Navigator - Q2 2023

Transcript

Randy Giveans (EVP of Investor Relations and Business Development in North America)

Welcome to the Navigator Holdings Conference Call for the Second Quarter of 2023 Financial Results. We have with us Mr. Mads Peter Zacho, Chief Executive Officer, Mr. Oeyvind Lindeman, Chief Commercial Officer, and myself, Randy Giveans, Executive Vice President of Investor Relations and Business Development in North America. I must advise that this conference is being recorded today. As we conduct today's presentation, we'll be making various forward-looking statements. These statements include, but are not limited to, the future expectations, plans, and prospects from both a financial and operational perspective, and are based on management's assumptions, forecasts and expectations as of today's date, and are subject to material risks and uncertainties. Actual results may differ significantly from our forward-looking information and financial forecasts. Additional information about these factors and assumptions are included in our annual and quarterly reports filed with the Securities and Exchange Commission.

With that, I now pass the floor to Mads Peter Zacho, the company's Chief Executive Officer. Please go ahead, Mads.

Mads Peter Zacho (CEO)

Good morning, thank you for dialing in to the Navigator Gas Holdings call. I'll start off by providing a brief overview of our Q2 results and then hand over to Oeyvind and Randy for greater details on business drivers and recent events. Our second quarter result came in similar to Q1 and much stronger than Q2 2022, with revenues of $135 million, adjusted EBITDA just below $70 million, and net income of $27 million. The result was mainly driven by higher charter rates, whereas vessel utilization was below that of Q1. Our balance sheet is robust, with cash of $180 million at the end of the quarter.

The initial $50 million share purchase program was completed in Q2. A further $25 million authorized as part of our new capital return program, opening up for both dividend payments and for further share buybacks. Utilization came in Q2 at 89%, below the 96 seen in Q1, but higher than Q2 2022 of 87%. Terminal throughput ran well above nameplate capacity, 278,000 tons. As previously announced, we grew our vessel capacity through the acquisition of five efficient, modern second-hand vessels. The takeover was completed faster than originally planned and completed mid-April. Expansion of the ethylene export terminal at Morgan's Point has come off to a good start. The first installments of $9 million have been paid, and we're expecting to pay another $9 million in August.

The expansion will give us up to 2 million tons of additional export capacity. Total CapEx for our share is expected to be around $125 million and completed by the end of next year. We sold Navigator Orion in May above book value, and we also formed Bluestreak CO2, a joint venture with Bumi Armada to transport CO2 from U.K. based stranded emitters. Outlook is good. Q3 utilization is expected to be above 90%, which is high in a historical context. Time charter rates are solid, which lays the foundation for another robust EBITDA result in Q3. Terminal throughput in Q3 is expected to remain strong, at or above nameplate capacity, and the ethylene continues to flow long distance to Asia.

The global handysize order book has not changed much, so in combination with good demands for seaborne gas transport and an aging global fleet, we think that the outlook is better than what we've seen for a long time. This is normally the time when the presentation changes to proper English language, albeit with a distinct Irish accent, but this time around, you have to bear with my broken English and the very dangerous accent that I have, but I apologize for that. Slide six, please. The Q2 financial result was a continuation and even slight improvement compared to the previous quarter and a clear improvement over the same period last year. The financial result was mainly driven by us from the top line.

Total operating revenue of $135 million was up 9.3% year-on-year, driven mainly by higher TCE rates. As you can see from the lower right table, TCE rates came in at $27,241 on average, which is a clear improvement over the $24,630 earned same time last year. Also better than the $25,620 earned in Q1. Utilization also increased to 89.1% during Q2, up from 87.4% in the same period last year. It was below the exceptional 96% that we achieved in Q1. As you can appreciate, it's been more than offset by high TCE rates. Our Greater Bay joint venture, which is 60% owned by us, acquired its final vessel during the second quarter of the year.

The third 22,000 cu m, 2019-built ethylene capable liquefied gas carrier, Navigator Vega, on the April 13. The vessel acquisition is now complete. This also increased vessel available days, which contributed to an increase in revenue during the quarter. You'll note that the operating revenue from the Luna Pool reduced to almost nil. Following the acquisition of the fifth vessel by the Greater Bay joint venture in April, the revenue from these vessels will now be fully consolidated into our financial statements and will not feature as operating revenues or lease expenses from the Luna Pool collaborative agreements. Our vessel operating expenses, or OpEx, as we call it, increased by 11.3% to $43 million in Q2, compared to the same quarter of last year, which resulted in vessel operating expenses per vessel day, increasing 6% year-over-year to $8,500.

This was a reduction from the previous two quarters as we continued to focus on our vessel operating costs. Depreciation of our vessels increased slightly by 2.3%, or $0.7 million, as the additional Greater Bay and Vega vessels joined the fleet. Keep in mind that we depreciate all our vessels to their scrap value, recycling value on the 25th anniversary. We realized a book gain of $4.9 million from the sale of Navigator Orion in the month of May. There was also an unrealized gain on our derivative instruments of $3.2 million during the second quarter, as the fair value of our fixed interest rate and swaps increased. Interest expense for the second quarter was $16.9 million, compared to the $11.5 million for the second quarter of 2022.

As a result, higher interest rates on the portion of our debt that is subject to floating interest rates. We fixed interest rates or have into interest rate swaps, for just below 50% of our debt. The tax charge for the quarter was $2 million, predominantly relating to both cash and deferred taxes on our share of the profits from the ethylene terminal in Houston. Our share result from the terminal was $6 million, Q2, down from the $6.8 million for the comparative quarter of last year. As a result, lower gas prices and therefore reduced throughput rates. Throughput of 277,582 tons compared to 268,444 tons during the same quarter of last year.

Net income for the second quarter was $26.6 million, or $0.36 per share. If we turn to the balance sheet on slide seven, you can see that it remains strong, with a cash balance of $180 million at June 30. This compares to a minimum liquidity covenant on our bank loans and credit agreements of $50 million. This cash balance is after buying back $50 million worth of own shares during the first half of the year. The strong cash balance will be used for capital redistribution, the ethylene terminal expansion, and as mentioned earlier, we keep looking for projects and investments that can enhance our shareholder returns.

While the debt has increased due to the financing of five Greater Bay joint venture vessels, our net debt to capitalization is low at 36.9%, and the net debt to EBITDA amounts to a manageable 3.4 times. Following the recent refinancing, the company now has no loan maturities until 2025, as shown on slide number eight, please. Maturities for 2025 includes the $100 million senior unsecured bond, which may or may not be refinanced, depending on any investment opportunities that may occur. The two bank facilities, totaling $190 million, will likely be refinanced at a higher than current loan-to-value, as the vessels serving as collateral are amongst our younger vessels. We expect that this refinancing, when it occurs in 2025, will be a cash positive event.

On slide nine, we outline the estimated cash break-even for 2023 at $9,460 per day. This low level, relative to the charter rate market, enables us to generate positive EBITDA throughout the shipping cycle. In the box on the right side, eight, we provide our daily OpEx expectations for 2023 across our differing vessel size segments, ranging from $7,600 per day for the smaller vessels, up to $10,100 per day for the larger, more complex ethylene vessels. We also provide a range for the expected annual spend for G&A costs, for depreciation, and for interest expense reimbursements. On slide 10, we outline our historical quarterly EBITDA, showing a step up over the past seven quarters and a further step up in this quarter.

A trajectory that I mentioned at the outset, that we expect to continue, at least in the near term. On the right hand side of slide 10, we show our historical EBITDA bar, with the last 12 months, incorporating the latest quarter, and an annualized EBITDA based on second quarter results. In addition, the EBITDA bars to the right of those show the effect of an increase in EBITDA if average charter rates were to increase by increments of $1,000 per day. With this, I'll hand it over to you, Oeyvind. Please go ahead.

Oeyvind Lindeman (Chief Commercial Officer)

Thank you, Mads, and good morning, all. Moving to slide 12. After a small drop in U.S. natural gas liquids production during the first quarter, the EIA statistics are currently showing a strong return to U.S. production. The final figures from May came in at a record level of nearly 200 million barrels per day production. U.S. price of LPG is therefore attractive against oil equivalents, measured both in price and energy content. This will continue to support export fundamentals. So far, LPG exports for the month of August, this month, is up 12% compared to August of 2022. These volumes are happening simultaneously to inventory build in Mont Belvieu, Texas. Typically, during summer inventory build, exports are soft, but that's not the case for this year.

The impact of recent U.S. natural gas production growth can be seen on the price of ethane on page 13. It has decreased over the last two months, further increasing the competitively priced production of American ethylene. The price arbitrage of ethylene to Europe and Asia is widening. The current spread, at least Asia, is about $400 a ton, which is sufficient to allow for terminal handling and freight at decent returns. Asia Pacific consumers are importing about 65% of total U.S. ethylene exports, with the remaining 35% heading to Europe. Our ethylene market conditions benefit with every cargo heading through the Panama Canal and across the Pacific Ocean, due to the long duration of these voyages. Similar to ethylene, ethane, as a feedstock, also enjoys U.S. domestic excess supply. Therefore, it is cheap, and its exports are increasing.

Remember, all our ethylene-capable ships can also carry ethane. On page 14, please. Ammonia has become an important commodity for us. Despite natural gas prices having returned to normal levels, the demand for maritime logistics for ammonia as input to the fertilizer industry has remained. Europe continues to source ammonia from across the oceans, both from North America and Asia, and this is a shift from the past, whereby most of the volumes were supplied from within the continent. European ammonia importers tend to favor handysize and medium-sized vessels. Seven out of the nine gas carriers we currently have contracted for ammonia employment are servicing these European consumers and ports. It matters to Navigator. Asia has reached about 50% share of the 17 million tons of yearly amount of ammonia exported by ships.

However, we strongly believe that the light blue line in the graph to the right will increase over the next few years as U.S. Gulf blue and green ammonia production comes on, on stream with a focus for exports targeted for global energy demand. Page 15, please. On the back of healthy natural gas liquids production in the U.S., robust ethane and ethylene exports, as well as continued demand coming from Asia Pacific, we are glad to see utilization reducing less this quarter, as we have historically experienced during the summer months. We're also happy to see that the utilization has bottomed out and in fact increased earlier than previous summer months. This gives us a certain degree of confidence to guide third quarter utilization for the three months above the 90% mark. Page 16 illustrates the latest gas carrier rate indicators, all pointing in the right direction.

One point to note, we are a far cry away from the COVID dip during 2020 and 2021, and we see the, the trajectory continuing. On page 17, the graph here illustrates the gas carrier segments and the respective order book and age profiles. As Mads mentioned, the handysize segment has a meager 4% order book against an existing fleet of 122 vessels. Of these 122 vessels, 25 of them are over 20 years of age and will be recycled at some point during this decade. With order delivery times of more than three years, we have a pretty good line of sight of the vessel supply situation in our segment. Randy will take over from here to give an exciting rundown, rundown of the latest developments. Over to you, Randy.

Randy Giveans (EVP of Investor Relations and Business Development in North America)

Thank you, Oeyvind. Following up on some several announcements we made in recent months, we want to provide additional details on those updated developments regarding a few of these announcements. As you can see here on slide 19, we are pleased to announce our return of capital for the second quarter of 2023, including our first ever dividend as a public company. In line with our recently announced return of capital policy and the illustrated table below, we are returning 25% of net income, or $6.7 million to shareholders this quarter. The board has declared a cash dividend of $0.05 per share, payable on September 22nd, 2023, to all shareholders of record as of September 8, 2023, equating to a quarterly dividend payment of $3.7 million.

Additionally, with NVGS shares trading well below our net of above $20, we will use the variable portion of the return of capital policy to repurchase shares. As a reminder, between December and this past May, we repurchased 3.8 million shares at an average price of $13.12 per share, for a total of $50 million. Subsequently, the board authorized a new $25 million repurchase program. As such, we will repurchase approximately $3 million of common shares between now and quarter end, such that the dividend and share repurchase together equal 25% of net income, $6.7 million. Returning capital to shareholders is relatively new to Navigator, but something we see as a requirement for a shareholder-focused company. Now turning to slide 20. Following up on our previous announcement regarding the expansion of our ethylene export terminal.

Under our existing 50/50 joint venture with Enterprise Products Partners over at Morgan's Point, we agreed to a capital project to increase the export capacity from approximately 1 million tons per year, as it is today, to at least 1.55 million tons and up to over 3 million tons per year by converting an existing ethane refrigeration train to also refrigerate ethylene. You'll see that in the yellow box. The project is now underway as the long lead items have been ordered, groundwork is progressing, and construction is still expected to be completed by the end of next year. The total capital contributions required from us to the joint venture are approximately $125 million, the majority of which will be paid in 2024. You can see the schedule in the bottom right corner.

We contributed the first progress payment of $9 million in April. The next payment is scheduled for late August. Remaining CapEx is expected to be paid from cash on hand until new financing agreements are completed sometime in early 2024. As you can see on the bottom left chart, the terminal continues to run at or above nameplate capacity, with 20, with second quarter 2023 throughput, reaching a new quarterly record high of 278,000 tons. The slight dip in July was just due to an early loading of a cargo in late June. August is already trending higher. Discussions are ongoing with current and new customers for multi-year offtake contracts, with the vast majority of the additional guaranteed capacity expected to be contracted during the construction phase next year.

On slide 21, our fleet renewal program continues to be implemented as we sell our oldest vessels and replace them with modern secondhand tonnage. Starting with the sale, on May 2nd, 2023, we sold our oldest vessel, the Navigator Orion, a 2000-built, 22,000 cu m LPG carrier, to a third party for $20.9 million, resulting in a $4.9 million profit. That leaves us with only three of our original Navigator vessels built in 2000, and we continue to engage buyers who are showing interest to acquire those older vessels. On the acquisition side, our new joint venture, owned 60% by Navigator and 40% by Greater Bay Gas, has now taken delivery of all five vessels, completing the acquisitions earlier than previously expected.

As a reminder, the total cost is $233 million, and 65% was financed by the $151 million bank loan, with 60% of the remaining cost, roughly $49 million, paid from our available cash. As a result of this S&P activity, our current fleet consists of 56 vessels, average age of right at 10 years, and an average size of 21,000 cbm. Finishing on slide 22, I want to personally invite all of you to our upcoming 2023 Analyst Investor Day here in Houston, Texas, a few months from now. On Wednesday afternoon, November 15th, we'll be hosting our Morgan's Point tours of the ethylene export terminal and one of our vessels. Just take a look at that middle picture and imagine yourself climbing on board that beautiful ethylene carrier.

Later that evening, the management team and some members of the board of directors will host a dinner for our analysts and investors. The next morning, Thursday, November 16th, we will host company and industry presentations covering current market trends, a financial update, as well as our medium-term strategy. We will then have lunch, followed by an appreciation event for our analysts, shareholders, customers, and partners. Unlike today's heat, the weather will be lovely, so you won't want to miss it. We really hope to see you in November. With that, I'll now turn it back over to Mads for closing remarks.

Mads Peter Zacho (CEO)

Good. Thanks a lot, Randy. Yeah, just to round it off, and just want to clarify that or just emphasize here that Navigator is on a, on a good path. Earnings are trending in the right direction, with robust utilization and gradually higher charter rates. Both are supported by the high utilization of our ethylene export facility at Morgan's Point, with more to come once the expansion is complete by end of 2024. The balance sheet is in its best shape ever, with an appropriate level of debt and also a recently refinancing portfolio. This gives us capacity for further growth, balancing growth with redistribution of capital through dividends and further share buybacks. Now we will do both, with dividends to be received on the 22nd of September and share buybacks to be initiated imminently. We published our annual ESG report in June.

I hope you had a chance to read it. Our efforts in making our business more sustainable are significant and were quickly picked up by the Webber Research 2023 ESG Scorecard. We now rank seventh among 64 shipping companies, and we have more initiatives ready to climb up further. Looking forward to see you in November in Houston, and, thank you very much. Back to you, Randy.

Randy Giveans (EVP of Investor Relations and Business Development in North America)

Thank you, Mads. Operator, we'll now open the lines for some Q&A. To raise your hand, press star nine, and then you'll have to unmute yourself by also pressing star six, or if using the Zoom app, just use the Raise Hand function.

... First question, you know, I should be.

Ben Nolan (Managing Director of Research)

Hey, hey. Hi, guys. Can you hear me? Am I unmuted?

Mads Peter Zacho (CEO)

Howdy, Ben.

Oeyvind Lindeman (Chief Commercial Officer)

Good, Ben.

Ben Nolan (Managing Director of Research)

Hey, good. Figured it out. Hey, good quarter. Have a couple questions. First, you, when you talked about, it seems like more and more of cargoes of all varieties are going to Asia. At the same time, I mean, we're, we're seeing seemingly news every day about, congestion around the Panama Canal and water levels and so forth. It, it, I assume that's a positive for your business, but is there any way to sort of think about the implications or, or how positive it is? Is, is it a, you know, modest or, or something that's making a meaningful difference?

Oeyvind Lindeman (Chief Commercial Officer)

Ben, excellent question. It's something we're looking at on a daily basis because our ships transit there, you know, every week. It has an impact, positively. Now, for the industry, for the gas industry, any inefficiencies or from a shipping point of view, takes capacity out of the available market. That is if you look it from a shipping point of view, that's a good thing. That is very much applicable for the bigger ships that has to transit through the new Panama locks. The new, the new locks only allow for nine transits each way, each day. The gas carriers are competing with the bigger ships of containers and LNG and so forth.

We're starting to see large delays there, whereby ships are being deviated around the Cape if they go to Asia. Clearly a positive from a shipping capacity point of view. For us, some of our mid-sized ships that are trading on ethane, so taking ethane from U.S. to also Asia, have also started to move via Suez or Cape, so that is an immediate impact on our business. Our handy-sized ethylene ships are quite nimble, so they... We have a pretty fixed schedule on them, so we can reserve canal slots and so forth in advance. We see less of an impact on the handysized ethylene ships going across the Pacific. But I think it is definitely one to watch. The more delays, the less shipping capacity, and that's a good thing.

The other question that you might be thinking of, if that's the case, and that is going to be for a long time, then does the market lack vessels to get back in time to load LPGs, ethane, ethylene? That's an entirely different question, but for now, it brings some positive implications to our freight market.

Ben Nolan (Managing Director of Research)

Okay. That's helpful, and I appreciate all the color there, Oeyvind. I guess for my, for my second question, then I'll, I'll turn it over. We, we, we did see, you know, there's hardly anything on order, but we did see a, a different shipping company order, I guess, a multi-gas carrier in last month or so that can do ammonia, CO2, LPG, all sorts of different things. I, I'm curious if that is something that you guys have considered doing. Just, you know, you're going through the fleet renewal program as, Randy, you've outlined. There's not much on order. You still have some older assets that you're, you're looking to divest. Any, any thoughts about maybe, you know, replacing them with something like that?

Mads Peter Zacho (CEO)

Yeah, I can just start out, and then you can complement me, Oeyvind, right? It's unlikely at this point in time that we'll be building a ship that can transport CO2 as well, as well as other, gases. Right now, there's still some uncertainties around the technology. It's far from certain that a given CO2, technologies such as low pressure or mid pressure is going to be the right one. We will be working with a number of projects, as we do through our Bluestreak joint venture. Here, we will be working very closely with the emitters to ensure that the technology and the capacity that we will be building for, will be matching what is required here.

We don't think that the, the risk of, of, of building that on, on speculation right now is, is, is worthwhile.

Ben Nolan (Managing Director of Research)

Oh, sorry. All right, I appreciate it. Thank you, guys.

Randy Giveans (EVP of Investor Relations and Business Development in North America)

Thank you, Ben. Okay, operator, I see Omar has his hand up.

Omar Nokta (Managing Director)

Hi. Hi, thank you. Hi, Randy. Hi, hi, team. Morning. Thanks for the update. Obviously, you know, as you have continued to highlight, it seems like the past few quarters, the business continues to thrive, and EBITDA is pushing higher. Wanted to ask, you know, the TCE rate you guys captured on the handy fleet this past quarter was at $27,000+ number, even with utilization having come off towards 89%, which is historically still fairly decent. How can we think about, say, the very near term? I know it's too short term, but in general, about the You've mentioned the utilization for 3Q now being above 90%. What can you give us in terms of guidance on the rate?

Can we expect the rate to also be climbing with utilization here, in the near term?

Oeyvind Lindeman (Chief Commercial Officer)

Thanks, Omar. We're very, the prepared remarks was really about we, we typically guide on utilization. You might have picked up that the, the bottom in utilization during summer months was higher than in previous years during the same period, and it also has shot up. We mentioned in the slide deck that July was close to 94%. That's a big jump from the total of Q2. In that respect, rates should also move, but in the Handysize segment, things take a little bit of time. Generally, in the summer months, the rate environment is a little bit soft. It's, it's less that this year.

I think, I think this is why we're being confident or talking about forward guidance on EBITDA, because it is likely it will continue to rise because of our confidence in utilization, and the rate level is also robust. I can't give you more guidance on the specific rates that we are seeing right now, except what your colleagues are or what the, what the different shipbrokers and so forth are, are putting out in the market. There's a slide deck on, on that, and you can, you can take a look, but it's, it's moving in the right direction.

Omar Nokta (Managing Director)

Thanks. Thanks, Oeyvind. I appreciate that. Maybe just one, one follow-up in terms of the, the, the fleet renewal and, and your activity in the S&P market. Wanted to ask about, you know, your, your non-handy ships in terms of... I know the small LPG carriers perhaps aren't necessarily core, to the, the main business, but what about the five, 12,000 ethylene carriers? How, how are those, you know, since the, since the merger, how, how are those transitioned into the fleet? Do you view those as a, as a meaningful piece of, of Navigator going forward, or, or do you think those are monetizable?

Mads Peter Zacho (CEO)

We're very happy with our mid-sized vessels. We think they have been built with the, with the right technology. They're very efficient ships, and we think they, they have a bright future ahead within Navigator to, to, to serve the, the ethylene and ethane market. So it's definitely core. And we do see in general that the infrastructure over long periods of time is being upgraded globally, so that larger and larger ships, I mean, you see that in pretty much all segments. We would think over time that, that, that there would be also gradually larger ships serving the, the, the markets that we currently well positioned in. I think that we define on, for sure, our own core markets have been the handysize, but also the mid-sized segment.

Omar Nokta (Managing Director)

Okay, got it. Thanks a lot for that. That's it for me. I'll turn it over.

Randy Giveans (EVP of Investor Relations and Business Development in North America)

Thank you, Omar. Okay, I do not see any other hands, so I think that concludes our Q&A time. Thank you again for dialing in. We look forward to speaking soon and certainly seeing you in a few months. Have a great day.

Oeyvind Lindeman (Chief Commercial Officer)

Thank you.