Navios Maritime Acquisition Corporation
Q2 2018 Earnings Call Transcript

Published: 22 Aug 2018

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation's Second Quarter and First Half 2018 Earnings Conference Call. With us today from the company are Chairman and CEO, Angeliki Frangou; Vice Chairman, Ted Petrone; and Chief Financial Officer, 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’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. First, we'll open 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, Angeliki Frangou.

[Angeliki Frangou:]

Thank you, Lora, and good morning to all of you join us on today’s call. For the second quarter of 2018 Navios Acquisition’s reported revenue of $41.5 million and adjusted EBITDA of $11 million. We also declared a quarterly distribution of $0.02 per share for the second quarter representing an $0.08 per share annualized in a currently of approximately 15%. The oil transportation market continues to be under pressure and we continue to preserve liquidity and reduced cost. On the cost side, our commercial and technical management fees are fixed until May 2020 with operating cost estimated about 17% lower than our listed peers for 2017. We are also taking advantage of the opportunity to return capital to stockholders. In addition to our dividend problem, we repurchased about 7.6 million shares or about 5% of the shares outstanding. Slide 4 highlights the total value of our investments. This value exceeds our current stock price. We own a majority of Navios mid-stream. This ownership interest at $0.27 to NNA/NAV per common share. We also have a 47.5% ownership interest into other special purposes entities which came out of proprietary deals which was with German banks. This entity have a total 24 vessels and together add an additional $0.46 to NNA/NAV per common share. In total the value of NNA’s investment equal $0.73 per common share. This is about 33% greater than our current share price of $0.55 per share and does not take into account the value of our cost fleet of 35 vessels. Slide 5 has our company highlights. NNA has a cost fleet of 35 diverse tankers with an average age of 7.5 years. Our fleet is 93.8% fixed for 2018, 39.2% of our fixed days include profit sharing arrangement. Slide 6 details Navios Acquisition key development. In June NNA proposed to acquire all publicly held unit of NAP that are not already owned by NNA in a stock unit exchange. Their offer is currently being evaluated. In Q2 of 2018 we generated an adjusted EBITDA of $11 million. Our chartering strategy provides stability in correcting market. For the second quarter of 2018, NNA's average charter rate for each of the vessel cost fleets were significantly higher than the Clarksons average. Also supply in 2018 we repurchased about 7.6 million shares for about $6 million providing an additional 5% return to our shareholders. During the quarter, we preliminary agreed a unique back-to-back bareboat charter for two Japanese VLCCs with scrubbers installed that will deliver to our fleet in the second half of 2020. In terms of bareboat charter, a 100% finance with a 6% fixed interest rate, we also have purchase also - at the same time we chartered out the vessels for a rate that is expected to create about 5 million in annual free cash flow. Slide 7 dives into the details of this unique bareboat charter. We preliminary agreed to charter in two Japanese VLCCs with scrubbers installed for 12 year. The implied price per VLCC is about 84.5 million with a 6% fixed interest rate for life. The vessel can be bareboat charter out via to a credit counter party. Over a 10-year period NNA is expected to generate about 32 million in net present value from the cash flow differential. If the purchase option is exercised at the end of year 10, NNA will have an additional 20 million in net present value. Slide 8 shows the expected cash flow breakeven for the second half of 2018. 57.4% of available days are fixed at base rate and a base rate plus profit sharing arrangement at an average rate of $14,340 net per day. Our fully loaded cost is about $16,900 per day and our 2,100 open plus floating rate days provides a breakeven of about $20,690 per day. Our daily cost includes operating expense docking general and administrative expenses, interest expense and capital repayment. Slide 9 demonstrates our liquidity position. We have $52.1 million as of June 30, 2018. Our net debt to book capitalization is at 68%. Moreover, we have now committed growth CapEx and a significant debt maturities until Q4 of 2021. At this point, I would like to turn the call over to Mr. Ted Petrone.

[Ted Petrone:]

Thank you, Angeliki. Please turn to Slide 11. Navios Acquisition's diversified fleet consists of 35 vessels with an average age of 7.5 years totaling 3.6 million deadweights. The fleet consists of seven VLCCs, 18 MR2 product tankers, eight LR1 product tankers and two chemical tankers. Turning to Slide 12, Navios acquisition continues the Navios Group policy of locking in secure cash flow with credit worthy counterparties. Through the first half of 2018, we extended the coverage of our fleet for approximately 16 total years via new fixtures, continuations and exercise optional periods and higher levels of profit sharing arrangements. Please turn to Slide 13. Our chartering 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. Turning to Slide 14. 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, with costs that are fixed until May of 2020. The daily operating expenses for commercial and technical management for the VLCCs and the LR1s are $9,500 and $7,150 respectively. The expenses for the MR2s and chemical tankers are $6,500 a day. The Navios Group of Companies does not charge any fees to affiliated or intercompany entities. Please turn to Slide 16. Navios Acquisition owns 59% of Navios Midstream Partners, including a 2% GP interest, with a market value of approximately $41 million as of yesterday's closing price. Turning to Slide 18. 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 other non-OECD Asia to increase refinery capacity by 3.3 million barrels per day and 2.5 million barrels per day, respectively. Please turn to Slide 19. OECD product stocks in Europe and the Americas have finally fallen below their five-year averages. OECD once again drives arbitraged trades as regional surpluses and deficits combined with relatively low-cost transportation, increased product ton miles. Turning to Slide 20. As expected, refineries have opened and expanded in Saudi Arabia and China. Those refineries are now contributing significant volumes of product export. Saudi Arabia product exports are up 36% or 0.5 million barrels year-to-date. The next Saudi Arabia refinery expansion will be 400,000 barrels per day in 2019. Chinese exports totaled 1.07 million barrels per day in 2017, up 8% over 2016. Through May, Chinese exports were up further 31%. The next Chinese refinery expansions will add 0.5 million barrels per day of capacity by October of this year. These developments combined with continued strong Asian demand should support product tanker at East of Suez this year. Turning to Slide 21. U.S. crude production has doubled since the end of 2008, reaching 10.5 million barrels per day in April of this year, a highest level of production since record started in 1920. The U.S has increased its total product exports by about 500% to approximately 5.5 million barrels per day since 2004. Please turn to Slide 22. Through July, the fleet has only grown by 1.1% with deliveries of 3.6 million deadweight, less 1.9 million deadweight of demolitions. About 5.1% of the product tanker fleet is 20 years of age or older. As of the beginning of May, there were 226 product tankers on order. 316, which are 17 years of age or older. The total order book is much less than those ships 17 years in age, particularly given historical non-delivery rates and scrap prices remaining high. As result, projected net fleet growth for 2018 is a low 1.6%, the lowest growth in five years which should support current time charter levels. Turning to Slide 24. The IMF projected global GDP growth for 2018 and 2019 at 3.9% for each year, with emerging and developing markets growing at 4.9% in 2018 and 5.1% in 2019. The main structural drivers going forward are moderate VLCC fleet growth and increasing demand from the Asian economies, particularly China and India. Increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs. Please turn to Slide 25. 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 by about 200 million barrels in the past 12 months and are now about 40 million barrels below the five-year average. With crude oil demand increasing, requirements for seaborn transpositions should increase going forward. Please turn to Slide 26. China is the world's largest importer of oil and the second largest consumer of oil, importing over two-thirds of its requirements. Chinese imports have more than doubled since January 2009, representing a 12% CAGR. Chinese crude imports have averaged 8.9 million barrels per day through July, up 4.3% from the same period last year. Additional refinery openings going forward should add about 3.4 million barrels per day to come onstream between 2018 and 2020, with 500,000 barrels per day coming onstream in October of this year. As you can see in the table below, on a per capita basis, U.S. oil usage is 6.7x that of China, European usage is 3.1x, and world usage is 1.4x. If China goes to world per capita consumptions levels, China would require an additional 249 VLCCs. Assuming all crude is imported by sea, this represents an expansion of the existing fleet by about 34%. Please turn to Slide 27. In terms of ton miles, the movement of crude from West Africa and South America to China uses about as many VLCCs as the movement from the Arabian Gulf, even though the Arabian Gulf shipped about 2x more oil to China. Increases in Atlantic basin crude going to China in 2017, created additional demand equaling to 31 VLCCs based on a 90-day round trip. VLCC supply, unfortunately grew faster than demand last year, causing lackluster rates for most of last year and into this year. Please turn to Slide 28. The graph on the left-hand side, Slide 28, shows a balance between the new building order book and the pool of scrap candidates. Even with the recent new building orders, the order books as of August 13, 2018, our 111 VLCCs compares favorably to the 90 vessels that are 17 years age or older. Year-to-date, 32 VLCCs were removed from the fleet. Please turn to Slide 29. Forecast for net fleet growth continues to decline, with 24 VLCCs new building deliveries so far combined with the previously mentioned 32 VLCC removals, net fleet growth year-to-date stands at a negative 0.9%. Given the outlook for continued ton mile growth, the supply and demand fundamentals look favorable going forward. Thank you. This concludes my review. And I'd like to turn the call over to Ioannis Karyotis for the Q2 financial results.

[Ioannis Karyotis:]

Thank you, Ted. I will discuss the financial results for the second quarter and the first half of 2018. Please turn to Slide 31. Revenue for Q2 2018, decreased by 29% to $41.5 million from $58.5 million in Q2, 2017, reflecting the continued downward pressure on tanker age. In Q2 2018, we had 99.6% fleet utilization. We achieved a time charter equivalent of $13,260 per day, reduced from the $17,491 per day achieved in the second quarter of 2017. Time charter expenses include a $5.7 million of commitment to Navios Midstream Partners accrued in the second quarter. Operating expenses were $22.9 million and G&A expenses were $4.9 million. Equity in net earnings from affiliated companies mainly reflecting our equity portion in Navios Midstream Partners earnings was $4.2 million. Adjusted EBITDA for Q2 2018, decreased by 59.4% to $11 million from $27.1 million in Q2 2017, primarily due to the decrease in revenue as discussed about. Other expenses included depreciation and amortization of $13.8 million and interest expense and finance cost of $19.3 million. Adjusted net loss for the quarter was $21.8 million or minus $0.14 per share. Turning to the financial results for the six month period, ended June 30, 2018. Revenue decreased by 28.7% to $87.6 million from $122.9 million last year, reflecting a time charter equivalent of $13,740 per day and a 99.6% fleet utilization. Operating expenses were $46.3 million and G&A expenses were $8.1 million. Adjusted EBITDA for the first half of 2018 decreased by 59.7% to $26 million from $64.5 million in 2017. Depreciation and amortization was $28 million and net interest expense and finance costs were $38.6 million. As a result, we reported an adjusted net loss of $39.7 million. Slide 32, provides selected balance sheet data as of June 20, 2018. Cash and cash equivalents including restricted cash was $52.1 million. Vessels net book value was $1.2 billion. Investment in affiliates of $116.1 million reflects Navios Acquisition's interest in Navios Midstream Partners, Navios Europe one and Navios Europe two. Receivables from related parties of $68.9 million reflect working capital contributions to Navios Europe one and two and the respective accrued interest, as well as the Management fees and payments for drydockings under the terms of our Management agreement with Navios Holdings. Total assets amounted to $1.5 billion. Total debt as of June 30, 2018 was reduced to $1.23 billion resulting to a net debt to book capitalization ratio of 68%. Turning to Slide 33. As for return of capital of shareholders, we declared a dividend of $0.02 per share for the second quarter, equivalent to $0.08 per share on an annualized basis. The dividend will be paid on September 27, 2018, to shareholders on record as of September 20, 2018. We also repurchased 7.6 million common shares so far, in 2018; providing an additional 5% return to our stockholders. I would also like to highlight that given our 59% interest in Navios Midstream Partners, we expect to receive in dividends from NAP, approximately $3.2 million, for the remaining two quarters of 2018, at the current distribution of $0.0125 per unit per quarter. And now, I will pass the call back to Angeliki.

[Angeliki Frangou:]

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

[Operator:]

[Operator Instructions] And your first question comes from Chris Wetherbee of Citigroup.

[Unidentified Analyst:]

James, on for Chris. Just wanted to ask a question about Slide 8, you raised 13 K, it looks like breakeven rate around 20, just wanted to understand - how you are going go about - or move forward with that, if there is anything around profit sharing or possible refinancing that might lower the cost or improve rates across the second half of the year?

[Angeliki Frangou:]

I mean, the reality is that - if you have seen, we have refinanced all our maturities for 2018. We did savings back and we have completed that. And if you really look at 6,000 available set around 6,000 available basic that we have for the second half, we only have 2,000 open. In current environment even with rate as they are, we are talking about a $12 million cash burn and we have seen that rate, especially on the real, which is a significant asset class. We have seen them on the last month almost doubling from a very low of $10,000 to almost $20,000. So, overall taking consideration of the liquidity we have and additional leverage with extra value that we have from our investment in Navios Europe one and two, you can see that you easily have the ability to - it's not a very difficult environment on the liquidity side and we have additional levers.

[Unidentified Analyst:]

So leaving aside the assets that you have, you actually see that across the remainder of the year, rates could eventually rebound at the rate that would enable you to cover that gap or is it something that you probably would have look for other sources of liquidity to cover?

[Angeliki Frangou:]

Yes, because - don't forget, first half was difficult, and Q3 seasonally going to Q4 is a strong period. So from where we see now, I mean, it seems the last trend how it has evolved with a rate was with a further improvement that we did go on the FFA cap. You can see that this can be actually not only it won’t be a cash burn but actually create positive cash flows.

[Unidentified Analyst:]

And also you brought up the material that was on Slide 4 about Navios Europe and - how much you go about monetizing that and actually I am marking some of that value or you did something essentially that might be more of - from wait and see and just continued buyback?

[Angeliki Frangou:]

In the Navios Europe I we can start working on selling the assets from next year. So we have the ability to sell or attend for 2019.

[Unidentified Analyst:]

Then also about the new bill bareboat charter agreement, is that more opportunistic would you think it’s something that you see in the market you might be able to do more of looking forward?

[Angeliki Frangou:]

Yes, I am pleased that we have a long relationship in the Japanese market in Navios Group and we are able to really lever that long-term relationship. We saw that there is good value on the new build vessels and we also made sure that we - I mean the bareboat things are valuable vessels that we have done anyway. At the same time we were able also to bareboat out and create a very nice trend within NNA that give us a very predictable return. So this is something that is really levering a long-term relationship we have on the Japanese market.

[Unidentified Analyst:]

And then just a quick question about the market overall, have you actually seen any trade concern impact however maybe a possibly a pressure on rates upwards trying to get volumes move under the gun for maybe locking in long-term agreements or directly [indiscernible]?

[Angeliki Frangou:]

Maybe one of the ways why you have an uptick I will not - we don’t know exactly how it happens but I’ll say that overall they will be creating more inefficiency on the trading partner. So in that realities, you will see also upward trend on the rate. One of the things that we were looking on trading side is we have seen that volumes actual picking have been increasing from last year.

[Ted Petrone:]

Right, I think if you look at the average of the listings out of the Arabian Gulf over the last 12 months it’s been 125, I mean last month was 140 August looks like 145. So the volume is picking up. What you need is volume before you get pricing pressure but the volume seems to be moving and you’re getting good numbers on the refinery crack margins though it seems to be above the 12-month average it also. So that bodes well for the products to also start moving. I think while it gets cold in Northern Hemisphere you may see the number start moving.

[Unidentified Analyst:]

So overall do you think that any of that is actually related to essentially trade concerns or do you think it’s really just all organic?

[Ted Petrone:]

I think it’s all organic I didn’t get the middle of the question was it.

[Unidentified Analyst:]

No, that’s fine. And then it just quick housekeeping item just wanted to get a sense of drydocking and brand of hire across the back half of the year?

[Ioannis Karyotis:]

On drydockings we have scheduled in Q3 drydocks for three MR2 product tankers and one VLCC.

[Unidentified Analyst:]

And roughly how many days does that include?

[Ioannis Karyotis:]

This you should expect around 16 days on the product tankers and around 20 days.

[Operator:]

Our next question is from Herman Hildan of Clarksons.

[Herman Hildan:]

I’m just trying to understand the charter agreement and I already heard comment about the - if the options get exercised in year 10 it’s then the revalue of $20 million. So effectively I kind of what year from the press release somewhat you said you’re basically equate the $20 million without the re-capital outlays that’s the kind of question I’m understanding?

[Angeliki Frangou:]

Yes, I mean there is a bareboat-in and a bareboat-out and you have about 5 million as the interest rate is fixed for 12 years, you have a 5 million check about and to the profit between the in and out. So that provides you about 32 million for the 10-year fixed period and it were - charter exercised their option there is an additional 20 million of course that is an option and it can be done or not.

[Herman Hildan:]

And also Angeliki I believe some years ago you had the comment that when you entered into three VLCCs from charters you did some work on the - kind of the historical performance for call it counterparty risk in the VLCCs segment. Could you maybe remind us, I believe you said that there has been only once on record basically they were counterparty has not, I mean commissioning?

[Angeliki Frangou:]

The reality is that in - as you 32 million barrels of oil, the counterparties have larger and you have not seen and the cost of the cargo is very significant. So there is no real arbitrations on default with counterparties on that. And when we really add share capital - we saw that there was only an arbitration where an owner was trying to pull away from charter. So, at counterparty risk on the VL purely from the value of the cargo is created totally different risk then we see other charters. And we're trying to reach at valuable and nice traction that will provide us a good visibility of earnings and at the same time renew our fleet.

[Herman Hildan:]

And then also on the consolidating back to the NAP fleet given that based on and obviously you have increased your ownership from 57% to 59% in the quarter. Can you give an update on kind of the process of wanted to expect to close some and so and so part?

[Angeliki Frangou:]

I think we have not changed our ownership in NAP. I think maybe - either you are talking about the buyback or you are talking about the GP interest. Now on the NAP we gave the NAP proposal which they are currently evaluating.

[Herman Hildan:]

So it’s not expected to close on that because action anytime that you can provide at this point in time?

[Angeliki Frangou:]

We cannot provide any…

[Herman Hildan:]

And also in brief can you touch upon the ability in 2019 to start kind of - pension you’re starting to unwind and now this Europe structure is it possible to kind of give an indications on pioneering of potential liquidity release from that structure and potentially how much you expect that to be in 2019?

[Angeliki Frangou:]

We have entered 2019 for Navios Europe I and as you can see from Page 4 just our investment is about 26 million without taking in consideration any of the output or compounded return for the year without even taking consideration the outside of the value vessels when they - residual value of the vessels as they will be liquidated. So in order you will have definitely a 26 plus whatever is the remaining compounded interest in that period. And a contract release at the end of 2019, it can happen earlier only with age and agreement.

[Herman Hildan:]

And then also finally we have seen a tremendous amount of say leasebacks in the product type space this year with obviously I want to tell you augmenting the scene. Have you obviously you have a partly seeing finance, but have you lifted that opportunities to refi over the re-capital and infrastructure or is that something that you’re for now kind of not really stressing with?

[Angeliki Frangou:]

We already have done, I mean we did with four vessels MR this year because we took the maturities that was in 2018 and beginning of 2019. So, the reality that we saw that source of financing and we got very nice terms, and we may be looking for the additional maturities as they come.

[Herman Hildan:]

So we shouldn’t expect - kind of major news on that time zone?

[Angeliki Frangou:]

No, we’re just taking care of the maturities as they come along.

[Operator:]

Thank you. We have no further questions at this time. I will turn the call back over to Angeliki Frangou, for any additional or closing remarks.

[Angeliki Frangou:]

Thank you. This concludes our second quarter result. Thank you.

[Operator:]

Thank you. This does conclude today conference call. You may now disconnect.