Navios Maritime Acquisition Corporation
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation's Second Quarter and First Half 2017 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 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; first, Mrs. Frangou will offer opening remarks. Then Mr. Petrone will give an operational update and industry overview. Next, Mr. Korres will review Navios Acquisition's financial results, and lastly we'll open the call to take questions. Now I'll 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. For the second quarter of 2017, Navios Acquisition reported a revenue of $58.5 million and adjusted EBITDA of $27.1 million. We also declared a dividend of $0.05 per share for the quarter resulting in a dividend yield of about 14%. We have seen the initial volatility in our price and continuous uncertainty in the outlook of the commodity has affected oil transportation. For example, looking at the VLCC asset class, the VLCC three rate experienced significant volatility with the rate weighing from above 50,000 a day to below 30,000 to-date. However, our charter strategy has insulated somewhat from this volatility. NNA seeks long-term charters when available, this were to provide above market events during times in which previous employment was unavailable and spot arrays were contracting. For the first half of 2017, NNA average charter rate for the combined fleet was estimated at about 51% higher than the market average. Based on the last 12 months performance NNA created about $70 million more revenue than the fleet would have achieved based on the spot market average. This results speaks to the strength of our business model, particularly when the capital without cost management. Please turn to Slide 4 where using company in response of Navios Midstream department. We expect to receive $21.3 million in distribution from Navios Midstream in 2017 and we have received almost $50 million distributions from Navios Midstream finished 2015. Our ownership in those Navios Midstream also are at $119 million or $0.79 to NNA per share NAV. This reflects about 60% of NNA's current market price. Slide 5 has our Company highlights. NNA has 33 more than high quality vessels with an average age of 6.5 years, diversified between crude, product and chemical tankers, all vessels are generating cash flow and without cash flow this is building as the fleet is 94% fixed for 2017. On the cost side, our operating costs are fixed from mid-2018. Slide 6 details Navios Acquisition key developments. During the first half of 2017, NNA reported $64.5 million of adjusted EBITDA, $27.1 million of [indiscernible] during the second quarter of 2017. Our strategy continues to provide charters that outperform the market. In fact, for the first half of 2017, we enjoyed charter rates that were about 51% higher than the spot market average translating into $39.1 million of additional revenue when compared to the market average. For the second half of 2017 almost 60% of our fleet available base are fixed at a base rate or a base rate plus profit sharing with almost 100% of our available days fixed in the third quarter of 2017. NNA's vessels are coming off-charter in the seasonal strong fourth quarter and over [ph] to contract out vessels further supported by a low breakeven of $6,000 or $133 per operating day. Slide 7 details our chartering strategy that ensures stable cash flow along the charter; charters protect our cash flow in the correcting market. As you can see for the first half of 2017, NNA average charter rates for the combined fleet was estimated about 51% higher than the market average. Based on the last 12 months performance, NNA generated about $70 million higher revenue than the market average. Slide 8 further details our chartering strategy by which we are balancing market opportunity and charter period. We seek protection from the market volatility by obtaining attractive period charters, about 68% over fleet available days and fixed at a base rate or at a base rate plus profit sharing and 20.3% at fixed on a sloping rate for the second half of 2017. For 2018 we have contracted out only 28.5% of our fleet as we monitor the market and look to gradually charter out our fleet at recovering rates. Any market improvements will be captured through one of the following three mechanisms; open days, days fixed on floating rate or days with base age plus profit sharing. Slide 9 demonstrates a strong liquidity position. We have $56.8 million in cash as of June 30, 2017, and net debt to book capitalization is at 54.9%. Moreover, we have no committed growth CapEx and no significant debt maturities until Q4 of 2021. Slide 10 shows a low breakeven for 2017 under current conditions. In 2017, 94% of our fleet is contracted at an average rate of $17,616 net per day compared to a fully-loaded cost estimated at $17,415 per day. As a result, our breakeven for our open days is only $6,113 per day. And daily cost includes operating expenses, dry docking, general and administrative expense, interest expense and capital repayment. 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 12. Navios Acquisition continues the Navios Group policy of locking in secured cash flow with creditworthy counterparties. In 2016, we extended the coverage of our fleet for approximately 30 total years via new fixtures, continuations and exercised optional periods at higher levels with profit sharing. We have continued that trend this year adding about 9.8 years of coverage through the beginning of August. Please turn to Slide 13; Navios Acquisition's diversified fleet consists of 36 vessels with an average age of 6.5 years, totaling 3.9 million deadweight. The fleet consists of eight VLCCs, 18 MR2 product tankers, 8 LR1 product tankers and two chemical tankers. Turning to Slide 14; our chartering strategy revolves around capturing market opportunity while also developing dependable cash flow from a diverse group of first class charters. So our profit sharing arrangements we can capture and benefit from marketable improvement over our current charter rates. 36.2% of our fixed days are covered by profit sharing this year. Turning to Slide 15; Navios Acquisition enjoys vessel operating expenses estimated at 17% below our peers. This is live to an estimated operating costs savings of about $88 million from 2014 to 2016. These savings got a record to our bottom-line increasing net income. We achieved these operational savings to our management agreement with Navios Holdings and these cost effects until mid-2018. Please note that the operating costs shown here include technical management related services and general and administrative expenses. Navios group of companies has not charged any fees to affiliated our inter-company entities. Turn to Slide 17; Navios Midstream brings Navios Acquisition flexibility and liquidity while providing a new platform for the wet sector for dividend seeking investors. NNA owns 59% of Navios Midstream Partners, including a 2% GP interest, with a market value of approximately $120 million as of yesterday's closing price. Turn to Slide 18; Navios Midstream Partners' fleet consist of six VLCCs is fixed with an average charter duration of about 3.8 years and is expected to provide over $400 million in long-term revenue with top-tier counterparties including Navios Acquisitions back-stop arrangements. Through first half of this year, Navios Midstream earned $27.1 million of EBITDA. Navios Midstream declared a cash dividend of $0.4225 per unit for Q1 of this year. This distribution provides NNA with approximately $21.3 million in annualized distributions. Turning to Slide 20; according to the IEA, refinery capacity is expected to increase by 10.3 million barrels per day from 2017 to 2022, 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 3.4 million barrels per day and 1.8 million barrels per day, respectively. New low capacity in Asia is forcing rationalization of old high cost capacity in the OECD. Because of this structural shift, the growth in ton miles of refined oil products is expected to continue to outpace the general demand for refined products. Turn to Slide 21; as expected, refineries have opened or expanded in Saudi Arabia and China. These refineries are now contributing significant volumes of product export. In 2016, Saudi Arabia exported an average of 1.4 million barrels per day of products in order to capture higher revenue per barrel while crude prices remained low. This was 26% higher than 2015. Chinese exports in 2016 were up 34%, led by diesel, which was up 115% over 2015 exports. Through May, total Chinese exports are up 13% from 2016. These developments should support product tanker trade east of the Suez this year. Turn to Slide 22; U.S. crude production has increased by 76% since the end of 2008, reaching 9.2 million barrels per day in May of this year. The U.S. has increased its total product exports by about 450% to about 5.1 million barrels per day since 2004. U.S. Gulf refineries which benefit from inexpensive domestic crude and natural gas supplies, are finding a natural export market to neighboring Mexico and Latin America, as well as Africa. Turning to Slide 23; our oil refineries vary greatly in the quantity, variety and specification of products that they produce. As depicted in this slide, regional surpluses and deficits combined with relatively low cost transportation, drive arbitrage trades and increased product ton miles. Increasing worldwide products imbalances point to increased ton mile development. Please turn to Slide 24; 2016 saw a 6.2% net fleet growth, 9.4 million deadweight delivered versus 12.9 million deadweight projected and a scrap of 700,000. Through June, the fleet grew by 2.5%, including 4.5 million deadweight of deliveries and 700,000 of demolitions. About 5.5% of the product tanker fleet is 20 years of age or older. As of the beginning of July, there were 226 product tankers on order and 182 which are 20 years of age or older. Given historical non-deliveries, the total order book is about equal to those ships 20 years of age or older. Please turn to Slide 26; world crude consumption is generally growing for the past 30 years with declines in '08 and '09 due to the financial global crisis. Starting in 2010, world crude oil and refined product consumption returned to its pattern of growth. The main structural drivers going forward are moderate VLCC fleet growth and increasing demand from the Asian economies, particularly China and India. The IMF projected global GDP growth for '17 and '18 at 3.5% and 3.6%, respectively, led by emerging developing markets growth of 4.6% in '17 and 4.8% in 2018. Growth in emerging markets is a key driver in future oil demand. Increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs. Turning to Slide 27; according to BP's latest worldwide oil demand projections to 2035, more than half of the increase in demand will come from China and India. A significant portion of additional demand will come from the Middle East, meaning that less crude will leave that area as exports. Majority of supply increases will come from non-OPEC Atlantic-basin sources, and in conjunction with less Middle East exports, this should increase ton miles of VLCCs going forward. Please turn to Slide 28; as noted at the top half of the slide, 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. With relatively steady demand in the U.S., increases in crude production have led to increased exports adding to ton miles. From January to May of this year, the U.S. exported almost 6 million barrels per month to China, plus another 3.8 million barrels per month to Japan. Korea and other Far Eastern importers for a total of 9.7 million barrels per months upcounting for 34% of U.S. exports in that period. Near-term crude export streams from West Africa, Brazil and other Atlantic based suppliers to new refineries in the Eastern hemisphere should help increase ton miles and support VLCC rates. Going forward, this trend should continue its Chinese domestic production declines and demand increases. The expansion of West to East crude movements can be seen in the lower part of the slide, which shows spot VLCC fixtures from low imports West of Suez headed to the East on paced growth by more than 70% since 2013. Turning to the Slide 29; China is the world's second largest consumer of oil, importing about two-thirds of its requirements. Chinese imports have more than doubled since January of '09, representing a 13% CAGR. For first half of 2017, China east crude imports averaged 8.6 million barrels per ton per day, which represented a 14% increase over the first half of '16 making China the world's largest crude oil importer during this period. Additional refinery openings going forward should add about 1.1 million barrels per day in crude demand by the end of this year, with a further 2.4 million per day to come on-stream from 2018 to 2020. As you can see in the table below, on a per capita basis, U.S. oil uses is 6.7x that of China, European usage is 3.1x, and world usage is 1.5x of China. If China goes to world per capita consumption levels, China would require an additional 261 VLCCs assuming all crude is imported by sea, this represents an expansion of the existing fleet by about 36%. Turning to Slide 30; Slide 30 shows the balance between the new building order book and the pool of scrapped candidates. Even with the recent pickup in confirmed new building orders the current contracted order book of 91 VLCCs is less than the 106 vessels that are 17 years of age or older. Given the outlook for continued ton mile growth, the supply and demand fundamentals remain healthy going forward. Please turn to Slide 31; non-deliveries remain high last year at 36%, have continued the trend so far posting a 21% non-delivery rate in the first half of '17. Forecast for net fleet growth for 2017 is approximately 34 VLCCs or approximately 4.9%. We note three VLCCs scrapped in the first half. Thank you. This concludes my review. And I would like to turn the call over to Leonidas Korres for the Q2 financial results. Leo?

[Leonidas Korres:]

Thank you, Ted. I will discuss the financial results for the second quarter and the first half of 2017. Please turn to Slide 33. Our results for the quarter and the first half of 2017 have been adjusted to exclude the $59.1 million per month on our investment in Navios Midstream Partners. The Company reassess the current value of its equity investment in the publicly traded company due to the decline on the market value of NAV. This impairment loss, investment lives [ph] is a non-recurring item that does not impact the company's cash or liquidity. Revenue for Q2 2017 decreased by 21.5% to $58.5 million, from $74.5 million in Q2 2016, reflecting the shortening of the tanker market. With almost a 100% fleet utilization, we have seen the time charter [indiscernible] of $17,491 per day reduce from the $21,380 per day achieved in the second quarter of 2016. Operating expenses were $23.7 million and G&A expenses were $3.7 million, reflecting our low cost structure given our relationship with Navios Holdings. Equity in net earnings from affiliated companies was $1.4 million, reduced by $2.4 million compared to Q2 of 2016, mainly reflecting the decrease of Navios Midstream net income during the second quarter of 2017 which was affected by one-off and schedule of hires. Adjusted EBITDA for Q2 2017 decreased by 40.4% to $27.1 million from $45.5 million in Q2 2016. Other expenses include depreciation, amortization of $14.2 million and interest expense and finance cost of $19.8 million. Adjusted net loss for the quarter was $4.6 million. Turning to the financial results for the six month period ended June 30, 2017, revenue decreased by 20.6% to $122.9 million from $154.9 million last year, reflecting a time charter equivalent of $18,475 per day and 99.9% fleet utilization. Operating expenses were $47.1 million. G&A expenses were $6.5 million, reduced by $3.1 million compared to the first half of 2016. Equity in net earnings from affiliated companies for the six months period was $4.1 million. Adjusted EBITDA decreased by 36.3% to $64.5 million from $101.2 million in 2016. Depreciation, amortization was $28.4 million and interest expense and finance cost was $38.6 million. As a result, we reported adjusted net income of $1 million. Slide 34 provides selected balance sheet data as of June 30, 2017. Cash and cash equivalents including restricted cash was $56.8 million. Vessels net book value was $1.3 billion. Investments and affiliates of $129.3 million mainly reflects Navios Acquisition interest in Navios Midstream after the impairment over the $59.1 million. Receivable from related parties include the $50 million drawn under the loan facility, NNA extended to Navios Holdings, management fees and advances paid for schedule current and forthcoming dry dockings under the terms of our management agreement, and working capital contributions to Navios Group one and two net of respective accrued interest. Total assets amounted $1.6 billion. Total debt as of June 30, 2017 was $1.1 billion. Net debt to book capitalization ratio increased to 64.9% from 61.4% as of March 31, 2017, mainly due to the impairment or now investment in Navios Midstream Partners. As of June 30, 2017, Navios Acquisition was in compliance with all of the covenants of its credit facilities in ship mortgage notes. Turning to Slide 35; our financial strength has enabled us to announce a dividend of $0.05 per share for the second quarter equivalent to $0.20 per share on an annualized basis. The dividend will be paid on September 14, 2017, to shareholders of record as of September 7, 2017. At this point, I would like to highlight that given our 59% ownership in Navios Midstream Partners, we expect to receive on an annual basis approximately $21.3 million in dividends from NMP at the time of distribution of $1.69 per unit. And now, I will pass the call back to Angeliki. Angeliki?

[Angeliki Frangou:]

Thank you, Leo. This concludes our formal presentation. And we open the call to questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Chris Wetherbee of Citi.

[Chris Wetherbee:]

Thanks, good afternoon. So I wanted to ask about the dividend and sort of your thoughts around that. So maybe we'll start with the charter side. You have charters that cover 2017 and you start to see some of the charter coverage really well off in 2018. And maybe starting there, how do you think about sort of the ability to recharter; how are you think about sort of terms in these markets, obviously on the crude side things continue to sort of -- to be on the softer end and could maybe potentially or into 2018; which one of your sense maybe we'll have the chartering strategy looks for the beginning of 2018 certain more of these vessels roll off?

[Angeliki Frangou:]

One of the things that you have seen is a lot about one-third of our fleet is fixed for next year. And as we are approaching Q4 which is a seasonally strong period on product and crude, we will be looking to start during the net bringing that percentage up about the 70% two-thirds of our fleet [ph]. So our strategy is consistent, so we always like to have some feat and as we go to the seasonally strong, we will actually increase our coverage. Now about dividends, you have to see one thing that Navios has been very consistent during the high times, I mean companies were jumping ahead of each other trying to [indiscernible], Navios has been very consistent on that dividend policy since 2010; and we're being comfortable what these can be substantially in the cycle.

[Chris Wetherbee:]

Okay, that's helpful. I appreciate it. What do you think about sort of the capital repayment piece of your breakeven as you move into 2018, can you just sort of remind us where that falls? Is it relatively consistent with 2017 levels?

[Angeliki Frangou:]

Yes. In 2018 our capital repayment is about -- on a per day basis is about $600 less. So here our breakeven will be below $1,700. And for the overall fleet, we are sitting in a very comfortable position, if you consider also that about one-third of our vessels are fleet. And our breakeven since today's rate, one of the things I'd like to stretch so that there is no confusion, here we've just spoken about capital impairment and the servicing of debt, the results were about $32 million of maturity. In 2018 which is an easily refined asset whose base is about 60% loan to value or less; so we don't foresee that that will be a problem.

[Chris Wetherbee:]

Okay, all right. Thank you very much for the time. I appreciate it.

[Operator:]

Your next question comes from the line of Noah Parquette of JP Morgan.

[Noah Parquette:]

I just would like your thoughts on -- obviously the quarter regulations for two years but the co-start has -- it's our requirements in place. Can you talk a little bit concerning how important the U.S. is in market; how are you seeing that will playout over the next couple of years?

[Leonidas Korres:]

The U.S. has exported double demand of oil, so I think the market is very important terms for the crude. What's – listen we're sitting here talking in what is usually the seasonal low here, so let's not project out on a straight line. I think that the U.S. crude is looking to move, I think this is whole discussion of loop maybe doing some exporting and that could be a game changer trying to get the oil out. Even if that was about the regulation would move back, we still have a number of older ships and they are going to have to go to scarp, especially when you're going to see Q3 being probably not because of Q2. We've got 160 ships that are over 15 years of age, we see that probably maybe 20 to 25 of them have to have special surveys before the end of the year. We're hearing -- our ear is always down on the ground listening. We're hearing that maybe there will be more scrapping coming forward and I would expect that. So I also think you will have as the northern hemisphere pool the curve before with turbine oil, we'll bring back some closing stores. So seasonality will come into play and you will have scrapping and I think the regulations will help scrapping going forward even if it is the later bid because some of these older ships are going to have -- they are facing a wall in front of them and they take their $18 million and scrap their ship by putting $4 million or $5 million in terms of pushing a 18-year old vessel through the water.

[Noah Parquette:]

Okay, thanks. And kind of a modeling question I guess; how much back stop [indiscernible], how much was that cash poll this quarter?

[Angeliki Frangou:]

The back stop is upto Q2. I mean for the first half it's about $5 million, $5.1 million to be exact. And as we're more than the stronger part of the Q4, that would be evening out [ph].

[Noah Parquette:]

You said it's $5.1 million in Q2?

[Ted Petrone:]

We said for the first six months of the year.

[Noah Parquette:]

Okay. And when does that show up on the income statement?

[Ted Petrone:]

This is on the P&L, so we take every quarter, what was the backstop of third quarter but this will be certainly after the termination of the contract in terms of price. It's on the time charter and the expense line.

[Noah Parquette:]

Okay. So we're not going to see that until the termination of the NAP contract, is that right? Is it cash flow every quarter or is it settled at the end?

[Ted Petrone:]

It's being settled at the end.

[Noah Parquette:]

Okay.

[Angeliki Frangou:]

But it's recorded every quarter.

[Noah Parquette:]

I see. Got you. I'm missing the equity income line?

[Ted Petrone:]

With the time charter and full years expense line.

[Noah Parquette:]

Okay. So at that point, I mean how do you guys think of the strategy in terms of utilizing an IP, obviously the backstop now -- and must drop down -- how do you see that as next strategy now?

[Angeliki Frangou:]

There is another value to NMP, to NNA it has been a good value. I mean, we have received about $60 million dividends and we have about $119 million of value with good assets. And of course on the point of NMP, this is -- it has to be continued, the fleet is there with long-term charter, so there is a lot of visibility and a lot of duration and we have to be patient to see cost of capital and cost of equity for further dropdowns.

[Noah Parquette:]

Okay, that's all I have. Thank you.

[Operator:]

Thank you. I'll now return the call to Mrs. Angeliki Frangou for any additional or closing remarks.

[Angeliki Frangou:]

Thank you. This completes our second quarter results.

[Operator:]

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