Navios Maritime Acquisition Corporation
Q3 2019 Earnings Call Transcript

Published: 11 Nov 2019

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation’s Third Quarter 2019 Earnings Conference Call. With us today from the company are Chairman and CEO, Angeliki Frangou; Vice Chairman, Ted Petrone; and Chief Financial Officer, 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 call is as follows. We’ll begin with formal remarks from the management team, and after, we’ll open the call to take questions.Now, I’ll turn the call over to Navios Acquisition’s Chairman and CEO, Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Laura and good morning to all of you joining us on today’s call. I’m pleased with the results for the third quarter of 2019. Navios Acquisition recorded the revenue of $59 million and adjusted EBITDA of $23.9 million. These are increases of about 42% and 142%, respectively over Q3 of 2018.We declared a quarterly distribution of $0.30 per share for Q3, reflecting a current yield of about 16%. In a robust tanker rate market, where you join the best of two words. We have significant cash flow visibility from $430 million in long-term contracted revenue, about 43% of our 2020 available days are fixed, almost half of those days also have profit sharing.At the same time, we can capture upside as 61.7% of our 2020’s available days are opened more on a floating rate. Also all our tankers are on the water generating revenue as we have no tankers being fit with scrubbers.Slide 4 presents some company highlights. NNA has a core fleet of 41 diverse tankers with an average age of 8.1 years. We also have maritime investments in the entities that own 24 vessels which as of the end of Q3 are about $83.9 million.Slide five highlights our key developments. NNA reported strong financial results for the third quarter with $23.9 million in adjusted EBITDA. For the first nine months of 2019 our adjusted EBITDA was $87.3 million.As I mentioned a moment ago, for 2020, we have a good mix of fixed revenue and exposure to the market. We have a unique growth pipeline that requires minimal capital. We are looking to dissolve Navios Europe I in Q4 of 2019. As of September 30th, 2019, NNA had $32.3 million of receivable due from Navios Europe I.With repayment of term loan B by securing $184.8 million of new financing with maturities extended through 2027. Deleveraging remains our priority. We have reduced our outstanding debt by $45.3 million or a 4% so far this year.We also raised $15 million in equity in October of 2019. On the cost side, we extended our management agreement for five years. OpEx rate will be fixed through December 2021, with an increase of about 3% compared to current rate.Slide six highlights the recent update that we have led to a robust tanker market. Scrubber retrofitting, there is an OFAC sanction on COSCO Dalian VLCCs in and then increasing floating storage due to compliance with the upcoming IMO 2020 regulation have considerably reduced VLCCs available globally.Physical attacks on the Saudi Arabia oil processing facility and in transit tankers sanctions to [indiscernible] and deteriorating crude production and exports in Venezuela and Libya has all turning back to the market. Finally, increased ton miles from US oil exports have added to the effective demand side of the equation.VLCC and product tanker spot rate should continue to be strong in the near-term. Compared to the beginning of the year where VLCC 1 year time charter rate has increased by 91% to $46,750 per vessel per day, while the MR2 1 year time charter rate have increased by 19% to $16,125 per vessel per day.Slide 7 illustrates our promising free cash flow potential. For 2020, our contracted revenue is expected to be $112.1 million. However, NNA also had 8,642 days that are open or on floating rate, giving us a breakeven rate of $18,489 per day.Assuming the current 1 year time charter rate 2020 expected revenue from this open or on a floating rate should be $216.4 million. Assuming the guidance spot rate, 2020 expected revenue from days open or on floating rate would be $282 million. With cost visibility we believe, they should generate free cash flow of $56.6 million or $122.3 million at current 1 year time charter rate and current spot rate respectively.Slide 8 goes through our accretive growth pipeline. We are in discussions about dissolving Navios Europe I, by the end of Q4 of 2019. We believe that this will result in NNA taking possession on the five tanker vessels from that fleet.Slide 9 highlights our proactive approach in repaying the Term Loan B which will complete it in October of 2019. The $196.8 million Term Loan B balance was repaid with $138 million of Chinese leases, $15 million in Japanese leasing and $31.8 million bank finance and $12 million used in cash from our balance sheet. In successfully refinancing the Term Loan B, we diversified and extended our debt maturities through 2027 and created $3.4 million in annual interest savings.Slide 10 highlights our new management agreement effective January 1st, 2020. Under the new terms, the manager will provide as with commercial and technical management services where OpEx will be fixed for two years through 2021, at the rates highlighted in the table. The rate reflects a 3% increase from current rate.Under the new administrative service agreement, allocated G&A cost will be reimbursed. The agreement also includes a commercial and technical management fee of $50 per day per vessel. No additional fees will be charged under the agreement, either for sale or purchase transactions or for origination of loans and other financing transactions.Slide 11 shows our liquidity position. Pro forma for the TLB repayment, equity raised senior notes repurchases and sale of Navios Electron, our cash is adjusted to $76.3 million as of September 30th, 2019. Our pro forma net debt to book capitalization is 73.6%. 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 Q4 2021.Slide 12 details our 2020 cost structure. 42.7% of our 2020 available days are fixed at an average base rate of almost $21,000 per day. Our daily cost which includes operating expenses, general and administrative expense, interest expense and capital repayment is estimated at $19,419 per day.Our 2020 contracted revenue is expected to be $112.1 million. We have 8,642 open days and based on contracted on floating rates, giving us a breakeven of $18,489 per day. With current weighted average spot rate for our fleet of about $30,000 per day, we are well positioned for significant cash flow generation in 2020.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 14. 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 LR1 and 18 MR2s product tankers along with two chemical tankers. Three of the VLCCs are bareboat new buildings and are scheduled for delivery in 2020 and 2021.Please turn to Slide 15. Slide 15 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 2020, about 38% of our fleets available days are fixed at a base rate or at a base rate plus profit sharing, and about 4% are fixed on floating rates. We continue to monitor this market and look the charter out. The circa 57% of our fleet that remains open for next year at these healthy rates. We seek charges that capture these improved levels through 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 16. 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 end of October, we have continued to extend the coverage of our fleet via new fixtures, continuations and exercised optional periods at higher levels, in some cases with profit sharing.Please turn to Slide 17. Slide 17 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.Please turn to Slide 19. The IMF projected global fleet GDP growth at 3% in 2019 and 3.4% in 2020, with emerging and developing markets growing at 3.9% in 2019 and 4.6% 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. Time at of service for scrubber retrofits will continue reduce the effective VLCCs supply in the near future.Please turn to Slide 20. The August record of 12.4 million barrels per day solidifies the US as the world’s largest crude oil producer. The US crude exports have continually expanded since 2015, reaching a record 3.4 million barrels per day in October of this year from almost zero in 2012.Additionally, about 1.4 million barrels of US light crude oil pipeline capacity is expected to open before year end. This should increase US-Gulf exports which is positive for ton miles. 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 more times of oil to China.Increases in Atlantic basin crude going to the Far East will continue to create more demand for VLCCs as US export capacity increases. US, Gulf, China trade issues get resolved and Atlantic basin countries began and expand exports over the next couple of years.Please turn to Slide 21. Tanker fleet utilization is expected to reduce over the seasonally strong winter months due to scrubber retrofitting and associated yard delays. Assuming 75% of the contracted retrofits occur 2.6% of the crude tanker fleet and 1% of the product tanker fleet will be out of during this period. Overall, 3.2% of the VLCCs fleet is expected to be out of service due to retrofits. This should tighten vessel availability and support time charter rates.Please turn to Slide 22. Net fleet growth through last week equaled 7.5% with 18.6 million deadweight deliveries against 1.8 million deadweight removals. We note that while the order book shows 67 VLCCs as of last week, there are 119 VLCCs over 17 years of age. With the upcoming IMO 2020 and Ballast Water Management regulations that will lead some vessel to retirement. We believe that the order book and fleet are well balanced.Turning to Slide 24. 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 IEA projecting China and other non-OECD Asia to increase refinery capacity by 5.2 million barrels per day and 2.4 million barrels per day, respectively.Please turn to Slide 25. US crude production has risen about 130% since the end of 2008, reaching 12.4 million barrels per day in August of this year, the highest level of production since record started in 1920. The US has increased its total product exports by about 500% to about 5.8 million barrels per day since 2004.Please turn to Slide 26. 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 could rise up to by 5 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 as a result of IMO 2020.Please turn to Slide 27. Through September of2019, the fleet grew 3.8% on deliveries of 6.7 million deadweight less 600,000 deadweight of demolitions. About 5.7% of the product tanker fleet is 20 years of age or older. As of October 1st, 2019, there are 191 product tankers on order and 358 which are 17 years of age or older.The total order book is much less than those ships that are 17 years of age and older, particularly given historic non-delivery rates, the coming Ballast Water and IMO 2020 rules and scrap prices that remained high. As a result, projected net fleet growth for 2019 is only 4.5%. project fleet growth for 2020 is even lower at 2.4% thus owner seek to have ships on the water this year in advance of the expected IMO 2020 disruptions in product trades.Thank you. This concludes my review, and I would like to now 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 third quarter ended September 30, 2019. Please turn to Slide 29. Revenue for Q3 2019 increased by 41.8% to $59 million from $41.6 million in Q3 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 Q3 2019, we had 99.4% fleet utilization. We achieved a time charter equivalent of $15,349 per day, improved from the $12,394 per day achieved in the third quarter of 2018. Time charter and voyage expenses of $5.4 million mainly reflect expenses relating to our vessels support voyage during the quarter.Operating expenses were $26.8 million and G&A expenses were $3.7 million. Adjusted for $7.3 million impairment loss relating to the sale of 1 VLCC in October 2019, and a $0.2 million stock-based EBITDA for Q3 2019 increased by more than 2 times to $23.9 million from $9.9 million in Q3 2018.Other expenses include depreciation and amortization of $17.2 million and interest expense and finance cost of $22.8 million. Net loss of $16.2 million reported for the quarter has been further adjusted to exclude $32.7 million accelerated amortization of intangible assets relating to the termination of two charter contracts in October 2019.Turning to the financial results for the nine-month period ended September 30, 2019, revenue increased by 50.7% to $194.7 million from $129.2 million last year, reflecting a time charter equivalent of $16,888 per day and a 99.7% fleet utilization.Operating expenses were $81.2 million and G&A expenses were $15.7 million. Adjusted EBITDA for the nine months of 2019 increased by more than two times to $87.3 million from $35.9 million in 2018. Depreciation and amortization was $52.3 million and net interest expense and finance cost was $69.5 million. Adjusted net loss for the nine month period was $34.2 million.Slide 30 provides selected balance sheet data as of September 30, 2019. Cash and cash equivalents including restricted cash was $102.9 million. Vessels’ net book value was $1.3 billion. Total assets amounted to $1.6 billion. Total debt as of September 30, 2019 was $1,225 million, resulting to a net debt to book capitalization ratio of 73.8%.In Q3, $47.2 million of debt was drawn to finance three product tankers that were collateral to the Term Loan B. and this amount was paid in October as part of the fully repayment of the Term Loan B.Pro forma for the Term Loan B refinancing, the sale of Navios Electron VLCC, the equity offering and the senior notes and repurchases, cash is adjusted to $76.3 million and debt outstanding to $1,158.8 million. Year-to-date, Navios Acquisition has reduced its debt outstanding by 4% or $45.2 million.Turning to Slide 31, as for return of capital to shareholders for the third quarter, we declared a dividend of $0.30 per share, equivalent to $1.20 on an annualized basis. The dividend will be paid on January 9, 2020 to shareholders on record as of December 17, 2019. We have also repurchased 0.7 million common shares to-date through our share repurchase program, providing an additional 4.7% 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 our call to questions.

[Operator:]

Thank you. At this time, the floor is now open for questions. [Operator Instructions] Our first question comes from the line of Chris Wetherbee of Citi.

[Chris Wetherbee:]

Hi, this is Liam on for Chris. Thank you for taking my question. So –

[Angeliki Frangou:]

Good morning.

[Chris Wetherbee:]

I just had a few questions about the Navios Europe I dissolution. I’m just I know that you guys have a 32.2 million receivable out there. And if the entity is dissolved, will receive all of this amount or like would it be immediate or is there a timeline for receiving these proceeds?

[Angeliki Frangou:]

And this is a very nice question. This is about a $2 NAV that is in our balance sheet then is not valued. So we have five vessels, 12 LR1s, 3 MRs and these vessels circa around $18 million of value will come and will translate it into $2 NAV, still NAV, so you can actually see it in our – really in our NAV and number two, you will have a $15 million EBITDA per year. So, you get quite attractive situation.

[Chris Wetherbee:]

Okay. So you’re saying that those five vessels are basically worth $80 million you said?

[Angeliki Frangou:]

So something around, yeah around –

[Chris Wetherbee:]

Yeah.

[Angeliki Frangou:]

Give me a second, I mean you can see the vessels there approximate valuation.

[Chris Wetherbee:]

If you were to kind of roll to make sure your fleet at that point, would you have to make – would there be any cash outlays associated with doing that would you kind of effectively have to purchase them or would you like are there no cash outlays with that. Just to understand how it works.

[Angeliki Frangou:]

Because it is very simple, because together with a loan you take and the receivable you translate it into vessels, so you get the vessels in and $15 million of EBITDA. So something that is already in your balance sheet that is not value, it will become $2 NAV.

[Chris Wetherbee:]

Got it, so it also kind of sounds like just to be clear, that if this were to take place, that all five vessels would come at the same time or would there be like a timeline for the vessels coming to you like one by one?

[Angeliki Frangou:]

No, it will be on the same time. Is the same way we bought, the same time we sell it?

[Chris Wetherbee:]

Got it. And how do you then think about the Navios like Europe II and like the receivables that you have outstanding for that, would there be a similar process for that that you guys would go through and what –

[Angeliki Frangou:]

Yes, yes but I have to remind you that Navios Europe II, we have a $61 million receivable, this is due for dissolvement in 2021 and this is approximately $3 NAV. So in that case most probably as these containers and dry bulk, this will come as vessel, but will be coming as [cost] [ph].

[Chris Wetherbee:]

Got it, all right and also just another point of clarification on the five tanker vessels for Navios Europe I with EBITDA. I understand based on what the disclosures in that side that the $15 million is based on 1 year time charter rates as per Clarksons. But does that mean that all those vessels like will be off charter when you could potentially receive them or do, they currently have existing charters?

[Angeliki Frangou:]

The two LR1s that on producing that they actually generate even above what is 1 year current NAV and the others are on very much like a market transaction.

[Chris Wetherbee:]

Okay, got it. And I guess just final question. When you’re thinking about vessel values and I know that vessel values have been stepping up recently particularly with some of the VLCCs that you guys owned even on that older like second-hand values. Where do you guys going to see that going? Do you think that you could continuing that like even translate that and so like that they’ll continue to increase going forward or what do you think are like the main puts and takes when it comes to vessel values going forward?

[Angeliki Frangou:]

Listen, we have seen that there is a – the reason the values go up because we’re since very robust earning capacity and then if you see, don’t forget that in Q3 we didn’t see the materialization of the increase in rate, but we saw a very strong Q4 and the foreseeable couple of quarters they look very strong.Additionally, Navios does not have any scrubbers, so we do not have operator base on a period where earnings are quite strong. So I think the cash flow generation that we see translate into a much higher – I mean it gives also – the values are going up. We saw like values overall going about 5% and to 7% higher from where they are today, they used to be in Q2.

[Chris Wetherbee:]

All right, thank you for taking my questions.

[Angeliki Frangou:]

Thank you.

[Operator:]

Thank you and I would now like to turn the floor back over to Angeliki Frangou for any additional closing remarks.

[Angeliki Frangou:]

Thank you. This completes our Q3 results.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.