Ardmore Shipping Corp Q1 FY2021 Earnings Call

Good morning, ladies and gentlemen and welcome to Ardmore Shipping's First Quarter 2021 Earnings Conference Call. Today's call is being recorded, and the 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 at any time during the next week by dialing 1-877-344-7529 or 1-412-317-0088 and entering the passcode 10155309. At this time, I'd like to turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead, sir.

Thanks and good morning, and welcome to Ardmore Shipping's First Quarter 2021 Earnings Call. First, our CFO, Paul Tivnan, will 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 the participants to our website at ardmoreshipping.com where you'll find a link to this morning's first quarter of 2021 earnings release and presentation. Tony and I will take about 20 minutes to go through the presentation and then open up the call to questions. Turning to Slide 2, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements, and additional information concerning factors that could cause the actual results to differ materially from those forward-looking statements is contained in the first quarter 2021 earnings release, which is available on our website. And now I will turn the call back over to Tony.

Thanks, Paul. So turning first to Slide 4, some highlights. We're reporting an adjusted net loss of $6 million or $0.26 per share for the first quarter compared to an adjusted net loss of $13 million or $0.39 per share last quarter. The improvement is largely the result of better market conditions, with our MR is earning $11,175 per day in the first quarter versus $9,425 in the last quarter. For the second quarter to date, we've earned around $11,000 per day with 50% of the quarter fixed. Our chemical tankers continue to perform well in the first quarter relative to MRs, earning $11,950 per day or $12,750 per day on a capital adjusted basis. And so far in the second quarter, they are earning $11,250 per day with about 80% fixed. Meanwhile, we've been active in the first quarter on commercial and energy transition projects, we've fixed four MRs on time charters at six months to one year duration at an average rate of $14,000 per day to partly de-risk near-term cash flow pending a full market recovery. We entered into a commercial management agreement for four of their 25,000 deadweight chemical tankers, trading alongside similar size units. We released our progress report in February 2021, which includes details of our energy transition plan or ETP for short. In connection with the ETP, we announced the formation of E1 Marine, a joint venture with Element One and Maritime Partners, which is now in documentation and should close in the next few weeks. We've also continued to focus on financial strength under challenging market conditions, maintaining a strong liquidity position and balance sheet.

Thanks, Tony. Turning to Slide 7. On the left-hand side chart, we have oil demand broken out by type. The two biggest drivers of oil demand recovery are road transport and aviation fuels. Demand for road fuels and jet fuels is expected to increase by 3.5 million barrels a day in the aggregates between now and December 2021, leading to a full oil market recovery in early 2022. Much of the demand recovery is to come from the US and Europe, while Asia is ahead in its recovery phase with demand close to pre-COVID levels. Beyond 2022, on the right-hand side is IA data, which is forecasting continued oil demand growth, post-pandemic of approximately 1 million barrels a day through 2024 and beyond. Moving to Slide 11. One ongoing trend which is accelerated by the pandemic is refinery dislocation, which is now a key demand driver for product tankers. Dislocation means shutting down refineries in developed areas with few refineries opening up in the Middle East and China. Over the past few years, we've seen a gradual trend of closing less efficient refineries in the US, Europe, Australia, and Japan. These refineries are 100,000 to 200,000 barrels a day with most of them built in the 1970s or earlier. At the same time, we have significant refinery capacity expansions in the Middle East and Asia. These refineries are larger and much more efficient. In the Middle East alone, two new refineries, one in Kuwait and one in Saudi Arabia are expected to come online this year with additional capacity of 1 million barrels a day.

Thanks, Paul. So before we conclude and go to questions, we want to take some time on this earnings call to discuss ESG and the particular activities around the energy transition for a total of four slides. So turning first to Slide 21. ESG is something that's always been important to us, albeit not necessarily under this terminology. Instead, we refer to it simply as progress pinned in our report. To mention a few highlights from our recently issued 2020 progress report in regard to G&A after ESG, in 2020 we were ranked third overall and first among four issuers out of 48 public shipping companies on the Weber Corporate Governance Scorecard, with an interesting correlation shown in the Weber report between the company's position on the scorecard and long-term returns on capital. In terms of the S in ESG, we have a high degree of diversity at every level in our organization, both by gender, nationality, and ethnicity, which we believe is a key factor in our solid operating performance in an industry that is otherwise not known for its diversity. And as for the E in ESG, we're doing very well on our CO2 emissions by virtue of having a modern fuel-efficient fleet along with a focus on fuel efficiency and voyage optimization, which has the twin virtue of reducing emissions while also improving TCE performance. We know that ESG is an increasingly important topic for investors, and we're happy to discuss these aspects a lot more in Q&A or offline later on. Moving to Slide 22 for a discussion on the shipping industry's decarbonization, the overarching point to make is that the pressure to reduce emissions is not only increasing, but it's also accelerating and we believe rules will come into force sooner than currently anticipated. As you can see from the pie chart to the upper right, shipping is not insignificant in a global context and is no longer being overlooked by regulators and environmental interest groups. Much of the discussion has been around EEXI, which is a technical measure of ship efficiency. But in our view, the carbon intensity indicator or CII, an operational measure will be more impactful as it will include rising targets year-by-year, and its A to E grading system, just like in school, will make it easier for charters to screen ships and marginalize those in the D & E categories. In terms of initiatives already underway, the EU emissions trading scheme is set to come into force for shipping in January 2022, which is just 8 months away, with full compliance expected to be required in April 2023. It sets a cap on carbon emissions, and any amounts over or under will cause a trading of allowances or payment of fines. Essentially, less efficient ships will cost more to run on any voyages taking place within the EU, and it is currently contemplated those voyages originating or terminating in the EU. Sea cargo charter is a framework for assessing and disclosing the climate alignment of chartering activities around the globe, and this will further encourage charterers to screen out inefficient ships and the Poseidon principles are intended to ensure that bank portfolios are aligned with carbon reduction targets set by the IMO, which will have the effect of reducing financing opportunities for less efficient ships. Overall, we expect a substantial transformation in the shipping industry between now and 2030, driven by regulations as well as industry initiatives such as those mentioned here. Turning to Slide 23, regarding our own focus on efficiency. Our fleet is already well ahead of the targets set by the industry. Historically we have substantially outperformed the Poseidon principles trajectory. For example, in the first quarter of this year our emissions were 9% below the target for 2021. In addition, all of our ships outperformed the EEXI targets currently under discussion by the IMO, and we believe we're one of only two listed companies in this position. As a company, we are dedicated to continuous improvement and to that end, we are engaged in projects and initiatives as shown in our 2020 progress report and also shown here in summary form in the lower half of the slide. I'm moving on to Slide 24 on our energy transition plan. Rather than taking you through the slide in detail, let me just explain at a high level what the ETP is and also what it's not. The ETP is a long-term plan that will evolve over time, with a constant focus on how to improve our core performance and relevance as a tanker company in a period of great change. It augments our core strategy, but it doesn't replace it. We're a tanker company, and that will change, but we'll change the cargo we carry. Over time, we will ship more and more sustainable cargoes. In other words, things other than diesel, gasoline, and jet fuel. Sustainable cargoes already make up roughly 25% of our revenues and we expect this to increase gradually. We also want to get closer to key customers facing similar energy transition challenges so that we can add value through our knowledge and capabilities, whether tactical, operational, or financial in nature. Most improvements will stem from technology, and we will increase our involvement in what we refer to as transition technologies; not research and development of theoretical solutions, but rather the practical assessment of already developed technologies, their economic viability and their deployment. However, this doesn't mean that we're becoming a technology company; we remain a tanker company with a strong operational focus and are merely expanding on something we've always focused on. Technology is a means to improve performance. A good example is E1 Marine; this involves a very interesting proven technology, a hydrogen generator already deployed on land, able to safely and efficiently produce hydrogen onboard ships to power fuel cells. In this case, we partnered with the developer of the technology, Element One along with Maritime Partners, a like-minded finance company that sees the potential of the system. E1 Marine will be independently staffed and run with the three partners contributing their knowledge and expertise to the venture as needed. We will continue to look for additional opportunities, principally to improve our own performance, but where it makes sense, to work in partnership with others on proven technologies that we can help bring to market. And then moving to slide 26 to sum up. A recovery in product and chemical tanker demand is well underway, but the exact timing of a full rebound is still unclear. However, we think it's very likely to be within the second half of 2021. Our chemical tankers continue to perform very well on a relative basis, probably because of their tighter correlation to global GDP growth, which also gives us reason to believe that a tanker market recovery will be led at this time by chemicals and products. Meanwhile, the supply outlook is very positive, particularly in light of the ordering spike for containerships, gas carriers, and bulkers taking up shipyard groups, meaning that yard capacity is becoming increasingly scarce. Our gross commercial performance in the first quarter reflects rebound in rates along with continued solid performance from our high-quality modern fleet, and excellent teamwork under very challenging conditions, both at sea and on shore. Our focus is also on risk management in financial strength with cash of $50 million and leverage at 50%, and the pending preferred share issuance supporting us with additional financial flexibility. Our ETP initiatives announced in February are long-term in nature, but well underway with early steps taken to form E1 Marine along with activities focused on fleet performance. Finally, even as we look forward to the end of the pandemic, as an industry, we continue to struggle with the operational and human impact of COVID-19, most recently the spike in cases in India. We are advancing with our Indian colleagues, whether our seafarers or shore staff, or our business partners, and our focus is on what we can do to assist, whether collectively or individually. For example, the Seafarers International Relief Fund, which was launched today for which there is a link on this slide. Thank you, and we will now open up the call for questions.

We will now begin the question-and-answer session. Our first question today will come from John Chappell with Evercore. Please go ahead.

Thank you. Good afternoon. Tony, I thought it was interesting at the end, you said you're not a technology company, you will remain a shipping company; it feels like you've always been kind of between a rock and a hard place on investing in assets in a meaningful way and now you've this huge energy transition opportunity that you're expanding into through this E1 venture. When you think about your capital envelope and ability to invest going forward, and I'm thinking more like three to five years, how do you think about the split between hard assets like the traditional shipping company versus taking advantage of potentially some of the higher returns in this energy transition venture?

Good question. Our thought process is largely around hard assets and building the core business in the direction that we've kind of laid out in the ETP. But at the same time, when opportunities arise that offer perhaps more attractive returns in a less capital intensive manner, obviously, we're going to take those seriously. Because again, that's part of our focus now to try to bring our strengths from the operational and technical side to bear on opportunities to partner with others and bring things to market. So, I can tell you that there are going to be a lot more E1 type projects, but it may very well be, it will be a function of what comes along, what we can be convinced of, and what our priorities are at that time.

Do you think the two are mutually exclusive, or if you did have an opportunity not to invest in assets and at the same time, you'll make a big investment in some E1 type project would the banks be there to support the latter, maybe more so than they have been in the former?

It's very possible. I think that you know, the sort of perception of E1 is quite large in the context of Ardmore; but in reality, we're investing $6 million in cash. So we think there is potential for extremely outsized returns there. But yes, I mean the banks are extremely supportive and encouraging in this direction. But another point I want to make is that when we look at the three key areas of our energy transition plan, they are all interlinked and kind of synergistic. So, efforts that we make on the technology side can feed into the other two areas and vice versa. So we think it's a pretty cohesive and synergistic approach.

Okay. And then just my final one, when I look at the slide six that you put in here for the first time, which is really interesting and some of the dynamics that have unfolded and layered that on top of some of the other things that Paul spoke about, it seems like the product tanker market should have inflected already and every time it starts to lift off, it seems to get knocked back down. So I'm not asking you for a timing of an inflection point, because I don't think anybody knows that, but from your perspective, why do you think it has been lifted yet? Is it just that there are too many vessels, there are too many vessels in the wrong places, the inventories are still too elevated, the mobility hasn't improved enough? What's been the limiting factor to really impede a full breakout?

That's a great question. It's all about shipping economics. Coming out of the significant downturn we experienced in the middle to late last year, we could see a notable demand recovery before reaching the supply-demand balance that signifies a turning point. I believe we are roughly halfway through that recovery, possibly even a little more, but we have not yet reached a level that would influence supply-demand dynamics and rates. There are many factors at play right now regarding the recovery, making it difficult to pinpoint anything specific. Additionally, other developments are ongoing. For instance, we've discussed the ongoing refinery dislocation, and during this time, China has been quietly but significantly increasing its exports, which is boosting product tanker demand. There's also the possibility of a return to discussions about IMO 2020, which previously created an additional layer of demand for moving low-sulfur products from east to west. However, this has been overshadowed by the overall demand surplus and the availability of such products in the west under those circumstances, though that situation could change. Moreover, the impact of stimulus spending and activity can influence demand, even if it is not permanent, lasting for a couple of years. So, in summary, while we cannot determine the exact inflection point, it doesn't surprise us that it hasn't occurred yet, as we are still recovering demand from a significant low.

And I get that. Thank you, Tony.

Sure.

And our next question will come from Randy Giveans with Jefferies. Please go ahead.

Howdy, Tony and Paul. How is it going?

Hey Randy, how is it going?

Good. So it seems like you booked, I think four MRs on-time charters. So can you provide some more color on that 27% of MR revenue days booked on time charter, maybe the rates and the tenure of those? Also looking at your rate guidance, it seems like the chemical tankers continue to outperform the MRs; why is that? When do you expect those MRs to inflect above the chem?

I think our reporting can sometimes be a bit unclear. For instance, the spot trading ships are about 40% to 50% through the quarter, while we have full visibility on the ships on time-charter for the entire quarter. When you combine these figures, it appears to add up to a larger number.

Yes, I did.

The reality is it's four out of 19 to 20 ships. So it's exactly. So Randy, still we've got 50% fixed. When we look at halfway through the quarter and $11,000 a day, but obviously these four ships then would fixed right through the quarter. So the rates, I am not going to disclose the rate, because that's market confidential, but the market rates for MRs in the first quarter were somewhere between $13.5 and $14. So that would be the rates that we fixed at. And yes, so you're 50% plus whatever four ships you have for the remaining six weeks. That makes sense.

Yes. And the duration on those charters, and of the rates you're saying confidential, but of those normal one year, 12 month charters?

They are six months to one year with no options.

Got it.

And then when we talked about the quarter-to-date, we're not adding the full quarter of the time charter days and that it's just a pro-rata share against the spot ships.

Okay, that makes sense on the number then. And then, I guess, second question, fourth quarter you repurchased around $300 worth of shares, didn't purchase any here in the first quarter. Your NAV is still over six if not seven; so how do you view share repurchase this year, the current share price level?

Good question. Randy, I guess, first off, in terms of the first quarter, we were obviously working on the E1 Marine transaction that is in the documentation, there is no buyback of shares. I think we've been very clear at the outset, the priorities on capital allocation remain debt reduction, financial strength, and continuing to manage through the risky markets as we see them. The investment in E1 was, as Tony mentioned, a $6 million capital outlay. We think that's a potentially high-return investment. So for us, the capital allocation priorities remain unchanged. To the extent that there are opportunities to take interesting investments, we look at share buybacks as two of them in a toolbox, but no immediate plans to move aggressively on that front.

Got it. I will turn it over. Thanks so much.

Thanks, Randy.

And our next question will come from Magnus Fyhr with H.C. Wainwright. Please go ahead.

Thank you. Good afternoon, guys. Just a question here, if I just confirm what I heard on the call. Did you mention that there is no capacity available until 2024? Is that just Korean yards or is that overall? What are you basing that on?

Well, yes. So Paul, do you want to explain the 2024?

Yes, that's the indication from ship brokers today. If you're looking to order a series of ships, that's the current situation. You might be able to get a single or a couple of ships, but overall, the feedback from the top-tier yards is that their capacity is booked for a long time.

So what's the last? I mean, I haven't seen that in a long time. It was the last time there was a 30-month lead time for an MR delivery.

I believe there may have been some misunderstanding regarding Paul's comment. When I spoke with S&P brokers, they indicated that the current level of ordering activity is substantial, primarily with containers but also involving gas carriers and bulkers, much of which has not yet been publicly announced. This demand is also reaching smaller builders typically constructing MR type vessels, which serve our container ships and mid-sized gas carriers. According to anecdotal evidence from these core MR shipbuilding yards, they are filling up quickly. The key point Paul was trying to convey is that if someone intends to order multiple ships, say four, six, or eight MRs, this will extend into 2024. Additionally, an interesting point from the broker I spoke with this morning is the fact that container ships are rarely ordered individually; instead, they are typically part of larger orders.

All right, thanks for clarifying that. Just the second question on the 260 product tankers over 20 years old that you expect to be scrapped over the next five years. I mean, how much do they really play into the market? Are they already kind of a two-tiered market where these won't really affect the market and the more interesting part would be looking at the, I guess the 17% of the fleet, that's between 15 and 19?

Yes, I mean it's a knock-on effect. If one of the really old ships get scrapped, that operator will typically buy a newer one to replace it, taking it out of the mainstream pool. If you look, they have been very active in the market for MRs around the age of 15 that are being bought by those people that have been scrapping the older ones.

Okay. Just one last question about the operating expenses. It seems they have decreased or you are managing them effectively. Are there any additional costs related to COVID this year, particularly due to crew changes?

Yes, it's life. It's not, it's $100 to $200 a day, something like that. We do think that the protocols that are having to be put in place now are going to basically result in more crew days if you will because the process of quarantining and arrival at a crew change port and quarantining again getting on board is we have to pay them all the way from when they basically check in. So that's going to increase a little bit, but it's max $100 to $200 a day.

Okay, great. That's all from me. Thanks.

Yes. Thanks, Magnus.

Our next question will come from Ben Nolan with Stifel. Please go ahead.

Hey, Tony and Paul, hope you guys are doing well. I want to start with the E1. I know it's still being finalized, but I'm interested in any additional interest you've seen since the announcement, or if there have been any early successes or updates on how things are progressing, even though it's not officially open yet.

Yes, we're still putting ink down on paper, but we hope to close it in the next couple of few weeks. We've hired a Managing Director and the Commercial Director for the JV. So the staffing is well underway. They are great people. We're in the process of class approval for the system, for deployment of vessels, and there have been, without being able to disclose any great detail, there are a lot of discussions going on with potential users. But this is not going to take off like a bottle rocket in a matter of months; this will take time. We hope to have a clear picture of redressal market by, what we do already theoretically, but concluding it out towards the end of the year. And we're also working on and hopefully around that time frame have demonstration units ready to deploy. So that's where we are at the moment.

That's helpful. Connected to that, I believe this involves methanol quite a bit, which is an area very close to where you are, but if I'm not mistaken, it is not something you're currently engaged in. Is that something you aspire to pursue, and should we be on the lookout for it in the future?

Yes, I think methanol is a cargo; it's the largest commodity chemical cargo, 80 million tons a year, which is like 3.5% of oil demand; it's not producing oil. It's a big, big chunk typically shipped in stainless steel or zinc coated ships, which we don't have at the moment, we could in the future. We also sometimes use Marine Line or Inner Line 9000, which can sometimes be problematic. So it's not a cargo that we currently ship. We also don't ship sulfuric acid or things like that. But it is a component of aggregate chemical tanker demand, and I think in a more general sense, if the demand outlook for methanol grows, that will help the overall commodity chemical market in an aggregate sense. To note that answers the question, but I would expect at some point we will be shipping methanol, but it's just in the context of it's another cargo that you can carry, providing you with more trading options.

Let me revisit what John mentioned earlier. While it's true that no one can predict the future with certainty, we can make some estimates. For example, looking at the IIA data shows that oil demand is on the rise, but it won't return to pre-COVID levels until next year. Concurrently, the product tanker fleet has increased by around 3% during this period. So, what gives you confidence that there will be a recovery in the second half of this year? What would signal a turning point, considering that absolute oil consumption might still be lower and the fleet larger? What factors would tip the scales in favor of that recovery?

Well, I think X could be a few things that I believe I've already mentioned, but the refinery shifts that have continued to take place and even accelerated in the pandemic, trying to export volumes via the re-emergence of the impact of IMO 2020 on demand and just overall trade complexity stimulus spending. The fact that very often rapid economic growth can be disruptive in terms of cargo movement and that could create its own element of demand, but that's not permanent.

Okay. Collectively, that could be enough, right? It works in terms of just making the math add up.

Yes.

Okay. All right, I appreciate it. Thanks.

Yes. Thanks, Ben.

This does conclude our question-and-answer session, also concluding today's call. The conference has now concluded. Thank you for attending today's presentation. At this time you may now disconnect your lines and have a great day.