Navios Maritime Acquisition Corporation
Q2 2020 Earnings Call Transcript

Published: 1 Aug 2020

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation’s Second Quarter 2020 Earnings Conference Call. With us today from the company are Chairman and CEO, Mrs. Angeliki Frangou; Vice Chairman, Mr. Ted Petrone; and Chief Financial Officer, Mr. Leonidas Korres. As a reminder, this conference call is being webcast. To access the webcast, please visit the Investors section of Navios Acquisition’s website at www.navios-acquisition.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 under the meanings of the Private Securities Litigation Reform Act of 1995 about Navios Acquisition. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Acquisition’s management and are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Acquisition’s filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Acquisition does not assume any obligation to update the information contained in this conference call. The agenda for today’s call is as follows. First, Mrs. Frangou will offer opening remarks. Then Mr. Petrone will give an operational update and industry overview. Next, Mr. Korres will review Navios Acquisition’s financial results. And lastly, we will open the call to take questions. Now I turn the call over to Navios Acquisition’s Chairman and CEO, Mrs. Angeliki Frangou.

[Angeliki Frangou:]

Thank you, Doris. And good morning to all of you joining us on today’s call. While the pandemic has greatly affected businesses, countries and people all over the world, the Navios family persevered with a great pride in the safety of our employees, and we have adapted to this ever changing environment. I am pleased with the results for the second quarter of 2020. During the quarter, Navios Acquisition recorded revenues of $112.2 million and adjusted-EBITDA of $72.7 million, representing increases of about 92% and 229% respectively over Q2 of 2019. NNA recorded adjusted net income of $32.4 million or $2.03 per share for Q2. We declared a quarterly distribution of $0.30 per share for the second quarter. Slide four, represents some of our company’s highlights. NNA has a 54 vessel fleet that includes 47 diverse tankers and seven containerships. The seven containerships entered into our fleet as settlement of our receivables from the liquidation of Navios Europe II, and we intend to sell them. The average age of our fleet is nine years old. Our chartering strategy continues to protect us from any downside, but also allow us to participate in the market upside. Slide five highlights the expected recovery in global oil demand during the second half of 2020. After the severe drop in oil demand during Q2 of 2020, demand is expected to increase by 14% in Q3. Oil demand in the second half of 2020 is expected to outpace the first half of 2020 by 8.2%. OECD as well as non-OECD countries forecast oil demand growth by 3.5 million and 3.8 million barrels per day, respectively, and China oil demand is expected to rise by 1.2 million barrels per day or 10% in the second half of 2020 compared to the first half. Slide six, highlights the robust fundamentals that exist for the VLCC vessels. 12% of the global VLCC fleet is being used as floating storage driven by a low oil price and limited inland storage capacity. The VLCC order book is at its lowest level since 1996. In fact, the current VLCC order book is less than the current VLCC fleet that is aged 20 years or older. VLCC ton mile demand is increasing as Atlantic exports fill refinery capacity expansion in China, and there is an increased demand for gasoline as pandemic related global quarantine ease up. Seasonality is currently affecting charter rate, as you can see from the chart at the bottom on the left, but the fundamentals are favorable and support a rebound in rate going into 2021. Slide seven shows Navios Acquisition’s key developments in Q2 of 2020, the company recorded an adjusted EBITDA of $72.7 million or a 230% increase compared to $22.1 million recorded in Q2 of 2019. Our chartering strategy focuses on upside participation, and we earned $20.7 million in profit sharing in the second quarter of 2020. Our downside is also protected by charter contracts with quality counterparties. For the second half of 2020, we have 74% of our available days fixed, of which 22.1% includes profit sharing. During the quarter, we successfully liquidated our investment with Navios Europe II and converted $37.7 million of receivables owed to us into steel value and cash. We secured $92.9 million in refinancing for six product tankers, extending the debt maturities through 2027. And we expanded our VLCC fleet with one additional vessel, bringing the total to four new building vessels under a bareboat lease with no initial capital outlay. The net present value of the differential between the bareboat and charter out rates for the three VLCCs is estimated at about $65 million. Slide eight, details our cost structure. For the remaining six months of 2020, we contracted 74% of our available days at a charter rate of $19,622 per day. This contracted rate excludes potential profit sharing for about 1,769 days. Assuming current one year time charter rate on our profit sharing days, our contracted charter rate would increase to $22,118 per day. Our total cost for the same period is expected to be $18,363 per day. We now have 2,080 open plus floating rate days, which gives us a breakeven of $14,775 per open day. Our total cost includes operating expenses, dry docking amortization, bareboat cost, general and administrative expenses, interest expense and capital repayment. Slide nine, shows our cash flow potential for the second half of 2020. For the remaining six months of 2020, our contracted revenue, excluding any profit sharing, is estimated at $116.2 million. NNA has 48.1% of our available days with market exposure and a breakeven rate of $14,775 per open and floating rate day. Assuming, one year time charter rate for our market exposure days, we expect to generate $18.9 million of operating cash flow. Should rates recover to 20 year average rate, we will generate $35.6 million of operating cash flow. Slide 10, shows our liquidity position as of Q2, 2020. Our cash balance is $68.5 million as of June 30, 2020. Our net debt to book capitalization is 72.9%. We have fully funded our growth CapEx, and we do not have any significant debt maturities until Q4 of 2021. And at this point, I would like to turn the call over to Mr. Ted Petrone.

[Ted Petrone:]

Thank you, Angeliki, and good morning all. Please turn to slide 12. In December of 2019, Navios Maritime Acquisition took delivery of five product tankers following the liquidation of Navios Europe I. Navios Acquisition’s diversified fleet now consists of 47 vessels at an average age of nine years, totaling 6 million deadweight. The fleet consists of 14 VLCCs, 10 LR1s, 18 MR2s and 3 MR1s product tankers and two chemical tankers. Four of the VLCCs our bareboat new buildings and are scheduled for delivery in Q4 of this year, Q1 and Q3 of next year, and with the last one due in 2022. In June of this year, Navios Maritime Acquisition took delivery of seven containerships of approximately 18,400 TEU capacity, following a liquidation of Navios Europe II. The containerships are noncore assets and are held for sale. Please turn to slide 13. Slide 13 details our chartering strategy which we use to balance market opportunity and credit risk. We seek protection from market volatility by obtaining charters of different durations in order to better manage market cyclicality. For the second half of 2020, about 74% of our fleet’s available days are fixed at a base rate - or at a base rate plus profit sharing and about 11.5% are fixed on floating rates. As a result of this strategy, Navios fleet enjoys significant downside protection as well as the ability to participate in the upside with about 48.1% of our fleet days exposed to market rates. Please turn to slide 14. Navios Acquisition continues its policy of locking in secure cash flow with creditworthy counterparties. Our fleet has secured about $480 million in long term contracted revenue, continued to extend the coverage of our fleet via new fixtures, continuations and exercised optional periods at current high levels, including profit sharing in some cases. Please turn to slide 15. Slide 15 shows in detail our current charters with their expected expiration dates. Our chartering strategy revolves around capturing market opportunity while also developing dependable cash flow from a diverse group of first-class charters. Please turn to slide 17. With the entire globe continuing to be affected by the pandemic, the IMF projected global GDP contraction of 4.9% in 2020, led by an 8% contraction in advanced economies. Governments have put in place unprecedented emergency monetary and fiscal plans to support their economies. In light of this, the IMF projects 5.4% global GDP growth in 2021. The IEA projects a global oil demand decline of 7.9 million barrels per day for 2020, which is 1.6 million barrels per day improvement over the April forecast. The IEA forecast for 2021 is an increase of 5.8% or 5.3 million barrels per day. Please turn to slide 18. As the graph on the left, a decline in oil demand for the first half of 2020, combined with an oversupply, resulted in OECD crude oil inventories ballooning to reach 330 million barrels above the five year average. The near-term economic outlook is improving as countries have emerged from quarantine, encouraging OPEC+ to increase production quotas starting in August. Assuming demand continues to recover and OPEC+ maintains discipline on stated cuts, stock draw should accelerate through the rest of 2020. For the graph on the right, a twin supply and demand oil shocks brought about a price collapse in crude oil as well as a Contango in oil futures. The result triggered a rapid floating storage booking of short and medium durations. Currently, there are 98 VLCCs on floating storage, which is about 12% of the fleet, as noted, this number is unchanged from May. Please turn to slide 19. China is the world’s largest importer of oil and the second largest of consumer oil, importing over 70% of its requirements. Chinese imports have increased over 300% since January 2009, representing a 13% CAGR. Chinese crude imports averaged 10.8 million barrels per day for the first half of 2020, a 10% increase over the same period last year. As you can see in the table below, on a per capita basis, U.S. oil usage is 5.8 times that of China, European usage is 2.7 times and world usage is 1.3 times. If China goes just to world capital consumption levels, China would require an additional 164 VLCCs, assuming all crude is imported by sea. This represents an expansion of the existing fleet by about 20%. Please turn to slide 20. U.S. crude oil production, although down from its record levels of 12.9 million barrels a day in Q4 of last year, still continues its elevated levels, coming in at 12.1 million barrels per day in April. This level of production, combined with reduced demand, has and should continue to allow the U.S. to export crude in the future. Additionally, other Atlantic exporters, led by Brazil plan to increase crude exports, more than offsetting any declines from Venezuela, Mexico and Nigeria. By 2025, at least 25% of Asian crude oil imports will have to come from the Atlantic Basin, increasing voyage length as Asian countries depend on imports for between 75% and 97% of crude consumption. China, India and other Asia will expand refinery capacity by 3.9 million barrels per day between 2020 and 2022, representing 58% of oil expansions. China in particular has a growing supply gap. Domestic crude production continues to decline as refinery expansions continue. China’s current planned refinery expansions to 17.7 million barrels per day capacity in 2021 translates to an additional 231 million barrels of crude oil needed, which would require an additional 29 VLCCs to the fleet. Please turn to slide 21. Net fleet growth through June equaled 2.7% with 6.7 million deadweight deliveries against 0.6 million deadweight removals. Projected net fleet growth for 2020 is 3.7%. New building deliveries reduced dramatically after year end. This decline can be partially attributed to owners hesitant to order long lived assets in light of macroeconomic uncertainty and engine technology concerns due to upcoming CO2 restrictions. Please turn to slide 22. While the order book shows 58 VLCCs, as of last week, there are 62 VLCCs, 20 years of age or older. We note that the current order book of 7.4% of the fleet is the lowest since 1996. With the IMO 2020 and ballast water management regulations that will lead to some vessels’ retirements, after the current disruptions, we believe that the order book and fleet are well balanced. Please turn to slide 24. According to the IEA, refinery capacity is expected to increase by 9.9 million barrels per day from 2020 to 2025, including all additions, expansions and upgrades. Over 70% of that capacity will be added in Asia and the Middle East, with the IEA projecting China and other non-OECD Asia to increase refinery capacity by 4.7 million barrels per day, with the Middle East adding a further 2.4 million barrels per day. Please turn to slide 25. U.S. crude production increases, along with refinery expansions in the U.S. Gulf, has led to product exports from the U.S. rising by 536% since the beginning of 2004. The U.S. has become a net exporter of petroleum products and continues to export significant quantities of products to Latin America and the Far East. U.S. product exports hit an all-time peak of 6.3 million barrels per day during the week of April 4 of this year, declined to 3.7 million barrels per day as COVID-19 lockdowns took hold, but have rebounded recently, hitting 4.9 million barrels per day for the week of July 17. Please turn to slide 26. An average of 11.4 million barrels per day of refining capacity is forecast to have been taken off-line for maintenance in April and May of this year, about 6.1 million barrels per day higher than the 2014 to ’18, five year average. These changes are being implemented in anticipation of revival in demand as COVID-19 related lockdowns end around the world and oil demand begins to rise. Please turn to slide 27. Gasoline demand has increased as COVID-19 lockdowns have ended. In particular, Chinese demand has risen above the 2015 to 2019 average as commuters show a preference for driving amid concerns over social distancing on public transportation. For a number of weeks, traffic across Chinese cities has been at or above 2019 average levels. Traffic congestion is near COVID levels across France, Germany, Switzerland and parts of Italy. Please turn to slide 28. In the first half of 2020, the fleet grew by 1.5% on deliveries of 3 million deadweight, plus a 0.5 million deadweight of demolitions. Projected net fleet growth for 2020 is only 2.4%. About 6.4% of the product tanker fleet is 20 years of age or older. As of July 1, 2020, there were 191 product tankers on order and 459 which are 17 years in age and older. The total order book is much less than those ships 17 years in age and older. Thank you. This concludes my review, and I would like to now turn the call over to Leonidas Korres for the Q2 financial results.

[Leonidas Korres:]

Thank you, Ted. I will discuss the financial results for the second quarter and the six month period ended June 30, 2020. Please turn to slide 30. Revenue for Q2, 2020 increased by 91.6% to $112.2 million, from $58.6 million in Q2, 2019 reflecting the very strong tanking market during the quarter. The second quarter of 2020, we had 99.2% fleet utilization. We achieved a time charter equivalent of $28,187 per day, much improved from the $15,525 per day achieved in the second quarter of 2019. Time charter and voyage expenses were $3.5 million. Operating expenses were $29.8 million, and G&A expenses were $6.3 million. EBITDA for Q2, 2020 increased by 196.6% to $72.6 million from $24.5 million in Q2 of 2019. As a result, we reported a net income of $31 million or $1.95 per share. Turning to the financial results. For the six month period ended June 30, 2020, revenue increased by 54.8% to $210.1 million from $135.7 million last year, reflecting a time charter equivalent of $26,339 and a 99% fleet utilization. Operating expenses were $59.7 million and G&A expenses were $10.2 million. I would like to remind you that our results were negatively affected in Q1 of 2020 by $13.9 million relating to the impairment recognized in the company’s receivables from Navios Europe II, which was liquidated during the second quarter. Adjusted EBITDA for the first half of 2020 increased by 103.5% to $129 million from $63.4 million in 2019. Depreciation and amortization was $33.2 million, and net interest expense and finance costs were $43.5 million. Adjusted net income for the six months of 2020 was $47.2 million or $2.98 per share. Slide 31 provides related balance sheet data as of June 30, 2020. Cash and cash equivalents, including restricted cash was $68.5 million. Vessels net book value was $1.3 billion. Total assets amounted to $1.6 billion. Total debt as of June 30, 2020, was $1.161 billion. Net debt-to-book capitalization ratio as of June 30 improved to 72.9%. Following the liquidation of Navios Europe II, Navios Acquisition was allocated $8.9 million in cash and seven containerships with their associated working capital. Navios Acquisition drew $41.7 million under a new short-term credit facility secured with the seven containerships and repaid $45.1 million of vessels’ indebtedness. The vessels are accounted for as held for sale, and the assets and liabilities associated with them are included in other assets and other liabilities respectively. Post Q2, Navios Acquisition repurchased $5 million of its ship mortgage notes for a cost of $2.9 million. Please turn to slide 32. As Angeliki mentioned, in the second quarter we concluded financings of $92.9 million extending maturities to 2027. These financings consist of $72.1 million sale and leaseback arrangement to finance four product tankers, which will be repaid through a period of four to seven years in consecutive quarterly installments with an interest of LIBOR plus a margin of 390 to 410 basis points per annum, depending on the vessel financed and $20.8 million bank financing for two product tankers, which will be repaid through a period of four years in consecutive quarterly installments with an interest of LIBOR plus 300 basis points per annum. Turning to, slide 33. As for return of capital to shareholders for the second quarter, we declared a dividend of $0.30 per share. The dividend will be paid on October 8, 2020, to shareholders of record as of September 4, 2020. And now I would like to pass the call to Angeliki for her final remarks.

[Angeliki Frangou:]

Thank you, Leo. This completes our formal presentation. And we’ll open the call to questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Chris Wetherbee with Citi.

[James Monigan:]

Hey, good morning. James on for Chris.

[Angeliki Frangou:]

Good morning.

[James Monigan:]

Just wanted to touch on the rate outlook that you had given and some of the other color you provided. So do you think that possibly the turn or the improvement in the time charter rates relative to spot rates is based on seasonality and the implications of refinery maintenance being moved forward to the earlier part of the year, or do you think that it's actually more or less built on sort of an expectation of resurging demand? Just kind of want to understand if there's like a recovery built into that time charter rate that you referenced or if you think that it's more or less just status quo and sort of seasonality and some of the other trends just flowing through it, just kind of wanted to get your thoughts there.

[Angeliki Frangou:]

That's a good question. I mean basically we see even though we came from a strong quarter, that had a lot to do with storage. We see that we are in the seasonally low quarter, but we see that the fundamentals on the industry being good, because you have big picture. We have the lowest order book in the last 25 years. Vessels over 20 years of age are more than the vessels on order. Yes, we have 12% of the VLCC fleet at storage, which again removes. And very importantly, you have VLCC ton mile demand is increasing as Atlantic exports fill the refinery capacity in Asia and China. So basically you have no order book, the lowest, and you have a lot of storage that even if you have release of storage of the 20%, you have a lot of older vessels. You have more older VLCCs than the new buildings to really clean up and rebalance this portfolio.

[James Monigan:]

Got it. So you think that mostly the sort of the pickup is based on sort of the supply side more than the demand side if I'm understanding your comment correctly?

[Ted Petrone:]

Yes, hi. This is Ted. I think you're absolutely right. I think that very rarely do you get that time charter rate to double the spot rates on the Vs, right, and on the MRs, you know the MRs have picked up a bit in the Atlantic and the Pacific. In the Atlantic it's all U.S., right? A big stock drawdown in crudes yesterday, which is a good sign for the market, higher than expected, and the refinery maintenance – refinery utilization has really jumped up in the Gulf, and there's a lot of export demand in the Atlantic. You're looking at some MRs now getting graduating rates as you go out further, right? The first three or four months is lower, it kicks up. Listen, the smart money or we say is the shorts is coming in now to pick up tonnage, because everyone realizes the economies are recovering to a certain extent and if demand goes up the price of the – you know you're looking at time charter rates today for the Vs that are sitting around the 20-year average. It could go higher come Q4.

[James Monigan:]

Got it, okay.

[Angeliki Frangou:]

One more point. I think that 2021, I mean you have good fundamentals, you're going into a seasonally strong Q4 and don't forget that 2021, the world GDP is actually going to almost 5.8% out. So it's a very strong recovery going forward. So basically, even though we are seeing in the pandemic, you see some good trends that can give you optimism.

[Ted Petrone:]

And adjust the PPS to Angeliki's PS. You know the order book is low, but because of you know engine technology concerns, right, IMO regulation, CO2 issues, it doesn't look like anybody is going to be jumping in anytime soon to be putting in new orders. So this order book should stay low for the foreseeable future.

[James Monigan:]

Alright, it makes sense to me. I wanted to kind of touch – keeping all that in mind and sort of the low risk level or the low risk sort of like outlook in terms of a rate ramp, does – I wanted to touch on the capital allocation strategy. So right now you're paying a dividend with a pretty substantial yield. It seems like there's a rather large discount to NAV out there. Just how are you thinking about capital allocation and/or shareholder sort of oriented capital allocation between the dividend and the buyback or buyback given the fact that there is a sort of ramp built in and the sentiment seems to be fairly negative?

[Angeliki Frangou:]

I think, I mean we already have a dividend policy I think on capital allocation. I don't think we will have more buyback. I think it will be more of a buyback of debt, which is a priority in our capital structure. I mean as you saw, we have taken – we took over – last year we refinanced term loan B and we now refinanced in the middle of the pandemic. We did $93 million in Q2 maturities and we took them to 2027. So priority today on the capital structure we have is really the maturity we have in the end of 2021 and again our mortgage note.

[James Monigan:]

Got it. So just – at all is the dividend something that you might consider reallocating towards buying the debt back given the fact – given how much of a discount you're getting, more so – I'm just trying to understand sort of if the cash flow for the dividend. You see sort of a better opportunity for it throughout any portion of your capital structure, that's all.

[Angeliki Frangou:]

Yes, the dividend is a Board decision, but I mean the results of the company were very good. We see a healthy environment, so I think this is something that we look to be in the right positioning. The thing that we are concentrating is the refinancings and that is something that we are doing over the last two years. It's not a network of one quarter, but it's something that we're looking as a priority for us.

[James Monigan:]

Got it, and then just a couple of quick ones. In terms of that refinancing, do you have any sort of date that you're targeting for refinancing that November facility for 2021? Should we expect something later this year as in the front half of next year? Just trying to get a sense of like the timing that you're working towards at the moment given the pandemic.

[Angeliki Frangou:]

I think this is market condition related and I think as you have seen overall, we are very active in the market. We are constantly working and preparing. I mean I think Q2 was also particularly an interesting quarter with a lot of the lockdowns. I think we are on the – we’re very alert, very on top of it and we are preparing for that.

[James Monigan:]

Got it. And then similarly on the container ships, do you have any idea when you might be able to actually liquidate those? Do you think that's something that happens in the second half of this year versus the first half of next or do you think it might even take longer than that?

[Angeliki Frangou:]

Listen, as we already did, we held them for sale and this is something well-articulated in that and it will be in an orderly fashion sold in the market.

[James Monigan:]

Okay, makes sense. Thank you for your time.

[Angeliki Frangou:]

Thank you very much.

[Operator:]

Thank you. I would like to turn the call back over to Angeliki.

[Angeliki Frangou:]

This concludes the second quarter earnings. Thank you.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.