Navios Maritime Containers LP
Q4 2019 Earnings Call Transcript

Published: 5 Feb 2020

[Operator:]

Thank you for joining us for Navios Maritime Containers L.P. Fourth Quarter and Full Year 2019 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, Mrs. Eri Tsironi.As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors section of Navios Containers website www.navios-containers.com. You will 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, we'll review the Safe Harbor statement. This conference call could contain forward-looking statements within 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 Navios Containers filings with the Securities and Exchange Commission. The information set forth herein should be understood in the light of such risk. Navios Containers does not assume any obligation to update the information contained in this conference call.The agenda for today's conference call is as follows. First Ms. Frangou will offer opening remarks. Then Mr. Ted Petrone will give an operational update and industry overview. Next Mrs. Tsironi will review Navios Containers financial results. And lastly, we will open the call to take questions.Now, I turn the call over to Navios Containers, Chairman and CEO Mr. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Doris, and good morning to all of you joining us on today's call. I am pleased with the results for the fourth quarter and full year of 2019. For the fourth quarter of 2019, Navios Containers reported an $18.2 million of adjusted EBITDA, $5.9 million of adjusted net income, and $0.17 of adjusted earnings per unit.For the full year of 2019 Navios Containers reported $59.6 million of adjusted EBITDA, $10.5 million of adjusted net income and $0.30 of adjusted earnings per unit. Our statements today do not attempt to project the impact of the coronavirus in China as the facts are developing and the potential damages are too difficult to measure.Prior similar events, such as SARS suggests that the negative economic impact can be short term. However, China today accounts for about 16% of global GDP compared to 4%, when SARS happened. Only time will tell what the actual impact will be. We will monitor the situation carefully.Slide 6 highlights Navios Containers strength. We acquired vessel of prices near scrap value and we have been building our platform through stormy weather. We believe that NMCI offers an attractive platform in the containership segment as we are well positioned for 2020.In 2019 and for the first quarter of 2020, we have benefited from materially improved charter rate environment having fixed our operating costs, while maintaining relatively low leverage.Slide 7, reviews our accomplishment in 2019. Market rates increased by 66% for the 4,400 TEU container asset class and by 36% for the 3,500 TEU container asset class. As measured in Q4 compared to Q1 2019, our Q4 financial results reflect the strength with adjusted earnings per unit of $0.17.For Q1 of 2020 Navios Containers have charted out 93% of its available days from which we expect to generate $38.2 million of revenue. This does not include any revenue from our index-linked charters. Our balance sheet is strong. The appreciable amount of the bank debt is covered by the scrap value of our fleet. Also, we are refinancing our four new Panamaxes through a seller's bank facility. Compared to the current bank facility of the vessel, the new facility will have an extended duration, reduced margin and an improved age adjusted amortization profile.As an update to our S&P activity we did not exercise our right of first refusal on the 10,000 TEU 2011-built containership, which was subsequently sold to a third-party. As I mentioned in the previous quarter, we have revenue visibility through the extension of charters of the two 10,000 TEU vessels through May 2024. We also have cost visibility as we renew the management agreement which fixes operating cost for a two-year period.Slide 8 highlights our cost structure and shows our expected cash breakeven for 2020. Approximately 46% of our available days are fixed or fixed with index-linked charters. Our days contracted on fixed rates provide for an average rate of $17,066 net per day. Our total cost is estimated at $11,931 per day and are 6,316 open and index-linked days provide a low breakeven of $8,437 per day.Assuming current charter rates observed in the market, we expect to generate about $91 million in revenue for 2020. Our total cost includes operating expenses, general and administrative expenses, interest expense and capital repayment.Slide 9 shows our liquidity. As of December 31, 2019 we have total cash of $18.1 million and total debt of $245.7 million. And our net debt to book capitalization is 52.2%. Moreover, we have no sizable debt maturities until 2022.At this point I would like to turn the call over to Mr. Ted Petrone, who will take you through our fleet operation and the industry overview.

[Ted Petrone:]

Thank you, Angeliki. Please turn to Slide 11. Navios Maritime Containers diversified fleet consists of 29 vessels with an average age of 11.6 years, totaling approximately 143,000 TEU. The fleet is split between New and Baby Panamaxes, and consists of four new 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 12. Our charting strategy revolves around leveraging stable cash flow from the New Panamaxes while capturing market opportunity from the Baby Panamaxes. We seek protection from market volatility by obtaining charters of different durations in order to better manage market cyclicality.For the first quarter of 2020, approximately 93% of our fleet's available days are fixed excluding index-linked charters. We continue to monitor the market and look to gradually charter out our fleet at recovered rates.Turning to Slide 14. The IMF projected global GDP growth at 3.3% for 2020 and 3.4% for 2021. Increases in container trade have generally grown at a higher rate than world economic growth due to the containerization of former break bulk cargoes as well as increased container ton-miles as retailers and advanced economies seek cheaper product production centers around the world set farther from existing consumers.On the back of global economic growth including the current effects of the U.S.-China trade war and associated Phase 1 trade deal, container trade is forecasted to rise by 2.8% in 2020. While it is too early to gauge the full impact of the coronavirus on world container trade, economic indicators continue positive. Initial industry reports remain unchanged on the back of the initial response by both China and the international community to the latest viral outbreak.Please turn to Slide 15. Phase 1 of the U.S.-China trade deal was signed on January 15. Under this agreement, China has agreed to buy an additional $200 billion of U.S. goods and services over the next two years as compared to the 2017 baseline, $77.7 billion of which will be in the form of manufactured goods.In 2017, China imported about $101.3 billion worth of U.S. manufactured goods. The envisioned expansion of manufactured imports would increase the value of U.S. exports to China by about 75% over a two-year period with a continuing escalation of U.S. exports to China from 2022 to 2025.Turning to Slide 16. Fleet growth in 2019 equaled 4% on deliveries of 10,58,000 TEU less 179,000 TEU of demolitions. Projected net fleet growth for the full year 2020 is at 3.1%, which should support time chartered levels. We also note that vessels over 20 years of age equal about 7.4% of the fleet.New IMO regulations for ballast water treatment systems as well as 0.5% global sulfur cap restrictions should accelerate scrapping of older less-efficient vessels. Effective fleet capacity for 2020 should be reduced by approximately 2% as owners retrofit scrubbers. Additionally in response to rising fuel costs expected due to IMO 2020, the average fleet speed could reduce by 0.5 knots absorbing about 2.5% of fleet capacity.Applying the speed reduction alone to the current net fleet growth estimate of 3.1% would result in an effective net fleet growth rate below 1% in 2020. Scrubber retrofits and speed reductions are expected to lower effective fleet growth to a good portion of 2020.Turning to slide 17. The current order book before non-deliveries is historically low at about 10.6% and is considerably below the average of 30% over the last two decades. Approximately 60% of the current order book is for vessels of 13,000 TEU or larger and 80% is for vessels of 10,000 TEU or larger. There is no order book for the Baby and new Panamaxes.Turning to slide 18. Containership idle capacity adjusted for scrubber retrofits stood at 2.2% at the end of January, a marked decline from the 4.3% peak reached at the beginning of March last year as slow steaming and scrubber retrofits decreased fleet efficiencies. About 1.5% of total fleet capacity is out of service in 2019 as owners retrofitted scrubbers in advance of the IMO 2020 coming into force. Approximately 1.9% of the fleet is expected to be out of service in 2020 about 3.1% of the fleet over 8,000 TEU is expected to be absorbed in 2020 as retrofits take longer than initially expected.Turning to slide 19. Since the beginning of 2014 there has been a net decrease of 128 containerships in the 4,000 to 5,100 TEU segment. This was led by a record 60 vessels or 272,400 TEU scrapped in 2016 and only three deliveries since then with no deliveries since the end of 2017. Decreased fleet size and increased fleet deployment particularly in Intra-Asia trading has been instrumental in supporting time charter rates for this segment.Please turn to slide 20. Post the expansion of Panama Canal in 2016 there has been a shift in trading patterns, which has caused greater need for baby Panamaxes that have shallow drafts and shorter lengths. This has resulted in about 75% reduction in Panamax vessels used for the Far East to North American trade, but an increase in these vessels being used in the high growth regions for Intra-Asia and Africa. The Baby Panamax share of the Intra-Asia trade has increased by about 90% from 2012, making it the size with the highest deployment growth in this trade. Intra-Asia trade is forecasted to grow by 3.6% in 2020 higher than the overall container trade.Turning to slide 21. Approximately 60% of global trade utilizes vessels in the 7,500 to 10,000 TEU size range. Disruptions in the container trade such as the expansion of the Panama Canal in 2016 have created favorable dynamics for certain vessel sizes that have benefited from the increased demand from redeployment across trade lanes while their order books remain nonexistent. The fundamentals for new Panamaxes remained positive.Turning to slide 22. For 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 7,500 to 10,000 TEU size range in other routes has more than offset the reduced use in the Far East to Europe trade route.Thank you. This concludes my review and I'd like to now turn the call over to Navios Maritime Containers CFO, Eri Tsironi for the Q4 financial results. Eri?

[Eri Tsironi:]

Thank you, Ted, and good morning all. I will briefly review our unaudited financial results for the fourth quarter and year ended December 31, 2019. The financial information referenced is included in the press release and summarized in the slide presentation available on the company's website.As shown on slide 24, revenue for the fourth quarter of 2019 increased to $39 million compared to $34.4 million for the same period in 2018. The increase was due to the increase in both the number of vessels operating during the period and the charter higher rates, more specifically our available days in the fourth quarter of 2019 increased by 13% to 2,576 from 2,281 in the fourth quarter of 2019.Our time charter equivalent rate for the fourth quarter of 2019 was $14,615 per day compared to $14,387 per day for the fourth quarter of 2018, despite the expiration of some of our legacy contracts that were fixed on higher rates.Adjusted EBITDA for the fourth quarter of 2019 was $18.2 million compared to $15.3 million in the same quarter last year. The $2.9 million increase in adjusted EBITDA was primarily due to a $4.6 million increase in revenue, $0.5 million decrease in time charter volumes and other expenses, partially offset by a $1.9 million increase in management fees and general and administrative expenses as a result of the expansion of our fleet and a $0.3 million increase in other direct vessel expenses.Effective January 1, 2020 our management fees for the vessels excluding drydocking expenses and including the $50 per day technical and commercial management fee are fixed for a 2-year period at $6,265 per day for our baby Panamaxes, $7830 per day for our post 8,000 TEU containers and $8,320 for post 10,000 TEU containers.Net income for the fourth quarter of 2019 was $2.9 million compared to $0.2 million net loss for the same period in 2018. Net income for the fourth quarter of 2019 was affected by a $3 million expense, relating to a vessel purchase option that was not exercised.Net loss for the fourth quarter of 2018 was affected by $2.6 million expense relating to the company's listing on a U.S. exchange. Excluding these items adjusted net income for the three months ended December 31, 2019 increased by 146% to $5.9 million compared to $2.4 million for the same period in 2018.The $0.5 million increase was mainly due to $2.9 million increase in adjusted EBITDA, a $1.1 million decrease in depreciation and amortization expenses relating mainly to the lower amortization of intangible assets and a $0.1 million decrease in the interest expense and finance cost net, partially offset by $0.6 million increase in amortization of deferred drydock and special survey costs relating to the increase in the size of the fleet.Moving to the full year 2019 operations, revenue was $141.5 million compared to $133.9 million in 2018. The $7.6 million increase was mainly due to the increase in the number of vessels operating during the year resulting in 10,261 available days compared to 8,442 available days for 2018.The increase in revenue due to more available days were partially offset by the decrease in time charter rates reflecting primarily the expiration of certain legacy time charter contracts.Time charter equivalent rate per day declined by 14% to $13,232 in 2019 compared to $15,369 for 2018. Adjusted EBITDA for 2019 decreased to $59.6 million compared to $69.3 million in 2018.The decrease in EBITDA was primarily due to a $16.2 million increase in expenses, mainly relating to management fees general and administrative expenses and time charter and voyage expenses, as a result of the expansion of our fleet and a $0.6 million in other income net and a $0.5 million increase in other direct vessel expenses.The overall increase in the above expenses was partially offset by $7.6 million increase in revenue. Net income for 2019 was $7.5 million compared to $12.7 million in 2018. Net income for 2019 was affected by $3 million expense relating to the purchase option that was not exercised.Net income for 2018 was affected by a $5 million expense relating to the company's listing on a U.S. exchange. Excluding these items, adjusted net income for 2019 decreased to $10.5 million compared to $17.7 million in 2018. The $7.2 million decrease in adjusted net income was mainly due to a $9.7 million decrease in adjusted EBITDA, a $5.1 million increase in interest expense and finance cost net, and a $2.4 million increase in amortization of deferred drydock and special survey costs as a result of our fleet expansion. Partially offset by a $10 million decrease in depreciation amortization expenses relating mainly to the lower amortization of intangible assets.Please turn to Slide 25 for the balance highlights. As per December 31st, 2019, cash and cash equivalents including restricted cash was $18.1 million. Long-term borrowings including the current portion and the seller's credit net of deferred fees amounted to $245.7 million.We retain a comfortable leverage level with financing that has attractive pricing and repayment profile. We have no maturities under our bank and leasing facilities until 2022. As per December 31st, 2019, the book value of our equity was $190 million. Net debt to book capitalization was 52%.I'll now pass the call back to Angeliki for any closing remarks. Angeliki?

[Angeliki Frangou:]

Thank you, Eri. This concludes our formal presentation. We'll open the call to questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Omar Nokta with Clarksons Platou.

[Omar Nokta:]

Hi there. Thank you. Yes, so obviously, a very good quarter the best quarter of 2019. And the rates you guys have been achieving have been getting better and better. As we can tell you've entered into several new time charters where you could tell that earnings are going to continue to push higher.As we think about -- you mentioned a lot of the uncertainty with the coronavirus. Do you have a sense of what's happening snapshot right now in the chartering market from say the charter's perspective? Have you noticed any sort of initial takeaways on how they're viewing vessels that are coming up for rehire? Any sort of change in how they're acting or behaving?

[Angeliki Frangou:]

Good morning Omar. You're right; we came in 2020 very well-positioned. And we have over 90% of our fleet available days fixed at a very good rate. But basically the corona -- so we are well-positioned in Q1, but we see that the coronavirus is an unknown is a negative unknown.What we will say is that usually -- the usual reaction of charter is to come back a couple of weeks after the Chinese New Year for renewal of services. What we have seen is that a lot of these inquiries have been postponed for later in March. So, I think every -- at this point, there is no really -- nobody can really tell you. I mean I've seen reports giving different growth percentage reduction on growth, but it's really very early to really make that determination.The one thing that we know is that you have factories closed. That means there will be -- with an extended Chinese New Year that means until they come back, production will be delayed. And of course then you have the additional event of consumption as basically China -- a lot of people are trying to compare this to the SARS epidemic environment.But the one thing that we have to be -- to think about is that China at that time was a first -- 4% of the world GDP. Today China is four times that it represents a 16%. So, nobody really can know, but we are very vigilant. The very good thing is that we are nicely covered for Q1. So, that gives us time to take advantage of opportunities.

[Omar Nokta:]

Yes. Thank you. That's helpful. And when you think about some of the delays potentially and enter into sort of negotiations set up in February, it's going to be in March. Is that -- would you say that's kind of across the Board charters as a whole or is it more just the Chinese charters?

[Angeliki Frangou:]

It is -- we are seeing a lot on the intra Asia or the Asian future of all charters. I mean, they delayed their requirements until they see what is actually happening. So -- but don't forget that purchases cannot -- I mean, if you have an extended Chinese vacation cargoes don't go in, don't go out. It's whatever is already in the system basically. So we will need to assess the situation.

[Omar Nokta:]

Okay.

[Angeliki Frangou:]

Basically -- take for example, I mean, and you can see it from CPRs from everywhere. There is basically no activities whatever work is remaining in CPR will work whatever -- people cannot move unless we see some kind of what is in the next day, which will happen, let's say, after Monday when they reopen, we need to see how the factories in consumption will react.

[Omar Nokta:]

Yeah, that definitely -- that makes sense. And sort of -- the next sort of question was the body language that you guys have had over the past couple of quarters has maybe indicated this or you previewed this, but with respect to the purchase option on that 10,000 TEU ship it looks like you -- the decline to exercise it. It's been subsequently sold to someone else. Maybe just any reason for why you wouldn't have wanted to acquire the vessel?

[Angeliki Frangou:]

It would have stressed our balance sheet. I mean, we already have bought four new Panamaxes that created a lot of stable cash flows. But in order to do that acquisition, we'll have to stress our balance sheet, and we'd like to be conservative. I mean, it's part of a balanced approach.

[Omar Nokta:]

Okay. And maybe just finally then when we think about the fleet you're obviously very -- and obviously, it's very sort of heavy in the Panamax of 3,000 TEU to 4,500 TEU segment. When we think about whether it's fleet renewal or fleet additions is that where you prefer to focus? Or would you still would like to go higher assuming that you don't have to worry about stretching out the balance sheet?

[Angeliki Frangou:]

Listen the 4,250 has been the majority of our vessels containership -- is 4,250 except two. The reality is that 4,250 has been -- we took the opportunity when vessels are repositioned from what used to be old Panama Canal to really inter Asia trade.And if you see as Ted has been talking about, you see a tremendous redeployment in that segment. But the reality is at that time we're buying it at scarp plus. So, it was a good opportunity. I think today what we are looking is depends whether the economic -- the dealer makes economic sense.

[Ted Petrone:]

I think, we like -- as we said we came into the year well positioned. We -- outside of corona, the supply and demand fundamentals are very good across the board. We particularly like the asset classes that we're in, because there's no order book for them.And if you look at a non-mainline trade specifically say inter Asia, it's growing higher than the world trade will grow, and it has been and it will continue to grow. It looks like going forward. So we think we're very well positioned in this asset class, and let's see what comes up. If we're lucky talked about maybe there's opportunities this year.

[Angeliki Frangou:]

One other thing that I'd like to add, I mean, we like the opportunities in both segments. The business is on the larger vessels we are talking far bigger investment. So you can be a little bit more nimble on the smaller size, because if you find the right opportunity it may not request the amount of capital that we need on the much larger transaction.

[Omar Nokta:]

Okay. Yeah. Understood. Thank you so much for that color Angeliki and Ted. Thank you.

[Ted Petrone:]

You’re welcome.

[Angeliki Frangou:]

Thank you.

[Operator:]

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

[Angeliki Frangou:]

Thank you. This complete quarter results.

[Operator:]

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