Ardmore Shipping Corporation (ASC) on Q4 2024 Results - Earnings Call Transcript
Bryan Degnan: Good morning, everyone. Welcome to Ardmore Shipping’s 2024 Investor Day, during which we will also be covering the company’s Results for the Fourth Quarter and the Full Year 2023. I’m Bryan Degnan with the IGB Group. Just a few administrative points before we get underway today. This event is being recorded and broadly distributed via live webcast, which along with today’s slides, is accessible at www.ardmoreshipping.com. An audio replay of the event will be available on the website from later today. The standard earnings press release was issued premarket this morning and is also available on the website. Let’s turn to Slide 2 here. Later in the event following the prepared remarks, there will be a Q&A session, at which point we will take questions from the people with us in the room today. For those joining remotely, please feel free to submit any questions that you might have at any time to ardmore@igbir.com. That’s Ardmore at India, Gulf Bravo, India, romeo.com. Throughout the event and for the benefit of those joining remotely, we’d ask that all those with questions utilize the provided microphones. Turning to Slide 3. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those projected in the 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 fourth quarter and full year 2023 earnings release. Moving to Slide 4. I’d like to introduce you to the members of the Ardmore leadership team, whom we will have the pleasure of hearing from today. We have with us Curtis Mc Williams, Ardmore’s Chairman; Anthony Gurnee, Founder and Chief Executive Officer; Bart Kelleher, Chief Financial Officer; and Gernot Ruppelt, Chief Commercial Officer. And with that, I would ask Curtis Mc Williams, the Chair of Ardmore Shipping Corporation to please join us on stage to provide today’s opening remarks.
Curtis Mc Williams: Thanks, Brian. Good morning or good afternoon now, excuse me. On behalf of the Ardmore Board and the senior management team, let me welcome you to our annual now investor conference to say that we live in interesting times, would be an understatement. Wars in Europe and the Middle East and congestion caused by the deteriorating climate drought-related conditions in the Panama Canal have resulted in profound changes to trade flows for our product tankers. Over the course of the next hour, you will hear how Ardmore strict commitment to three guiding principles, those being, one, performance and progress. We believe these are not mutually exclusive, endeavors, but in the long run, support Ardmore’s ability to excel in both arenas; two, our well-articulated capital allocation policy; and three, our ongoing efforts to ensure that we have best-in-class governance. We believe that these continue to position the company well to drive our financial performance, both in the short-term as well and more importantly, in the long-term. With that being said, I want to again thank you for your continued interest in Ardmore and your support of our company. We remain solidly committed to being good stewards of your investment. And with that, I’ll ask Tony, our CEO, to come and begin his remarks.
Anthony Gurnee: Thank you, Curtis. What happened to your foot? Okay. Good. Great. Okay. So firstly, I’d like to thank you Curtis for those kind remarks. I would like to outline the format for today’s meeting. Bart and I are going to start off by presenting our results for the fourth quarter and full year 2023. And then we’re then going to pivot to the Investor Day segment, which Bart and Gernot are going to lead, focusing on our strategy and how we’re converting these strong markets into earnings. And then at the end, I’ll offer some closing thoughts before opening up the meeting to questions either from here at the floor or remotely. And again, for remote questions, please send them to ardmore@igbir.com. So turning first to Slide 6 for highlights. We’re pleased to report another successful year for Ardmore with earnings of $113 million, or $2.71 a share, continuing what is now a multiyear trend. Our fourth quarter performance reflects robust product and chemical tanker market conditions with adjusted earnings of $26 million, or $0.63 a share, and with further strength building into the first quarter. Our MRs earned $32,500 per day for the fourth quarter and $35,400 per day so far in the first quarter with 60% booked. And our chemical tankers on a capital adjusted basis earned $29,300 per day for the fourth quarter and $30,100 per day so far for the first quarter with 70% booked. Our markets are clearly experiencing significant strength as a result of geopolitical and climate-related trading restrictions bolstering already tight supply/demand fundamentals and which all – all of which are going to be the themes and focus of our presentation today. So meanwhile, we continue to execute on our longstanding capital allocation policy. Today, we’re declaring another quarterly cash dividend of $0.21 per share, consistent with our policy of paying out one third of adjusted earnings. And as a part of a gradual fleet upgrade and modernization plan, we’ve acquired a 2017 built MR tanker while also simultaneously selling our 2010 built Ardmore Seafarer. In addition, we’ve opportunistically chartered out one of our chartered-in MRs to realize the $7,500 a day spread and a profit of $2.7 million over the remaining one year period. And overall, we believe that Ardmore is in an excellent position to benefit from these ongoing strong market conditions. So turning to Slide 7. Near-term product to chemical tanker market outlook. I want to take the opportunity now to briefly introduce the geopolitical and climate-related trading restrictions that have been affecting our market. The disruptions in the Red Sea and the consequent rerouting of vessels around Africa are adding significantly to voyage lengths and therefore, the tonne-mile demand. But before we go further, we need to remember that numbers aside, we’re dealing with real people with real world issues, and I’d like to acknowledge the key role of our seafarers in this increasingly dangerous world and to emphasize that their securities are top priority. But from a pure economic standpoint, as you can see from the graph on the upper right, refined product tonne-mile demand is up 11% year-on-year, with the Red Sea disruptions playing a substantial role. At the same time, the impact of the EU refined product embargo persists, further exacerbated by European diesel inventories approaching historical lows. And in addition, restrictions in the Panama Canal have reduced traffic by up to 30% overall and quite a bit more for MRs. This bottleneck is resulting in prolonged voyages and reduced effective supply of all ships, including product tankers. The aggregate impact of all these disruptions are illustrated on the graph in the lower right. Meanwhile, demand fundamentals remain compelling and not just the demand side, but on the supply side, we see very low levels of scheduled new building deliveries for at least the next two, three years, which should really limit fleet growth. And with that, I’m happy to hand the call back to Bart, the meeting, not the call, sorry.
Bart Kelleher: Thanks, Tony. Moving to Slide 8, there we go. Our board continues to build upon its financial strength. As a result of our effective cost control, reduced debt levels and access to revolving credit facilities, we’ve managed to lower our breakeven level to $13,900 per day. This is a noteworthy achievement during a period of elevated interest rates and high inflation. In addition, we have a strong liquidity position with nearly $50 million of cash on hand at the end of the quarter, and we have a total debt of just over $125 million, representing a leverage level of approximately 20%. Ardmore’s focus on optimizing performance, closely managing costs in this inflationary environment, while preserving a strong balance sheet. Turning to Slide 9 for financial highlights. Just want to reiterate how pleased we are with the continued strong performance with adjusted earnings of $2.71 per share for the full year and $0.63 per share for the fourth quarter. We are correspondingly reporting strong EBITDAR for the year and the quarter and continue to frame EBITDAR as an important comparable valuation metric against our IFRS reporting peers. Well, I won’t go into all the details here. There’s a full reconciliation of this presented in the appendix on Slide 43. Our significant revolving debt capacity has allowed us to manage our leverage levels and reduce our interest expense even in this elevated rate environment. Also, please refer to Slide 48 in the appendix for our first quarter guidance numbers. Moving to Slide 10, in accordance with our energy transition plan and as part of our ongoing dry dockings program, we’ve made some significant investments in our fleet to further improve operating performance, reduce emissions, and enhance earnings. In 2023 we completed seven dry dockings with a total capital expenditure of nearly $40 million, of which 25 million was spent on scrubber installations and a number of other energy efficiency technologies, which we’ll discuss in more detail later in this presentation. As we complete these dry dockings, we’ll have more than half of our MR fleet outfitted with carbon-capture-ready scrubbers. Importantly, as you can see from the chart in the upper right, the majority of our remaining dry dockings are in the first quarter, so we’ll have the benefit of our full fleet and its earnings power for the balance of the year. Also noteworthy, we had very strong on-hire availability for the fourth quarter at practically 100%, result of the close coordination of our teams at sea and onshore. Moving to Slide 11. Here we’re highlighting our significant operating leverage. As you can see in the chart for every $10,000 per day increase in TCE rates, earnings per share is expected to increase by approximately $2.30 annually, with free cash flow generation, nearly $100 million over the same time period. Given the range of TCE rates shown on the slide, it’s important to note that we’ve recently been booking at the upper end of this scale. If these rates were to take hold more widely, it would naturally have a material impact on our earnings. This is why we’re really excited about the market outlook. We find Ardmore’s position compelling. With that I’m going to hand it back to Tony to sum up the earnings portion of our presentation before we transition to the Investor Day section.
Anthony Gurnee: Yes, so just briefly, in summary, first, regarding the market, we’re seeing already robust conditions strengthening into the first quarter on the back of geopolitical and other climate-related disruptions, and with supply demand fundamentals remaining very favorable. And then with regard to the company, we continue to perform well on both an absolute and a relative basis. Our strengthening balance sheet gives us the ability to execute on all of our capital allocation priorities simultaneously, including paying a dividend representing one third of earnings. We’re investing in our fleet to improve efficiency and reduce emissions, which has the added virtue of simultaneously improving earnings. And regardless of market conditions, as always, our efforts are focused on driving performance today while positioning Ardmore for long term success. So, that concludes the earnings portion of the presentation today. And we’re going to move now to more of the Investor Day content and Bart is going to give a more in depth view of the company and our strategy, and then Gernot is going to provide his insights on how we’re translating these strong market conditions into earnings.
Bart Kelleher: Thanks again, Tony. Turning to Slide 14, when it comes to strategy, Ardmore has been very consistent over the years with a focus on MR product tankers and chemical tankers and the overlap that these ships trade in. Furthermore, the company’s development has been marked by a gradual increase in scale while building organizational capability. Today, our global platform with our shoreside team strategically located across key regions, working closely with our seafaring colleagues onboard our modern fuel-efficient fleet, give us the scale to service a diverse customer base. We also find ourselves at a juncture where our nimbleness and agility will take on even more significance. With the changing market conditions, driven primarily by the energy transition, which we’ll discuss in detail, we are well positioned to take advantage of opportunities in these dynamic times. Turning to Slide 15, at Ardmore, our guiding principle, which we frequently discuss can be captured as a combination of performance and progress. We’ve highlighted just a few notable examples on this slide of how we do this. Both absolute and relative performance are very important to us. We placed a significant emphasis on our performance relative to our peer group across a key number of metrics. Our entire staff is collectively measured this way, leading to an exceptional degree of performance focus and team effort. And there is a powerful flywheel effect between this performance and our company’s progress. Performance today allows us to invest in progress, which further enhances our future performance. And with a diverse and talented team, and strong collaboration between our seafarers and shore, we’re driving progress at Ardmore and across the shipping industry, uncovering and executing opportunities that might otherwise be missed. Moving to Slide 16, where we turn our attention to governance, a long-standing and key part of Ardmore’s philosophy and approach since our inception in 2010 through our IPO in 2013, and well before the industry recognized Webber rankings were even created. And this is a cornerstone of our business today. We are very pleased that our principled approach to corporate governance continues to set a leading standard within the industry, and we’re proud of the recognition that we are once again the number one ranked publicly traded company – tanker company in the Webber ESG Scorecard. Essentially, when you invest in Ardmore, you invest in a company committed to both excellence and integrity. Turning to Slide 17, here, we’ll discuss how we balance the energy transition with what can be termed, energy reality. This challenge entails increasing our fleet efficiency and reducing emissions, while continuing to meet the ongoing demand for the transportation of refined products and chemicals. At Ardmore, we recognize that this energy transition will take time. It’s an evolution, not a revolution. With this in mind, we introduced the energy transition plan in early 2021 and as a natural extension of our strategy with a focus on seizing opportunity, decarbonizing and continuing to build value in a changing market environment. This plan is rooted in a sound commitment to deliver tangible results today in terms of efficiency gains and carbon reduction, while strategically positioning Ardmore for the future. Most importantly, it fosters a forward-looking mindset, rooted in performance reality. Central to this approach was the establishment of an internal team dedicated to the energy transition. This team possesses marine engineering and naval architecture expertise and operational experience and is led by our Director of Innovation, Garry Noonan. The ETP team is focused on working collaboratively with customers, technology providers and our broader organization to develop valuable projects and investments for our fleet. A crucial aspect of their work involves true experimentation, which supports the development of novel, as well as practical solutions to execute across our word. Additionally, I would like to emphasize the valuable support and guidance provided by our newly formed Sustainability Committee of our Board. Which is chaired by Dr. Kirsi Tikka, who holds a Ph.D. in Naval Architecture and has extensive experience in the design and classification of vessels. And she is joined by Helen Tveitan, Head of Carisbrooke Shipping; and Mats Berglund, the former CEO of Pacific Basin shipping. In summary, this dynamic plan aligns seamlessly with our overarching principles of performance and progress. Turning to Slide 18, here we focus on some of the key initiatives outlined within the energy transition plan. As we just discussed, we’re active in deploying energy efficiency technologies across our fleet. In addition, with the expected increase in demand for the chemical and specialized product trades, including renewable fuels, we expect to gradually shift our fleet composition and revenue mix more towards these cargoes. And furthermore, we emphasize our commitment to collaboration through energy transition projects, which involves partnering with customers as we aim to address their specific energy transition priorities. Since introducing this plan in 2021, we’ve really come a long way. These initiatives are fully embedded in Ardmore’s culture today. As we turn to the next slide, we’ll examine some key ETP technologies. So moving to Slide 19. This slide highlights some of the latest technologies we have implemented last year and are piloting this year. Notably, since the inception of our energy transition plan less than three years ago, we’ve truly embrace the spirit of experimentation, conducting diligence on over 200 potential solutions and successfully implementing 14 of them to-date with returns ranging from 40% to well over 100%. And as you can see in the image, our team has examined a wide range of efficiency projects across all areas of our ships from the propeller, to the engine room, to the bridge and beyond. And this also extends ashore to cutting-edge software utilized to optimize performance. On the next slide, we’ll drill down into a case study for one of the solutions in more detail. So turning now to Slide 20. The installation of micro boilers on our vessel is a great example of one of these very practical investments. This modest cash outlay of $225, 000 per ship yields a strong return of 40%. This unit creates tremendous efficiency when our vessels are important, enabling us to reduce the level of fuel typically consumed by the ship’s larger main boiler by harnessing the heat naturally emitted from the operation of our generators. By the end of the first quarter, 50% of our fleet will have these units installed. Importantly, when we undertake multiple projects of this nature, the cumulative impact to our performance is significant. Now moving to Slide 21. Where we highlight our long-standing capital allocation policy, which remains our guidepost and one we know that we frequently discuss with all of you. Given our strong financial position and low breakeven, we have the ability to pursue all of our capital allocation priorities simultaneously. And with this strong earnings environment and a robust financial position, we are pleased to declare another dividend. And since the reinitiation of our quarterly dividend policy in the fourth quarter of 2022, Ardmore has paid $50 million of total dividends to our shareholders, which represents nearly 10% of our market capitalization. As discussed earlier, we’ve invested significantly in our fleet’s efficiency, improving performance and ultimately, the quality of earnings. In addition to these investments, as Tony described, we have recently taken advantage of some selective transactions to modernize our fleet. By acquiring a 2017 Korean-built Eco-Designed MR tanker while concurrently executing an agreement to sell our 2010 built Ardmore Seafarer. To put this into perspective, when considering the increased fuel efficiency of the new vessel and avoiding the expense of upcoming drydocking for the Seafarer, we see this as an interesting investment effectively buying seven vessel years and a cost equivalent to the current average annual depreciation rate. Examining our balance sheet, we aim to sustain leverage through market cycles supporting a resilient financial position and a high quality of earnings while giving us the foundation needed to opportunistically execute well-timed investments. Turning now to Slide 22. As we just discussed, Ardmore’s team is focused on leveraging our platform and consistently creating value through shipping cycles. In an industry challenge by technological and regulatory uncertainty, we recognize the volatile and dynamic nature of the shipping landscape. At Ardmore, we’re built to thrive in such conditions. To conclude, I want to emphasize that our purposeful strategy, energy transition plan, capital allocation plan and dedicated team at sea and ashore are all aligned and focused on generating long-term value for our shareholders. With that, I’m very excited to hand it over to Gernot and hear what he has to say about the volatile tanker markets and how Ardmore is delivering industry-leading performance.
Gernot Ruppelt: Thank you, Bart, and good afternoon. It’s good to be back in New York and to present to you on another successful year and on why we believe there is more to come. Over the next 15 minutes, I will take you through main drivers on the demand side, touch on supply fundamentals. And then I will provide some real-life examples of how Ardmore continues to capture the full benefit of these extraordinary markets. Turning to – here we go, Slide 25. This is the world today. This slide highlights some of the key changes in cargo movements over the past two years. In green, you see how cargoes move today. Contrasted in red is how they used to move before. The difference in voyage length, red versus green represents the increase in the demand picture in product tankers. What is behind these very long distance trades? To begin with, Europe is structurally short refined products, in particular, diesel and jet fuel. And it has been like that for a while. Europe has been increasingly sourcing its refined products from overseas. That was purely for economic reasons and largely on the account of Europe’s aging refinery system. And on top of that, the EU refined products embargo. No more diesel from Russia. European product inventories are around historical lows. To cover those shortfalls, long-haul imports from the U.S. and from East of Suez markets are replacing short-haul voyages. What used to be a one-week voyage, Baltic Russian ports to Northern Europe or the Black Sea to the Mediterranean, and that now takes three to five weeks. That is a significant jump in itself. On top of that, you add substantial disruption in the Red Sea, which all of us see and read about in the news every day. Vessels are navigating around the Cape of Good Hope to avoid the Red Sea. This adds another 30% to 70% in voyage length depending on origin. And that is on top of what is already a very long voyage to begin with. Then in the West, completely unrelated to any geopolitical events, the Panama Canal has essentially run out of water. MR traffic to the canal has reduced substantially. Here you can see, what used to be a very typical trade on the left in red, from Houston to places like Ecuador or Peru on the West Coast of South America. Sourcing the same products from Asia is about 3x the voyage length and we’re seeing exactly this play out. For the past 150 years, the world has relied on the Suez Canal and later the Panama Canal to connect global trade at significantly shorter distances. Well, today, once again, merchant ships are going around the Cape. So to summarize what are the factors in play, long-term demand drivers, Europe, structurally short diesel, two separate yet concurrent geopolitical events, Russia, Ukraine, and the recent events in the Red Sea. And third, climate-related changes and water shortages in Panama. This confluence has resulted in a substantial increase in tonne-miles and a remarkably tight supply in product tanker markets. Slide 26 is providing more detail on the points I just made, and I will not run through them one by one. But the charts on the right paint a clear picture. The number of product tanker transits to the Suez Canal is down by 60% and decreasing further. The number of Panama Canal transits is down by 40%. It is an evolving situation and the trend line continues to point down. Turning to Slide 27, where we continue on the theme of demand drivers. As Bart alluded to earlier, the energy transition is unfolding as an evolution, not a revolution. Demand for oil remains a steadfast factor. Reflected in the upper right graph, the International Energy Agency, aligning with industry projections, foresees continued growth in oil demand. Beyond the persisting demand for oil, there is a consistent pattern of refinery expansion in the East strategically located near points of production. This expansion results in heightened ton miles for product tankers meeting the consumptions demand in the West. Adding another layer, the chemical sector, a market we actively participate in is poised for substantial growth as well. This is attributed to the significant petrochemical capacity set to come online in Asia over the coming years. In summary, then these robust long-term demand drivers point to continued strength in the product and chemical tanker markets. Moving to Slide 28, supply, matrix on the left provides a visual of the evolution indeed the tightening of tonnage supply in our industry. The two dimensions are average age of the fleet, size of the order book. If you looked at the top left, the quadrant in red, about 15 years ago, we were looking at a fleet that was already very modern plus a very large order book. As the years progressed, follow the progression there, the order book declined and fleet age increased. Today, we are on the opposite side of the matrix. In the green quadrant on the bottom right, a low order book and the fleet on the water is the oldest it has been in two decades. Looking at the graph on the right, the current product tanker order book stands at 13% of the existing fleet. The MR order book is under 8% of the existing fleet. In five years, nearly half of the global fleet will be older than 20 years of age. Yes, there are some niche markets for older ships to operate in. However, the capacity of these niche markets is far too limited to absorb what is essentially 50% of today’s MR market. There are only 8 million deadweight tonnes on order for MRs. 55 million deadweight tonnes will be within the scrapping age profile in the next five years. So by order of magnitude, 7 times the amount of deadweight capacity could potentially be scrapped compared to what is on order today. As we mentioned on our last earnings call, it is important to point out the impact that Aframax crude tankers have on the overall product tanker order book. Currently Aframax crude tankers, their net fleet growth is forecast at near zero. This implies that an increasing proportion of LR2s most likely older vessels will naturally transition to trading crude to cover the shortfall in Aframax tankers. And we are already seeing a clear trend today of LR2s shifting into dirty trades. Turning to Slide 29 this pulls it all together. We can see from the green bars in this chart the strong forecast from tonne-mile, long-term demand fundamentals 2024 enhanced by the full year impact of the EU embargo and then the further uplift from the Red Sea disruptions. Contrast, we can see the limited net fleet growth across product and chemical tankers indicated by the gray and blue bars. Closing out then I want to reemphasize the clear contrast of low net fleet growth with the escalating tonne-mile projections. This gap is setting the stage for continued market strength and resilience. Turning to Slide 31, I will now demonstrate how some of these market drivers are reflected in the way we trade our ships. Essentially, what we do evolves around three key themes. One, fully capturing these very firm markets. Two, embracing the increasingly complex nature of our business environment, and unlocking the opportunities this creates for a company like Ardmore. And finally, building value through creative spread plays, adding incremental profitability on top of prevailing market levels. Turning to Slide 32, this is a snapshot of our global setup across time zones covering our key markets in the Americas, in Europe and in Asia. This enables us to engage a broad and diverse range of high quality customers, a selection of them can be found here. Importantly, we are also engaging with and trading with an increasing number of chemical, agricultural and other non-petroleum focused companies. Ultimately, this is about having lots of trading options for Ardmore to ensure we can capture these strong markets in the most optimal way, both in terms of timing and voyage combinations. Turning to Slide 33, here are now some examples of what is achievable in these markets. These are actual voyages we have undertaken in recent months. Starting on the right hand side, you can see a long haul Asia to Europe voyage. The original routing is shown as the red dotted line. As repeated ship attacks unfolded in the Red Sea last December, we negotiated a cape routing option, which we subsequently exercised. The incremental fuel cost and time was fully priced in to maintain our TCE despite the longer route. At the same time, we can see an example on the left of how we are servicing the Pacific markets from Asia. In addition to the original voyage leg from Asia to Mexico, we found lucrative onward employment options that were combined in a creative way. We achieved a strong TCE of $36,000 a day over 4.5 months and the vessel was laden much of the time. As you can see in both examples, duration of voyages originating in Asia is extended drastically, both due to the disruption in the Panama Canal and in the Red Sea. The impact this has had on Asia-Pacific freight is notable. The box at the bottom right there shows freight movements since the start of the attacks in the Red Sea and the following escalation. Realized TCE on these routes essentially doubled from seasonally already high levels around $30,000 a day to now $60,000 a day. Just to mention about 65% of our fleet is trading currently in the Eastern regions. Turning to Slide 34, idle days and ballast days or you could say empty voyage legs are expensive, especially in this market. Let’s look at an interesting combination we have done on one of our chemical tankers, essentially reducing all ballast over half a year. These ships are half the size of our MRs, but they are more versatile in terms of carrying non-petroleum cargoes, and they can then be combined in lucrative ways. Starting at the bottom left of the map in Argentina with a long laden leg into South Korea, followed by a China run into Europe, followed by Europe to the U.S. Then from there back to South America, a full circle, earning close to $30,000 a day over six months with only negligible ballast and 95% laden days. Again, these ships have half the intake of an MR. Turning to Slide 35, once more this slide shows what is possible in this market. As Bart mentioned earlier, we had a large number of dockings this past year. Typically, the way we trade our ships is all about maximizing flexibility and maximizing optionality. When you are positioning for drydock, you’re working towards very defined place and time. Doing this in a sensible way is both an art and a science. In this example, we’re looking at a vessel that was opened in Northern Europe earlier last year. As you can see, we wanted to bring it to China for drydock. We put together a repositioning plan and combined a Transatlantic voyage with a U.S. Gulf to South America run. This was followed by a South America export cargo that brought the ship within [indiscernible] drydock location. Also here we see a 4:1 laden to ballast ratio and more importantly, a TCE close to $40,000 a day over four months. These are incredible earnings in their own merit, and truly remarkable when you consider these were really repositioning voyages. Now, the examples I’ve just shown you were only three examples of a much larger data set, yet, we hope they demonstrate to you some of the key themes we have been dealing with commercially. And of course, in aggregate, all this will show up positively in our TCE results. Turning to Page 36. Here, I would like to show you one important way of how we have created additional value on top of a strong market. In this case, through a high performing time charter book and spread place. Allow me to explain what we are looking at here. The green line is the spot market. The bars in blue are the number of ships we have on time charter out. The bars in gray are the number of ships we have time charter in. While the world was still on lockdown during the COVID pandemic, the need for mobility was limited. Product tanker markets were weak. During that time, we benefited from strong time charter coverage at one point up to seven ships. At the same time, we started to execute some attractive time charters in with forward optionality. When markets started to recover, the number of ships we had on time charter increased, the number of ships we had on time charter in increased, and we let our time charters out expire. This was near perfect timing as you can see, we pivoted from a more defensive stance in 2022 – we pivoted from a more defensive stance in 2021, when times were bad to really opening up our charter portfolio in 2022 to fully capture the market strength that has ensued since. For another example, this past summer we extended one of our chartered in vessels for min 12 max 18 months in our option. We continue to trade her spot for about half a year to capture the strength of the past winter market. Then we recently locked her in for a 12 month period to cover the remaining charter period, including the optional period. The guaranteed profit spread on these 12 months alone was $2.7 million. So on top of the previous high spot earnings of the previous high spot earnings. We also want to mention that we hold in the money call options for time charter extensions, specifically time charter in extensions. Those are declarable later this year on three ships for charter periods until mid-2025. The option rates are at less than half of today’s actual spot earnings. Therefore, we believe these options will still be very much in the money by the time they’re due. At the current market levels, these three options will create additional value of $17 million. So do stay tuned. It is important to note that we were able to create these structures in both weak and strong markets. Slide 37, this is the team. Strong markets are great, but you need the right team and the right platform to capture them. A very diverse team, as Bart pointed out, it’s diverse by design because we know that diverse teams create stronger performance, diverse in terms of cultural background, professional background, personality, and diverse along other dimensions. This enables better decision making and better access to our global markets, hence better performance. Our trading mantra is rooted in a nimble yet methodical approach to our ever changing markets, leveraging both experience factors as well as a suite of digital Intel tools and AI supported performance optimization systems. We believe that any market or any voyage for that matter, offers infinite opportunities for incremental performance gains in our whole system, and how we are approaching things philosophically is set up to capture that. This concludes my section. Thank you for your attention and I look forward to answering your questions later. Back to Tony.
Anthony Gurnee: Thanks, Gernot. That lunch really looks and smells good. All we got was a ham sandwich. Great. Well, listen, we’ve gone through a lot of detail now and what I want to do actually is kind of zoom out quite a ways and think a little bit about where we are in the cycle. So forgive the really dumb imagery here, but it’s a serious question. I think it’s one of the most important questions as investors that you face looking at this sector. So I started in this business in the late 80s as a banker and since then anybody that’s been around that long I think some of the room have will count it up and think, yes, actually we’ve been through six cycles. When I started as a banker, back when banks actually went money and so we were taking real risk and we were looking back a couple of cycles. So altogether, I feel like I’ve got sort of in my bones about eight cycles and thinking about where we are today and kind of looking at all that experience. It does feel like there are some patterns that are important. So I think the first pattern is that – of those eight, half were relatively, in hindsight now, fairly short upturns. They felt very important and exciting at the time, but they didn’t last long. But the other four, and I would include this one in that. And we can discuss that in Q&A are fundamentally different. They are longer and more persistent. And they share some common characteristics. So one – and forgive me, but we’re going back to 1957. But the truth is that the dynamics in our business in terms of supply and demand haven’t really changed, at least since World War II, maybe even further back. So the first thing they all have in common is that they were preceded by 10, 11, 12, maybe even 13 years of fundamentally bad markets. And in that period, fleets got older, order books shrank, maybe there were some bumps along the way of activity, but fundamentally, yard capacity shut down. So, like, when was the last time we were in a strong market, 2008, 2009? I think shipyard capacity is substantially lower today than it was then. So that’s the setup. And then what they all have in common is that some unexpected positive demand event occurs, usually geopolitical. That kind of lights the fire. And it’s usually not just one event. It’s several things that happen. Now, I mean, each of these upturns is different and unique, but there are some similarities, right. And I don’t want to do this now, but if you want Q&A, we can think back to what were the specifics in each of these upturns. But you kind of ignite this unexpected jump in demand through not just one event, but a series of events. And then it becomes clear that supply is not going to be able to catch up. And that’s really the foundation of one of these strong markets. They last anywhere from four to six years, and they all end the same way, which is when a really deep economic crisis hits the global economy. So I’m going to leave it at that. I think the questions are, where are we in the cycle, and what is Ardmore doing to position itself for different probabilities of outcomes here? So happy to engage in that discussion with you. And anything else? Just last thing I want to do, though, is thank you all for joining us today and in particular thanking Curtis for coming up all the way from Florida in spite of the weather and in spite of his [indiscernible] there. So that’s an Irish expression. And happy to open up the floor for questions.
A - Bryan Degnan: For the benefit of the people on the webcast, we do have microphones that will be circulated, so we’ll take one up here. And for those again on the webcast, if you want to ask a question, please email ardmore@igbir.com. I’ll feed those into the mix here, but for the time being, please go ahead.
Unidentified Analyst: Thank you. Thank you. Within the chemical and product segments, what percentage of the fleet, the global fleet, can make it around Africa without refueling?
Anthony Gurnee: That’s an easy question. Every ship can. However, operationally, they may not want to do that. So, in fact, South Africa is becoming a bit of a bottleneck, because if you have to carry more bunkers, you’re shutting out cargo. And there may be other reasons if, I don’t know. Gernot?
Gernot Ruppelt: Yes. There’s a – so we didn’t touch on this, but bunker planning becomes definitely one of those operational elements you need to be very aware of to essentially make sure you don’t – you bunker where you’re intending to bunker and not squeeze into a last minute situation.
Bryan Degnan: I’ve got one upfront here. Yes.
Unidentified Analyst: I have three questions, but when you said South Africa, do you mean labor in South Africa, or are they short of fuel?
Anthony Gurnee: Gernot?
Gernot Ruppelt: I think whenever you move away from the main bunkering ports and the main refining regions, you might find yourself exposed to scarcity of bunker supply, higher pricing, infrastructural bottlenecks like barge availability, and then potentially longer waiting time. And of course, every time we either pay more for our bunkers or extend our voyage length without any revenue to put towards it, that has a negative impact on our TCE. So it’s less labor shortages, it’s just pricing and availability of fuel and the infrastructure. And of course, by being very proactive and forward looking in your voyage planning, you can avoid to find yourself in those messy situations. But it’s just one of many examples where – and I think it’s a great example, as the world changes trade patterns there’s always a lot of things to consider. And in itself that creates, of course, volatility around some of those bunker supply lines with a further knock on effect on the entire oil system.
Unidentified Analyst: My three original questions are, you mentioned China. Please expand on that. Two, can the Russians sell refined products to say, a middleman in Persia who will sell it to an Indian and change the label and deliver it into the market? And three, when you calculated return on capital for those environmental savings, what was the price of fuel that you saved? So China, Russia and price.
Anthony Gurnee: Can you repeat the third question?
Unidentified Analyst: He showed a return on capital of – excuse me, 40% to 140%. So that means you saved money to get that 40% to 140%. At what price of fuel did you save it?
Anthony Gurnee: Okay, I think it was $500 a ton, which is kind of where we are, relatively $500 a ton, which would be…
Unidentified Analyst: $500 a ton.
Anthony Gurnee: Which would be like, you know…
Unidentified Analyst: $70 a barrel.
Anthony Gurnee: $70 a barrel, yes. But I think for the other two questions, Gernot would you like to…
Unidentified Analyst: Russia and China?
Gernot Ruppelt: Yes. I think there’s certainly been some concern around to what extent does essentially Russian origin crude or products find their way back into the supply chain in the west. Essentially, if you sell crude oil from Russia into refineries anywhere in the world, particularly in the east, at some point, will they be refined and blended and find their way back into the refined chain in the west? I wish I could give you a definitive answer. Of course, we don’t track – we don’t have the ability to blockchain the oil train in that sense, but I think that’s a concern. And I’m not sure anybody has a really good and exhaustive answer. Yeah.
Unidentified Analyst: And you said China is restricting exports.
Gernot Ruppelt: So there has been – there has been for the earlier part of last year, a significant drop in crude throughput in China, pretty much on the back of just weaker domestic demand, because there has been some countercurrents in the Chinese economy. And as a part of that, we have seen a general trend towards declining Chinese exports. That being said, we know that a lot of the teapot refineries, the independent, non-state owned refineries, also operate with the main purpose to export their products overseas. And we are now actually seeing towards the later part of last year and into this year that crude throughput in China is very much on the rise. New export quotas have been issued, export quotas aren’t a perfect predictor of actual export volumes, but everything points towards a likely increase of Chinese product exports again.
Unidentified Analyst: Thank you.
Unidentified Analyst: Since we’re here, Tony, you just sort of left the last bid wide open, saying this could be a four to six year bull market. We’re two years in, roughly. And how does Ardmore respond to that? So I take it to mean that you think this is going to be a longer cycle. Are you thinking about your strategy on that basis any differently than you were, say, a year ago at this time? Or what are you looking to do against that backdrop? And again, you never see a cliff coming, right? So how do you prepare for that side of it?
Anthony Gurnee: Sure. Yes. So I think it was Mark Twain that said that history doesn’t repeat itself, but sometimes it rhymes, so there’s no certainty. But there really is some interesting parallels and commonalities of the periods that I mentioned. And I think there’s a general view that this feels like it could go on for another couple of years. Nobody knows how it’s going to end, but I think we all do know how it’s going to end. It’s how all your portfolios are going to end. And this could have another two, three, even four years in it. It’s also interesting when you look at those prior periods there were spikes within those, right? But they were overall at just much higher levels, right. So who knows? But it seems like a really good setup, and the geopolitical issues feel fairly persistent at the moment. So in terms of what are we doing about it, we like where we are. We don’t have a fleet replacement problem, not for another four or five years, our fleet is highly fuel efficient. The investments we’re making, as Bart described, are terrific. We just kind of top graded the fleet a little bit by selling the 2010. We weren’t planning to, but we just saw the opportunity because in particular, the value of that older ship had gone up a lot. And we’re just intently focused on performance. And so if we see opportunities to grow, we will. We could have engaged in a lot of growth in the last 10 years, and none of you would have liked it. Okay. So we’re definitely big enough to play on a global stage. We’re nimble. And what that really means is that we’re able to really focus on each ship and the voyage and optimizing the voyage and trading it out, but also having optionality in the way you position your fleet, which is difficult. And then I think the other thing people don’t quite, even if you hear it over and over, again, it doesn’t quite register, but the biggest fleets in our sector are only 5% of the market. Okay. So it’s a very, very fragmented trading business. And what really matters is how you were able to trade your ships, not necessarily, at least on the market side, any kind of market cloud. So that’s a bit of a ramble. But go ahead and ask me the question.
Unidentified Analyst: Well, no, I mean, it’s – just sort of coming back to it. So is that – are you thinking about your position and the way that you approach the market in the same way that you were a year ago at this time? Is that kind of the answer?
Anthony Gurnee: I think a year ago we were really excited. Now we’re settling in and getting used to $35,000 a day. So joking aside, I think a year ago we were thinking, right, this is a blip, and it’s going to be over. And when it’s over, we’re going to be in a much better position financially, and we know what to do in terms of acquiring assets. Now it’s a little more difficult, but again, we don’t feel compelled to do anything other than what we think just makes sense in terms of long-term value. Yeah. Yes, sir.
Bryan Degnan: Yeah, you got just there.
Anthony Gurnee: Go ahead.
Unidentified Analyst: What percentage – oh, thank you. Do you hedge any of your fuel costs actively? And second, do you lease new ships coming on as they are built, rather than purchase them outright?
Anthony Gurnee: Do you want to address fuel? And maybe you can address leasing?
Gernot Ruppelt: Yes, generally, we don’t really hedge. We hedge our fuel needs. There could be certain specific examples if we had a corresponding long or short exposure on a particular freight element and if we wanted to then lock in the corresponding TCE, we could, in theory, lock in the fuel as well. But we generally don’t do that, essentially not really all markets, to play the oil markets and such.
Bart Kelleher: And then on the question on vessels and financing, so I guess, we don’t have any new build on order coming in that we would potentially put on leasing structures or drawdown debt. But the company in the last year and a half has really focused on the balance sheet and the shifting of debt back to the traditional shipping banks, predominantly European based, and where they’ve been able to provide us 100% coverage in some cases of revolving credit facilities, which gives us tremendous flexibility, even within a quarter to manage debt levels and decreased interest expense. And so through that delevering, we’ve been able to pull our break even down. If we hadn’t done that, it would be probably $3,500 a day north of $17,000 a day, and it’s below $14,000 today. And so I think the key thing for us is always maintaining a really wide network and relationship of financial capital providers. We’ve had significant leasing structures in the past. We still have a few, but much more focused on the traditional shipping lines today.
Bryan Degnan: And if I could just say, everybody could please make sure you speak into the microphones. I appreciate that we took a moment to get to you, but in general, speak into them. And if we could, turn up the volume on the mics hearing on the webcast, because it’s a bit tough to hear.
Anthony Gurnee: All right. Where’s the mic?
Unidentified Analyst: Thank you very much, guys.
Bryan Degnan: Wow.
Unidentified Analyst: Tony, you mentioned like the past four or six cycles. One thing that seems a little different this time around is that a lot of the companies have less leverage. If you think back to the kind of those previous cycles, it’s been a real scramble for cash flow and equity issuance. Now it feels like very different. And certainly, your balance sheet is remarkably healthy. What difference do you think that will make on this particular market in terms of the behavior of owners.
Anthony Gurnee: Good question. I’m trying to think like the last strong market we had was in the 2020 [ph]. So people were very busy ordering ships at that point for incredible prices. And when it all came off, so there’s a lot of carnage. So it feels like companies are a lot more sensible now. They may also be held back by the considerations around the energy transition and alternative fuels, et cetera. So – and like if you look at the dry bulk sector, they’ve been at this longer now. And there’s been a remarkable restraint in ordering activity there. So, I think it’s just a different mindset. Maybe as a result of social media.
Unidentified Analyst: [Question Inaudible]
Anthony Gurnee: It could be, yes. Great.
Unidentified Analyst: This is an idea of a question of the new market. That may be arising in California that displays 53% of the diesel with renewable diesel. So you have – and refineries are shutting down or not connected by pipeline. So with each barrel of gasoline that you produce a certain amount of diesel, which may not have a home. What type of market could that be for the product tanker industry?
Gernot Ruppelt: Yes. I think you’re touching on a few really interesting points. I mean, one, something we certainly see right now how the conversations are changing with our also petroleum-based customers, some of the sort of really large and main commodity traders are now quite actively engaging in trading and certainly also more forward-looking discussion on biofuels, renewable aviation fuels, blending components for biofuels. And with that, it just comes more complexity. As you’re saying, we need different components, different feedstocks to generate those biofuels. We need different blending components for that. We need different ships and different onshore capabilities and organizational capabilities to handle those in, first of all, a safe, but most importantly, also an economic way, and the mismatch that you described where any refinery already today has a given product slate. And of course, you can do things to adjust that product slate, but it will never be perfectly matching a regional market. As a matter of fact, they will continue to change, and that creates product overhang that essentially then gets discounted in terms of price and that will get exported somewhere else. So for us, this is kind of part of this really exciting story where driven through the energy transition needs and some focus on renewable fuels, but also just an increasing complexity. So conversely, imagine a world where there was only one fuel that fits everything that moves, that would be a far less complex world and probably would be a lot less interesting in terms of tanker demand. And as you’re moving away from that towards more complexity, more product grades, that creates different trade lanes and more interesting ways for us to also arbitrage that. And yes, but it’s very much happening. I mean, some of those conversations, two or three years ago just simply didn’t take place. And just recently, we had one of the European refiners approach us and basically ask us for – could almost argue like a tutorial, like a walk-through on some of these newer cargoes and what to observe when shipping those cargoes from an operational and commercial standpoint. And we find that as a nice validation of the reputation we have created in those markets to be well beyond just diesel and gasoline, which of course, still today is a bulk of what we do, but we can do a lot more than that.
Bryan Degnan: Okay, we’ve got one appear and then Chris subsequently.
Unidentified Analyst: Thank you. It was also the philosopher Heraclitus that said, "the only constant in life is changed". So maybe if I could ask some questions regarding some ways that are on the horizon. I was looking at your presentation in the route. And is your baseline, the Suez canal blockage, I’m wondering that’s just happening right now. When things normalize, how is that going to affect your business when you have to return to your normal routes? How is that going to benefit your competitors and how it’s going to affect the financials of – revenues for the company please?
Anthony Gurnee: Gernot, you want to talk?
Gernot Ruppelt: Yes, I can take a stab at this. So, I think just maybe a comment on timing. And the quote that you just mentioned is very much highlighted in various internal and external debates we have, and I think it’s very much of what – as I said, our trading mantra is based on it. We are in a very changing environment. And for us to trade well in this. We just have to really embrace that. I don’t think that, unfortunately, the situation in the Red Sea is going to solve itself overnight. And I believe that even some other factors like the situation in Russia and Ukraine, even if there was a peace that were to find – a peaceful solution to the conflict I think some of those trades that we’re seeing now that have changed as a result of this will be quite sticky. I don’t necessarily foresee the world going back to just how things used to be before than overnight. I think that’s a really good and valid question and the question we ask ourselves all the time, if we took some of those components out of the equation, where would the market be today? What is the baseline? And that’s a tough one to answer, but I think what we certainly shouldn’t take as a baseline is 2021, which is COVID. I think it’s really important to remember that just before the world went into this lock down and the subsequent terrible tanker market that ensued a lot of positive things were actually happening. The fuel switch created a lot of complexity around diesel shortages. Europe is already structurally short of diesel. All of a sudden, there was a higher demand for marine diesel fuels, low sulfur fuels. So there was actually a lot of interesting things happening in the winter of 2019 to 2020 that we’re just starting to emerge. And then coming out of COVID, before the Russian invasion of Ukraine, the market was actually really already on an upswing, which is what we were able to kind of anticipate and predict. We didn’t see that we didn’t see the outbreak of war coming when we opened our time charter portfolio. We saw the world normalizing in terms of its mobility needs. And I think that is already a fairly healthy and substantial baseline. And returning back to that, I think, would not be a terrible thing. At the same time, how quickly would that happen, considering the stickiness of new trades, new trading relationships, new trade patterns and the relatively cheap cost of freight still and the overall profit margin on what it takes to move a product from A to B, I think we’ll stay in this elevated environment for a good while.
Unidentified Analyst: When it comes to your dividend, the dividend yield right now a little bit high. How are you going to sustain your dividends in the future as well as by new fleet – modernity fleet in the future.
Bart Kelleher: I think come back to our capital allocation policy. And the great thing about Ardmore that has been in place for a number of years and before the current market increase. And if we think back, the policy has always been one where in the past, it is to maintain the fleet to have modest leverage, always be looking for potential accretive growth and then have the ability to return capital to shareholders. And then in this upturn, we have the ability to actually do that simultaneously. So that was a key part of reinstituting the dividend and paying one-third of adjusted earnings, starting with Q4 2022. I think when we think about capital allocation broadly, we still have runway to further invest in the current fleet and make that more efficient. We have further runway to reduce leverage. And then always very prudent about the current market conditions, the need of the underlying business and also in the fleet’s longevity, all while balancing the important aspect of returning capital to shareholders. But I think we view that we have a guidepost, but we take a dynamic approach based on the conditions at the time.
Unidentified Analyst: Thank you. And my final question is about interest rates. The company came around when interest rates were near zero. Now we’re having higher for longer normalized interest rates. Can you talk about your debt and how you’re going to again, sustain a dividend invest and operate in a higher cost of capital environment? Thank you.
Bart Kelleher: Sure. And that’s one where the company really took a very deliberate approach a year and a half ago and we shifted and got revolving bank capacity from the traditional European lenders as we bought back and exercise purchase options on the leased vessels. So that actually was one where coming into a stronger market and knowing that we could actually manage the debt levels within the quarters to keep it lower as the interest rates were increasing. And then we’ve been very deliberate as we’ve had this increase in earnings, that a key part of that has been to delever. So we’re now at breakeven of $13,900 per day. If we hadn’t delevered and in these rising interest rates environments, we would be north of $17,000 per day. And now I think we have that luxury position with the much lower debt level that we can be confronted with a range of different higher for longer scenarios. But it doesn’t impact our ability to actually execute our capital allocation policy in all four parameters.
Bryan Degnan: Great. So we’re going to go to Chris next. I would ask again, though, if everyone could please make a point at front table as well, to speak directly into the microphones. They’re having some difficulty on the webcast. If we could raise the volume on the mics at all guys. See what you can do, but.
Unidentified Analyst: Yes. Thanks, guys. Let me just follow-up on that question with regards to the debt levels and leverage, assuming the market continues to remain strong for the next coming years, are you happy with the current leverage ratio? How low could that go? And what’s the ultimate bottoming, let’s say, of the cash breakeven level in your minds that you could get to?
Bart Kelleher: Sure. Thanks, Chris. I think, I mean, dynamic situation. I think the way that we think about it is we’re looking at the market today. There’s the full range of scenarios of how it could evolve and develop. But again, it comes back to having the capital allocation policy in that guidepost. We like the current leverage levels. It really has increased the quality of earnings, lowered the break even. I think we still have some runway on the break even. I mean, certainly we’ve tackled the interest expense side of it very, very tight when it comes to cost management internally on both the OpEx front and G&A front. And I think we just – we have to remind ourselves that we were very early managing the balance sheet and getting the – arranging the revolving credit facilities. I think we have actually some further ability to work with our banks to get even more revolving facilities opposed to term. So that’s something that we’re working on as well. And look, I mean, we take a longer-term approach through the cycle. So you don’t know exactly how it may play out, but it’s important to delever and have your dry powder available should a cycle play out or interesting opportunities emerge. And we think that we can then plant the flag for future forward value. But I think it’s just very much a conversation that the team has on a daily basis.
Bryan Degnan: Actually, just in the intro I am going to – I mean, feel free. But I’m going to have a couple of these from the webcast, so please do keep sending those in ardmore@igbir.com. I’ll try not to take yours, Omar, but just on scrubbers. How are you thinking about that? Why does it make sense now? It didn’t make sense then, broadly scrubbers. Apologies, Omar, that was yours.
Anthony Gurnee: Let me start with that. Yes, so we’ve now begun to install scrubbers on our ships. These scrubbers are lower cost, better technology, they’re modular, and the installation time is a fraction of the traditional scrubber installation. So we’re very pleased with those investments. In particular, they can be upgraded to carbon capture. So it fits really well into our business model. Why didn’t we do scrubbers three, four years ago? We were in a very financially strained situation at the time, everybody was. And the cost of the capital needed to do those installations would have been very high. We – in fact, instead of doing scrubbers, we bought a ship at a really good price. And I did calculate what the scrubber spread would had to have been to equal the returns we got on the ship that we just sold, and at $6,000 a day. So that – so – but every company has their own specific set of conditions and decision points, and we’re comfortable with the decision we made back then, and we’re really happy with what we’re doing now.
Bryan Degnan: Thank you. Just wanted to, Tony, follow-up on, I think, Ben’s line of questioning early on in the Q&A about strategy, and he was asking you about how you thought of things today versus a year ago. Wanted to ask, given, Gernot, you went through the different choke points that we’ve been seeing, and a lot of the disruption, the Black Sea, the Baltic, Panama Canal, Red Sea recently, given what’s been going on geopolitically recently, has that at all changed how you are thinking about strategy? Has it caused you to pivot or think about capital allocation differently or just strategy differently, given what’s going on right now in the Red Sea?
Anthony Gurnee: Good question. Hard to answer. So I don’t think it’s really affecting our strategic thinking. Our thinking there has been mostly operational and safety related. So it was very clear when the shooting, one of our ships was attacked, and we were very lucky in getting away without being hit. Others haven’t been so lucky. So it was an easy decision to avoid the Red Sea. Let’s see what, how things unfold and how that solves itself, how long that takes and how long it takes for ships to return to that route. Just generally, I think geopolitically it just, these events, as long as you’re kind of smart and safety conscious in the way you operate, they just add to aggregate ton-mile demand and they just boost the market. And then it’s just a matter of very ta
