Ardmore Shipping Corporation (ASC) Q1 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Ardmore Shipping's First Quarter 2021 Earnings Conference Call. Today's call is being recorded and 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 up at that time. A replay of the conference call will be accessible at any time during the next week by dialing 1877-344-7529 or 1412-317-0088 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 and 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 $8.6 million per share. Sorry $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 fixed for on MR's 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 with for four of their 25,000 deadweight chemical tankers, trading alongside around 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 are 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 mean 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 it 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 pinched in MR report. To mention a few highlights from our recently issued 2020 progress report when it comes to the G&A after ESG, in 2020 we were ranked third overall and first of four issuers at a 48 public shipping companies on the Webber Corporate Governance Score card, with interesting correlation shown in the Webber 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 at this 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 and a focus on fuel efficiency and voyage optimization, which has the twin virtue of reducing emissions, but 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 shipping industry 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 of the carbon intensity indicator or CII, and operational measure will be more impactful as will include rising targets year-by-year and it's A to E grading system just like school will make it easier for charters to screen chips and marginalize those less efficient 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 in any amounts over or under will cause a trading of allowances or payment of fines, effectively less efficient ships will cost more to run on any voyages taking place within the EU, or it's 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 charter us to screen out inefficient ships and the Poseidon principles are intended to ensure that bank portfolios are aligned with carbon reduction targets set out by the IMO, which will have the effect of reducing financing opportunities for inefficient 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 target set by the industry, historically we have substantially outperformed besides the 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 20 progress report and also shown here in summary form in the lower half of the slide. I'm turning 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 with the ETP is and also what it's not. The ETP is a long-term plan which will spend years and 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 tanker company and that will change, but will changes 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 nuts and bolts assessment of already developed technologies, their economic viability and their deployment. But this doesn't mean that we're becoming a technology company, we are and will remain a tanker company with a strong operational focus and are nearly expanding on something we've always focused on. Technology is a means to improve performance. A good example of Z1 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 instance, we partnered with the developer of the technology, Element One along with Maritime Partners, a like-minded finance company, which sees the potential of the system. Even 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, which we can help bring to market. And then I'm moving to slide 26 to sum up. A recovery in the product and chemical tanker demand. 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 glad at this time by chemicals and products. Meanwhile, the supply outlook is we think 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, an excellent teamwork under very challenging conditions, both at sea and shore. Our focus is also on risk management in the financial strength with quarter of cash of $50 million and leverage at 50% and the pending preferred share issuance supporting us 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. But it's a final point, 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 assess whether collectively or individually. And for example to sea fares international relief funds, 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. And 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 the 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, potentially very attractive returns in a less capital intensive manner. Obviously, we're going to take those seriously, because again that's part of our -- our focus now is to try to bring our strengths from the operational and technical side to bear on opportunities to partner with others to bring things to market. So, I can tell you that there is going to be a lot more E1 type projects, but there 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 with the banks be there to support the ladder, maybe more so than they have been in the former.

It's very possible. I think that you know it's interesting the, the sort of the perception of E1 is quite large in the context of Ardmore, but in reality we're investing $6 million of cash. And 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 I think another point I want to make, because it's very -- it's a very important point 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, 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 in that a little bit, it seems to get knocked back down. So I'm not asking you for 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 there is 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?

Well, I think it's a great question. I think it's just pure shipping economics in that you could -- if you're coming out of the deep trough as we were from the kind of middle late last year. You could see a significant demand recovery before the supply demand balance gets to that point of inflection. So I think we're arguably halfway through the recovery, maybe a bit more, but clearly not enough yet to inflect in terms of supply-demand and the impact on rates. And it's, there are so many moving parts right now on the balance of recovery, that it's just hard to kind of pinpoint anything, but it could be -- and the other thing I think to point out is that other things are happening, right. So we've talked about the continued refinery dislocation. We've also in this period seen China very quietly, but significantly continuing to increase their exports, which is driving product tanker demand as well and there could be return to things like nobody is talking about IMO 2020 anymore, other than maybe in the context discovers, but that did definitely create an incremental layer of demand, we think from moving low-sulfur products from the east to the west. It's just been swamped by the surplus or the dearth of demand overall, and the availability of that kind of product in West under those conditions, but that could come back as well. And so, we think that there -- you also have the impact of stimulus spending and activity on demand, which isn't permanent, but it can have an impact for up to a couple of years. So that's a rambling long -- long way around, saying that we don't know exactly when the inflection point is, but it doesn't surprise us that it hasn't happened yet, because what we are doing now is making up demand from the very deep trough.

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 and then also looking at your rate guidance, it seems like the chem tankers continue to outperform the MRs, why is that. And when do you expect those MRs to inflect above the chem?

Okay. Maybe I'll just -- I think the way we report sometimes can be a little bit, it's just the math but -- but we have for example the spot trading ships are roughly 40%, 50% through the quarter, but for the ship down time charter, we know the whole quarter. Right. So I think if you add those together, It's looking like a bigger number somehow.

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 at, so we're halfway -- 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 around somewhere between 13.5 and 14 in a bit. 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 charter.

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 for the 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 kind of 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 documentations, there is no buyback shares. I think we've been very clear at the outset, the priorities on capital allocation. They remain debt reduction and financial strength and continuing to manage through the risky markets as we see them. The investment in the one was as Tony mentioned, $6 million in capital outlay. We think that's a potentially high return investment. So for us the capital allocation priorities remain unchanged and to the extent that there are opportunities to kind of take interesting investments, we look at thus share buybacks it's there two of them in a toolbox, but no immediate plans to kind of 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, and is that just a Korean yards or is that overall, and what are you basing that on?

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

Yes. So that's what -- that's indications from ship brokers are today, if you wanted to do a series of ships that's where you're looking at. I'm sure if you look for a one-sie, two-sie already could probably get the merger, but generally the feedback from the main yards in the kind of top tier yards is that capacity is booked down for an extended period of time.

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

Well, I think Paul's comment may have been misunderstood. Okay. We, if you were, I think, I mean when I talked to S&P brokers, the amount of ordering activity taking place at the moment, largely with containers, but also gas and bulkers is huge and a lot of it hasn't been announced yet. So -- and it's spreading down to sizes, which are typical MR type of builders and Burt's, basically feed our container ships and mid-sized gas carriers. So in these kind of core MR shipbuilding yards, there it seems like based on what we're hearing anecdotally, but not formerly reported yet, they're filling up rapidly and I think the point that Paul was trying to make is that if you want to order a long series of ships. Let's say you wanted to order four -- six or eight MRs or something, that's going to extend into 2024. And another point the broker makes me this morning, which is interesting. We know this, but you forget that when container ships are ordered, they're never ordered in ones and twos, it's always for a strength and so, these are larger orders.

All right, thanks for clarifying that. And 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 look at the, I guess the 17% of the fleet, that's between 15 and 19 .

Yes, I mean it's a knock-on effect. So 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. So like there is a very active market for MRs around the age of 15 that are being bought by those kind of people that have been scrapping the older ones.

Okay. Just last question on the -- it looks like the operating expenses have come down, or you're managing them very well. Any additional cost for COVID year, I mean with 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 -- we 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 well. Starting with a couple of things. Let me start with the E1 and I appreciate that it's still in the process of being finalized, but I'm curious if -- since you've made the announcement and it's obviously pretty public. What kind of any incremental interest you're seeing or are there been any early wins or any update as to sort of 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 as well underway. They are great people, where we're in the process of class approval for the system, for deployment of vessels and there's been -- without being able to disclose any great detail there is -- there are a lot of discussions going on with potential users, but this is not -- 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, 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, having demonstration units ready to deploy. So that's what we are at the moment.

All right, that's helpful and then sort of connected to that obviously, I believe it with this contemplates is methanol, quite a lot, which is an area that is very close to where you guys are, but is not as I'm not mistaken, is not an area that you're currently in. Is that an area -- is that something you aspire to do and something that we should be on the outlook for going forward?

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 a shift in stainless steel or zinc coated ships, which we don't have at the moment, we could in the future and then also sometimes Marine Line or Inner Line 9,000 is used, for that can be sometimes problematic. So, it's not a cargo that we currently ship. We also don't ship sulfuric acid or things like that. So it's -- but it is a component of aggregate chemical tanker demand and I think in a more general sense is, if the demand outlook -- if the demand for methanol grows, that will help the overall commodity chemical market in an aggregate sense. So to note that answers the question, but I would expect at some point, we will be shipping methanol, but it's not -- it's just in the context of it's just another cargo that you can carry providing you with more trading options.

Okay. Let me lastly, circle back to something that John was talking about and again sort of appreciating that none would really know, but one where you're sort of doing the back of the envelope math as to sort of when things can rebalance and let's just take the IIA data for instance and there. Obviously, there is an upward trajectory for oil demand, but it doesn't get back to pre-COVID levels until sometime next year. At the same time, the product tanker fleet has grown by 3% or so since all of this started. How do you sort of -- how do you get comfortable with a recovery, let's say, in the back half of this year or sort of what's sort of it that tipping point that says, okay, well maybe absolute oil consumption is maybe still a little bit less, and the fleet is a little bit bigger, but that doesn't really matter because X, we are going to sort of fill in the blank, but what tips the scales to?

Well, I think X could be a few things that I believe I've already mentioned, but the refinery shifts that have continue 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. And 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 long-term.

Okay. And collectively, that could be or should be enough right, like that's -- it gets you there, in terms of just making the math work?

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 for attending today's presentation. At this time you may now disconnect your lines and have a great day.