Navios Maritime Containers LP
Q4 2018 Earnings Call Transcript

Published: 30 Jan 2019

[Operator:]

Thank you for joining us for Navios Maritime Containers' Fourth Quarter and Full Year 2018 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. Chris Christopoulos. As a reminder, this conference call is being webcast. To access the webcast, please visit the Investors section of Navios Containers' website at www.navios-containers.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 can also be found there. Now, I'll review the Safe Harbor statement. This conference call could contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Containers. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Containers' 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 filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Containers does not assume any obligation to update the information contained in this call. The agenda for today's conference calls is as follows; first, Mrs. Frangou will offer opening remarks, then Mr. Petrone will give an operational update and industry overview. Next, Mr. Christopoulos will review an obvious Containers' financial results, and lastly, we'll open the call to take questions. Now, I turn the call over to Navios Containers' Chairman and CEO, Ms. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Laura, and good morning to all of you joined us on today's call. I'm pleased with the results for the full year and the fourth quarter of 2018. For the full year of 2018, Navios Containers reported $69.3 million of adjusted EBITDA and $17.7 million of adjusted net income. We also reported $15.3 million of adjusted EBITDA and $2.4 million of adjusted net income in the fourth quarter. As you can see from Slide 5, NMCI has grown it's fleet to 30 containers ships in just under two years. The company was established in early 2017 to leverage the weakness in the container ship sector and scaled up it's fleet quickly and efficiently. In December of 2018, Navios Containers moved the trading of it's shares from the Oslo to the Nasdaq Global Select Market marking the next stage in it's growth. Slide 6 shows some of the company highlights. NMCI is a container ship growth vehicle focused on acquiring vessels in the Baby Panamax and Neo Panamax container ship sizes. Our entry point has generally been excellent as we acquired the fleet at prices near scrap value. Our financing reflects this as a debt on our balance sheet is governed by scrap value over fleet alone. Our fleet thus has an attractive mix of a potential improvement in cash yields and capital appreciation. With conservative leverage, low operating expense and right of first refusal [ph] for all container ships within the Navios Group, NMCI offers investors a bright future. Slide 7 outlines the continued focus in sourcing a creative fleet growth opportunities. As I have mentioned earlier, NMCI is focused on acquiring vessels in the distressed Baby Panamax segment which provides significant capital appreciation and yield improvement. We are also at the same time acquiring container ships in the Neo Panamax segment; this not only diversifies our investment but also provides cash flow as our initial investment, the Baby Panamax sector works through it's natural cycle. NMCI is investing $128.6 million in container ships compromised of $23.6 million in acquiring two 2010-built 4360 TEU container ships, and $105 million in acquiring two 2011-built 10,000 TEU container ships. Both Baby Panamaxes were delivered to our fleet in December of 2018 and our short-term charters. One Neo Panamax was acquired in January 2019, and we'll have an option to acquire the other Neo Panamax until in March 2019. Both vessels are on long-term time charters and provide annualized EBITDA of $13.1 million and an aggregate EBITDA of $38.5 million through the exploration of their charters. Given the distressed state of equity markets in the share price, we've financed these vessels to a mix of internally generated cash new debt financing and sellers credit. Slide 8 highlights our attractive entry point into the container ship sector. We acquired vessels near the scrap value and at significant discount that got a new building parity value. The recent purchases of the 4250 TEU container ships were acquired at 58% discount to the new building parity value. In addition, there is impressions of the 10,000 container ships were acquired at 30% discount to their new building parity value. Given this attractive entry points, NMCI has significant upside potential as charters and asset values move to historical leverages. Slide 9 dives deeper into their upside potential over flip that I just spoke about. As rate recovered the to the 15-year average rate on the 4250 TEU vehicles have a potential to appreciate by 117% in terms of asset values, as values over the Baby Panamax vessels recover to their 15-year leverage. Our vessels could potentially appreciate by 117%, as well as values covered the 11-year leverage on the Neo Panamax vessel. Our 10,000 TEU vessels could potentially appreciate by 18%, keep in mind that this Neo Panamaxes in the meantime will provide substantial cash flow to support our operations. Slide 10 shows our local structure. For 2019, 45.4% of our fleet available days are fixed at an average rate of $18,654 per day. Our fully loaded cost is about $11,936 per day and 5,895 open days provides a low breakeven of about $6,353 per day. Our daily cost includes operating expense, general and administrative expense, interest expense, and capital repayment. Slide 11 shows our liquidity. As of December 31, 2018 we had total cash of $18.9 million and total debt of $219 million and our net debt to book capitalization is 49.8%. Moreover, our debt balance is covered by the scrap value of our fleet alone and we have no maturities until 2022. At this point, I would like to turn the call over to Ted Petrone who will take us through our fleet operation and the industry overview. Ted?

[Ted Petrone:]

Thank you, Angeliki. Please turn to Slide 12. Navios Maritime Containers' diversified fleet consists of 30 vessels and an average age of 10.5 years totaling 153,000 TEU. The fleet investment is roughly split between Neo and Baby Panamaxes consisting of five Neo Panamaxes ranging from 8,204 TEU to 10,000 TEU, and 25 Baby Panamaxes ranging from 3,450 TEU to 4,730 TEU. Please turn to Slide 13. Our chartering strategy revolves around leveraging stable cash flow from the Neo Panamaxes while capturing market opportunity from the Baby Panamaxes. We seek protection from market volatility by obtaining charters of different duration in order to obtain better managed market cyclicality. For 2019, about 45% of our fleets available days are fixed. We have 5,895 open days, 90% consist of Baby Panamaxes. We continue to monitor the market and look to gradually charter out our fleet at recovering rates. Turn to Slide 15. The IMF projected global GDP growth at 3.5% in 2019 and 3.6% in 2020. Increases in container trade have generally grown on a higher rate than world economic growth due to containerization of former break bulk cargos, as well as increases in container miles as retail as in advanced economies to cheaper production centers around the world that are farther from existing customers. On the back of global economic growth, container trade grew at 4.3% in 2018 and is forecasted to rise by 4.1% in 2019 which is higher than the expected 2.9% naturally growth. Turn to Slide 16. 2018 fleet growth equals 5.6% on deliveries of 1.283 million TEU less than 116,000 TEU of demolitions. Projected net fleet growth for 2019 is 2.9% which should support time charter levels. We also note that vessels over 20 years of age equal about 6.5% of the fleet. New IMO regulations for balanced water treatment systems, as well as the 0.5% global sulfur-cap restriction should accelerate the scrapping of older less efficient vessels. Given the forecast to trade in container mild growth to fundamentals going forward remained positive. Turn to Slide 17. The current order book before non-deliveries is historically low at 13%, and considerably below the average of 30% over the last two decades. Approximately, 65% of the current order book of the vessels of 13,000 TEU or larger and 80% is for vessels of 10,000 TEU or large; there is no order for the Baby and Neo Panamax. Turn to Slide 18. Scrub or retro fitting in connection with the IML 2020 fuel cap regulation will cause inefficiencies by restricting vessel supply. Current estimates suggest that about $1.6 million TEU vessel equivalent we'll install scrubbers in 2019. This would equate to circle 1.1% of fleet capacity being absorbed due to retrofitting. Applying this to the current net fleet growth estimate of 2.9% would result in an effective net fleet growth of only 1.8% in 2019. Turn to Slide 19. Post-expansion of the Panama Canal in 2016. There has been a shift and trading patterns, which has caused greater needs for Baby Panamaxes that have short address and shorter lengths. This is a result of over 75% reduction in Panamax vessels used for the Far East to the United States but an increased in these vessels being used in high growth regions of Inter Asia and Africa. Nearly 90% of all vessels in this size scrubbed since 2015 and have been those with the longer lengths. From 2013 to the end of 2018, the use of 4,000 to 5,100 TEU vessels in Inter Asia has increased by almost sevenfold from 22 to 151 vessels. Turn to Slide 20. As vessel trading in the main Far East to Europe increased in size, vessels that trade Inter Asia are also becoming larger. The Baby Panamax share of the Inter Asia trade has increased by 103% from 2012 making it the size with the highest deployment growth in this trade. Turn the Slide 21. Approximately, 6% of global trade utilizes vessels in the 7,500 TEU to 10,000 TEU size range. Recent disruptions in the container trade such as the expansion of the Panama Canal in 2016 have creative favorable dynamics for certain vessel sizes that have benefited from the increased demand from redeployment across trade lines while their order books remained low to nonexistent. The fundamentals from Neo Panamax is vessels remain positive. Turn to Slide 22. Before the Panama Canal expansion the primary trade route for these vessels was the Far East to Europe trade. While these routes increasingly use larger vessels, the growth in trade for vessels in the 75,000 to 10,000 TEU size range in other routes has more than offset the reduced use in the Far East Europe trade route. Thank you. This concludes my review and I'd like to turn the call over to Navios Maritime Containers' CFO, Chris Christopoulos for the Q4, 2018 financial results. Chris.

[Chris Christopoulos:]

Thank you, Ted, and good morning all. I will briefly review our unaudited financial results for the fourth quarter and year ended December 31, 2018. The financial information referenced is included in the press release and it's summarized in this slide presentation available on the company's website. Moving to the financial results as shown on Slide 24, revenue for Q4 of 2018 increased by 61.4% to $34.4 million compared to $21.3 million in Q4 of 2017. The increase was mainly due to the 59.1% increase in the available days of our fleet. EBITDA for the fourth quarter of 2018 was affected by expenses related to the listing on the NASDAQ exchange. Excluding these expenses, adjusted EBITDA for the fourth quarter of 2018 was $15.3 million, an increase of $5.4 million or 53.8% over the same quarter last year, primarily due to the $13.1 million increase in revenues, which was mitigated by a $7.7 million increase in all other expenses both primarily-related to the increase in the number of available days. Our EBITDA this quarter also reflects the roll-off of a number of our legacy time charter contracts. Since our inception, we have strategically acquired a number of container ships with longer term charters at above market rates and have capitalized on that significant cash flow contribution to grow our fleet and pay down our debt. Our TC for the fourth quarter of $14,387 per day is up modestly year-over-year, reflecting both this roll-off of the legacy contracts, but also the continued improvement in the earnings of our Baby Panamax fleet on short to medium term contracts. Adjusted net income for Q4, 2018 amounted to $2.4 million, $0.7 million higher than the same quarter last year. Moving to the full-year operations, it's worth noting that the full-year periods are not entirely comparable. The company was incorporated on April 28, 2017 and we took delivery of our first vessels on June 8th of that year. Revenue for the full-year increased to $133.9 million compared to $39.2 million for the period since our inception in 2017 mainly due to the significant increase in available days from 2,411 days in 2017 to 8,442 days in 2018. Adjusted EBITDA for the full year 2018 increased to $69.3 million compared to $19.2 million for the period since inception in 2017. The increase was mainly due to the increase in revenue discussed, which was offset mainly by corresponding increases in management fees in general, and administrative expenses relating to the reference growth in available days. It is worth also noting that we have not had all 28 vessels in our fleet for the full year. Adjusted net income amounted to $17.7 million, $14.6 million higher than the corresponding period of 2017. Fleet utilization for the full year 2018 was approximately 99%. On Slide 25 I will briefly discuss some key balance sheet data. At the end of Q4, cash and cash equivalents were $18.9 million. Long-term borrowings including the current portion, Net op [ph] deferred fees amounted to $219 million. The book value of our equity was $182.5 million. Net debt to book capitalization, 49.8% which we are very comfortable with, particularly given where we remain in the cycle. On Slide 26 we summarize our recent acquisitions and financing activity. As we discussed earlier in the presentation, we acquired three container ships for a total of $76.1 million, two 4,360 TEU and one 10,000 TEU. And we have the option to acquire one additional 10,000 TEU container ship for $52.5 million. We sourced a new $50 million loan that partially financed the two 4,360 TEU ships we acquired and also refinance the remaining credit facilities maturing in December, 2019. We sourced the new $63.6 million loan to finance the acquisition of the two 10,000 TEU vessels. That's $31.8 million per each vessel including the option we have until March, 2019 to exercise. We also have a seller's credit of $20 million in place through January next year, which provides us with flexibility to finance these two vessels. Lastly, we completed a $26.7 million sale and leaseback of an additional four vessels in November, 2018. That is $98.2 million in total for 14 vessels under our sale and leaseback transaction. We have put in place financing with attractive pricing and favorable repayment profiles ranging between 15 to 21 years on an age adjusted basis. We have no debt maturities until 2022. I now pass the call back to Angeliki for any closing remarks. Angeliki?

[Angeliki Frangou:]

Thank you very much.

[Operator:]

[Operator Instructions] Your first question comes from the line of Espen Landmark of Fearnley.

[Espen Landmark:]

Two questions if I may. I mean, first on the spot market, I think you had 89% or so chartered out by 3Q and now 4Q delivers a somewhat lower TC suggesting a quite a low TC for the remaining 250 days or so trading as both. So, you have a few more vessels coming off now into '19. So the question is how was the spot market looking at the moment beyond the charter rate. Is also utilization numbers coming down you think?

[Angeliki Frangou:]

To be honest, we have 50%, as you very well said, 50% of our available days is almost fixed for 2019. If you see in Page 10, 45 to be exact, the majority of our open days, 90% of open days is really on the Baby Panamexes and yes, seasonally, you have a lower rate. You are about 9,000 but what we will see -- what we have seen is that you can actually fix vessels. We've even seeing rate that we can do index on two vessels and you have the seasonal adjustment as you exit Q1 in the Chinese New Year. So what we see is that yes, you have about 50%. This is by design to be able to capture the upside. And let's really see the fundamentals of the container. Number one, you have a new building program reduced in 2019. And you have a net fleet -- You have an estimate net fleet growth of about 2.9%, about 20%. Demand is growing at about 4%. And then very importantly, if you incorporate that the scrubber effect but yes, in the biggest vessels but it will affect 222 vessels, 2 million TEUs. If you assume that there's going to be over 18 months, we have seen about 1,000,600 TEUs will be affected for this year. That means that we will reduce the fleet growth by over 1.1%, down to less than 2%. So you will have less than 2% supplier vessels with over -- with slightly over 4% on demand. So, yes, we are in the beginning of the year which is seasonally low, but this kind of an environment looks interesting and I think what we're seeing is also the opportunity to see index for multiple years which was something that we haven't seen that market and I don't think it exists very much.

[Espen Landmark:]

And secondly, I mean, there is kind of this flight to liquidity; it seems amongst investors these days. And I guess in the past we've seen a lot of consolidation on the liner side, and I guess even if you have heard, still on the leasing with Poseidon [ph] and GSL off lately, but it's still relatively fragmented the market whilst I guess the liners would like to talk to larger tonnage [ph] providers to provide flexibility. So the question is, is there alternatives where you could grow the fleet inorganically, joining forces with some of your peers?

[Angeliki Frangou:]

I think it's a matter of portfolio balance. Don't forget that a lot of the companies out there have a balancing issue. The U.S. is coming at the very attractive -- you created your portfolio in the [indiscernible], your leverage is very modest, your debt today is less than scrap values, and you have an upside potential because of your entry points. On your assets, it can be over 100%. So I think, you -- of course, you see the way of growing, but we have to choose growing in a way that makes sense. Let's not forget that we care about returns to our shareholders. I mean, and -- as now we are creating effective rational portfolio, the next item that I think is important is contemplating between purchase of vessels and adding them to our investors on a buyback or this kind of a move which is very, very important for investors.

[Espen Landmark:]

All right. And kind of on that note, is there any covenance restricting you from paying out the certain amount of cash going forward?

[Angeliki Frangou:]

No, we do not have. So it's purely economic rationale which I think is important. We are not operating in a vacuum, and that is an important issue but it is something that's going to be said -- I mean there is a minimum liquidity which we usually have but otherwise you can easily do a dividend or the buyback, most probably buyback that makes a lot of economic sense depending on the friction of your vessels in cash crops.

[Espen Landmark:]

Perfect. Thank you very much.

[Operator:]

There are no other questions at this time. I will now turn the phone back over to Angeliki Frangou for any additional or closing comments.

[Angeliki Frangou:]

Thank you. This is complete our Q4 results.

[Operator:]

Thank you. That does conclude today's conference call. You may now disconnect.