Navios Maritime Partners L.P. Q1 FY2022 Earnings Call

Thank you for joining us for Navios Maritime Partners First Quarter 2022 Earnings Conference Call. With us today from the company are Chairwoman and CEO, Ms. Angeliki Frangou; Chief Operating Officer, Mr. Stratos Desypris; Chief Financial Officer, Ms. Eri Tsironi; and Executive Vice President of Business Development, Mr. George Achniotis. As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors' section of the Navios Partners' website at www.navios-mlp.com. You can see the webcasting link in the middle of the page and a copy of the presentation referenced in today's earnings conference call will also be found there. Now, I will review the Safe Harbor statement. This conference call could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Partners. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Partners Management and are subject to risks and uncertainties, which could cause actual results to differ materially from the forward-looking statements. Such risks are more fully discussed in Navios Partners' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Partners does not assume any obligation to update the information contained in this conference call. The agenda for today's call is as follows: First, Ms. Frangou will offer opening remarks; next, Mr. Desypris will provide a Navios Partners operational and fleet update overview; next, Ms. Tsironi will give an overview of Navios Partners financial results; then Mr. Achniotis will provide an industry overview; and lastly, we'll open the call to take questions. Now, I'll turn the call over to Navios Partners Chairwoman and CEO, Ms. Angeliki Frangou. Angeliki?

Thank you, Daniela and good morning to all of you joining us on today's call. I am pleased with the results for the first quarter of 2022. During the first quarter, Navios Partners recorded revenue of $236.6 million, EBITDA of $126.1 million, and net income of $85.7 million or $2.78 per common unit. Sadly, Ukraine has been ravaged by the war in its third month with significant cost of human lives. The war is also impacting global seaborne commodity trade. Ukraine and Russia are significant exporters of grain and other mineral commodities. Russia also exported oil, gas, and coal. Sanctions and the war have resulted in the displacement of those exports by other commodities being transported over longer distances, thereby adding to ton miles. The situation is fluid and we have no crystal ball to understand how this will evolve. In the meantime, governments and companies are quick to act to satisfy their short-term needs while considering long-term policies. Please turn to Slide 3. In 2021, we reimagined the public shipping company. Today, NMM is one of the leading U.S. publicly listed shipping companies with an asset base diversified across 16 vessel types in three segments servicing more than ten end markets. About one-third of our fleet operates in the dry bulk, containership, and tanker segments, and we believe that this structure offers a stronger, more resilient entity to our stakeholders with continuous opportunities for accumulated growth. As previously announced, this quarter we are going to acquire four Aframax/LR2 tankers on the back of charter commitments from an investment-grade counterparty. Through this transaction, we are entering a new segment with reduced risk and excellent long-term prospects. Slide 4 presents some recent segment data. The NMM fleet of 150 vessels has an average age of 9.5 years and a loan to value of 28.5%. The fleet has $4.1 billion of net equity value. Moreover, we have $2.8 billion in contracted revenue over approximately 35,500 available days for the remaining nine months of 2022, with almost half exposed to market rates. This provides upside to the ongoing recovery in charter rates in the dry and tanker markets. Slide 5 summarizes a few basic principles behind the diversified platform. Number one, we can optimize chartering. In segments offering attractive returns, we can enter into period charters while in other segments we can be patient. Second, segments have some countercyclicality built in. This creates the opportunity of redeploying the strong cash flow earned from performing segments into asset purchases in underperforming segments, where we believe attractive acquisition opportunities exist. Third, asset values themselves can be volatile. Leverage remains low only if asset values cooperate. We believe that by diversifying our asset base, the balance sheet impact of asset value fluctuations will be muted. Consequently, our balance sheet strength will be partially based on this diversity. I note that we are in a rising interest rate environment globally. As Eri will discuss in a moment, we have been working on securing fixed-rate financing and reducing the margin of our debt from above 300 basis points to about 200 basis points. We see that the cost of debt is increasing, which provides yet another reason to be conservative with the amount of debt on our balance sheet. On Slide 6, we illustrate how we optimize our chartering. As you can see from the charter on the top right, the container segment is enjoying historically high charter rates. More surprisingly, we have fixed our container fleet on long-term charters with almost 100% of our available containership days secured for the remaining nine months of 2022. This reduces market and residual risk for these vessels. We manage the credit risk of the long-term charters independently to ensure that we are not simply trading one risk for another. In our dry bulk segment, we benefit from a recovering market where rates are returning to their historical 20-year averages. We have fixed only 24% of our available dry bulk fleet days for the remaining nine months of 2022, opting to keep 76% exposed to market rates to capture any available upside. Our chartering strategy also allows us to secure our dry bulk fleet on longer-term charters when rates improve. Lastly, we have 53% of our available tanker days fixed, mainly with favorable legacy charterers. We anticipate running this fleet on market rates until healthy rates allow us to consider premium charters. We expect our tanker fleet will generate stronger returns once the market recovers. As a measure, we not only have the luxury of waiting for a rate recovery but also expanding into sub-sectors such as the Aframax/LR2, given the strength of our other segments. Slide 7 details our approach to capturing segment opportunities and our strategy toward bearing our S&P activity with sector fundamentals. NMM made a $1.3 billion investment in 22 newbuilding vessels that will be delivered to our fleet through the first quarter of 2025. We leveraged the strength of the container market. First, we acquired 16-year-old vessels for $220 million, and second, we invested $620 million in ten new 5600 TEU containerships by entering into long-term credit working charters for these vessels. These ten containerships will earn about $710 million in contracted revenue over 5.2 years of their related charters and are currently worth about 20% more than our older prices. We also engage in routine management of our fleet age profile in the dry bulk and tanker space. Seven dry bulk and five tanker vessels were acquired at attractive prices. In our dry bulk segment, NMM made a $332 million investment in seven newbuildings ordered when vessel volumes were challenged in the first half of 2021. These vessels are also worth about 20% more today. Slide 8 reviews our recent developments. In the first quarter of 2022, NMM generated $236.6 million in revenue, $126.1 million in EBITDA, and $85.7 million in net income. During the quarter, we entered into a new tanker subsector when we agreed to acquire four newbuilding Aframax/LR2 vessels. These vessels are designed with the latest technology and can carry either crude or products. The base acquisition price was $58.5 million per vessel, and we will also pay $4.2 million more for additional features and improvements. Two of the vessels have been chartered out for five years at a net rate of $25,576 to an investment-grade counterparty. During the five-year period, each of these charters will earn $30.3 million in additive EBITDA, representing a 10% annual yield. Considering scrap value, at the end of the charters, the residual value will be 31% of our purchase price while the vessel will still have 20 years of useful life. For the remaining two vessels, the charterers have the option to charter these vessels at the same terms, with options exercisable by mid-October 2022. The newbuilding VLCC acquired in 2020, which will be delivering into our fleet in July 2022, is fixed on a two-year variable charter to an investment-grade rated Japanese oil major at a floating rate with a floor of $22,572 per day and a ceiling of $29,700 net per day. NMM’s P&L is healthy and the balance sheet remains strong. As of March 31, 2022, we have about $108 million in cash. The size of our balance sheet cash has numerous considerations, including new vessel capital commitments and fleet working capital. Consequently, I would expect that we will utilize considerably more than our current cash balance. Considering only our working capital over our own fleet size, we estimate an approximate cash balance of around $2 million per vessel. Leverage is 28.5% LTV as of March 31, 2022, and we have a staggered debt maturity profile. NMM has $2.8 billion in contracted revenue, with contracted revenue already exceeding forecasted expenses by almost $70 million for the remaining nine months of 2022. Moreover, out of our 35,500 available days, almost 16,000 of those days are exposed to market rates, allowing for significant potential cash flow generation. At this point, I would like to turn the call over to Mr. Stratos Desypris, our COO, who will walk you through the next few slides. Stratos?

Thank you, Angeliki and good morning everyone. Navios Partners is differentiated by its industry-leading scale, diversified sector exposure, and an ongoing opportunity for continuous growth. Slide 9 details our strong operating free cash flow potential for the remaining nine months of 2022. We have contracted 55.4% of our approximately 35,500 available days, with our delivery rate at $28,697 per day. Our contracted revenue exceeds total cash expenses by almost $70 million, and we still have 15,829 days with market exposure that will provide additional operating cash. The majority of our market exposure comes from our dry bulk vessels, where approximately 76% of our available days are open for index-linked chartering. In Slide 10, you can see our fleet profile. We are engaged in a renewal process that involves constant balancing efforts. We would like to be proactive and capture cyclical opportunities while allocating capital. As you can see at the bottom of the slide, we have 24 vessels that are over 15 years old while at the same time, we have 22 newbuilding vessels to be delivered from the third quarter of 2022 through the first quarter of 2025. Moving to Slide 11, we continue to secure low time employment for our fleet. As Angeliki mentioned, we recently entered a new tanker segment, the Aframax/LR2. We chartered out two of these vessels commencing in 2024 for five years at $25,576 net per day. This will generate approximately $93 million of contracted revenue. Regarding our chartering activity, we chartered out the newbuilding VLCC delivering in July 2022 on a bareboat basis for a period of approximately two years at a floating rate based on index with a floor of $22,572 and a ceiling of $29,700 net per day. Including operating expenses of approximately $10,000 per day, this vessel will have a floor of $32,572 and a ceiling of $39,700 net per day on a time charter equivalent basis. We also chartered out one 4250 TEU containership for approximately 5.2 years at an average net rate of $40,743 per day, generating approximately $76 million of contracted revenue. Following these recent features, our contracted revenue amounts to $2.8 billion. 79% of our contracted revenue comes from our containerships, with charters extending through 2030 with a diverse group of quality counterparties. Around 40% of this contracted revenue will be earned through the end of 2023.

Thank you, Stratos, and good morning everyone. I will briefly review our unaudited financial results for the first quarter ended March 31, 2022. The financial information is included in the press release and is summarized in the slide presentation available on the Company's website. I would like to highlight that 2022 results are not comparable to 2021, as in 2021 NMM gradually merged with Navios Containers, with Navios Partners increasing its available days by 164% to 11,228 compared to 4,252 for the same quarter last year. Moving to the earnings highlights in Slide 12, total revenue for the first quarter of 2022 increased by $171.5 million or 263% to $236.6 million compared to $65.1 million for the same period in 2021. The increase in revenue was a result of the expansion of our available days and the increase in time charter equivalent rate. The fleet TCE rate increased by 37.4% to $20,386 per day compared to $14,836 per day for the same period in 2021. The average TCE achieved by sector was; dry bulk $19,848, containers $27,214 per day, and tankers $15,345 per day. For the three-month period ended March 31, 2021, EBITDA was affected by $124.9 million of one-off non-cash items. EBITDA for Q1 2022 increased by approximately $92.4 million to $126.1 million compared to $33.7 million adjusted EBITDA for the same period in 2021. The increase in EBITDA was primarily due to an increase in revenue, partially mitigated by a $50.2 million increase in vessel operating expenses, a $14.6 million increase in time charter and voyage expenses, and a $9 million increase in general and administrative expenses, as well as a $4.9 million increase in direct vessel expenses excluding amortization of deferred drydock's special survey costs and other capitalized items, and a $0.9 million increase in other expense net. The increase in expenses is mainly a result of the expansion of our fleet. Net income for the three-month period ended March 31, 2022, amounted to $85.7 million compared to $11.8 million adjusted net income for the same period last year. The increased net income was primarily due to a $92.4 million increase in adjusted EBITDA and a $21.8 million increase in amortization of unfavorable lease terms. The above increase was partially mitigated by a $29.8 million increase in depreciation and amortization expense, a $7.4 million increase in interest expense and finance costs, and a $3 million increase in amortization of deferred drydock special survey costs and other capitalized items. Turning to Slide 13, I will briefly discuss some key balance sheet data. As of March 31, 2022, cash and cash equivalents were $108 million. Our cash position has been mainly affected by the following items: $126.1 million EBITDA, $82.7 million working capital movement in accordance with a management agreement mainly relating to our tanker fleet, a $19 million payment for our newbuilding vessels, $54.5 million net payments on our loan facilities and interest payments, $12.1 million payment for drydocks in addition to vessels, and a $12.1 million payment relating to claims to be settled by insurances in future periods. Long-term borrowings, including the current portion, net of deferred fees amounted to $1.32 billion. Net debt to book capitalization was at a comparable level of 38%. Slide 14 highlights our balance sheet spread. Our debt is four times covered by the value of our fleet based on asset valuation. We have already arranged the financing for the 2022 maturities, while our remaining maturity profile targets no significant volumes due in any single year. Approximately 30% of our debt, including operating lease liabilities have fixed interest rates, providing natural hedging against unforeseen rate increases. The strength of our balance sheet is also reflected in our latest financing activities. We continue to lower our margins and add new debt facilities. In March 2022, we signed a $55 million facility at SOFR plus 2.25%. In April, we agreed to enter a new facility of $25.2 million at SOFR plus grade adjustment spread plus 2.5%, refinancing existing facilities with an average margin of 3.3%. We have also received offers for the financing of our newbuilding program at even lower margin levels. Turning to Slide 15, you can see our ESG initiatives. We aspire to have zero emissions by 2050. In this process, we are pioneering and adopting certain departmental regulations up to two years in advance, aiming to be one of the first fleets to achieve full compliance. Navios is a socially conscious group whose core values include diversity, inclusion, and safety. We have very strong corporate governance and a clear code of ethics. Our Board is composed of a majority of independent directors and independent committees that oversee our management and operations. Slide 16 details our company highlights. Navios Partners is a leading U.S. publicly listed company. Our diversification strategy creates resiliency and enables us to mitigate individual segment volatility. Our diversification scale and financial strength should make NMM an attractive investment platform as we take advantage of global opportunities. I'll now pass the call to George Achniotis, Executive Vice President of Navios Partners. George?

Thank you, Eri. Please turn to Slide 18 for the review of the dry bulk industry. Despite the disruption in trade caused by the war in Ukraine, the BDI achieved the highest Q1 average since 2010. This was driven mostly by the strength of the sectors. In fact, the Supramax sector posted the highest Q1 average since assessments began in 2017, on the back of strong minor bulk demand and an overflow of container cargoes. Dry bulk trade in 2022 is projected to increase by 0.6%. Similar to last year, most of the increase is expected to happen in the second half of the year, with an additional boost in ton miles as Ukrainian grain exports are expected to be significantly reduced, and Russian grain and coal exports get redirected away from Europe. New longer trade routes emerge on the back of stronger worldwide coal demand as the world seeks to cope with extraordinarily high natural gas prices. Turning to Slide 19. Demand for major and minor bulk cargoes remains in growth mode, despite China lockdowns and the invasion of Ukraine. Specifically, seaborne iron ore trade is expected to increase by 10.2% in the second half of 2022, with normal seasonality projected in Brazil and Australia increasing exports as China plans further infrastructure investments to maintain a targeted GDP growth of 5.5% for 2022. High gas and oil prices and the Ukraine-Russian crisis should support increased coal imports. The gas price surge has driven power plants to switch back to coal-fired power generation, helping 2022 ton miles expand at an expected rate of 4%. Seaborne coal exports are expected to follow the same seasonal pattern as iron ore, with coal demand projected to grow by 7.8% in the second half of 2022. On the grain side, the global grain trade continues to be supported by an ever-increasing world population, rising global demand, and heightened food security issues initially driven by the pandemic and now by a war encroaching on the wheat and corn fields of Eastern Europe. Although global seaborne grain trade is expected to decrease in 2022 by 1.4% due to the Ukraine crisis, new trading patterns will result in ton mile decreases of only 0.4%. Please turn to Slide 20. The current order book stands at 6.6% of the fleet, one of the lowest on record. Net fleet growth for 2022 is expected at 2.2% and only 0.4% in 2023 as owners remove tonnage that will be uneconomic in light of the IMO 2023 CO2 rules coming into force. Vessels over 20 years of age represent about 8.3% of the total fleet, which compares favorably with a historically low order book. In concluding our dry bulk sector review, continuing positive demand for natural resources, war-related longer haul trades for coal and grain, combined with COVID-related efficiencies and the slowing pace of newbuilding deliveries, will support healthy freight rates. Please turn now to Slide 22, focusing on the container industry. Demand for goods over services in the U.S. and Europe continues to be firm, supporting container trade. Recently, rates have moderated; however, rates are over five times 10-year averages, and long-term rates are at or near record levels, allowing owners to enter long-term contracts at profitable levels. As you can see in the box on the lower right, increases in demand for goods, together with congestion and restocking, should further support containership demand with expected growth of 3% in 2022. Turning to Slide 23. Net fleet growth is expected at 3.5% for 2022, close to the demand growth forecast. It should be noted that about 66% of the order book is for 13,000 TEU vessels or larger. In addition, 10.2% of the fleet is currently 20 years of age or older. In conclusion, the container trade remains robust despite recent geopolitical and macroeconomic headwinds. Supply and demand fundamentals remain balanced due to continuing demand for consumables, stock building, and supply chain bottlenecks. Continued fleet and porting efficiencies should support the containerized shipping industry in 2022. Please turn now to Slide 25 for the review of the tanker industry. In spite of the Ukraine-Russian crisis, the IEA still projects approximately a 2% increase in demand for 2022. The expectation is that by Q4, oil demand will exceed pre-pandemic levels. Refining margins have increased substantially as strong demand for clean products continues to expand ahead of the summer travel season. The IEA projects a 17.3% increase in jet fuel demand in 2022. Both crude and clean products should benefit from the boost in ton miles as Russian oil exports are redirected to new, longer trade routes due to a phased-in European ban on Russian exports. Turning to Slide 26. VLCC net fleet growth is projected at only 2.9% for 2022 and only 1.5% for 2023. This decline can be partially attributed to owners' hesitance to order expensive, long-lived assets in light of macroeconomic uncertainty and emerging technology concerns due to upcoming CO2 restrictions. The current order book is only 6.2% of the fleet. Vessels over 20 years of age make up 10.7% of the total fleet, which compares favorably with the low order book. Finally, turning to Slide 27. Product tanker net fleet growth is projected at only 1.1% for 2022 and only 1% for 2023. The current product tanker order book is 4.9% of the fleet, one of the lowest on record, and it compares favorably with the 7.3% of the fleet which is 20 years of age or older. We believe that the overall tanker order book and fleet are well balanced, as the IMO 2023 and Ballast Water Management regulations will lead to some vessel retirements in the coming months. In concluding, product tanker rates began to pick up in recent weeks, and they are currently at healthy levels, leading the way for the crude tanker recovery. The combination of global oil demand returning to pre-pandemic levels, OPEC+ increasing production, new longer trading routes for both crude and products, as well as the lowest order book in three decades should provide for healthy tanker earnings going forward. And this concludes my presentation. I would now like to turn the call over to Angeliki for her final comments.

Thank you, George. This completes our formal presentation, and we'll open the call to questions.

And we'll go first to Chris Robertson with Jefferies.

Good morning and thanks for taking my questions.

Good morning.

So the containership and dry bulk markets remain firm, tanker rates are on the rise and NMM has $2.8 billion in contracted revenue, and yet at $0.05 the distribution was just 1.8% of quarterly EPU, with units trading well below NAV. How are you thinking about returning capital to unitholders at this point?

Thank you for the question. I think it is a great fundamental equation of what we are doing. I mean we have a diversified platform. What we are doing is basically we are allocating. We have seen that we have been very nimble, we actually invested in a new sector and the Aframax/LR2, we took the opportunity when other companies that are in this sector could not adhere to the targets. We're able because we diversified to allocate resources very opportunistically and conservatively in a sector where it can give us great results, Aframax/LR2. On the other hand, we aim for total returns for our shareholders, providing them a low LTV. As you know, we have the opportunity to have $1.3 billion on newbuildings, essentially allowing us to replace our fleet. We currently have 22 newbuildings and about 24 vessels aged between 15 and 20 years. So, this is an ongoing process that allows us to allocate resources opportunistically in the correct sector because we're diversified. So we don't have to reserve containers and we have reallocated money and cash in tankers. And we are doing that constantly across the board in the different segments to provide total returns to our investors.

Just in terms of the new building program I guess is that, do you think that's come to completion at this point because a substantial amount of your fleet will be replaced in coming years as those deliver. So how are you thinking about I guess on an ongoing basis are you going to be more in cash harvesting mode, now that the kind of it's firing on all three cylinders and that could potentially be used for more capital return to the unit holder or do you think there is more growth from here in terms of the fleet?

You need to recognize that there are several aspects to manage, including the new building program that requires funding. The low loan-to-value ratio is crucial, especially given the challenging environment we face with the war in Ukraine, rising interest rates, and minimal public policy support in China. While the shipping news is positive, with governments and companies addressing their immediate needs, uncertainty persists in the long term. Therefore, we must be cautious as we navigate through various events. Our focus is on maintaining a low level of risk to ensure flexibility and capitalize on different opportunities.

Got you. All right. Yeah. Thank you very much for the time.

Thank you.

We'll go next to Ulrik Mannhart with Fearnley Securities.

Good afternoon, Angeliki, Eri, Stratos, and George, congratulations on another great quarter. I have a question that you touched upon on Page 10 regarding balancing the aging vessels with newbuildings and your comments on growth. What do you see as the ideal or optimal fleet size? Should we expect around 150 vessels going forward, or are you looking for growth?

I appreciate the insightful question, Ulrik. The focus here is on generating value through net asset value and enhancing benefits for all our stakeholders. It's not just about a specific number of vessels, but rather about maximizing value for our stakeholders. The recent deal we secured in the Aframax/LR2 sector exemplifies an opportunity that others might overlook. We were able to enter a new market with adaptable vessels in a strategic manner, signing a five-year contract that is expected to yield over $30 million in EBITDA. This represents a 10% yield, and if we factor in residual value risk after five years, considering scrap value, it equates to approximately 30% of the residual value. This serves as a compelling entry point, allowing us to leverage further growth opportunities. Ultimately, our aim is to deliver value for our investors.

Okay, thank you. And also looking at operating cash flow. It looks like about $5 million trickled through from about $126 million of EBITDA for the quarter and I presume there are some working capital movements there. Can you provide some color or elaborate on those movements?

I think as we mentioned in the script, we have cleared the working capital required under the management agreement mainly relating to our tanker fleet, and we also had some advances for the annual ratings, which has mainly affected our cash position.

Okay. Thank you. And are any of those movements expected to be reversed over the next quarter or what should we expect for movement in the next quarters?

So, I think going forward the management fees will be in line with what we have in our management agreement. There are no backlog, if that is your question.

Okay, thank you. That answers my question. Thanks a lot.

And that concludes our Q&A session. I will now turn it back to Angeliki for any closing remarks.

Thank you. This concludes first quarter results. Thank you.

And this does conclude today's program. We appreciate your participation and you may now disconnect.