Navigator Holdings Ltd. (NYSE:NVGS) Q2 2023 Earnings Conference Call August 17, 2023 10:00 AM ET
Randy Giveans – EVP, IR and Business Development
Mads Peter Zacho – CEO
Oeyvind Lindeman – Chief Commercial Officer
Conference Call Participants
Ben Nolan – Stifel
Omar Nokta – Jefferies
You have joined the meeting as an attendee and will be muted throughout the meeting.
Navigator Holdings Conference Call for the Second Quarter 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 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 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 Zacho, the company’s Chief Executive Officer. Please go ahead, Mads.
Mads Peter Zacho
Good morning, and thank you for dialing in to 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 second quarter results 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 and 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 of 278,000 tonnes.
As previously announced, we grew our vessel capacity through the acquisition of five efficient modern secondhand 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. And the first installment of $9 million have been paid, we’re expecting to pay another $9 million in August.
The expansion will give us up to 2 million tonnes 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, a joint venture with Bumi Armada to transport CO2 from a UK-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 results in Q3. Terminal throughput in Q3 is expected to remain strong at or above main fleet 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 demand, the sea bourne 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. So this time around, you have to bear with my broken English and the very English (ph) accent that I have got, 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. The financial result was mainly driven by a stronger 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 in 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% (ph) during Q2, up from 87.4% in the same period last year. It was below the exceptional 96% that we achieved in Q1, but as you would appreciate, it’s been more than offset by higher 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 cubic meter 2019-built ethylene capable liquified gas carrier, Navigator Vega, on the April 13 and the vessel acquisition is now completed. 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 (ph). 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 be shown as operating revenues or voyage 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 continue 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 venture 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 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 of higher interest rates on the portion of our debt that is subject to floating interest rates. With fixed interest rates that have interest rate swaps were just below 50% of our debt. The tax charge for the quarter was $2 million, it is predominantly relating to both cash and deferred taxes on our share to profits from the Ethylene Terminal in Q2.
Our share results from the term loan was $6 million in 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 tonnes compared to 268,444 tonnes 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 7. 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 [indiscernible] 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 flow 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 8, 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 vessel serving as per natural amongst our younger vessels. So we expect that this refinancing when it occurs in 2025 will be the cash-positive event.
On Slide number 9, we outlined the estimated cash breakeven for 2023 at $19,460 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 different 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 rate to the expected annual spend for the G&A cost for depreciation and for interest expense preventions
On Slide number 10, we outlined 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 this second quarter results. In addition, the EBITDA bars to the right of those, show the effect of an increase in EBITDA in 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.
Thank you, Mads, and good morning, all. Moving to Slide 12. After a small drop in US natural gas liquids production during the first quarter, the EIA statistics are currently showing a strong return to US production. The final figures from May came in at a record level of nearly 200 million barrels per day production.
US 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 ’22. These volumes are happening simultaneously to inventory build in Mt Belvieu, Texas. Typically, during summer, inventory-build exports are soft, but that’s not the case for this year.
The impact of recent US 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 competitive price production of American ethylene. The price arbitrage of ethylene to Europe and Asia is widening. The current spread at least to Asia is about $400 a tonne, which is sufficient to allow for terminal handling and freight at decent returns.
Asia Pacific consumers are importing about 65% of total US 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 US domestic excess supply. Therefore, it is cheap and its exports are increasing. And 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 are starting (ph) to return to normal levels, the demand for maritime logistics for ammonia’s 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. So it matters to Navigator. Asia has reached about 50% share of the 17 million 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 US 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 US, 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. And 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 far — away from the COVID dip during 2020 and 2021. And we see the trajectory continuing.
On Page 17, the graph here illustrates the gas carrier segment 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 book lead times of more than three years, we have a pretty good line of sight of the vessel supply situation in our segments.
Randy will take over from here to give an exciting — rundown of the latest developments. Over to you, Randy.
Thank you, Oeyvind. So 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.
So as you can see 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 22, 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 NAV of above $20, we will use the variable portion of the return of capital policy to repurchase sales. 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 on.
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 tonnes per year as it is today, to at least 1.55 million tonnes and up to over 3 million tonnes per year by converting an existing ethane refrigeration train to also refrigerate ethyl, 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.
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 and 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 ’23 throughput, reaching a new quarterly record hot of 278,000 tonnes. The slight dip in July, which is due to an early loading of a cargo in late June and August is already trending higher. Discussions are ongoing, current and new customers for multiyear 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 second-hand type vessels. Starting with the sale on May 2, 2023, we sold our oldest vessel, the Navigator Orion, a 2000-built 22,000 cubic meter 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 acquiring 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 costs, roughly $49 million paid from our available cash. So 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 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 [indiscernible] vessels. So just take a look at that middle picture and imagine yourself climbing on board that beautiful ethylene carrier.
Later that evening, with the management team and some members of the Board of Directors, we will host a dinner for our analysts and investors. 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 heat, the weather will be lovely. So you won’t want to miss it. We really hope to see you in November.
And with that, I’ll now turn it back over to Mads for closing remarks.
Mads Peter Zacho
Perfect. Thanks a lot, Randy, perhaps. Yeah, just to round it off and I just wanted to clarify that to 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’s Point, with more to come once the expansion is complete by end of ’24.
The balance sheet is in its best shape ever with an appropriate level of debt and also recently refinanced in portfolio. This gives us capacity for further growth, balancing growth, redistribution of capital through dividends and further share buybacks, and 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 and significant and were quickly picked up by the Webber Research 2023 ESG Scorecard. We now ranked seventh among 64 shipping companies and we have more initiatives ready to climate up further. So looking forward to seeing you in November in Houston, and thank you very much.
Back to you, Randy.
A – Randy Giveans
Thank you, Mads. So, operator, we will now open the lines for some Q&A. [Operator Instructions] So first question, your line should be live.
Hey, guys. Did I — can you hear me? Am I unmuted?
Loud and clear.
Mads Peter Zacho
Hey, good. Figured it out. Hey, good quarter. 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. 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?
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 positive. Now for the industry, for the gas industry, any inefficiencies or 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 of view, that’s a good thing. 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 nine transit 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 of view. For us, some of our midsized ships that are trading on ethane, so taking ethane from US 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. So they — 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 handysize 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.
Now, 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 and that’s an entirely different question. But for now, it brings some positive implications to our freight market.
Okay. That’s helpful. And I appreciate all the color there, Oeyvind. I guess, for my second question and I’ll turn it over. We did see — there’s hardly anything in order, but we did see a different shipping company, or as a multi-gas carrier in last month or so that can do ammonia, CO2, LPG, all sorts of different things. I’m curious if that is something that you guys have considered doing just you’re going through the fleet renewal program as Randy have 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?
Mads Peter Zacho
If I can just start out and then you can complement me, Oeyvind and Randy. 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. And we will be working with a number of projects as we do through our Bluestreak joint venture. And 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 risk of building that on speculation right now it’s worthwhile.
Sorry. Excuse me. All right. I appreciate. Thank you, guys.
Thank you, Ben. Okay, operator, I see Omar has his hands up.
Hi. Thank you. Hi, Randy. Hi, team. Good morning. Thanks for the update. 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%, 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? Can we expect the rate to also be climbing with utilization here in the near term?
Thanks, Omar. We’re very — the prepared remarks was really about, we typically have guided on utilization. And you might have picked up that the bottom in utilization during the summer months was higher than in previous years during the same period, and it also has shopped 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. 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 than 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. 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 progress 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.
Thanks. Thanks, Oeyvind. I appreciate that. And maybe just one follow-up in terms of the fleet renewal and your activity in the S&P market. I wanted to ask about your non-handy ships, in terms of, I know the small LPG carriers perhaps aren’t necessarily core to the main business, but what about the five 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?
Mads Peter Zacho
We’re very happy with our midsized vessels. We think they have built with a rapid technology. They are 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, it’s been operated 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. So I think that we define on — for sure, our only four markets have been in the handysize, but also the midsize segment.
Okay. Got it. Thanks, Mads for that. That’s it from me. I’ll turn it over.
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.