Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Second Quarter 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 anytime during the next two weeks by dialing 1-877-344-7529 or 1-412-317-0088, and entering passcode 10145250. At this time, I'll turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Good morning and welcome to Ardmore Shipping's second quarter 2020 earnings call. First, let me ask our CFO, Paul Tivnan, 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 will find a link to this morning's second quarter 2020 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 in the forward-looking statements is contained in the second quarter 2020 earnings release, which is available on our website. And now, I will turn the call back over to Tony.

Thanks, Paul. Let me first outline the format of today's call. To begin with, I'll discuss our quarterly highlights and then key industry developments. After which, I'll provide some thoughts on our long-term strategy and focus on shareholder value, how we assess growth opportunities, and explain our perspective on corporate governance. And after that, Paul will provide an update on product tanker fundamentals, and a detailed financial update. And then, I will conclude the presentation and open up the call for questions. Turning first to Slide 4. We're reporting adjusted net profit of $13.7 million or $0.41 per share for the second quarter compared to a profit of $6.5 million or $0.20 per share for the first quarter. The tanker market was very strong in the second quarter with Ardmore performing well on a relative basis, thus producing excellent TCE results. Our MRs overall earned $21,260 per day compared to $19,300 in the first quarter, while our Eco-Design MRs earned $21,540 versus $19,560 in the first quarter. Our chemical tankers earned $16,340 per day compared to $19,700 in the first quarter. And on a capital adjusted basis, in order to compare apples-to-apples to MRs, the chemical tankers earned $18,000 per day for the second quarter versus $22,000 for the first quarter. Let me explain what we mean by capital adjusted. This is something that we've been doing internally for a while and we think it would be useful in explaining the performance of our chemical tankers relative to the MRs. The methodology is quite simple and Paul will go over this again a little later. But essentially, it's just a matter of converting the TCE to a bareboat equivalent, proportionally adjusting for the capital invested in the ship relative to a same age MR, and then building back up to…

Thanks, Tony, and good morning, everyone. Given Tony has already covered the current markets and key industry developments, in the interest of time, we will move to the industry fundamentals on Slide 10. However, for your reference, we've attached a detailed slide on current market activity with associated charts to the appendix of the presentation. Moving then to industry fundamentals. The global economy is slowly emerging from the COVID-19 pandemic. Recent estimates from the IMF were that the global economy will grow by 5.4% in 2021, following a decline of 4.9% this year. Oil consumption is expected to gradually recover through 2021, and the IEA are forecasting oil demand in the third quarter of next year at 99 million barrels, close to the pre-COVID levels. In terms of a global recovery, the chemical tankers in particular should benefit from a global economic rebound in 2021. As you can see on the chart in the upper right, chemical tanker trade is highly correlated to GDP. Two major end users of commodity chemicals are the automotive and the construction industries, which should both perform well in recovery. Meanwhile, product tanker tonne-mile demand, should benefit from accelerated refinery dislocation. Recent reports highlight that up to 1.4 million barrels a day of refinery capacity in Europe is under threat of closure, while refinery capacity continues to increase in the Middle East and Asia. On the supply side, product tanker net fleet growth remains exceptionally low. Today, the order book stands at 177 product tankers or 5.9% of the existing fleet delivering from the third quarter of 2020 to the first quarter of 2023. Estimated scrapping of the product tanker fleet is running at 40 to 45 ships per year. However, this looks set to increase as the product tanker fleet is aging rapidly. In…

Thank you, Paul. So to sum up then, we just completed a very profitable quarter, driven by exceptional market volatility, earning $0.41 per share, which provides an annualized earnings yield of 40% based on our current stock price. In addition, we've added two ships on highly attractive terms, which will add meaningfully to our earnings power. For example, at fleet average TCE of $18,000, these two ships are 15% accretive to EPS, and they'll also lower our overall breakeven rate. The muted near-term market outlook reflects seasonal and boil inventory destocking factors as well as uncertainty around more immediate oil demand. But we maintain our long-term positive view based on the outlook for tanker demand in the global, recovery in global economy, combined with very strained, a very constrained supply growth. The outlook for chemical tankers is particularly compelling, given the high correlation to global GDP and the prospects for post-pandemic above-trend global economic growth. Recent market volatility has, if nothing else, highlighted the earnings and cash flow potential of our fleet under strong charter market conditions. But it's worth making the point that oil market-related spikes don't constitute a cyclical upturn, something that we've not seen in the tanker sector for more than 10 years. Cyclical upturns occur when demand rises unexpectedly on a sustained basis and already constrained supply cannot catch up. Usually also occurring against a backdrop of deep pessimism and investor fatigue after long years of weak market conditions. In our opinion, this is not out of the question, if we see a strong, post-pandemic global economic recovery, as all the other conditions are, in fact in place. Meanwhile, our new capital allocation policy is yielding positive results in terms of increasing our financial strength with cash and undrawn lines now up to $82 million and…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jon Chappell with Evercore. Please go ahead.

Thank you. Good afternoon, everyone. Paul, first question is for you. The liquidity $82 million as of July 27, I assume that doesn't include the new vessels you're buying. So, if we pro forma that to $65 million and given your debt amortization profile and your outlook for the near term, what's the level of liquidity that you're looking to maintain? And I ask this in regards to your ability or optionality to purchase additional ships, given the discount that you were able to buy this recent one on?

Great question, Jon. So, the liquidity as of yesterday was just around $83 million, and we paid, we've paid a deposit on that ship, leaving a balance of about $30 million. So, pro forma about $70 million after we take delivery of the ship. And then we plan on financing this, let's assume 50% would bring us back up to kind of mid-$70s million. What I would say there is, we have, that includes, the full amount of the cash would include $55 million drawn on the revolver. So, in terms of our capacity, it depends on the charter market from here, so we can maintain our liquidity at those levels or pay down some amount of debt, but I think we do want to maintain as much financial flexibility as we can. So, hopefully that answers your question.

It does. And then the other thing I just want to follow-up on, Paul, on the same slide that you said you're taking the recently acquired ship and the chartered-in ship ahead of what you anticipate to be a stronger winter market, so late September-ish. But then you have zero dry docks in 3Q and six dry docks, which represent a pretty fair portion of your fleet for 4Q. Is there any way you can accelerate the dry docks from some of those ships into 3Q to get it in kind of the winter shoulder season, or on the other side of the coin, maybe postpone them a little bit, given some shipyard issues with the pandemic? Anyway to avoid kind of maximum offer your time during which you're anticipating to be a stronger period?

I know the teams are working on that. I think the ability to move these around by several months is already a challenge given the restriction on shipyards with COVID, etc. So, I know the team would like to bring a few forward and are already working on that in terms of delaying. It's quite a challenging thing to do, given shipyard availability, voyage scheduling, etc. So, I think we would certainly love to do that and avoid what hopefully will be a very strong earnings period. So, right now, this is what we expect based on ships positioning, etc., but that could change as well.

Our next question comes from Chris Tsung with Webber Research and Advisory. Please go ahead.

I kind of want to just piggyback off of Jon's question earlier. I mean, it's something that I was about as well that we're thinking about here. Just knowing that a lot of the flag and class states have postponed dry docking due to COVID, I was wondering what that does to the shipyard availability? And do you guys foresee the supply of tankers tightening considerably in Q4 as perhaps other competitors are trying to do the same thing that you guys are trying to accomplish?

We haven't really thought that through. I think we'll look into it. But it's a difficult situation. The class societies and flags have been, at least in our case have been very helpful in forthcoming and giving us extensions where needed for that reason. So, let's see. I think if things clear up, you probably would see a rush of ships into yards at a time of recovery simply because that's the extension you get, they're not going to continue extending for convenience, right. So that's an interesting point you're making.

All right, cool. And I mean just for my model purposes, it is like about 15 days in dry docking and maybe some days for repositioning, so let's just say, 20, 25 days is pretty accurate in terms of like what you guys would anticipate for Q4?

That's pretty accurate. On average, might even come out a little bit less depending on ship position, etc., but that's a pretty good place to work from.

Okay. Thanks, Paul, thanks, Tony. And I guess, we're just kind of wondering like over the past quarter, have you guys noticed any trade routes that have been a little bit more resilient or possibly starting to show signs of recovery? Trying to just get a sense of how you guys are observing the floating storage trade unwinding. And perhaps if there is any, I guess, material shifts in trading patterns or routes that could have led to increase or decrease tonne-mile demand?

I think the U.S. Gulf market is always important, and it seems to be very much alive and well; same thing with the Arabian Gulf. So, those are two big drivers of demand. It's been pretty confusing disruptive market with a lot of port congestion, as well as just sort of outright floating storage. So, it's not at all clear, but it feels like there are factors at play now, which have moved up the U.S. Gulf market decisively, that's strengthening the Atlantic generally. And in particular, China is very active exporting, importing crude, running refineries at full tilt and exporting. And that's we think is going to provide a good foundation for a rebound.

So, China reporting lots of crude exporting. And I guess just to follow-up on that response of yours, so what delays in import? And I guess is demurrage still very much a factor? And how is that looking when you guys are fixing new ships? Is it still, how close is it to like the rates that you guys are able to get or is it like very much discounted?

No, it's usually fairly healthy, and sometimes you engage in voyages, which are literally called demurrage place, because the rate itself may not be that great on an initially calculated spot basis, but when you factor in the likely delays and the demurrage you're going to collect it, it turns out to be okay. So it's definitely, that's alive and well.

Our next question comes from Omar Nokta with Clarksons. Please go ahead.

You guys spent a good amount of time in your remarks talking about strategy, and I just wanted to check in with you guys on where the fleet stands. You guys have chartered in an MR I believe for the first time. And one of the things that Ardmore has been able to do and show, I think despite a relatively small MR platform, even though you've still got scale, that you've been able to get TCE averages in line or better than some of the bigger operators over time. Is this charter-in, is this the beginning perhaps of a new strategy to try to exploit your trading platform?

It's something we've been looking to do for a while. It's a tool in the kit to kind of leverage and enhance our yields. I think time charters, if done a little bit indiscriminately at high rates, theoretically it may look good on paper, but they can back fire, because that's completely inflexible in terms of the cash flow obligation there. So we're particularly pleased with the rate that we got here, because it's, it makes out a little bit, it's kind of a complicated answer, but it not only substantially accretes value at, let's say, $18,000 a day fleet average, but it also lowers our breakeven rate. So, it's something we may do more of. This is not the first ship we've ever time chartered in. We have done this in the past I think while we were public company, but in the chemical sector, and it's something that we've been very busy building our platform and capability and systems, and we're now able to expand it this way fairly easily.

And then just another question I have is just on the 2010 MR you guys are purchasing. Clearly seems opportunistic, and like you said, it's a good price given the 10-year special survey is already done. It got the ballast water treatment system in place. How do you think about, how this vessel fits into your Eco-Design or Eco-Mod portfolio?

So, this one, we like the price and the fact that it's been through second special survey and ballast water treatment installation. And it's a near sister to the 308s that we own. It's a pump room ship, it's not deep well. And it's not, it doesn't have an electronic engine. But Onomichi makes terrific ships, and they're always fuel-efficient. And whenever they come out with a new version, they always improve the design. So we've got high hopes for this one. And it also has more cargo capacity. So, we think it should trade well and the price is great. And quite honestly, when we calculated the breakeven, which assumes, on a net income basis assumes 50% debt, our eyes popped out of our head, $11,700 a day. If we could achieve that across the whole fleet, we'd make $40 million more per year, and our ROIC on a through the cycle basis would be 8%. So, it kind of underscores the value of a good ship at a great price.

Yes, agreed. And Paul mentioned, you are financing it obviously with cash to start and then expect to do maybe 50-50 financing. Is this financing something that you expect to basically have squared away within the next few months?

Yes, we're starting to look at it now, Omar. We'd probably get it done within the third quarter. We have got a strong cash balance. So, there is no urgency there. I'd like to think that, we'll get it done in the next, within the third quarter, I'd say.

Our next question comes from Randy Giveans with Jefferies. Please go ahead.

So, obviously, I appreciate the quarter-to-date rate guidance. And in the press release, you stated that rates are not reflective of potentially stronger rates in the back half of the quarter. So, there's two questions on that. First, what kind of rates are you currently fixing this week? And then second, when do you expect rates to kind of get back to those mid-teen levels through the MRs?

Let me start and maybe Paul can provide more detail. The rates are around these levels. We've talked about the fact that the Atlantic is up substantially and probably in the, overall in the high-teens now and the East is lagging, but heading in the right direction. So overall, we're probably in that ballpark. I think it's important every company comes out with their quarter-to-date estimates. The reality is that we're all in the same market, and when the dust settles, we all get about the same TCEs, give or take, a 1,000 or 2,000 a day. So I think it's important just to kind of focus rather on the market and the market outlook as opposed to any one particular company's quarter-to-date estimate. And it's not a forecast for the quarter and we do think that things are going to be improving. Paul, I don't know, if you want to add to that?

No, I think that's fair. I think we're obviously the first out of the gate in terms of companies that, we are presenting numbers, which is reflective of July effectively and into a week or two in August. So we've seen rates pick up quite meaningfully in, particularly in Atlantic in the last week or so. And if that continues and you're fixing ships at these levels, it will pull up quite meaningfully. So it depends how the market evolves. But the point is that the rates, the rates guided are reflective of what we've seen in, and booked in July and up until 10 days from now effectively.

Sure. All right. And then I guess following up on the 2010-built MR acquisition. Was there like a maximum age until we're looking at? Obviously, this is 10 years old, a little higher than your average fleet age, say, instead of maybe a five-year old per ship. Or is it purely just the price was so low that it didn't even matter what age it was? And then, I guess, following up on that for the price, is that reflective of maybe a weaker market, or is there something unique to that kind of asset sale that the price was at a discount as you mentioned?

I think we paid a fair price. We, look, the ship is a little older than we would normally focus on, and we acknowledge that, but we really like the fact that it's been with a high quality owner from new. It's been through dry dock and special survey and ballast water installation. And we have looked at newer vessels, but we thought this was the best value out there, at least that type. This is, we call them Eco-Mods, but it's essentially a standard Japanese ship. We will take some steps to improve the fuel consumption on it, but they're great ships to begin with. They're not that far off of Eco-Designs in terms of their fuel consumption. Of course, we're in a bunker price environment now where that's not as critical as it would have been when we were looking at IMO 2020 fully playing out. And the performance of a pump room compared to a deep well is not huge as well. So, taking into account all these factors, we felt this represented great value and compared to the kind of the more modern Eco-Design Korean ships. And then the final thing I'd mention is that it's something that you can do, you can afford to do, if you have an already modern fleet. You can kind of average down a little bit in the age, if you find pockets of value.

And lastly, just a quick modeling question, I guess, for Paul. Very impressive swap there, I think it's three years at 0.32%, which I thought was a typo at first, but pretty good. Could you discuss maybe this transaction a little more? Do you have plans for additional swaps? And then, I guess, what's your current kind of weighted average interest expense or weighted average rate on your bank debt, your revolver, your capital leases blended? I know you said 2.8% for the bank debt, just trying to get an overall rate there?

Perfect. So, starting with the swaps question, first of all. So we did 75% of our debt, anything that was termed, effectively all of our term debt and leases is now swapped out. The only thing that has not been swapped out is the revolvers. Obviously, you can't swap something that the balance is constantly moving, and then also one of the facility, which is maturing next year for one ship. So pretty much all of our debt that we could swap out, we have swapped out. You're not the first to think that it was a typo. We actually have to explain that to our auditors as well. They've never seen anything this low. So, it was a good rate. The markets worked for us and we seized upon it. In terms of the weighted average margin on our bank debt, it is just under 2.5%, 2.49%. The leases is in the threes, about 3.05%. So, weighted average then is about just under 3%. And then the LIBOR, the weighted average funding cost is, because some of our debt is funded up, one-month LIBOR comes in slightly under 30 basis points.

It's probably around 2.75% or 2.8%?

Yes, all-in.

All-in. Okay. On average.

On average, yes.

Plus the 0.32%. So, it's probably all in, it's maybe 3.3% to 3.1%, on average across all.

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

So, I just have two. The first is really around both the acquisition of the second-hand ship as well as the time charter. Just trying to think through, how much of the timing of you sort of getting back into growth mode here, so to speak, is a function of the fact that the quarter was really good, especially within capital allocation strategy, you had cash on the balance sheet, and so, it enabled you to go out and buy things versus market timing and feeling like, hey, this is a really great opportunity and irrespective of what the last quarter, while we really want to execute on it.

I think that, Ben, Tony. Yes, look, it's obviously a combination. So, we, to be honest, if we were paying $0.06 dividend, we might not have been comfortable doing this. And we do think these are really well timed additions to the fleet and quite accretive. So it's really a combination of the incremental financial strength, the liquidity, and the opportunity that we saw.

And then, Tony, I think you did a good job of outlining sort of the Hafnia situation, and I don't want to delve into that necessarily here because it's pretty clear where you stand. I'm curious though. Well, along those lines, you talked about sort of having the scale operationally that you want. I'm curious how you think about scale from the perspective of capital access and capital markets? And how does that weigh into thinking about sort of your long-term strategy for Ardmore?

Well, look, it's clear that everything else being equal, a greater market cap is helpful. How much more helpful, we're really not sure about. I'm sure, if we had $2 billion or $3 billion in market cap, we probably trade better than we do today. But we don't observe that we're trading at a disadvantage to other companies. And the point about everything else being equal is that everything isn't equal and there are other very important factors to consider. What's your percent free float? What's your ADTV? What's the risk of an overhang translating into a downward pressure on the stock price? These kinds of things. So that's why we're committed to the governance and the listing quality that we have, and that's why we're committed to trying to execute on compelling opportunities whether it's single ship acquisitions or M&A transactions.

Okay. All right.

Especially with capital markets, look, we'd love to have increased scale in capital markets, but it's not the kind of, there's no point in doing it if you can only do it dilutively.

Our next question comes from J. Mintzmyer with Value Investor's Edge. Please go ahead.

So first question, elephant in the room, I think you've all danced around it a little bit. I enjoyed the kind of offline conversations as well. But looking at that Hafnia offer, look, I mean, it was a low-ball offer, they took advantage of your low stock price. All the reasons you didn't like the offer makes sense. But let's talk about what sort of offer would make sense? Is it a sort of NAV to NAV transaction, or how do you see successful consolidation in this sector?

Well, I think, let's start with consolidation, right? As I mentioned, we think that there is an important distinction to be drawn between consolidation and scale, and they're used almost interchangeably. In terms of consolidation, we just, at least in our sector, we don't observe that anybody has more than 5% of the world fleet. And the customer side is equally fragmented, and so it's really a trading business. So it's really a question of what you can do with scale. And we engage in M&A discussions continually always in private and always on the basis that, that they have to be compelling for our shareholders. So, what kind of a transaction would make sense? It would be one where it improves our performance. It's meaningfully accretive. It maintains the quality of governance and listing that we have, and it's strategically coherent. So, I think that would describe it.

Well, hopefully we see some of those transactions come across the line. You bring up a good point about scale and efficiencies. Obviously, there's not a whole lot to be gained. I think most of us understand that. I know at least the analysts understand that. But there is way too many stock tickers, right? I mean, there is way too much stuff floating out there trading around splitting investor interest, not enough market cap to bring in the meaningful buy-only firms. So I think that's maybe, I think Ben kind of hit it on the head earlier on mentioning that maybe that's an area where we could see some benefits from these consolidations and trading liquidity. So fingers crossed on that one. Second question for you guys, looking at ships versus repurchases, right? We've talked about this a little bit before and I understand your capital allocation priorities. But you decided to buy looks like just one ship and chartering another at a great value. I think the ship was a great value. But your shares are trading at 50%, 40% to 50% discount to NAV. Is there any sort of reason why you chose to pick the ship over picking investing back in your own fleet?

It's a great question, J, and it's one that we've been discussing internally and externally for ever since we've been public. We've done share buybacks in the past. Nobody remembers it. They were not well timed because the stock was traded way down since then. So the best thing we did in terms of returning capital was just paying dividends. So you have to remember that share buybacks may look good and feel good at the moment, but they've got to work on a cyclical basis, right? The second thing is that, companies like us are highly constrained by the SEC rules when we engage in share repurchasing, unless we want to put out a public tender. And so the amount we can bring in is actually quite limited. Now I know that our volumes are up, and it seems like this should be kind of an easy thing to execute on, but we know from personal experience that it's actually not. I don't think we ever got more than $2 million in the quarter. And so, that's another point to make. The other thing is that, we did look at, if we were to buy back the equity of the ship that we just bought in shares at a 40% discount or something, the NAV accretion would be about the same as the earnings accretion we're going to get over the next three years on the ship, if you compare it to our breakeven rate overall. So, I think it depends on how you look at it. Some people are in love with the signaling the share buybacks. Our experience is that it never works, nobody remembers, and if they do remember, it's negative memories of it. And that's, I guess the other point to make is that, everything else being equal, we'd rather increase our cap and free float rather than deducting from it.

Thanks, Tony, appreciate you walking through that one. Just look at the numbers, I know you understand this right from a spreadsheet sense, but investing in the ship, you spent about $8 million of equity and you grew your fleet by roughly 4%, right? Whereas if you invested that same $8 million in your shares, now granted, you probably couldn't get them all in the fours or fives, right? It would jack the price up just a little bit, but you would grow your fleet by 5% to 6%, right, on a per share basis and you would be growing at an average age of six-and-a-half years to seven years as opposed to adding a ship that was 10 years old. So I know that's a spreadsheet numbers, but just something to put out there for you guys. I think it would be great to see both, right, both some sort of tender and repurchase and also see you taking advantage of these low marks in the market.

Yes, I hear you. Just to reiterate my point, the, just that one ship, the accretion or the additional performance compared to our breakeven is $1.5 million a year, so $4.5 million over three years, and that's about the same as buying the shares back that amount at a 50% discount. So it's a great philosophical discussion. It's one that we have with our Board constantly as well. And at the moment, we feel like the opportunity is more compellingly in the right kind of acquisitions at the right time.

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