Navigator Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 17, 2023

There are 5 speakers on the call.

Operator

Welcome to the Navigator Holdings Conference Call for the Second Quarter 2023 Financial Results. We have with us Mr. Mads Peter Zaccot, Chief Executive Officer Mr. Oeyvindeman, Chief Commercial Officer and myself, Randy Gibbons, Executive Vice President of Investor Relations and Business Development in North America. I must advise you that this conference is being recorded today.

Operator

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 forecast. 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 Zacco, the company's Chief Executive Officer.

Operator

Please go ahead, Mads.

Speaker 1

Good morning. Thank you for dialing into the Navigator Gas earnings 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 Q2 result came in similar to Q1 and much stronger than Q2 2022 With revenues of $135,000,000 adjusted EBITDA just below $70,000,000 and net income of $27,000,000 The result was mainly driven by higher chart rates, whereas vessel utilization was below that of Q1. Our balance sheet is robust with cash of $180,000,000 at the end of the quarter.

Speaker 1

The initial $50,000,000 share purchase program was completed in Q2 and a further €25,000,000 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 of 200 and 78,000 tonnes. As previously announced, we grew our vessel capacity through the acquisition of 5 efficient modern secondhand vessels. The takeover was completed faster than originally planned and completed mid April.

Speaker 1

Expansion of the ethylene export terminal Morgan's Point has come off to a good start and the first installments of $9,000,000,000 have been paid and we're expecting to pay another $9,000,000 in August. The expansion will give us up to 2,000,000 tonnes of initial export capacity. Total CapEx for our share is expected to be around $125,000,000 and completed by the end of next year. We sold Navigator Brian in May I thought book value and we also phoned Blue Street, a joint venture with Gumi Yamada to transport CO2 from U. K.-based stranded emitters.

Speaker 1

Outlook is good. Q3 utilization is expected to be above 90%, which is high in a historical context. Time travel 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 slow long distance to Asia. The global HETYSIZE order book has not changed much.

Speaker 1

So in combination with good demand 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. This time around, we have to bear with my broken English and the very Danish accent that I have, but I apologize for that. Slide 6, please. The Q2 financial result was a continuation and even slight improvement compared to previous quarter and a clear improvement over the same period last year.

Speaker 1

The financial result was mainly driven by strong top line. Total operating revenue of $135,000,000 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 And also better than the 25,620 earned in Q1. Utilization also increased to 89.1% during Q2, up from $87,400,000 in the same period last year. It was below the exceptional 96% that we achieved in Q1, But as you can appreciate, it's been more than offset by ITC rates.

Speaker 1

Our Greater Bay joint venture, which is 60 Stand owned by us acquired its final vessel during the Q2 of the year, the 3rd 22,000 cubic meter 2019 builds ethylene capable liquefied gas carrier Navigator Vega on April 13 and 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 Duna boom reduced to almost 1,000,000. Following the acquisition of the 5th vessel by the Great update on 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 voyage expenses from the LumaFoo Collaborative agreements. Our vessel operating expenses or OpEx as we call it, increased by 11.3% to $43,000,000 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.

Speaker 1

This was a reduction from the previous two quarters as we continue focused on our vessel operating costs. Depreciation of our vessels increased slightly by 2.3% or $700,000 as the additional Greater Bay Area and Veta vessels join 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 $4,900,000 from the sale of of Navigator Ryan in the month of May. There was also an unrealized gain on our derivative Instruments of $3,200,000 during the Q2 as the fair value of our fixed interest rate and swaps increased.

Speaker 1

Interest expense for the Q2 was $16,900,000 compared to the $11,500,000 for Q2 of 2022, as a result, higher interest rates on the portion of our debt that is subject to floating interest rates. We've fixed interest rates or have interest rate swaps for just below 50% of our debt. The tax charge for the quarter was $2,000,000 It's predominantly relating to both cash and deferred taxes on our shareable profits from the ethylene terminal in Q2. Our share result from the terminal was $6,000,000 in Q2, down from the $6,800,000 for the comparative quarter of last year. As a result, lower gas prices and therefore reduced throughput rates.

Speaker 1

Throughput of 270 7,582 tonnes compared to 268,444 tonnes during the same quarter of last year. Net income for the Q2 was $26,600,000 or $0.36 per share. If we turn to the balance sheet on Slide 7, you can see that it remains strong with a cash balance of of $180,000,000 at June 30. This compares to a minimum liquidity covenants on our bank loans and credit agreements of $50,000,000 This cash balance is after buying back $50,000,000 worth of Boom shares during the first half of the year. The strong cash balance will be used for capital redistribution, the ethylene terminal expansion.

Speaker 1

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 5 Greater Bay joint venture vessels, Our net debt to capitalization is low at 36.9 percent 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 8, please. Maturities of 2025 includes the $100,000,000 senior unsecured bond, which may or may not be refinanced depending on any investment opportunities that may occur. The 2 bank facilities totaling $190,000,000 will likely be refinanced at a higher than current loan to value as a vessel serving as collateral amongst our younger vessels.

Speaker 1

So we expect that this refinancing when it occurs in 2025 will be a cash positive event. On Slide number 9, We outlined the estimated cash breakeven 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, slide 8, 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 FME vessels. We also provide rates for the expected annual spend for the G and A cost for depreciation and for interest expense related interest.

Speaker 1

On Slide number 10, we outline our historical quarterly EBITDA Showing a step up over the past 7 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, Slide 10, we show our historical EBITDA balance with the past 12 months incorporating the latest quarter and an annualized EBITDA based on this 2nd quarter result. In addition, the EBITDA bars to the right of those showed 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, Maarten. Please go ahead.

Speaker 2

Thank you, Mads, and good morning all. Moving to Slide 12. After a small drop in U. S. Natural gas liquids production during the Q1, the EIA statistics are currently showing a strong Return to U.

Speaker 2

S. Production. The final figures from May came in at a record level of nearly 200,000,000 barrels per day production. U. S.

Speaker 2

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 'twenty two. 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.

Speaker 2

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 2 months, further increasing the competitively priced production of American Ethylene. The price arbitrage of ethylene to Europe and Asia is widening.

Speaker 2

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.

Speaker 2

Similar to ethylene, ethane as a feedstock also enjoys U. S. Domestic excess supply. Therefore, it is cheap and its exports are increasing. And remember, all our ethylene capable ships can also carry ethane.

Speaker 2

On Page 14, please. Ammonia has become an important commodity for us. Despite natural gas prices have 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.

Speaker 2

European ammonia importers tend to favor handysize and medium sized vessels. 7 out of the 9 Gas carriers we currently have contracted for ammonia employment are servicing these European consumers and ports. So it matters to Navigator. Asia has reached about 50% share of the 17,000,000 tonnes of yearly amount of ammonia exported by shares. However, we strongly believe that the light blue line in the graph to the right will increase over the next Few years as U.

Speaker 2

S. Gulf blue and green ammonia production comes 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.

Speaker 2

And we're also happy to see that utilization has bottomed out and in fact increased earlier than previous summer months. This gives us a certain degree of confidence to guide 3rd quarter utilization for the 3 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 2021, And we see the trajectory continuing. On Page 17, The graph here illustrates the gas carrier segments and the respective order book and age profiles.

Speaker 2

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 book lead times of more than 3 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 of the latest developments. Over to you, Rand.

Operator

Thank you, Oeyvind. So following up on some several announcements we made in these months, we want to provide additional details on those updated developments regarding a few of these announcements. So as you can see here on Slide 19, we are pleased to announce our return of capital for the Q2 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 percent of net income or $6,700,000 to shareholders this quarter. The Board has declared a cash dividend of $0.05 per share, payable on September 22, 2023 to all shareholders of record as of September 8, 2023, equating to a quarterly dividend payment of $3,700,000 Additionally, with NDA shares trading well below our management of above $20 We will use the variable portion of the return to capital policy to repurchase shares.

Operator

As a reminder, between December and this past May, we repurchased 3,800,000 shares at an average price of $13.12 per share for a total of $50,000,000 Subsequently, the Board authorized a new $25,000,000 repurchase program. As of we will repurchase approximately $3,000,000 of common shares between now and quarter end such that the dividend and share repurchase together equal 25% of net income, dollars 6,700,000 Returning capital to shareholders is relatively new to that year, 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 fifty-fifty joint venture with Enterprise Products Partners over at Morgan's Point, we agreed to a capital project to increase the export capacity from approximately 1,000,000 tons per year as it is today to at least 1,550,000 tons and up to over 3,000,000 tons per year by converting an existing ethane refrigeration frame to also refrigerate ethylene, and 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.

Operator

The total capital contributions required from us to the joint venture are approximately $125,000,000 the majority of which will be paid in 2024. You can see the schedule in the bottom right corner. We contributed the 1st progress payment of $9,000,000 in April and the next payment is scheduled for late August. Remaining CapEx is expected to be paid from cash 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 2nd quarter 23 throughput reaching a new quarterly record high of 278,000 tons.

Operator

The slight dip in July, which is due to an early loading of the cargo in late June August, is already trending high. Discussions are ongoing with current and new customers for multiyear offtake contracts with the vast majority of the additional guaranteed capacity expected to be contracted during the construction days next year. On Slide 21, our fleet renewal program continues to be implemented as we sell our oldest vessels and replaced them with modern secondhand luggage. Starting with the sale, on May 2, 2023, we sold our oldest vessel, the Navigator Orion, a 2,000 built, 22,000 cubic meter LPG carrier to a third party for $20,900,000 resulting in a $4,900,000 profit. That leaves us with only 3 of our original Navigator vessels built in 2000 and we continue to engage buyers who are showing interest to acquire those older vessels.

Operator

On the acquisition side, our new joint venture owned 60% by Navigator and 40% by Granite Gas has now taken delivery of all 5 vessels, completing earlier than previously expected. As a reminder, the total cost is $233,000,000 65% was financed by $151,000,000 bank loan with 60% of the remaining costs, roughly $49,000,000 paid from our available cash. So as a result of this

Speaker 1

S and P activity,

Operator

our current fleet consists of 56 vessels, average age of right at 10 years and average size of 21,000 Cubic Meters. Now 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. So on Wednesday afternoon, November 15, we'll be hosting our Morgan's Point tours of the ethylene export terminal and one of our vessels. So just take a look at that middle picture and imagine yourself climbing on board that beautiful ethylene character. Later that evening, with the management team and some members of the Board of Directors will host a dinner for our analysts and investors.

Operator

And then the next morning, Thursday, November 16, 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. And unlike today's theme, the weather will be lovely, so you won't want to miss We really hope to see you in November. And with that, I'll now turn it back over to Mads for closing remarks.

Speaker 1

Good. Thanks a lot, Randy. Just to round it off and just want to clarify that just emphasize here that Navigator is 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 Point with more to come once the expansion is complete by end 2024.

Speaker 1

The balance sheet is in its Best day 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. And now we will do both with dividends to be received on the twenty 2nd September and share buybacks to be initiated in minutes. We published our annual ESG report in June. I hope you had a chance to read it.

Speaker 1

Our efforts in making our business more sustainable and significant and were quickly picked up by the Webroot Research 2023 ESG scorecard. We're now ranked 7th among 64 shipping companies, and we have more initiatives ready to climb up further. So looking forward to see you in November in Houston, and thank you very much. Back to you, Randy.

Operator

Thank you, Mads. So operator, we'll now open the lines for some Q and A. So first question, your line should be open.

Speaker 3

Hey, guys. Did I can you hear me? Am I unmuted?

Operator

How have you been?

Speaker 2

Good, Matt.

Speaker 3

Hey, good. Figured it out. Hey, Dick Hor, I have a couple of questions. First, Oeyvind, you talked about it seems like more and more of Cargoes of all varieties are going to Asia. But at the same time, I mean, we're seeing seemingly news every day about Congestion around the Panama Canal, water levels and so forth.

Speaker 3

I assume that's a Positive for your business, but is there any way to sort of think about the implications or how positive it is? Is it Modest or something that's making a meaningful difference?

Speaker 2

Ben, excellent question. It's something we're looking at on a daily basis because we our ships transit there every week. And it has an impact positively. Now for the industry, for the gas industry, any inefficiencies From a shipping point of view, takes capacity out of the available market. So that is if you look at it from a shipping point

Speaker 1

of view, that's a good thing.

Speaker 2

And that is very much applicable for the bigger ships that has to transit through the new Panama locks. And the new locks Only allow for 9 transits each way each day. And the gas carriers are competing with The bigger ships of containers and LNG and so forth. So we're starting to see large delays there, whereby ships are being deviated around the Cape if they go to Asia. So clearly, a positive from a shipping capacity point

Speaker 1

of view.

Speaker 2

For us, some of our midsized 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 handysize ethylene ships are quite nimble.

Speaker 2

So they And we have a pretty fixed schedule on them. So we can reserve canal slots and so forth in advance. So we see Less of an impact on the hand besides 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.

Speaker 2

Now the other question that you might 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, ethaneethylene, and that's an entirely different question. But for now, It actually brings some positive implications to our freight market.

Speaker 3

Okay. That's helpful. And I appreciate all the color there, I guess for my second question and I'll turn it over. We did see There's hardly anything on order, but we did see a different shipping company. We're we have a multi gas carrier in last month or so that Can do ammonia, CO2, LPG, all sorts of different things.

Speaker 3

I'm curious if that is something that you guys have considered doing, Just you're going through the fleet renewal program, as Randy outlined. There's not much on order. You still have some older assets that you're looking to divest. Any thoughts about Maybe replacing them with something like that?

Speaker 1

Yes. I can just start out and then you can complement me, Oeyvind. It's unlikely at this point in time that we'll be building ships that can transport CO2 as well as other gases. Right now, there's still some uncertainties around the technology. It's far from certain that given CO2 Technologies such as low pressure or mid pressure is going to be the right one.

Speaker 1

We will We're working with a number of projects as we do through our Blue Street joint venture. And here, we will We're 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 risk of building that on speculation right now is worthwhile.

Speaker 3

Sorry, it's muted. All right. I appreciate it. Thank you, guys.

Operator

Thank you, Ben. Jay, operator, I see Omar has his hand Hi.

Speaker 4

Thank you. Hi, Randy. Hi, team. Good morning. Thanks for the update.

Speaker 4

And obviously, as you have continued to highlight, it Seems like the past few quarters, the business continues to thrive and EBITDA is pushing higher. I wanted to ask The TCE rate you guys captured on the Handy fleet this past quarter was at 27,000 plus number, even with utilization having come off towards 89,000, 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 utilization for 3Q now being above 90%. What do you think of what can you give us in terms of guidance on the rate?

Speaker 4

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

Speaker 2

Thanks, Omar. We're very the prepared remarks were really about we typically guide on utilization. And you might have picked up that the bottom in utilization during summer months was higher than in previous years during the same period and it also has shut up. So we mentioned in the slide deck that July was close to 94%. So that's a big jump from the total of Q2.

Speaker 2

So 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 less that this year. So 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.

Speaker 2

I can't give you more Guidance on the specific rates that we are seeing right now except what your colleagues are What the different ship brokers and so forth are putting out in the market. So there's a slide deck on that and You can take a look, but it's moving in the right direction.

Speaker 4

Thanks, Lloyd, and I appreciate that. And maybe just one follow-up in terms of The fleet renewal and your activity in the S and P market, wanted to ask about your non handyships in terms of I know the small LPG carriers perhaps aren't necessarily core to the main business, but what about the 5, 12,000 ethylene carriers? How are those Since the merger, how are those transitioned into the fleet? Or do you view those as a meaningful piece of Navigator going forward? Or do you think those are monetizable?

Speaker 1

We're very happy with our midsize vessels. We think they have built with the Raptor Technology, they're very efficient ships, and we think they have a bright future ahead within Navigator to serve 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. So we will think over time that there would be also gradually larger ships serving The markets that we're currently well positioned in.

Speaker 1

So I think that we define For sure, our only total markets have been the anti size, but also the mid size segment.

Speaker 4

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

Operator

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

Operator

Have a great

Speaker 1

day. Thank you.

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Key Takeaways

  • Navigator reported Q2 results with $135 M revenue, $70 M adjusted EBITDA and $26.6 M net income, achieving 89% vessel utilization and ending the quarter with $180 M cash.
  • The company completed a $50 M share buyback in Q2, authorized an additional €25 M program, and initiated its first ever dividend of $0.05 per share under the new capital return policy.
  • Through its Greater Bay joint venture, Navigator acquired five modern secondhand ethylene-capable vessels in mid-April and sold its oldest ship, lowering the fleet’s average age to about 10 years.
  • The Morgan’s Point ethylene export terminal expansion is underway with a total $125 M capex commitment to increase capacity from 1 Mtpa to over 3 Mtpa by end-2024, with the first $9 M payment already made.
  • Strong US LPG and ethylene exports, a tightening global orderbook and expected Q3 utilization above 90% underpin a “better than long-term” charter rate outlook.
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Earnings Conference Call
Navigator Q2 2023
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