Ardmore Shipping Corporation

Good day and welcome to the Ardmore Shipping's fourth quarter 2021 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Anthony Gurney, CEO. Please go ahead.

Thank you. Good morning, and welcome to Ardmore Shipping's fourth quarter earnings call. First, I'll ask our CFO, Paul Tidman, 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 a link to this morning's fourth quarter and full year 2021 earnings release and presentations. 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 four looking statements. Actual results may differ materially from the results projected from those four looking statements, and additional information concerning factors that could cause the actual results to differ materially from those in the four looking statements is contained in the fourth quarter and full year 2021 earnings release, which is available on our website. With that, I'll turn the call back over to Tony.

Thanks, Paul. So first let me outline the format for today's call. To begin with, I'll offer some perspective on the current market and outlook, and then discuss what Ardmore is doing in response to that outlook. After that, Paul will provide an update on product and chemical tanker fundamentals, along with a discussion of our financial performance. And then I'll conclude the presentation and open up the call for questions. In addition to Paul and me today, we also have our Chief Commercial Officer, Gernot Ruppelt, with us to provide additional insight into our markets if desired. So turning to slide four, our fourth quarter performance reflects market levels prior to the onset of winter and what we expect was the last period of significant demand destruction from the pandemic. Our first quarter to date is much improved with our eco-design MRs earning $14,525 per day in spot trade, up 25% from last quarter and 60% from the low point in mid-2021, reflecting improving fundamental oil demand as well as the winter market. Looking ahead, we expect a continued recovery in 2022, but one potentially influenced by many competing factors. Most importantly, the evolution of the pandemic and the completion of what has so far been a strong but uneven global economic recovery, but also geopolitics creating uncertainty and potential market volatility, a continuation of crude tanker activity and product trades, thus temporarily increasing tonnage supply, and a high oil price impacting the cost of bunkers and thereby reducing TCEs, as well as impeding trading activity. However, notwithstanding these factors, the big picture is very much one of an ongoing global economic recovery, increasing product and chemical tanker demand, and a tight supply outlook, with high scrapping levels matched with constraints on tanker new building ordering activity. On our last call, we expressed the view that the worst was behind us and that we should see a moderate but still meaningful market improvement this winter, which we think has occurred. We now believe that rates should continue to improve through 2022 on a trajectory very similar to that of the global economy, but also one that will be influenced in particular by oil market dynamics, which we will discuss later on in more detail. Moving to slide five. The question then is, what is Ardmore doing in response to this outlook? First, we're increasing our earnings upside by returning to full exposure to our freight markets. Second, we're at the same time maintaining a conservative financial stance and even strengthening our financial position, most recently in the second half of 2021, issuing perpetual preferred shares. Third, we're continuing our clear focus on operating performance through both revenue enhancement and smart cost management in an inflationary environment. And fourth, we're working on our energy transition plan, which is progressive by design but also very much performance-driven. in the sense that we're reducing carbon emissions in the near term through greater fuel efficiency, thereby boosting earnings. We're moving gradually into more non-CPP cargoes, which offer more trading flexibility, thus enhancing TCE performance. We're increasing engagement in long-term time charter project discussions involving transition fuels and efficiency features, with return expectations to ensure value accretion if we find the right deals. And we're making progress with our E1 marine investment, including the recently announced first-ever methanol-to-hydrogen-powered towboat shown on this page. Overall, when it comes to the market outlook, we believe there's good cause to be optimistic, but we remain financially cautious regarding the exact nature and timing of a full recovery. Meanwhile, there's plenty of opportunity for the Ardmore team to continue improving performance, as described above, as well as engaging selectively on financial and asset transactions to protect and build value. And with that, I'll hand the call back to Paul.

Thanks, Tony. Turning to slide seven for demand fundamentals. Demand outlook is positive. Global GDP growth is solid, while oil demand is recovering, with continued growth expected through 2022 and beyond. As you can see from the graph on the upper right, global oil demand is expected to increase by 3.2 million barrels a day this year, surpassing pre-COVID levels on a global basis in the second quarter. It's worth noting that the recovery has been uneven. Road fuel and petrochemical demand is back up to pre-COVID levels, while aviation fuel is the laggard. Looking forward, the medium-term outlook for oil demand remains firm. Consumption is expected to reach 104 million barrels a day in 2026. Meanwhile, refinery dislocation will continue to have a positive impact on product anchor demand, providing an additional layer of growth. At a high level, closures of refineries in developed markets such as Europe and the U.S., means the oil products supplied by these refineries are replaced by seaborne imports from new refineries in the Middle East and Asia. The current volume of refined products moved at sea is about 21 million barrels a day, and in this context, the level of refinery dislocation is significant for product tanker demand. The pandemic accelerated the refinery dislocation trend with closures of older, more inefficient refineries. Between 2022 and 2026, refinery capacity in export-oriented locations particularly the Middle East and Asia, is expected to increase by 8.5 million barrels a day as compared to local market-oriented refinery closures of 5.5 million barrels a day in the US, Europe, Japan, and Australia. Overall, product tanker tonne mild demand is expected to grow by 3% to 4% to 2026, which is above the current product tanker supply growth. Chemical tanker demand is also positive. It is highly correlated with global GDP, which is expected to increase by 4.5% in 2022, and other factors such as petrochemical output have a multiplier effect on chemical tanker trade growth. Moving to slide 8, we take a look at supply fundamentals. Supply output for product and chemical tankers is favorable, given the lower debunk and increased scrapping levels. Net fleet growth is expected to be below demand growth for the coming years, while current market conditions persist. 2022 estimated fleet growth for product anchors is 1.4%, and for chemical tankers is 0.8%. Scrapping levels have increased significantly, and we expect scrapping to continue given the age profile of the fleet. 68 product anchors were scrapped in 2021, compared to 20 ships in the prior year. Currently, 9% of the product anchor fleet and 14% of the chemical tanker fleet are over 20 years old. In addition, upcoming regulations, which will begin to take effect from January 2023, will further increase pressure on ownership. Meanwhile, looking at future supply, the order book for product and chemical tankers is low relative to the demand outlook and ongoing scrapping, while new ordering is constrained due to very limited birthing availability as a consequence of activity in other sectors rising up prices and pushing out deliveries. And an ongoing lack of clarity and propulsion technology has dampened the willingness of tanker owners to order now. Turning to slide 10 for financial highlights. We're reporting an adjusted loss of 8.6 million or 25 cents per share for the fourth quarter, compared to an adjusted loss of 12.8 million or 37 cents per share in the third quarter. MRs averaged 11,400 a day for 4Q21 and 10,900 a day in the third quarter, while chemical tankers performed better with TCE of 11,300 per day in 4Q compared to 8,400 a day in the third quarter. Charter rate improvements reflect the ongoing recovery in oil demand. Also, while freight rates have strengthened, some of the upward momentum in TCEs are being eroded by higher bunker prices. Next, we will take a closer look at our cost line items and provide some guidance for the coming quarter. Operating expenses were $16.1 million for the fourth quarter and $61 million for the full year, a slight decrease on the prior year, mostly related to one less ship in operation in 2021. Looking ahead, we expect operating expenses for the first quarter to be approximately $15.6 million. Chartering expense was $2.1 million in the fourth quarter, and we expect it to be in line in the first quarter. Appreciation amortization totaled $9.3 million in the fourth quarter and $37 million in the full year, slightly down year-on-year. We expect appreciation amortization for the first quarter to be $9.5 million. Total overhead costs were $4.3 million for the quarter and $19.2 million for the full year, representing a slight increase on 2020, mostly attributable to market-related increases in insurance and foreign exchange. For the first quarter of 2022, we expect overhead, incorporating corporate and commercial, to be approximately $5.1 million. Interest expense was $4.1 million for the fourth quarter and $16.7 million for the full year, down significantly from the prior year. We're currently benefiting from the float to fixed interest rate swaps entered into in mid-2020. Currently, $255 million, or 79% of our debt, is fixed at our margin plus 32 basis points through June 2023. In the first quarter of 2022, we expect interest expense to be approximately $4.1 million, including amortized deferred finance fees of $400,000. Overall, we believe our cost structure is among the lowest of our peer group, and in particular, our internal commercial overhead costs are approximately 50% of prevailing market tool fees. Moving to slide 11 for fleet and operational highlights. We are continuing to invest in the fleet to optimize operating performance. Three dry dockings and one ballast water treatment system installation were completed in 2021. And we expect to complete two dry dockings and two ballast water treatment system installations this year with capex of $4.8 million. Forecasted revenue days for 2022 are approximately $9,500. Chemical tankers representing 23% of total fleet days. And for the first quarter, we have about 10% of the days fixed on time chargers. Operationally, the fleet continues to perform well. On-hire fleet availability was 99.5% last year, and 87% of our crew are now fully vaccinated for COVID. But challenges continue for our industry, and crew welfare will remain a top priority. Turning to slide 12, we take a look at charter rates. Reporting the fleet average TCE of 11,390 per day in the fourth quarter, up from 10,300 per day in the third quarter. EquiDesign MR is at 11,600 in the fourth quarter, up from 11,050 in the third quarter. The chemical tankers are performing very well on a relative basis. As with previous quarters, we are presenting charcoal 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 are reported at 11,250 per day for the quarter, and on a capital-adjusted basis, the chemical shifts are reported at 12,200 per day. Looking ahead as of today for the first quarter of 2022, we have 60% of our days booked on the MRs at $13,725 per day, and 70% of the days booked on the chemicals at $13,325 per day. Turning to slide 13 for capital allocation and a look at our balance sheet. We completed the drawdown of the second tranche of the preferred shares, raising $15 million in December, Preferred shares are a highly attractive piece of capital, boosting liquidity and enabling leverage reduction. Maintaining a strong balance sheet and liquidity position, we had $67 million in total liquidity, comprising cash of $55 plus another $12 million in undrawn lines at the end of December, which equates to $2.7 million per shift. Total net debt stood at $313 million at the end of December, with leverage on a net debt basis of 49%, down 3% from 4Q 2020. Debt reduction remains a top priority under capital allocation policy. We reduced overall debt by $34 million in 2021, and we have scheduled repayments of $37 million this year while maintaining the revolving credit facilities for financial flexibility. Meanwhile, shift values are increasing and boosting net asset value. Values are up approximately 6% since June 2021 on the back of rising new building costs, limited new supply, and a positive outlook. With that, I'd like to turn the call back over to Tony.

Paul. So to sum up then, our fourth quarter results reflect conditions prior to the onset of winter, along with the tail end of the pandemic-related demand destruction, and so far this quarter, conditions are much better. Where we go from here is a function of the global economic recovery and tanker fundamentals, all of which look positive through 2022 and beyond. But as mentioned at the beginning, the oil market itself should be considered as well, given the currently negative impact it's having on the tanker market. These factors include A high oil price and backward-dated futures curve resulting in very high bunker costs and impeding trading activity, as well as driving ongoing inventory destocking. OPEC plus production discipline and some operational constraints on supply resulting in further reduced crude shipments. Geopolitical factors seemingly creating inactivity as opposed to any activity at the moment. And gray markets keeping substandard crude tankers in operation when they should have already been scrapped. The point here is that any shift away from these negative conditions would not only raise overall tanker demand, but also pull crude tankers out of clean trades as well as attract LR2s back into crude, thus boosting the product and chemical tanker sectors as well. Overall, we're optimistic for the coming year, but given the cross-currents that we've discussed, we're also maintaining a conservative financial stance. Long-term, we feel that our focus on operating performance, our ETP framework, and our selective approach to transactions are keeping us focused on the right things, above all, protecting and building value for shareholders. And with that, we'll open up the call for questions.

We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. The first question is from Randy Givians of Jefferies. Please go ahead.

Howdy, gentlemen. How's it going? Good, Randy. Hey, Randy.

How's it going?

Excellent. Doing well. So I guess first question, just on the overall market, kind of your fleet strategy, clearly constructive on the outlook, moving a lot of your vessels more to the spot exposure. I guess two questions, maybe exactly how bullish are you on the market, and then will that lead to some charter-in opportunities for some additional exposure?

Yeah, I think I'll just answer that simply. We do at the moment have two ships chartered in. It's something we've been doing for a while, but we're not really ever in a position to communicate our commercial intentions, but certainly it's one option that we have. Sure.

That's fair. And then looking at the E1 investment and the methanol to hydrogen towboat, I guess looking at your partners, how will they all kind of fit into the development process? What's the estimated timeline for that development? And more importantly, maybe the financial impact or upside from this new project?

Hey, Randy, I'll take that one. Great question. I guess, first of all, you know, we're When I heard you talk about maritime partners, their investment and their returns. But it is a very exciting announcement made in November for the first vessel. The anticipated delivery of that vessel is 2023. And, you know, interest overall in the system and particularly on the back of that announcement in the E1 system has been significant. So too early to say in terms of what it means overall, but it's a very positive development for the system and validation of it. So, yeah, we're very excited about it.

Got it. All right, well, I'll turn it over from there. Thanks again. Thank you.

The next question is from John Chappell of Evercore. Please go ahead.

Thank you. Good afternoon or good morning. Tony, starting with you and the response to your outlook, one of the things you noted moving gradually into non-CPP cargoes. Could you kind of describe exactly what you mean by that? Does that mean the existing fleet or any upgrades or other alterations you need to make to the fleet as you get out of the traditional trades or just any other things regarding strategy as you kind of de-emphasize, I guess, the traditional CPP?

Yeah, I'll just answer briefly. And as you know, Gernot's here, so I'll ask him to comment as well. But, you know, I think it's a mix of things. First of all, about 25% of our cargos are already non-CPP. We do have the six chemical tankers. And most of our MRs are chemical tanker notation. So, I think it's a combination of a little bit of technical aspect to it and operational know-how. But I'll ask Ernaut to comment further.

Ernaut Leibowitz Yeah, thank you, Tony. Maybe just to add to that on the chemical tankers, the six that we own and the four that we commercially manage, we are trading those predominantly in non-CPP cargoes, but that has also created interesting cross-training opportunities for MRs where we are engaging in non-CPP trades, both east and west, where we've even on occasion parceled up some of our larger ships. There's also a lot of demand coming from biofuel, biofuel blending for anything that has to do with not just straight up petrochemical demand, but feedstock and blending feedstock for biofuels. So we see a lot of that happening at the moment, and we're able to capitalize on that.

And for my second question, Gernot, to keep you in the hot seat, you know, We've talked about this refinery dislocation for some time now. I think Paul said it's been accelerated through the pandemic. Why do you think it hasn't led to more material improvement in the marking conditions yet? And as a follow-up to that, how much of this kind of pressure on product do you think is made in voyages of new-build crude carriers? And are we kind of getting close to the end of the tunnel on that pressure?

Yeah, I think it's important that we look at where inventories are at the moment. Particularly in the Atlantic, in the U.S. and also in Europe, we see refined product inventories quite low. And, of course, in a market that has been pretty back-related, you don't see that pop on long-haul trading demand as much as we would see in a contango market. But that ought to change at some point. And you could certainly see a great need for inventory restocking that would exist, particularly in the Atlantic, that would get sourced from Some of the new refineries and more excessive inventories we would see east of Suez. Sort of the trend that we've seen towards the start of the year around crude tankers taking CPP cargoes, that certainly is happening. But as we see crude markets improve, that should also abate. And in a way, the eastern freight markets have already priced that in now.

All right. Thank you, Gurnat. Thanks, Tony.

The next question is from Magnus Fehr of H.C. Wainwright. Please go ahead.

Yes. Hi. Just a question on the market outlook, you know, excluding, you know, the pandemic and any potential wars. How do you see the seasonality playing out this year, you know, going forward?

Yeah, I mean, maybe I'll just ask her not to answer that. But, you know, the winter is far from over. But do you want to explain what happens?

Yeah, clearly, I think the winter market is showing a lot of interesting movement, particularly in the Atlantic at the moment. We've seen quite a bit of tightness in the market. And as of this morning, TC2, the gasoline route from Europe to New York, would be earning roughly $19,500 a day on a low-to-low basis. The U.S. Gulf is somewhat behind still, but also firming and is getting quite tight. So at the moment, the triangulated TCE would be probably around 15 and a half. But where we see things moving on TCE 14, it might next up might well be 17 and a half on an Atlantic average. And then the eastern markets are still somewhat behind based on what we just described, giving some of the, you know, some of the activity on crew tank and new buildings. But with increased CPP flows and inventory restocking, we should also see more east to west arbitrage that should also support trade advances in the east.

Do you think with, you know, market recovery underway, do you think there will be much seasonal dip like we typically see in a year, or do you think there will be steady improvement throughout the year?

Yeah, I mean, you know, it's a very – you get these pockets of market increases and pockets of weakness, you know, kind of pretty much all the time, no matter what kind of market environment you're in. And so, you know, we obviously look at the, you know, the global averages to get a sense of the, you know, the direction. But, you know, at the moment, the west is strengthening and the east is a bit weak. It was the opposite a few weeks ago.

All right. Thank you. And just one question on your fleet. I mean, most of them you could design. And, you know, how do you see, I mean, these three ships or the four ships built in Japan, that's very good shipyard. Three of them are built in 08. How do you see them trading going forward? I know they're very high-quality ships, so I'm just curious what your thoughts are.

You know, they are very fuel-efficient ships. They are of a very high quality with great following among our customers, the majors and the oil traders. So they are very versatile ships, even though they would be more focused on the refined product trades. But of course there's plenty of that to go around and, you know, looking at the particular dimensions of those ships, they can also access certain traits and certain ports, uh, which, uh, which would be uniquely suited for these ships. So there's a very meaningful, uh, market for these ships to continue trading.

All right. So then turning 15 next year, shouldn't really have any implications for those shifts, uh, despite stricter regulations.

Yeah, I think it's really kind of a preference issue for the customers, and obviously when the market's stronger, they don't seem to mind as much. But if they have choice, obviously they'll go at that point for the more modern ships. But they continue to trade quite well even beyond 15. Historically, we've tended to sell off ships when they get around that age, but that's not a cast iron rule.

Okay, very good. Well, thank you.

Again, if you have a question, please press star, then one. The next question is from Ben Nolan of Stiefel. Please go ahead.

Hey, guys. I've got a couple. First, Paula, with respect to – I appreciate you giving the guidance. With respect to the equity method, and obviously there's a loss, and I know that you don't control sort of how that flows through, but any – color that you might be able to have as to sort of how we should expect those numbers to come in or flow through going forward, or is it just going to be we'll see?

Thanks, Ben. I guess it's a case of we'll see. E1 Corp and E1 Marine are early stages of development, so it's really at a commercialization stage now, so the running costs are fairly modest, but obviously if things really pick up on the revenue side, then there'll be a positive impact. So it's a little bit too early to say, but I wouldn't expect any major movements on it for the coming quarters.

Okay, and then just sort of in line to that, assuming that things pick up and move forward, is there any capital call that you guys would be obligated or would want to make, should that be necessary?

No. I mean, as was said, when we made the investment almost coming up to a year ago now, it is a pretty asset-like model, so don't expect any capital calls as such. It's intended to be primarily a licensing model. There may be small capital amounts for assisting with prototypes, et cetera, but no, wouldn't expect any capex on it.

Okay. And then shifting gears just sort of to market commentary color, just appreciating that this is sort of a touchy-feely kind of an answer, but yesterday I'm sure you heard one of your competitors came out and said they were hyper or uber bullish or whatever. I don't know, Tony, Gernot, are you guys sort of in that same camp or maybe a little bit less competitive? you know, exuberant or, I don't know, any way to frame that?

Yeah, I think it's safe to say that we've been humbled by the past two years. And it's, you know, the pandemic has really thrown a lot of curveballs at us. Some good, but a lot bad. We're just trying to call it as we see it right now by just kind of focusing on the numbers in terms of the, you know, oil demand outlook, global economic recovery, and what looks to us to be a very tight supply outlook as well, but also acknowledging that there's a lot going on in the oil markets that are having an impact. So, yeah, I think that we certainly directionally share their view. We're characterizing it in our own way here.

Got you. And then lastly for me, fuel spread's really widened out a bit. Now all of a sudden scrubber economics, even for things like MRs, seem to be wide open. Any thought at all about sort of revisiting that idea for you guys?

Good question.

Scrubbers.

It's one that we look at all the time. We tend to, when we look at our performance, we strip out the benefit of the scrubbers, recognizing that that doesn't really capture the cost of the scrubbers, which is some operational cost as well as... the initial capital investment. So I think that given what's happened so far, we're pretty happy with our decision. Every company had its own rationale and view on it, and that's perfectly legit. That's not to be questioned. But we've chosen to invest instead more heavily in fuel-saving devices, which directly improve performance, where the returns on investment are north of 50%, so we like those. Again, none of them have been particularly large in total amount, but when we talk about our ETP, that's really what we're working on in part. So I think that so far the scrubber investments haven't been, when you factor in the upfront capital costs and operating expenses, it's been okay. I don't think it's been a home run, nor has it been a you know, a bust in terms of returns. But you have to factor in all the components of it, not just the revenue enhancement.

Right. And so from where you sit, you're not, you know, you're not necessarily imminently or looking to make an investment in that direction today.

No, because our own view, and again, everybody has a different angle on it. Our own view is that the incremental return for the incremental investment is still, you know, they're pretty neutral.

Okay. All right, perfect. Thanks.

And I just want to clarify, that's particularly the case with MRs and chemical tankers. It's very different for bigger ships. Right.

The next question is from Climate Mullins of Value Investor Dedge. Please go ahead.

Good morning, gentlemen. Thank you for taking my questions. Looking at their order book, it's at very low levels. But I was wondering, with all the ordering we have seen in other segments, what kind of delivery would a buyer be looking approximately at on an MR order?

Yeah, I think it depends on the yards you go to. If you look at the biggest yard that builds MRs, it's Hyundai Meepo. Last year, they delivered 29 ships. And if you look at the delivery schedule from that yard over the next couple of years, it declined substantially. And, you know, I think we're looking out into, certainly well into 2024 at this point. It may be possible you can get orders in other yards to deliver it sooner, but it's definitely pushed out quite substantially. I don't know if that answers the question.

Indeed it does, it does. Thank you. And secondly, just a modeling question. Go on, go on, sorry.

I was just going to mention the other thing that's very important to understand is that new building prices have pushed up for an MR from arguably $34 million a couple of years ago to $41 million today. So, big increase in price.

Indeed, that's putting a lid on new building ordering. And secondly, I was going to ask the modeling question, when do you expect to conduct the two dry dockings forecasted for 2022?

The dry docking for 2022 will be mid-year towards the second half.

All right. That's helpful. That's all from me. Thank you very much.

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