Ardmore Shipping Corp (ASC) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Fourth Quarter and Full Year 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 2 weeks by dialing 1 (877) 344-7529 or 1 (412) 317-0088 and entering passcode 10151864.

At this time, we'll turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Good morning, and welcome to Ardmore Shipping's Fourth Quarter and Full Year 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 this morning's third quarter 2020 earnings release and presentation.

Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions.

Turning to Slide 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 in forward-looking statements. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2020 earnings release which is available on our website.

And now I'll turn the call back over to Tony.

Thanks, Paul. So first, to outline the format of today's call, to begin with, I'll discuss financial highlights and market developments, then some comments on the energy transition. Paul will discuss product and chemical tanker fundamentals and provide a detailed performance update, and then I'll conclude the presentation, and we'll open up the call for questions.

Turning first to Slide 4. Last year started off strong with IMO 2020, rose to record highs with the Saudi oil price war and pandemic disruption, then to new lows by year-end. Nevertheless, resulting in overall positive adjusted net earnings of $0.5 million or $0.02 per share and Ardmore spot MR performance of just under $16,000 a day.

Fourth quarter financial results are reflective of a trough in product tanker rates, with an adjusted loss of $13 million or $0.39 per share and spot MR performance of $9,600 per day.

Chemical tankers didn't enjoy the same volatility as MRs earlier in the year, but rates have fared better in the second half, earning just under $11,000 a day or $11,800 on a capital adjusted basis to the cost of an MR.

Meanwhile, Ardmore had been active and taking advantage of these volatile market conditions. We completed the sale of the Ardmore Seamariner just at the end of the year. This was replaced by the 2010 built Ardmore Seafarer, which we purchased in the third quarter at an attractive price and a much lower breakeven rate of $11,700 per day.

We completed financing for the Ardmore Seafarer with Iyo Bank at LIBOR plus 2.25%, our lowest bank spread to date. We took advantage of weak market conditions by carrying out 6 dockings in the fourth quarter. We just recently fixed 3 MRs on 1-year time charters to partly derisk near-term cash flow. We repurchased just under 100,000 shares in the fourth quarter at a weighted average price of $2.91 per share. And we've maintained a strong liquidity position and balance sheet with year-end cash of just over $58 million and corporate leverage on a net debt basis of 50%.

Turning to Slide 5 on the market outlook. Ardmore MR spot performance has enjoyed a partial rebound so far this year on the back of winter market activity and a modest economic recovery. We expect continued challenging market conditions until a full economic recovery is underway, largely dependent on the effectiveness and timing of the vaccine rollout.

Thereafter, we expect a rebound in charter rates along with our financial performance in a recovering market, with above-trend ton-mile demand growth characterized by a demand pull recovery with refined product draws leading the way of our crude activity, and oil market disruption and trading activity creating longer voyages and getting refined products to markets where they're needed.

Beyond the post-pandemic recovery, we expect continued product tanker demand growth 2030, with global economic growth and refinery activity away from points of consumption, offsetting the initial impact of the energy transition.

As already mentioned, chemical tankers have fared better than product tankers since the beginning of the rebound, which we expect to continue in a full recovery. Meanwhile, product tanker supply growth remains constrained, with net fleet growth of 1% to 2% per annum for the foreseeable future, and upcoming energy transition regulations keeping a lid on newbuilding activity. While we're cautious about the first half of 2021, we believe the second half will bring improved conditions and should continue to build thereafter.

Turning then to Slide 6. The global energy transition will have a profound impact on the shipping industry, including our segments. While this will unfold over years, the impact has already been felt through anticipated regulations and constraints on newbuilding ordering activity. Our view is that the transition represents more opportunity than compliance challenge as reflected in our energy transition plan, the main elements of which are as follows: First, we see significant opportunity for continued improvements in fuel efficiency as well as early adoption of 0-carbon fuels, which Ardmore will pursue in keeping with our current strategy.

Second, many of our customers have similar incentives to decarbonize, and we'll approach this through closer collaboration with shipping companies such as Ardmore, who are able to assist them in achieving their aims.

And third, over time, our chartering activity will migrate more toward nonfossil fuel cargoes, for which demand will continue to grow along with the global economy. In fact, already 25% of our business is nonfossil fuel cargo.

The energy transition plan is a progressive initiative, but at the same time it's strategically consistent and focused on performance, which we will describe more fully in our upcoming 2020 sustainability report due out next week.

And on that note, I'll hand the call back over to Paul.

Thanks, Tony, and starting off with the market fundamentals. The outlook for the product and chemical tanker demand remains very positive. An economic rebound is widely expected post pandemic. Both the World Bank and the IMF are expecting the global economy to expand by 4% this year, with China alone forecast to grow by 7.9% in 2021.

The IEA are forecasting global oil demand to increase by 8% or 7.4 million barrels a day, getting back to pre-COVID levels of 99 million to 100 million barrels a day towards the end of this year and to grow by approximately 0.85% per annum thereafter out to 2030.

Global refining throughput is expected to increase this year by 6% or 4.5 million barrels a day, further boosting cargo volumes. And the ongoing trend in refinery dislocation is accelerating as smaller refineries give way to new mega-scale export-oriented refineries. 1.9 million barrels a day of refinery capacity closed in 2020 in Europe, Americas, Japan, Philippines and Australia, while 5.8 million barrels of new capacities coming online between the end of 2020 through 2024 in the Middle East and China, resulting in greater voyage distances and ton-mile demand.

Meanwhile product and chemical tanker supply is looking increasingly attractive. The energy transition looks set to accelerate a significant turnover in the global fleet as increased emissions and efficiency targets put pressure on older, less-efficient ships, resulting in more scrapping. And to put this into perspective, over 800 ships or 26% of the product tanker fleet will be over 20 years old and within the scrapping zone in the next 5 years.

The current order book is already at all-time lows. Product tanker order book is 6.3% or 193 ships delivering over the next 3 years, and we expect fleet growth net of scrapping to be approximately 1% to 2% per annum for the next 2 years. Chemical tanker order book is 3.6% or 64 ships. And net of scrapping, the expected fleet growth is less than 1% per annum for at least the next 2 years.

New ship ordering is expected to remain low until there is further clarity on propulsion technology and emissions regulations as well as an economic justification for ordering.

Moving to Slide 10 for a summary of our quarterly performance and our financials. We're reporting a profitable full year 2020, a very strong first half characterized by market volatility and oversupply, followed by a weaker second half, reflecting the impact of pandemic on oil demand. As Tony mentioned, charter rates have improved in the first few weeks of this year, and we're currently trending higher than the fourth quarter.

For the full year-end 2020, we're reporting adjusted earnings of $500,000 or $0.02 per share, which excludes the losses on the sale of the Ardmore Seamariner.

Looking at our expense items. Operating expenses came in at $62.5 million for the year, in line with last year, which was an exceptional performance given the challenges managing COVID.

Total overhead costs were $17.9 million for the year, comprising corporate cash expenses of $11.9 million and commercial and chartering expenses of $3 million. Costs were down year-on-year primarily related to travel, another COVID-related cost savings.

As mentioned before, in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate cost is the comparable overhead. For a direct comparison, our internal commercial overhead costs are running at approximately 50% of market rate prevailing pool fees.

Interest costs came in well below budget for the full year, reflecting lower interest rates and completion of the fixed-to-floating swap in May of this year -- last year. Currently, $305 million or 75% of our debt is fixed at a margin plus 32 basis points through May 2023. Depreciation and amortization totaled $38.4 million for the year.

In terms of guidance for the first quarter, we expect operating expenses to be approximately $16 million. We expect overhead incorporating commercial and corporate to be $4.5 million, including cash and noncash items. We expect depreciation and amortization to come in at $10 million. Interest and finance costs are approximately $4 million, including deferred finance fees amortized at $400,000. And finally, we have 1 ship on time charter in, and we expect charter-in expenses to be $1.2 million for the first quarter of '21. Overall, Ardmore's cost structure is amongst the lowest of our peer group despite our smaller size, with significant incremental improvements possible through scale.

Turning to Slide 11, we take a look at charter rates. As mentioned earlier, 2020 was a year of 2 halves, a very strong first half followed by a much weaker second half. And in spite of the challenges in the second half, the Eco-Design MRs earned $15,990 for the full year while the fleet average came in at $15,355.

It's important to point out that none of our MRs have scrubbers fitted. So ignoring capital or operating costs associated with the scrubbers, our estimate is that a scrubber-fitted MR should generate a premium to TCE of $600 a day for the fourth quarter and $1,200 a day for the full year based on the spread between HSFO and VLSFO over the period.

And looking across the quarterly performance with various ship types. Eco-Design MRs reported TCE of $9,600 in the fourth quarter, while the Eco-Mod ships reported $9,050. The chemical tankers performed very well on a relative basis. And as with prior quarters, we presented the charter rates on the chemical ships on an actual and a capital adjusted basis. Purpose here is to present the rates for the various vessels on a comparable basis to an MR.

The methodology is simple. We establish a bareboat equipment rate for the ships each quarter based on TCE. We then make an adjustment to the bareboat for the relative value of a ship to an MR. And then this added or subtracted to the TCE rate. Again, this is one of the methods we use internally to assess relative TCE performance, and it's pretty useful for contextualizing rates across different asset classes.

Looking down at rates. The chemical tankers reported $10,900 for the quarter and $11,700 on a capital adjusted basis. And looking ahead, as of today, and already mentioned, for the first quarter, we have 45% of our days booked on MRs at an average of $11,500 per day and $11,000 per day on the chemicals with 75% of the days booked.

Moving to Slide 12 for fleet and operations update. Our fleet continues to perform well with all COVID-19 challenges being carefully managed. Crewing and seafarer welfare remains a top priority. Ardmore, along with other leading ship owners, strongly supports the recently announced Neptune Declaration in an effort to build awareness of the issues and push to accelerate crew changes and vaccinations for our seafarers.

In terms of fleet performance, Ardmore's modern, highly fuel-efficient fleet continues its strong performance on emissions reduction, and we remain well ahead of target set by the industry. Our fleet carbon emissions for 2020 were 11% better than Poseidon Principles targets, and we have a continued focus on further improvements and investments in technology. In addition, all of Ardmore's fleet significantly outperforms the EEXI targets currently under discussion by the IMO.

Meanwhile, we continue to invest in the fleet to optimize operating performance. We completed drydockings on 6 vessels in the fourth quarter, taking advantage of the weaker charter markets. And all of the dockings were completed in the East, enabling more cost-effective drydockings.

Total CapEx for the full year 2020 was $10.6 million, comprising 9 drydockings and advanced payments for ballast water systems. And we're forecasting CapEx of $7.5 million for 2021 on drydockings, ballast water system -- treatment system installations and performance-enhancing upgrades.

Finally, we're forecasting 9,300 revenue days for 2021. And as Tony mentioned, with some recent fixtures, we currently have 12.5% of our 2021 days fixed on time charter at market rates.

Turning to capital allocation and financial activity on Slide 13. We're continuing to focus on financial strength and liquidity and reporting cash of $58.4 million at the year-end. Total net debt at the end of December was $347 million, and net leverage was 50.2% down year-on-year. We completed the sale of the 2006 built Seamariner for $10 million in January, and net cash proceeds from the sale of the vessel were $5.4 million after prepayment of debt.

We closed a 5-year $10 million loan facility for the Ardmore Seafarer with Iyo Bank at LIBOR plus 2.25% in December. And we repurchased 100,000 shares under our new share repurchase plan at a weighted average price of $2.91 per share during the open period in the fourth quarter.

Debt reduction and financial strength remain our top priorities under capital allocation policy. We expect debt repayments of $42.5 million for FY '21 while maintaining revolving credit facilities for financial flexibility. We have very healthy...

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with an unrestricted cash of $2.25 million per owned ship...

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which is amongst highest of our peer group.

And with that, I will turn the call back over to Tony.

Thanks, Paul. So to summarize, again, 2020 overall was a profitable year, but a roller-coaster in terms performance and a reminder of our earnings potential, with our voyage coming in at $77,000 a day over 50 days.

While the market remains challenging, rates have improved with the winter conditions and the beginnings of economic recovery. We expect generally weak market conditions to persist until a full global economic recovery is underway, which we anticipate will occur in the second half of 2021. Meantime, we remain financially conservative...

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Pardon me, Paul. Your line is chopping off.

Can you hear me now?

(technical difficulty)

No, your line is breaking off.

Okay.

Could you try dialing back in?

Yes. Okay.

I would suggest you to reconnect to the call again.

(technical difficulty)

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Pardon me, ladies and gentleman, please stand by while we reconnect. Thank you for your patience.

Okay operator, are we back on?

Pardon me, this is the operator. We have reconnected the speakers, and we'll continue. Please proceed.

Okay. Thanks. So I think Paul was almost done. And the good news is I had a chance to completely rewrite the summary. So here we go.

So anyway, so to summarize, again, 2020 overall was a profitable year, but a roller-coaster in terms of performance and a reminder of our earnings potential with our best voyage coming in at $77,000 a day over 50 days.

While the market remains challenging, rates have improved with the winter -- with winter conditions and the beginnings of economic recovery. We do expect generally weak market conditions to persist until a full global economic recovery is underway, which we anticipate will occur in the second half of 2021.

Meantime, we remain financially conservative with strong cash reserves and keeping the focus on performance and cost control. At the same time, we're also looking beyond the immediate challenges to future opportunities in a full market recovery and in the energy transition.

And as a final point, while we all want to look forward to a brighter future, we must not forget the hardships that the ongoing pandemic presents, most of all to our seafarers, but also to shore staff in lockdown and in travel-related quarantine on our behalf. We want to acknowledge their sacrifices and thank them for their perseverance and their professionalism.

And on that, we're happy to open up the call for questions.

(Operator Instructions) The first question comes from Jon Chappell with Evercore.

Tony, first question is a little bit shorter term, and then I'll switch to a longer-term one. The time charter outs, certainly not something you guys have done recently. And given your outlook for the market, seems to be somewhat bottom ticking. Maybe you can just give us, first of all, the numbers around the time charters, 3, 1 years, what the rate is roughly and then also the thought process behind locking in for a year, given your kind of 2 time horizon theme on 2021 with the second half being much better?

Jon, just luckily, trade winds has helped us out with an article today on MR time charter rates and the rates that we booked are consistent with that. The reason why we're doing it is that we do think that there's -- it's going to be choppy for the next number of months. We think the rate probably reflects how on average the year is going to turn out, which would suggest rates in the high teens later in the year on a spot basis. So we're pretty happy with the rates. So I think it helps us out. And we don't think we're leaving a lot on the table.

Okay. And then just to be clear, that 45% of 1Q that you've given, does that incorporate the time charter rates as well, which would obviously be much higher than the spot? Or is that just purely what your ships are in the spot market?

No, Jon, that's incorporated. That's a blended between the time charter ships and the spot ships and the time charters were fixed during the quarter. So -- but 2Q would have a higher percentage of fixed days. But to answer your question, the number of quarters is a blended between the TCE and the spot.

Do you have it on a pure spot basis?

On a pure spot basis, it is a couple of hundred dollars a day or less, not much. Given the rating, it's not a huge component of the first quarter.

Got it. And then bigger picture. Tony, I was going to ask before the call started. Bottom of the market, you have an optimistic outlook on the back half of this year and the rest of the decade, ending the year with $58 million of cash. Like it seems like this may be your time to expand the fleet.

But then you had the slide on the energy transition and kind of your next steps as far as that goes. How are you thinking about expanding the fleet at the bottom of the market, while also retaining capital and thinking about the next evolution of whether it's fuel propulsion or any other steps necessary as part of the energy transition?

Good question, Jon. I mean, look, there are a lot of competing priorities here. And we also want to remain financially conservative, right? So there's nothing I can articulate that's going to illuminate anything. We see opportunities in the energy transition. We think we've got a lot of upside and exposure to a recovering spot market. And we maintain our priority on over time delevering.

(Operator Instructions) The next question comes from Randy Giveans with Jefferies.

So I guess, following up on that. Looking at Slide 8, obviously, the outlook seems pretty attractive from both the supply and demand perspective. Slide 11, market is still very close to the bottom. So what are your thoughts on maybe securing some additional time charter-ins, maybe not for a year, if you're just doing some outs for a year, but the 3- and 5-year time charter-in rate is only around $13,500, maybe $14,000 for an Eco. What's your appetite there for some longer-term time charter-ins?

We are being a little -- we are being a bit more active in the time charter space, both in and out. That will continue as we see opportunities. And a lot of it's kind of sort of fixture-specific. So I think everything you're saying makes a lot of sense. These are good ideas. We just have to wait and see what opportunities arise that are actionable.

Got it. Okay. Yes. On paper, it looks good, I guess, into practice. That's why you get the big bucks. All right. And then, I guess, on the share repurchase plan, obviously, nice to see that getting put to work, although it's only for, I don't know, $300,000. So what determined that amount in the fourth quarter? And then going forward, is that the top priority for use of cash?

Randy, no. I mean I think, look, as Tony kind of laid out, there's a lot of competing priorities for cash at the moment. The energy transition is a very exciting development. There will be opportunities to deploy our capital there. One of our top priorities is to maintain a strong liquidity position and pay down debt.

As also you've seen in the fourth quarter, we bought back some stock at a very attractive price. So it remains a tool in the tool box, but we've got to balance a number of competing objectives. And ultimately, the long-term goal here is to build long-term shareholder value. And I think there'll be lots of opportunities in that. And the share repurchase will be one of them. But the energy transition plan is super exciting, and that has potential to create a lot of value here as well.

So a lot of competing priorities. I'm very pleased to get the share repurchase a little bit down in the fourth quarter. And it's there to be used again as and when we kind of see fit. But like Tony said, on the time charters, we're not going to tip our hand in advance.

Got it. And then any rhyme or reason for that number? Or is that just kind of trading liquidity constraints?

A little bit of that. It was -- the specific number is $98,000 and something. So $100,000 was round. We didn't just stop at $100,000. So no, no, it was purely a function of markets and timing. And we were at that time.

Sounds good. Yes. Congrats. Obviously, on a rollercoaster, but a pretty solid year.

This concludes the question-and-answer session. The conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.