Navigator Holdings Ltd. (NYSE:NVGS) Q3 2022 Earnings Call Transcript

Navigator Holdings Ltd. (NYSE:NVGS) Q3 2022 Earnings Call Transcript November 16, 2022

Navigator Holdings Ltd. misses on earnings expectations. Reported EPS is $0.03 EPS, expectations were $0.18.

Randy Giveans: Welcome to the Navigator Holdings Conference Call for the Third Quarter 2022 Financial Results. We have with us, Mr. Mads Peter Zacho, Chief Executive Officer; Mr. Niall Nolan, Chief Financial 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 will be making numerous 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 state and are as such, subject to material risks and uncertainties.

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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: Thank you so much Randy, and good morning, everyone. Thank you for joining our call. The third quarter of 2022 was an exciting period of growth for Navigator. We have announced two joint ventures to expand our operation capabilities in the global liquefied gas supply chain. In September, we announced that the Company has entered into the Greater Bay Gas joint venture to acquire a total of five ethylene capable liquid carriers. The first vessel is expected to be acquired next month. The joint venture with Greater Bay Gas will result in a reduction in the average age of Navigator’s fleet and will allow us to take advantage of more efficient vessels that is lowering our emissions and also offering improved economics for our customers.

We’ll see the rest of the fleet being acquired during the course of 2023. What’s more, yesterday we announced our participation in an expansion project at our existing export terminal joint venture with Enterprise Product Partners in which we own a 50% shareholder. The expansion project consists of modification to an existing ethane refrigeration unit, which will provide the capability to refrigerate both ethane and ethylene alongside providing additional ethylene refrigeration capacity to our export terminal joint venture, the world’s largest ethylene export terminal. Looking at the quarter overall, our operating revenues for the third quarter increased by 7.9% in comparison to the same period last year. And that was mainly due to an increase in vessel available days in fleet utilization, average monthly time charter equivalent rates and pass-through voyage costs.

Notably the demand from ethylene from Europe that we witnessed in the second quarter of 2022 continued into July and August so with about 80% of U.S. ethylene exports was transported to Europe. That of course highlights the growing importance of energy security both nationally and locally in Europe. Utilization for our fleet in Q3 was 85%, which was in line with the same period last year and in line with our guidance for the quarter. I’d like to thank all staff of Navigator for the excellent work and contributions during this period and just hand it over to Niall, who will take you through the financial performance of the quarter. Please, Niall.

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Niall Nolan: Thank you, Mads, and good morning all. The operating performance for the third quarter €˜22 generated an adjusted EBITDA of $41.5 million compared to $40.5 million for the third quarter of last year. Although this is lower than the $55 million achieved in the first two quarters of 2022. It is expected that the fourth quarter will return to or exceed those earlier quarters of this year. The total operating revenues for the third quarter were $106.8 million compared to $102.7 million for the comparative third quarter of last year, 2.2 million of this increase was primarily as a result of the additional handysize vessels joining our fleet as part of the Ultragas transaction in August, 2021, and a further $9.6 million generated from the nine smaller vessels that operate within the independently run Unigas Pool also acquired as part of the Ultragas transaction.

Vessel utilization improved slightly during the quarter to 84.9% relative to the third quarter of last year, which achieved utilization of 84% and this contributed in an additional $800,000 of additional income. And charter rates too improved slightly relative to the third quarter of last year accounting for an additional $0.5 million of overall increase in revenues. Average charter rates were just over $22,000 a day or $670,000 per month for this quarter compared to $21,900 per day or $665,000 per month for the third quarter of last year. Four vessels entered dry-dock for their scheduled surveys during this third quarter in addition to the seven during the first half of this year, taking a total of 106 days and with a capital cost of $3.7 million.

The dry-docking of two of these vessels either have finished or will finish during the fourth quarter, along with a final single vessel to enter dry-dock during this coming fourth quarter. As there are no new builds on order, these dry-docking costs are the only capital expenditures the Company has for the remainder of 2022. The operating revenue from the Luna Pool was $3.2 million for the quarter, representing our share of the other participants’ net revenues with voyage expenses from Luna Pool of 3.6 million, representing the other participants’ share of our net revenues from the pool. Consequently, our vessels contributed 400,000 to the other pool participant during the third quarter. However, we achieved a net benefit of 600,000 in aggregate over the course of the first nine months of 2022, but overall, this number should net to zero over the longer-term.

Voyage expenses increased by 20.5% or $3.4 million during the quarter to 20.2 million, primarily as a result of the additional vessel in the fleet, most of which were on voyage charters, thereby incurring these pass-through voyage expenses. Higher fuel costs which form part of voyage expenses are passed on to our customers through higher charter revenues. Our vessel operating expenses or OpEx increased by 10.6% to $38.7 million for the third quarter compared to the third quarter of last year, much of which was as a result of the additional vessels in the fleet during the quarter relative to last year. Vessel operating expenses per vessel, per day did increase quarter-on-quarter by 4.2%, but remain below $8,000 a day at $7,930 per day for this third quarter compared to $7,607 per vessel, per day during the third quarter of last year.

Depreciation on our vessels increased by 36.5% or $8.8 million compared to the third quarter of last year. As I stated previously, this is in part due to the 16 additional vessels that joined the fleet in August, 2021, which accounted for 1.3 million of this increase, but also 6.2 million as a result of the Company’s decision to reduce the estimated useful lives of all of our vessels from 30 years to 25 years as of January, 1, 2022. General and administrative expenses decreased by 23.2% or approximately $1.8 million to $6.1 million relative to the comparative quarter of last year. And other income being management fees earned from the other participants for our — the management of the Luna Pool reduced to $60,000 for the quarter as a result of reduced revenue generated by the Pool.

An unrealized foreign exchange gain on the retranslation of our $600 million Norwegian kroner bond at September 30 was 5.1 million, and this was fully offset by an unrealized loss on the foreign exchange swap that we have in place, which is included in gains and losses on derivative instruments. In addition to this foreign exchange loss, the unrealized gains on derivative instruments also includes a $7.6 million gain for the quarter relating to further gains on the interest rate swaps as LIBOR swap rates continue to rise during the quarter as central banks around the world increase interest rates as they try to grapple with rising inflation. We have fixed interest rates on approximately 55% of our debt as of September 30, 2022 at levels between 0.36% and 2% significantly below current levels.

The interest expense for the quarter was $13.2 million compared to $10.1 for the third quarter of last year as a result of rising interest rates on that portion of the debt that is subject to floating interest rates as well as interest on the additional debt assumed as part of the Ultragas transaction. Our share of results from the ethylene terminal were $4.7 million for the quarter based on throughput charges relating to 189,000 tons of ethylene exported through the terminal during the third quarter lower throughput than the past three quarters, but higher than the 128,000 tons of ethylene throughput during the third quarter of last year, which generated 3.3 million for our share of the profit. Terminal depreciation amounts to approximately $1.3 million per quarter giving an EBITDA for our share of the terminal of approximately 6 million during this third quarter.

Our net income for the third quarter was $2.4 million, a reduction from the earlier quarters, but with the expectation of significant improvement during the fourth quarter of this year. On the balance sheet, on Slide 7, the Company had cash of $157.1 million at September 30 with a further $20 million available from undrawn revolving credit facilities. Our minimum liquidity covenant from our various bank loans and credit arranges remains a maximum of $50 million, thus providing significant headroom. Our total debt, which stood at $881.4 million at September 30, was reduced by 38.8 million during the third quarter. Our debt comprises of loan facilities secured on our vessels of approximately 666 million, a credit facility associated with the terminal at 44 million and two Norwegian bonds, which in aggregate total 171.7 million.

We are currently documenting the refinancing of our 215 vessel loan facility into a new six year facility, as well as converting our September, 2020 facility from U.S. LIBOR to SOFR and at the same time extending its maturity by one year to September 2025. In addition, the 600 million Norwegian kroner denominated bond equivalent to approximately $71.7 million, which has a maturity of November 2023, has a current call option enabling the Company to exercise the call on this bond, which would result in an in a redemption payment premium of 1.79%. On Slide 9, we outlined the estimated cash breakeven for 2022 at $18,570 per day. This low level enables us to generate positive EBITDA even in the toughest of market conditions, and we have remained cash generative throughout the shipping cycle.

In the box in the right side of Slide 9, we provide our expected daily OpEx across the vessel segments, ranging from $6,900 per day for the smaller vessels to $9,100 per day for the larger, more complex and older ethylene vessels. We also provide a range of expected annual spends for vessel OpEx G&A depreciation and interest expense on that slide. On Slide 10, we outline our historical quarterly EBITDA showing an uplift in Q3 2021 and in Q4 2021, the quarters in which the positive impact of the Ultragas transaction were achieved. It also shows a consistent EBITDA of approximately 55 million over the prior three quarters with only a dip in the third quarter to 41.5 million, which we anticipate will be remedied in the fourth quarter. And with that, I’ll hand you over to Oeyvind for his remarks.

Oeyvind Lindeman: Thank you, Niall. Before we get into the detail, I just want to highlight that — hold on one second, I just want to highlight that the third quarter albeit challenging, met our guidance of 85% utilization. However, Q4 is shaping out in a very positive way, which we’ll talk a little bit more about, but it’s really a tale of two quarters and quarter four with higher volumes of ethylene exports, destinations being in the Asia Pacific region, and 10 ships are now fully employed on their time charters and ammonia is really driving utilization up above 90%, but we’ll spend a little bit more details on that later. If you move to Slide 12, we are seeing increasing production of U.S. natural gas liquids being ethane, propane and butane, and U.S. domestic demand remains flat, which is driving the growth in U.S. export, which in turn has a positive impact on gas carrier demand.

In addition, U.S. propane has widened its competitiveness compared to oil as a fuel or as a feedstock to the petrochemical industry. Both increased production and relative competitiveness to alternative sources of energy and feedstock continue to drive U.S. exports of LPGs. We can see an uptick for handysize exports in the graph to the lower right where October had 40% higher handysize LPG export volumes compared to September of this year. Similar to LPG, ethane remains competitive as feedstock to the production of ethylene. Cheap ethane translates to low cost production of ethylene for US producers. The graph on Page13 shows ethylene arbitrage opportunities to international markets. The one next to it shows U.S. exports of ethylene which is increasing from about 70,000 tons in September to about 110,000 tons in October.

There’s a big increase for a small market. Not only do we see export volumes go up, but we also see changes as Mads has mentioned to the importing locations. During third quarter, the majority of the ethylene volume is heading to Europe, whereas during the first weeks of fourth quarter, we see this shifting to primarily Asia-Pacific destinations, which more doubles the north per mile sale for each ton exported. The underlying demand for additional ethylene exports is evident. Just to give you an example, during October, we maxed out on our export capacity at the terminal that we had more capacity, we would’ve exported more. With NGL production increasing continued ethane rejection, we are firm believers that expansion of this capacity will add value to ethylene supply chain, including producers and international consumers.

Frankly, the industry needs it, and Randy, will share a little bit more color on this later on in this presentation. The other major story is ammonia. Due to the supply constraints of traditional ammonia exports from Ukraine and high national gas prices, Europeans are facing low domestic production and no proximity of supply is a double negative for Europe, but the demand is still there, and people need fertilizer for food production and food security. Therefore, European countries need to look federal field to supply for to source the supply of ammonia. Europe is now sourcing ammonia from location we would never have dreamt of in the past, from China, from Australia, from Bangladesh and Middle East. You can clearly see European decrease of ammonia imports from February of this year on Page 14, and then a sharp increase thereafter; however, from places outside of Europe, as you mentioned.

As a consequence, we have increased around ammonia employment during third quarter from 7 to 10 vessels. We should place about 20% of our earning stays across the fleet and 25% if you consider only the handysize portion of our fleet. This is a big change and these vessels are removed from the normal market, so they’re not now competing for LPG or other easy petrochemical cargos improving the supply demand balance in those segments. You can clearly see the impact on our earning stays on the following page, Page 15. If you look at a dark blue portion at the bottom, it clearly illustrates the rapid increase of ammonia in our earning states, and that is alongside ethylene pushing utilization up to 95% in October, a big change from third quarter.

In conclusion, third quarter and fourth quarter is extremely straightforward. Today, we have high volume from the terminal ethylene with the majority of the volumes heading Asia-Pacific. Third quarter, we did not. Today, we have 10 vessels fully employed in ammonia at the beginning of fourth quarter, removing tonnage availability for other cardinals. Third quarter, we have 30% less of this. In addition, we see higher exports of Ethane and LPG from North America for the first month of fourth quarter compared to the last month or September in third quarter, which positively underpins the supply demands balance. All this is driving utilization about 90% and rates are following the rate increases illustrated by a sharp uptake during October on the following page for handysize, semi refrigerated and handysize fully refrigerated vessels.

And in this environment with very low order book, there won’t be many ships adding being added to the fleet. We are pretty excited about what fourth quarter can bring to Navigator. With that, I will hand it over to Randy. Randy please.

Randy Giveans: Thank you, Oeyvind. So, yes, it’s been a very busy few months for us recently with the Company announcing three meaningful announcements regarding our uses of cash. First, on September 30, we announced that we entered into a joint venture agreement with Greater Bay Gas Company. The joint venture owns 60% by Navigator and 40% by greater Bay Gas, and tends to acquire five ethylene vessels listed in the table below. Two of the vessels are 17,000 cubic meters built in 2018, and three of the vessels are 22,000 cubic meters built in 2019. The vessels are expected to be acquired on a staggered basis between December, 2022 and November of 2023. The total purchase price for the five vessels is $233 million, and our 60% portion of that is a little under $140 million.

For capital outlay, assuming 65% debt financing around $90 million of Navigator’s $140 million commitment, the total cash needed for the acquisitions will likely be less than $50 million spread out upon vessel delivery over the next 12 months. Secondly, on October 18, we announced the board’s authorization for a share repurchase program of up to 50 million of NVGS common stock to be implemented via open market purchases, privately negotiated transactions or in accordance with an approved trading plan. Now there are numerous reasons for this, primarily that repurchasing shares below NAV is an creative use of cash and boosts our NAV per share. Also, our share price was above $15 just as recently as June, but has been sold off with the broader markets in recent months.

Additionally, this program diversifies our uses of cash, which will likely be split between debt repayment, terminal expansion, fleet renewal, and capital returns to shareholders. So most recently, yesterday afternoon, we announced a project under our existing 50 joint venture with enterprise products partners to expand the ethylene export terminal at Morgan’s Point. Construction is expected to commence in the first quarter of 2023 and end in 2024, at which time the expansion project is expected to be fully operational. Current limited spot cargo availability is leading new customers to discuss multi-year off-take contracts. So we expect to contract the majority of the off-take volumes prior to project completion. Now, in terms of specific volumes, CapEx and timeline, we will not be able to provide exact details today, but we do expect to publish a joint press release with all of these details in the coming weeks.

So please stay tuned. With that, I’ll turn it back over to Mads for closing remarks.

Q&A Session

Mads Peter Zacho: Thank you, Randy. So if you look at our financial position in Navigator, right now you can see that we have built cash debt during the past, and we have flexibility to that robust balance sheet gives us that we can pursue both growth opportunities and capture repatriation. In Q3, our fleet utilization was pretty subdued as expected, and so was the terminal throughput. Ammonia though was strong and now we see that we have 10 vessels transporting ammonia. In Q3, we did announce two exciting growth prospects and a share buyback and looking into Q4 now, we can see that there’s significantly higher utilization than what we saw in Q3 with October running above 94%. So we think we are reasonably solid ground when we expect that our utilization will exceed 90% for the full quarter of the full quarter.

All the three product segments that we are transporting show strength in demand and as we speak, the terminal is running above nameplate capacity. So we think that the outlook for the coming months look pretty robust and we’ll be happy to take some questions from you. So back to, to you, Randy.

A – Randy Giveans: Yes. Thank you, Matt. So, operator we’ll now open the lines for some Q&A. So first question, your line should be open.

Unidentified Analyst: Hey, can you hear me?

Randy Giveans: We can hear you, Ben. How are you?

Ben Nolan: Here we go. Thanks. I’m clearly not technologically sophisticated enough. I’m good, thanks. So I have a couple just really quickly, I appreciate that you can’t or that you’re not in a position to be able to talk too much about the terminal, but congrats for finally getting it. But I’m curious how, if you could maybe Niall, how are you thinking about funding, we’ll see how much it is or whatever, but clearly it’s going to be some CapEx. What’s the source of funds for this, do you think?

NiallNolan: Yes Ben, hi. The CapEx, as Randy has said, is likely to be spent over the next two years. So it’s quite spread out. And with our starting point in terms of cash as to where we are now, we actually have sufficient cash, existing resources to pay for share of the extension. That said, having an asset which has cost north of $250 million in total, and having no debt is not particularly good use of capital. So, we are exploring options as to how we can best finance it using the lowest cost of capital. You’ll be aware that there is no debt allowed within the joint venture itself, so therefore financing traditional bank financing is more difficult to come by.

Ben Nolan: Okay. Yes, that makes sense. And if, I’ve got three questions so far. But I wanted to dig in a little bit on utilization. Obviously, it sounds like it’s getting a lot better, which is good to hear, but if I just think of this from the perspective or think of your utilization especially after adjusting for vessels that are on time charter. So, utilization for those not on time charter would appear to be well below 80%. It seems to me that from a net basis you’d be doing a whole lot better to just put those vessels on time charter and have full utilization, even if you give up a little bit on rate. Can you help me as to why that might not make sense?