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Operator: Good morning, ladies and gentlemen, and welcome to Ardmore Shipping’s First Quarter 2023 Earnings Conference Call. Today’s call is being recorded, and an audio webcast and presentation are available in the Investor Relations section of the company’s website, ardmoreshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference call will be accessible anytime during the next two weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 312-65-95. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Anthony Gurnee: Good morning, and welcome to Ardmore Shipping’s first quarter 2023 earnings call. First, let me ask our Chief Financial Officer, Bart Kelleher, to discuss forward-looking statements.

Bart Kelleher: Thanks, Tony. Turning to Slide 2. 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 first quarter 2023 earnings release, which is available on our website. And now I’ll turn the call back over to Tony.

Anthony Gurnee: Thank you, Bart. Let me first outline the format for today’s call. To begin with, I’ll discuss highlights, market outlook and updates on our capital allocation policy. After which Bart will provide an update on product and chemical tanker fundamentals and our financial performance. And then I’ll conclude the presentation and open up the call for questions. So, turning first to Slide 4 for highlights. We’ve seen strong momentum and positive volatility being sustained in the first quarter and into the second quarter with TCE rates remaining at extremely elevated levels compared with historical norms. First quarter results reflect continued strength in the product and chemical tanker markets, with adjusted earnings of $43 million or $1.04 per share, equating to an annualized book return on equity of 35%.

On a TCE basis, our MRs earned $37,500 per day for the first quarter. And so far, we’re running at 34,000 per day for the second quarter with 50% booked. Our chemical tankers on a capital adjusted basis earned $32,000 per day for the first quarter and are running at $38,000 for the second quarter, also with 50% booked. Ardmore continues to deliver on its capital allocation policy, and we’re very pleased to declare a quarterly cash dividend of $0.35 per share, representing one-third of adjusted earnings and equating to an annualized current yield of approximately 10%. Overall, Ardmore is benefiting from a strategic focus and optimization of its top trading performance, while tightly managing costs and maintaining a low breakeven level of $14,500 per day.

Importantly, our full fleet exposure to the spot market, including our time charter in vessels, allows Ardmore to fully capture the benefits of the currently strong market. And as a final note, we highlight the operating leverage we have to charter rates, where every $10,000 per day increase in rates results in an incremental $2.30 per share in annualized earnings. Moving to Slide 5. The outlook for product and chemical tankers remains very compelling in a tightly balanced market. The EU refined product embargo, which came into effect on February 5, has resulted in a bifurcation of the product tanker fleet, driving route inefficiencies and thus higher ton-mile demand. Notably, the number of product tankers in the Russian trade increased by 50% to over 330 and it is worth emphasizing that there is a stickiness to this trade with these tankers typically not being able to reenter the global fleet, at least not easily.

We’re also seeing China’s economic recovery gaining strength with GDP growing by 4.5% in the first quarter and expected to accelerate further through the year. In fact, China is forecast to be more than 1/2 of the projected 2% increase in global oil demand in 2023. Meanwhile, chemical tanker demand is forecasted to grow by 7.5% in 2023 on the back of strengthening economic activity. Furthermore, and importantly, the product in the chemical tanker order books remain at historically low levels, so that supply growth is expected to be very low versus the robust demand outlook. So, although there are macro headwinds and recessionary concerns, which are impacting overall market sentiment, in our view, these concerns continue to be outweighed by the positive demand factors mentioned above.

Moving to Slide 6, where we discuss the embargo in more detail. We believe the impact of the EU embargo is yet to fully play out and there could be a potential coiled spring effect leading to further ton-mile demand growth. As you can see from Chart 1, ton miles relating to European imports are only up 15% year-on-year in contrast to the 114% increase in Russian export ton miles. The reason is highlighted in Chart 2 is the European inventory build prior to the embargo. As inventories are drawn down, we expect to see European refined product imports increase. Of note, diesel inventories are already down 10% since February. So, three highlights the expected differential in European product and port voyage lengths and suggest that there is another leg of ton-mile demand yet to be realized from the embargo once inventory drawdowns give way to higher imports.

Turning to Slide 7. We remain fully focused on our capital allocation policy because, as we said before, at Ardmore capital allocation is what anchors our ambition to reality and frames how we approach decision-making. As a result of our ongoing very strong chartering performance, low breakeven levels and net leverage of 21%, we’re now in a position to pursue all of our priorities simultaneously. These priorities are maintaining our fleet over time, which we’re doing by continuing to invest in our ships to optimize their performance, sustaining low leverage below 40%. As mentioned, we’re currently at just over 20% on a net debt basis. Well-timed accretive growth. We continue to evaluate and develop potential transactions in a patient and disciplined manner.

And finally, returning capital to shareholders, we are consistent with our dividend policy of paying out one-third of adjusted earnings, we’re pleased to declare a quarterly cash dividend of $0.35 per share, which will be paid on June 15. The key point to this business is a highly cyclical business where financial strength can pay off hugely as it permits well-timed investment and growth, but we also must balance reinvestment timing and growth with returning capital to shareholders, which is the cornerstone of our capital allocation policy. And on that note, I’ll hand the call back over to Bart.

Bart Kelleher: Thanks, Tony. Building upon Tony’s comments on market outlook, we’ll further examine the industry fundamentals. Overall, the supply-demand dynamics remain highly favorable. On Slide 9, we highlight the widening supply-demand gap. The strong ton-mile growth, which is highlighted in the green bars on the chart is driven by robust underlying fundamentals, further enhanced by the EU embargo in 2023 and by the full year impact of the European import ton-mile story on 2024 that we just discussed. The widening supply-demand gap is accentuated by the deceleration in net fleet growth to effectively zero with the potential for contraction in the near future. Even under a range of different demand scenarios, this is a very wide supply demand gap by historical standards and one that we’ll delve into on the subsequent slides.

On Slide 10, we highlight the favorable structural shifts in the product and chemical tanker markets. As we have touched on, the Russia-Ukraine conflict and the EU refined products embargo have resulted in a persistent reordering of the global product trade driving demand. The long-term trend of refinery dislocation between the East and West with an expected additional 7.6 million barrels per day of export-oriented capacity to come online in Asia and the Middle East through 2026, continues to have a positive impact on the product and chemical tanker market, all while the IEA continues to note a multiyear trajectory of consumption demand growth. And also highlighted on this slide is the strong chemical tanker demand forecasted to grow at levels in excess of global GDP, projected to increase by over 5% annually, driven by both growing consumption and increased voyage length.

Moving to Slide 11, where we highlight how the low product tanker order book contrast sharply with the rapidly aging fleet. Currently, the order book is just 6% of the total fleet. As mentioned in the past, the low order book is mainly due to very limited shipyard birth availability and the consequence of crowding out by other shipping sectors and the continued lack of clarity on emissions regulations and propulsion technology, which is deterring investment. To put this further into perspective, and while there has been some moderate recent ordering, there is currently only 10 million deadweight tons of orders versus nearly 70 million tons within the scrapping age profile in the next five years. Naturally, in the higher chartering rate environment, scrapping levels reduce, but the global fleet’s age profile, in particular with the large group of vessels originally built in the early to mid-2000s, provides future support to supply dynamics over the medium to long term.

Moving to Slide 13. Ardmore continues to build upon its financial strength. Net leverage at the end of March stood at just over 20%, which is down from 55% at the end of the same period last year. We have a strong liquidity position with $53 million of cash on hand and over $190 million in undrawn revolving facilities at the end of the quarter. As noted in the chart on the bottom left, we have managed to reduce our cash breakeven levels by $2,000 per day in a rising interest rate environment as a result of effective cost control, reduced debt levels and access to revolving debt facilities. As always, Ardmore remains focused on optimizing performance and continuing to closely manage costs in this inflationary environment. Turning to Slide 14 for financial highlights.

As noted, we are very pleased with our performance as we report results of $1.04 per share for the first quarter of 2023. We are correspondingly reporting strong EBITDAR for the quarter and continue to frame EBITDAR as an important comparable valuation metric against our IFRS reporting peers. Please note that there is a full reconciliation of this presented in the appendix on Slide 25. Although our very favorable floating to fixed interest rate swaps will roll off this summer, we have reduced our debt level significantly mitigating the impact of prevailing higher interest rates. And please refer to Slide 26 in the appendix for our second quarter 2023 guidance numbers. Moving to Slide 15. We continue to invest in the fleet to optimize performance.

This year, we have eight scheduled dry dockings planned, and this reduces to four next year. We’ve expanded our plans to install second-generation carbon capture ready scrubber technology on board nine of our vessels following a recent order for three additional units for installation in 2024. As a reminder, these modular units, as highlighted in the picture on the slide are fitted with the latest technology, which filters, neutralizes and reduces water discharge. And there is no anticipated additional downtime as these installations are planned to occur within the time constraints of normal dry docking. Also noteworthy, we had on-hire availability of almost 100% for the first quarter as a result of the continued close coordination of our teams Etsy and Onshore.

Moving to Slide 16. Here, we’re highlighting our significant operating leverage. The blue bar on the left notes our reported EPS of $3.74 in 2022 and compares this to the green bars, which represent what our 2023 EPS would be based on current market run rate levels as well as upside cases for the remainder of the year. In 2022, we reported our most profitable year-to-date. But as you can see from this chart, and considering the current TCE market, we have the potential to deliver even higher earnings this year. Finally, I’d also like to highlight that even without increases to vessel values and simply based on accrued cash generation, our net asset value would increase by approximately $1.50 per share annually post dividend for every $10,000 per day increase in TCE rates.

These dynamics, along with the very supportive supply-demand fundamentals are keeping us really excited about the outlook and our compelling positioning. With that, I’m happy to hand it back over to Tony and look forward to answering any questions at the end.

Anthony Gurnee: Great. Thanks, Bart. So, in summary, regarding the market, TCE rates remain extremely elevated relative to historical norms. The impact of EU refined product embargos playing out with increased ton-miles and a potential further leg of demand yet to come. And the medium-term outlook also remains positive for both product and chemical tankers based on the widening supply-demand gap with very low net fleet growth being far outstripped by anticipated demand growth. And regarding the company, we’re achieving continued strong TCE performance and are matching this with effective cost control in an inflationary environment. In fact, we completed the rest of 2023 at the same rate levels as our performance year-to-date, we would beat last year’s record earnings.

Meanwhile, our robust balance sheet and low cash flow break evens are enabling us to pursue all of our capital allocation priorities simultaneously. To finish with an important recent announcement and keeping with our longer-term strategic focus, our Board has formed a sustainability committee to oversee and advise on environmental, social and energy transition matters, which will ensure Board focus and support for the company as we make progress in these complex and extremely important areas of our business. And with that, we’re pleased to open up the call for questions.

Operator: Our first question is from Jon Chappell with Evercore ISI. Please go ahead.

Jon Chappell: Thank you. Good afternoon. Tony, I want to start with you. I know that the long-term outlook that you laid out looks pretty attractive. But of course, there’s a lot of focus currently on the short term. You mentioned some of the inventory destocking in Europe. There’s typical seasonality, although you did mention kind of defined seasonality in your last slide. Can you just speak to what’s kind of going on in the market today, how that kind of compares to two, three months ago when the market was really flying and how that shapes your second half outlook as well?

Anthony Gurnee: Hi, John. So, look, I think we’re very positive even in the near term from where we are today. I think the supply constraint is impactful, not just longer term, but currently, Secondly, we think there’s a lot of positive demand factors that should emerge in the second half of the year. When it comes to seasonality, rates are – okay, we did $37,000 a day for Q1. And so far in Q2, we’re at like 34,000. To me, that’s like within the margin of error and oscillation that would suggest to me that the market is about the same level. Clearly, these – this is a level where we’re off where we were in the third and fourth quarters last year. I think at that point, we were dealing with kind of maximum disruption and a lot of the disruption has gone away, but we’re still dealing with significant and perhaps increasing dislocation, for example, as we kind of laid out with regard to diesel imports into Europe.

So overall, we’re – we remind to kind of pinch ourselves here and kind of reflect on the long faces that we’ve got because we’re only earning $34,000 a day right now. So, we think it’s a pretty good setup for continued strong performance.

Jon Chappell: Okay. And then my follow-up for you, Tony, but I’d also like to hear Bart’s views given his experience at other firms through other cycles. You mentioned you’re hitting all your capital allocation targets. The yields close to 10%, you’ve really de-levered pretty aggressively to the point where maybe more deleverage is kind of unnecessary, but asset values are still really elevated too. So how do you kind of think about the next three to five years on prioritizing that capital allocation? And do you think you’re going to get an opportunity to kind of replenish or even expand the fleet? Or are you going to be stuck in this kind of rock in a hard place of asset values are really strong and the returns maybe don’t make sense at this point?

Anthony Gurnee: I’m tempted to let Bart go first, but I’ll mention that it’s a pretty comfortable rock in a hard place right now. So, there are a lot worse things to happen to a shipping company. We also, I believe very firmly that this is going to continue to be a cyclical business. I think that the – I think the high asset values today are reflective of people that are in the market every day, their estimates of what cash flow is going to look like in the next couple of years. So, we are positioning the company to benefit through the cycle from buying opportunities when they arise. We’re continuing to look at opportunities even as we speak, nothing is attractive at the moment, but that doesn’t mean that even in relatively strong conditions, you can’t find something that makes sense. But Bart, I don’t know if you want to —

Bart Kelleher: No. I mean, I’d echo that and just – I mean, we’re always turning over stones or rocks maybe as we’re putting it. And even if we’re not consummating deals, you’re definitely gaining key intelligence as an organization that you can drive into your business today. And then that gives you greater conviction for when the right deal may emerge. And then like Tony said, we can address the other capital allocation policies simultaneously, and you’ll keep a very dynamic approach to it in this strong market.

Anthony Gurnee: Can I just add one more thing, which is that at a time when interest rates have risen sharply in the last year, our breakeven has come down a lot. And that’s – that’s because of the lower debt levels. And that, of course, translates into better earnings, higher quality earnings, more solid NAV and a higher quality dividend yield.

Jon Chappell: That’s complete sense. I appreciate it, Tony. Thank you. Thanks Bart.

Operator: The next question is from Omar Nokta with Jefferies. Please go ahead.

Omar Nokta: Thank you. Hi, guys. Hi, Tony. Hi, Bart. Thanks for the update. And maybe just sort of on the last point of discussion you were having with Jon about values being elevated and the returns potentially not looking as exciting. Obviously, there’s no rush to do anything and you like being in this rock and a hard place. Just sort of the perspective that you have that I guess we broadly see, is that sort of product market-centric? Does that carry over into chemicals as well? Do you see better opportunities there? Any way you can sort of qualify how you’re seeing the opportunities, whether it’s more advantageous to look at chemicals versus product or not?

Anthony Gurnee: Generally speaking, the MR sector is much more homogenous. The chemical sector is lots of different ship sizes and types and kind of pockets. And therefore, just by that very nature, there are probably more opportunities on the chemical side at the moment. But again, I want to emphasize the fact that the values are underpinned by market player estimates of near-term cash flow.

Omar Nokta: Yes. Okay. Thanks for that. And then maybe just a bit broadly kind of on the – as you mentioned, right, you 37% in the first quarter, 34% currently. Obviously, we’ve seen a shift in the market at least in the VLCCs with OPEC cuts starting to have an impact. In the past, there’s been a view of a trickle-down effect across all segments when you have an OPEC cut like we’ve seen, how do you see the production changes from OPEC impacting products? Do you feel that the sector is well insulated – or are there other important drivers that are driving the strength relative to, say, large crude ship?

Anthony Gurnee: So, for the past year, that typical linkage hasn’t really held. And we do think that there are particular specifics to the product tanker sector that delink it to the crude market at the moment. And we also believe, as we’ve said, we think that there may be more of a demand impact to come from the EU oil embargo. And again, our business is driven by refinery throughput and output and therefore very much linked to consumer demand. OPEC is making decisions based on crude – trying to drive crude pricing and manage crude inventories. So, there is a – at the moment, we believe they are decoupled.

Omar Nokta: Okay. Thanks. And maybe just as a quick follow-up to that. We’ve seen crack spreads come off. And so that sort of does dictate to an extent throughput, but it seems that refining margins potentially are still somewhat elevated relative to history. The sort of maybe in your crystal ball or maybe just in your discussion with charters or how you’re seeing the market as it is now, have you seen any noticeable shift in refinery habits as a result of the lower margins?

Anthony Gurnee: I think there’s always this dynamic of refinery turnarounds when they happen, and it’s a well-kept industry secret because it’s competitive intel in that business. But we are in a phase where there is an elevated level of refinery turnarounds in China. However, the U.S. Gulf is back up to over 95% throughput for utilization. So overall, – it is true that crack spreads and refinery margins are off the peaks, well off the peaks, but they’re still more than double where they were before the conflict. And we think that’s still compelling and driving profitability for refineries.

Omar Nokta: Yes, that makes sense. Thanks, Tony. I’ll turn it over.

Anthony Gurnee: Sure.

Operator: The next question is from Ben Nolan with Stifel. Please go ahead.

Ben Nolan: Hi, guys. I have a couple. So first, maybe two capital allocation type questions. We’ve seen a fair bit of people converting leases that were done a few years ago into more traditional bank debt. I’m curious if that’s something that you might be looking to do? And then also, as it relates to the capital return policy. As you said, Tony, I mean, the balance sheet is at 21% leverage. Any thoughts about maybe adjusting that one-third of net income ratio as it relates to the dividend?

Bart Kelleher: So, this is Bart. Thanks, Ben. So, in terms of the leases converting to bank debt, that was actually something that the company tackled mid-2022 – and so today, we only have two remaining vessels on lease and the initial purchase options don’t come until mid-next year. But that was the key shift to the revolving facilities, which then we subsequently have continued to pay down. So that addresses the lease question. On the capital allocation in terms of debt level, the capital allocation policy is set for a through-the-cycle approach over the course of time, you delever when you’re in the strong upmarket, so that you have opportunity and inherent dry powder as the cycle plays out. And we see that while we’re below 40%, and that’s the stated goal, we have – we still have additional runway to actually delever further and also continue with the one-third dividend, which again is a policy for through the cycle.

And I think we’ve been vocal before that if we see a continued cash build in a strong market and different accretive growth opportunities don’t emerge, we’re also supportive of additional return of capital to shareholders and that’s a conversation we frequently have with our Board. And most likely, that would be in the form of a special dividend.

Ben Nolan: Okay. Yes. I appreciate that. And in the for what it’s worth department, I agree. There’s no need to go crazy. My next question relates to the carbon capture ready scrubbers that you have. Appreciating that they’re ready, and so they’re not active or wouldn’t, if I understand it correctly, be actively capturing carbon. I’m curious what would need to be implemented in order to enable that? Both in terms of incremental CapEx in order to capture the carbon. And also, just generally speaking, I mean, do you need to see more infrastructure in place around the world? Or how do we think about sort of those moving from simply a ready state to something that’s active?

Anthony Gurnee: Yes. So, Ben, on the incremental CapEx would be probably less than the $300,000. It’s essentially an additional component that gets mounted on the back. I think that any carbon capture technology and application is still very nascent in the shipping industry. This is a very, very straightforward simple method of capturing carbon, but it does have to be linked to a kind of a shoreside infrastructure and kind of predictable trade routes to make it effective. And that’s actually the case with any ship-based carbon capture system.

Ben Nolan: Okay. So, I assume these are aiming, right? So, you need access to – yes. Okay. All right. but we shouldn’t expect – it doesn’t sound like that infrastructure is really close at this point? So, it’s not something we should expect soon I guess, is what you’re saying, correct?

Anthony Gurnee: Yes. And I think that it’s very good for the environment, I think, very good for our carbon reduction compliance. I don’t think it will have a big, big impact on our earnings, unless the ship’s going time charter to somebody that’s willing to really pay up for that feature. But we like that – we think it’s taking the company in the right direction. And it could actually be implemented very quickly if the – it’s not – it wouldn’t be years away. It could be relatively quick if the demand were there.

Ben Nolan: Got it. All right. I appreciate it. Thank you guys.

Anthony Gurnee: Sure.

Operator: This concludes our question-and-answer session, and the conference is also now concluded. Thank you for attending today’s presentation. You may now disconnect.