Navios Maritime Acquisition Corporation
Q3 2017 Earnings Call Transcript

Published: 5 Nov 2017

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation's Third Quarter 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. 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 will also be there. 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. We'll begin this morning's call with formal remarks from the management team, and after, we'll open the call to take your questions. Now, I 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 third quarter of 2017, Navios Acquisition reported revenue of $54 million and EBITDA of $23.3 million. We also declared a dividend of $0.05 per share for the quarter, resulting in a dividend yield of about 16%. The recent volatility in oil price and continued uncertainty in the outlook of oil has adversely affected transportation. For example, in Q3, the VLCC spot rate is in this range below $7,500 towards -- to a high of $22,500. With seasonality in Q4, the rate is currently around $30,000. This volatility and continued price uncertainty generally act as an overhang on the sector. Thus, our share price ranged at a significant discount to the intrinsic value. Our long-term chartering strategy insulates us somewhat from this volatility. In fact, for the first nine months of 2017, NNA average charter rate for each fleet was about 57% higher than the market average. This translates to about $60.3 million of additional levering. Please now turn to slide 4. We are a leading tanker company and a sponsor of Navios Midstream Partners. We expect about $21.3 million in distribution from NAP in 2017 and received almost $55 million in distributions from NAP since 2015. Our ownership interest in Navios Midstream also adds a $115.2 million or $0.77 to NNA's per share NAV. Slide 5 has our company highlights. NNA has 36 modern high-quality vessels with an average age of 6.8 years, diversified between crude, product and chemical tankers. We have cash flow visibility as our fleet is 98.8% fixed for 2017, and we also capture market upside through the profit sharing in our contracts that earned us $7.6 million in 2016. On the cost side, operating costs are fixed through mid-2018. Slide 6 details Navios Acquisition's key developments. We expect to be repaid the full outstanding amount of $55.1 million on our loan to NM during the fourth quarter of 2017. This consists of about $50 million in principal and $5 million interest. Cash from the loan repayment will improve liquidity, with net debt to book capitalization reducing by 355 basis points. During the nine months of 2017, NNA recorded $87.8 million of adjusted EBITDA, of which $23.3 million was during the third quarter of 2017. For Q4 of 2017, 71% of our fleet's available days are fixed at a base rate or a base rate plus profit sharing. NNA's vessels are coming on charter in a seasonally strong fourth quarter, an opportune time to contract out vessels. Our total costs for 2017 are covered by a fixed revenue alone. And we will have further upside through 962 open plus floating-rate days for the fourth quarter. Slide 7 details our chartering strategy that ensures stable cash flow. Our long-term charters protect our cash flow in a correcting market. As you can see, for the first nine months of 2017, NNA average charter rate for the confined fleet was an estimated 57% higher than the market average. Based on the nine-month performance, NNA generated about $60.3 million higher revenue than the market average. Slide 8 further details our chartering strategy, which we used to balance market opportunity. We seek protection from market volatility by obtaining attractive period charters. About 71% of our fleet's available days are fixed at a base rate or a base rate plus profit sharing, and 24.4% are fixed on floating rates for the fourth quarter of 2017. For 2018, we have contracted out only 36.9% of our fleet as we monitor the market and look to gradually charter out our fleet at recovering rates. Any market improvement will have -- will be captured through one of the following three mechanisms, open days; days fixed on floating rates or days with base rates and profit sharing. Slide 9 demonstrates our strong liquidity position. We have $117.5 million in cash as of September 30, 2017, pro forma for the $55.1 million repayment of NM loan. Our net debt to book capitalization at 61.5% pro forma for the loan repayment. Moreover, we have no committed gross CapEx and no significant debt maturities until Q4 of 2021. Slide 10 shows the low breakeven for 2017. In 2017, 98.8% of our fleet is contracted at an average rate of $17,312 net per day compared to our fully loaded cost estimated at $17,174 per day. As a result, our total costs for 2017 are covered by a fixed revenue alone, and we have further upside through our 962 open plus floating rate days for the fourth quarter. For 2018, 36.9% of our fleet is fixed. The average rate for our product tankers fleet is $14,134 net per day. We have 9,308 open plus floating rate days aligned and manageable breakeven rate of about $15,000 per day. Our daily cost includes operating expense, drydocking, G&A expenses, 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 13. Navios Acquisition continues the Navios Group policy of locking in secure cash flow with creditworthy counterparties. In 2016, we extended the coverage of our fleet for approximately 30 total years of coverage via new fixtures, continuations and exercised optional periods at higher levels with profit sharing. We have continued that trend this year, adding about 13 years of coverage to the beginning of November. Please turn to Slide 14. Navios Acquisition's diversified fleet consists of 36 vessels with an average age of 6.8 years, totaling 3.9 million deadweight. The fleet consists of 8 VLCCs, 18 MR2 product tankers, 8 LR1 product tankers and 2 chemical tankers. Please turn to Slide 15. 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 the market improvement over current charter rates. 36.3% of our fixed days are covered by profit sharing this year. Turning to Slide 16. Navios Acquisition enjoys vessel operating expenses estimated at 17% below our peers. This has led to an estimated operating cost savings of about $89 million from 2014 through '16. These savings go directly to our bottom line, increasing net income. We achieved these operational savings through a management agreement with Navios Holdings, and these costs are fixed until 2018 midyear. Please note that the operating costs shown here include technical management, related services and general and administrative expenses. The Navios group of companies does not charge any fees to affiliated or intercompany entities. Please turn to Slide 18. Navios Midstream brings Navios Acquisition flexibility and liquidity while providing a new platform in the wet sector for dividend-seeking investors. NNA owns 59% of Navios Midstream Partners, including a 2% GDP interest, with a market value of approximately $115 million as of yesterday's closing price. Turning to Slide 19. Navios Midstream Partners' fleet of 6 VLCCs is fixed with an average charter duration of 3.6 years and expected to provide about $360 million in long-term revenue with top-tier counterparties, including Navios Acquisition's backstop arrangements. Through Q3 of this year, Navios Midstream earned $41.6 million of EBITDA. Navios Midstream declared a cash dividend of $42.25 per unit for Q3 of '17. This distribution provides NNA with approximately $21.3 million in annualized distributions. Turning to Slide 21. According to the IEA, refinery capacity is expected to increase by 10.3 million barrels per day from '17 to 2020, 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 agents to increase refinery capacity by 3.4 million barrels per day and 1.8 million barrels per day, respectively. New low-cost 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 products is expected to continue to outpace the general demand for refined oil products. Turning to Slide 22. 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 in 2015. Chinese exports in 2016 were up by 34%, led by diesel, which was up 115% over 2015 exports. Through July, total Chinese exports are up 8% from 2016. These developments, combined with continued strong agent demand, should support product tanker trade east of the Suez this year and going forward. Turning to Slide 23. US crude production has increased by 76% since the end of 2008, reaching 9.2 million barrels per day in July of '17. The US has increased its total product exports by about 470% to about 5.3 million barrels per day since 2004. US 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. Turn to Slide 24, please. 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 of transportation, drive arbitrage trades and increase product ton miles. This was readily apparent in the aftermaths of the U.S. Gulf hurricane when product tanker demand and rates grows rapidly in response to U.S. Gulf refinery outages. Over the long term, increasing worldwide product imbalances point to an increased ton mile development. Please turn to Slide 25. 2016 saw 6.2% net fleet growth, 9.4 million deadweight delivered versus 12.9 million deadweight projected and a scrapping of 700,000 deadweight. Through September of this year, the fleet grew by 3.8%, including 6.9 million deadweight of deliveries and 1.2 million deadweight of demolitions. About 5.1% of the product tanker fleet is 20 years of age or older. As of the beginning of October, there were 222 product tankers on order and 174 which are 20 years of age or older. Given historical non-deliveries, the total order book is about equal to those ships of 20 years of age or older. Turning to Slide 27. World crude consumption has generally grown for the past 30 years with declines in '08 and '09 due to global financial crisis. Starting in 2010, world crude and refined product consumption returned to this pattern of growth. The main structural drivers going forward on moderate VLCC growth and increasing demand from the Asian economies, particularly China and India. The IMF projected global GDP growth for 2017 and '18 at 3.6% and 3.7%, respectively, with emerging and developing markets growing at 4.6% in '17 and 4.9% in '18. Growth in emerging markets is a key driver for future oil demand who will have IMF increased forecast for this year and '18 are due to stronger-than-expected growth in China, Japan, Europe and Russia. Increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs. Please turn to slide 28. 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 the area as exports. The majority of supply increases will come from the non-OPEC Atlantic basin sources. And in conjunction with less Mideast exports, this should increase ton miles for VLCCs going forward. With OPEC indicating that they will continue their production cuts and Chinese consumption more than expected, we expect new Atlantic-based crude to head to the Far East. This, combined with the low level of vessels in floating storage, had led to a seasonal increase in VLCC rates. Please turn to slide 29. As noted on the top half of this slide, in terms of the ton miles, the movement of crude from West Africa and South America to China uses as -- about as many VLCCs as the movement from the Arabian Gulf, even though the Arabian Gulf shipped about 2 times more oil to China. With relatively steady demand in the US, increases in crude production have led to increased exports, adding to ton miles. From January through July of this year, the US exported 5.4 million barrels per month to China plus another 1.8 million barrels per month to Japan and Korea for a total of 7.2 million barrels per month, accounting for 26% of US exports in that period. 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 production declines and demand increases. The expansion of west to east crude movements can be seen in the bottom part of the slide, which shows spot VLCC fixtures from load ports west of Suez to the east are on pace to grow at more than 70% since 2013. Please turn to Slide 30. China is the world's second-largest consumer of oil, importing two-thirds of its requirements. Chinese imports have more than doubled since January of '09, representing a 13% CAGR. Through September, Chinese crude imports averaged 8.5 million barrels per day, representing an increase of 12% over the same period last year, making China the world's largest importer of crude oil during this period. Additionally, refinery openings going forward should add about 1 million barrels per day in crude demand by the end of this year, with a further 2.7 million barrels per day to come on stream from 2018 to 2020. As you can see in the upper right hand and the table below, on a per capita basis, US oil usage is 6.7 times that of China, European is 3.1 times and world usage is 1.5 times. If China goes to world per capita consumption levels, China would require an additional 261 VLCCs, assuming oil crude is imported by sea. This represents an expansion of existing fleet by about 36%. Please turn to Slide 31. Slide 31 shows the balance between the newbuilding order book and the pool of scrapped candidates. Even with the recent pickup in newbuilding orders, the current contracted order book of 89 VLCCs is less than 99 vessels that are 17 years in age or older. Given the outlook for continued ton mile growth, the supply and demand fundamentals remain healthy going forward. Please turn to Slide 32. The forecast for net fleet growth in '17 is approximately 38 VLCCs or approximately 5.4%. We note ten VLCCs scrapped year-to-date. Thank you. This concludes my review. And I would like to turn the call over to Leonidas Korres for the Q3 financial results. Leo?

[Leonidas Korres:]

Thank you, Ted. I will discuss the financial results for the third quarter and the nine-month period ended September 30, 2017. Please turn to Slide 33. Revenue for Q3 2017 decreased by 20.6% to 54 million from 68.1 million in Q3 of 2016, reflecting the softening of the tanker market. Our revenue was negatively affected by the scheduled drydocking of three product tankers. In Q3 2017, we had 99.7% fleet utilization. We achieved a time charter equivalent of $16,486 per day, reduced from the $19,159 per day achieved in the third quarter of 2016. Time charter expenses include the 6.1 million backstop commitment to Navios Midstream Partners accrued in the third quarter. Operating expenses were 23.9 million, and G&A expenses were 2.8 million, reflecting our low cost traction. Equity in net earnings from affiliated companies was 3.8 million, mainly reflecting our equity portion in Navios Midstream Partners' earnings. EBITDA for Q3 2017 decreased by 44.1% to 23.3 million from 41.7 million in Q3 2016. Other expenses included depreciation and amortization of 14.2 million and interest expense and finance cost of 18.9 million. Net loss for the quarter was $8.1 million or minus $0.05. Turning to the financial results for the nine-month period ended September 30, 2017. Revenue decreased by 20.6% to 177 million from 223 million last year, reflecting time charter equivalent of $17,814 per day and a 99.8% fleet utilization. Operating expenses were 71 million. G&A expenses were 9.3 million, reduced by 3.5 million compared to the nine-month period of 2016. Equity in net earnings from affiliated companies for the nine-month period reflects the 59.1 million impairment on our investment in Navios Midstream Partners in the second quarter of 2017. Adjusted for one-off items, EBITDA for the nine-month period of 2017 decreased by 38.7% to 87.8 million from 143.2 million in 2016. Depreciation and amortization was 42.7 million, and net interest expense and finance cost was 57.5 million. As a result, we reported an adjusted net loss of 7.1 million. Slide 34 provides selected balance sheet data as of September 30, 2017. Cash and cash equivalents, including restricted cash, was 62.4 million. Vessels' net book value was 1.3 million. Investment in affiliates of 126.8 million mainly reflects Navios Acquisition's interest in Navios Midstream Partners. Receivables from related parties mainly grew the 50 million loan facility, and then they extended to Navios Holdings and the expected accrued interest, management fees and payments for drydockings under the terms of our management agreement as well as working capital contributions to Navios Europe I and II and their respective accrued interest. Total assets amounted to 1.6 billion. Total debt as of September 30, 2017, was 1.1 billion, resulting to book capitalization ratio of 65%. Pro forma for the 55.1 million expected cash inflow in Q4 from the early repayment of the 50 million loan to NM and the 5.1 million of accrued interest, net debt to book of capitalization ratio improved by 5.4% to 61.5%. As of September 30, 2017, Navios Acquisition was in compliance with all of the covenants of its credit facilities and ship model notes. Turning to Slide 35. We announced a dividend of $0.05 per share for the third quarter, equivalent to $0.20 per share on an annualized basis. The dividend will be paid on December 12, 2017, to shareholders of record as of December 6, 2017. I would also like to highlight that given our 59% interest in Navios Midstream Partners, we expect to receive approximately 21.3 million annually in dividends from NAP at their current distribution of 1.69 per unit. And now I will pass the call back to Angeliki.

[Angeliki Frangou:]

Thank you, Leo. We open now the call to questions.

[Operator:]

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

[Noah Parquette:]

I just wanted to ask, with the capital coming in from NNA or the NM loan, there's a lot that looks interesting now with VLCC prices and the product tanker market. Are you guys thinking about deploying that capital? And any color would be helpful.

[Angeliki Frangou:]

I think this is - we also believe that this is an appropriate time. I mean, the outcome from the loan was very beneficial for both companies. We've got 5 million in interest and a 10% return. And today, I think prices of our assets [indiscernible] and on product tankers are attractive. So our priorities remain deleveraging, I mean, we have gone through not as aggressively, but we have been from 2012, almost 76% to today being at 61%. And then it's really acquiring attractive assets. Let me remind you that we sold a couple of very nice vessels at the doubles market. So this is at a point of the market where you acquire assets and you can then see the appropriate time for reflecting. And of course, the last priority, and very important one, is to return to our investors. And this is - we are very mindful of that. We have a consistent dividend but also a very [indiscernible].

[Noah Parquette:]

And for the deleveraging. I think your target before the long was like 55% net debt to cap. Is there still explicit targets that you have? Or is it something else?

[Angeliki Frangou:]

Yes, yes, and we will further delever. And don't forget that will happen with a recovering market also, meaning with additional cash flows. One of the things we have seen in that is also the ability to be able to return to our investors on dividend. Through the cycle, it has been through our chartering strategies. Instead of just taking the spot market for one year, by the strategy of creating nice cash flows over a period of the year, that provides a better overall return and visibility, but also better returns on our investors and ability to have the dividend.

[Noah Parquette:]

And so moving on market, we saw that a real nice pickup in scrapping for VLCCs in summer and particularly in August. So that corresponded with the dropping rates to the cash breakeven. Are we going to have to see kind of that it's a little bit of a mixed bag with rates so bad to see the pickup in scrapping? Or can we find the happy median of decent scrapping levels, along with decent rates at this point? Because scrapping has been so pushed back in the VLCC market, it would be nice to see some more of that.

[Ted Petrone:]

I think that the - even market recovered. Remember, we have these regulations coming in. We've got a much-older fleet on these, right. We have more of these that are 17 years of age or older than the newbuildings that's coming in. So I think with the sulfur and people stepping back from scrubbers, for a number of reasons, I think the older ships are going to have to scrap sooner. So I do think as the market recovers, I think scrapping will hold steady and be healthy.

[Operator:]

Your next question comes from the line of Chris Wetherbee of Citigroup.

[Dora Huang:]

This is Dora on for Chris. First, I just want to ask about those three VLCC that's coming off charter in the first quarter. Do you have any like - can you give us some color on that about the re-chartering opportunity?

[Angeliki Frangou:]

Let me - I mean, we always focus on getting our vessels chartered, especially because of the seasonally strong Q4. I mean, as you can see also from the forward curves, you see that December is even a stronger month and the returns would be higher. So our strategy to have our vessels open, this gives us an ability to fix them at a much higher environment. There is a 30 plus on this kind of an environment. And that is, by design, we wanted to have our VLs coming in this kind of period.

[Ted Petrone:]

We're very happy to have them open and seasonally strong. But I can say that - to give you some color for next year, less newbuildings, right. One of the other issues that, I think, pressed the rates down on these was crude. The forward curve going from contango to backwardation took a lot of ships out of floating storage. So that may actually flip next year, the forward curve, because it can contango back to floating storage, taking ships out of the market. OPEC probably sometime in the year is going to start pumping more. So we're actually quite positive on these next year going forward.

[Dora Huang:]

So just to make sure I got it right. So the rate is going to be - is expected to be over 30k?

[Ted Petrone:]

I expect the rates to be better than this year. So far, they have averaged around 23, 24. And if you look at all the research firms, we’re probably looking in the low 30s. And I think that's probably a good range, something that's starting with a three for the year.

[Dora Huang:]

Speaking of the seasonal strong - season for crude oil. I just want to get a sense about how do you think about, like, your percentage of fixed days for 2018. Like, do you have a target?

[Ted Petrone:]

Well, right now, again, we're like - listen, I think the - as I said, the Vs will surprise people I think, and the products are going to go from seasonal strength to fundamental strength because the newbuildings really come - fall off the cliff starting next year. You're coming out of the refinery margin season. So we're very happy. I think across the board, on refineries and on the crude, those ton miles are moving up. I mean, China is taking more oil from the US Gulf and from the Atlantic. And even though this volume has been slightly up, the ton miles have been moving up on both of them. So we're pleased that we have open vessels going forward. Listen, there is a reason that people are picking up product tankers at 14,000 today for a year and the numbers are probably 8,000 or 10,000 average through this year because everybody sees the numbers going forward. And I think the guys who are short needs some cover.

[Dora Huang:]

Just one follow-up. How many scheduled off-hire days do you expect in the fourth quarter?

[Leonidas Korres:]

In the first quarter of 2018, we have three product tankers up for scheduled drydock. So you should expect an average of 16, 20 days for these.

[Dora Huang:]

In 2018 that is?

[Leonidas Korres:]

In Q1 of '18. And in Q4 of '17, there are another two product tankers for the same number of days.

[Dora Huang:]

How about fourth quarter '17?

[Leonidas Korres:]

In the fourth quarter of '17, as I said, two product tankers.

[Operator:]

There are no further questions at this time. I will now turn the call back over to Ms. Angeliki Frangou for closing remarks.

[Angeliki Frangou:]

Thank you. This completes our Q3 results.

[Operator:]

This concludes today's conference call. You may now disconnect.