Earnings Call Transcript - NMM Q3 2023

Operator, Operator

Thank you for joining us for Navios Maritime Partners Third Quarter 2020 Earnings Conference Call. With us today from the Company are Chairwoman and CEO, Ms. Angeliki Frangou; Chief Operating Officer, Mr. Efstratios Desypris; Chief Financial Officer, Ms. Erifili Tsironi; and Vice Chairman, Mr. Ted Petrone. As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors section of Navios Partners' website at www.navios-mlp.com. You'll see the webcast 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 give an overview of Navios Partners segment data. Next, Ms. Tsironi will give an overview of Navios Partners financial results. Then Mr. Petrone will provide an industry overview. And lastly, we'll open the call to take questions. Now, I turn the call over to Navios Partners Chairwoman and CEO, Ms. Angeliki Frangou.

Angeliki Frangou, CEO

Good morning and thank you all for joining us on today's call. I am pleased with the results of the third quarter of 2023, in which we reported revenue of $323 million and net income of about $90 million. We are also pleased to report net earnings per common unit of $2.92 for the quarter. Before I provide some comments on the Company, I would like to share my views regarding economic sentiment. The U.S. economy is generally healthy, but there are clouds on the horizon. The U.S. has high government debt levels and the highest fiscal deficit. The Fed is engaged in quantitative tightening, and there is a risk of interest rates rising further from their current elevated levels. China, the world's largest consumer of commodities, is not firing on all cylinders. These factors, along with the wars in Ukraine and Israel, are contributing to making this one of the most dangerous times in memory. Despite these clouds, the TCE market is robust and healthy. Our company is doing well and is positioned for all weather. We'll continue to focus on things that we can control, such as reducing overhead, being eco-friendly by keeping a modern energy-efficient fleet, and expanding into areas that will promote our long-term prospects, such as the recent tanker build we entered into with various majors. Navios Partners is a leading publicly listed shipping company, diversified in multiple asset classes in three sectors with an average vessel age of about 9.6 years. We have 180 vessels split roughly equally into three sectors based on a charter-adjusted value. Please turn to Slide 7. We have about $270 million in cash on our balance sheet. In the third quarter, we had about 5.3% annualized return on our cash balances. In addition, we are positioned well for the fourth quarter as we have $52 million of contracted revenue in excess of cash expenses and 2,304 open index days. In the third quarter, we entered into the transshipment business. We modified Navios Vega, an Ultra-Handymax vessel, to have the equipment necessary to provide transshipment operations and entered into a five-year charter with Navios South American Logistics. The vessel is expected to commence operations in the fourth quarter and generate about $30 million of EBITDA over the course of its charter. The vessel itself in this trade should have an extended useful life of about 30 years. Please turn to Slide 8. We provide an S&P update year-to-date. In 2023, we generated $255.2 million gross proceeds from the sale of 14 vessels. In the first nine months of the year, we received $242 million, and we received the $13 million balance in the fourth quarter of 2023. In terms of acquisition, we spent $421.6 million for four newbuildings, scrubber-fitted Aframax LR2 vessels and four Japanese newbuildings MR2 vessels. We also spent $28 million to acquire a 2019 Kamsarmax vessel that we previously chartered in. We continue to work on obtaining long-term contracted revenue. In the third quarter, we created $257.9 million of contracted revenue. Of this amount, we expect to receive $171.9 million from five tankers with an average charter period of 3.8 years. Additionally, we expect to receive $47.1 million from the vessel we placed into the transshipment business. Finally, we expect to generate $38.9 million from three 4,250 TEU containerships, averaging about $18,300 net per day for 1.9 years. This year, we were approached by certain counterparties to enter into a menu that would relieve them of certain liabilities. We facilitated this transaction with an estimated $10.2 million net present value benefit to Navios. $3.5 million of this value is attributed to a $52.5 million prepayment of charter hire for two containerships, and $6.7 million of this value is related to charter amendment and extension for two containerships. Please turn to Slide 9. Since our transformation in 2020, our financial performance has been strong. Our nine months 2023 adjusted EBITDA is 11.4% higher than nine months 2022. Looking back, 2022 was 57% higher than 2021 and almost 570% higher than 2020. We believe that our diversified business model can continue to perform in difficult markets.

Efstratios Desypris, COO

Thank you, Angeliki, and good morning all. Please turn to Slide 10, which details our strong operating free cash flow potential for the fourth quarter of 2023. We fixed 83% of our available days at an average rate of $23,610 net per day. Our contracted revenue exceeds expected total cash expense for Q4 '23 by about $52 million. We have 2,304 opening index-linked days that will provide additional profitability. Please turn to Slide 11. We are always renewing the fleet so that we maintain a young profile. It is part of our strategy to reduce our carbon footprint by modernizing our fleet, benefiting from new technologies and eco vessels with greener characteristics. We have $1.7 billion remaining investment in 28 building vessels delivering partly through 2027, for which most of the financing has already been in place. In containerships, we acquired 12 vessels for a total of about $860 million, which we hedged by entering into long-term credit bore charges, generating about $1 billion in contracted revenue for about 6.5 years average duration of the related charters. In the tanker space, we acquired 16 vessels for a total price of approximately $885 million. We have already chartered out 10 of these vessels for another period of five years, generating revenues of about $0.5 billion. The dry bulk program of eight vessels was completed in June 2023 with the delivery of the last Capesize vessel. We have also been active in opportunistically selling other vessels based on segment fundamentals. Year-to-date, we have sold 14 vessels with an average age of approximately 15 years for $255.2 million. We sold seven tanker vessels for about $160 million to take advantage of the strong tanker market. We also sold seven dry bulk vessels for a total price of $95.4 million. Our last sale was a 19.3-year-old Capesize vessel, which we sold within Q3 for $13 million. Moving to Slide 12. We continue to secure long-term employment for our fleet. As Angeliki mentioned earlier, in Q3, we have created about $260 million additional contracted revenue. Approximately $172 million comes from our tanker fleet, and about $40 million comes from our containerships. Additionally, we agreed to a five-year contract with Navios Logistics for Navios Vega, one Handymax vessel that was modified to perform transshipment operations, which is expected to provide about $50 million in revenue. The vessel is expected to be delivered within the fourth quarter. Additionally, we amended charters for four of our containerships. For two of the vessels, we agreed a prepayment of higher for $52.5 million and the assumption of the subcharter that the vessels are currently on. This repayment was received in October and resulted in the net present value benefit of approximately $3.5 million. For the remaining two vessels, we have agreed on the current charter rate and extended duration of the charters for an additional 2.4 years at an implied rate of $18,000 per day, creating $31.7 million additional revenue and resulting in a net present value benefit of approximately $6.7 million. In Slide 13, you can see our total contracted revenue, which amounts to $3.3 billion. $1 billion relates to our tanker fleet, $0.4 billion relates to our bulk fleet, and $1.9 billion relates to our containerships. Charters are extended through 2037 with a diverse group of quality counterparties. About 50% of our contracted revenue will be in the next two years.

Erifili Tsironi, CFO

Thank you, Efstratos, and good morning all. I will briefly review our unaudited financial results for the third quarter and nine months ended September 30, 2023. The financial information is included in the press release and summarized in the slide presentation available on the Company's website. Moving to the highlights on Slide 14. Total revenue for the third quarter of 2023 slightly increased to $323.2 million compared to $322.4 million for the same period in 2022. Time charter revenue for the period is understated by $9.7 million because U.S. GAAP rules require the recognition of revenue for our charters with the escalating rates on a straight-line basis. Available days increased by 6.7% to 13,759 compared to 12,897 for the same quarter last year. Our average combined time charter equivalent rate for the third quarter of 2023 was $22,052 per day, which is 7.3% lower than Q3 2022 levels. In terms of sector performance, both tankers and containers enjoyed improved rates compared to the same period last year. TCE rates for the third quarter of 2023 for owned tankers increased by 26.8% to $27,688 per day and for our containers by 5.4% to $34,350 per day. In contrast, our dry TCE rate was 29.5% lower compared to the same period last year at $14,139 per day. EBITDA, net income, and EPU were adjusted due to the following gains from sale of vessels. For Q3 2023, $7.2 million; for the first nine months of 2023, $50.8 million; and for Q3 and first nine months 2022, $143.8 million. Excluding these items, adjusted EBITDA for Q3 '23 decreased by 2.3% to $173.7 million compared to $177.7 million for the same period last year. Adjusted net income for Q3 2023 decreased by 27% to $82.6 million compared to $113.4 million in Q3 2022, mainly due to the negative effect of a $21.3 million reduction in the positive income of the amortization of unfavorable leases and a $6.3 million increase in our interest expense, net of interest income, due to the increase in our debt leverage and interest rate costs. Adjusted earnings per common unit for Q3 2023 were $2.68. Total revenue for the first nine months of 2023 increased by 16.7% to $979.6 million compared to $839.7 million for the same period in 2022. Time charter revenue for the period is understated by $30.2 million because U.S. GAAP rules require the recognition of revenue for our charters with escalating rates on a straight-line basis. The increase in revenue was mainly a result of a 16.5% increase in available days to 41,239 compared to 35,394 for the same period since 2022. Our combined time charter rate for the first nine months of 2023 was slightly lower at $22,242 per day compared to the same period last year. In terms of sector performance, both tankers and containers enjoyed improved rates compared to the same period last year. Time charter equivalent rate for the first nine months of 2023 for our tankers increased by 62.7% to $29,014 per day and for our containers by 14.6% to $34,930 per day. In contrast, our dry freight TCE rate was 36.3% lower compared to the same period last year at $13,630 per day. Excluding the items mentioned earlier, adjusted EBITDA for the first nine months of 2023 increased by 11.4% to $520.5 million compared to $467.3 million for the same period in 2022. Adjusted net income for the first nine months of 2023 decreased by 21% to $250.5 million compared to $317.2 million for the same period last year. Our net income was negatively affected by $47.8 million reduction in the positive impact of the amortization of favorable leases and a $43.4 million increase in our interest expense, net of interest income, due to the increase in our debt levels and interest rate costs. Adjusted earnings per common unit for the first nine months of 2023 were $18.13. Turning to Slide 15, I will briefly discuss some key balance sheet data. As of September 30, 2023, cash and cash equivalents were $269.2 million. In the first nine months of '23, we paid $225.9 million of pre-delivery installments and other capitalized expenses under our building program and $83.9 million for vessel acquisitions and improvements. We sold 13 vessels for $237.4 million, net adding $153 million cash after the repayment of the respective debt. Long-term volumes, including the current portion net of deferred fees, slightly reduced to $1.93 billion. Net debt to book capitalization decreased to 36.4%. Slide 16 highlights our debt profile. We continue to diversify our funding resources between bank debt and leasing structures, while 36% of our debt has fixed interest at an average rate of 5.6%. We also try to mitigate part of the increased interest rate costs, having reduced the average margin for our floating debt by approximately 40 basis points to 2.3% from 2.7% at 2022 year-end. A maturity profile is targeted with no significant volumes due in any single year. In terms of our newbuilding program, 82% of our new premium financing is already concluded or in the documentation phase at an average margin of 1.8%. During the quarter, we arranged a total of $92.3 million to refinance the existing leasing facilities where we managed to decrease respective margins and extend maturities. Turning to Slide 17, you can see our ESG initiatives. We continue to invest in new energy-efficient vessels and reduce emissions through energy-saving devices and efficient vessel operations. Navios is a socially conscious group whose core values include diversity, inclusion, and safety. We have strong corporate governance and a clear code of ethics, while our Board is composed predominantly of independent directors.

Ted Petrone, Vice Chairman

Thank you, Eri. Please turn to Slide 20 for the review of the tanker industry. World GDP is expected to grow at 3% in 2023 and 2.9% in 2024 based on the IMF's October forecast. There's an 85% correlation of world oil demand to global GDP growth. In spite of economic and geopolitical uncertainties, the IEA projects a 2.3 million barrels per day increase in world oil demand for 2023 to 101.9 million barrels per day and a 0.9 million barrels for the increase in 2024. Chinese crude imports continue to rise, averaging 11.4 million barrels per day through September, a 14.6% increase over the same period last year. Following a very strong first half, tanker rates softened slightly as Q3 seasonality played out, accentuated by reduced exports, refinery maintenance, and inventory drawdowns. Recently, rates have risen on the back of rising demand and increased refinery throughput as the maintenance season finishes. The recent Saudi and Russian crude export cuts have been somewhat mitigated by increased Atlantic exports, which have elevated volatility for the larger vessels. Turning to Slide 21. As previously mentioned, both food and product rates remain strong across the board due to healthy supply and demand fundamentals, minimal fleet growth, and shifting trading patterns. Product tankers are also aided by healthy refinery margins and discounted Russian crude exported to the Indian Ocean and the Far East returning to the Atlantic as clean product. Crude ton mile growth is expected to increase by 6.2% in '23 and a further 4.9% in 2024. Similarly, product ton miles anticipated increases stand at 11.3% and 6.1% for 2023 and 2024, respectively. Turning to Slide 22. The OCC net fleet growth is projected at 2.3% for 2023 and a negative fleet growth of 0.9% for 2024. This decline can be partially attributed to owners being hesitant to own expensive long-lived assets in light of macroeconomic uncertainty and technology concerns due to CO2 restrictions in force since the beginning of this year. The current low order book stands at only 2.7% of the fleet or just 24 vessels, the lowest in 30 years. Vessels over 20 years of age are 14.1% of the total fleet or 129 vessels, which is over 5 times the oil book. Turning to Slide 23. Product tanker net fleet growth is projected at 2.1% for '23 and only 1.1% for 2024. The current product tanker order book is 10.2% of the fleet, which is the lowest on record and is approximately equal to the 9.8% of the fleet which is 20 years of age or older. In concluding the tanker sector review, tanker rates across the board continued at strong levels. The combination of below-average global inventories, growth in global oil demand, new longer trade routes for both crude and products, as well as the lowest order book in three decades and the IMO 2023 regulations should provide for healthy tanker earnings going forward. Please turn to Slide 25 for a review of the dry bulk industry. For the majority of Q3, normal seasonality played out, assisted by unwinding congestion and soft demand outside China. However, Chinese raw material demand continued to increase on the back of sustained economic stimulus and pre-winter stockpiling, especially for coal and iron ore. This led the BDI to more than double from 962 on July 25 to 2,105 on October 18. After a recent retracement, the BDI currently stands at about 1,400. With regard to iron ore and coal, Chinese continuing stimulus measures and relentless destocking should assist imports through the year-end. The global grain trade is impacted by the war in Ukraine, shifting trading patterns towards longer-haul routes. Seaborne grain trade volume is expected to grow by 2.7% in '24, aided by ton mile growth of 3.6%. Going forward, supply and demand fundamentals remain intact. A normal seasonally stronger Q4, the historically low order book, declining net fleet growth, and tightening GHG emissions regulations remain positive factors, which are reflected in the time charter and S&P markets. Please turn to Slide 26. The current order book stands at 8% of the fleet, one of the lowest since the early 1980s. Net fleet growth for '23 is expected at 2.9% and only 2.2% in 2024, as owners remove tonnage that has been uneconomic due to IMO '23 CO2 regulations in force since the beginning of the year and the emissions trading system starting in Europe at the beginning of next year. Vessels over 20 years of age are about 8.3% of the total fleet, which compares favorably with the historically low order book. In concluding our dry bulk sector review, continuing demand for natural resources, congestion at the Panama Canal, war and sanction-related longer-haul routes, combined with a slowing pace of new deliveries, all support freight rates going forward. Please turn to Slide 28. Container rates, although still above pre-pandemic levels, continue to soften on the back of elevated deliveries and lower imports by Western consumers, partially attributed to the end of stimulus-fueled spending and other macroeconomic issues, including inflation. A loan trade is expected to grow by 3.8% in 2024. Newbuilding deliveries in '24 and '25 will be equivalent to approximately 20% of the fleet after a record net fleet growth of 7.7% this year. This has continued to pressure rates for some time. The Shanghai Container Freight Index, or SCFI, currently at 1,013, which is 5% lower than at the beginning of the year when it was at 1,061. As you noted, the graph on the lower right, the U.S. retail inventory-to-sales ratio is off the recent low, but still well below the long-term average. The graph on the lower left indicates a recent slowdown of U.S. consumer purchases of goods, although still above pre-pandemic levels. Lower imports have eased port takeaway bottlenecks and port congestion. Turning to Slide 29. Net fleet growth is expected at 7.7% for '23 and 6.8% for 2024. The current order book stands at 26.7% against 10.7% of the fleet that is 20 years of age or older. About 72% of the order book is for vessels that are 10,000 TEU or larger. In concluding the container sector review, supply and demand fundamentals remain challenged due to economic and geopolitical uncertainties and an elevated order book. However, the prospect of Chinese stimulus and world GDP growth of 3% for '23 and 2.9% in '24 provides a counterpoint for a challenging '23. This concludes our presentation. I would now like to turn the call over to Angeliki for her final comments.

Angeliki Frangou, CEO

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

Operator, Operator

We will take our first question from Omar Nokta with Jefferies.

Omar Nokta, Analyst

Obviously, Navios has been focused on keeping a pretty nice and sizable contract backlog at $3.3 billion, which is basically flat with last quarter. You've highlighted the amend and extend on the containership charters, which makes sense given the pullback in that market. And you highlighted that they are NPV-positive. I wanted to ask in general, can we expect more of these in the near term? Is this something that we will continue to see in the container market and then also with respect to Navios? And then do you think that there is potential that's happening with the newbuildings as well? Or is this more of a dynamic that's affecting some of the existing tonnage that was fixed at the height of the market?

Angeliki Frangou, CEO

Omar, actually, your observation is correct. Containers are in a weak moment, so these kinds of transactions happen. I mean counterparties will ask for amendments. And of course, we only do things that make sense for Navios, so we are very careful about that. We basically secured over $10 million of positive NPV. We do not see this happening on others. And it was a counterparty that was uniquely less strategic to the sector when there was a very robust situation, and logistics had to be resolved.

Omar Nokta, Analyst

Yes, no, that's helpful, Angeliki. And then I wanted to follow up and ask about the transshipment business, which clearly looks interesting. You took the Vega, if I recall, it's an older Supramax and you fixed it for five years at that $30 million of cash flow. Obviously, that jumps out just given especially where dry bulk rates have been. Just wanted to ask, one, what does the cost look like to modify the ship for that transshipment business? And then also, are there opportunities to do more here on that front?

Angeliki Frangou, CEO

Actually, to be honest, the CapEx was very modest considering the opportunity. We are entering a unique area. We have that ability because we have the transparency in the region because of Navios South American Logistics. And yes, this business can start with one vessel and grow more. And there was an additional tremendous benefit because of the proprietary nature of the transshipment vessel, which allows for more opportunities on employment or action, facilitating trade from South America to China and South America to Europe. So this can create the ability of a whole sector. We see this as a very good entry point, modest CapEx, and the ability to extend the life of the assets. Because these assets, unlike others, can essentially last beyond the five years we amortize, giving us all our profit and CapEx during that time.

Omar Nokta, Analyst

Okay. Wow. That sounds interesting and compelling. So we'll stay tuned for more to come and maybe just one final one. You've obviously addressed this on the call but also in the past. In terms of strategic priorities, clearly, fleet renewal and continuing to build backlog is key. In terms of the balance sheet, perhaps maybe the main priority is to deleverage and bring the net LTV down to that 20% to 25% range?

Angeliki Frangou, CEO

Yes. I mean deleveraging is a goal. Sometimes you have to judge between a new opportunity and new sectors versus deleveraging. But deleveraging is a target, along with acquiring energy-efficient vessels and creating new sectors and new opportunities. You saw that we modernized our fleet and found unique opportunities to integrate energy-efficient vessels. The very important part of this was that we actually expanded our relationships with oil majors, and that is something we focus on building.

Chris Wetherbee, Analyst

I wanted to ask, Angeliki, maybe as you think about this entity, so you have, obviously, exposure to multiple end markets here. And I guess, each one of them is in a little bit of a different part of the cycle. So as you're thinking about incremental capital and where you want to put that to work, how are you approaching that? I understand the newbuild opportunities you have both on the container and the tanker. But as we're thinking about where you think about putting new capital to work, where would you want some emphasis to be placed?

Angeliki Frangou, CEO

Chris, the reality is that it involves many calculations and a lot of work trying to see what the best opportunity is. I mean you saw how we allocated a good amount of money this quarter. We have entered a new asset class, the Aframax MR2s, and we invested in that because we see efficient vessels that have specifications matching current needs. We see many opportunities with the oil majors for expanding trades. Same with MR2s, we observe certain counterparties needing specific vessels with shortfalls in higher emissions but with our energy-efficient vessels, we can mitigate that. We analyze opportunities to ensure long-term returns and what will yield the best residual value while providing appealing returns. We focus on attractive returns of over 10% and low residual value risk given longer asset durations.

Chris Wetherbee, Analyst

Okay. That's helpful. I appreciate that. And that makes sense. And I guess maybe on the other side of that coin, so I think there were 14 vessels that were sold year-to-date. Could you talk a little bit about how you think about opportunities to maybe monetize some of the fleet and maybe where you want to emphasize or where you see relative value between asset values and charter rates today?

Angeliki Frangou, CEO

Basically, there is a graph that we have for unit recovery, and we see strong values for tankers with, of course, strong returns. I mean we optimize that fleet. And then on the dry bulk, you have more or less volumes and long-term net of the vessels, approximately about 80% to 90%. So what we are doing is basically, we see exactly what is maintenance CapEx, what is the age of the vessel, knowing the regulatory environment for the next couple of years, meaning that you will have carbon tax in Europe, there will be requirements. So we target vessels that make sense and add value to sales. We believe that on average, we should renew about 10 vessels yearly just to maintain the average age of the fleet. So yes, we had more vessels initially. However, in 2024, this will drop to an average of about vessels. This is not strictly mathematical. It depends on market conditions, but this is approximately the kind of renewal we aim for.

Chris Wetherbee, Analyst

Okay. That's the way I should be thinking about it, and obviously, market fluctuations will determine how aggressive you are, I guess. And then maybe just one more on the tanker cycle as you guys think about it. Obviously, some macroeconomic concerns flowing through here. I guess you had said you always do a really nice job outlining your thoughts on what the market looks like. I guess, as you're thinking about the potential for either a recession or slowdown materially in U.S. economic activity and demand pull in developed markets, how do you think about that playing out in 2024 and influencing your view on oil demand?

Angeliki Frangou, CEO

Today, the U.S. economy is relatively healthy. There are clouds, and I mean there are definitely clouds regarding interest rates, but we don't see a recession today. However, there is also the significant effect from the wars in Ukraine and Israel. Essentially, the war in Ukraine has increased the ton miles, which is a trend that will likely continue. There are longer ton miles for crude and product. And this does not consider potential disruptions due to global events. That could have quite an impact, especially given the area's significant oil and gas reserves, which could become significant in case of any disruptions.

Operator, Operator

And we have reached our allotted time for questions. I will now turn the call back over to Ms. Angeliki Frangou for any additional or closing remarks.

Angeliki Frangou, CEO

Thank you. This concludes our results for the quarter.

Operator, Operator

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.