Navios Maritime Acquisition Corp (NNA) Q1 2020 Earnings Conference Call May 6, 2020 8:30 AM ET
Angeliki Frangou - Chairman & CEO
Ted Petrone - Director
Leonidas Korres - CFO & Director
Conference Call Participants
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 obligations to update the information contained in this conference call.
The agenda for today's conference call is as follows, 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?
Thank you, Doyce, and good morning to all of you joining us on today's call. I begin by saying how proud I am of the entire Navios family during the fearful time of uncertainty. We provide an essential service. At any given time, our vessels at sea carry over 1,000 people, keeping these vessels moving in and out of granting countries with an ever-changing set of rules and problems, often requires immediate input for many disciplines.
The manager of our vessels has done a magnificent job keeping our fleet functioning during this time of crisis, while also taking the necessary measures to ensure safety of its employees. I am pleased with our results for the first quarter of 2020.
During the quarter, Navios acquisition recorded revenue of $97.9 million and adjusted EBITDA of $56.2 million. Representing increases of about 27% and 36%, respectively, over Q1 2019. NMA also reported adjusted net income of $14.9 million or $0.95 per share for the first quarter. We declared a quarterly distribution of $0.30 per share for the first quarter. The oil markets have been significantly impacted by large supply shock due to the recently resolved oil price war between Russia and Saudi Arabia, and unpresented demand shock related to the ongoing COVID-19 pandemic. Stay at home orders have later decreased global demand and increase in floating storage, not only on the crude oil but also for products. Our chartering strategy is protect the focus on protecting the downside while capturing as much upside as possible. Our tactics evolve as what we were able to fully obtain in the past such as profit sharing is no longer easily available today.
Further, fixed investment we’ve made today reduces the proportion of upside we are able to capture, which we estimate to be about 55% to a market rate at above $40,000 per day.
Slide 4 presents some of the company highlights. NMA has a core fleet of 46 diverse tankers and an average age of 10 years. We recently added 5 vessels to our fleet by liquidating Navios Europe I. We also have an investment in Navios Europe II, which owns 14 vessel fleet and is expected to be liquidating in Q2 of 2020. Our receivables of Navios Europe II, are expected to be transformed into steel and cash.
Slide 5 highlights the fragile oil market with Saudi Arabia and Russia initially disagreeing on oil production cuts, the oil market experienced expressive storm. The oversupply of oil was met with reduced demand causing oil markets to experience a historical shock.
In April, there was 29 million barrels per day drop in demand, this impact led to the May WTI oil contract going negative. Slide 6 highlights the recent rise in floating storage demand for VLCCs, driven by a rise in Contango spread as a result of the dislocation in the oil market. Almost 100 VLCCs or 12% of the global fleet are currently serving as floating storage unit. For perspective, consider that 39 VLCCs were used for floating storage on average during the 2-year period of 2018 and '19.
Slide 7 demonstrates Navios Acquisition key developments. In the first quarter of 2020, the company showed a 36% increase in adjusted EBITDA to $56.2 million from $41.2 million in Q1 of 2019, as our chartering strategy expose us to much of the market upside. Looking at our features, we have 48.3% of our available days on fixed rate, 22.2% fixed with a profit-sharing arrangement and 12.8% fixed on floating rates and the remaining 16.6% available days open, mainly in the fourth quarter.
Additionally, we expect to liquidate our investment [indiscernible] Navios Europe II in the second quarter of 2020 and convert receivable into steel value and cash. On a financing front, we are in the process of refinancing $76.7 million for four of our product tankers. On the S&P front, we expanded our VLCC fleet by four new vessels, with no initial capital outlay. We have 3 new building VLCCs delivering into our fleet in 2020 and 2021 and an option for a fourth vessel delivering in 2022. The vessels are structured as bareboat leases and all have been chartered out. The net present value of the differential between the charter in and charter out rate for the three VLCCs is about $65 million.
Slide 8 details our cost structure. For the remaining 9 months of 2020, we contracted 70.5% of our available days at $19,578 per day. This stated rate may be understated as it excludes any profit sharing from our 2,651 days that have such arrangements. Our total cost for the same period is expected to be $18,674 per day. We have 3,511 open plus floating rate days, which gives us a breakeven of $16,511 per day. Our total cost includes operating expenses, dry docking amortization, general and administrative expenses, interest expense and capital repayment.
Slide 9 shows our cash flow potential and the recent factors that have led to a robust tanker market. As I touched upon earlier, the collapse in the oil price has driven inventories around the globe higher. A rise in Contango spread has increased the demand for tankers to be used as floating storage unit. For 2020, our contracted revenue is expected to be $164.6 million. However, NNA also has 3,511 days that are open all on floating rate, giving us a breakeven rate of $16,511 per day and another 2,651 days fixed with profit sharing arrangement.
Assuming a weighted average forward rate based on a current 1-year time charter rate, expected revenue for the remaining 9 months of 2020 should be $134.3 million from our open plus floating rate days and profit sharing. With cost visibility, we believe this could generate free cash flow of about $76.8 million. However, given the ongoing supply demand dynamic from the pandemic, the VLCC charter rate realized on Contango justifying floating storage.
Slide 10 shows our liquidity position as of the first quarter. Our cash balance is $51.1 million as of March 31, 2020. Our net debt-to-book capitalization is 75.4%. We have a fully funded growth CapEx, and we do not have any significant debt maturities ending in the fourth quarter of 2021.
At this point, I would like to turn the call over to Mr. Ted Petrone.
Thank you, Angeliki, and good morning all. Please turn to Slide 12. In December of 2019, Navios Maritime Acquisition took delivery of 5 product tankers following the liquidation of Navios Europe I. Navios Acquisition's diversified fleet now consists of 46 vessels with an average age of 10 years, totaling 5.7 million deadweight. The fleet consists of 13 VLCCs, 10 LR1s, 18 MR2s, 3 MR1 product tankers and 2 chemical tankers. 3 of the VLCCs are bareboat newbuildings and are scheduled for delivery in Q4 2020 as well as Q1 and Q3 of 2021.
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 remaining 9 months of 2020, about 70.5% of our fleet's available days are fixed at a base rate or at a base rate plus profit sharing and about 12.8% are fixed on floating rates. As a result of this strategy, the Navios fleet enjoys significant downside protection as well as the ability to participate in the upside with 51.6% of our fleet days exposed to market rates.
Please turn to Slide 14. Navios has a fleet of 10 VLCCs in the water, 9 of which are contracted out at an average rate of $27,258 net per day, providing downside protection in a cyclical market. One VLCC is fixed at 100% of the Baltic TD3C time charter index. Along with secured base rates, profit sharing arrangements provide Navios with 83% of the additional revenue between $20,000 and $40,000 per day charter hire and 55% of the additional revenue above $40,000 per day.
Please turn to Slide 15. Navios Acquisition continues its policy of locking in secure cash flow with creditworthy counterparties. Our fleet has secured about $450 million in long-term contracted revenue. We continue to extend the coverage of our fleet via new fixtures, continuations and exercised optional periods at higher levels and in some cases, also with profit sharing.
Please turn to Slide 16. Slide 16 shows in detail our current charters and their expected expiration dates. Our charting strategy revolves around capturing market opportunity while also developing dependable cash flow from a diverse group of first-class charters.
Please turn to Slide 18. The entire globe affected by COVID-19 virus, world economies were severely constrained as governments put confinement guidelines in place. In April, the IMF projected global GDP contraction of 3% for 2020, led by a 6.1% contraction in advanced economies and including only a 1% expansion in China, India and other developing Asian economies. Governments have put in place emergency monitoring fiscal plans to support their economies, central banks have embarked on huge monetary stimulus programs. In light of this, the IMF projects 5.8% growth in 2021, including an 8.5% expansion in China, India and developing Asia. The IEA projects a global oil demand decline of 9.3 million barrels per day for 2020, erasing a decade of growth. April demand is projected to drop 29 million barrels a day to a level of demand last seen in 1995.
Please turn to Slide 19. The slide on the left -- the graph on the left shows the estimated results of the OPEC+ group's recent supply cut of circa 10 million barrels a day. This was nowhere near close to offsetting the collapsing demand estimated to be at least twice that figure, thereby closing a crude stock buildup of about 17 million barrels per day. Assuming demand recovers at OPEC+ maintained discipline on stated cuts, stock draw should reach about 4.7 million barrels a day in the second half of 2020. Twin supply and demand oil shock brought about price collapse in crude oil as well as Contango and oil futures. The result triggered rapid floating storage bookings of 3 to 6 months durations. Currently, there are 98 VLCCs on floating storage, which is about 12% of the fleet. This is shown on the graph on the right.
Please turn to Slide 20. China is the world's largest importer of oil and the second-largest consumer of oil, importing about 2/3 of its requirements. Chinese imports have increased about 200% since January '09, representing an 11% CAGR. Chinese crude imports averaged 10.4 million barrels a day in the second half of '19 and 10.2 million barrels a day in the first quarter of 2020. As you can see in the table below, on a per capita basis, U.S. oil usage is 6.4x that of China. European usage is 2.9x that and world usage is 1.4x. If China goes to world per capita consumption levels, China would require an additional 220 VLCCs. Assuming all crude is imported by sea, this represents an expansion of the existing fleet by about 27%.
Please turn to Slide 21. U.S. crude oil production hit highs in February and March of this year of 12.8 million barrels per day and should continue to export crude in the future. Additionally, other Atlantic exporters plan to increase crude exports, more than offsetting 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 about 80% of their crude consumption. China and India and other Asia, to expand refinery capacity by 3 million barrels per day between 2020 and 2025, representing 48% of all expansions. 18.1 million barrels a day refinery capacity in China to 200 -- to the year 2021 translates to an additional 330 million barrels of crude oil, which would require 41 VLCCs.
Please turn to Slide 22. Net fleet growth through April equaled 1.7% with 4.9 million deadweight deliveries against 600,000 removals. Projected net fleet growth for 2020 is 4.1%. We note that while the order book shows 61 VLCCs as of last week, there are 155 VLCCs 17 years of age and older. With the IMO 2020 and ballast water management regulations that will lead to some vessel 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 14 million barrels per day from 2020 to 2025, including all additions, expansions and upgrades. About 75% 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 6.5 million barrels, with the Middle East adding a further 4.3 million barrels per day.
Please turn to Slide 25. U.S. crude production has risen by about 150% since the end of 2008, reaching 12.9 million barrels per day in November of last year, the highest level of production since record started in 1920. The U.S. has increased its total product exports by over 500% to about 6 million barrels per day since 2004.
Please turn to Slide 26. An average of 8.7 million barrels per day of refining capacity is forecast to have taken off-line for maintenance in April of this year, about 2.4 million barrels per day higher than the 2014 to '18, 5-year average. Currently, forecast maintenance will average over 7.2 million barrels per day through May and is currently forecasted to decline thereafter. These changes are being implemented in anticipation of a revival in demand as COVID-19-related lockdowns end around the world and oil demand begins to rise. In the meantime, product tanker spot rates have hit all-time highs and period rates have remained elevated due to lack of storage and delays in discharging.
Please turn to Slide 27. In Q1 of this year, the fleet grew about 0.8% on deliveries of 1.7 million deadweight, less 400,000 deadweight of demolitions. Projected net fleet growth for 2020 is only 2.7%. About 6.5% of the product tanker fleet is 20 years of age or older. As of April 1 of this year, there were 181 product tankers on order and 462 which are 17 years of age or older. The total order book is much less than those ships 17 years in age and older.
Thank you. This concludes my review. I would like to now turn the call over to Leonidas Korres for the Q1 financial results.
Thank you, Ted. We will discuss the financial results for the first quarter ended March 31, 2020. Please turn to Slide 29. Revenue for Q1 2020 increased by 26.9% to $97.9 million from $77.1 million in Q1 2019 reflecting the improved tanking market and the increased fleet of Navios Acquisition following the acquisition of 5 product tankers in mid-December through the liquidation of Navios Europe I. In Q1 2020, we had 99.3% fleet utilization. We achieved a time charter equivalent of $24,442 per day improved from the $19,643 per day achieved in the first quarter of 2019. Time charter and voyage expenses of $6.1 million, mainly reflect expenses relating to our vessel spot voyages during the quarter. Operating expenses were $29.8 million.
And G&A expenses were $4 million, reduced from the $5.1 million in Q1 of 2019. Our results in Q1 were negatively affected by $13.9 million relating to the impairment recognized in the company's receivables from Navios Europe II, which is expected to be liquidated during the second quarter. Adjusted for this, EBITDA for Q1 2020 increased by 36.3% to $56.2 million from $41.2 million in Q1 of 2019. Other expenses include depreciation and amortization of $16.6 million and interest expense and finance cost of $21.8 million. As a result, we reported an adjusted net income for the quarter of $14.9 million or $0.95 per share.
Slide 30 provides selected balance sheet data as of March 31, 2020. Cash and cash equivalents, including restricted cash, was $51.1 million. Vessels net book value was $1.3 billion. Total assets amounted to $1.5 billion. Total debt as of March 31, 2020, was 1.1615 billion, resulting to a net debt-to-book capitalization ratio of 75.4%.
Turning to Slide 31. As for return of capital to shareholders for the first quarter, we declared a dividend of $0.30 per share. The dividend will be paid on July 9, 2020, to shareholders of record as of June 3, 2020.
And now I would like to pass the call to Angeliki for her final remarks. Angeliki?
Thank you, Leo. This concludes our formal presentation. We will open the call to questions.
[Operator Instructions]. Your first question comes from the line of Chris Wetherbee with Citi.
James on for Chris. I just wanted to touch on Navios Europe II. I was wondering if you could give us color around the amount of cash you expect to receive. Whether you plan on selling the vessels to a third party or a related party? And just any color in general around sort of what you might get out of that and what it looks like? Possibly if the time line could get kicked out for -- on account of COVID-19?
The Navios Europe II is dissolving in the second quarter. The special committee will be going. The cash of the Navios Group was around $25 million, which will be proportionally given to the different companies and the value of the asset. So this is a special committee. They're going through. It should be completed within Q2.
Got it. And just in general, could anything happen around basically the shutdown being pushed out or anything that might get cause that to be delayed? Or is it realistically under most scenarios going to happen in 2Q?
We think that it will be completed within Q2. All the arrangements have been organized, so it should be happening now.
Right. Got it. Then also, I wanted to touch on the storage contract you're seeing in the market. It seems like most of them are around 3 to 6 months, but wanted to give sort of your take on whether the demand for storage might go beyond that and these contracts would likely need to be rolled after those 3 to 6 months charters are up.
I think this is very much a function, I mean, storage is the real driver of our market. And we have seen over 100 VLCCs right now used as storage, which basically is about 3x the number of vessels we had in the last 2 years. Really the storage depends on the commodity price and the availability and the use. But this is a very -- is the driver of the market. And this will also assist to bridge the gap between the recovery of the economies, which we expect in, let's say, GDP in 2020 is -- world GDP is going to be minus 3% with the second half recovering, and by 2021, we have a 6% world GDP growth. So the storage is a very good driver for bridging the gap.
Now I think this is a market -- I mean, if you have seen from our results, we were -- this is a market that is very volatile. I'll give you an example. In Q1, I mean, we saw the market starting the VLCC starting at about $130 million, dropping to $20,000 and recovering to over -- almost over to $200,000. So being able to have your strategy where you capture the upside, which is the way Navios is set up, we have 17% of our fleet with a floor or a fixed rate and 50% with the profit sharing mechanism provides us this ability to capture this volatility through the quarter. And also having vessels that are in the water. We did follow scrap policy where we stopped vessels, used -- spent on CapEx and also lose the opportunity on capturing the market. So I think this is a market that you have to be very flexible and very in tune in order to capture the opportunity.
Got it. That's helpful. So looking at second-hand values, although rates have moved on storage. Second-hand values haven't moved all that much. Is there actually -- but then again, those are a bit more backward looking. So is there actually a strong bid out there for second-hand values or secondhand vessels? And we just haven't seen the values move up. Or is it something that second-hand market is really looking through the storage opportunity that is?
I think this is actually -- this is amazing that you have prices going up. I have to remind you that this period, there is no crew member that can go onboard a vessel. You cannot change crew, you cannot reflag the vessel, you cannot do a transaction. The amazing thing in the kind of an environment, that's why all the leading brokerage companies have stopped giving value basically, is because the only vessels that were able to be sold was VLCCs and product tankers because new owners will take the vessels with the existing crew. This is actually an unbelievable how strong is in a market where you could not have any transactions. I mean, if you wanted to sell any vessel anywhere in the world, it's impossible.
At this time, I'd like to turn the conference back over to Angeliki.
Thank you. Thank you very much. This was our first quarter results. Thank you.
Thank you. This concludes today's conference. You may now disconnect.