clear, that 45% of one queue that you've given, does that incorporate the time charter rates as well, which would obviously be much higher than the spot? Or is that just purely what your ships are in the spot market?

No, John, that's incorporated. That's the blended between the time charter ships and the spot ships. And the time charters were fixed during the quarter. So two queue would have a higher percentage of fixed days. But to answer your question, the The number quoted is a blended between the TC and the spot.

Do you have it on a pure spot basis?

On a pure spot basis, it is a couple of hundred dollars a day at a time. It's not much. Given the rating, it's not a huge component of the first quarter.

Got it. And then bigger picture, Antonio is going to ask before the call started – you know, bottom of the market, you have an optimistic outlook on the back half of this year and the rest of the decade, ending the year with $58 million of cash. Like, it seems like this may be your time to expand the fleet. But then, you know, you have this slide on the energy transition and, you know, kind of your next steps as far as that goes. How are you thinking about, you know, expanding the fleet at the bottom of the market, while also retaining capital and thinking about the next evolution of whether it's fuel propulsion or any other steps necessary as part of the energy transition?

Good question, John. I mean, look, there are a lot of competing priorities here, and we also want to remain financially conservative, right? So, you know, there's nothing I can articulate that's going to eliminate that. We see opportunities in the energy transition. We think we've got a lot of upside and exposure, you know, to a recovering stock market. And we, you know, we maintain our priority on overtime, you know, delivering.

Okay. Thanks, Tony. Thanks, Paul. All right, John.

As a reminder, if you have a question, please press star then one to be joined into the queue. The next question comes from Randy Gibbons with Jefferies. Please go ahead.

Howdy, gentlemen. How's it going? Hey, Randy. Hey. So I guess following up on that, looking at slide eight, obviously the outlook seems pretty attractive from both the supply and demand perspective. Slide 11, market's still very close to the bottom. So what are your thoughts on maybe securing some additional time charter ins? Maybe not for a year if you're just doing some outs for a year, but the three- and five-year time charter in rate is only around $13,500, maybe $14,000 for an eco. What's your appetite there for some longer-term time charter ins?

You know, we are being a little, you know, we are being a bit more active in the time charter space, both in and out. That'll continue as we see opportunities. And a lot of it's kind of, you know, sort of fixture specific. So, you know, I think everything you're saying makes a lot of sense. These are good ideas. We just have to wait and see what opportunities arise that are actionable.

Got it. Okay. On paper, it looks good. I guess into practice, that's why you get the big bucks. And then I guess on the share repurchase plan, obviously nice to see that getting put to work, although it's only for, I don't know, $300,000. So what determined that amount in the fourth quarter? And then going forward, is that the top priority for use of cash?

Hey, Randy. No, I mean, I think, look, as Tony kind of laid out, there's a lot of competing priorities for cash at the moment. The energy transition is a very exciting development. You know, there'll be opportunities to deploy capital there. One of our top priorities is to maintain a strong liquidity position and pay down debt. And as also you've seen in the fourth quarter, we bought back some stock at a very attractive price. So, you know, it remains a tool in the toolbox. but we've got to balance a number of competing objectives, and ultimately the long-term goal here is to build long-term shareholder value, and I think there'll be lots of opportunities in that, and the share repurchase will be one of them. But the energy transition plan is super exciting, and that has potential to create a lot of value here as well. So a lot of competing priorities. Very pleased to get the share repurchase a little bit done in the fourth quarter. And, you know, it's there to be used again as and when we kind of see fit. But like Tony said, on the time charters, we're not going to tip our hand in advance.

Got it. And then any rhyme or reason for that number? Was that just kind of trading liquidity constraints?

A little bit of that. I mean, the specific number is 98,000 and something, so 100,000 was around me. We didn't just stop at 100,000. So, no, no, it was purely a function of markets and timing and where we were at that time.

Sounds good. Yeah, congrats. I was on a roller coaster, but a pretty solid year.

Thanks, Randy. Thanks, Randy.

This concludes our question and answer session. The conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.