Earnings Call Transcript - NVGS Q1 2024

Operator, Operator

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, as such, 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 will now pass the floor to Mads Peter Zacho, the company's CEO. Please go ahead, Mads.

Mads Zacho, CEO

Thank you, and good morning. Thank you all for logging into this Navigator Gas earnings call for Q1 2024. Yes, I will as always begin with a quick review of the main data points relating to the first quarter of '24 and then I'll talk about the outlook for the year. Gary, Oeyvind, and Randy will follow up in a couple of minutes with more detail on our business drivers and results. Also this time, we can present robust revenues for the past quarter with operating revenues almost equal to the same period in 2023. The mix is different, though, in that it was driven by higher time charter rates. Adjusted EBITDA for Q1 set a new record at $74 million, well above the EBITDA of $69 million for the same period last year. Adjusted net income came in at $23 million. Our cash position remained solid even after we repaid on debt facilities on our credit revolver, and we also continued deploying capital into our ethylene terminal expansion. We've returned capital to our shareholders with a $0.05 per share dividend and repurchased our own shares similar to previous quarters. You'll see this continue as we also now declare a further 5% per share dividend plus new share buyback, which will be equivalent to 25% of net income following our first-quarter results. We're particularly pleased with the commercial result in that we are able to push up our TCE rates to an average above $28,000, which is 11% higher than the same period last year. Last year in Q1, our utilization was unusually high at 96%. In Q1 of this year, we achieved utilization closer to 90%, which is more akin to previous quarters. We're pleased that we managed to generate TCE rates and EBITDA at a record level in this environment. Throughput at our JV ethylene export terminal was slightly down at 220,000 tons for the quarter, but we expect that during this year, we will reach a total export near the terminal capacity of 1 million tons per annum. The expansion of the terminal continues on track for completion in Q4 of 2024 and we have now contributed progress payments of $51 million in total to date. Navigator's Board approved a new investment in an early-stage clean ammonia export project in the U.S. Gulf Coast area. As we said before, we are optimistic about clean ammonia as an energy carrier and we believe that gas tankers will transport the majority of the clean ammonia volumes. As is the case with Morgan's Point, our key interest lies with the terminal and ship-to-shore logistics. The outlook for our business remains good. We expect utilization to remain near or above 90%, and we continue to renew our expiring time charters at higher rates. With solid demand for transportation on Handysize gas carriers, older vessels being sold out of international trade and limited supply from new buildings in our segment, we expect this to continue. We also see a gradual normalization with the Panama Canal, which Oeyvind will explain in more detail shortly. I'll now hand it over to Gary, and he'll give you a more detailed review of our financial results.

Gary Chapman, CFO

Thank you very much, Mads, and very good morning or afternoon to everyone. I'm pleased to report first quarter 2024 results in which we continued our progress and momentum with, again, some very positive outcomes and a new record adjusted EBITDA, giving ourselves a great platform. Our total operating revenue was $134.2 million in the first quarter of 2024 with slightly lower but still very healthy utilization of 89.3%, boosted by stronger time charter equivalent rates that were, on average, $28,339 per day in the quarter, a marked increase compared to $25,620 per day in the first quarter of 2023. There were further positive effects as a result of having our 5 Navigator Greater Bay vessels fully operational in the first quarter of 2024 compared to the same quarter in 2023. Total vessel operating expenses and depreciation in the first quarter of 2024 was slightly up compared to the same period last year, mainly due to having those 5 Navigator Greater Bay vessels in full operation. The net effect overall for us was a near 14% increase in operating income, up to $36.3 million, compared to $31.9 million in the same quarter last year. Our general and administrative costs were well managed in the quarter, coming in slightly lower than the same period in 2023, and our interest expenses were cushioned by interest income earned on our cash balances in the quarter, while the non-cash movement in the mark-to-market valuations of our interest rate swaps resulted in a small loss in this first quarter of $0.4 million, reflecting more stable forward interest rates in recent months. Our income tax line reflects current and mainly deferred taxes primarily derived from our investment and share of profits in our ethylene export terminal at Morgan's Point. The ethylene terminal throughput volumes, as Mads mentioned, in the first quarter of 2024 were 220,000 tons lower than the same quarter last year by around 29,000 tons. However, we currently expect the terminal to remain near its throughput capacity during 2024 with results accordingly. Our new record adjusted EBITDA was $74.1 million. Net income attributable to stockholders of Navigator Holdings was $22.6 million, with EPS for the quarter coming in at $0.31. The balance sheet remains strong with a cash and cash equivalents balance of over $172 million at March 31 and total liquidity, including our undrawn revolving credits, over $200 million. This compares to minimum total liquidity covenants on our bank loans and credit agreements of around $50 million. This cash and liquidity balance is after all of our recent buybacks and dividends and after making our scheduled loan repayments and progress payments for our ethylene terminal expansion project. Our net debt to capitalization was just 33% as of March 31, 2024, and net debt to adjusted EBITDA was 2.4x for the 12 months to March 31, 2024. With good market rates and robust utilization, our liquidity has continued its upward trend. We expect that some of our cash will be needed for the remainder of our ethylene terminal expansion project until we finance a proportion of our investment later in the year and for other projects and investments that we're considering to enhance shareholder returns. There are, of course, a number of projects that we're actively looking at. In the meantime, we'll continue to manage our business carefully, reduce our debt, look to our capital distributions and share buybacks, and be good stewards of the business's capital. Looking at our finance situation. Although we have no low maturities until 2025, we're looking at those, including the $100 million unsecured bond that matures in September 2025, which is likely to be called or extended sometime from March 2025, and the $190 million of remaining 2025 maturities that are likely to be refinanced with new loans or loans of more than $200 million, resulting in a positive liquidity event for the company. The feedback received from new and existing lenders is very positive, and we'll provide a further update as part of our second quarter results.

Oeyvind Lindeman, Commercial Director

Thank you, Gary, and hello to everybody. If you look back on what cargoes have driven our business over the last 10 years or so, we see a couple of clear trends. Firstly, LPG used to be a significant driver for our earnings days. However, as you can see, it has steadily been declining over the last decade or so, representing only 1/3 of our earnings days now. Secondly, the emergence of ammonia and petrochemical demand is clearly filling the LPG shortfall for Navigator. We are excited about these developments, and what they contribute to our business today as well as the significant growth projections for each cargo grade going into the future. This explains why we will spend some time talking about ethylene and clean ammonia later in the presentation. Growth of petrochemicals and ammonia is very much linked to North America, and North America's significance to Navigator is growing year by year. A whopping 60% of all our voyages originated in North America, compared to below a quarter a few years back. This reaffirms that we are firmly linked to U.S. gas production growth, U.S. midstream investments, and U.S. downstream olefin infrastructure. We see positive trends in all these areas, which will invariably benefit us. Turning to U.S. natural gas liquids production, it dipped during the first month of this year but trended positive during March. LPG exports, which come from the NGL barrel, were less volatile. As we have mentioned during previous calls, NGL production and LPG exports provide a good indication of the health of the freight markets. Additionally, we need to think about how the Panama Canal situation is impacting supply, whether vessels transit the Panama Canal or the Cape of Good Hope on their way to Asia. U.S. exports show that 55% of all its LPG exports head to Asia, which means that most of U.S. exports are impacted by the Panama Canal in some way. For our segment, this is actually a good thing. Handysize ethane trade becomes more viable against larger vessels needing to head via South Africa. It is also positive for ethylene earnings. Although shorter voyages yield benefits, we still see this impacting overall operational efficiency. I think the benefits are greater for us. Staying on ethylene, the global seaborne ethylene market for 2023 was 5.3 million metric tons. When Morgan's Point ethylene export terminal commenced operations in 2019, it began to influence the status quo. The increase in tonnage requires longer voyages for the volumes, which again increases demand for our ethylene shipping services. The U.S. has advanced from being an insignificant ethylene supplier to now reaching 20% of global seaborne supply. The U.S. ethylene market share has the potential to reach half of the current global supply post-expansion, which is impressive and demonstrates the power of affordable U.S. gas and its ability to change traditional trade patterns.

Randy Giveans, Investor Relations

Thank you, Oeyvind. Following up on several announcements we made in recent months, we want to provide some additional details on updated developments regarding those announcements. We're pleased to announce our return of capital for the first quarter of 2024, in line with our recently announced return of capital policy. We're returning 25% of net income or $5.7 million to shareholders this quarter. The Board has declared a cash dividend of $0.05 per share payable on June 25, 2024, to all shareholders of record as of June 4, 2024, equating to a quarterly dividend payment of $3.7 million. Additionally, with Navigator Gas shares trading well below our NAV of at least $25 a share, we'll use the variable portion of the return of capital policy to repurchase shares. During the first quarter, we repurchased 52,630 common shares totaling $800,000 at an average price of $15.20. Looking ahead, we expect to repurchase at least $2 million of Navigator common shares between now and the end of the quarter, such that the dividend and the share repurchases together equal 25% of net income. Returning capital to shareholders will remain a core focus for us.

Mads Zacho, CEO

Thanks a lot, Randy. You can see here that 2024 has come off to a good start. We are pretty confident that the year will be one of stronger commercial and financial results. I think we are well positioned for the future with a strong outlook in our existing core markets, and that combined with some really exciting opportunities in new emerging markets, such as the transportation of clean ammonia or CO2. Our balance sheet is in its best shape ever, and it gives us the flexibility to grow our business and return capital to shareholders at the same time. We are looking into a very exciting 2024 with better things to come.

Operator, Operator

We will now open the lines for some Q&A. The first caller's line will be open shortly.

Omar Nokta, Analyst

This is Omar Nokta from Jefferies. Randy, you mentioned the Hootin and the Hollarin. It has been a great quarter and a series of quarters. You've achieved your highest EBITDA ever. It's also worth noting, as you pointed out in the release, that utilization has decreased year-over-year, and you've mentioned softer demand. There are clearly significant dynamics at play. Thinking about it, do you see the year-over-year utilization dip as a seasonal issue? Was it felt more noticeably than last year? Additionally, how do you see overall activity levels shaping up as we move past the first quarter?

Mads Zacho, CEO

Maybe I can just kick us off and then Oeyvind, you can take over and give the more detailed explanation. Looking at the first quarter of last year, that was really the odd one out here. At 96% utilization, it's very difficult to achieve, and there will almost always be ships that for one reason or another will be idle for short periods of time. Once we're at 90% or just over that, we are typically able to push up rates and we consider that to be a robust market pretty much as we saw in Q1 this year.

Oeyvind Lindeman, Commercial Director

Even though utilization was somewhat lower than 12 months ago, the TCE rates are higher, the average TCE rate. There's a dynamic, it's a trade-off between utilization and rate level. We haven't seen soft demand because TCE rates are up. We had a ship that, for whatever reason, was idle for technical issues, and each ship out of service has a penalty of 2% on that number. We were able to push rates, and TCEs are up. The ethylene and ethane trade is producing about 40 a day, which is the highest we've ever seen. Things are looking bright on that front. Utilization is just a small factor.

Omar Nokta, Analyst

That's clear. And then maybe shifting gears a bit towards the terminal expansion. You signed your first offtake agreement, which is nice to see, and you're expecting more ahead of completion. What kind of ramp should we expect as we think about starting to generate earnings off that in '25?

Randy Giveans, Investor Relations

It's turnkey. So there will be maybe one or two weeks of ramp-up operations, but most of that will happen in November and December. By January 1, 2025, we will be fully operational for the entirety of the new capacity.

Omar Nokta, Analyst

All right. Sounds good. Just on the ammonia project you highlighted. Is this something that you expect to do alone at Navigator or would you look to partner with somebody?

Mads Zacho, CEO

I think we would inevitably be partnering up in projects like these ones. Typically, the marine infrastructure would be linked up to a production facility or storage facility of some sort, and we would rely on good land partners for that.

Frank Galanti, Analyst

What capacity are you considering for that project if it moves forward? What would be the approximate capital requirements from Navigator?

Randy Giveans, Investor Relations

It's hard to really provide details at this point. The initial investment is for the pre-FID and FID studies to answer those questions. It will be a meaningful number. I don't think it starts with a B in terms of billions, but it will certainly be much larger than this initial $2.5 million investment.

Mads Zacho, CEO

We're in a quite comfortable place right now with the current gearing ratios, which are lower than I would think would be the steady state for a company like ours. We have capacity to do more. This is a reflection of us also looking at growth projects and committed to grow Navigator over time.

Gary Chapman, CFO

We don't have a target. We try to be careful with our balance sheet and make sure that we choose the right projects and uses for those funds. We have the return of capital policy that gets looked at each quarter by the Board. I hope we'll be able to give some news to the market about new projects soon.

Climent Molins, Analyst

I know it's early stage, but what sort of economics of new offtake agreements compare to existing capacity?

Randy Giveans, Investor Relations

We can provide commentary, but we probably won't at this time, right, because we're still in discussions with additional offtakers. It is for multiyears and is at a very good return, similar to what we've been earning on the current contracts.

Gary Chapman, CFO

We're looking at different sources of funds for this, and at this stage, since we're in a comfortable position, we're not rushing that. Our cash position allows us to invest from our own equity first. It's a tricky question to answer.

Randy Giveans, Investor Relations

By year-end, we'll have fully repaid the existing facility on the terminal. So we'll have an asset worth hundreds of millions of dollars that is certainly underlevered.

Mads Zacho, CEO

Share buybacks are an efficient tool for returning capital to shareholders. Navigator is generating good cash flow, and our balance sheet is strong. It's a valid question you're asking here. We've bought back $50 million worth of shares last year, and we think that worked well.

Oeyvind Lindeman, Commercial Director

We don't normally give guidance for the next quarter, but we can say that the ethylene data is fairly accurate at about $40,000 a day. Those contracts are higher than what you see on that graph. We are seeing more positive numbers than that.

Operator, Operator

Thank you again for joining us on today's call. We'll certainly be available for follow-ups and hope to see many of you on Tuesday, June 25, at the New York Stock Exchange. Have a wonderful day.

Oeyvind Lindeman, Commercial Director

Thank you.