Navios Maritime Acquisition Corporation
Q2 2019 Earnings Call Transcript

Published: 21 Aug 2019

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation's Second Quarter 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, Mr. Leonidas Korres.As a reminder, this conference call is being webcast. To access the webcast, please visit the Investors section of Navios Acquisition's website, at www.navios-acquisition.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 Acquisition.Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Acquisition's 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 Acquisition's filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Acquisition does not assume any obligation to update the information contained in this conference call.The agenda for today's conference call is as follows. We'll begin this morning's call with formal remarks from management team, and after, we'll open the call to take questions.Now, I will turn the call over to Navios Acquisition's Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Laura and good morning to all of you joining us on today's call. I'm pleased to report that for the second quarter of 2019, Navios Acquisition recorded revenue of $58.6 million and EBITDA of $24.5 million, increases of about 40% and 130% respectively over the second quarter of 2018.We continued to return capital to our investors. We declared a quarterly distribution of $0.30 per share for the second quarter, reflecting a current yield of about 21.6%. In addition, we repurchased about 735,000 shares under share repurchase program.Slide four presents some company highlights. NNA has a core fleet of 41 diverse tankers with an average age of 8.1 years. We also have material investments in the two Navios Europe entities net on 24 vessels. At the end of the second quarter of 2019, we had $80.6 million in receivable from these entities.We enjoy significant cash flow visibility. We have $430 million in long-term contracted revenue and have fixed 90.2% of total available days for 2019. About 67% of these days are fixed on the base rate of which 70% have profit sharing. About 23% of 2019 available days are fixed on floating rate. These charters are with a diverse group of first-class counterparties. We expect to generate more than $200.3 million of contracted revenue from our base rate charters in 2019.Slide five highlights our key developments. We have spent quite a bit of time thinking about and working towards a refinancing of our PLD. We are pleased to announce that we expect to prepay this $196.8 million balance within the second half of 2019.In addition to refinancing the term loan B, debt reduction is a priority. We expect to reduce debt by 3% or $33.4 million by prepaying a total of $218.3 million in debt through $184.8 million in proceeds from new financing arrangements, proceeds from vessel sales and utilization of our balance sheet cash.As to the recent key activity, we began renewing our fleet in 2018, when asset values were weakened. Since then, we have been selling older vessels and committing to a new bareboat charters. Year-to-date, we sold three of our old VLCCs and committed three newbuild VLCCs under bareboat contract, which will be delivered in 2020 and 2021. We view these bareboat deals as providing reasonable financing for acquiring new vessels without initial capital outlay.Slide six details our financing efforts for the term loan B. The outstanding balance of the term loan B of $196.8 million will be repaid using proceeds from $15 million Japanese lease facility, $138 million Chinese leasing facilities, $31.8 million of bank lease facility, which is subject to approval, and $12 million of cash from our balance sheet.Slide seven shows our liquidity position. We have $42 million in cash as of June 30th, 2019 and $67.2 million in cash pro forma for the sale of the Nave Electron. And net debt to book capitalization is 74.2%. We have fully funded our growth CapEx pro forma for the repayment of the term loan B. We do not have any significant debt maturities until 2021.Slide eight shows the expected cash flow breakeven for the second half of 2019. 83.1% of our available days are fixed at an average rate of $17,994 net per day. Our daily cost is about $17,979 per day, and our 2,997 open plus floating rate days are expected to provide a breakeven of $17,956 per day. Our daily cost calculation includes fixed operating expenses, dry docking amortization, general and administrative expense, interest expense and capital repayment.Slide nine shows our expected cash flow potential. For the second half of 2019, we have 2,997 open days plus days contracted on floating rates. Therefore, NNA fleet is expected to generate significant free cash flow. At forward rate, rated by NNA fleet, we will generate about $20 million of free cash flow.At this point, I'd like to turn the call over to Mr. Ted Petrone.

[Ted Petrone:]

Thank you, Angeliki and good morning all. Please turn to slide 11. Navios Acquisition diversified fleet consists of 41 vessels with an average age of 8.1 years, totaling $5.5 million deadweight. The fleet consists of 13 VLCCs, 8 LR1s, 18 MR2s product tankers, and two chemical tankers. Three VLCC bareboat new buildings are scheduled for delivery in 2020 and 2021.Please turn to slide 12. Slide 12 details our chartering strategy, which we use to balance market opportunity and credit risk. We seek protection from market volatility by obtaining charters of different durations in order to better manage the market cyclicality.For 2019, about 57.7% of our fleet available days are fixed at a base rate or a base rate plus profit sharing, and about 25.4% are fixed on floating rates. We continue to monitor the market and look to gradually charter out our fleet at recovering rates. Any market improvement will be captured through one of three methods; one, days with fixed rates; two, days with floating rates; or three, days with base rates plus profit sharing.Please turn to slide 13. Navios Acquisition continues its policy of locking in secured cash flow with creditworthy counterparties. Our fleet has secured about $430 million in long-term contracted revenue. Through the middle of August, we extended the coverage of our fleet for approximately eight years via new fixtures, continuations and exercised optional periods at higher levels, in some cases with profit sharing.Please turn to slide 14. Slide 14 shows in detail our current charters with their respective expected expiration dates. Our chartering strategy revolves around capturing market opportunity while also developing dependable cash flow from a diverse group of first-class charterers. Through our profit sharing arrangements, we can capture and benefit from market improvement over our current charter rates.Turning to slide 16. The IMF projected global GDP growth at 3.2% in 2019 and 3.5% in 2020, with emerging and developing markets growing at 4.1% in 2019 and 4.7% in 2020. The main structural drivers going forward are moderate VLCCs fleet growth, increasing demands from Asian economies, particularly China and India, and increasing supply from the Atlantic basin.Turning to slide 17, the April record of 12.2 million barrels per day solidifies the U.S. as the world's largest crude oil producer. The U.S. crude exports have continually expanded since 2015, when first reauthorized reaching a record 3.1 million barrels per day in June of this year from almost zero in 2012.In terms of ton miles, the movement of crude from the Atlantic basin to China uses about as many VLCCs as the movement from the Arabian Gulf, even though the Arabian Gulf shipped about two times of oil to China. Increases in Atlantic basin crude going to the Far East will continue to create more demand for VLCCs as U.S. export capacity increases, U.S.-China trade issues get resolved, and Atlantic basin countries begin and expand exports over the next couple of years.In this short-term, measures such as Saudi Arabia's expansion of crude shipments from Yanbu to avoid the Strait of Hormuz will add approximately 10% to typical AG Far East VLCC round trip voyages.Please turn to slide 18. In July, 0.8% of the VLCC fleet was out of service due to scrubber retrofitting. The supply of VLCCs that are scheduled to be out of service for the remainder of this year is set to increase to about 2.7%. This should tighten vessel availability and support time charter rates. Overall, 2.1% of the crude tanker fleet is expected to be out of service due to retrofitting.Please turn to slide 19. Net fleet growth through last year equaled 5.4% with 45 deliveries against six removals. We note that while the order book shows 77 Vs, as of August 12th, there are 119 Vs over 17 years of age. With the upcoming IMO 2020 and Dallas Water management regulations, that will lead to some vessel retirements, we believe that the order book and fleet are well balanced.Turning to slide 21. According to the IEA, refinery capacity is expected to increase by 13.7 million barrels per day from 2019 to 2024, including all additions, expansions and upgrades. About 74% of that capacity will be added in Asia and the Middle East, with the EIA projecting China and other non-OECD Asia to increase refinery capacity by 5.2 million barrels and 2.4 million barrels, respectively.Turning to slide 22, U.S. crude production has risen about 130% since the end of 2008, reaching 12.2 million barrels in April of this year, highest level of production since record start in 1920. The U.S. has increased its total product exports by about 500% to about 5.5 million barrels per day since 2004.Please turn to slide 23. Record refinery maintenance peaked in May at 7.4 million barrels per day, partly due to preparations for increasing product demand associated with IMO 2020.For the balance of the year, refinery capacity is set to rise by approximately 4 million barrels per day due to a combination of new refinery additions and a significant reduction in refinery maintenance as refineries get ready for this historic fuel switch.Please turn to slide 24. Through July of this year, the fleet grew 3.2% on deliveries of 5.7 million deadweight less 0.5 million deadweight of demolitions. About 5.8% of the product fleet is 20 years of age or older. As of August 1st of this year, there were 192 product tankers on order and 362 which are 17 years of age or older.The total order book is much less than those ships 17 years of age and older, particularly given historical non-delivery rates, the coming Dallas Water, and IMO 2020 rules and scrap prices that remained high. As a result, projected net fleet growth for 2019 is 3.9%, the second lowest growth in five years, which should support current time charter levels.Thank you. This concludes my review, and I would like now to turn the call over to Leonidas Korres for the Q2 financial results.

[Leonidas Korres:]

Thank you, Ted. I will discuss the financial results for the second quarter and the six-month period ended June 30, 2019. Please turn to slide 26. Revenue for Q2 2019 increased by 41.2% to $58.6 million from $41.5 million in Q2 2018, reflecting the increased fleet of Navios Acquisition following the merger with Navios Midstream Partners and the improved rate environment compared with the same period last year.In Q2 2019, we had 99.8% fleet utilization. We achieved a time charter equivalent of $15,525 per day, improved from the $13,260 per day achieved in the second quarter of 2018. Time charter and voyage expenses of $4.2 million mainly reflect expenses relating to our vessels support voyage during the quarter.Operating expenses were $26.5 million and G&A expenses were $6.8 million. EBITDA for Q2 2019 increased by more than two times to $24.5 million up from $10.7 million in Q2 of 2018.Other expenses include depreciation and amortization of $17.3 million and interest expense and finance cost of $23.7 million. As a result, we reported a net loss for the quarter of $16.6 million.Turning to the financial results for the 6-month period ended June 30, 2019. Revenue increased by 54.9% to $135.7 million from $87.6 million last year, reflecting a time charter equivalent of $17,635 per day and a 99.8% fleet utilization.Operating expenses were $54.4 million and G&A expenses were $11.9 million. EBITDA for the first half of 2019 increased by more than three times to $66.1 million from $19.5 million in 2018. Depreciation and amortization was $35 million and net interest expense and finance cost was $46.6 million. As a result, we reported a net loss of $15.7 million.Slide 27 provides selected balance sheet data as of June 30, 2019. Cash and cash equivalents including restricted cash was $42 million. Pro forma for the sale of Nave Electron VLCC, our cash position increases to $67.2 million. Vessels' net book value was $1.3 billion. Total assets amounted to $1.6 billion. And total debt as of June 30, 2019, was $1.2 billion, resulting to a net debt to book capitalization ratio of 74.2%.Please turn to slide 28. As Angeliki mentioned, we expect to prepay our term loan B within the second half of 2019. The new credit facilities that will replace the term loan B, consists of the following; $15 million sale and leaseback arrangement with the majority of five years and interest of LIBOR plus 345 bps per annum to finance one product tanker. This facility was drawn in Q3 2019, and the net proceeds were used to partially prepay the term loan B.Up to $90.8 million sale and leaseback arrangement to finance six product tankers, which will be repaid through an average period of 6.4 years in consecutive quarter installments with an interest of LIBOR plus at margin ranging from 335 to 355 bps per annum, depending on the vessels financed.Up to $47.5 million sale and leaseback arrangement that will finance three product tankers, which will be repaid through an average period of 5.5 years in consecutive quarterly installments with an interest of LIBOR plus a margin ranging from 350 bps to 360 bps per annum, depending on the vessels financed.In addition, NNA is in advance discussions with a commercial bank for a bridge facility of up to $31.8 million to finance 1 VLCC. Following the completion of all the above financing arrangements, along with the recent repayment of $21.5 million bank facility, our debt is expected to decrease by 3% or $33.4 million.Turning to slide 29, as for return of capital to shareholders for the second quarter, we declared a dividend of $0.30 per share, equivalent to $1.20 on an annualized basis. The dividend will be paid on October 9, 2019 to shareholders on record as of September 25, 2019. We have also repurchased 0.7 million common shares through our share repurchase program, providing an additional 5.4% return to our stockholders.And now, I would like to pass the call to Angeliki for her final remarks. Angeliki?

[Angeliki Frangou:]

Thank you, Leo. Please open call to questions.

[Operator:]

Thank you. [Operator Instructions]Your first question is from Chris Wetherbee with Citi.

[Chris Wetherbee:]

Yes hey. Thanks. Good morning guys. I wanted to ask specifically about slide 18; you guys on that highlight some of the tankers out of service due to scrubber retrofit. When we think about 2020, give a sense of what these numbers might look like. How much carryover potential is there? I don't think that everybody's going to get in scrubber installs before year-end 2019. Do we have some dynamic that plays out that could help sort of soften the wave of deliveries or early fit with the normal sort of scheduled delivers that we would expect next year?

[Angeliki Frangou:]

Good morning Chris. What we have seen is something expected and the actual delays on the dry dock is quite significant. I mean we are seeing creeping from -- we always said that we'll be around 45 days. And we are seeing that this is going over 60 days plus. There's huge delays. ShipGear cannot really deliver the time lines.The spillover you've heard will definitely be in Q1 and most -- over 2020. Now there's one thing interesting that the VLCC environment is strong. I mean, we are talking about today around 40,000. Our previous charter is about 50% above what you had in the beginning of the year. And looking at rate -- forward rate of over 55,000.Even though -- and this is going to continue. Guess one is the delays on the dry dock. But also, I think it's a matter of -- as Ted said, that is a longer term mile because of exports from our plant [ph]. So, you have to fundamental something that we recognize early on and here you have almost unachievable site taking vessels off service on the period that we make the most profitable period. And -- but on the other side, we see also that strong mile demand is expanding.

[Chris Wetherbee:]

Okay. You have two different sides of it. You have demand as well as supply sort of interacting there. And just want to make sure I'm clear, while you didn't give a number, the expectation as for some of this dry docking delay, the spillover to 2020, right, there should be some dynamic of that at least in the first half of next year. Is that a fair way to think about it?

[Angeliki Frangou:]

Yes. Definitely. I mean we have seen the situations that are extremely -- I mean, vessels are waiting to enter dry docks. You're seeing even regular dry docks without scrubber being extended to 20, 25 days. So, I think these are very, very long queues; equipment is not delivering on time. Overrun -- I mean, that is something I think very much around the market.

[Chris Wetherbee:]

Okay, got it. And then further sort of thinking about the VLCC fleet. This is a semi-unique year in terms of the fleet growth being relatively elevated, non-deliveries being relatively low. When you think about sort of turning the page into 2020, given the dynamics for IMO, should we expect sort of resurgence of some of those either non-delivery number or how do you think about scrapping next year?

[Angeliki Frangou:]

I think you have now long experience in shipping. You know that when there is a strong environment, people don't scrap. But the reality is that you have a part of the fleet that is derived. So, if there were conditions out there, they will go to scrap. The most important thing I'll say from supply point of view is that the order book next year is about 9 million deadweight tons for VLCCs versus double this year.So, if you have a little bit of a softer market at one point or another, it's seasonal. Or -- and you have half of the deliveries that gives you -- and basically, you have no orders that have been placed in -- right now. No new orders.I think that gives you a good situation. So, it is what it is. The order book is what we see. We observed it this year. And next year, we are having a very, very modest order book, less than 50% of this year, and the year after, almost nothing. So, -- and no new orders, which I think is very critical. So, it is what we see right now.

[Chris Wetherbee:]

Okay. Okay, that's helpful.

[Angeliki Frangou:]

Ted wants to--

[Ted Petrone:]

I just want to say -- I said that the -- overall the order book is less than 10% on the V. So, it's very low, historically. So, we got high rates in the face of record deliveries at the beginning of the year. The first half of the year we just peaked, as Angeliki said. So, besides the whole IMO issue, these guys underestimated -- looks like some of them -- many of them underestimated the task.Supply and demand fundamentals are better. There's more -- there's longer ton miles. There's U.S. Gulf exports improved. The Iranian story, this is going to go away pretty soon. You got all those refineries opening up in the Far East. They have to be fed with the crude. So, I think going forward, the forward curve is telling you something.

[Chris Wetherbee:]

Yes. Okay, got it. That's very helpful. And then I want to focus a little bit on the balance sheet. Obviously, some progress being made with the 2020 maturities. I know it's a little early yet, but what's -- what are the thoughts or potential options on the table for 2021?So, obviously, a bigger number that needs to be sort of tackled at that point, how do you think about that? And sort of when should we think about hearing more from a timing perspective about what you may do around the 2020 maturities -- 2021 maturities, I should say?

[Angeliki Frangou:]

Yes. This is something that we are constantly looking. I mean debt reduction is part of our force. We worked on the term loan B, which we lessened from last year. We got three global financings.The next thing in it is the [Indiscernible] as we always -- we are always opportunistic on debt repayment and also we have a good [Indiscernible] that we have with advanced [Indiscernible] and will be used.

[Chris Wetherbee:]

Okay. Great. Well, listen, thanks very much for the time. I appreciate it.

[Angeliki Frangou:]

Thank you.

[Operator:]

And that is all our questions for today. I would now like to turn the call back over to Angeliki Frangou for any closing comments.

[Angeliki Frangou:]

Thank you. This concludes our quarterly report.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.