Navios Maritime Acquisition Corporation
Q2 2016 Earnings Call Transcript

Published: 18 Aug 2016

[Operator:]

Thank you for joining us on Navios Maritime Acquisition Corporation’s Second Quarter 2016 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 Investor 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 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 finally we will open the call to take questions. Now, I will turn the call over to Navios Acquisition’s Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you Doris and good morning to all of you joining us on today's call. Navios Acquisition reported EBITDA of 45.2 million and a net income of 30.2 million or $0.08 per share for the second quarter of 2016. This includes 1.3 million of profit sharing recognized in the second quarter of 2016 over total of 7.4 million reported in the first half of 2016. We declared a dividend of $0.05 per share for the quarter resulting in a dividend yield of about 13% on an annualized basis. Slide 3, our company highlights. NNA has 38 modern high quality vessels with an average age of 5.4 years. All our vessels are in the water and are generating cash flows. Our fleet is 98.2% fixed for 2016 and 56.6% fixed for 2017. Over 54% of our 2016 fixed days have been in profit sharing arrangement. NNA operating costs are fixed through mid-2018, and are about 11% below industry average and provide us with a significant competitive advantage. Let me remind you that through our management agreement with Navios Holdings we benefit from significant economies of scale which we estimate exceed 30 million in each of the past two years compared to that available in the market. Please turn to slide 4. We are a leading tanker company and a sponsor of Navios Midstream Partners. We expect to receive $21.3 million in distributions from Navios Midstream in 2016 and our common equity interest in Navios Midstream is worth about $150.6 million or about $1 per annum to NNA per share NAV. This represents about 65% of NNA’s current share trading value. Slide 5 details Navios Acquisition key developments. NNA reported a net income of $36 million or $0.23 per share for the first half of 2016 and 12.2 million of which was recorded in the second quarter. EBITDA for the first half of 2016 was $103 million and 45.2 million of which were reported in the second quarter. NNA is on track for $206 million in a run rate of expected 2016 EBITDA. As mentioned earlier profit sharing on a counterparty [ph] market are upside and then a 7.4 million during the first half of 2016. As displayed in their table NNA has 98.2% of our available days which positioned the company to generate strong cash flow in 2016. Cash flow maybe further boosted by open days and days contracted on floating rate. Slide 6 details our chartering strategy by which we balance market opportunity with long term employment. The strategy is designed to provide protection from market volatility through period charter coverage 98.2% and 56.6% of our fleet is contracted out in 2016 and 2017 respectively. And with market improvement we recapture through one of the following three mechanism; open days, days fixed on floating rates, or days with base rate and profit sharing. Slide 7 demonstrates our strong liquidity position was up $76.4 million in cash as of June 30, 2016. We have now committed growth Capex and also significant pretty much rate this until the fourth quarter of 2021. Slide 8 shows the cash flow portion from our low breakeven. 98.2% of our fleet is contracted for 2016. We expect to end and Navios has contracted daily charter out rate of $20,679 per day compared to the 2016 average fully loaded cost of $17,165 per day. In 2017 where 56.6% of our fleet is contracted at an average contracted daily charter out rate of $21,020 compared to a fully loaded cost of $17,310 per day. As you know our daily cost includes operating expense, dry docking, general and administrative expenses, interest expense, and capital repayment. You can see at the bottom of our slide our breakeven analysis. NNA should be able to generate significant cash flow in 2016 further assisted by days that are open and contracted on floating rates. And 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 10, with the completion of our new building program last year we have no growth CAPEX requirements and can accumulate cash from our fleet of 38 vessels on the water. We have sold two 2013 built chemical tankers, the sale is expected to close in the second half of this year on the completion of the vessels chartering commitments. Navios Acquisition continues the Navios Group policy of locking in secured cash flow with credit worthy counterparties. In 2015 we extended the coverage of our fleet for 33.5 total years of coverage via new fixtures, continuations, and exercise optional periods at higher levels with profit sharing. We added a further 12 years of coverage so far this year. Navios acquisition diversified fleet consists of 38 vessels although one was at an average of 5.4 years totaling 3.9 million deadweight. The fleet consisted 8 VLCCs, 18 MR2 product tankers, 8 LR1 product tankers, and 4 chemical tankers. Turning to slide 11. We have fixed practically all of our capacity for 2016, and what should be a continuing healthy environment we have fixed 56.6% in 2017 and about 15% of revenue days for 2018. About 54% of our contracted fleet has profit sharing in 2016. The average contracted daily charter out rate for our fleet is $20,679 for 2016. The rates for 2017 and 2018 are $21,020 and $17,874 respectively. Turning to slide 12, our charting strategy revolves around capturing market opportunity. We’re also developing dependable cash flow from a diverse group of first class charters. As a result the average duration of all our charters is about 1.1 years. Due to continuing strong market for our vessels we earned 7.4 million due to profit sharing in the first half of 2016. Turning to slide 13, Navios Acquisition enjoys vessel operating expenses significantly below the industry average. Currently Navios Acquisitions daily OPEX is about 11% below the industry average. We achieved these operational savings through a management agreement with Navios Holdings. The operating cost under this strategy agreement are in force until mid-year 2018. Please note that the operating cost shown here include all estimated dry dock costs. Turning to slide 15, Navios Midstream brings Navios Acquisition flexibility and liquidity through providing a new platform in Midwest [ph] sector for dividend seeking investors. NNA owned 60.2% of Navios Midstream Partners including a 2% GP interest with a market value of approximately 160 per million as of yesterday's closing price. Turning to slide 16, Navios Midstream Partners fleet of six VLCCs is fixed with average charter duration of 4.8 years and is expected to provide approximately $0.5 billion of long-term revenue at top tier counter parties. The first half of 2016, Navios Midstream earned $34.1 million of EBITDA including 4.3 million of profit sharing. In all of 2015 Navios Midstream earned $62.2 million of EBITDA including $8 million of profit sharing. Navios Midstream declared a cash dividend of $0.4225 [ph] per unit. This distribution provides NNA with approximately $21 million in annualized distributions. Turning to slide 18, according to the IEA refiner capacity is expected to increase by 11.8 million barrels per day from 2016 to 2021 including all additions, expenses, and upgrades. About 65% of that capacity will be added in Asia and the Middle East with the IEA projecting China and other non-OECD to increase refinery capacity by 3.3 million barrels a day and 1.5 million barrels per day respectively. New low capacity in Asia is forcing rationalization of old high cost capacity in OECD. We see refinery closings in Europe and the Caribbean as well as closing in Australia and Japan can be partly attributed to inefficiencies of these facilities. Because of this structural shift the growth in ton miles of refined oil products is expected to continue outpace the general demand for refined oil products. Turning to slide 19, as expected refineries have opened or expanded in Saudi Arabia and China. These refineries are now contributing significant volumes of product export through May Saudi Arabia exported average of 1.4 million barrels per day of products in order to capture higher revenue per barrel while crude prices remain relatively low. This is 52% higher than the same period last year. Chinese exports through May are up almost 50% from 2015 led by diesel exports of about 5.5 million tons which was 319% higher than the same period last year. India's oil demand continues to grow and is forecast to increase demand by 3000 barrels a day for 2016. India's increased demand has led to a 68% increase in product imports to about 430,000 barrels a day through May. These developments should support product tanker trade East of Suez this year. Turning to slide 20, U.S. crude production has increased by 81% since the end of 2008 reaching about 9 million barrels per day in May. U.S. has increased its total product exports by over 400% to about 4.7 million barrels per day since 2004. U.S. Gulf refineries has benefited from inexpensive domestic crude and natural gas supplies we find in national export market to may be Mexico, Latin America, as well as Africa. U.S. product imports have declined over the past couple of years but continue to come from farther away and into product tanker ton miles. There has been little to no effect on U.S. product exports after the lifting of the ban of exporting U.S. crude but this development continues to [indiscernible]. The fundamentals of product tanker trading patterns continue to adjust in relation to these changes. Please turn to slide 21, oil refineries vary greatly in their quantity, variety, and specification of products that they produce. As depicted in this slide, regional surpluses and deficits combine with a relatively low cost of transportation drive, arbitrage trades, and increased product ton miles. Increasing worldwide product imbalances point to increased ton mile development. This global, multidirectional trade pattern enables product tankers to triangulate thereby minimizing balance time and maximizing revenue. Please turn to slide 22, 2015 saw 5.5% net fleet growth. So far this year we have seen about 27% non-delivery figure that is 6.2 million deadweight delivered versus 8.5 million deadweight projected and is scrapping of about half a million deadweight tons given net fleet growth of 5.7 million deadweight or about 4%. About 5.5% of the product tanker fleet is 20 years of age or older. As of the beginning of August the order book totaled 19.8 million deadweight or about 13% of the fleet. A level usually considered adequate for regular replacement of an existing fleet but little or no demand growth. The card order book for 2017 onwards is only 13.5 million deadweight. Turning to slide 24, world crude oil consumption is generally growing for 30 years with declines in 2008 and 2009 due to the global financial crisis. Starting in 2010, world crude and refined product consumption returned to this pattern of growth. The main structural drivers going forward are moderate VLCC fleet growth increasing demand from the Asian economies particularly China and India as well as growth in the U.S. and the Arizona. The IMF projected global GDP growth for 2016 and 2017 at 3.1% and 3.4% respectively led by emerging and developing markets, growth of 4.1% in 2016, and 4.6% in 2017. We know that the IMF left its growth forecast for emerging markets a key driver in future oil demand unchanged in its recent revisions. Increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs. The IEA raised the forecast of global oil demand for 2015 12 times to 94.8 million barrels per day or an increase of 1.6 million barrels per day, the largest yearly increase in 5 years. The IEA projects 2016 demand at 96.3 million barrels per day or an increase of 1.4 million barrels per day or a 1.5% increase and 2017 demand at 97.5 million barrels per day, an increase of 1.2 million barrels per day or 1.3% over 2016. Please turn to slide 25, as noted at the top half of slide 25 in terms of ton models the movement of crude from West Africa and South America to China uses about as many VLCCs as a movement from the Arabian Gulf even now the Arabian Gulf shipped about two times more oil to China. The growth in VLCC ton miles will continue as China imports more crude from Venezuela, Brazil, and West Africa as it diversifies its sources of oil. Given current demand in the U.S., any decline in crude production should lead to increased imports and to turn miles. Near term crude shipment increases from Nigeria should help increase ton miles and support VLCC rates after the deferred refinery maintenance period. The expansion in West to East crude movements can be seen in the bottom part of the slide which shows the percentage of spot VLCC fixtures load towards West of Suez headed to the East has grown significantly in the past three years increasing ton miles. Please turn to slide 26. China is the world's second largest consumer of oil importing more than half of its requirements. Chinese imports have more than doubled since January 2019 representing a 13% CAGR. Crude imports reached 8 million barrels per day in February and again in April all time records. Chinese crude imports remained elevated through July averaging 7.5 million barrels per day which represents a 0.8 million barrels per day increase or a 12% over the same period in 2015. Additional refinery openings going forward at about 370,000 barrels per day in crude demand this year. As you can see in the upper right and to the table below on a per capita basis U.S. oil usage is 6.9 times that of China, European usage is just 3.1 times, and world usage is 1.5 times. The China goes to world per capita consumption levels, China will require an additional 271 VLCCs. So if all crude is imported by sea this represents an expansion of the existing fleet by about 40%. Turning to slide 27, 2015 saw a 3.1% net fleet growth. So far through July 7.3 million deadweight has delivered against 11 million deadweight projected giving fleet growth of 3.7% as there has been no scrapping through July. 138 VLCCs or 200% of the fleet is 15 years old or older compared with the current 119 VLCCs on order. As of the beginning of August, the order book totaled 37 million deadweight or about 18% of the fleet, a level usually considered adequate for regular replacement of an existing fleet with little or no demand growth. 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 2016. Please turn to slide 29, revenue for Q2 2016 decreased by 7.4% to 74.5 million from 80.4 million in Q2 of 2015. With almost a 100% fleet utilization we achieved a time charter equivalent of $21,380 per day, reduced from the $22,541 per day achieved in the second quarter of 2016 reflecting the softening of the tanker market. Our results were also affected by a reduced number of available days compared with the same period last year from 3,523 days to 3,437 days and the scheduled dry docking of [indiscernible] VLCC. During the quarter we earned 1.3 million through profit sharing. Operating and voyage related expenses were 25.3 million reflecting our low cost structure given our relationship with Navios Holdings. And G&A expenses were 6 million increased compared with the same period last year mainly due to performance bonuses for 2015 invested in this quarter. Equity and net earnings from affiliated companies was 3.7 million mainly reflecting our equity portion in Navios Midstream Partners earnings. EBITDA for Q2 2016 decreased by 25.2% to 45.2 million from 60.4 million EBITDA in Q2 2015. Other expenses include depreciation and amortization of 14.3 million and interest expense and finance cost of 18.9 million. Net income decreased to 12.2 million or $0.08 per share from a net income of 26.4 million in Q2 of 2015. At this point I would like to remind you that EBITDA and net income in Q2 2015 was positively affected by 5.8 million gain on sale of assets. Turning to the financial results for the six month period ended June 30, 2016, revenue decreased by 2.6% to 154.9 million from 159 million last year reflecting a time charter equivalent of $22,055 per day and 99.8% utilization. During the first half we earned 7.4 million through profit sharing. Operating and voyage related expenses were 50.9 million and G&A expenses were 9.5 million. Equity net earnings from affiliated companies for the six month period was 8.6 million, EBITDA for the first half of 2016 decreased by 9.4% to 103 million from 113.6 million in 2015. Depreciation and amortization was 29.2 million and net interest expense and finance cost was 38 million. As a result we reported net income of 36 million or $0.23 per share. Slide 30, provides selected balance sheet data as of June 30, 2016. Cash and cash equivalents including restricted cash increase to 76.4 million. Vessels net of depreciation decreased 1.3 billion reflecting the sale of two chemical tankers. Their net book value of 62.1 million is now reflected in the line vessel scale for sale. Investment in affiliates of 201.7 million mainly reflects Navios Acquisition interest in Navios Midstream Partners. Total assets amounted to 1.8 billion. Total debt as of June 30, 2016 was 1.16 billion. Our net debt to capitalization ratio decreased to 63% from 65.3% as of December 31, 2015. Pro forma for the agreed sale of the two chemical tankers expected to close in Q3 and Q4 2016 following the completion of their chartering commitments. Net debt to capitalization further decreased to 59.7%. As of June 30, 2016 Navios Acquisition was in compliance with all of the covenants of its debt facilities and [indiscernible]. Turning to slide 31, 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 providing a yield of about 13%. The dividend will be paid on September 31, 2016 to shareholders on record as of September 14, 2016. On this point I would like to highlight that given our 60.2% ownership in NAP, we expect to receive on an annual basis 21.3 million in dividends from Navios mix in partners of the current distribution of $1.69 per unit. And now I will turn the call back to Angeliki. Angeliki?

[Angeliki Frangou:]

Thank you Leo this completes our formal presentation we open the call to questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Prashant Rao of Citi.

[Prashant Rao:]

Good morning guys. If we could just start with the balance sheet you were able to bring down your net debt to cap again this quarter, come down over 200 basis points since the end of last year. Given the cooling off in the rate should we still be thinking about a target potentially 50% to 65% entering this year or just maybe a sub 50 number, in the higher 50s is safe for assumption and sort of related to that how do you think about the return of capital to shareholders versus strengthening the balance sheet given the volatility in this market since the last time you reported?

[Angeliki Frangou:]

I think that on the deleveraging we are moving to the direction we have already been over the last two years. We’ve seen that today its around 63%, pro forma for the say and they were naturally deleveraging that we have with the first generation. Don’t forget we are about 98% fixed so we are very well protected in this kind of an environment. And we are almost 60% for next year. So we see that we will be moving at around mid 40s by year-end. 55% by year-end, sorry.

[Prashant Rao:]

Okay, so I am sorry, it is 55 but helpful and then turning to the market, charter rate for 2017 fixtures are so far really healthy and as we looked to the fixture season for this fourth quarter and just wanted to get a sense early read or initial thought seems like the crude non-delivery trend on the VLCC side are strong, could possibly be supporting of more typical seasonality? And then on the product side just wanted to get your sense if there is an acceleration in that non-delivery trend is possible during the supply demand dynamics there?

[Angeliki Frangou:]

I will let Ted talk through that. One thing I can say and again in that sense is that in this kind of an environment you have to be conservative about use of your cash and how you see the market. Let's not forget that we -- Q1 we had $60,000 a day and they about $20,000. So you always have to be a little bit conservative and I think our strategy which was always to fix our vessels and have profit sharing has been a good one in the current environment. I mean, the oil fleets [ph] average rate there 17,000 overlies also fixed with profit sharing so it gives us a lot of flexibility in this kind of an environment.

[Ted Petrone:]

Sorry, when we take a look at the market I think we have to see what got us to these low rates. I think in Q2 you had there was a lot of -– let's say an expected crude right going through the systems. The refiners are pushing it out. A lot of the going around high stocks, profit margins were down on the refineries. Also if you look at the crude price in Q2 it started moving up from say mid 30s to low 50s. So refineries had low profit margins and all of a sudden high input cost. So they start to catching up on deferred maintenance, right. So you had the biggest -- I think the IEA said it was the biggest drop in refinery run since 2008 and 2009 prices. So I think that was a ripple effect to the market. I think on the crude side also you estimate Atlantic supply issues throughout Mexico, Venezuela, Nigeria, Canada even. So lot of long haul trade got cut back. So I think there was some seasonality here but I do think now and you are having some draw downs on these refineries and with the cold weather coming in seasonality come back, normally Q3 has been the low point of the year. Probably averaging two thirds of what it would average throughout the year. So we expect the numbers to come back. I personally don’t think the rates will stay below 20, I think they move up. I think you get back close to this year on the view and may even average close to the 20 average. I think so far through this year we’re averaging around 45 and the 20 average is 40. I think you’ll see some low numbers for a while but I think Q4 will come back. I do think we need to watch carefully the non-deliveries on the Vs and the product for the rest of the year. I do think it is going to continue at these higher levels but even if it doesn’t I think you have 138 Vs that are over 15 years of age versus 119 on order, that’s on paper. So I take a third of them out. So going forward I think you still have a healthy market. Let's not take a few weeks here and take two dots and draw a line forward and say that’s a trend line. So we’re in a seasonal dip and it got accentuated by some refinery issues but I think the market is fine.

[Prashant Rao:]

Alright, that’s really helpful color. And yes, seasonal uptick is usually there so it is just a few weeks right now to completely see where you are coming from on that. And just one last housekeeping question, the performance bonuses and the G&A expense line, I just wanted to get a little bit of color what those were in terms of possible your current the bump up in the second quarter, something you expect going forward, just trying to get -- I guess sense of an implication for changes the KD front -- or the direct taxable expense line item as well just OPEX in general how we should think about it, I know it is small but sort of wanted to get your thought?

[Leonidas Korres:]

This relates to 2016 performance of the company so this invested in Q2 that’s why you saw G&A is a little bit high this quarter. So you shouldn’t expect anything throughout the rest of the year.

[Prashant Rao:]

Okay and then is there anything that’s similar for 2017 if we could see or is it sort of one time?

[Leonidas Korres:]

It’s related to 2015 so if there is any other one performance for 16, this of course is something different.

[Prashant Rao:]

Okay, understood thank you very much for the time.

[Operator:]

Your next question comes from the line of Mike Webber of Wells Fargo.

[Unidentified Analyst:]

Good morning, this is Donald Boggin [ph] stepping in for Mike. Thank you for taking my questions. My first question is on your cash flow optionality moving forward given the steady uptick in the cash on the balance sheet, how are you prioritizing deleveraging relative to increasing dividends or potentially further growth given asset values are inching back towards 2013, trial levels?

[Angeliki Frangou:]

I think that balance is managed and then we have done -- we have a period of time we looked on deleveraging. We have some near maturities which will be also one of our first comparisons. On -- if dividend increases are considered we have a dividend policy which has been steady for many years and we have seen another companies in the sector that increased their dividends is not really you see double-digit yields so you don’t see any real reason for doing that. I think we have a policy that we find it appropriate for balance sheet and for our cost generation.

[Unidentified Analyst:]

Okay, thank you for that. And I guess I will circle back to the dividend aspect of the question. I mean I agree with your point the -- pretty strong at roughly 13% but would you consider ramping distributions as a very shareholder friendly way of increasing liquidity back to the fair dynamic [ph]?

[Angeliki Frangou:]

I think I already answered your question.

[Unidentified Analyst:]

Okay, well thank you for the color, that’s it for me.

[Operator:]

We have reached the allotted time for questions-and-answers. I will now return the call to Mrs. Angeliki Frangou for any additional or closing remarks.

[Angeliki Frangou:]

Thank you. This concludes our second quarter results.

[Operator:]

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