Navios Maritime Acquisition Corporation
Q4 2018 Earnings Call Transcript

Published: 6 Feb 2019

[Laura Yagerman:]

Thank you for joining us for Navios Maritime Acquisition Corporation's Fourth Quarter and Full-Year 2018 Earnings Conference Call. With us today from the company are Chairman and CEO, Mrs. Angeliki Frangou; Vice Chairman, Mr. Ted Petrone; and Co-Chief Financial Officers, Mr. Leonidas Korres and Mrs. Erifili Tsironi. 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

[Angeliki Frangou:]

Thank you, Laura, and good morning to all of you joining us on today's call. For the full-year of 2018, Navios Acquisition reported revenue of $187.9 million and adjusted EBITDA of $56.8 million. For Q4 of 2018, we reported revenue of $58.7 million and adjusted EBITDA of $20.9 million. We also declared a quarterly distribution of $0.30 per share for Q4, representing a yield of 21% per share annualized. Tanker rates have improved during Q4 of 2018 with the TD3C VLCC spot rate increasing by more than 200% to about $45,000 per day compared to Q3 2018. Although VLCC rate have since retreated, rates for January 2019 were still above 3x higher than rates for January of 2018, and we expect VLCC rates for Q1 of 2019 to average about $30,000 per day. In light of the rate improvement, the acquisition of Navios Midstream was timely, as well as accretive to our NAV. In addition, the acquired state of NAP vessels is expected to add 15.6 million of free cash flow in 2019. Slide 4 highlights our fleet and investments. NNA on 43 vessels after the acquisition of NAP. We also own 47.5% into special purpose entity which owned 24 vessels. Slide 5 present some company highlights. NNA has a core fleet of 43 diverse tankers with an average age of 8.3 years. We renew our fleet version two Japanese VLCCs with scrubbers to be delivered in the second half of 2020. Our fleet is 52.1% fixed for 2019 and 81.7% of the fixed days including profit sharing arrangement. We also keep our cost structure low with operating expenses about 17% lower than peers and fixed through mid-2020. Slide 6 highlights our key development. On December 14, 2018, NNA completed the acquisition of the 41% of NAP that we did not already own with the stock value at $23 million. The acquisition of NAP provided NNA with a significant value uplift, as it is accretive to NNA's NAV and also provide $15.6 million of free cash flow. NNA generated about $57 million of adjusted EBITDA for 2018 and $21 million of which was generated in the fourth quarter. We are also returning capital to our stockholders, a dividend program providing return of 21%. In addition, we’ve a share repurchase program under this program. We’ve a purchased about $7.4 million worth of our shares or about 5.2% of the shares outstanding. As an update to our refinancing effort, we anticipate refinancing $77.8 million in maturities coming during the next 18 months through a favorable leasing structure which will have an interest rate of LIBOR plus 3.5%, tenure of 7 years and a net adjusted repayment profile of 18 years. Slide 7 shows the power of the -- of our 47.5% investment in Navios Europe 1 and Navios Europe 2. In total, this investments are worth $72.5 million as of December 31, 2018. The value of our investments reflect the compounding effect of annual preferred return of 12.7% and 18%, respectively. These entities maybe liquidated in Q4 of 2019 and Q3 of 2021. On a per share basis, the current value of this investment is worth $5.27. Slide 8 shows the expected cash flow breakeven for 2019. 52.1% of our available days are fixed at an average rate of $18,995 net per day. Our fully loaded cost is about $17,706 per day and 8,294 open plus floating rate days provide a breakeven of about $16,668 per day. Our daily cost includes operating expenses, dry docking, general and administrative expense, interest expense and capital repayment. Slide 9 shows our expected cash flow potential. For 2019, we have 8,294 open days plus days contracted on floating rate. Therefore, in NNA fleet is expected to generate significant free cash flow. At current rate and with our current capital structure, NNA fleet will generate about $31 million of free cash flow. Fixed charter rate recovered those in 20 year average, NNA fleet will generate about $89 million in free cash flow. NNA is well positioned to get the benefits of the recovery and generate significant cash flow. Slide 10 demonstrates our liquidity position. We have $46.6 million in cash on December 31, 2018. Our net debt-to-book capitalization is 73.1%, and we have a fully funded growth CapEx. In addition, we have received a term sheet and are in advanced discussion to refinance $77.8 million of debt due in 2019 and 2020 and extend maturity to 2026 through a leasing structure. At this point, I'd like to turn the call over to Erifili Tsironi, Navios Acquisition Co-Chief Financial Officer.

[Erifili Tsironi:]

Thank you, Angeliki, and good morning, all. Please turn to Slide 12, large modern fleet. Navios Acquisition's diversified fleet consists of 43 vessels with an average age of 8.3 years totaling 6 million deadweight. The fleet consists of 15 VLCCs, 8 LR1 product tankers, 18 MR2 product tankers, and 2 chemical tankers. Two VLCC bareboat new buildings are scheduled for delivery in 2020. Please turn to Slide 13, recent fleet development. Navios Acquisition continues the group -- the Navios group policy of locking in secured cash flow with credit worthy counterparties. In 2018 we expanded the coverage of our fleet for approximately 22 years of coverage, buying new fixtures, continuations and exercise optional periods at higher levels with profit sharing. We have continued that trend and bring approximately 2.5 additional years through January of this year. Please turn to Slide 14, chartering strategy. Slide 14 details our chartering strategy, which we use to balance market opportunity and credit risk. We seek protection from the market volatility by obtaining charters of different durations in order to better manage market cyclicality. For 2019, about 45% of our fleet's available days are fixed at a base rate or at a base rate plus profit sharing; and about 8% 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 the three methods

[Leonidas Korres:]

Thank you, Eri. We will discuss the financial results for the fourth quarter and the full-year 2018. Please turn to Slide 18. Our results include 18 days of operation of Navios Midstream Partners fleet following the completion of the merger on December 13, 2018. Please note that the transaction was accounted for as a business combination where purchase accounting was applied and the resulting effect on the company's consolidated statement of operations was less than $0.1 million and lies as follow

[Ted Petrone:]

Thank you, Leo. Please turn to Slide 22. The IMF projected global GDP growth at 3.5% in 2019 and 3.6% in 2020 with emerging and developing markets growing at 4.5% in '19 and 4.9% in 2020. The main structural drivers going forward are moderate VLCC fleet growth; increased demand from the Asian economies, particularly China and India; and increasing supply from the Atlantic basin. Increases in the world GDP growth year-on-year have generally led to higher time charter rates for VLCCs. Please turn to Slide 23. 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 of '09, representing a 13% CAGR. Chinese crude imports averaged 9.2 million barrels per day in 2019, up 9% from last year. Additionally, refinery openings going forward should add about 2.9 million barrels per day coming on stream between 2019 and '21 after the 500,000 barrels per day that came on stream in October of last 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 capital consumption 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 33%. Turning to Slide 24. The U.S has had six straight months of record breaking crude production. The latest November record of 11.9 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 the first reauthorized reaching an average of 1.9 million barrels per day through November of '18 and almost zero in 2012. In terms of ton miles, the movement of crude from the Atlantic base and particularly the U.S., 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 equal to 31 VLCCs, based on a 90-day round trip. About 86 new VLCCs will be required to supply the new Chinese refinery capacities coming on stream in 2019 and '20. The fuel is all moved by VLCCs. Please turn to Slide 25. The net fleet growth for 2018 equals 0.8% with 39 deliveries against 35 removals. We know that while the order book shows 98 VLCCs as of February 1, there are a 123 VLCCs over 17 years of age. With the upcoming IMO 2020 and ballast water management regulations that will lead to some vessel retirement, we believe that the order book and fleet are well balanced. Given the outlook for continued ton mile growth, the supply-and-demand fundamentals look favorable going forward. Please turn to Slide 27. 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 the 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. Turning to Slide 28. U.S. crude production has risen about a 125% since the end of 2008 reaching a 11.9 million barrels per day in November of last year, the highest level of production since records started in 1920. The U.S. has increased its total product exports by about 500% to about 5.7 million barrels per day since 2004. Please turn to Slide 29. OECD product stocks in Europe and the Americas remain below their 5-year averages from most of 2018. This should once again drive arbitrage trades as regional surpluses and deficits, combined with relatively low-cost transportation to increase product ton miles. Product trade should also get a boost later in 2019 as the world moves to comply the IMO 2020 mandate to burn low sulfur fuels. Please turn to Slide 30. In 2018, the fleet grew only 1.2% on deliveries of 5.2 million deadweight plus 3.2 million deadweight of demolitions. About 6.4% of the product tanker fleet is 20 years of age or older. As of January 1, 2019, there were 228 product tankers on order, and 379 which are 17 years of age or older. The total order book is much less than those ships of 17 years of age or older, particularly given historic nondelivery rates the coming ballast water and IMO 2020 rules and scrap prices that remain high. As a result, projected net fleet growth for 2019 is a low 2.7%, the second lowest growth in five years, which should support current time charter levels. Thank you. This concludes my review and I'd now like to turn the call over to Angeliki for her final comments.

[Angeliki Frangou:]

Thank you, Ted. This opens the call to questions.

[Operator:]

Thank you. [Operator Instructions] Your first question is from Noah Parquette of JPMorgan.

[Noah Parquette:]

Thanks. Good morning, good afternoon. I just wanted to ask you guys have been very active. You kept the dividend, bought back stock. How do you think about using cash flow going forward? Are you comfortable with this path? Have you considered maybe retiring some of your public notes, or lowering leverage? Just wanted to know a little bit more about your thought process.

[Angeliki Frangou:]

Good question. Let's take a step back. Last year, what we see -- we saw is we got our dividend and we redeployed that kept the dividend. We kept -- returned to our shareholders via dividend, but we also did a buyback of over 5% of our shares in what we think is a interesting evaluation to our increasing -- a good evaluation to our increasing value. More recently, I consider debt [ph] is trading in more attractive levels and this is something that we are reviewing as part of our overall return of our capital and company view. Another thing that is very important is that we see that market, we have seen that the market has -- after we’ve combined the company, we are shipping on 43 tankers, of which 15 are VLCCs in a market that we see is materially improved from last year, which was one of the worst year. And it will give us a possibility to generate quite significant cash flows, because let's not forget that 90% of our days are exposed to some kind of market element, meaning we can capture the upside. So with is as a background I think we are in a good position to generate cash flows. You’ve seen that we are in the process of refinancing our 2019 and early '20 maturities and then go forward on the rest of the debt.

[Noah Parquette:]

Okay, great. And then just one other and just maybe for Ted. Your thoughts on the Venezuela sanctions and how trade flows might change or what -- how vessels could be affected?

[Ted Petrone:]

I think the Venezuelans have an issue with whatever they can get out they have to take the clean products from the States which they are not going to get, they have to get that from farther away if they can. But I do think in Venezuela, they’re going to go from like 2.5 million barrels a day, but I think the U.S, Brazil, the Atlantic is well poised to take up any slack that Venezuela might have. And if you want to switch over to Iran, those sanctions are actually building some floating storage, which I also I think is positive for the market.

[Noah Parquette:]

Okay. Go ahead. Thanks, guys.

[Operator:]

Thank you. We have reached our allotted time for questions. I will now turn the floor back over to Angeliki for any closing or additional comments.

[Angeliki Frangou:]

Thank you. This completes our quarterly results.

[Operator:]

Thank you. That does conclude today’s conference call. You may now disconnect.