Navios Maritime Acquisition Corporation
Q4 2016 Earnings Call Transcript

Published: 10 Feb 2017

[Operator:]

Thank you for joining us for Navios Maritime Acquisition Corporation’s Fourth Quarter and Full Year 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’ll turn the call over to Navios Acquisition’s Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Lorence. Good morning to all of you for joining us on today's call for the full year of 2016 Navios Acquisition has got EBITDA of 194.6 million, net income of 62.9 million and profit sharing of 7.6 million. For the fourth quarter of 2016 Navios Acquisition total EBITDA of almost 50 million, net income of 18.1 million or $0.11 per share and we also declared a dividend of $0.05 per share for the quarter resulting in positive 11.6%. We have constantly take a dividend for the last seven years and distributed out a total of 51.7 million for 2016 representing about 50% of our net income. This gives us sufficient room to meet rather requirement in deleveraging in gross CapEx. Also our policy of [indiscernible] work to provide above market earnings in the year in previous employment was unavailable in the spot rate or contracting. For the full year of 2016 M&A average charter rate for it's combined fleet was 11% higher than the market average. These results speak to the strength of our business model particularly when capital with a cost management. Slide three, company highlights, M&A has 36 model high quality vessels in an average eight of six years diversified between crude product and chemical [indiscernible]. All of our vessels are generating cash flow of 75.4% fiscal 2016-2017 in almost 60% for 2018. M&A was 7.6 million, profit sharing during 2016 and about quarter of our available days in 2017 of profit sharing arrangements. On the cost side operating cost are fixed through mid-2018 at a rate of about 4% lower than the market average. Please turn to slide four, we are [indiscernible] company and the sponsor of Navios Partners. We expect to receive about 31.3 million in distributions from Navios Midstream in 2017. Our common equity interest in Navios Midstream is worth about a 135 million, at about $0.90 through an NAV. Or at another grade this is about 52% of the next current price of our shares trading in the New York stock exchange. Slide five, Navios Acquisition did very -- as I said the moment grow the M&A to net income of 62.9 million for the full year of 2016 and the [indiscernible] $0.40 was for the full year. EBITDA for the year was 194.6 million. In addition we reduce our debt by a net amount of 5.3 million taking to account 33 million debt repayment in the 26.7 million debt. As an update to our S&P activity through 2016 target was shown an improved for 2016 generating gross profit of 74.6 million in the 9.5 million gain. 32.7 million of gross proceeds were used to repay debt through the 38.8 million repayment cash on our balance sheet. M&A's net debt decreased by 6.4% as an example of this transaction. Finally as part of our continued commitment to Navios Marinetime Midstream partners NNA has notched up three vessels fro Navios this has been mitigated as Navios has charted out this vessel to third parties. Slide 6, charting strategy by which we buy market opportunity with long term employment. The strategy is designed to provide protection from market volatility through previous charter coverage. 75.4% is contracted out for 2017. Any market improvement will be captured through one of the following mechanism, open days, floating rates or profit sharing. Slide seven, our strategy that ensure a stable cash flow, charter offers protection in the current market through the stable cash flow associated with previous charter. As you can see for the full year of 2016, M&A average charter rate for the comparing fleet was 11% higher as a market average. CapEx was cost minus when -- outperformed years in market averages. Slide 8 demonstrates strong liquidity position. We have 66.9 million in cash as of December 31, 2016. Pro forma for the same year [indiscernible] on a pro forma basis our net debt and capitalization improved by 340 basis points or almost 5.2 percent compared to year in 2015. We have not committed growth CapEx in debt maturities until the fourth quarter of 2021. Slide 9 shows a event for 2017 under current condition. In 2017 75.4% of our fleet is contracted at an average rate of $18,629 compared to a fully loaded cost of $17,510 per day. As a result the breakeven for our open days is only 11,764, the cost includes expenses [indiscernible] expenses interest expense and capital repayment. At this point I would like to turn the call over to Mr. Ted Petrone.

[Ted Petrone:]

Thank you. Angeliki. Please turn to slide 11, Navios Acquisition continues and Navios Group policy of secure cash flow of credit worthy counter parties. 2016 we extended the coverage of roughly for approximately 30 total years of coverage the fixed years continuation and exercise optional periods at higher levels with profit sharing. We also sold two, 2013 built chemical tankers for a book gain of $9.5 million. Please turn to slide 12, Navios Acquisition grew to [indiscernible] with an average age of six years totaling 3.9 million, the fleet consisted eight VLCC's, 18 MRT tankers, 8 LL1 tankers and 2 chemical tankers. Please turn to slide 13, our charting strategy revolves around capturing market opportunity, also developing dependable cash flow from the diverse of first class charters, we also earned 7.6 million of profit sharing in 2016. Turn to slide 14, Navios Acquisition enjoys operating expenses below the industry average currently, Navios Acquisition OpEx is about 4% below the industry average. We achieved this operational savings to the management agreement with Navios Holdings, the operating cost under this management agreement are in force until mid-year 2018. Please note that the operating cost shown here include all estimated dry docking cost. Please turn to slide 16, Navios Midstream brings Navios Acquisition flexibility and liquidity while providing a new platform to the sector for dividend seeking investors. Navios Acquisition owns 59% of Navios Midstream partners including a 2% GPH risk [ph] with a market value of approximately 135 million as of yesterday's closing price. Please turn to slide 17, Navios Midstream Partners fleet of six VLCC [ph] with an average charter duration of 4.3 years and expected to provide approximately 400 million in long term revenue in top tier counter parties. 2016 Navios Midstream earned 66.2 million of EBITDA including approximately 5 million of profit sharing. Navios Midstream declared a first dividend of $0.4225 per unit. This distribution provides NNA with approximately $21 million in annualized distributions. Please turn to slide 19, according to the IEA refiner capacity is expected to increase by 11.8 million barrels per day in 2016 to 2021 including all addition expense and upgrades. About 65% of that capacity will be added in Asia and the Middle-East with the IEA projecting and other non-OECD to increase refinery capacity by 3.3 million barrels per day and 1.5 million barrels per day respectively. New low capacity in Asia is forcing rationalization of old high cost capacity in OECD. 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 20, as expected refineries have opened or expanded in Saudi Arabia and China. These refineries are now contributing significant volumes of product export through November Saudi Arabia exported average of 1.4 million barrels per day of products in order to capture higher revenue per barrel while crude prices remained low. This is 32% higher than the same period last year. Chinese exports through November are up 34% for 2015 led by diesel exports of about 13.3 million tons which is a 116% higher than the same period last year. In November Indian product imports were up 50,000 barrels a day or about 20% year-on-year adding to demand. These developments should support product [indiscernible] this year and going forward. Turning to Slide 21, U.S. crude production has increased by about 75% since the end of 2008 reaching about 9 million barrels per day in November of '16. The U.S. has increased its total product exports by about 400% to about 4.8 million barrels per day since 2004. U.S. Gulf refineries has benefited from inexpensive domestic crude and natural gas supplies while finding a national export market to neighboring Mexico and 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. Please turn to slide 22, 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 transportation drive, arbitrage trades, and increased product ton miles. Increasing worldwide product imbalances point to increased ton mile development. This global, multi-directional trade pattern enables product tankers to triangulate thereby minimizing balance time and maximizing revenue. Please turn to Slide 23. 2016 saw 6% net fleet growth, 9.4 million deadweight delivered versus 12.9 million deadweight projected and scrapping of 0.8 million deadweight about 6% of the product tanker fleet is 20 years of age while older as of beginning of January there were 248 product tankers on order and a 178 which were 20 years of age or older. Given historical non-deliveries total order book is about equal to those ships of 20 years plus. As of the beginning of January the order book totaled 18.1 million deadweight or about 11% of the fleet. The current order book for 2018 onwards is only 4.8 million deadweight. Turn to slide 25, world crude oil consumption has generally grown for the past 30 years with declines in 2008 and 2009 due to the global financial crisis. Starting in 2010, world crude oil and refined product consumption returned to this pattern of growth. The main structural drivers going forward are moderate VLCC growth increased in 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 2017 and 2018 at 3.4% and 3.6% respectively led by emerging and developing markets, growing at of 4.5% in 2017, and 4.8% in 2018. Growth in emerging markets is a key driver in future oil demand. Increasing in world GDP growth year-on-year has generally led to higher time charter rates for vessels especially VLCCs. Please turn to Slide 26, according to BP’s latest worldwide oil demand projections to 2035 more than half of the increasing 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. Majority of supply increases will come from non-OPEC Atlantic based sources and in conjunction with less mid-East exports this should increase ton miles for VLCCs going forward. Please turn to Slide 27, as noted in the top half of Slide 27 in terms of ton miles the movement of crude from West Africa and South America to China uses about as many VLCCs as the movement from Arabian Gulf even though the Arabian Gulf shift 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 it's sources of oil. Given current demand in the U.S. and declining crude production should lead to increased imports and to ton miles. For any border adjustment tax if enacted could potentially increase U.S. crude oil exports also raising ton miles. Please turn to Slide 28. 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 2009 representing a 14% CAGR. Chinese Crude imports reached all-time record of 8.6 million barrels per day in December an average 7.6 million barrels per day which represented a 0.9 million barrel per day increase or 13% over 2015. 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 barrels per day to come on-stream between 2018 to 2020. As you can see in 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. If China goes to world per capita consumption levels, China will require an additional 271 VLCCs. Assuming all crude is imported by sea this represents an expansion of the existing fleet by about 40%. The chart in the upper right shows China's per capita energy consumption exceeds Europe's by the year 2030. Please turn to Slide 29. Non-deliveries are made high last year 36% forecast from net fleet growth for 2017 is approximately 31 vessels or approximately 4.5%. Deliveries are expected to be less in the number of VLCC need for the expected increase in demand. The order book as of beginning of January equal 99 vessels which is less than a 171 vessels that are 15 years of age or older. We know two VLCCs strapped to Q4 of '16 the first trading VLCC strapped since the first quarter of 2015. Thank you. This concludes my review and I would like to turn the call over to Leonidas Korres for the Q4 financial results. Leo?

[Leonidas Korres:]

Thank you, Ted. I’ll discuss the financial results for the fourth quarter and the year-end ended December 31, 2016. Please turn to Slide 31, revenue for Q4 2016 decreased by 12.3% to $57.3 million from $76.7 million in Q4 of 2015. With almost a 100% fleet utilization we achieved a time charter equivalent of $19,683 per day, reduced from the $22,291 per day achieved in the fourth quarter of 2015 reflecting the softening of the tanker market. Operating and voyage related expenses were $25.7 million and G&A expenses were $4.3 million reflecting our low cost structure given our relationship with Navios Holdings. Equity and net earnings from affiliated companies was $3.7 million mainly reflecting our equity portion in Navios Midstream Partners revenues. EBITDA for Q4 2016 decreased by 5.2% to $49.9 million from $2.6 million EBITDA in Q4 2015. Other expenses include depreciation and amortization of $15 million and interest expense and finance cost of $19 million. Net income for the quarter was $18.1 million or $0.11 per share compared with a net income of $20.1 million in Q4 of 2015. Please note our results were positively affected by the 9.5 million book gain from the sale of two chemical tankers. Turning to the financial results for the year-ended December 31, 2016, revenue decreased by 7.4% to $290.2 million from $313.4 million last year reflecting a time charter equivalent of $20,742 per day and 99.7% fleet utilization. Operating and voyage related expenses were $102.8 million and G&A expenses were $17.1 million. Equity net earnings from affiliated companies was 15.5 million, EBITDA for 2016 decreased by 11.9% to $194.6 million from $220.8 million in 2015. Depreciation and amortization was $60.5 million and net interest expense and finance cost was $76 million. As a result we reported net income of $62.9 million or $0.40 per share. Slide 32, provides selected balance sheet data as of December 31, 2016. Cash and cash equivalents including restricted cash were $56.7 million. Vessels net of depreciation was $1.3 billion, reflecting the sale of two chemical tankers and one product in 2016. Investments and affiliates of $196.7 million mainly reflects Navios Acquisition interest in Navios Midstream Partners. Long-term receivable from related parties was $80.1 million includes a $50 million drawn under the loan facility were extended Navios Holdings. Total assets amounted to $1.7 billion. Total debt as of December 31, 2016 was $1.1 billion reflecting a debt of more than 100 million within 2016. As a result net debt to book capitalization ratio declined 62.3%. Turning to Slide 33, our financial strength has enabled us to announce a dividend of $0.05 per share for the fourth quarter equivalent to $0.20 per share on an annualized basis providing a yield of about 11.6%. The dividend will be paid on March 14, 2017 to shareholders on record as of March 07, 2016. At this point, I would like to highlight that given our 59% ownership in Navios we expect to receive on an annual basis approximately $21.3 million in dividends from NAP of the current distribution of $1.69 per unit. And now, I will pass the call back to Angeliki.

[Angeliki Frangou:]

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

[Operator:]

[Operator Instructions]. Our first question comes from the line of Chris Wetherbee of Citigroup.

[Chris Wetherbee:]

The first question I had was on the on the MR2 fleet. I'm just sort of taking a look at slide number 13 here. I just wanted to get a sense of maybe how you think about the rechartering strategy in 2017? Do you have a number of vessels that are coming up and I guess I just wanted to get a sense as sort of how you think about the sensitivity from both the revenue and earnings perspective from these recharter?

[Angeliki Frangou:]

I will let Ted talk later but I will give you -- you can see how we have benefiting from vessels. We have fleet between 13,000 and 14,000 with shorter durations. I think as market progresses we will be able also to do floor call to us and 50

[Ted Petrone:]

And to Angeliki point about, we are looking at the spot rates we’re are always arbitraging against net market with the shorter, short to long period which is certainly 20% above the market going forward and I think you know you got some issues here on the products with coming into the [indiscernible] season so it's not the right time to be putting anything longer than that but once you pass the stock drawdown period which I think is going to come soon I think you got to help your market going forward. So we’re just going to navigate through this and we will be fine.

[Chris Wetherbee:]

And along the lines of the fourth quarter how should we be thinking about sort of transacting in the fleet? So are there more vessels that sort of might be opportunistically sold here or are there are opportunities for that, I just want to get a sense of maybe how we think about it, you know is this some of these guys are coming up for renewal or are there just other opportunities or it's fourth quarter more of one-off type of dynamic?

[Angeliki Frangou:]

Chris last year we did opportunistically we sold three vessels, [indiscernible] and two of the chemical tankers which was not also one of our core area at very attractive values relative to what we bought. In that aspect I think we see the market -- we won't see easy to dispose of assets. What we may see as we have done the sales we may be looking on actually acquiring assets. We see the values been attractive. We see the big deliveries on the time care has been finished and not in an aggressive way but relative you know of looking at the market. We see those valuations maybe attractive for a substitution of assets. We sold all the vessels it makes sense to buy the younger vessel at a more softer period of the time. At the end of this what is the portfolio and how we again good monetization do. So this is a time where you fix your employment, you do profit callers, this kind of a structure and then as we softer valuations we maybe an attractive point to acquire vessels and renew your fleet as younger vessels.

[Chris Wetherbee:]

Along those lines if we’re thinking about potentially been opportunistic with vessel purchases. How do you think about sort of the financing opportunities, what would you look? I mean with your [indiscernible] in that scenario just want to get sense maybe how you can financing ships if there are opportunities out there.

[Angeliki Frangou:]

I mean we’re going to find vessels, I mean we have the ability to do acquisitions without tapping equity market but we see that maybe finance is available from banks or from leasing opportunities in Japan, China, we have seen a lot of this kind of entities.

[Chris Wetherbee:]

Okay, so there is still capital out there for you? Okay that’s helpful. Last question from me. I will pass it over, just on the dividend, strong consistent frac record there, just any thoughts sort of you know you have been roughly in the same yield perspective for a while now, just want to get a sense of how you’re guys thinking about the distribution I'm guessing the answer is going to be that you’re very committed to maintaining it but I just want to kind hear your thoughts on the distribution of these levels?

[Angeliki Frangou:]

You’ve seen our company from the beginning from 2010, we’re very consistent of that. So we will continue. We do not come with a grant statement but we’re very consistent on that distribution.

[Operator:]

Our next question comes from the line of Noah Parquette of JPMorgan.

[Noah Parquette:]

I just wanted to ask about your leverage and if you still consider having like a leverage target this level. What kind of debt paydown you’re expected over the next year?

[Angeliki Frangou:]

Our target has been to grow to the 50s and we started from high 50s over the year and we’re coming down. We could have done more aggressively. We’re seeing that as we last year we repaid about a 100 million, 40 million in capital repayments, 60 million from the sale of assets. This is something we will be continuing and we will be dropping about we see this year we will be dropping about 2% to 3% easily and we will be moving towards that target at about in the mid-50s.

[Noah Parquette:]

And then maybe this is more for Ted. I mean when you look at the product tanker sector now, I mean a lot of the issues that people attribute the weakness to high inventory level of refined products, how do you see that playing out over this year in the context of OPEC production cut. What time frame do you think we need to see some sort of draw down where there is more long term activity.

[Ted Petrone:]

You know long range picture, I actually do expect demand growth net fleet growth for the year. So when you look back by the year it will be a strong year, maybe you have a stronger second half and first half and I think you’re into a again you’ve the [indiscernible] season coming up and I think after that the drawn downs will be even and go forward. So OPEC is doing 80% compliance looks like to us and the U.S. seems to be ready and the Atlantic seems to be ready to be exporting more. So, I don’t think OPEC is a big story the headline story that it should be in terms of tankers right now.

[Angeliki Frangou:]

One another think that we have to -- in the United States is that you have the new administration may create a new level with the border adjustment of the tax policies that will be followed. It will have an effect on import, export I think.

[Noah Parquette:]

And then just quickly, can you provide any sort of kind of schedule for dry docking or implementation of the Dallas Water treatment regulations in September? You know how much of that is front loaded?

[Ted Petrone:]

During this quarter we had dry docking of [indiscernible]. In Q2 we have two in advance and may take second half we have [indiscernible] schedule for dry dock.

[Angeliki Frangou:]

On the balance quarter, one system that’s approved in the U.S. and there is still new building vessels we have last quarter on the rest of the vessels we still have about two years and further next dry docking and by that time the whole policy of what is the best balance quarter will be resolved. So there is still some time and it won't be a quick process on the implementation of the balance quarter.

[Operator:]

Our next question comes from the line of Amit Malhotra [ph] from Deutsche Bank.

[Unidentified Analyst:]

I wanted to follow up on the leverage target that was brought up I guess in Noah's first question. The question I have is I think like net debt, net debt target relative to like book capital or book equity is kind of relevant in the shipping business. I mean you know this obviously better than I do but it's obviously not the way the banks look at it and so in that respect given the decline that we see in asset values. Like where do you think the company is like real net leverages because it's certainly not in the low 60% given the decline we have had in asset values.

[Angeliki Frangou:]

As you know we have about 50% of our debt is from commercial banks in bond, we are in compliance with all our loans and you know that our loans are not very high level, it is about 6% and on our -- and we have also our bond which we are structured this ratio. Overall the company is well on the level that also from our rating you see that you’ve a good levels of debt to EBITDA. So we don’t see any concern on that and one of the most disciplined companies on the way we have been acting because we have bonds we follow very carefully.

[Unidentified Analyst:]

But does the company, Leo, does the company prepay the bank debts, so the company is not actually susceptible to LTV covenants. I mean just trying to get a sense of like I understand you guys might be fine on the covenant standpoint but just in terms of the financial position of the company because you’re extending loans to Navios Holdings, you’re back stopping NAP so clearly you’re making a signal about the strength of NNA and I'm just trying to understand aside from the covenants where is that financial position relative to market value, the assets?

[Leonidas Korres:]

We haven't prepared any debt we had to mature this one in Q4 and one in Q1, so other than that it's normally payment of debt.

[Angeliki Frangou:]

Let me understand the company has -- we structure a balance sheet in a way that is it can weather the entire cycle. We always are remindful of the banks and that’s why we have all and we have 50% of our balance sheet on debt from the banks and 50% from bonds that give you duration and if you don’t have volatility of interest rates. On this structure we’re very comfortable. Our cash generation has been very significant that’s why we can support also our dividend policy which is very consistent and we’re also able to see how we will expand, acquire or you know lever it.

[Unidentified Analyst:]

Let me just add one more if I could -- I understand and I appreciate the math behind the coverage of the cost based on your fixed position for the reminder of the year. Just wanted to ask is the back stop to the NAP vessels included in that calculation and I think that settles annually if I'm not mistaken. I'm just trying to understand the cash cost of that back stop. Obviously I know you know over 60% of that is coming to you in the form of dividend anyways but in terms of what the gross cash cost for that back stop is if you can just provide that that will be helpful.

[Angeliki Frangou:]

In today's market we don’t foresee any outlay, vessels are already fixed on that third parties so and you see from the current market position we don’t see exposure into that. This is a [indiscernible] settlement and presently at a very good level.

[Operator:]

Ladies and gentlemen we have reached the allotted time for questions today. I will now turn the floor back over to Mrs. Angeliki Frangou for any additional or closing remarks.

[Angeliki Frangou:]

This completes Q4 results. Thank you.

[Operator:]

Ladies and gentlemen this does conclude today's conference call. You may now disconnect.