Ardmore Shipping Corporation (ASC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Ardmore's investor call to discuss its strategic investment and joint venture with Element 1 Corp. and Maritime Partners. 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 the passcode 10153295. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead.

Thank you, and welcome to our investor call to discuss e1 Marine. First I'm going to ask Paul to discuss forward-looking statements, and then we'll get into the presentation.

Great. Good morning, everyone, and thanks, Tony. Before we begin our call, I would like to direct all participants to our website at ardmoreshipping.com, where you'll find a link to this press release and presentation. Tony and I will take about 10 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. Additional results may differ materially from the results projected from those forward-looking statements. And additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the press release, which is available on our website.

Thanks, Paul. On the call today, in addition to Paul, we also have Mark Cameron, our Chief Operating Officer and who is also heading the energy transition projects for us. And then Garry Noonan, who is the Head of Transition Technologies. They'll be available during Q&A to help with questions. Turning to Slide 3. We're pleased to announce that we've entered into a nonbinding LOI for the following set of transactions. First is the formation of e1 Marine, a joint venture among Element 1, Ardmore and Maritime Partners. e1 Marine will have a worldwide mandate for E1's unique hydrogen generation technology for application to the marine sector. The second transaction is Maritime Partners will invest $40 million in Ardmore in the form of perpetual preferred shares, having a dividend rate of 8.5% per year. And third, Ardmore is set to purchase a 10% equity stake in E1 in exchange for $4 million of cash and 950,000 shares in Ardmore Shipping. The transactions are subject to definitive documentation and are expected to close simultaneously early in the second quarter. We're very excited about the potential of e1 Marine technology, and it further demonstrates our commitment to supporting the decarbonization of the marine sector, consistent with our recently announced Energy Transition Plan. The proposed transactions are a culmination of significant market research, consultation with industry experts and a focus on identifying valuable carbon-reduction technologies as well as investment opportunities and commercial alliances. And we're also pleased with the investments in perpetual preferred shares by Maritime Partners, which we anticipate will enhance our financial strength and support continued selective growth. On to Slide 4. Just by the way of background, our core business is the owning and operating of product and chemical tankers in worldwide trade. As part of this, the Ardmore team has an intensive focus on operating performance, including fuel efficiency, innovations around ways to improve performance and carbon reduction. The energy world is changing rapidly. Admittedly, this is more evolution than revolution, and it will unfold over years, but the pace of change is accelerating. At Ardmore, we view the energy transition as an opportunity rather than a threat or a regulatory check-box exercise. During 2020, we developed our own approach, which we recently announced as our Energy Transition Plan, or ETP, and it's focused on 3 key areas: transition technologies, transition projects and sustainable cargoes. Transition technologies relate to fuel efficiency and future fuels, both to improve our fleet performance over time and to partner with others to facilitate deployments of technologies industry-wide. E1 came as an early opportunity, representing an exciting application of a proven technology to solve a big problem the marine factor faces: getting hydrogen onboard safely and efficiently. And that's something we'll discuss in detail later on. As part of the ETP, we're also forming Ardmore Ventures to hold the JV interest in e1 Marine and the shares of E1 as well as other similar future potential investments. Turning then to Slide 5. Let's discuss the challenge. Hydrogen has evolved as one of the key zero-carbon fuels for the future, but it has practical challenges. Very low density, requiring a large time to transport a relatively small amounts of even highly compressed hydrogen. And liquefied hydrogen even more challenging than LNG and half the energy density, thus making it, quite honestly, questionable as bunker fuel. The options for transporting and storing hydrogen really come down to 3. The first is compressed hydrogen. And if you look on Slide 5 on the upper right, you can see a picture of what's in essence a 40-foot container, weighing 31 tons, but only containing 0.7 metric tons of compressed hydrogen at 350 bar. Liquefied hydrogen has to be cooled down to 253 degrees below 0 Celsius to maintain a liquid state. That's much colder than LNG. You can see the photo on the lower right of an LNG-powered capesize bulk carrier to get a sense of the scale of the tanks that would be required. The third option is the use of carrier fuels, methanol and ammonia being the 2 most discussed. PEM fuel cells, in other words, proton exchange membrane fuel cells, are an excellent power solution for decarbonization broadly. They're much more energy-efficient than internal combustion engines. And when combined with renewable hydrogen, from whatever source, they're zero carbon. The challenge is that low-temperature PEM fuel cells require high-purity hydrogen. E1 technology offers a competitive solution by producing ISO-grade hydrogen reformed from methanol on site. So next to Slide 7, a bit of background on Element 1 Corp. Element 1 is a leading developer of advanced hydrogen generation systems supporting the fuel cell industry. It was founded 10 years ago by Dr. Dave Edlund and Robert Schluter. They're based in Bend, Oregon. Dave Edlund is a renowned expert with over 30 years of experience in this field. The E1 team has developed a unique patented technology for generating high-purity hydrogen for specific use in low-temperature PEM fuel cells. E1 currently has 3 product lines to service demand in the various markets: The S Series, the L Series and the M series. The S series is a small application up to 10 kilowatts. The L series is 100 kilowatts plus. And it's essentially a station -- it's essentially a land-based hydrogen gas station concept. And the M series is essentially a mobile version of the L series currently scaled up to 100 kilowatts. Broad application for these products include not just marine, but also road transport, land-based hydrogen filling stations, rail, power backup and industrial equipment. The technology is unique and proven. The technology involves methanol-to-hydrogen reforming and purification to ISO grade on a commercial scale. Currently, around 250 of the S series are in operation, the longest for a few years and over 5,000 hours of operation. The M series has been tested out on a truck already, as you can see in the photo, completing over 5,000 kilometers with no issues. We believe E1 itself is poised for significant growth, and we understand there are several strategic transactions under consideration across different sector applications. On to Slide 8 to just describe a little bit about e1 Marine. As we've already made the point, it's a 3-way joint venture with Ardmore, E1 and Maritime Partners, each bringing to the table its own set of skills and experience and expertise. And so e1 Marine will have a worldwide mandate to develop, market and sell E1's products and services to the marine sector, very broadly defined. The business model will primarily involve licensing and royalties with some small-scale manufacturing. It's not expected to be labor- or capital-intensive. It will have its own organization and team across management, engineering and regulatory expertise as well as marketing and admin. A Managing Director has been identified and is expected to be announced in the coming weeks. So on to Slide 9. Let's discuss a little bit of the specific advantages of the E1 technology to the kind of applications we're thinking of. The first point is that the hydrogen-generated fuel cell combination consumes approximately 35% less energy than diesel generators and is thus more cost-effective even before considering new regulations or carbon tax. Second is that, even with standard methanol, hydrogen-generated fuel cell set produces 30% to 50% less CO2 as well as 0 particulates, 0 SOX and 0 NOX as compared to a diesel generator. Third point is that the system is ready to meet anticipated future regulatory requirements by simply switching to renewable methanol. The system can be potentially configured to efficient carbon capture, and it can be carbon-negative and also can be modified to run on ammonia, if that's desired. Third point is that it's a very simple design and construction with high reliability and very few moving parts, thus no maintenance and repair costs as compared to internal combustion typical diesel generator sets. And the fifth and final point here is that there's potential for further operational efficiency gains versus diesel engines for a propulsion when matched with the battery bank to provide surge power and to manage -- and for managing low loads. Methanol itself is readily available. It's a highly efficient source of hydrogen, and it's easy to handle and store. In fact, methanol is the largest commodity chemical produced, 80 million tons annually. To put that in perspective, it's produced from natural gas for the most part. But if you compare that 80 million tons to the oil market, that's 1.7% of all global oil consumption. So there's very large production already. It's available everywhere. And in fact, it's the largest commodity chemical moved to sea. And virtually, any chemical carrier can move it. Turning to Slide 10 to discuss the addressable marine market. e1 Marine has a very broad mandate, essentially all vessels and offshore support plus selected port infrastructure and other applications. The key applications that we're interested in targeting initially are main propulsion on small vessels, meaning riverine and coastal. Second is auxiliary power generation, essentially generate replacements or substitutes. And then third is power for refrigerated containers, which has its own set of dynamics and issues. In addition, we'll be looking to deploy this in a land-based form and port infrastructure for hydrogen refilling stations and as power backup systems, for example, in offshore wind farms. Our initial research indicates a total market of -- we're thinking of it in terms of 500-kilowatt unit equivalent of power. So in other words, a 1 megawatt application would be 2 units. We think that the market potential is in the region of 200,000 units. What we're going to do is leave the rest of the discussion around the market and how that translates into financial returns for the joint venture until Q&A. I'm going to turn the call over to Paul now to talk about our investment in E1 and the preferred shares.

Great. Thanks, Tony. So turning to Slide 12. As Tony mentioned, one of the exciting things about E1 technology is its broad application. Aside from the marine market, there's a very large addressable markets across trucking, rail, land-based refilling stations and power backup. E1 is at a pivotal stage of its development. It's through the intensive R&D phase, and the focus now is on commercialization and scaled-up manufacturing. We believe the timing is optimal for investing in their business, and we're taking a 10% stake in the company through a mix of cash and shares. Based on Ardmore's net asset value, this works out at a valuation for E1 of approximately $110 million. E1 will also issue warrants to Ardmore, and Ardmore will take a seat on the E1 board. As part of e1 Marine and our partnership with Maritime Partners, they will take a 20% upside in the E1 investment, ensuring full alignment. We really like the E1 business model. The primary source of revenue is licensing and royalties and unit sales, so we believe there's potential for significant value creation as sales ramp up. We are really excited for E1. They're a great team with a complete dedication to developing and building great hydrogen technology, and we look forward to being part of the next chapter in their development. And turning to Slide 13 for the third leg of these transactions. We are pleased to welcome Maritime Partners as a preferred shareholder of Ardmore. As part of a series of transactions, Maritime Partners will invest $40 million in Ardmore in the form of perpetual preferred shares. The issuance has been structured along the lines of a typical public preferred issuance, both in terms of size and terms. The shares will carry a dividend of 8.5% per annum, with an option for payment in kind for up to 4 quarters in a 3-year period. The dividend rate is subject to escalation for certain credit-related triggers, in line with our other financing covenants. And Ardmore will also have the option to redeem the shares from the end of year 3. The financing provides considerable financial flexibility. It strengthens our balance sheet and provides additional capital for further selective growth. Maritime Partners are a very high-quality investor with significant expertise in asset financing and structured products, and we look forward to working with them, both as a shareholder and as a partner in e1 Marine. And with that, I will turn the call back over to Tony for some closing remarks.

Thank you, Paul. So just to take a step back, our core business is owning and operating product and chemical tankers. And in optimizing our performance, we work every day to innovate a couple new ways to sustain and improve our performance. You've heard us for years talking about things like skysails, PBCFs, [indiscernible], engine controls, waste heat boilers, variable fans and pumps. And operationally, we're focused on optimal trim, optimal speed, optimal routing. We feel, in this set of transactions and in this project, in particular, we're leveraging our existing strengths and extending that to provide what we think are potentially valuable technologies to the market and to the overall industry. This is also consistent with the Energy Transition Plan. The ETP has 3 key areas: sustainable cargoes, transition projects and transition technologies. We're serious about all three. This happens to be the first step in 1 of the 3 areas: transition technologies. So overall, we feel that this is consistent with our core strategy. It's consistent with the Energy Transition Plan, and it builds off our strengths. E1 hydrogen generation system is a proven technology. It's ready for use with a large addressable market across many industrial sectors. We're excited in particular about the prospects of e1 Marine in the maritime space. We think it's well suited given the current challenges with transporting hydrogen in other forms. E1 system runs on standard or renewable methanol that can be configured for carbon capture, and it can be built or retrofitted to run on ammonia. The transactions contemplated fit neatly within the Ardmore ETP and, in particular, our focus on transition technologies, where we feel we can play a valuable role leveraging our engineering expertise and sector knowledge. And as a final point, we're very pleased to have proposed $40 million preferred share investment by Maritime Partners, and we look forward to developing a close ongoing working relationship. And with that, we'll end the presentation and open up the call for questions.

[Operator Instructions] The first question is from Randy Giveans from Jefferies.

Congrats on the deal. For the first time in my life, I think I'm glad I took organic chemistry in college. But for this acquisition, right, I guess, generally, big picture, why take a stake in maybe this particular technology when there are several options out there, LNG and others, and there isn't necessarily a clear winner as to which one will emerge in the coming years? And then second part of this question, when do you think you'll really recoup some benefits from this investment? Is it 2 years, 5 years, 9 years?

Good questions. Okay. So why this technology as opposed to others? We've been studying all the technologies and all the solutions for probably over a year now and thinking about where are the opportunities really for our own fleet. But in addition, if we believe in it, how do we then find a way to deliver that to others as well. We're not here to bash other technologies or other alternatives. We think that over time and in different sectors, there will be different solutions. I mean, it's clear that this is not a solution for VLCC main propulsion, okay? But we think it is an excellent solution for those that want to deploy fuel cells for power generation, either electricity or propulsion. It also depends on the jurisdiction you're going to be operating. So for example, the European environment is going to evolve very rapidly and very differently from other parts of the world. So we don't consider this to be a niche product. We think it can be and will be deployed very broadly, but we don't think it's the be-all and end-all and a single solution. But it's a very, very simple, proven and powerful answer to a big question, how do you get hydrogen on board a ship safely and efficiently. In terms of timing, we've tried to make the point many times when we talk about the ETP and about this as well that this is going to evolve over years, not months, right? But we all acknowledge that the pace of change is accelerating. And it's not merely regulatory. It's customer preference. It's jurisdictional as well. So we think the change is coming actually much faster than people recognize. For the changes that we know are coming, this also has very interesting applications for companies that have ships that might struggle to meet EEXI, CII standards because this could be retrofitted or even placed on board in a modular way. What's interesting is that, as a company, 25% of our fuel consumption is generators. So generators are a surprisingly large amount of fuel consumption. And if you want to make a dent, we think this is a good answer. The other thing is that there hasn't been a lot of focus yet on how to deal with the problem of carbon emissions from generators. It's all been about main engines. So in terms of timing, I think either now or later in the call, we're happy to get into the scope of market. But suffice to say that we don't necessarily see -- we could -- it could be cash flow positive in 2022, let's say, but let's wait and see how it evolves. I will say one more thing at this stage. We're already getting a lot of keen interest, a very specific interest.

All right. I guess second question, just looking at the preferreds, right, 8.5%, fairly kind of value there. I guess, will the $25 million or ideally $40 million be used for further growth in this kind of ancillary business or likely used for fleet renewal?

Randy, let me take a run at that, and then I'll pass it over to Tony. So yes, the preferred is $40 million. And I said in the prepared remarks that it was structured as an independent transaction and to be consistent with what a public issuance would look like in terms of size and terms. So after the investment in E1, that leaves about $35 million of excess cash, which is for general corporate purposes. It does provide a lot of financial flexibility. The transaction itself delevers the company by about 5% on a net debt basis. And importantly, it gives us the opportunity to take out for some of these lease transactions, takes out the mezzanine component, which is a little bit more expensive. So I think, for us, we have laid out our capital allocation policy. It's out in the market now for over a year. Financial strength is a priority and beyond that for selective growth. So I suppose not much more to add on that. Tony, I don't know if any more to that?

Yes. I would just make the point that it represents like 5% or 6% of our total capitalization. It's classed as equity. It does have a current yield. It will have an impact on breakevens a little bit, but we think it gives us a lot of flexibility and it's permanent. So even the mezzanine capital that's built into the leases that Paul talked about, that's not permanent capital. So -- and we think it's reasonably attractively priced. We have to remember that we're in a very low interest rate environment. That's not going to remain the same forever. So yes, so we're very pleased with it, and it's a real relationship.

Good deal. Well, that's it for me.

Good.

Thanks, Randy.

The next question is from Omar Nokta from Clarksons.

And this is for Randy. I also took organic chemistry, but that's what pushed me to change majors to finance and funny how it just comes full circle. I think -- thanks for the update and very interesting and unique opportunity here and really taken somewhat of an innovative approach to the energy transition. I guess maybe just taking a step back, you formed the JV with Element 1 and Maritime Partners. You're also taking a 10% stake in Element 1. Maritime Partners is investing $40 million. I guess, maybe how mutual exclusive are these transactions? And I guess, are they sort of a requirement for this JV to come together?

I think it's a circle of virtue. I think there are just benefits for each party in the various components, so -- but they are linked. It's one overall transaction, but every part of it is willingly given and happily taken.

Got it.

And just to add to that, Omar, I guess in terms of the relationship with Maritime Partners, we have been speaking to Element 1 about the technology for a number of months. Coincidentally, Maritime Partners had also been speaking about their technology for the inland market. So this is just a -- the stars aligning and just very much a common interest and common kind of business philosophy. So it came together pretty quickly when we realized what people were looking to accomplish there.

Okay. I see. Very interesting, sort of like an organic kind of development. The -- maybe just on to Randy's question, just about the use of the $40 million, the $25 million plus $15 million, it sounds like initially, it's refinancing, shoring up/strengthening the balance sheet and preparing for selective growth. And when you think about that selective growth, is that still in the MR sector?

I think the best way to frame up our growth aspirations is that it will be consistent with our core strategy and with the ETP.

That's fair. Yes. And then just final question, Tony, or Paul, just on the JV itself. Is there any capital that you're putting into that aside from the $10 million you're investing in Element 1 separately?

Yes. Paul, you start and I'll...

Yes. I think, initially, there's a small bit of capital. We're talking about a few hundred thousand dollars here to get the business up and running. We develop some prototyping and do some initial work and around getting regulatory approval. This is a large -- really large addressable market. Some of the sectors will have kind of immediate application. Others might take a little bit more time in terms of regulation. So we're -- this is an independent company. Let's remember that e1 Marine will stand on its own 2 feet. So Ardmore will be involved at the early stage, making sure that it gets set up, and it's on its own 2 feet. So one way of answering, yes, there will be an initial amount of working capital going in, in the tune of a few hundred thousand dollars, but then we think it should be fairly self-sufficient and sustainable within a matter of months, if not sooner.

Yes. Just to add to that, I think it's worth keeping in mind the business model, which is licensing and royalties, right? So the cash flow from those could start coming in sooner than you would otherwise expect.

Got it. And that's it for me. Congratulations again, and it'd be really fun to watch this development.

[Operator Instructions] The next question is from Pavel Molchanov from Raymond James.

I appreciate the opportunity. As a clean tech analyst, I'm intrigued by this from the sustainability angle. And clearly, one of the conversations we're hearing a lot in the hydrogen landscape is green hydrogen using electrolysis as much as possible. How -- what is the difference between Element's hydrogen generator and an electrolysis device? Are there some similarities or contrasts?

Pardon me, ladies and gentlemen. It appears the speaker line has dropped. [Technical Difficulty] Ladies and gentlemen, the speakers are back in the call. We'll continue with the question-and-answer session.

Absolutely. I guess I'll repeat the question I was starting to ask earlier. In the hydrogen landscape, the transition away from reforming towards green hydrogen through electrolysis. It was very visible, of course, from a decarbonization standpoint. And I'm curious if Element's -- what the differences are between Element's product and an electrolyzer? Are there some similarities or differences?

Pavel, this is Tony. If I understand the question, what's the difference between what the hydrogen generator system that E1 has created and electrolyzer. So the electrolyzer is the process of producing the hydrogen, which can then be combined with CO2 to produce renewable methanol. So that's the production of the fuel. And this is the production of hydrogen from methanol. So that's the production. What you're talking about is the production of hydrogen from electrolysis, which is a very, very energy-intensive, fixed installation type of business.

Understood. And a follow-up to that. Are there any incentives for your installations of Element's technology that you're aware of in any given jurisdiction? Any subsidies or tax credits something like that?

We're not there yet, but we imagine there will be, in particular in the European market and maybe eventually in the U.S. market. So -- but none of our estimates on the value of the technology and the system aren't dependent on any kind of subsidy.

And lastly, are there any jurisdictions, particularly in Europe or any other regulatory zones where this type of installation may become mandatory to get into the port and use your vessels in the first place?

Yes. I think that, as we were discussing earlier, there are going to be many solutions for carbon-neutral and zero-carbon power for the marine sector. This is one solution, which enables -- one of the most attractive, which is hydrogen for fuel cells. So short answer is that there -- the regulatory landscape in Europe is evolving rapidly. And there are projects already underway to run ships on hydrogen with fuel cells. So this is already a reality. And we think there will be immediate interest from individuals that are engaged in that kind of project activity to look at this technology.

Okay. Well, it's exciting stuff. So congrats on taking the initiative.

Thank you.

Thanks, Pavel.

There are no more questions in the queue. This concludes our question-and-answer session and the conference. Thank you for attending today's presentation. You may now disconnect.