Earnings Transcript for NM - Q3 Fiscal Year 2021

Operator: Good morning, and thank you for joining Navios Maritime Holdings Third Quarter 2021 Earnings Conference Call. We are pleased to host this call from the Cayman Islands. With us today from the company are Chairwoman and CEO, Ms. Angeliki Frangou; Vice Chairman, Mr. Ted Petrone; Chief Financial Officer, Mr. George Achniotis; and Senior Vice President of Strategic Planning, Mr. Ioannis Karyotis. I will now turn the call over to Ms. Daniela Guerrero, who will take you through the conference call details and the Safe Harbor statement. Daniela?

Daniela Guerrero: Thank you. As a reminder, this conference call is being webcast. To access the webcast, please visit the Investors section of Navios Maritime Holdings website at www.navios.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 should contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Maritime Holdings. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Maritime Holdings 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 Maritime Holdings' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Maritime Holdings does not assume any obligation to update the information contained in this conference call.

Operator: The agenda for today's conference call is as follows. We will begin this morning's conference call with formal remarks from the management team. And after, we will open the call to take questions. Now I turn the call over to Navios Holdings' Chairman and CEO, Ms. Angeliki Frangou. Angeliki?

Angeliki Frangou: Thank you, Michael, and good morning to all of you joining us on today's call. I am pleased with the results for the third quarter of 2021. In the third quarter, Navios Holdings reported revenue of $168.4 million, EBITDA of $116.1 million and net income of $59.9 million. Navios Holdings announced plans for addressing about $770 million in upcoming note maturities enabled by $550 million in debt financing. This refinancing addresses an imminent note maturity and provides liquidity and sufficient runway for Navios to satisfy $155 million of notes maturing in August of 2022. Importantly, we achieved a release of almost $300 million of collateral and provided an 18-month period, during which there will be no cash requirement for interest or amortization for about half of the debt financing package. Please turn to Slide 3 for an overview of the Navios structure. As you can see, Navios Holdings operates 36 drybulk vessels with an average age of 8.9 years. During the third quarter, Navios Partners completed its merger with Navios Acquisition. With 142 vessels across various segments, Navios Partners is one of the largest U.S. publicly listed shipping companies. Post-merger, Navios Holdings owns 10.3% of Navios Partners valued at $80 million. Navios Logistics operates as the leading infrastructure and logistics company in the Hidrovia region. Navios Holdings maintained its 63.8% ownership in Navios South American Logistics. Slide 4 highlights our recent developments. We'll continue to strengthen our balance sheet with secure financing that allow us to retire $614.3 million of ship mortgage notes while also reducing $50 million of senior secured notes. During the third quarter, we generated $168.4 million in revenue, $116.1 million in EBITDA and $59.8 million in net income. For the first nine months of 2021, we generated $429 million in revenue, $251.3 million in adjusted EBITDA and $84.9 million in adjusted net income. During the third quarter, we also achieved a time charter rate per day of $37,767 for our Capesize vessel, $27,828 per day for our Panamax vessel and $23,520 per day for our Ultra-Handymax vessel. Fourth quarter 2021 and 2022 should also offer strong cash flow. So far in the fourth quarter, we capitalized on market conditions by fixing 88% of our 3,382 available days at a net rate of $31,444 per day. You can see our fixes by asset class laid out on the slide. For calendar year 2022, there are 12,993 available days, of which 10,322 are open or index-linked. However, breakeven is only about $10,713 per open day. With market rates averaging around $33,500 per day we hope to generate additional free cash flow from this strong drybulk market. Lastly, I highlight the completion of Navios Partners merger with Navios Acquisition. As a result of the merger, Navios Holdings own 10.3% stake in the combined entity. Slide 5 details the $664.3 million retirement of notes enabled by the $550 million of new debt financing that we recently announced. As laid out at the top of the slide, Navios Holding will retire $614.3 million in ship mortgage notes due January 15, 2022. This will be accomplished as follows. We will use $555.5 million in profit from the new debt financing plus available cash and $158.9 million of ship mortgage notes pledged as collateral to NSM under the own facilities will be canceled. Navios Holdings will also redeem $50 million in senior secured notes, after which $105 million balance will remain outstanding. As you can see from the bottom of the slide, of the new debt financing, $287 million is sourced from commercial banks and sale leaseback agreements. These facilities will be secured by 18 drybulk vessels. 17 are collateral to the ship mortgage notes, plus seven drybulk vessels under bareboat charters and sale leaseback agreement as additional collateral, and $262.6 million of new debt financing is sourced from NSM. These loans will provide for $112.6 million to refinance the existing NSM loan and $150 million of additional liquidity. NSM lends its support for the refinancing through the following two ways. First, it released approximately $300 million of collateral allowing Navios Holdings to cancel $158.9 million of ship mortgage notes and grant the remaining collateral as security for the commercial credit facilities. Second, it provided NM an initial 18 month period, during which there will be no cash interest or amortization. Interest due in respect of this period will be paid in the form of a junior debt instrument. Slide 6 shows the pro forma debt structure post our deleveraging effort. At year-end 2020, we had almost $1.2 billion in debt. Pro forma for the new debt financing extinguishment of ship mortgage notes and partial redemption of the senior secured notes, we will reduce debt by approximately 40% to $722 million. These amortizing debt maturities will also be targeted reducing concern tied to large maturities. There will be no cash requirement for servicing the NSM loan for the first 18 months. We believe our deleveraging efforts are carving a new path forward for Navios Holdings as we remove the immediate refinancing risk. I would like now to turn the call over to Mr. George Achniotis, Navios Holdings CFO, who will provide more details of our new debt financing. George?

George Achniotis: Thank you, Angeliki. Please turn to Slide 7 to discuss in more detail the new financing facilities. As Angeliki explained, we have obtained financing, which will be used along with available cash, to retire $664.3 million of debt comprised of $614.3 million of ship mortgage notes due next month and $50 million of senior secured notes due in August 2022. This financing is composed of the following facilities. First, $105 million term loan facility with Hamburg Commercial Bank. The facility bears interest of LIBOR plus 4.5% initial margin reducing to 3.25% based on certain conditions. It has a two year term and a 5.8-year amortization profile and will be secured by seven drybulk vessels. Second, $105 million term loan facility with Credit Agricole and BNP Paribas. This facility bears interest of LIBOR plus a margin range of 3.75% to 2.85% based on certain conditions. It has a three year term and a 4.9-year amortization profile and will be secured by seven drybulk vessels. Third, $77 million for sale and leaseback agreements. The agreements have an average term of seven years, an amortization profile of 9.4 years and an average effective interest rate of 5.3%. And fourth, two PIK loan facilities with NSM for a total of $262.6 million. The facilities provide $150 million of additional liquidity, no cash interest or amortization for 18 months and a PIK interest rate of 18%. Note that this interest rate is reduced to 16.5% after the repayment of the senior notes and reduces further if paid in cash to 13.5%. The facilities have a term of four years, 18 months no call, an amortization of $10 million quarterly commencing in Q3 of 2023. The upfront fee and all PIK are to be paid in the form of convertible debenture, having a 5-year term, 4% PIK convertible into common shares of Navios Holdings and voting on an as-converted basis. In order to enable the refinancing, NSM has agreed to release a total of about $300 million of collateral as follows. $158.9 million of ship mortgage notes, which will be canceled; and $140 million of one drybulk vessel and equity of seven vessels in bareboat and sale and leaseback facilities offered as additional collateral to commercial banks. I note here that the PIK loan facilities were negotiated by a committee of independent disinterested Board members and its independent advisers. Moving to Slide 8, the chart at the bottom of the slide demonstrates how the balance of the two senior notes will be reduced by $815 million from almost $920 million at June 30, 2021, to $105 million. In Q3, we redeemed $150 million of the senior secured notes. $287 million of new bank credit facilities and $100 million from the new NSM facility will be used to extinguish the ship mortgage notes and $50 million will be used to redeem the senior secured notes. NSM will release $159 million of ship mortgage notes currently held as collateral, which will be canceled. And finally, about $68 million of available cash will be used to extinguish the remaining ship mortgage notes. Turning to Slide 9, we provide a calculator for the potential cash flow generation of the company in 2022. As you can see on the chart at the bottom of the slide, we have almost 13,000 available days in 2022. Almost 2,700 days or 21% of the total are fixed at about $28,000 per day. The remaining 10,322 days have market exposure as they are either open or fixed on index-linked charters. If you look at the table at the bottom right of the slide, the breakeven to cover all of our 2022 expenses, including the new debt service, their open index day is currently about $10,700 per day. This compares favorably with the $33,500, which is approximately the current market rate weighted for our open index days. Please turn now to Slide 10 for a review of the Navios Holdings financial highlights for Q3 in the nine months to September 30, 2021. In Q3 2021, we had a record EBITDA of $116 million almost double the adjusted EBITDA of about $60 million in Q3 of 2020. To put it in perspective, the $116 million achieved in the quarter this year is more than the adjusted EBITDA achieved in the first nine months of 2020. The increase is mainly attributable to the time charter equivalent rate achieved in the quarter of $30,146 per day, which was more than double the Q3 2020 TCE of $14,056. Net income for the quarter was $59.8 million compared to $1.8 million adjusted net income in 2020. The increase is mainly due to the increase in EBITDA. Turning to the nine month results. Adjusted EBITDA for the first nine months of 2021 was $251.3 million, more than double the $115.8 million achieved in 2020. EBITDA and net income for the nine months were adjusted to exclude $25.9 million income in affiliate companies due to the merger of Navios Partners and Navios Containers in Q1 and $25.9 million impairment loss relating to seven vessels. Similar to the Q3 results, the increase in adjusted EBITDA was mainly attributable to the increase in the time charter equivalent rate achieved in the period, which was $21,470 per day compared to $9,673 in the nine months of 2020. Adjusted net income for the first nine months of 2021 was $84.9 million compared to an adjusted net loss of $47 million in 2020. The increase was mainly due to the increase in EBITDA. Moving to Slide 11 and our balance sheet highlights. As of September 30, 2021, the cash balance was $46.7 million. Senior secured and ship mortgage notes on our balance sheet have decreased by $154 million, reflecting the notes bought back during the year. Finally, at the bottom of the slide, we present the new debt maturity profile pro forma for the expected repayment of the ship mortgage notes, the $50 million redemption of the senior secured notes and the new financing discussed earlier. As you can see, we have extended and staggered our maturities. And with the exception of the secured notes of Navios South American Logistics due in 2025, we do not have any significant maturities in a single year. Now I will turn the call over to Ioannis Karyotis for his review of the Navios South American Logistics results. Ioannis?

Ioannis Karyotis: Thank you, George. Slide 12 provides an overview of Navios Logistics. Navios Logistics operates three port terminals, which are complemented by our barge fleet for river transportation and product tanker fleet for coastal cabotage trade. Please turn to Page 13. In the third quarter of 2021, our operating performance continued to be impacted by a soft cabotage market attributed to the weak economic environment in Argentina and deteriorating river conditions. Adjusted EBITDA was $23.3 million. This quarterly adjusted EBITDA number has been adjusted to exclude a $24.1 million loss from the disposition of certain financial assets. These adverse conditions highlight the essential role our port assets in Nueva Palmira Uruguay played within the regional logistics chain. Because our port is located at the mouth of the river, the loading draft has been unaffected compared to Argentine ports that are suffering from 80 year low water levels in the Parana River. And as a result, we are driving additional revenue through our port terminal. For Q3 2021, the port segment adjusted EBITDA decreased by 10% to $19.6 million. This decrease was attributed to $4.1 million in lower other operating income compared to Q3 2020, during which time the grain port recorded a claim settlement. Excluding the effect of that income, operating performance of the port segment show an improvement compared to the same period last year. Low water levels in the Parana River caused certain of our major customers to divert cargoes to our port from Argentina because our loading draft is almost two meters higher than other Argentine ports. We believe that this competitive advantage not only supports our grain port performance this year but would have long lasting effects as customers reengineer their internal logistics requirements. On the iron ore side, from the Vale contract, we had revenue per the minimum guaranteed quantity of 4 million tons per year. continued to transit through our port terminal during the quarter, moving around 170,000 tons. Despite solid demand for iron ore, both Vale and export volumes from the Corumba have been adversely impacted by low water levels. In the bulk segment, Q3 2021 adjusted EBITDA decreased by 13% to $2 million. The decrease is primarily attributed to higher volumes and operating costs. The low water levels are adversely affecting operations and profitability as barges have limited carrying capacity and reduced drafts, and trips take longer to be completed. River conditions continue to be challenging. In our cabotage market, Q3 2021 adjusted EBITDA decreased to $1.8 million from $4.5 million in the same period last year. The decrease is due to lack of employment for some of our vessels during the quarter because of the weak economic environment in Argentina. For Q3 2021, adjusted loss for the quarter was $2.2 million compared to $6.8 million adjusted profit in the third quarter of 2020. Loss for the period has been further adjusted to exclude the impact of $2.1 million noncash deferred taxes. Turning to the financial results for the nine month period ending September 30, 2021, revenue was relatively unchanged at $173.7 million. Adjusted EBITDA was $68.6 million and adjusted loss was $0.5 million. Please turn to Slide 14. Navios Logistics has no significant debt maturities until 2025. Our bond is trading above par, yielding 7.9%. Cash and cash equivalents at the end of the third quarter of 2021 were $31.9 million. During the quarter, we made a dividend distribution of Grimaud Ventures S.A shares to our shareholders. I would now like to turn the call over to Ted Petrone.

Ted Petrone: Please turn to Slide 15. Slide 15 presents our diversified drybulk fleet consisting of 36 vessels totaling 3.9 million deadweight; 12 Capes, 19 Panamaxes, 4 Supramaxes and 1 Handysize. The average age of the fleet is 8.9 years, 19% younger than the industry average. Navios Group total fleet of 186 vessels includes 90 drybulk vessels, 53 tankers and 43 container vessels. Please turn to Slide 16, which highlights our ESG initiatives. Maritime shipping is the most environmentally friendly means of transportation as it is the most energy and carbon-efficient mode of transport. We aspire to have zero emissions by 2050. In this process, we have been pioneering and are adopting certain environmental regulations up to two years in advance, and we aim to be one of the first fleets to achieve full compliance. Navios is a socially conscious group whose core values include diversity, inclusion and safety. We maintain policies and procedures that provide effective corporate governance and a clear code of ethics. Our Board is composed a majority of independent directors and independent committees that oversee our management and operations. Please turn to Slide 18. The IMF projects global GDP growth at 5.9% for 2021 and 4.9% for 2022. The rate for '21 is the highest in almost 50 years and is led by a 7.2% expansion in China, India and developing Asia. Vaccine rollouts, continued fiscal stimulus and government infrastructure projects should continue to support economic growth. Drybulk trade is projected to increase by 3.7% in 2021 and further increase by 2.1% in 2022. Rates in all asset classes rose sharply in '21 reflecting surging trade driven by strong demand for both major and minor bulk commodities. The BDI average for Q3 was 3,732, the highest quarterly average in 2008. In fact, the BDI reached 5,650 on October 7, the highest level in 13 years led by increased iron ore exports out of Brazil, pushing Capesize rates to just under $90,000 in early October. More recently, despite increased volatility, rates remain well above long-term averages as demand is forecast to continue to outpace net fleet growth in 2022. Turning to Slide 19, post-pandemic stimulus measures in the advanced economies and economic growth in China has fueled demand for iron ore. Global iron ore demand is expected to increase by 1.4% this year, an increase to 1.9% in 2022. Additionally, availability of resilient exports to China in 2022 are expected to increase by 5.3% increasing ton miles and driving demand for Capesize vessels. Forecast for 2022 are for continued growth in iron ore world imports x China as the effects of the pandemic recede. Europe's imports are expected to grow by 8%, and Asia, excluding China, is expected to import 7% more iron ore. Please turn to Slide 20. World seaborne coal trade is expected to grow by 6% in 2021 and 2% in 2022. Asian coal imports, which account for over 80% of the world's seaborne coal trade, are expected to increase by 5.1% in 2021 and 1.6% in 2022. According to the International Energy Agency, global coal-fired electricity generation is expected to rise by nearly 5% this year and exceed pre-pandemic levels, therefore, increasing a further 3% to an all-time high in 2022. Turning to Slide 21, an ever-increasing world population, food security issues driven by the pandemic as well as increasing protein demand worldwide continues to support the global grain trade. Worldwide grain trade has been growing at 5% CAGR since 2008 mainly driven by Asian demand, which is forecast to grow by a further 11.4% in 2021. Overall, world grain trade is expected to increase by 2.8% in 2021 and 2.7% in 2022. Please turn to Slide 22. The current order book stands at one of the lowest on record at 6.9% of the fleet. 2021 net fleet growth is expected at 3.5% and only 1.5% for 2022 below the projected increase in drybulk demand for both years. Vessels over 20 years of age are about 8.5% of the total fleet, which compares favorably with the previously mentioned low order book. In concluding, demand is forecast to continue to outpace net fleet growth in 2022 as strong demand for natural resources, combined with continuing COVID-related logistical disruptions and the slowing pace of newbuilding deliveries, all support healthy levels of current and future freight rates. This concludes my presentation. I would now like to turn the call over to Angeliki for her final comments. Angeliki?

Angeliki Frangou: Thank you, Ted. This completes our formal presentation. We open the call to questions.

Operator: And we will take our first question from Omar Nokta with Clarkson Securities. Your line is now open.

Omar Nokta: Hi, there. Thank you. Hey guys. Yes. Congratulations on these different financing packages. I know it's been a long time coming, and you're finally here. You've definitely taken care here of the January maturity and you've taken a chunk out of the August maturity as well. Wanted to ask how are you guys feeling about the remaining $105 million bonds that come due in August of '22? How are you thinking about those maturities?

Angeliki Frangou: Good morning, Omar. So basically what we did is, as you said, we addressed $770 million immediately with the refinance to take care of the immediate maturity, the $614 million of the ship mortgages. And what it provides us is it provides a sufficient liquidity and sufficient runway to address the August maturity because we are coming down to about $100 million, and we have a very low breakeven of 10,700 with over 10,000 available days. In an environment where we see a healthy drybulk market, we see that -- and this is continuing. We see that is a good healthy market. We have restricted suppliers that said -- and the COVID inefficiencies are still in place. So basically, we have sufficient liquidity and runway to address the $100 million that will remain outstanding in August of 2020 -- August 2022, sorry.

Omar Nokta: Yes. Understood. Thanks Angeliki. And I guess maybe, more broadly, in the past, when we think about strategic priorities for Navios Holdings, as we get into 2022, you're very close here. In another month or so when you'll have the closing of these different transactions. In prior conversations, you mentioned that taking a look at the future of holdings from a strategic standpoint in terms of doing something substantial, that takes a backseat until the refinancings and restructuring, call it, takes place. We're very -- we're pretty much there. How are you feeling strategically about NM as we get into '22? Anything that you guys have highlighted that you're willing to share?

Angeliki Frangou: I think one thing that I would say -- I would like to say is that what we got with this refinancing package is a very precious commodity, the commodity of time. We have -- we took care of the imminent maturity, $770 million. We reduced debt, we created staggered maturities. And what we got with all this, we have over four years' time. We have a nice fleet. We have nice assets, and this gives us the time to get the cash flows and see our strategic options.

Omar Nokta: Okay. So more of a -- now you have time to evaluate without having to worry about the refinance. Now that, that's taken care of, you can now actually focus and come up with the long-term plan. So I guess more to come here as we look ahead here in the next few months.

Angeliki Frangou: Yes. I mean we took care of these imminent maturities that really it was a big burden for the company and a drag. And don't forget, we actually reported our best quarter in the history of Navios and the whole year is really developing well. We see strong demand, and we see that this time and sufficient runway and liquidity will provide us the best options.

George Achniotis: Omar, if I may. Good morning. So one thing that I wanted to address, we have heard people expressing concerns about the dilution. So I would like to address that, if you don't mind. Yes, there will be dilution but you have to consider what were the alternatives for the company. I mean regular financing was out of reach. No one was willing to put equity in a company with a very big burden debt overhang. So the options were basically two, either to go into distressed hedge funds or going to bankruptcy, and we have seen a number of our peers going to bankruptcy. So in either case, the equity would be completely wiped out. So NSM stepped in, in terms that are not unreasonable. By releasing its collateral, it facilitated the repayment of the maturities of next month and also the new bank financing. But more importantly is what Angeliki said. It has given the company an 18-month runway in a very good market. So we have the chance to delever, build up our cash position, expand or renew the fleet and revisit our capital structure in a couple of years. And one last thing I wanted to point out, the conversion price for the debenture is $3.93, and the share price closed last night at $3.65. So the option price is under the water at the moment.

Omar Nokta: Yes. Understood. Thanks George, and I agree that there weren't many alternatives, especially with the significant amount of capital being brought in with not that much collateral cover. So appreciate your comments, George and thanks Angeliki as well. I'll turn it over.

Operator: That is all the questions we have for today. I will turn the program back over to Angeliki for any additional or closing remarks.

Angeliki Frangou: Thank you. This completes our Q3 results. Thank you.

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