Earnings Call Transcript - NMM Q4 2022

Operator, Operator

Thank you for joining us for Navios Maritime Partners' Fourth Quarter 2022 Earnings Conference Call. With us today are Chairwoman and CEO, Ms. Angeliki Frangou; Chief Operating Officer, Mr. Efstratios Desypris; Chief Financial Officer, Ms. Eri Tsironi; and Vice Chairman, Mr. Ted Petrone. I will now review the Safe Harbor statement. This conference call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 regarding Navios Partners. These statements are not historical facts and reflect the current beliefs and expectations of Navios Partners' management. They are subject to risks and uncertainties that could lead to actual results differing significantly from these forward-looking statements. These risks are detailed in Navios Partners' filings with the Securities and Exchange Commission, and the information provided should be viewed in that context. Navios Partners does not have any obligation to update the information discussed in this call. The agenda for today's call includes opening remarks from Ms. Frangou, an overview of Navios Partners' segment data from Mr. Desypris, a review of the financial results from Ms. Tsironi, an industry overview from Mr. Petrone, and finally, we will open the floor for questions. Now, I will hand the call over to Ms. Angeliki Frangou.

Angeliki Frangou, Chairwoman and CEO

Good morning to all of you joining us on today's call. I am pleased with our results for the year and the fourth quarter of 2022. For the full year, we reported revenue of $1.2 billion and net income of $579.2 million. For the fourth quarter, we reported revenue of $370.9 million and net income of $118.3 million. We are also pleased to report net income per common unit of $18.82 for the full year. Navios Partners is a leading publicly listed shipping company, diversified in 15 asset classes in three sectors with an average vessel age of about 9.5 years. Navios Partners entered 2023 well-positioned. Over the last couple of years, NMM acquired three fleets, one in each of container, tanker, and dry bulk segments. Today, we have 176 vessels split roughly equally into three sectors based on a charter-adjusted basis. In addition to achieving diversification, we have been actively managing our portfolio to maintain a younger, more technologically advanced fleet as we believe the newer technologies are a competitive advantage when compared to the older vessels. Our business model allows us to take advantage of opportunities when a segment is experiencing difficulties such as when we acquired tankers in 2021. We can also acquire assets on the market and at advantageous prices, and the cost of acquired assets can be offset by attractive long-term creditworthy charters. As ever, our industry is challenged by macro events and uncertainty that can affect all forecasts. Recessions and Central Banks tightening mobility are changing trading patterns due to the Ukrainian conflict and its collateral consequences. So far, global trade has adapted to these conditions, mostly by increasing ton miles for wet and dry commodities. We remain vigilant and are also focused on reducing the average rate in the medium term after a period of relative activity in rationalizing our acquired fleet by selling old vessels and acquiring new vessels. We have a net LTV of about 45%, measured at the end of the fourth quarter of 2022 for old vessels in the fleet. Our goal is to reduce leverage so that our net LTV would be in the range of between 20% and 25%. We believe that this leverage is an appropriate range for the full cycle while allowing us to expand our balance sheet should opportunities develop. Also, in the current charter rate market, this should happen naturally given our expected cash generation. Please turn to Slide 7. As you can see, we had an excellent year, generating net income of almost $600 million. A significant amount of our net cash flow was used to fund our fleet replacement program and certain amortizations of our debt facilities. We also have been busy in the fourth quarter. We contracted $328.3 million in long-term charters, of which $226.5 million was for eight tankers and approximately $102 million was for three newly acquired Capesize vessels. We also sold 11 vessels for $213.5 million. Our activities during 2022 created a low breakeven of $2,134 per open day. We present details of the available and open days by vessel type on the right-hand side of the chart. Of the open days, about 77% are dry bulk and 17% are tanker days, the balance being container days. We hope to generate substantial cash flow in 2023 given this low breakeven.

Efstratios Desypris, Chief Operating Officer

Thank you, Angeliki, and good morning, everyone. Slide 9 demonstrates the basic principles of our diversified platform in action. We aim to benefit from countercyclicality, which creates opportunities to redeploy cash from well-performing segments into assets in underperforming segments. We believe a diversified asset base helps to mitigate volatility in our financial statements. As of Q4 2022, miles of containerships, adjusted for charter growth, dropped by 40%, and dry bulk dropped by 8%, while tanker vessel volumes increased by 42%. In sum, the net sales of our fleet value resulted in a decrease of approximately 7%. We contracted this analysis on charter-adjusted basis, because otherwise, it would not capture our chartering activities, which effectively hedge the asset prices. Multiple segments also allow us to optimize chartering. In segments with attractive returns, we can enter into period charters. In other segments, we can be patient. As you can see from the chart on the bottom, the container segment is currently enjoying historically high charter rates. Accordingly, we have fixed our containers on a long-term charter, and in fact, almost 90% of our available containership days are fixed for 2023. This reduces market and residual risk. 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 tanker segment, current charter rates are surpassing the 20-year average levels. We have fixed available tanker days at almost 70% for 2023. We expect our tanker fleet will generate strong returns. Lastly, in our dry bulk segment, our rates are currently below the historical averages. We have been patiently entering short-term charters. As a result, about 20% of our available days are fixed for 2023. In Slide 10, you can see our fleet renewal activities. We are always renewing the fleet so that we maintain a strong profile, benefiting from newer technologies and more carbon-efficient vessels. Navios Partners made a $1.5 billion investment in 23 newbuilding vessels that will be delivered into our fleet through 2026. In containerships, we are acquiring 12 vessels for a total of $860 million. We held our investment by entering into long-term creditworthy charters, generating about $1.1 billion in contracted revenue for an average duration of related charters of about 6.4 years. In the tanker space, we entered the LR2/Aframax subsector by ordering six vessels for a total price of $380 million. These vessels have been chartered out for 5 years at an average net rate of $26,580 per day, generating revenues of approximately $290 million. We have also ordered two highly spec LR2 vessels for about $80 million. Finally, on the dry bulk fleet, we have three Capesize vessels on order that are being delivered through June of 2023. These vessels have been chartered out for an average duration of about 5 years at a net rate of almost $20,000 per day.

Eri Tsironi, Chief Financial Officer

Thank you, Efstratios, and good morning, all. I will briefly review our unaudited financial results for the fourth quarter and 12 months ended December 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 2022, NMM recently expanded its fleet through acquisitions. Moving to the earnings highlights on Slide 12. Total revenue for the fourth quarter of 2022 increased by 38% to $370.9 million compared to $268.1 million for the same period in 2021. Time charter revenue for the period is understated by $18.1 million because of accounting rules requiring the recognition of revenue on a straight-line basis where some of our charters have been escalating rates. Available days increased by 27% to 14,409 compared to 11,363 for the same quarter last year. Our average time charter equivalent rate increased by 4% to $23,840 per day compared to $23,005 per day for the same period in 2021. In terms of sector performance, both tankers and containers enjoyed improved rates. Rates for our tankers doubled to $30,834, and container rates increased by 43% to $34,037. In contrast, our dry bulk rates were 46% lower at $15,876. EBITDA for the fourth quarter of 2022 increased by 35% to $206.2 million compared to $152.4 million for the same period last year. Net income for Q4 2022 slightly improved compared to 2021, reaching $118.3 million, and per unit was $3.84. Total revenue for the full year 2022 increased by 70% to $1.21 billion compared to $713.2 million for the same period in 2021. 2022 revenue is understated by $48.2 million because of the accounting adjustment required for charters with escalating rates. Our available days increased by 56% to $49,804 compared to $31,884 for 2021. Fleet average TCE rate increased by 6% to $23,042 per day compared to $21,709 per day for 2021. In terms of sector performance, TCE rates increased by 40% for containers to $31,358 and 37% for tankers to $21,020. Dry bulk rates were 70% lower compared to 2021 at $19,464. EBITDA for 2022 increased by 41% to $817.3 million compared to $578.5 million for the same period last year. Excluding one-off items, adjusted EBITDA increased by 57% to $667.9 million. Net income for 2022 increased by 12% to $579.2 million compared to $516.2 million for the same period last year. Earnings per unit were $18.8. Excluding one-off items, adjusted net income increased by 18% to $429.9 million. Adjusted net income per unit was $14.

Ted Petrone, Vice Chairman

Thank you, Eri. Please turn to Slide 20 for the review of the tanker industry. After rising sharply in Q3, tanker rates continue to strengthen through mid-November before softening slightly on the back of the cooling Chinese economy and mild winter in the Northern Hemisphere in the absence of U.S. Gulf crude exports. Since the end of January, rates for both crude and product tankers have risen significantly on the basis of China re-opening and longer ton miles for all Russian crude and products. Despite economic uncertainties in the Ukraine crisis, the IEA projects a 2% increase in world oil demand for 2023 to 101.9 million barrels per day, exceeding 2019 pre-pandemic levels. China, in particular, accounted for 45% of global oil demand growth in 2023, rising by 0.9 million barrels per day or 6% over 2022. Turning to Slide 21. Tanker rates across the board have risen due to improving supply and demand fundamentals combined with the invasion of Ukraine, which has shifted Russian crude and product exports to longer routes out to India and China. Additionally, European refineries are replacing Russian crude and products with supplies from the U.S., Brazil, and the Middle East, further increasing ton miles and trade inefficiencies. Incremental support for rates is expected as new EU sanctions and price caps begin on crude December 5 and on product trades February 5. Product tankers should also be aided by discounted Russian crude exports to the Far East returning to the Atlantic as clean product. This could add upward pressure on already strong rates. In 2023, crude and product ton mile growth is expected to increase by 6.4% and 11.2% respectively. Turning to Slide 22. Vessel net fleet growth is projected at 2.1% for 2023 and negative fleet growth of minus 1.5% for 2024. This decline can be partially attributed to owners' hesitance to order expensive long-lived assets in light of macroeconomic uncertainty and engine technology concerns due to CO2 restrictions enforced since the beginning of this year. The current record level order book is only 2% of the fleet or only 18 vessels, the lowest in 30 years. 16 VLCCs will deliver during the balance of 2023, none in 2024 and one each in 2025 and 2026. Vessels over 20 years of age comprise 14% of the total fleet, which is over 7 times the order book. Turning to Slide 23. Product tanker net fleet growth is projected at 1.8% for 2023 and only 0.4% for 2024. The current product tanker order book is 5.4% of the fleet or 137 vessels, one of the lowest on record and it compares favorably with the 10.1% of the fleet or 363 vessels which are 20 years of age or older. In concluding the tanker sector review, tanker rates across the board continue at strong levels. The combination of below-average global inventories, oil demand returning to pre-pandemic levels, new longer trading routes for both crude and product, as well as the lowest order book in three decades and the IMO 2023 regulations should provide for healthy tanker earnings going forward.

Angeliki Frangou, Chairwoman and CEO

Thank you, Ted. This concludes our formal presentation. We open the call to questions.

Omar Nokta, Analyst

I wanted to ask about your dynamic approach to the fleet and the overall portfolio. Regarding the vessel sales you announced today, you've sold 11 ships for $214 million. How much are you expecting to net after paying down the debt associated with those ships? How do you plan to use the remaining free cash?

Angeliki Frangou, Chairwoman and CEO

This is a good question. I mean, on the $213 million, if I am correct, it’s $123 million net of debt. I mean, basically as you know, we rationalize our fleet by selling all the less efficient vessels and keeping and acquiring technologically advanced vessels which also have a better carbon footprint. So this is a strategy. We have seen us working long on that and it has provided a fleet today with an average age of 9.5 years, materially lower age than the industry. It is 4 years older on containers and tankers, and about 2 years on dry bulk.

Omar Nokta, Analyst

And you mentioned, Angeliki, early on in the presentation about the target leverage range. Can you just go over that again because I see the LTV is at 49%. And I think a year ago, you had been aiming for somewhere in the mid-30s. Could you just go over what you were saying earlier about what you'd like the net equity ratio to be?

Angeliki Frangou, Chairwoman and CEO

Our net equity ratio LTV is around 45%. It’s important to note that our LTV does not factor in the payments already made on newbuildings. This means there’s a natural reduction in our debt as vessels are delivered. We anticipate approximately $300 million in capital repayments each year along with this natural deleveraging from the new vessels. Given this and the cash generation we expect, we are targeting a net equity ratio in the range of 20% to 25% because the vessels generate cash. Overall, we entered 2023 in a strong position. Over the last two years, we made three significant acquisitions: one in containers, one in tankers, and one in dry bulk. We believe that the shift in China's zero COVID policy in 2023 could yield substantial cash flows.

Omar Nokta, Analyst

The target net LTV is between 20% and 25%. Just to confirm, Efstratios, you mentioned the LR2 contracts. All six of those newbuildings have been fully contracted for an average of about five years?

Efstratios Desypris, Chief Operating Officer

Yes, exactly, but the last two LR2s have been concluded in Q4. So all 6 of them are contracted for 5 years at an average rate of around $26,500.

Omar Nokta, Analyst

And then maybe just one final one, just on sort of the sales and the overall transactions you've done here. It's really been centered within dry bulk and within tankers. And clearly, it seems containers have been much more about just harvesting the backlog effectively. How are you thinking about that fleet as it stands today, given we've seen the market correct, there are some ships that do come up open for renewal? How are you thinking about the fleet that you have today in containers and whether you become more active in either divesting or acquiring ships?

Angeliki Frangou, Chairwoman and CEO

I mean, if you see in the container segment, I mean, basically, we have seen that around high teens, '20s and we have seen the chartering of our vessels. We have a minimal base. I mean, we have a $2,134 open breakeven per open day. And if you see on Page 8, basically container base is less than $1,500. So it's a minimum. And we see that the rates there are still at a level of about high teens, approximately there. So this is where we are on the containers. Our position on the container segment is that, as you remember, in 2021, we had older vessels. And basically, we made these decisions early on, chartering the fleet, and we are able to renew our fleet. So we already have the backlog of the vessels we need to renew. This is part of our $1.5 billion newbuilding program, and this is basically in positions we already have taken. So we are harvesting the existing and this is the decision we have made. And we have already ordered the ones we wanted to do.

Operator, Operator

It appears we have no further questions at this time. I would now like to turn the program back over to Angeliki for any additional or closing remarks.

Angeliki Frangou, Chairwoman and CEO

Thank you. This completes our presentation. Thank you very much.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.