Navigator Holdings Ltd. Q4 FY2022 Earnings Call

Welcome to the Fourth Quarter Financial Results for 2022. We have with us Mads Peter Zacho, Chief Executive Officer; Niall Nolan, Chief Financial Officer; Oeyvind Lindeman, Chief Commercial Officer; and I am Randall Giveans, Executive Vice President of Investor Relations and Business Development in North America. This conference is being recorded today. During the presentation, we will be making various forward-looking statements. These statements include future expectations, plans, and prospects from both the financial and operational perspectives and are based on management assumptions, forecasts, and expectations as of today. They 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 can be found in our annual and quarterly reports filed with the Securities and Exchange Commission. I will now hand it over to Mads Peter Zacho, our Chief Executive Officer. Please go ahead, Mads.

Thank you, Randy, and good morning. Thank you for listening in. Please go to Slide number 3. Our fourth quarter came in substantially stronger than the previous quarter, with revenues of $123 million, EBITDA just below $60 million, and net income of $10 million. Our balance sheet is robust, with cash of $153 million plus $20 million of undrawn facilities at year-end. The delivery of our balance sheet continued with net debt reaching just over $700 million by year-end. This is despite us buying back shares since mid-December. We finalized our refinancing efforts for now, actually just yesterday. And currently, we have our next maturities only from 2025 and onwards. So our next discussions with our banks will certainly be around growth projects. Commercially, our utilization came in just over 94% in Q4 compared to our guidance of above 90% and above the 91% reached in Q4 2021. Terminal throughput was 263,000 tonnes in Q1, that ran above the nameplate capacity which, as you may recall, for now is about 1 million tonnes per year. Seaborne ammonia transport was strong, and we had 10 vessels transporting ammonia during the quarter. Fortunately, we'll grow our vessel capacity through the acquisition of five secondhand vessels, vessels that we know really well because we have commercially managed them over the past few years. We expect to take over all five a bit faster than what we had previously announced, most likely will be done by April. And that's great, of course, in the current market which is pretty robust. Our joint venture with Enterprise successfully continues to develop. We continue to run at capacity, and we have great plans for expanding the terminal, and Randy will talk to that in a little bit. The outlook seems right for now, Q1 is almost over, and we've seen high utilization above 95% so far this quarter. The terminal throughput in Q1 is expected to be strong again at around 260,000 tonnes, and ethylene is in high demand in both Europe and Asia. Handysize rates have gradually firmed and Oeyvind will talk a little bit more about those in just a few minutes. So, I guess this makes us confident that our financial performance in Q1 of this year is going to be robust. This current healthy demand for seaborne gas transport is well complemented by a modest handysize vessel order book and also an aging global fleet. So with that intro, I'll just leave it to Niall who will take you through the financial results from the last quarter. Please, Niall.

Thank you, Mads, and good morning to everybody. As we show here on Slide 6, the net income and EBITDA for the fourth quarter was $10 million and $59.4 million, respectively; an improvement on the third quarter of 2022, giving a trajectory that is expected to continue into 2023. The total operating revenues for the fourth quarter were $123.3 million, $9 million less than the $132.3 million for the comparative fourth quarter of last year, but $16.5 million higher than the $106.8 million achieved in the third quarter of 2022. The $9 million decrease for the comparative fourth quarter was threefold. First, we had a lower contribution of $7 million from the nine smaller vessels we have in the Unigas pool. Second, there was a decrease of $5 million as a result of pass-through voyage costs due to having more vessels on time charters than spot charters in the comparative period. Thirdly, $1.7 million resulted from having 84 less available days during the fourth quarter of '22 relative to the fourth quarter of 2021. However, these decreases were offset by an increase of $4 million as a result of increasing charter rates which rose from just under $22,500 per day for the fourth quarter of 2021 to $23,621 per day for the fourth quarter of '22, an increase of $1,100 per vessel per day, as well as an increase of $2.6 million due to increased utilization which, as Mads said, increased from 91.4% for the fourth quarter of 2021 to 94.1% for the most recent quarter. We had three vessels in dry dock for scheduled surveys during the fourth quarter, taking the total number of dry dockings to 12 for 2022. In aggregate, these vessels were in dry dock for a total of 375 days during 2022 and cost a total of $16.9 million. As we have no new builds on order, these reduction costs are the only capital expenditures the company had during 2022. For 2023, we expect to have seven vessels enter dry dock at a total budgeted cost of $9.2 million. The operating revenue from the Luna Pool was $6.3 million, representing our share of the other participants' net revenues, with the voyage expenses from Luna Pool being $5.5 million which represents the other participants' share of our net revenues from the pool. Consequently, the other pool participants' vessels contributed $800,000 to us during the fourth quarter and $1.4 million over the 12 months of 2022. Voyage expenses, as I referred to a moment ago, decreased by $5 million or 22% during the fourth quarter to $16.9 million, which had the effect of reducing revenue as these are pass-through costs. Our vessel operating expenses increased by 8.7% to $43.9 million for the fourth quarter compared to the fourth quarter of 2021, resulting in vessel operating expenses per vessel per day increasing quarter-on-quarter by 12.9% to $9,058. This was primarily because of timing, ordering, and delivering spare parts, with the average vessel operating expenses per vessel per day for the full year of 2022 being $8,210 per day, a level at which we expect to maintain or even improve during 2023. Depreciation of our vessels increased by 19% or $4.9 million compared to the fourth quarter of 2021, mainly due to the reduction in the estimated useful life of our vessels from 30 years to 25 years, which occurred on January 1, 2022. Depreciation for 2023 is expected to be approximately $130 million to $134 million, an increase from 2022 as a result of the additional five ethylene vessels acquired or to be acquired from Pacific Gas. General and administrative costs decreased by 7.4% for the fourth quarter and 5% for the full year as we maintain tight control of our overheads and additional costs incurred in 2021 associated with the Ultragas transaction and the running of our New York office which we closed in mid-2022 that have not reoccurred in 2022. Other income, being management fees earned from the other participants of our management of the Luna Pool, were $100,000 for the quarter and $364,000 for the full year. We will not benefit from these management fees going forward as the five vessels to which they relate have been or will be purchased by the joint venture and fully consolidated into our financial statements. We redeemed our $600 million Norwegian bond on December 23, 2022, and the foreign exchange loss incurred during the quarter relates to the retranslation of that bond between September 30 and when the debt was repaid, resulting from the strengthening of the Norwegian kroner relative to the U.S. dollar. Conversely, there was a gain on the cross-currency interest rate swap which crystallized or was realized on the repayment of the bond and the consequential termination of that swap. Regarding the Norwegian kroner bond redemption on December 23, we've paid a premium of 1.79% or $1.1 million to those bondholders on the redemption date and wrote off $212,000 of deferred financing costs associated with that bond. The interest expense for the fourth quarter was $14 million compared to $10.7 million for the fourth quarter of 2021 due to rising interest rates on the proportion of our debt that is subject to floating interest rates. We have fixed interest rates or have entered into interest rate swaps for approximately 52% of our debt as of December 31, 2022, at LIBOR or SOFR levels that are fixed between 0.36% and 2%, in addition to our 8% fixed rate $100 million unsecured bond. Our share of results from the ethylene export terminal was $7.9 million for the quarter based on throughput charges relating to 263,000 tonnes of ethylene exported through the terminal compared to 234,000 tonnes during the fourth quarter of last year and significantly higher than the 190,000 tonnes throughput during the third quarter of 2022. In aggregate, during 2022, there were 987,500 tonnes of ethylene throughput, which is on or about the nameplate capacity, and we expect this level of volume to continue into 2023. The profit from our share of the ethylene export terminal for the full year 2022 was $25.8 million, which in addition to the $5.3 million for our share of the terminal's appreciation gives a terminal EBITDA for 2022 of $31.1 million relating to our share. The tax charge for the full year 2022 was $5.9 million, of which $5.1 million relates to the 21% U.S. tax charge on our share of the profits from the ethylene export terminal. Over $3.8 million of this terminal tax relates to non-cash taxes. Net income for the fourth quarter was $10 million, as I mentioned, or $0.13 per share, giving a total net income for 2022 of $53.5 million or $0.69 per share. Moving to the balance sheet on Slide 7. The company ended the year with a cash balance of $153.2 million against the minimum liquidity covenant from our various banks and credit agreements of $50 million, thereby giving us significant headroom. The cash balance is after paying the $600 million Norwegian kroner bond referred to earlier, which relates to about $72 million. As of December 31, our total debt stood at $862 million. As shown on Slide 8, during the last quarter of 2022, we extended the maturity of one of the bank loan facilities by one year from 2024 to 2025, refinanced another facility that tranches maturing in 2022 and 2023 by means of a new $111.8 million facility, and we entered into a $151.3 million facility for our 60%/40% Greater Bay joint venture to part finance the acquisition of the five ethylene carriers from Pacific Gas. The first of these vessels was acquired in December 2022, upon which we drew down $27.5 million on the loan. A second was acquired in January this year, and the remaining three vessels are expected to be acquired—one this week, one next week, and the final vessel expected to be acquired sometime next month in April. We will pay 60% of the remaining equity portion on these vessels, which equates to approximately $49.8 million from existing cash resources. Yesterday, as Mads already referred to, we entered into a new $200 million facility, which will be used to refinance two existing loan facilities that are scheduled to mature in 2023 as well as providing approximately $65 million for general corporate purposes. This loan has a six-year tenor maturing in 2029 and has a cost of LIBOR plus a margin of 2.1%. On Slide 9, we outlined the estimated cash breakeven for 2023 at $19,170 per day. This low level enables us to generate EBITDA throughout the full shipping cycle. In the box on the right-hand side of Schedule 9, we provide our daily OpEx expectations for 2023 across the different vessel segments, ranging from $7,500 per day for the smaller vessels to $10,100 a day for the larger, more complex ethylene vessels. We also provide a range of the expected annual spends for G&A costs, depreciation, and interest expense. On Slide 10, we outlined our historical quarterly EBITDAs showing a marked increase over the past five quarters, a trend we expect to continue, along with the effects of our EBITDA on the graph on the right, if our average charter rates were to increase by $1,000 per vessel per day in increments. And with that, I'll hand you over to Oeyvind for his remarks.

Thank you, Niall, and good morning, all. If you move to Slide 12, we can see that EIA is showing an increase in American LPG exports during the fourth quarter of '22. Despite a decrease in natural gas liquids production during the month of December, the winter storm disruption is now more or less back up to where it was pre-storm. Despite the lower production, LPG exports grew during the period. This can be explained by an unseasonably high LPG inventory in the States combined with very low domestic consumption. U.S. propane exports continue to rise into 2023. We can also see that for the handysize segment, where the exports have followed suit with increases for March of this year. Propane is widening its competitiveness compared to oil. Both energy consumers and petrochemical consumers are looking to LPG due to its current price competitiveness; a widening gap between propane and oil favors demand centers which are able to switch between the two. Similar trends can also be applied to American ethane and ethylene, which we can see on Page 13. That excess production of ethane translates to a highly competitive base for domestic and international ethylene producers. Argus is quoting the market price for one tonne of ethane at $180 a tonne at the beginning of March. This favors producers utilizing ethane as feedstock in their production of ethylene. The American ethylene arbitrage to both Europe and Asia is widening. The price differentials have been increasing over the last few months, and physical exports have been heading to both continents across the Atlantic Ocean and across the Pacific Ocean via the Panama Canal. The ethylene export terminal is running at nameplate capacity, and we expect this to remain for the first quarter and into the second quarter of 2023. Ethane exports are showing continued robustness, and we anticipate some growth in conjunction with ethane terminal capacity cuts as investors can easily switch between ethane and ethylene, and we have a handful of ethylene vessels currently employed in the ethane trade. In addition to energy security, the Europeans have had their hands full in replacing lost supply from Ukraine. If you take a look at Page 14, it clearly shows the change in European ammonia marine logistics. Europe recorded a historic high of seaborne ammonia imports for the fourth quarter. The handysize segment benefited the most out of the other gas carriers, enabling consumers to source ammonia from further places. One-third of our handysize vessels were employed in ammonia in the fourth quarter, which is double the number of vessels compared to the fourth quarter of last year. Natural gas prices, which are relevant to the production of ammonia as natural gas is an essential feedstock, have since come down from their winter highs. The price reduction is expected to put a damper on the current ammonia imports. However, we believe ammonia has a tremendous growth trajectory going forward, both in terms of playing an increasingly important role in providing food security through enhanced crop growth and also within the energy transition where it can enable lower carbon fuels and energy. We can clearly see the positive impact on Page 15 with additional vessels trading in ammonia, stronger LPG demand pull during the winter months, and continued ethylene exports. These three elements positively impacted our utilization during the fourth quarter. As has been mentioned before, utilization has continued into the first two months of this year. Naturally, higher demand pull on the product side combined with higher utilization lends itself to a solid base for rates to improve. Slide 16 shows the latest uptick across all gas carrier segments including the handysize semi-refrigerated, handysize fully refrigerated, and handysize ethylene subsegments. Spot rates for oil charters take into account the supply and demand fundamentals at that specific point in time, area, and cargo, and they can fluctuate quite a bit. The assessed time charter rates which this graph illustrates are based on a 12-month duration. It reflects third-party opinion of what time charter rates should be today should a 12-month contract be executed at that point in time. We can confirm that time charters that are renewed are repriced at higher rates compared to what they were in 2022. We have traditionally had a 50-50 split on cover across the fleet. However, at the beginning of this year, we selectively reduced this ratio to about 40-60, increasing our spot market exposure. The rate environment, as in all shipping sectors, is influenced by the availability of vessels. Our segment has a limited order book, as you can see on Slide 17, which shows that out of the 122 vessels that are currently trading, 25 are above 20 years of age. The shipyards are occupied with LNG tankers and bulkers, and therefore, timing for any new gas carrier supply is limited to 2026 onwards. The yard bottleneck provides us with clear visibility of the vessel supply balance for the next three years, which is a good thing. I will now pass you on to Randall Giveans who will take you through some of the current company milestones. Over to you, Randy.

Thank you, Oeyvind. So following up on several announcements made in late 2022, we want to provide additional details on recent developments regarding three of those announcements. Starting on Slide 19, our fleet renewal program is making significant progress as we are selling our oldest vessels and replacing them with modern second-hand tonnage. On November 23, 2022, we sold our oldest vessel, Navigator Magellan, a 1998-built, 22,000 cbm LPG carrier to a third party for $12.7 million. We have these vessels with only four vessels built prior to 2008 or in the year 2000, and we continue to engage buyers showing interest in acquiring four vessels above 20 years of age. On the acquisition side, in September of 2022, Navigator Holdings announced that we entered into a joint venture agreement with Greater Bay Gas Company to acquire five ethylene-capable vessels. Following this announcement, our new joint venture, owned 60% by Navigator and 40% by Greater Bay Gas, has already taken delivery of two of the five vessels thus far, and the remaining three vessels are expected to be delivered in the coming weeks earlier than previously expected. As a reminder, the total cost will be $233 million, with 65% financed by the $151 million bank loan with the remaining costs, roughly $50 million, payable from available cash. On Slide 20, we want to provide an update on our share repurchase program. In October of 2022, we announced the Board's authorization for a share repurchase program of up to $50 million of NTTS common stock to be implemented via open negotiated transactions or in accordance with an approved trading plan. Following the repayment of the bonds in December, we commenced the share buyback program, and through March 17, we have repurchased 2.02 million shares at an average price of $12.57 per share, totaling a little more than $25 million, leading to roughly $25 million remaining on the initial authorization. To note, the year-to-date average daily trading value has increased to roughly 180,000 shares per day or $2.3 million, with many days above 300,000 shares in recent weeks. Going forward, we expect to continue to repurchase shares as we believe the share price remains significantly undervalued relative to our net asset value and the current earnings backdrop. The share price was $15 last June and $14 earlier this month, and our outlook is more constructive, with our base stronger now than either of those times. Given our aforementioned financial flexibility, we have the firepower to further repay debt, fund our CapEx, and continue repurchasing shares. Finishing on Slide 21 in our most recent announcement, a few weeks ago, we announced additional details for the expansion of our ethane export terminal under our existing 50-50 joint venture with Enterprise Products Partners. We have reached a capital project to increase the export capacity from approximately 1 million tonnes per year to at least 1.55 million tonnes and up to 3 million tonnes per year. The total capital contributions required from us to the joint venture for this expansion are expected to be approximately $120 million to $130 million, commencing in the first quarter of '23 and ending in the fourth quarter of '24, which the company expects to fund using a combination of cash on hand and additional debt financing. Along these items have already been opened, and construction is expected to be completed in the second half of 2024. As you can see in the bottom left chart, the terminal continues to run at or above a late capacity, and current limited spot cargo availability is leading many new customers to discuss multiyear offset contracts. We expect to contract the majority of the volumes for the expansion prior to project completion next year. I know several of you have questions about why we have a large range for the capacity expansion. The aforementioned $120 million to $130 million will cover our full CapEx for this project, guaranteeing at least an additional 550,000 tonnes per year. There will be some additional favorable costs for the volumes above that, but not much. The degree to which the expansion sees 50,000 tonnes per year will fully depend on demand and price spreads. One important detail about the expansion is that it will triple our chilling capacity of ethylene at the terminal. As a reminder, the loading rate from the storage tank to our terminal is roughly 100 tonnes per hour. However, the current bottleneck is the existing ethylene training curing week of 125 tonnes per hour. After expansion, the total chilling rate of ethylene will increase to 375 tonnes per hour, providing substantial flexibility and optionality. Although we can't go into the specific project details today, additional information regarding the engineering design and operations will be announced next week. So stay tuned as the expansion range will make a lot more sense then. I'll now turn it over to Mads for closing remarks.

Thank you, Randy. We'll transition to Q&A shortly, but I want to make a few key points. Firstly, Navigator is currently in a strong position. While our earnings haven't yet reached our desired level, we are clearly on an upward trajectory. Our balance sheet is the strongest it has ever been, with a manageable level of net debt. We have recently refinanced our loan portfolio, giving us ample time until the next maturities in 2025. This positions us well for additional growth and allows us to redistribute capital through our ongoing share buyback, which is currently halfway completed. Commercially, we are seeing positive trends with high utilization of our fleet, terminal throughput at full capacity, and a healthy demand mix among our main commodities. We anticipate that Q1 2023 will continue this positive trend and deliver the highest EBITDA we've seen. Following Q1, we will focus on growing the company through the expansion of our ethylene export terminal and will actively seek investment opportunities to enhance our portfolio. We are particularly enthusiastic about prospects in transporting green or blue ammonia and CO2, which will complement our strong existing business and support our growth in the energy transition, putting Navigator on a sustainable path. Thank you, and back to you, Randy.

Thank you, Mads. So with that, we'll turn over to some Q&A. Operator, please allow the first caller.

Can you hear me? Am I on?

We can. How are you, Ben? How are you?

I can't hear you. Well, I'll go ahead and ask my question. The first point relates to the expansion. By my calculations, at the low end, it would generate demand for at least six new ethylene-capable handysize vessels, and at the high end, potentially over 20. The fleet is fully utilized. Even though there are 17,000 vessels fully deployed throughout the industry, there are essentially no new orders. How are we going to transport all the ethylene once it's ready for production next year?

So Ben, there is interchangeability between ethane and ethylene. So I think there, at least in the beginning, there will be competition for moving ethane out of North America and ethylene, favoring the folks with ships that can transport either one, like Navigator and others. So there are enough ships today that can carry all that ethylene, but that is detrimental on the ethane side. There will be a little bit of a puzzle between the two, but that's in the first instance.

And I can say maybe, Ben, also from my side that we may be a little less worried about that. I mean, we've seen rates for ethylene-capable ships being relatively low, delivering a modest return for all participants in the ethylene gas sector for a very, very long time. That needs to rectify itself so that the providers of those services will have a reasonable return on the shipping fleet. There are still a number of ships that are capable of transporting ethylene that, from time to time, also transport some of the other commodities. I think we'll just see a bit of adjustments so that they will do what they were built to do, which is transporting ethylene over time.

All right. We'll take our next question.

Randy, it's Omar. Am I coming through okay?

Loud and clear, Omar.

Good. Nice to see you yesterday. Yes, I just wanted to ask a bit further on the terminal. I guess you mentioned next week, we'll get some more info on that, so I'll look for that. But I just wanted to ask in terms of the offtake agreements you're discussing with your customers, how are they looking relative? Or how are these discussions developing in terms of, say, duration? I'm sure you won't be able to comment too much, I guess, about the tariff, but I guess in duration, how do those compare relative to what you have on your existing volumes?

Sure. On the new offtake agreements, it's certainly a range where we have some portfolio players running shorter-term, one or two years, and certainly some running five-plus years. So we expect to contract that out with some range of maturities. They're starting in late '24; some will roll '25, '26, and some will go until 2029 plus.

Okay. When considering the contracting of the additional capacity, you have 1 million tonnes, and you're planning to increase it to 550 million with the intended capital expenditures. Are you expecting to contract all the volumes before the construction period ends? Will that be for the 550 million or for the entire build-out, including the additional million?

Yes. I think it's the majority of the price, so we'll have at least 1.55 million tonnes of capacity. I know our partner and I spoke would like to see at least 80% to make 90% of that contracted, obviously, making some upside for spot cargoes, which we have the expansion anyway. I would expect that 90% number for the full 1.55 million to kind of be the goal for contracts.

Okay. And then just wanted to follow up separately. Final question. Just kind of on the shipping market itself. You guys gave a pretty good update, and clearly, there's been a big bounce back in the Handysize shipping segment. Definitely, in the fourth quarter relative to the third, we're seeing longer distances for the U.S. exports towards Asia versus Europe, like it was in the third. Just wanted to ask how you see things developing now? I know you gave some color in your opening comments. I just wanted to see how those distances are going currently, and is there any risk or anything that you see on the horizon that would shift those back towards more shorter-haul trades into the European market?

If this is specifically linked to ethylene, we're booking ethylene ship freight from the U.S. for April and May already. The indications are that it will continue to go to Asia, which is great. Some is going to Europe because there's a big arbitrage to Europe as well. So it's a little bit of who can pay the most in the ethylene freight game. But definitely, the trend continues to go towards Asia Pacific destinations.

Great. All right. Well, thank you. I appreciate the color and looking forward to next quarter. It sounds like it's going to be a record figure.

Thanks, Omar. Any other questions? Okay, everyone on the line, or then maybe to you, can you give an update for where TCE rates are now and maybe your expectation for the rest of 2023?

During the call, we provided some insights in the prepared remarks. Currently, the renewals we are handling for time charter rates in 2023 have been adjusted to match or exceed the figures we are presenting. This marks a clear improvement compared to the last two to four years, which is encouraging to see. We are also increasing our spot exposure because we believe the fundamentals support this slight change. Spot rates are highly influenced by factors such as timing, location, and cargo, leading to greater variation and volatility compared to time charter rates. However, when we look at everything together, the overall situation is better than what we've experienced in a long time.

Excellent. And then last question for Niall. After this quarter, share repurchases, what is the diluted outstanding share?

The quarter you mentioned, Randy, the share repurchase program started in mid-December. The number of shares bought in December was just under 0.5 million shares. So far, we have purchased about 2 million shares in total. This brings us down to approximately 75 million shares outstanding at the beginning of the year.

And that's, of course, with any potential completion of the program will take another if it was at the same average price, of course, it would be another 2 million. So you need to add that in because the idea is that we have the full $50 million. And so far, we are heading in that direction.

Well, thanks. That is it for the Q&A. Thank you again to all those who joined us. We will be back likely in mid-May for our Q1 '23 results. Looking forward to seeing you then and feel free to reach out with any questions. Have a great day.