Ardmore Shipping Corporation

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's second quarter 2021 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 two weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 101589, excuse me, 101-58719. Again, 101-58719. If you require operator assistance, please press star then zero. At this time, I will turn the call over to Anthony Gurney, Chief Executive Officer of Ardmore Shipping.

Thank you and good morning and welcome to Ardmore Shipping second quarter 2021 earnings call. First of all, I'll ask Paul Titman, 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'll find the links to this morning's second quarter 2021 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 discussions today contain 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 maturely differ from those in the four living statements is contained in the second quarter 2021 earnings release, which is available on our website. And with that, I'll turn the call back over to Tony.

Thanks, Paul. So in terms of the format for today's call, to begin with, I'll discuss financial highlights and reach of product anchor market activity. Afterwards, Paul will provide an update on product anchor fundamentals and financial performance, and then I'll conclude the presentation and open up the call for questions. So turning first to slide four, we're reporting an adjusted net loss of $7.6 million or $0.23 per share for the quarter compared to $8.6 million or $0.26 per share for the first quarter, the result of extremely challenging trading conditions as a result of the pandemic, but with a recovery now in sight later this year, which we will discuss in depth later on. Charter rates improved in the second quarter, representing continued sequential improvement from the lows seen in the fourth quarter of last year, but we're now into a seasonally soft summer period. Our MRs earned $11,600 per day in the second quarter compared to $11,200 in the first quarter and $9,700 in the fourth quarter of last year. For the third quarter to date, we've earned approximately $10,000 per day, with 40% of the quarter fixed, an expected decline given the time of year regarding the seasonal slowdown. Our chemical tankers continue to perform well relative to MRs, with earnings of $12,300 per day, or $14,000 on a capital-adjusted basis, but are now following the product tankers down in a seasonally soft summer period. Meanwhile, in the face of these challenging market conditions, we continue to focus on operating performance, financial strength, and executing on our energy transition plan. Operationally, we're performing well relative to the market and our peers, and in anticipation of improving market conditions, we're looking to build earnings upside, most recently by adding another TCN MR for a period of up to one year at a rate of $11,850 per day. Regarding balance sheet strength, we closed and funded a $25 million perpetual preferred issuance with maritime partners, and we also refinanced two 2015 built ships on a sale-leaseback basis with an existing financier, providing net cash proceeds of $15 million. And in terms of our energy transition plan, we closed the Element One transactions in June, and among other initiatives, we are working on deploying the Lean Marine fuel lot system across the fleet, which will improve our fuel efficiency and represents an excellent return on incremental investment. As of quarter end, we had total cash in undrawn lines of $77 million, consisting of cash on hand of $55 million, and available undrawn facilities of $22 million, and net leverage of 48%. So we're in a very comfortable position financially, despite the ongoing market challenges. Moving to slide six for a summary of MRR charter market activity. Rather than walk through the slides here in detail, I'd like to make a few key observations. First is that the increasing level of market activity during the quarter resulted in the third successive improving quarter from the market bottom. And while the market's been weak, it's felt quite normal in terms of the type and the amount of trading activity. Second is that this level of market activity was sufficient to result in real moves in charter rates when the Colonial Pipeline hacking incident occurred, meaning that there was a sufficient base in demand to support a market improvement with relatively little increment. The third thing I want to mention is that if you introduce on top of this base of demand another three to four million barrels a day as expected by the end of the year, you should have a very healthy MR spot market again. And fourth and finally, the shutdown of the Quinana Refinery in Australia, which is discussed on the slide, is a case study in refinery dislocation, resulting in another 32 MRs calling there in the quarter, or about 10 a month, and representing roughly a half percent increase in global MR 10 mile demand. That's small, but it's nevertheless incremental and permanent, and resulting from the retirement of just one relatively small refinery and an ongoing trend of shutdowns. In terms of our own fleet deployment, as you can see in the call-out box on the lower left, in the second quarter we were 55% east and 45% west, 23% of our revenue days were from chemicals, and 19% of our fleet was time-chartered out, meaning that if you deduct TC out in chemicals, only about 60% of our revenue days were exposed to the very challenging MR spot market. And with that, I'd like to hand the call back to Paul.

Thanks, Tony. On the next two slides, we will take a look at the product anchor demand drivers to primarily underlying oil consumption and increasing tonne oil demand as a result of accelerated refinery dislocation. So, looking firstly at global oil demand on slide 8. The global oil demand recovery is well underway. Current oil consumption is expected to increase by approximately 4 million barrels a day by the end of the year. Road fuel demand is coming back strongly and expected to exceed pre-COVID levels this September, while the recovery in aviation fuel remains constrained by border closures. Overall, demand across all refined products is expected to return to pre-COVID levels this winter as the vaccine rollout continues. At the same time, oil production is expected to increase to meet demand. OPEC Plus are reversing their cuts, while other producing regions are gradually increasing their output. Finally, oil product inventory services have been worked through, with current stock levels in line with the five-year trailing average. Moving to slide 9, we take a look at refinery dislocation developments, which is the key driver of ton mile demand growth. Dislocation means shutting down of locally oriented refineries in developed areas and subsequently supplying those markets with refined products transported by sea from refineries which are opening in the Middle East and China. As you can see on the map on this slide, there's a very clear trend in where the refineries are closing and where refineries are opening. Over the past few years, we have seen a redrawing of the global refining map, specifically closures in less efficient refineries in the US, Europe and Australia, and Japan, and at the same time significant refinery capacity expansions in the Middle East and Asia. These new refineries are larger and much more efficient. And while the trend has been ongoing for some time, the pandemic has accelerated the closure of smaller refineries. Approximately 4 million barrels a day of refinery capacity has been closed or announced since the start of last year. Most recently in June, it was announced that the 200,000 barrel-a-day refinery in St. Croix would close again indefinitely. And meanwhile, the new 400,000 barrel-a-day jazan refinery in Saudi Arabia and the 600,000 barrel-a-day refinery in Al-Zour in Kuwait are scheduled to come online later this year. Overall, refinery dislocation developments are providing a significant boost to our market, which will become more evident in the coming months as oil consumption returns to more normalised levels. Turn to slide 10. Supply growth for Prototankers remains constrained. The significant increase in ordering activity in other shipping sectors is resulting in a crowding out of tankers and curtailing future supply. The order book is already very low. As you can see on the graph on the upper right, the Prototanker order book is 6.7% of the fleet with 208 ships delivering over the next three years. Net of scrapping, which we will go through in more detail below, We expect big growth of less than 1% for the next two to three years. On the graph on the lower right, you can see that the product anchor scrapping has significantly increased, with levels so far this year double 2019-2020 full-year numbers, despite COVID-related challenges. 40 product anchors have been scrapped so far in 2021, equating to a run rate of 70 ships for the full year. The scrapping levels are encouraging, particularly given the delays at scrapping facilities in Southeast Asia, where activity has been hampered by COVID restrictions. We also expect scrapping to increase in the coming years. Firstly, increased emissions and efficiency targets associated with the energy transition would put pressure on older and less efficient ships. Secondly, the polytanker fleet is ageing. Currently, 240 polytankers are over 20 years old, equating to an average of 50 to 60 shifts to be scrapped annually for the next five years. And looking further out, there are 930 shifts over 15 years old, which would indicate a much higher scrapping rate over the next 10 years. Overall, based on the low order book and current and anticipated scrapping levels, we expect products and chemical tanker supply growth to be muted for the next three years. Moving to slide 12 for a summary of our quarterly performance and financials. We're continuing our focus on cost control and efficiency improvements. Operating expenses are under budget at $15.1 million for the second quarter compared to $14.3 million for the same period last year, reflecting operational constraints in 2020. Looking ahead, we expect operating expenses for the third quarter to be approximately $16.5 million. Chartering expense was 1.4 million for the second quarter and we expect costs for the third quarter to be 2.3 million with the additional shift chartered in in June. Depreciation and amortization totaled 9.2 million for the second quarter and we expect depreciation and amortization for the third quarter to come in at 9.3 million. Total overhead costs were 4.9 million for the quarter, comprising corporate expenses of 3.8 million, commercial and chartering of 600,000, and 500,000 are non-cash items. As mentioned before, in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that the corporate cost is a comparable overhead. Overall, despite Ardmore's cost structure, is amongst the lowest of our peer group, despite our smaller size, with significant incremental improvement possible through scale. Currently, our internal commercial overhead costs are approximately 50% of market-raised prevailing pool fees. For the third quarter of 2021, we expect total overhead incorporating corporate and commercial to be 4.9 million, including cash and non-cash items. Interest costs came in at 3.7 million for the second quarter, compared to 4.8 million for the same period last year. The lower interest costs reflect the floating to fixed swap entered into in May 2020. Currently, 270 million of our debt, or 70% of our debt, is fixed at a margin of 32 bits through May 2023. We expect interest and finance costs for the third quarter to be approximately 4.8 million, including amortised deferred finance fees of 460,000. Finally, as you can see on the chart on the lower right, we're maintaining a strong liquidity position with 55 million in cash on hand, as at the end of June, with an additional 22 million available in undrawn lines. Turning to slide 13 for fleet and operations highlights, we're continuing to invest in the fleet to optimise operating performance. We had no dry dockings in the second quarter, but we have three dry dockings scheduled for the third quarter, including one ballast water treatment system installation. In total, we're forecasting capex of 6.2 million for 2021, comprising three dockings, one ballast water treatment system installation, and performance enhancing upgrades. Forecasted revenue days for 2021 were 9,410. We have five vessels fixed on time charter at attractive rates, representing 19% of revenue days for the third quarter. Overall, the fleet continues to perform well with all COVID-related challenges continuing to be carefully managed. Turning to slide 14, we take a look at charter rates. As mentioned, rates have improved slightly from the prior quarter. We reported a fleet average TC of 11,800 per day in the second quarter, up from 11,350 per day for the first quarter. MRs averaged 11,650 for the quarter, comprising 11,800 on eco-designs. and 11,130 on legal mods. Meanwhile, the chemical tankers are performing very well on a relative basis. As with previous quarters, we are presenting the charter rates on the chemical tankers on an actual and capital-adjusted basis. The purpose here is to present the rates for the various vessels on a comparable basis to an MR. Chemical tanker rates reported 12,308 per day for the quarter, and on a capital-adjusted basis, the chemical shifts reported 13,964 per day. Looking ahead, as of today and already mentioned by Tony, for the third quarter we have 40% of our days booked on the MRs at 10,000 per day and similarly 10,000 per day on the chemicals with 35% of the days booked. Turning to slide 15, we are continuing to prioritise financial strength with a strong balance sheet and liquidity position. Total net debt is 321 million with corporate leverage on a net debt basis of 48%. We refinanced two MRs with existing financiers on a sale and lease back in June, with cash proceeds of $15.5 million after prepayment of debt. In June, we completed the drawdown of $25 million on the preferred equity for maritime partners, and the second tranche of $15 million is subject to final request and approval. Debt reduction remains a key priority on your capital allocation policy, with all of Ardmore's debt amortizing. We have scheduled debt repayments of $19.6 million for the second half, and maintaining revolving credit facilities for financial flexibility. The preferred share issuance provides flexibility to prepay debt, reduce costs, and cash break even levels. And finally, we have unrestricted available liquidity of 3.1 million per ownership, which is amongst the highest of our peer group. And with that, I would like to turn the call back over to Tony.

Thanks, Paul. So to sum up on slide 17, product anchor charter rates improved quarter on quarter, but we're now in a seasonally slow period. Chemical tanker rates are performing very well on a relative basis, with rates outperforming product tankers for the last three quarters, a trend we expect to continue. We also expect product and chemical tankers to lead an overall tanker market recovery, given the expected very rapid recovery in CPP demand. While the exact timing of the market recovery is unclear, we do expect to see meaningful improvement in tanker rates towards the end of the current quarter and into the next, as economies reopen in earnest and international air travel begins again. Meanwhile, the MR supply outlook is very positive with the scrapping rate now three to four times the level of 2020 and an ordering boom in other shipping sectors taking up yard capacity and driving up pricing. As we await a market recovery, operational performance and financial strength remain our top priorities. We also continue to pursue our ETP initiatives. We closed the Element 1 transactions in June and are working on other initiatives to drive improvement in fleet performance and emissions reduction. And as a final point, we recognize that the purpose of these calls is to discuss economics, but we must remember the very real impact of COVID-19 on our operational world. In particular, our thoughts remain with our seafarers and their families, and we're working every day to ensure their health and safety through the pandemic. We're very pleased to have co-led the Seafarers International Relief Fund fundraising effort initiated in May, and we want to thank those of you who participated. And with that, we're happy to open up with all your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are 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 2. 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 morning. Good afternoon.

Hey, John. Hey, John.

Paul, my first one's for you. The Seawolf and the Seahawk refinancings may create up a fair amount of cash relative to the size of your balance sheet. Just curious, did you have to change the terms of those financing, take on a bigger spread, and then also, Are there any other shifts in your fleet where you have the potential to do a similar refinancing if we have the same type of liquidity?

Good question, John. So specifically on those two shifts, it's an existing financier, but they've moved from a bank facility to a sale and leaseback structure. So the terms and the pricing of that would reflect the more leasing tax structure, so a slight increase on the margin there. And, yes, we would have a number of other shifts in the fleet that we could – put into those tax structures if we need to. But, you know, as Tony pointed out, and I point out in my comments as well, we've got a strong liquidity position now, and it doesn't feel like there's any immediate needs for any financings like that for the next quarter or so.

Okay. I mean, could you just say how many shifts? Because it's good to know you have that option without a more dilutive necessity, if need be.

Oh, yeah. No, we have, I think it's approximately eight shifts on eight or ten shifts on senior bank financing, which we could transfer to, if need be.

Great. And then my second question, I know you said you have 80 dry dock days coming up, but as I read about this lean marine fuel-out propulsion and installing it on the entirety of your fleet, is this something that can be done in voyage? Is it something that's done just during the normal dry dock? Will there be an acceleration of dry dock days in the quarters, you know, forthcoming to do this? And then also maybe if you can just explain a little bit more of the financial benefits of using this technology.

Sure, I'll answer and then pass it over on to Tony. But no, the lean marine system, we've had it on one of our existing ships, trialing it for a period of time. That doesn't require any additional dry docking. It can be done on the on the run, and the dry docking days, yeah, we had shifts scheduled for dry docking in the second quarter, but yard constraints, they've all now, would be done in the third quarter, so the 80 days would be pretty standard for that. And then in terms of the fuel benefits and payoffs, the payback on these things is a matter of months. I don't know, Tony, if you have any further comments on that.

Yeah, I mean, it's probably, yeah, close to 2 million across the fleet. We'll roll it out over time. There's no meaningful time out of service. And it can be done on the run, as Paul said. And the IRR is about 75%. Okay.

Great. Thanks, Tony. Thanks, Paul.

Thanks, Tom.

The next question comes from Randy Givens with Jefferies. Please go ahead.

Howdy, gentlemen. How's it going?

Hey, Randy.

Hey. So looking at the one-year time charter in, I really like that deal there, under $12,000 a day for the 2009 built MR. Is there a big discount there relative to maybe a modern or eco 2015, 2016 built MR? Any further appetite for further time charterings here?

You know, we're pretty selective in what we do. You know, probably an eco design would cost maybe $1,000 more because that's the additional incremental earnings. from fuel efficiency and a bit of commercial flexibility in the design. So, yeah, I mean, we, you know, it's a time charter again now is you could consider it a core part of our business.

Great. All right, and then I guess second question, you know, obviously the E1 deal is complete. You raised the $25 million in the preferreds. Congrats on that. Any updates on timing for the additional $15 million in preferred equity and maybe the use of capital, that $25 million or even $40 million?

Thanks, Randy. I'll take this. No update on timing. It's in the works. It's likely after the summer break at this point. And in terms of use of proceeds, there's nothing earmarked for it right now. I think maintaining financial flexibility is a key priority for us. but in terms of use of proceeds, debt reduction, or, you know, opportunistic acquisitions, or just investment in the energy transition. So I think the main priority right now is maintaining a strong liquidity position and maximum financial flexibility.

Got it. All right. Well, that's it for me. Thanks so much.

Thanks, Randy. Thanks, Randy.

Again, if you have a question, please press star, then 1. The next question comes from Magnus here with HC Wainwright. Please go ahead.

Yeah. Hey, guys. Just a couple questions left just on the hydrogen joint venture. I mean, it's been six months in now. Do you have any, can you kind of give us a little update on what's going on there and what our expectations should be over the next 12 months?

Thanks, Magnus. So I guess E1 Marine, it officially closed at the end of June, on June 17th. So the management team there, we've got managing director of place and a marketing director will be joining in the next few weeks. So they're busy right now. They're working on class approval for the system and getting it marinised I suppose for the want of a better phrase I think it's possible we could have sales on the board this year but more likely it'll be in 2022 so I think right now they're working on the regulatory marinisation but significant inbound interest from the shipping community as well across all sectors so I think it bodes very well for that business but I would say likely 2022 before we get proper sales on the board

All right, very good. That's it from me. Thank you.

Thanks, Lucas.

This concludes our question and answer session and today's Ardmore Shipping second quarter 2021 earnings conference call. Thank you for attending today's presentation. You may now disconnect.