Navios Maritime Holdings Inc.
Q4 2011 Earnings Call Transcript

Published: 23 Feb 2012

[Operator:]

Thank you for joining us for this morning’s Navios Maritime Holdings Fourth Quarter and Full Year 2011 Earnings Call. With us today from the company are Chairman and CEO, Ms. Angeliki Frangou; President, Mr. Ted Petrone; SVP of Strategic Planning, Mr. Ioannis Karyotis; and Chief Financial Officer, Mr. George Achniotis. As a reminder, this conference call is also being webcast. To access the webcast, please go to the Investor Section of Navios Holdings’ website, www.navios.com. Before I review the structure of this morning’s call, I’d like to read the Safe Harbor statement. This conference could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Navios. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Holdings’ management and are subject to risks and uncertainties which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in Navios Holdings’ filings with the Securities and Exchange Commission. The information set forth in this conference call should be understood in light of such risks. Navios Holdings does not assume any obligation to update the information contained in this call. Thank you. The agenda for today’s call is as follows. First, Ms. Frangou will offer opening remarks. Next, Mr. Petrone will provide an operational update and an industry overview. Mr. Karyotis will go through an overview including recent financials for Navios South American Logistics. Then, Mr. Achniotis will review Navios Holdings’ financial results. Lastly, we’ll open the call and take your question. I’d now like to turn the call over to Navios Holdings’ Chairman and CEO, Ms. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Laura. Good morning to all of you who join us on today’s call. We are pleased to report our results for 2011. We had a good solid year and a good fourth quarter. We are pleased with our performance in a difficult market. Our focus during this period has been to efficiently monitor operation of our global fleet and maintain a good relationship with our commercial partner. We have also been focused on maintaining a solid balance sheet and we work on shareholders’ continued dividend payment. We declared a $0.06 dividend for the fourth quarter of 2011 to shareholders of record on March 22, 2012. Slide 2 shows our current stock with the value of Navios Holdings primarily derived from four areas

[Theodore C. Petrone:]

Please turn to slide 9. After a rally at the end of 2011 that brought the BDI above $2100, the index has lost over two-thirds of its value, dropping below $700 for the first time in three years. Negative seasonal and cyclical demand, together with thriving tenant supply, provide little confidence from any substantial improvement in rates in the near term. Should the stark patterns repeat, lower rates will induce more scrapping enforcing a self-correction of the drybulk market. While demand for the supply of commodities available, we see that our movement increases over the longer term. Even with slower world economic growth projections, latest research shows increased 2012 drybulk trade estimates over 2011. Please turn to slide 10. The drivers for the world GDP, growth continue to evolve. Developing economies contribute a higher percentage to total world growth than the developed economies. The IMF expects that trend to continue for the foreseeable future. Apparent concerns about the sovereign debt crisis in the euro zone that led the IMF to lower its forecast for 2012 world growth to 3.3% and 3.9% in 2013. Latest forecast show emerging economies will continue to grow at 5.4% in 2012 and 5.9% in 2013. The primary engines of trade growth continue to be China, India and Brazil with other emerging countries adding strong growth. Drybulk trade has expanded by an average of 4.7% per year in the last decade since China joined WTO. The consensus forecast for 2012 are for drybulk trade to grow in excess of 4.5%. Please turn to slide 11. In order to continue their urbanization and industrialization, China and India continue to invest heavily in infrastructure throughout the Latin America, Africa and Middle East regions. Both countries are securing supply lines of natural resources with these infrastructure investments to ensure continued growth. As a larger question of oil trade is occurring between emerging and developing economies, trade patterns are shifting eastward and southward. Moving to slide 12. Development and urbanization of the western and central parts of China will continue significantly to steel consumption in 2012 and onwards. In construction, housing construction and consumer spending growth will underpin development in 2012 and beyond. Crude steel production in China for 2011 was up 9% year-on-year, China imported 687 million metrics tons of iron ore for 2011, 11% more than 2010. Domestic iron ore production was up 24% to 1.3 billion tons. In addition, China increased imports of coal for use in steel making and for power generation by an estimate 13% year-on-year. In 2011, worldwide steel and iron ore trades hit a new record of 1.1 billion metric tons as imports increased for the tenth consecutive year. This increase has been the result of higher demand from all major steel producing countries except Japan. Going forward, the growth in worldwide iron ore has gone, will be constrained until new iron ore mines and expansion projects become operational. While with the medium to long-term miners are investing heavily in additional production, chart in the upper right depicts potential new iron ore mining capacity of over 500 million tons per annum on a cumulative basis through 2014. These expansions increased the tons carried and ton miles. Turning to slide 13. India has taken initial steps to industrialize and urbanize. As you can see in the lower right-hand chart, India is expected to increase its urban population to 590 million people by 2030 that means India will have to build about 1.5 New York cities per year during that time. To keep pace with expanding steel and electricity production, India coal imports shown on the left-hand chart have increased dramatically at a 25% compounded annual growth rate since 2006. According to the Central Electricity Authority of India, substantial demand will continue at 65% of current planned new power generations will be coal fired. India now imports more coal per year than UK, Italy, France and Germany combined. Indian companies are buying coal assets globally to assure of future supplies to meet projected growth. The government recently announced that state-owned enterprise are to invest in infrastructure and overseas energy purchases to promote energy security. Turning to slide 14. Low freight rates, expensive fuel, and high ship scrap prices led to a surge in scrapping of vessels in 2011. In total, 362 vessel were sent to scrap including 67 Capes. The 22.3 million deadweight tons scrapped last year represents the largest amount in deadweight tons and second largest on percentage terms dating back to the 1970s. Through February 17 of this year, 3.6 million deadweight tons has been scrapped. On an annualized basis, this equals approximately 28 million deadweight tons. Current environment should lead to higher scrapping levels and about 12% of the fleet is 25 years in age or older and 18% of the fleet is 20 years of age or older, providing about 110 million deadweight tons of scrapping potential. Moving to slide 15. 2011 new building deliveries were 95.9 million deadweight tons against an expected 137.3 million deadweight tons, a slippage of approximately 30%. The order book for 2012 ballooned from 120 million deadweight tons in December to 139 million deadweight tons, as statisticians reclassified many ships that were not delivered in 2011 to 2012 deliveries. Non-deliveries continue to be a substantial part of the drybulk order book as early indications point toward a high level of non-deliveries in 2012. Accordingly, net growth for 2012 in deadweight tons should be lower than 2011 after expected scrapping is taken into account. The order book declines dramatically starting in 2013. Please turn to slide 16. We currently own 27.1% of Navios Partners, including a 2% GP interest. Navios Partners operates a fleet of 18 vessels, equaling 1.9 million deadweight tons with an average age of 5.6 years. Please turn to slide 17. Navios Partners provides significant cash flow to Navios Holdings. Through 2013, we received more than $78 million in total distributions from partners. In 2011, we received $25.6 million in distributions. This is more than 100% of Holdings’ expected annual dividend. Including Navios Acquisition’s dividend, Navios Holding, Navios Maritime Holdings received over 135% of its expected annual dividend from its ownership in these two companies. Please turn to slide 18. We have an approximate 54% economic interest at Navios Maritime Acquisition. Navios Acquisition’s current fleet consists of 29 tanker vessels, totaling 3.3 million deadweight tons. Navios Acquisition currently has 15 vessels in the water with an average age of 5.8 years. We anticipate our new building program for product tanker positions us to take advantage of favorable long-term industry dynamics. Please turn to slide 19. Navios Acquisition is summarized in slide 19. Navios Acquisition has a large, modern and diversified tanker fleet worth more than $1 billion. Navios Acquisition has long-term contracted revenue that is well above the company’s low operating breakeven. This cash flow can sustain Navios Acquisition for a long period in distressed market conditions. Navios Acquisition has profit-sharing arrangements in many contracts. These agreements limit the downside risk to the base rate and allows Navios Acquisition to enjoy the upside volatility. For example, profit sharing for our two chemical carriers came to approximately $2,800 per day per vessel in Q4 of 2011. This concludes my presentation. I would now like to turn the call over to Ioannis Karyotis, Senior VP of Strategic Planning. Ioannis?

[Ioannis Karyotis:]

Thank you, Ted. As you can see on slide 20 and 21, Navios Holdings owned 63.8% stake in Navios South American Logistics. Navios Logistics has three segments, each of which enjoys significant growth prospects. We seek long-term revenue from a diverse portfolio of high quality clients. Our strategic relationships, investments and the overall favorably export market fundamentals position us well. Slide 22 sets forth our recent developments. The new silo in Uruguay is expected to be operational in Q1 of 2012. Total storage capacity of the Dry Port consequently will be 400,000 to 600,000 metric tons. We are also constructing a new conveyor belt that we increase better loading capacity by 6%. The new conveyor belt is expected to be operational in the first half of 2013. In addition, we have renewed several client contracts introducing a 24% increase in tariffs and significant increase in the minimum rotations. In the Liquid Port Terminal in Paraguay, we added 3,000 cubic meters of storage capacity in December 2011. We have contracted this new capacity to an Oil Major for a two-year period. We are constructing two additional storage tanks of 7,100 cubic meters combined capacity. These tanks are expected to be operational in the second quarter of 2012. In the Barge business, three new convoys are now servicing a five-year contract for iron ore transportation. During 2011, one of these convoys was in service for four months and the other two operated for about one month. All three convoys will be operational for the full year in 2012. In addition, we renewed the employment of five existing convoys for iron ore transportation with up to 20% higher base rates and we also signed a new five-year contract for one convoy for grains transportation, All convoys use 16 to 20 barges and our contracted with large high-quality counterparties under terms that protect us from advance rated commissions. Please turn to slide 23. For Q4 2011, revenue increased by 49% to $66.8 million compared to the same period last year. EBITDA for the same period was $10.1 million, 3% higher compared to Q4 of 2010. Port Terminals achieved 104% increase in revenue, mutually all of which was attributable to increased fuel volume and prices in our Liquid Port in Paraguayan. The segment EBITDA decreased by 21% to $2.9 million, mainly due to margin compression in sales of products in our Liquid Port. Barge business achieved a 33% increase in revenue as three new convoys were operational for part of the quarter and existing iron ore contracts for three convoys were renewed at higher rates. EBITDA increased by 175% to $6.5 million from $2.4 million in the fourth quarter of 2010. EBITDA margin expanded significantly to 25% from 12% in Q4 of the last year. While the Cabotage business increased revenue slightly, EBITDA decreased to $0.6 million from $3.7 million. This occurred mainly because we had scheduled and unscheduled repairs in three vessels. Interest expense and finance cost in the fourth quarter increased to $5.1 million from $1.2 million for the same period in 2010 due to the interest expense associated with the similar notes issued in the second quarter of 2011. Depreciation and amortization expenses increased to $6.3 million as compared to $5.8 million in Q4 of 2010. This resulted in a decrease in the fourth quarter net income. Turning to the 12-month period ended December 31, 2011, revenue increased by 25% compared to the same period of 2010 to $234.7 million. EBITDA grew 20% to $39 million due to the increase in interest expenses and finance cost to $17.1 million from $4.5 million 2010 and the increase in depreciation and amortization expenses to $23.3 million from $22.6 million 2010. Our net result was a loss of $0.2 million in 2011 as compared to a net income of $5.6 million 2010. Please turn to slide 24. Slide 24 provides selected balance sheet data as of December 31, 2011. Navios Logistics had a strong balance sheet. At the end of 2011, cash and cash equivalents was $40.5 million compared to $39.2 million at the end of 2010. Net debt-to-book capitalization at the end of the year was 34.6%, up from 25.5% in 2010, but still conservative overall. Now, I would like to turn the call to George Achniotis, Navios Holdings’ Chief Financial Officer. George?

[George Achniotis:]

Thank you, Ioannis, and good morning, all. Please turn to slide 25 for a review of the full year and fourth quarter 2011 financial highlights. I would like to draw your attention to a fact that was in previous quarters for comparability purposes, we are presenting the consolidated results on a pro forma basis, excluding the effects of Navios Acquisition. Despite a challenging shipping market in 2011, we managed to increase our revenues between 2010 and 2011 and adjusted EBITDA has remained the same between the two years at $265 million. This was achieved through an increase in the available days of the owned fleet due to a delivery of the new building vessels and despite the reduction in the available days for charter-in fleet and the average TC rate achieved during the year. Both years were affected by certain one-off items. In 2011, EBITDA was affected by the following items

[Angeliki Frangou:]

Thank you, George. This completes our formal presentation for the year-end and Q4 result. And we’ll open the call to questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Natasha Boyden with Cantor Fitzgerald.

[Natasha Boyden:]

Good morning everybody.

[Angeliki Frangou:]

Good morning Natasha.

[Ted Petrone:]

Hi, Natasha.

[Natasha Boyden:]

Just a general question, you know asset values have obviously been coming down on rates. They are extremely depressed and there’s concern the company is obviously could be again in violation of loan covenant, so I’m just wondering what you’re actually seeing in terms of distressed opportunities from the banks. Are you seeing anything at all?

[Angeliki Frangou:]

I think this is Natasha, this is an ongoing situation and one thing that we will say is that in Navios Holdings with a fleet of 45 vessels in the water and 57 overall, we have no loan-to-value covenant problem on the whole portfolio. I think this is a strategy and unlike a lot of the other companies, we are well-positioned on any market conditions.

[Natasha Boyden:]

Okay. And I think, Angeliki, I think maybe you said in your earlier remarks, you talked about the banks not really being available to a lot of owners out there. Is that something that you’re seeing or I’m guessing that Navios is probably one of the few companies that is still actually getting benefit from the banks. Would that be correct?

[Angeliki Frangou:]

Yes, I will tell you that at this point, financing has been ship financing is far worse than the 2008-2009 period, so the conditions are very much worsening. Navios has no problem of accessing the market and the other thing is that we see a lot of distressed deals. The issue is that you will have to be you’re in the driver’s seat, I will say, because your balance sheet is precious right now.

[Natasha Boyden:]

And then just curious what you’re seeing in terms of period charter activity in both the Panamax and the Capesize sectors. Are you seeing any more interest at all from charters for longer period charters, or are they still sort of staying on the sidelines?

[Angeliki Frangou:]

You see some bottom fishing here. I mean today a company without problems will not do a long-term charter, meaning three or five years, because you are really locking in at very low rate. But it is encouraging that you see three years and five years, which means that at least someone is seeing an optimistic view, with further deliveries also in the second half of the year. On an actually rate, you can see that we saw a little bit of, I mean we are not on the absolute bottom, a little bit of more optimism for Q2. And the BDI is at 700, but the reality is that we are seeing that, okay you are still in the Q1, in the middle of the Q1, but we are seeing that Q2 there will be better rates than what we are seeing on the spot market. Of course, we also have to realize that spot market rates are really not what Navios does; we usually do one-year time charters. So you are seeing rates in the low-teens on every size, mid-teens to low-teens.

[Natasha Boyden:]

Okay, great. Thank you. And then just lastly, are you considering any further dropdowns of vessels to Navios partners here?

[Angeliki Frangou:]

This is an obvious one it's going to be in between the two both and depends on the market conditions and as our creative belief for both parties.

[Natasha Boyden:]

Okay. Thank you very much, Angeliki.

[Angeliki Frangou:]

Thank you.

[Operator:]

Your next question comes from the line of Chris Wetherbee with Citi.

[Christian F Wetherbee:]

Great, thanks. Good morning guys.

[Angeliki Frangou:]

Good morning.

[Christian F Wetherbee:]

Wanted to just kind of touch on maybe your outlook for rates and I know it’s difficult to get a sense of where we go from here. Angeliki, you talked a little bit about things potentially improving in 2Q and certainly that seems like it makes sense. How do you think that I know there is going to be volatility, that’s probably the one thing we can all accurately forecast, but how do think rates look as we kind of come out of 2012 and into 2013? I mean can we get back to a sustained period with the level of capacity on the water where Capes are earning $25,000 to $30,000 a day, or does that just seem to be just unrealistic just given the supply/demand circumstances?

[Angeliki Frangou:]

Chris, one thing that I want to tell you that is in this market, you have seasonality and cyclicality. Q1, as is always the Chinese New Year and weather pattern, you will be low. You will have a Q2 and Q3 that, Q2 and Q4, which is also the harvest seasons in the North and South hemisphere and we do always better. We have today if you take 2011 and 2012 is developing, we are looking on average is which average is you are seeing averages of, let’s say for Supermaxes and Panamax around $14,000 and again $14,000, $14,500 and Capes for $15,500. I think this is at these levels, we will see massive scrapping and with a restriction of banks, you will see massive amount you will see substantial nondeliveries. So as we come in 2013, I believe that you will and this is internal belief that you will be slipping up into the newbuilding and to the nondelivery so the rate of net fleet growth will be lower and you will also have economic activity and demand around the world recovering because we have seen that emerging markets are loosening. China is loosening its policy; U.S. is doing better than we expected, and no matter what we think about Europe, by 2012, it will have been in a better situation. So with a net fleet growth reduced because of scrapping and non-deliveries, 2013 should be coming into a better equilibrium.

[Christian F Wetherbee:]

Sure. Okay, that’s helpful. I appreciate that’s actually it’s good color. On the order book, you touched on it a little bit, when you think about the order book for 2013 and 2014. Ted, you had a great slide in there, kind of highlighting the progression of I guess the roll-forward of the slippage which is just adding to the kind of current year order book. When you think about 2013, where it stands right now, does it feel like the at least stated amount of deliveries expected is likely to be delivered? So in other words, should slippage on that piece as it stands right now, be a lot lower than it has been just by the simple fact that orders for delivery in 2013 are more likely have been made in the last, call it 18 months or so where you maybe needed to have financing, maybe you need to have a little bit more of a deposit down in order to secure the slot? I mean what are your thoughts about slippage when you get out past this big year?

[Angeliki Frangou:]

In the previous years before 2011, it was averaging about 40%. Last year, it was 30%. So we’re looking at range, We would be looking at ranges anywhere between 30% and 50%, even going out to 2013, but take a look at the order book as a whole, Chris. Today, it is about 185 million deadweight tons on order between now and out there to 2014. Let’s say the slippage is only one third your or the non-deliveries, so you’re down to 120 million deadweight tons that may deliver. You have about that amount of vessels that are over age. So as Angeliki is saying, things could come into equilibrium sooner than people expect. We expect the nondeliveries to continue to be within the ranges we’ve been saying for the last three years, anywhere from 30% to 50%. This year, it’s probably a bit higher than last year and 2013 is going to be somewhere in the same range; it’s hard to predict.

[Angeliki Frangou:]

One thing that I’d like to add to this, Chris, to give you a little bit of the banking side of color is that a lot of that what you see even 2013 and 2014 is orders from the past. So you don’t really know how short they are. On the other side, what happened in 2010, there was an optimistic moment because the market in the drybulk looked, with economic activity, that everything was looking very promising so you had a little bit of more order throughout the year. But the reality is that financing has been so severe in the last year, in the second half of 2011, that I do not believe a lot of orders will be able to materialize [because] surety banks don’t have the money to advance a loan and will never be able.

[Christian F Wetherbee:]

Okay.

[Angeliki Frangou:]

And we see it from vessels we have on delivery, on different yards. You see that a lot of owners have behind you or ahead of you the problem of actually this vessel being completed. So there is a big problem on actually financing right now that will further strengthen these nondeliveries.

[Christian F Wetherbee:]

Sure, sure, that certainly make sense. And then maybe a final question just to think about the scrapping potential. Obviously, you had a record year last year and we’re off to a very rapid pace in the first month and a half of this year. What do you think the potential capacity could be for scrapping of drybulk vessels? I know it is difficult because obviously the different vessel classes impacting it, but do you have a sense of what maybe capacity looks like from a global perspective as far as scrapping is concerned?

[Angeliki Frangou:]

I will tell you something, scrapping is very easy. So unlike a lot I remember three, four years ago, everyone said they can never be more than 12 million deadweight tons, easily we reached last year almost 23 million deadweight tons. The reality is it can increase as much as 30 million deadweight tons and there is a lot of researches research firms that are seeing numbers they are quoting numbers up to 30 million deadweight tons. I believe this kind of an environment that we see today and with a scrap price at 500; in the older vessels it doesn’t make sense to be kept, it makes more sense even for the banks to scrap the vessel, take the additional debt that the vessel has and put it in a younger vessel and keep that vessel around. So it will be very much accelerated.

[Christian F Wetherbee:]

Okay.

[Angeliki Frangou:]

I mean if you take the 10-year and 15-year asset class and look relative to a scrap, it makes no sense for operating an over 20-year vessel.

[Christian F Wetherbee:]

Sure, sure. What’s the youngest vessel that you’ve seen scrapped recently, I mean are we starting to see I feel like we’ve heard some news about in the neighborhood of 15 years old, but have you seen anything lower than that, younger than that be scrapped at this point?

[Angeliki Frangou:]

We haven’t heard any. We find it very peculiar to be less than 15.

[Christian F Wetherbee:]

Sure

[Angeliki Frangou:]

But we have seen even VLCC’s scrap at four VLCC’s what was 15 years old.

[Christian F Wetherbee:]

Sure

[Angeliki Frangou:]

So you realize that is easily done.

[Christian F Wetherbee:]

Yeah

[Angeliki Frangou:]

It makes sense

[Christian F Wetherbee:]

Okay

[Angeliki Frangou:]

But I wouldn’t say that I would you will see something younger. The reality is with a scrap price where it’s down, I mean take a [Capesize mast], you have the scrap value of a Cape with a $500 per of 10 million deadweight tons, why you should keep a vessel and not change it for a 15 year old? It makes no sense. So people use economic rationale on that and also even if the vessel has a mortgage, the bank will prefer to scrap the vessel, get additional debt that it may have and move it to a younger vessel. So it has some recovery potential.

[Christian F Wetherbee:]

Okay, so they’re being flexible as far as that’s concerned about allocating the mortgage to the appropriate assets?

[Angeliki Frangou:]

It would be because if you’re let’s say you are a bank and you have a 20-year old Cape, it makes no sense to give up the vessel if the recovery is not imminent.

[Christian F Wetherbee:]

Okay.

[Angeliki Frangou:]

And there are three factors, Chris that you have, as you know the high scrap prices, right? The high fuel and the low freight; the high scrap prices will continue and the high fuel looks like it’s going to continue through the year. So that really makes the differential between the older vessels and the newer vessels. The spread is even larger and I would expect utilization rate in these older ships even today is 50%, so I would assume if you’re doing the math, it’s quite easy calculation for the owner.

[Christian F Wetherbee:]

Yeah. No, that certainly make sense. Okay. Well, listen, thanks very much for the time. I appreciate it.

[Theodore C. Petrone:]

Thank you.

[Angeliki Frangou:]

Thank you.

[Operator:]

That’s completed the question-and-answer session. At this time, Ms. Frangou, do you have any closing remarks?

[Angeliki Frangou:]

Thank you very much. This completes our fourth quarter earnings. Thank you.

[Operator:]

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