Navigator - Q4 2023

Transcript

Mads Peter Zacho (CEO)

Thank you for standing by, ladies and gentlemen, and welcome to the Navigator Holdings Conference Call for the Fourth Quarter 2023 Financial Results. On today's call we have Gary Chapman, Chief Financial Officer, Oeyvind Lindeman, Chief Commercial Officer, and myself, Mads Peter Zacho, CEO. I must advise you 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 as such subject to material risk and uncertainties. Actual results may differ significantly from our forward-looking information and financial forecasts. Additional information about these factors and assumptions is included in our annual and quarterly reports filed with the Securities and Exchange Commission.

With that, please go ahead to page number three, and we'll get going on the presentation. Good morning, everybody, and thanks a lot for taking part in this Navigator Gas Earnings Call. I'll begin with an overview of the highlights for the fourth quarter of 2023, and then I'll talk a little bit about the outlook for the year that we just started. As always, Gary and Oeyvind will follow up in a couple of minutes with more color on our business. We generated a solid top line with growth in operating revenues compared to both Q3 2023 and same period 2022. This was mainly driven by higher time-charter rates. Adjusted EBITDA for Q4 was equal to the record of $72 million that we set in Q3, and it was a significant improvement over last year's $55 million.

The progress was reflected in adjusted net income, which more than doubled compared to same period last year. Our cash position remained robust even when we repaid on our credit revolver and invested into our ethylene terminal expansion. In Q4, we continued paying the cash dividend of $0.05 per share, and we repurchased own shares similar to previous quarters. You'll see this continue as we now also declare a further $0.05 per share in dividends and some additional share buybacks. This will, in total, be equivalent to 25% of our net income following our fourth quarter results. The average TCE, or time-charter equivalent rate per day earned by our vessels reached more than $28,000 for Q4 2023. This compares to less than $24,000 in Q4 of 2022.

Fleet utilization stayed above 90% in Q4, and that was just shy of the utilization that we achieved in Q3 and same period 2022. Utilization at or above 90% typically allows for higher TCE rates. Throughput at our joint venture, Ethylene Export Terminal, was slightly down at 208,000 tons for the quarter, but it was nevertheless brought to a total of the terminal capacity of 1 million tons per annum. The expansion of the terminal continues to be on track for completion in Q4 2024, and in 2023 we contributed progress payments of $35 million made up of four payments of around $9 million each in April, August, October, and December. The outlook for our business remains robust. We expect utilization to remain near 90%, and we continue to renew our expiring time-charters at higher rates.

With solid NGL production and thereby demand for transportation on handysize gas carriers, combined with limited supply from new buildings in our segment, we expect this to continue. We also do not expect that the trade patterns through Panama Canal and Suez will be restored in the near future, which may lead to more cubic-meter miles transport work for us. We work intensively with our customers to improve the efficiency and avoid idling or ballast voyages. The most recent examples of backhauling propylene from Asia are a great example of that joint work. With that, I'll just hand it over to Gary for a more detailed overview of our financial results. Go ahead, Gary.

Gary Chapman (CFO)

Thank you very much, Mads, and good morning or good afternoon, everybody. I'm pleased to report our latest fourth quarter 2023 results, in which we've continued our momentum with, again, some very positive results. On slide six, we see our total operating revenue up over $18 million, or 14.9% to $141.6 million in the fourth quarter of 2023, compared to the fourth quarter of 2022. With much of this increase due to stronger time-charter equivalent rates, as Mads has pointed out, that we're on average $28,428 per day in the quarter, compared to $23,622 in the fourth quarter of 2022. There were further positive effects as a result of having our five Navigator Greater Bay vessels fully operational in the fourth quarter of 2023, and this was also reflected in our ownership days, available days, and operating days figures, as shown on the right-hand side.

Against this, utilization was a little down in the fourth quarter of 2023 compared to the fourth quarter of 2022, but at 91.3% it was still very healthy, as Mads has already said and as Oeyvind will confirm later. Our ethylene terminal throughput volumes in 2023 were 987,000 tons, close in line with nameplate capacity at 1 million tons, and we currently expect to remain near capacity in 2024. Our daily vessel operating expense in the fourth quarter of 2023 was essentially in line with the fourth quarter of 2022 at $9,067 per day, noting that the fourth and the last quarter of the year is typically a little higher than the other quarters, and 2023 was no different. We are providing some full-year 2024 expense guidance on slide nine for those that are interested in this.

Depreciation was up slightly over the same period in 2022, mainly due to the addition of the five Navigator Greater Bay vessels that were acquired at various times from and after December 2022. The non-cash movements in the mark-to-market valuations of our interest rate swaps were a loss of $5.2 million in the fourth quarter as a result of softening forward interest rates, and our interest expenses were cushioned by interest income earned on our cash balances in the quarter. Our income tax line reflects current tax and deferred taxes, mainly on our share of profits from our ethylene export terminal at Morgan's Point. Overall, our earnings per share for the quarter was $0.24 for the fourth quarter of 2023, compared to $0.13 for the same period in 2022, with Adjusted EPS up at $0.32.

As Mads mentioned, the fourth quarter 2023 results provide a record-equaling $72 million adjusted EBITDA. Taken across the full year, we're reporting the highest annual adjusted EBITDA in Navigator's recorded history at $282 million. The balance sheet, shown on slide seven, remains strong with a cash balance of over $158 million at December 31st. This compares to a minimum total liquidity covenant on all of our bank loans and credit agreements of around $50 million. This cash balance is after all of our recent buybacks, our dividends paid in 2023, and after repaying $23.8 million of the $111 million term loan and revolving credit facility, which funds remain available to be redrawn under the terms of the facility agreement. This basically means that we had around $182 million of liquidity at the end of 2023.

Our net debt capitalization was just under 35% as of December 31st, and net debt to adjusted EBITDA was 2.6x for the 12 months to December 31st. We see our cash being needed for our ethylene export expansion project until we fix finance for that later in the year, as well as for other projects and investments that enhance shareholder returns. As you'd expect, there are a number of projects that we're actively looking at. In addition, under our five pillars that we'll mention later, we'll continue to reduce our debt, look to capital distributions and share buybacks, and we're always looking at how we can renew and potentially add to our fleet. Of course, finance is very important to all of this, and as shown on slide eight, we have no loan maturities until 2025.

The maturities for 2025 include a $100 million senior unsecured bond, which we might refinance depending on investment opportunities, and the two bank facilities totaling $190 million that will likely be refinanced in a cash-positive transaction. On these 2025 maturing bank facilities, we already have commenced discussions with our lending group, and we've received very positive feedback already. We'll provide further updates on these as discussions progress over the coming quarters. On slide nine, we outline our estimated cash break-even for 2024, which is $20,705 per day, which figure includes scheduled debt repayments and our heavier dry-dock schedule in this coming year compared to 2022 and 2023. Even considering this, with this relatively low break-even level relative to charter rates, recalling our average TCE for the fourth quarter of 2023 was over $28,000, it enables Navigator to generate positive EBITDA throughout the shipping cycle.

Then, to the right on this slide is daily OpEx expectations for 2024 across our differing vessel-size segments, ranging from our smaller vessels to our larger, more complex ethylene vessels. We also provide a range for the expected annual spends for vessel OpEx, general and admin costs, depreciation, and net interest expenses, all of which are broadly in line with 2023 figures. On slide 10, we outline our historic quarterly adjusted EBITDA, showing a step up over the past 4 quarters and a continuing trend this quarter, all nicely demonstrating the very positive results we've been able to report across the whole of 2023, culminating in our highest adjusted EBITDA on record of $282 million. We also expect the first quarter of 2024 to provide a healthy result.

On the right side of slide 10, we show our historic adjusted EBITDA bar, our last 12 months bar, essentially 2023, and an annualized adjusted EBITDA based on this quarter's result. In addition, the EBITDA bars to the right show the effects of an increase in adjusted EBITDA based on incremental increases in average charter rates of $1,000 per day to give some further perspective. Then, on slide 11, we cover the important topic of our vessels' scheduled dry docks. We have 17 vessels scheduled for dry docking during 2024, with an expected total of 399 off-hire days, and with total dry docking CapEx anticipated of $22.9 million, all of which is fully budgeted. Some more detail on the expected timing and costs of these dry docks is shown below, noting that one vessel has already successfully completed its docking in January of this year.

Also, as we have announced before, we will take these dry docks as opportunities to install energy-saving technologies on those vessels at a cost of around $4.8 million, with many of those technologies having a very short payback period. Finally, we also provide here some guidance on 2025 and 2026 scheduled dry docks for those that are interested. Then, with that, at the end of a good quarter and at the end of a very strong year and with a great foundation set up for 2024, I'll stop there, and I'll hand over to Oeyvind to give you an update on our commercial position. Thank you.

Oeyvind Lindeman (Chief Commercial Officer)

Thank you, Gary. Good morning, all. Let's move to slide 13 to take a closer look at the recent developments of American gas fundamentals. The U.S. reported 210 million barrels of natural gas liquids production at year-end, which is up 10 million barrels since our last earnings call. This is a meaningful increase, but why is it important? Well remember, one barrel of natural gas liquids consists on average of 42% of ethane, 45% of LPG, and the remaining natural gas liquids. U.S. domestic consumption of ethane and LPG is relatively flat, and therefore, any additional production is more or less solely aimed for export markets. As a consequence, American midstream companies are investing in additional gas processing plants, fractionators, and terminal expansions to allow for the increase in production. This is good for gas transportation.

In general, it is great for Navigator and our growing ethane and ethylene business. The graph in the middle shows global handysize demand measured in volume transported. The volume includes LPG, ammonia, and petrochemical cargoes. As you can see, the total tons carried dropped during the last months of 2023. This is mostly due to disruptions at the Suez and Panama Canals. Many of the handysize petrochemical voyages were rerouted. Longer voyages reduce frequency of loading operations, which in turn reduce volume. However, as we can see for the first two months of 2024, the total volume is more or less tracking historical seasonality. If we look at handysize ethane and ethylene exports specifically, we see a positive development. The right-hand graph shows a positive counter-seasonal development. We see more exports from the U.S. of these cargoes compared to previous years.

It tells us that despite the longer voyages, U.S. ethane and ethylene remain highly attractive to international buyers. The updated ethylene arbitrage between the U.S. and Europe and Asia is shown on the left graph on slide 14. Growing NGL production puts pressure on the domestic price of ethane. Ethane price, which is the lower line, continues to slide. U.S. ethylene price is represented by the grey line on the left-hand graph, and European and Asian landed price is shown by the two top lines. As we can see, the arbitrage between the continents has widened since last earnings call. This is positive, of course. It is also needed to cover additional freight due to the longer voyages. However, as you see on the middle graph, ethylene export volumes decline somewhat. This is counterintuitive. The explanation lies with the restricted transits at the Panama Canal.

The number of gas carrier transits through the canal went rapidly downhill from September of last year onwards. The vast majority of vessels, including ours, were rerouted via Cape of Good Hope when bound to Asia. The duration of our round trips from Houston to Asia increased by 50%, which in turn stretched vessel availability at Morgan's Point export terminal. From a shipping perspective, this is not a bad thing, though. What is interesting to comment on is that of ethane exports. Rerouting of larger ethane vessels, which service take-or-pay supply contracts, created a demand for handy-sized vessels. We fill the cracks that open in their supply chains. This is a nice increase in the handy-sized ethane volumes, and you can see that on the right-hand graph. Our earnings days mix on slide 15 reflects the flexibility in our fleet.

42% earnings days are derived from petrochemical cargoes, 20% from ammonia, leaving only 33% from LPG when taking into account the non-utilization factor for December. Canal disruptions are knock-on effects to logistics due to cause fluctuation in utilization. Utilization is a dynamic metric. It also includes unforeseen technical issues and downtime across the fleet. We have mentioned in the past, and you heard Mads mention it too, and I will take the opportunity to mention it again, that utilization around and above 90% mark represents a very good market. Around this level, we are in an environment where freight rates are relatively healthy. These healthy freight rates are shown on slide 16. There was a knee-jerk upswing in the third-party market assessment immediately after the Panama Canal issues, particularly for the Green Ethylene Index. The assessment has now settled more in reality at quite robust levels.

What we can say is that semi-refrigerated and fully refrigerated vessels coming off time charters are being renewed at higher rates than we have seen for many years. What typically ruins the shipping part is oversupply of vessels. We have said it in previous calls, and it remains valid today. We have clear visibility of supply coming into the segment over the next few years. It is low at 7%, shown on slide 17. At the same time, the segment has 21% of existing vessels over 20 years of age. Therefore, we are quite comfortable with the supply side of things in our core segment, and that's a good thing. I'm happy to take questions on all the above topics, but first, I'll hand it over to Randy for him to go over a few exciting developments at Navigator. Randy.

Randy Giveans (EVP of Investor Relations and Business Development)

Thank you, Oeyvind. So yeah, following up on several announcements we made in recent months, we want to provide some additional details on these developments regarding a few of those announcements. So turning to slide 19, we are pleased to announce our return of capital for the fourth quarter, in line with our recently announced return of capital policy and the table below. We are returning 25% of net income, or $4.5 million, to shareholders this quarter. The board declared a cash dividend of $0.05 per share that will be payable on April 25th to all shareholders of record as of April 4th. And that will be a quarterly dividend payment totaling $3.7 million. Additionally, with our shares trading well below our NAV of at least $24 a share, we'll use the variable portion of this policy to repurchase shares.

As a reminder, between December 22nd and May of 2023, 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, of which we've used $4.1 million thus far. Now, looking ahead, we expect to purchase at least $800,000 of NVGS common shares between now and the quarter end, such that the dividend and the share purchases together equal 25% of net income. Returning capital to shareholders will remain a core focus for us. On the next slide, following up on our previous announcements regarding the expansion of our ethylene export terminal, the project is, frankly, progressing nicely. Engineering is now fully complete. All the long lead items have been ordered, and many of the key components have started to become delivered.

If you want to come down to Houston and see for yourself, just let me know. Construction is expected to occur throughout 2024 and be completed during the fourth quarter. The total capital contributions required from us for this expansion project are expected to be less than $130 million. To date, we've made five progress payments totaling $43 million, and the remaining CapEx is expected to be paid from cash on hand until those new financing agreements are completed, likely later this year. As you can see on the bottom left chart, despite some softness in December and January due to tight commodity spreads and limited vessel availability, throughput is now back to nameplate capacity, with March looking to be another strong month.

Discussions are ongoing with current and new customers for the multi-year off-date contracts, and we expect the vast majority of the additional capacity to be contracted during the construction phase throughout the coming months. Finishing on slide 21, in shipping, consistently making money is obviously important, and so is spending this money wisely. As such, we just wanted to highlight our five key pillars for capital deployment. We remain focused on reducing debt, primarily through quarterly debt amortization. We remain committed to paying out consistent cash dividends, and also will continue to repurchase shares, especially at these steeply discounted levels. We've recently renewed the fleet by selling our oldest vessels, replacing them with modern secondhand vessels, and we'll continue to grow our energy infrastructure business, most recently highlighted by the ethylene export terminal expansion and our investment in Azane Fuel Solutions for ammonia bunkering.

Going forward, management will remain diligent in being good stewards of the capital. With that, I'll now turn it back over to Mads for his closing remarks.

Mads Peter Zacho (CEO)

Good. Thanks a lot, Randy. And on this page, we'll just take a quick look back at 2023. And as you can see here, we finished the year with strong earnings improvements over previous years and with progress on pretty much all parameters. Entering into an exciting 2024, Navigator is heading in the right direction and is well positioned for the future. Our leading market position, strong customer relationships, an experienced and engaged team, and our efficient fleet of handy-sized gas carriers leave us with a really strong foundation for growth. The balance sheet is in its best shape ever, and it gives us the flexibility now to grow our business and return capital to shareholders at the same time. The best is yet to come. And with that, I'll just hand it back to you, Randy.

Randy Giveans (EVP of Investor Relations and Business Development)

Thanks so much, Mads. Operator will now open the lines for some Q&A. So to raise your hand, you can press star 9, and then you'll have to unmute yourself by pressing star 6, or if using this Zoom function, just use the raise hand function. First question, your line should be open.

Omar Nokta (Managing Director and Head of Shipping Research)

All right. Thanks, Randy. Hi, guys. This is Omar Nokta from Jefferies. Am I coming through okay?

Randy Giveans (EVP of Investor Relations and Business Development)

Howdy, Omar. Loud and clear.

Omar Nokta (Managing Director and Head of Shipping Research)

All right. Thank you, Randy. Yeah. Well, thanks for the update. Good morning, good afternoon. Just a couple of questions for me. I wanted to get a sense of how the market thus far for your ships has progressed the first couple of months. You mentioned, obviously, I think, Mads, in one of the early slides, it showed utilization being kind of maybe closer to 90% so far in Q1, which is still obviously strong, slightly down. You mentioned rates being firm. I just wanted to get a sense in terms of, say, the volatility that we saw in the larger VLGCs. We saw a good amount of volatility with rates starting the year off very strongly. Then they fell off a cliff, and then they've started to rebound again.Just wanted to get a sense from you, has that same type of dynamic translated into the handy segment?

Mads Peter Zacho (CEO)

Oeyvind, why don't you give a few words to that one?

Oeyvind Lindeman (Chief Commercial Officer)

Yes, of course, Omar. The very large gas carriers dropped off a cliff earlier in the year. That did not happen with the handysize segment. Contrary, it increased, both in the broker assessments that we show every earnings call, but it filtered through to the rates that we were able to renew at or some of the ethylene/ethane spot fixtures. So we did not experience the same as the VLGCs, but it was positive for us and remains positive.

Omar Nokta (Managing Director and Head of Shipping Research)

Okay. Thank you. And then I guess maybe just perhaps maybe for you, Randy, or just for everyone, just in terms of the terminal expansion, thinking about the contracts that could be entered into, how do you envision those starting to develop as we move through 2024? Do you think that there's you obviously have the existing nameplate capacity with a big chunk of that 1 million contracted, 1 million tons. But for the expansion part, there's the 550,000 tons that are coming on. Do we think of is that where we can see contracts coming? And then also, what about contracts for the potential upwards of, say, the extra 1.5 million? Is that become contracted also this year? Is it more of a spot?

Randy Giveans (EVP of Investor Relations and Business Development)

Yeah, Omar, I'll start on that. So in terms of the scale of contracting, clearly, we have the 94% on the existing million contracted, but those unwind over the coming years. So we expect some extensions there. And then for additional new contracting, we expect that to happen, frankly, this year. So when you look at it as a portfolio, we'll have about 1.55 million tons that we can sell forward starting January 1st, 2025, let's call it. The plan, the goal, is to sell probably 90% of that forward. I think that's the Enterprise and Navigator model for this asset. So that would be 1.4 million tons, roughly, that we'd want to have sold in advance, right? And we think the first few of these contracts, both on the upsize, extension, new customers, should be happening here in the coming weeks, months at the latest.

That's kind of your first part. In terms of contracting additional tonnage, for now, we are guaranteed the 550,000 tons from the new train, the flex train that can do up to 2.2 million tons in addition to the 1 million that we already have. Now, in terms of contracting that, we cannot contract that forward because we are not guaranteed that capacity. Now, maybe in future years, we will start buying additional guaranteed capacity, per se. But for contracting purposes, the most we could sell forward is 1.55 million tons, and then incremental cargoes would be then sold on a spot basis.

Omar Nokta (Managing Director and Head of Shipping Research)

Okay. Thanks, Randy. Okay. That's very, very clear. Final one for me, and I'll pass over. It's a separate topic, but something you guys have highlighted for sub-reporters now, and that's the ammonia trade as an area of growth. And you guys are very active in that already. And you mentioned recently seeing a good amount of cargoes there. We have seen owners in the shipping segment kind of or shipping sector kind of go after the VLACs as a way to capitalize on this trade going forward over the long term. I guess one, is that something that Navigator has an interest in to explore, the larger ammonia carriers? Or do you think that perhaps ammonia is more easily or realistically shipped on the midsize and smaller ships that you currently operate?

Mads Peter Zacho (CEO)

Maybe I can just kick us off on this, and then I'll invite my colleagues to add to it. We think that the majority of ammonia in the future is going to be transported on midsize. They're very flexible, and they're very well-suitable for ammonia trade. It's not very expensive for VLGC owners today if they want to order a new-built VLGC to add, you could say, a small cost onto that and then make it capable of transporting ammonia. So you could say it's not I don't think necessarily you should assume that these VLGC owners necessarily expect that they will be transporting ammonia on those new-built orders that they put in.

When it comes to our view on it, we are talking to a number of customers around this, and we do expect that over time, we'll be building vessels that being handy-sized or midsize vessels that will be carrying ammonia. For now, we would probably be looking to do it against an offtake contract so that we have, you could say, at least the first couple of years covered, particularly if it comes to building vessels that are propelled also by ammonia. So we do expect to take part in this market. We also expect to take part in the wider supply chain. Azane Fuel Solutions is a good example of that.

We think also upstream, replicating a setup like we have with Enterprise today on Morgan's Point for ethylene, if we can do something similar on production of ammonia or the marine logistics around it, we'd be quite interested in doing so.

Omar Nokta (Managing Director and Head of Shipping Research)

Okay. Thank you, Mads, for that. Very, very helpful caller. Thanks, guys, for the time. I'll turn it over.

Mads Peter Zacho (CEO)

Appreciate it.

Randy Giveans (EVP of Investor Relations and Business Development)

Thanks, Omar. Next caller, your line should be open. Just be sure to press star 6 to unmute yourself. Okay. While we wait for that one, we had a question come in around Azane. So Oeyvind, I'll turn this over to you. For the Azane joint venture, it seems like there is a lack of ammonia infrastructure to use as a fuel for the shipping community. How will Azane meet this need?

Oeyvind Lindeman (Chief Commercial Officer)

So it's very simple. In order to encourage the ship-owning industry to construct, be confident in constructing vessels that use ammonia as fuel, fuel needs to be available. Therefore, Azane Fuel Solutions, which is one of the first infrastructure companies covering that particular challenge, is there to unlock that problem. So since Azane, for since the investment and so forth, etc., a few people have come confidently ordering vessels with ammonia fuel, knowing that ammonia as fuel will be available in their short-sea trades. Also, oil majors, particularly one in Norway, have since then launched a tender for offshore vessels exactly using ammonia as fuel. So you can see it's the start, it's the forefront and pushing the button to start the change. And it'll happen slowly in the first instant and then grow exponentially. That is our belief, and Azane is part of that transition.

Omar Nokta (Managing Director and Head of Shipping Research)

Thank you, Oeyvind. Operator, any other questions with their hands raised? Now, I have one last question here on dry docking. Are we anticipating any delays in materials, equipment, which might delay the dry docking or make it longer? How confident are you in the schedule that you provide?

Mads Peter Zacho (CEO)

I can kick us off here and say that we are well underway in terms of planning and executing on the dry dockings that were planned for 2024. We don't expect, per se, that there will be any delays in these, and we also expect that they will stick to the schedule in terms of duration and also in terms of cost that we laid out. So yeah, there is inflationary pressure in the world around us. It's abating somewhat now, and we think we planned well for this. So we don't expect that there'll be cost overruns or delays.

Randy Giveans (EVP of Investor Relations and Business Development)

Sounds good. I know we have one other analyst looking to ask a question. Is your line available? All right. Well, you know where to find us, so we'll take that offline. But thank you again for joining us for our 4Q23 earnings call. Feel free to email [email protected] if you have any follow-ups. And we look forward to speaking with you in May for our first quarter 2024 results. Have a great day.

Oeyvind Lindeman (Chief Commercial Officer)

Thank you.