Navios Maritime Acquisition Corporation
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation's First Quarter 2018 Earnings Conference Call. With us today from the company are Chairman and CEO, Ms. Angeliki Frangou; Vice Chairman, Mr. Ted Petrone; and Chief Financial Officer, Mr. Ioannis Karyotis. 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 will 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. First, we'll begin this morning’s conference call with formal remarks from the management team and after we'll open the call to take question. Now, I turn the call over to Navios Acquisition's Chairman and CEO, Mrs. Frangou will give opening remark, then Mr. Petrone will give an operational update in an industry overview next Mr. Karyotis Navios Acquisition financial results and lastly, we will open the call to take question. Now, I turn the call over to Navios Acquisition's Chairman and CEO, Ms. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Lora, and good morning to all of you join us on today’s call. For the first quarter of 2018 Navios Acquisition’s reported revenue of $46.2 million and adjusted EBITDA of $15 million. We also declared a quarterly distribution of $0.02 per share for the current quarter representing an $0.08 per share annualized in a currently of approximately 11%. In the digital market with we have some familiarity with the group, we have taken measures to present liquidity and exist cost. As you all see our operating initiatives created about 35 million in 2018 liquidity. We eliminated all debt maturities for the next 18 months and increased liquidity from the $44.5 million sale of VLCC. in addition, we fixed commercial [indiscernible] monitoring fees till May 2020. The relationship with us sponsor that we benefited in the May, this operating cost was 17% lower than for the year 2017. While doing all this we’re also retiring capital by bringing dividend with about 11% current yield and repurchasing 6,156,244 shares providing an additional 4% of the debt. Slide 4 had a company highlight and then they have 35 diverse target with 8 or 7.3 year, our fleet is 77.2% fleet fixed for 2018 and 32.3% of our fixed based included profit sharing arrangement. Slide 5 highlights the total value of our investments. This value exceeds our current stock price. We’re the majority owner of Navios mid-stream and our ownership interest at $0.34 to M&A commercial NAV. We also have a quarter 7.5% ownership interest into other entities which come out of proprietary deals we show with German banks. This entity Navios issued with 10 basis another issue to 14 basis at an additional $0.44 to NNA per common share NAV. The value of investment of $0.78 per common share is greater than our current share by of $0.74 per share. Our current share price seems to disregard the actual value of our cost fleet. Slide 6 details our Navios Acquisition key developments, which have specially refinanced 59.25 million of debt facilities for the 71.5 million same in lease back arrangement. The refinancing is [Indiscernible] in expense debt maturities to 2024. With the limited all maturities due for the next 13 months. We also extended our fixed operating expense for an additional two years at an average increase of only 1.2%. This arrangement allows us to benefit from the economies of scale by Navios holdings. For example, in 2017 this translated into an operating cost that was about 70% loan than our peers. During the quarter we also sold a VLCC to Navios Midstream partners for 44.5 million. 26.8 million was used to repay bank debt and 17.7 million balance was used to build liquidity. Lastly, we want to update you on our stock repurchase program. Year-to-date 2018 we repurchased about 6 million shares for about 5 million providing an additional 4% return to our shareholders. Slide 7 guides into the details of the real facility drop down to the VLCC drop down to NAV. The [Indiscernible] for 2019 VLCC was sold to an AP for 44.5 million. since acquisition the vessel generated 42.9 million in EBITDA and 25.5 million in free cash flow. this is a 50% free cash. As I mentioned we used some of the proceeds to repaid bank debt. We released two of our product tankers from bank loan security package. This vessel was then subsequently added to the collateral package of our senior secured note improving the collateral package 8 for 5. This most will also say data monetization of 3.9 million in 2018 a 5 million in 2019. Slide 8 further details our recently completed refinancings. We successfully refinanced 69.25 million of bank debt with a new 71.5 million in lease back arrangement. The financing is for multiproduct package and really is to 2024. We now have no debt maturities for the next 13 months. The refinancing also expands our financing sources and establishes a key relationship with a major Chinese leasing company. The new facility comes with a very favorable debt that includes an interest rate of LIBOR plus 3.05% 18 years age adjusted repayment profile in a 6-year tenure. Slide 9 summarizes a net benefit of our operating initiatives. As you can see from the slide we estimate about 35 million in net increase to our 2018 illiquidity position as a result of the measures we adopted and that I highlighted previously. Slide 10, shows the 22 million of estimated operating cost savings that NNA generated in 2017 derived through the significant economies of scale created [indiscernible] to quantify the savings we did a deep dive into our peers operating cost by reviewing 20X and related disclosure. Navios Acquisition enjoys vessel operating expenses estimated at 17% below our peers. Our Navios results at M&A operating cost savings were approximately $1700 per day lower than the peer others resulting of 22 million of estimating savings in 2017. When performed the same analysis for the past year NNA operating cost savings are estimated at about 111 million from 2014 to 2017. These savings go directly to our bottom line. We deliver the savings that from a straight the success of competitive benefits of our relationship between NM and NNA and the value delivers to all our stakeholders. And we believe that completing our efficiency is based on actual operating result is the most persuasive way to demonstrate actual savings. Slide 11 shows the cash flow breakeven for the remaining nine months of 2018. 49.9% of available days are fixed at the base rate and a base rate plus profit sharing at an average rate of $13,957 net per day. This excludes revenue from our VLCC days and we expect a contracted revenue to improve throughout the year as we opportunistically fix as VLCCs days gradually at recovering rates. Our fully loaded cost is about $16,758 per day and 4,826 open plus floating rate days provides a breakeven of about $18,500 per day. Our daily cost includes operating expense docking general and administrative expenses, interest expense and capital repayment. Slide 12 demonstrates our strong liquidity position. We have $81.1 million in cash as of March 31, 2018. Our net debt to book capitalization is at 64.9%. Moreover, we have no committed growth CapEx and no significant debt maturities until Q4 of 2021. At this point, I would like to turn the call over to Mr. Ted Petrone. Ted?

[Ted Petrone:]

Thank you, Angeliki. Please turn to Slide 14. Navios acquisitions diversified fleet consisted of 35 vessels with an average age of 7.3 years totaling 3.6 million deadweights. The fleet consists of seven VLCCs, 18 MR2 product tankers, eight LR1 product tankers and two chemical tankers. Please turn to Slide 15. Navios acquisition continues the Navios group policy of locking and secure cash flow with credit worthy counterparties. In 2017 we extended the coverage of our fleet for approximately 16 total use of coverage via new fixtures, continuations and exercise optional periods of higher levels of profit sharing. We have continued that trend adding approximately six additional years to April this year. Please turn to Slide 16. Slide 16 details our chartering strategy which we used to balance the 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 the remaining nine months of 2018 about 50% of our fleets available days are fixed at a base rate, or a base rate plus profit sharing and about 90% of fixed on floating rates. In 2019 we have contracted at only 10.6% of our fleet, as we 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 of fixed rates, days of floating rates, or three days with base rates plus profit sharing. Please turn to Slide 17, our charter strategy revolves around capturing market opportunity while also developing dependable cash flow from a diverse group of first class charters. Through our profit sharing arrangements, we can capture and benefit from market improvement over our current charter rates. Please turn to Slide 18, as Angeliki previously mentioned, Navios Acquisition enjoys vessel operating expenses estimated at 17% below our peers. We achieved these operational savings through a management agreement with Navios Holdings, which has recently been extended for two years, with a cost that are fixed until May of 2020. The daily operating expenses for commercial and technical management for the VLCCs and the LR1s remain unchanged at $9,500 and $7,150, respectively. The expenses for the MR2s and chemical tankers increased by only $150 to $6,500 a day. Overall the total average costs increased by just 1.2%. Navios group of companies does not charge any fees to affiliated or intercompany entities. Please turn to Slide 20, Navios Midstream brings Navios Acquisition flexibility and liquidity while providing a platform in the West sector for dividend seeking investors. NNA owns 69% of Navios Midstream Partners, including the 2% GP interest with a market value of approximately $49 million as of yesterday's closing price. Turn to Slide 21, Navios Midstream Partners fleet of six VLCCs is fixed with an average charter duration of 3.1 years and is expected to provide about 340 million in revenue with top tier counterparties including Navios Acquisition's backstop arrangements. Navios Midstream declared a cash dividend of $0.125 per unit for Q1 of this year. This distribution provides NNA with an approximately $6.3 million in annualized distributions. Please turn to Slide 23, according to the IEA refinery capacity is expected to increase by 12.5 million barrels per day from 2018 to 2023, including all additions, expansions and upgrades. About 67% of that capacity will be added in Asia and the Middle East, with the IEA projecting China and not other non-OECD Asia to increase refinery capacity by 3.3 million barrels per day and 2.5 million barrels per day, respectively. New low-cost capacity in Asia is forcing rationalization of old high cost capacity in the OECD. Because of the structural shift the growth in ton miles of refined oil products is expected to continue to outpace the general demand for refined oil products. Turn to Slide 24, OECD product stocks in Europe and the Americas have finally fallen below their five-year averages. This year once again, drive arbitrage trades as regional surpluses and deficits combined with relatively low-cost transportation, increased product ton miles. Turn to Slide 25, as expected refineries have opened or expanded in Saudi Arabia and China. Those refineries are now contributing significant volumes of product export. Saudi Arabia product exports are up 48% or 0.6 million barrels per day year-to-date. The next Saudi Arabia refinery expansion will be approximately 400,000 barrels per day in 2019. Chinese exports totaled 1.07 million barrels per day in ’17 up over 8% over ’16, through February Chinese exports were up a further five -- 4.5%. These developments combined with continued strong Asian demand should support product tanker trade East of the [U.S.] Please turn to Slide 26. The US crude production has increased by 94% since the end of 2008, reaching 10.3 million barrels per day through February of this year a highest level of production since November of 1970. U.S has increased its total product exports by about 485% to about 5.4 million barrels a day since 2004, U.S Gulf refineries which benefit from inexpensive domestic crude and natural gas supplies are finding natural export market to neighboring Mexico and Latin America, as well as Africa. Please turn to Slide 27, in 2017 the fleet grew by 4%, including 8.1 million deadweight of deliveries and 2.1 million of demolitions. to April of this year the fleet has only grown by 0.4% with deliveries 2 million deadweight less 1.3 million deadweights of demolitions. about 5.4% of the product tanker fleet is 20 years of age or older. As of the beginning of May there were 232 product tankers on order and 330, which are 17 years of age or older. The total order book is much less than those shipped 17 years of age or older, particularly given historical non-delivery rates to scrap prices remain high. As result projected net fleet growth in 2018 is a low 1.9%, the lowest growth in five years which should support current time charter levels. Turning to Slide 29. World crude oil consumption has generally grown for the past 30 years with declines in '08 and '09 due to the global financial crisis. starting 2010, world crude oil and refined product consumption returned to this pattern of growth, the main structural drivers going forward on moderate VLCC fleet growth and increasing demand for Asian economies particularly to China and India. The IMF projected global GDP growth for 2018 and '19 at 3.9% for each year with emerging and developing markets growing at 4.9% in '18 and 5.1% in '19. Increases in world GDP growth year and year have generally led to higher transfer rates for VLCCs. Please turn to Slide 30. Although crude oil destocking has taken slightly longer than initially expected, OPEC production limits have continued to lower crude oil inventories. OECD inventories have declined 112 million barrels in the past 12 months and now just 30 million barrels above the five-year average. The IEA expect this average to reach sometime this month with crude demand increasing requirements for seaborn transpositions should increase going forward. Please turn to Slide 31. China is the world's largest importer of oil and the second largest consumer of oil importing about two thirds of its requirements. China imports have more than doubled since January '09 representing 30% CAGR. Chinese crude imports averaged 8.4 million barrels per day in '17 and 9.3 million barrels per day through April up 9% year on year. Additional refinery openings going forward should add about 2.7 million barrels per day to come onstream from 18 to 21. As you can see the table below on a per capita basis, US oil uses is 6.7 times that of China, European usage is 3.1 times and world usage is 1.5. If China goes to world per capita consumptions levels, China would require an additional 261 vessels assuming all crude is imported by sea, this represents an expansion of the existing fleet by about 36%. Please turn to Slide 32, in terms of ton miles the movement of crude from West Africa and South America to China uses about as many VLCCs as the move from the Arabian Gulf, even though the Arabian Gulf shift about two times oil to China. Increases in Atlantic basin crude going to China in '17 created additional demands equal to 31 VLCCs based on 90-day round trips. The VLCC supply unfortunately grew faster than demand last year, causing lackluster rates for most of the year. As the new billing deliveries begin to flow later this year, increasing ton mile demand should bring the VLCC market back into balance. For example, increasing U.S. crude production have led to an 89% increase in 2017 exports adding to ton miles. In 2017 the U.S. exploited 6.8 million barrels per month to China. Near-term new crude export streams from West Africa, Brazil and other Atlantic basin suppliers to the new refineries in the Eastern hemisphere should help increase ton miles and support VLCC rates. Going forward, this trend should continue as Chinese domestic oil production declines and consumption increases. Please turn to Slide 33. The graph on the left-hand side of the slide shows the balance between the new building order book and the pool of scrap candidates. even with recent new building orders, the order books as of May 8th of this year of the 109 vessels compared very favorably to the 101 vessels that are 17 years of age or older. Year-to-date 20 VLCCs were removed from the fleet with another 10 vessels circulated for potential scrapping. Forecast are calling for removal of 40 VLCCs from the fleet this year. Turn to slide 34 please. The forecast of net fleet growth continues to decline from January 1st estimates. With 12 VLCC new building deliveries so far combined with the previously mentioned 20 VLCC removals net fleet growth year-to-date stands at a negative 1%. Given the forecast for 2018 of 40 removals and the expected 40 VLCCs to be added the forecast is for 0 or possibly negative fleet growth this year. Given the outlook for continued ton mile growth, the supply and demand fundamentals was healthy going forward. Thank you. This concludes my review. And I would like to turn the call over to Ioannis Karyotis for the Q1 financial results.

[Ioannis Karyotis:]

Thank you, Ted. I will discuss the financial results for the first quarter ended March 31, 2018. Please turn to Slide 36, revenue for Q1 2018 decreased by 28.4% to $46.2 million from $64.5 million in Q1 2017, reflecting the softening of the tanker market. In Q1 2018, we had 99.5% fleet utilization. We achieved a time charter equivalent of $14,205 per day reduced from the $19,475 per day achieved in the first quarter of 2017. Time charter expenses include the $4.9 million of commitment to Navios Midstream Partners accrued in the first quarter. Operating expenses were $23.4 million and G&A expenses were $3.2 million reflecting our low-cost structure. Equity in net earnings from affiliated companies which mainly reflects our equity portion in Navios Midstream Partners earnings was negative 4.3 million mainly due to a 6 million negative impact from the sale of one of Navios Midstream Partners VLCCs. Excluding the above and another one of our items adjusted EBITDA for Q1 2018 decreased by 59.9% to $15 million from $37.4 million in Q1 2017. Other expenses included depreciation and amortization of $14.2 million and interest expense and finance cost of $19.3 million. Adjusted Net loss for the quarter was $17.9 million or $0.11 per share. Slide 37 provides balance sheet data as of March 31, 2018. Cash and cash equivalents including restricted cash was $81.1 million. Vessels net book value was $1.2 billion. Investment in affiliates of $114.5 million reflects Navios Acquisition interest in Navios Midstream Partners. Navios Europe one Navios Europe two. Receivables from related parties of 70.8 million reflect working capital contribution to Navios Europe 1 and 2 and the respective accrued interest as well as the management fees and payments for dry dockings under the terms of our management agreement. Total assets amounted to $1.5 billion, following the sale of Nave Galactic we repaid 26.8 million of bad debt during the quarter on top of the schedule debt repayments. As a result, total debt as of March 31, was reduced [1 billion 30 million] resulting to new debt to book capitalization ratio of 64.9%. Then go Slide 38, we announced a dividend of $0.02 per share for the first quarter equivalent to $0.08 per share on an annualized basis. The dividend will be paid on June 27, 2018 to shareholders of record as of June 21, 2018. I would like to highlight that given our 59% interest in Navios Midstream Partners, we expect to receive in dividends from NAP approximately $4.7 million for the remaining three quarters of 2018 at the current distribution of $12.05 per unit per quarter. Year-to-date we have also repurchased 6.1 million common shares providing an additional return to our stockholders of approximately 4%. And now I’ll pass the call back to Angeliki. Angeliki?

[Angeliki Frangou:]

Thank you [Iohannis] We'll now open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Noah Parquette of JPMorgan.

[Noah Parquette:]

I wanted to ask you after sales at Nave Galactic, are you guys considering further VLCC sales and not necessary at NAPs but just kind of in the context where rates are and where your liquidity is at?

[Angeliki Frangou:]

I think that we were looking on a replacement. I think it will be an immediate action. I mean on the next 24 months -- 12 to 24 months we will make some replacement of assets. And this is something that we look constantly for the right replacement candidate. One of the things that I’d say that is number one priority right now as we are having -- this is a difficult moment for the tanker segment which overall is -- there is accelerated capping which makes us optimistic on the medium term. What is our first priority is to create liquidity which we have created about 35 million of liquidity for 2018, is something we know very well how to do. And taking all maturities if you see that we have extended maturities through 2024 we are eliminating any debt maturities for the next 15 months having a low operating cost. And on the other side we are also returning to our investors. I mean we did a buyback of about 4% that gave an additional [indiscernible] of 4% to our shareholders. So yes, it is one of the things but I think we should look it later on.

[Noah Parquette:]

And then I wanted to ask it's obviously new but have you guys given some thought about what backing out of the Iranian sections or the nuclear agreement, how that may affect the crude tanker market?

[Ted Petrone:]

Yes, our drilled down here is that it's probably de minimis either way, remember it’s not the EU involved yet for the sanctions [indiscernible]. But the estimates are maybe a couple of 100,000 to 0.5 million by the end of the year barrels less, but if you’ve seen in the publicly OPEC, the Kuwaiti’s and the Saudi’s have come out and said that they will stabilize the market whenever necessary, so I think maybe the Saudi’s are prepared to take back some of the market share that the Iranian's had, so let’s see how it plays out, but in terms of the market it’s really more geopolitical then supply and demand.

[Noah Parquette:]

And then just a quick modeling, what are the two product tankers that are replacing the Nave Galactic as collateral?

[Ted Petrone:]

[Indiscernible]

[Operator:]

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

[Unidentified Analyst:]

Hi, guys good morning, James on for Chris, just wanted to ask about the share repurchases and how you might think about the run rate for those across the rest of the year, so there’s basically 5 million this quarter and there’s 20 million remaining but just wanted to get some understanding of what the repurchases throughout the rest of the year would look like and possibly when the program might [quit].

[Angeliki Frangou:]

One of the things about the share repurchase you have to realize that it is also relative to volume, high volume so because this is done in a way that has to be effect, [our whole] earlier on was over 1 million now it's about 300,000, so it will be affected by the volume.

[Unidentified Analyst:]

Actually, on slide 9, the liquidity forecast, what type of repurchases are you assuming in the capital return?

[Angeliki Frangou:]

We’ve already put whatever we already have acquired and allocated there.

[Unidentified Analyst:]

And then in terms of the liquidity forecast, and what level rates would have to be and for you to meet that, are you projecting some level of improvement in the market overall or are you actually just assuming status quo. I just wanted to get a sense of what could possibly disrupt that in terms of the market?

[Angeliki Frangou:]

On the liquidity [indiscernible] there’s not a real reduction on debt repayment, cash we’ve got from VLCC, financing maturities and this is what in reducing by the EBITDA of the VLCC dropdown and the increase in OpEx, so this does not affect the rate, to do the rate you need to go to page 11 where it has a cost structure. And we now have breakeven rate which is about 18.5 for the remaining of the nine months, for 4,800 days, so from there you can do your calculation and come to rate environment you want to do.

[Unidentified Analyst:]

And just part of the [indiscernible] breakeven costs they’re actually backstop premiums, they and not actually included in the breakeven cost?

[Angeliki Frangou:]

It is included in our -- on our financings as you have seen in the reports. It is not in the forecast payments for the backstop is in 2019.

[Operator:]

Thank you. We have reached the allotted time for question and answers. I’ll now turn the conference over to back to Angeliki for final remarks.

[Angeliki Frangou:]

Thank you. This completes our Q 1 results. Thank you.

[Operator:]

Thank you for participating in today’s conference call. You may now disconnect.