Ladies and gentlemen, thank you for standing by, and welcome to the Navigator Holdings First Quarter Conference Call 2019 Financial Results. We have with us Mr. David Butters, Chairman, President and Chief Executive Officer; Mr. Niall Nolan, Chief Financial Officer; and Mr. Oeyvind Lindeman, Chief Commercial Officer of the company. At this time, all participant lines are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advise you the conference is being recorded today. And now, I pass the floor to one of your speakers, Mr. Butters. Please go ahead, sir.

Thank you, Jenny and good morning and welcome to Navigator’s first quarter 2019 earnings conference call. It has just been over a month now since our last earnings call, so I would expect this call to be quite brief. Now, while the call may be brief, it will not be without mentioning some significant accomplishments achieved over this very short period. Now, the two most important ones are; number one, the addition of a third long-term contract for our joint venture ethylene export terminal in Texas. The contract was signed on the eve of the collapse of the US-China trade negotiation and reflects the strong demand of US quality ethylene, and the fact that US sourced petrochemical gas products can absorb significant tariffs, if necessary, and remain a viable export commodity. The second major achievement completed since our last call was the entering into a five-year contract of affreightment to transport ethylene. The agreement contemplates the use of potentially up to four of our handy-size ethylene carriers and the unusual length of the COA underpins a concern by the charter of a potential shortage of appropriate tonnage over the five-year contract period. We are excited and pleased by these two agreements and believe that we will see more of them in the coming months. Oeyvind and Niall will discuss these developments next, but I hope you will appreciate we are under confidentiality agreements, underlying these agreements, and we do not intend to divulge much in the way of detail. We will honor those commitments we have made. So, with that, I will let Niall begin with a discussion of our financial performance. I will be back with a few closing comments and then we will open up the call for a question-and-answer period. Niall?

Thank you, David and good day, everyone. Headline revenue for the first quarter was $76.1 million, 2% less than the $77.8 million generated during the first quarter of 2018. Net revenue, that is revenue after deducting pass-through voyage expenses, was $62.7 million for the quarter, not dissimilar to the $62.8 million generated for both the first quarter of 2018, but also for last quarter, the fourth quarter of 2018. Despite net revenue being almost identical across the quarters, increases were achieved in charter rates during the quarter, but were offset by a reduction in utilization. Charter rates rose to $21,782 per day or $662,500 per month during the first quarter, compared to $20,190 per day or $614,000 per month for the first quarter of 2018, generating an additional $4.9 million. However, net revenue reduced by $5.2 million as a result of a drop in utilization from 91.7% for the first quarter of last year to 84.8% during this first quarter. We undertook one drydocking during the first quarter, costing an aggregate of $1.5 million with a further 9 scheduled over the remainder of the year. The aggregate cost of these nine drydocks are expected to be approximately $40 million, which now includes the mandatory fitting of ballast treatment systems since January 1 of this year which cost approximately $500,000 each. Voyage expenses for the first quarter decreased by $1.6 million or 10.8%, relative to the first quarter of last year. The voyage costs are [Technical Difficulty] operating days related to the time charters and contract affreightments and 37% on voyage or spot charters. Vessel operating expenses or OpEx increased during the quarter with average daily OpEx of $8,618 per vessel compared to $7,982 per vessel per day during the first quarter of 2018. This rise was higher than expected, but…

Thank you, Niall. During previous calls, you might recall that we expect the handysize segment to be oversupplied by about eight vessels. [Technical Difficulty] available and we identified four key infrastructure projects, all of which are underway at combined [Technical Difficulty] So, a slight update on the various projects and the, what we named the road to 2020. First, the Mariner system on East Coast that added incremental ton miles [Technical Difficulty] propane to propylene economics are competitive, leading to new plans already underway and additional ones on [Technical Difficulty] Now more specifically for the quarter. Far Eastern consumers were filling their inventories prior to the Lunar New Year, which commenced early February and did not need to be very reluctant to continue importing for the remainder of February and March. A wait and see approach was adopted. The European chemical industry commenced a period of turnarounds during the quarter, a whole host of plants were taken offline for periodic maintenance. European excess ethylene and butadiene turning to balance our short in the region. The shorts were supplied from us, which traditionally had -- the total effect was that of reduced ton mile compared to the norm. This should change once the turnaround period has been completed. The quoted 12 month time charter rate during the quarter remained mostly unchanged, with VLGCs at low $700,000 per month, although the spot market has risen recently, and midsized and semi-refrigerated handysize covering around the 500,000 per month mark. The drag from the various events discussed or identified just now during the first quarter will influence somewhat the start of second quarter before the various infrastructure projects take firmer hold.

Thank you, Oeyvind. And Jenny, I understand that some of our voices are not coming through as clear and as loud as they should. So if there's any way you can check on the technical communication, that would be great.

Yeah. As we speak now, but at the moment, you're loud and clear.

That's great. So I will continue and just kind of repeating some of what Oeyvind said so it would be helpful. A couple of years ago when we mapped out the need for the Road for 2020, we did not anticipate that five handysize vessels, leaving the Venezuela coastal trade and coming into the already crowded spot market, but with the top of US sanction composed by -- on paper basis during the first quarter, that is just what happened and two of the five vessels that came out of Venezuela were in fact our vessels and they have inflicted somewhat of a punitive economic environment on the handy market and that will probably continue until the comprehensive settlement with Venezuela and reduces the crisis there. Now, we have applied to OFAC for a license to return to Venezuela, based upon humanitarian grounds as our activity there was essentially to provide LPG for bottle gassed used in everyday heating, cooking, sanitation, and then the sterilization of infant care. We have not heard from OFAC, but realistically, we don't expect to unfortunately. Venezuela aside, we believe in the milestones we identified on that Road to 2020 remain achievable and essentially on our original time schedule. For example, we understand that Mariner 1 and 2 will be operating at capacity of around 300,000 barrels a day in June. And full capacity, including Mariner East 2 will be operational by year end, bringing the total throughput into Marcus Hook to around 600,000 barrels a day, if all goes well. We focus a bit more on the developments on the East Coast, simply because tons leaving the US via the Delaware River are more likely to go to Europe and because of Europe’s proximity to the East Coast and because Europe has a number…

[Operator Instructions] We will now take our first question.

Good morning, guys. It’s Mike Webber from Wells Fargo. Heard most of the call, you kind of cut in and out a little bit, but I wanted to loop back on, I guess, first on the carriers you guys had tied to Venezuela. Can you talk to the leverage you guys had on those carriers and what impact you are going to have this little ripple through from a credit perspective, if there is any impact?

I don't think there's any impact. They were part of our regular collateral package, but they're out earning money now, Mike, we just had to pull them out. They've been in there for quite some while. That business has been a good business for us and for a number of other shippers for quite some while. It's a very essential business, it was the heart of the population’s heating and cooking business. They can't live very long without this basic commodity. Stories were that they were burning their own furniture to try to offset the lack of propane, and infants were going without sterilization. I think it's a hot lead as far as I'm concerned. And it will come back no matter what, but it will take some time, I believe, but there is no -- there was no financial, dramatic financial impact on us for moving it out. The biggest impact is you’ve got, instead of what Oeyvind mentioned was what we thought was eight oversupplied handysize vessels, you added just five more, so we have to work off quite a bit more, but they will be worked off until they go back to work in Venezuela.

Okay. But they’re part of a broader collateral package, so they're just back in the pool, so there's no, they're not secured individually or anything like that.

Yeah.

Okay, so that’s helpful. And then, and I know you kind of touched on this a bit. But if you could talk to how the backlog looks for the East Coast facility, I know, there are a couple of anchor customers, and there's some– there is a push to secure the rest of the business. I know, there are some things you probably can't get into, but But just from a broad strokes perspective, can you kind of give us a bit more color about how that's shaping up? And how much of at least the traditional revenue stream there would be something close to fixed versus something more merchant?

First of all, you mentioned the East Coast facility. Are you referring Mike to the ethylene terminal in Houston ship channel?

Yes, sorry.

Yeah, we're comfortable where we are with the commitments – they’re long term commitments. We have a number of other customers where we're negotiating, that could push us well up to over the top, if you will. There will be a strategic decision, I'm sure, down the road where we say just how far do we go as far as long-term commitments on the terminal. Do we keep some of it into the spot market where the margins may be significantly better or do we just tie everything down? Look, the spread is enormous right now, and has been, and we expect that to continue. So there is an awful lot of demand for it. I think there were some comments coming out of enterprise, invest today, that people are just saying that, we need it, we need it now. I think the overhang of these negotiations on the tariffs have had some kind of dampening -- some sort of dampening effect on commitments for five to seven years on the terminal, but nevertheless, there is enormous amount of demand. Today, again, I will repeat, if we were open today, it would be sold out. The demand is that strong, the margins are so great and we expect that to continue. But we will press on getting the throughputs to a significant level. They're over 50% now. We don't have a target, Mike, as to how much we want to commit before we close out, but we're very comfortable where we are. I don't know if that answers quite all of it.

It does, and forgive me because your scripted comments kind of cut in and out a bit earlier. So I want to make sure I heard it right. But just in terms of to reconcile the idea that there's so much demand for -- so much scarcity value, I guess placed on long term, the availability of long term tonnage that you're signing COAs that are longer in nature versus the fact that they're still I would think that even with the tariff conversation that there's still merchant volumes that are available out of a facility like that, I would think that you would see a pretty healthy bid already for those as well. I'm just trying to kind of reconcile those two data points, and it could just be a very healthy backlog that’s behind the scenes that we don't see, that's kind of the angle I was looking at.

I think you're right, there is. Listen, no one signs a five-year COA without great concern that there's going to be a lack of availability of tonnage. Okay, pure and simple. And let's leave it there, in a way, because we need to be a little bit cautious about what we say because we have these clients who are sensitive for competitive reasons on what they're taking, what they're committing to, what kind of vessels they're going to be using. And I appreciate that. And I'm quite sensitive. And we also have a partner in the terminal that I'm sensitive to who was as everyone knows, is quite protective about providing a lot of information, rightfully [ph] so, they've been successful.

We’ll now take our next question.

This is Ben Nolan from Stifel. Hopefully, you guys can hear me. I wanted to follow up a little bit. Hey, David, I wanted to follow up a little bit and again, hopefully not pressing too much, but with the three contracts that are in place, is it -- can you say maybe what percentage of the million tons per year has now been contracted versus what is left to be contracted?

No, I can't tell you, frankly. But we're all – look, we’re over 50%. Okay. So -- and we're at a place where the terminal is self sufficient today, and it's all a matter of how far we want to go and when do we want to go there and who do we want to go with? Those are the issues.

And then diving in a little bit more deeply. I assume that the COA for the -- up to four ethylene carriers is tied to that facility? That's a fair assumption, correct?

I'm not saying anything, you shouldn’t make any assumptions please.

How about this then? So if there is capacity over and above what has been contracted, when the terminal comes online later this year? Is it your expectation that that might be potentially sold into the spot market by you and your partner? Or is the idea to sort of simply sell what you've committed to sell?

That will be of course a joint decision with our partners at enterprise. Whatever is installed has a spot market and the spot market may be much more attractive than the long term commitments, it should be, it is today, if we were to be operating. And I think it's a game plan, how to play that out when it comes to that position at the end of this year? How do we want to play it? How does enterprise want to play it? How do we treat our customers? How do we treat them? Those who committed long term that many of the customers who have already signed up have additional appetite? Do we handle that or do we spread it around? I think it's a dynamic position at the moment, I think, but I think the nice part about it is the choices that they are and they are delicious choices for us. We will be making those later. So uncomfortable, I’m very excited, but I just want to get there as these customers said we want it and we want it now.

So I maybe thought of another way to phrase my previous question without being overly sensitive. So the four new vessel contracts what have you COAs, those are incremental to the, I guess, four vessels that you currently use to service target. Correct? So collectively up to eight, is that correct?

Ben, you’re not going to talk.

Okay. I understand. I just am trying to see if this is incremental or just sort of an extension of existing business.

Okay, I understand what you're trying to do, Ben.

Okay. Alright.

I have to be -- in all seriousness, we're sensitive to the customer and the charter. And if they want to be protective, then we will -- we're going to match the music right now.

Right. Okay. That's fine. Last one, for me, unrelated to those things. The ethylene terminal in Italy, they caused some issues that you called out in the press release and Oeyvind talked a little bit about. It sounds like that's back up and running again, although, a month ago when you did your earnings release, it didn't really come up. A, I was curious why you didn't call it out at that time. But more importantly, are there any other issues that are happening today that might be having an impact on your business, other than Venezuela that we should be aware of?

Ben, it's a good question and Europe, as I mentioned in the opening remarks, typically is a net exporter of ethylene and butadiene primarily to Asia. So right now, they are undergoing a turnaround period whereby a lot of these plants -- producing plants are down for maintenance, making that area balanced or short. So if you have voyages, traditionally from [indiscernible] or from Northwest Europe to Asia, it takes two months to go there and back. And for butadiene and ethylene, so that takes up quite a substantial amount of boats. Now, today, over the last few months with the maintenance period, some of that, that keep internally in Europe, and some of it has been imported from the US. And of course, US to Europe is quite shorter than from West to East. So those are the fundamental things that is going on right now, albeit, it’s short term, which is good. So structurally, Europe is long, and US is long, and where it should all go, well, most of it is East, getting back up to the ton mile that we anticipate, and have seen in the past. Despite tariffs and all, ethylene and other products can -- we have seen as well, I think we mentioned on last call, frequently going to Taiwan, Korea, Japan, Indonesia, instead of China. So that's what's happening at the minute, but Europe needs to overcome its maintenance period, and then we’ll see an impact on that I believe.

Yeah, and don't downplay the continuing dampening impact that these five vessels that came out of Venezuela have. I think that will continue until that there's a resolution that the resolution will happen because this activity that we've been engaged in and a number of other companies have been engaged in for a long period of time must be reconstructed. That's the central movement of the lifeblood of the population in Venezuela, it's got to be back, it will be back.

Okay, but for the second quarter, probably another kind of a little bit lower than normal utilization is what we should expect.

I would think that that's a good observation.

We will now take our next question.

This is [indiscernible] Just wanted to kind of go back to the terminal? Could you provide some color on what type of hypothetical returns would be available in today's market for merchant value, I think it would be helpful to demonstrate what the benefits are maintaining for the spot exposure versus the motivation for counterpart specific long term agreements?

I'm not quite sure I understand the question.

You can buy ethylene being sold in the US today at sub $300 a ton and the market price in Far East is about $1000 a ton. And if you can get hold of that, then of course, shipping is part of it. And then of course, the attraction.

The spread still is -- the spread is greater than the cost of the ethylene itself after you provide transportation and terminaling. I don't know of any other commodity that has that kind of spread. So there's terrific motivation to buy US. And I don't expect that to change – not only can change by a dramatic decline in the price of oil, so that naphtha becomes more competitive or ratchet up of the cost of ethane because of natural gas prices spike. But otherwise, you've got a sustainable margin that becomes highly attractive in the long term and because of other factors, such as environmental reasons you find ethane based ethylene to be the most attractive.

Okay, that's helpful. I think it's just important to kind of continue to say that the current levels are still compelling. Switching gears a bit to the financing around the terminal. I think in your prepared remarks, you mentioned that 35 million of that 70 million to 75 million facility is available based on today's contracted capacity. How do you, one, think about the timing of the draw down on that facility and then two, how do you expect to bridge the gap in the remaining, I think, it's 40 million of required capital contribution for the terminal?

The facility that we can draw down on is the final piece of the financing. So, working backwards from when it's completed, we will utilize the facility. For the remaining part, we have the $55 million on the existing revolver that we can utilize to pay that remaining part. But as additional throughput agreements are signed, then that 40 million reduces.

And then just one more on the Venezuela charters, was there any -- could you quantify the revenue impact in Q1 tied to those specific charters or the loss of those charters?

In what way – the…

Maybe what the difference was and what those charters are tied to PDVSA was compared to what you were getting in the spot market once you lost the long term employment?

Well, the charters were probably -- combined were probably in excess, slightly in excess of $1 million a month.

We will now take our next question.

This is Fotis Giannakoulis from Morgan Stanley. David, I would like to ask you about the JV sanctions, the Chinese tariffs. I know this is not a new issue for the LPG market. But I wonder if you have any color to give us about, if there is any volume right now, before the escalation that is going from the US to China. If you see any implications on the demand, and the project, the PDH projects that they are developing in China, that they can affect the LPG, the pet chem demand market.

Okay. Thanks, Fotis for that question. I did not include any comments about the impact of the tariff breakdown on the ethylene terminal or our business, because I knew you would, for example, be asking that question directly? And it's a good question. So let me talk about ethylene first, and then whether or not that has an impact on our terminal and the prospects of the terminal. To understand that, you must grasp and understand that there is a tremendous need -- demand in China for incremental ethylene, they're growing rapidly. The economy still is. Globally, ethylene is growing at least the growth rate of GNP. And in China, it's growing even more rapidly. They don't have the capacity, they’re short and significantly short of ethylene. So we have, on one hand, a strong demand for imports. The rest of the world is also hungry for ethylene. But particularly China, and that's where the tariff barriers are going out. The second part of that is the United States. We have, in the United States because of the hydrocarbons, the lowest price by far of any producer. So, we can manufacturer ethylene based on the feedstock of ethane, less than the price of ethane practically, it's less than $300 a ton. So there, you have a strong demand and a great supply of very inexpensive. Now that means that this bridge and tariffs will be breached somehow, how does it happen. Do we breach it directly? Yes, you could breach it because the margins are so great that you could absorb the 25% or whatever it may be tariffs and move into that. We're seeing ethylene going into China now without any kind of hold up, it's flowing and flowing smoothly and uninterruptedly. Don't expect that to change, but even if we were to increase, even more the tariffs from what the 25% is, there will be a fungible activity going on. And what do I mean by that? I mean, that if a major producing country, producing a lot of ethylene, and is not affected by these tariffs, you could conceive them of importing US ethylene to supplement their domestic needs and exploiting their own domestically made ethylene to go to China without tariffs. So you'll see that kind of trade take place, I am sure. That is why for example, the Chinese have not imposed tariffs on crude oil because crude is so fungible that it's just a silly game to try to put a tariff on it.

So the impact eventually could be a positive for the handysized gas carriers because of this fungibility of the ethylene and re-shipments from other countries, Asia and Canada, still with China, is that correct?

We appear to have lost our speaker lines. So if you're just done by, I’ll dial back out to the speaker for you. Please continue to stand by. Yes. Please go ahead, sir.

Okay. Fotis, did you pull the plug? But in any event, I think I finished the question that Fotis had raised about whether the barriers, the tariff barriers on ethylene into China would impact the terminal and the flow of ethylene to China and my answer is unequivocally no. It will go either directly, paying that tariff or will go indirectly through another country, offsetting domestic production in that country. So, any other questions?

Yes, thank you. We will now take our next question.

This is Randy Giveans at Jefferies. Don't hang up on me.

I did not hang up on Fotis. He hung up on me.

That could be true. All right. On the last call and kind of just now, you mentioned utilization, 1Q below 4Q levels? Do you have an exact percentage? And then secondly, how has utilization been these past six weeks? And when do you expect it to exceed 90% again?

Oh, Randy. Again, this is a good question regarding utilization. So if you look at our -- if you charted our utilization over the last 12 months or so, it goes between 90% and 85%. There's a slight nudge up we've seen the last six weeks, which is good to see. But again, it depends very much on the Europeans to start up their chemical plants again. And of course, the market gets used to having these five additional ships that was on us from, as a result of the sanction. So where's all going to fall? Question mark, but second half or into 2020 when these infrastructure projects we mentioned, I wrote the 2020, when they take firmer hold and becomes apparent and start pumping volume, that is a definite time where you’re going to see utilization to where we used to be, which is well above 90%. That's our expectations at least.

That's what we're shooting for. I think the whole concept behind the road to 2020 Randy eight is that we will be back to the utilization and rates that we experienced in 2015. Why? Because of the projects that are in place now, the infrastructure projects, the pipelines, the fractionators, the terminals and the plants, the PDH plants and the ethylene plants. They're all converging at once. And when they are up and running, they will be what we believe a very tight market and that’s somewhere in the middle of 2021, it will be back to where we saw rates and utilization in 2015. That is a little over a year from now, less than a year, more than -- just about a year.

All right. And then looking at these kind of multi-year contracts that are freighting in the US and the four ethylene vessels, what percentage of the year will these COA agreements employ those vessels? Is this just as like a few COAs per year, maybe a quarter of the year or are there enough activity on those to pretty much run the shifts all year round through 2025.

The plan and the contract and so forth, et cetera, is for -- throughout this continuous. So, it's not the contract -- any contract that we do on a COA basis typically is on a continuous basis, so is not based on a particular time of the year.

So, those vessels will have 100% utilization until December 2025.

That's the time charter, time charter, if you have a five year time charter, then you achieve utilization being very high in minus [indiscernible] charters. So it’s intermittent whereby you can then optimize triangulation and so forth. So, time charter, yes, you always are different, but of course, they will provide utilization for those ships performing the voyages.

It's not any for specific vessels, we use a whole fleet to accommodate that trade. And the beauty of it is that you can, not only carry it to its destination, but if you're lucky enough, you have something to call back and it just makes the whole thing much sweeter. But so yeah, the whole idea is to spread them out pretty much 12 months a year, over the five year period.

Got it. Okay, that's fair. And then lastly, obviously, US China trade war making a lot of headlines. How do you see that LPG market being impacted by, let's call it, no trade deal in 2019 versus a trade deal actually happening soon? I know you said there may not be a huge impact, but, there's going to be those two options. How would that affect the market?

Well, look, let's assume there is a trade war. Okay, and barriers go up, tariffs are up, how does it affect us. That's the real question. Okay, because that's the downside. Again, what I will repeat on ethylene, it will flow either directly because it can absorb the tariff because the margins are so great, or it will go indirectly and flow into China because China has the demand. Okay. Now, where it will have an impact and is having an impact is in ethane exports, all incremental major ethane where you have to organize the construction of new ethylene plants in China and that you have to work out the terminal and long term commitments on ethane, I suspect those are on hold. And there is, as we have talked about in the past, a fair amount of demand on the part of Chinese petrochemical companies to build new ethylene crackers in China, based upon importing US ethane on very large ethane carriers. In my opinion, that's on hold. Now, I never thought that this would be a big business for us, because I think that it will be a very competitive market. And I think it just has to wait a resolution on tariffs before people can sit down and negotiate with long term supplies of ethane with the major suppliers in the United States and contract the construction of plants, which will take three or four years to build and to build the very large ethane carriers. So that business in my opinion, is in fact on hold. Because the only place you're going to get major volumes of ethane is in the United States. And if there's a war, you're not going to get a tariff war, a trade war. If you're going to have that, you're not going to get that settlement and thing. So that's the biggest impact that I see. Ethylene is going to flow, ethane is going to be paused until there's a resolution, and then it will flow.

And there are no further questions at this time. Please continue.

Well, thank you very much, everyone for joining us today. I know there were some interruptions and some lack of clarity in some of the voice, but we look forward to being with you again the next time. Thank you.

Many thanks to all our speakers today. That does conclude the conference. Thank you all for taking part and you may now disconnect.