Navios Maritime Acquisition Corporation
Q2 2015 Earnings Call Transcript

Published: 18 Aug 2015

[Operator:]

Thank you for joining us for this morning for Navios Maritime Acquisition Corporation Second Quarter 2015 Earnings Conference Call. With us today from the Company are Chairman and CEO, Ms. Angeliki Frangou, Vice Chairman, Mr. Ted Petrone and Chief Financial Officer, Mr. Leonidas Korres. As a reminder, this conference call is also being webcast. To access the webcast, please visit the Investors section of Navios Acquisition's website at www.navios-acquisition.com. Also on the website, under the Investors section, you will see a corresponding presentation that we'll reference throughout this conference call. I'd now like to read 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 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. Now I'd like to outline the agenda for today's call. First, Ms. Frangou will offer opening remarks. Then Mr. Petrone will go through an operational update and industry overview. Next, Mr. Korres will review Navios Acquisition's financial results, and finally we'll open the call to questions. Now, I'd like to turn the call over to Navios Acquisition's Chairman and CEO, Ms. Angeliki Frangou. Angeliki?

[Angeliki Frangou:]

Thank you, Laura and good morning to all of you joining us on today's call. I'm pleased with our record results, we are in the second quarter of 2015. We grew revenue by approximately 29% and adjusted EBITDA by about 58% and reported $26.4 million of net income compared to a loss in the prior period. We also returned capital to our shareholders by declaring a quarterly dividend of $0.05 per share for the quarter resulting in a dividend yield of about 5%, and repurchasing approximately 500,000 shares of common stock under the share repurchasing program. We are proud of Navios Acquisition's current position. The result of seven years of hard work, we've built the fleet at the bottom of the cycle initially by purchasing new buildings at the time we believe the market was miscalculating the risk-reward profile. Subsequently we shifted to acquiring vessels from the water. To-date, all our vessels are operating and we have no newbuildings or vessel acquisition commitment. Consequently, our free cash flow is now – to deliver a volatile while also returning capital to our shareholders through our share buyback in our existing dividend policy. As a result, the 2015 year-to-date portray for a VLCC improved more than 100% to an average of about $55,000 compared to an average VLCC rate of $27,000 in 2014. Not only was this portrayed up significantly but it has - the margin has become very active. There were 48 long term franchises through mid-August which is about 50% greaterthan the number of loss of long term fixturesfor the full year of 2014, and also greater than the number of long term fixtures in mainly over the past four years. Please turn to Slide 3. We transformed NNA into a leading tanker company with a 37 vessel fleet. Based on the first half of 2015, we expect to generate over $200 million of EBITDA for the full year of 2015. NNA also owns 61% interest in NAP which is worth about $185 million or $1.22 per shares. Navios Midstream brings NNA flexibility and liquidity while providing a new platform in the West sector for dividend seeking investors. Slide 4 presents our Company highlights. NNA has 37 modern vessels with an average age of 4.4 years. Our entire fleet is in the water and we are almost fully fixed for 2015 and about 43% for 2016. We are also disciplined in our operating cost, we benefit from the economics of scale of the Navios Group, and our operating expense is 19% less than the industry average and it has been fixed through mid 2016. We earned $16.2 million from profit sharing in the first half of 2015 and we are well positioned as we have profit sharing on 54% of our fleet for the remaining six months of 2015 and almost 19% of our remaining days open or fixed on floating rate. Slide 5 highlights key developments during the quarter. NNA expects an EBITDA run rate in excess of $200 million for 2015. Our Q2 adjusted EBITDA of $55.3 million was the highest since NNA inception. The Company is well positioned for strong cash flow generation in 2015 as shifted by profit sharing arrangement [net earnings] [ph] about $16 million for the first half of 2015, significantly greater than what we had for the full year of 2014. We have consistently returned capital to our shareholders with 19 quarter of consecutive distributions totaling $0.95 per share. We have repurchased 526,390 shares under our $50 million share repurchasing program, providing a tax free return to our shareholders of an additional 35 basis points. Slide 6, further highlights key events during the quarter. During the quarter, we dropped down two VLCCs, the 2000-built C Dream, and the 2003-built Nave Celeste, to NAP for $100 million. The selling price represented 19% premium to their book value. The drop downs in NNA to delever by 5% as $47 million and sales proceeds were used to prepay debt. The two VLCC drop down was substituted with the product collateral under our senior secured note, improving the collateral parties and replacing older vessels with younger ones. Slide 7, showcases NNA growth from cyclical loss. Our available days grew by 37% in 2014 compared to 2015. Despite the sale of vessels and will further grow another 4% in 2015. We acquired 45 vessels, most of which were acquired from distressed sellers at attractive prices. We diversified by creating NAP and MLP which provide us additional revenue and liquidity in which we maintain approximately 61% interest translating into $17.2 million in 2015 expected dividend. As you can see from the free cash flow sensitivity table, NNA could earn in the range of $86 million to $103 million in free cash flow for 2015 based on different rate assumptions. Slide 8 details our balance sheet management through the market volatility. We purchased new buildings when we fund the market, we understood the risk-reward profile, and subsequently shifted to acquire vessels underwater. To-date, we have no newbuilding or acquisition commitment. We intend to use a significant cash flow to delever our balance sheet while also returning capital to our investors through the share buyback program in our existing dividend policy. At June 30, 2015, our leverage ratio was almost 63%, an 18% improvement since 2012. Slide 9, demonstrates our strong liquidity position. We have total liquidity of $122.6 million at the end of the quarter, including $80.6 million in cash. We have no significant debt maturities until the Q4 of 2021. Slide 10, shows our cash flow cushion from our low breakeven. 97.2% of our fleet is contracted for 2015. We expect to earn an average contracted daily charter-out rate of $19,301 compared to 2015 average fully loaded cost of $15,606 bonus per day. This reduces our fully loaded cost of $15,175 products per day in 2016. As you know, our daily cost includes operating expenses, drydocking, general and administrative expenses, interest expense, and capital repayment. As you can see from the free cash flow sensitivity table with excess cash over cost of $43.7 million and 1,259 days opened or fixed on floating rates, NNA could earn in the range of $86 million to $103 million in free cash flow based on different rate assumptions. 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 12. With the completion of our new building program earlier this year and the recent drop downs of two VLCCs to NAP, our fleet under water stands at 37 vessels. Navios acquisition continues the Navios Group policy of locking in secure cash flow with creditworthy counterparties. So, far 2015, we have extended the coverage of our fleet to 14.25 year via new fixtures and exercise optional periods at higher levels with profit sharing. Rates continue at higher levels than last year and charters are looking for longer periods. Turn to Slide 13. Navios acquisition diversified fleet consists of 37 vessels totaling $3.5 million deadweight. The fleet consists of six VLCCs, 19 MR2 product tankers, 8 LR1 product tankers and 4 chemical tankers. Navios acquisition currently has vessels on the water with an average age of 4.4 years. Since the beginning of 2013, our product tanker fleet in the water has grown 140% from 12 to 29, and the total fleet on the water grew 95% to 37 vessels. 17 product tankers have delivered since the beginning of 2013. Turning to Slide 14. We have fixed about 97% of our capacity for 2015 in what should be a continued healthy environment, we have fixed just 43% in 2016 and about 8% of revenue days for 2017. About 54% of our contracted fleet has profit sharing in 2015. The average contracted daily charter out rate for our fleet is $19,301 for 2015. The rates for 2016 and 2017 are $14,815 and $16,105, respectively. Reflecting existing charters, we expect to re-charter at higher rates. Available fleet base will decrease slightly from $13,791 in 2015 to $13,542 in 2016 reflecting the dropdown to two VLCCs to NAP. Please turn to Slide 15. We have gained market exposure for our VLCCs by chartering vessels on index length or pool earnings basis. Two-thirds of our remaining days this year are in these type of charters. By doing so, we do not only secure quality credit counterparties but also high fleet utilization and continue exposure to the spot rate environment. During the second quarter, four of our VLCCs on floating rates earned about $55,000 a day, a high rate in a normally slack quarter. Average VLCC earnings for Q3 continued at healthy levels averaging about $58,000 per day, which allows us to generate healthy cash flow from our 736 VLCC open or floating rate days, creating stable cash flows to long term charters remains our core strategy and we will rebalance charters to include longer term contracts at appropriate time. Please turn to Slide 16. Slide 16 goes deeper into our chartering strategy for our product tanker fleet. We retain upside potential through profit sharing arrangements on a majority of our available days. Profit sharing earned us $7.7 million in Q2 and $14.1 million for the first half of the year as displayed in the chart at the bottom left. The uptick in product tanker rates that began in Q4 of 2014 has remained through all of this year and which creates better re-chartering opportunities for our fleet. Turning to Slide 17, our chartering strategy revolves around capturing market opportunity while 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 one year. During the continuing strong market for our vessels, we earned $8.6 million of profit sharing in Q2 of 2015, and a total of $16.2 million for the first half. In comparison, we earned $6.7 million of profit sharing in all of 2014. Slide 18. We have strategic relationships with key participants in the industry and strong vetting track record with major oil companies. Good management is an integral part of long-term success and is therefore a fundamental part of our business plan. NNA, as a part of the Navios Group provides world-class ship management services that meets safety, environmental, and customer requirements. The attributes we seek in our counterparties are strong credit quality and ability to conclude long-term charters. I note that these charters are only available to those owners who have been thoroughly vetted. Please turn to Slide 19. Navios Acquisition enjoys vessel operating expenses significantly below the industry average. Currently, Navios Acquisition's daily OpEx is about 19% below the industry average. We achieve these operational savings through a management agreement with Navios Holdings. The operating expenses under these management agreements are in force until May 2016. Please note that the operating cost shown here includes all drydocking costs. Please turn to Slide 21. During the fourth quarter of 2014, we launched Navios Midstream Partners and Midstream MLP. Navios Midstream brings NNA flexibility and liquidity while providing a new platform in the West sector for dividend seeking investors. Navios Acquisition owns 16.85% of Navios Midstream Partners including our 2% GP interest with a market value of approximately $184 million as of Monday's closing price. Please turn to Slide 22. Navios Midstream Partners fleet has six vessels, it is fixed with an average charter duration of 5.8 years providing approximately $600 million of long-term revenue with top Tier counterparties. In the first half, Navios Midstream earned $26.6 million of EBITDA including $2.4 million in profit sharing. Navios Midstream declared a cash dividend of $0.4125 per unit, providing Navios acquisition with approximately $17 million in annualized distributions. Navios Midstream announced its intention to raise dividend by $0.01 per unit over the next four quarters. Turning to Slide 24. According to the IEA, refinery capacity is expected to increase by 6.4 million barrels per day for the period 2015 through 2020. About 70% 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 1.5 million barrels per day and 1.2 million barrels per day respectively. New low-cost capacity in Asia is forcing rationalization of old high-cost capacity in the OECD. Recent refinery closings in Europe and the Caribbean as well as closures due in Australia and Japan can be probably attributed to the age and inefficiencies of those facilities. Because of the structural shift, the growth in ton miles of refined oil products is expected to continue to outpace the general demand for refined oil products in the long run. Turning to Slide 25. U.S. crude production has increased by 94% since the end of 2008, reaching 9.6 million barrels a day in May. Since U.S. crude exports are prohibited by law, the U.S. has increased its total product exports by 345% to over 4.3 million barrels per days in 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. U.S. product imports have declined over the past couple of years but continue to come from further away adding to product ton miles. The fundamentals of product tanker trading patterns continue to adjust in relation to these changes. Please turn to Slide 26. Oil refineries vary greatly in their quantity, variety and specifications of products that they produce. As depicted in this slide, regional surpluses and deficits combined with relative low-cost of transportation drive arbitrage trades and increased product ton mile. Increasing world-wide products and balances 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 27. In the product sector, demand for transportation expressed in terms of ton miles increased by about 79% in the period 2004 to 2014, equivalent to a CAGR of 6.5%. Projections indicate similar growth in 2015. The increase in tanker demand was greater than the increase in overall trade due to the growth in long haul product tanker trades. The map at the bottom of the slide depicts existing product trade routes, as well as prospective routes based on the anticipated eastward shift in global refinery capacity. Please turn to Slide 28. In 2014, tanker non-deliveries equaled 35% at 6.4 million deadweight delivered out of a projected 9.8 million deadweight. Through July of this year, we saw a 38% non-delivery figure with 5.6 million out of 9 million deadweight projected, when combined with 0.9 million deadweight scrapping, this led to a 4.7 million deadweight or 3.5% net fleet growth through July. About 5% of the product tanker fleet is 20 years of age or older. As of the end of July, the order book totaled $22.5 million deadweight or about 16% of the fleet, a level usually considered adequate for regular replacement of existing fleet with little or no demand growth. The order book declined after this year as only $16.2 million deadweight is due after 2015. And mostly price of the period depend on overall steel prices and not the supplier vessels. Please turn to Slide 30. As you can see on the left hand graph, longer term time charter rates have increased dramatically since the middle of last year standing at $44,500 a day as of the end of last week. As global demand for energy continues to grow, major oil companies and oil producers should seek to secure more vessels on longer-term charters. There will always be seasonality, healthy rates are projected going forward. As noted on the right hand graph, there were 48 fixtures of longer term charter to August which is higher than the entire number of long-term charters for all 2013 and 2014 combined. Please turn to Slide 31. World crude oil consumption has generally grown for 30 years with the decline in 2008 and 2009 due to the global financial crisis. 2010, world crude oil and refined product consumption returned to this pattern of growth. The main structural drivers going forward are minus net VLCC fleet growth for 2015 through 2017. Increasing demand from the Asian economies, particularly China as well as the boost to the U.S. and Euro zone GDP growth that comes from declining energy prices. Please turn to Slide 32. The IMF projected global GDP growth for 2015 and 2016 at 3.3% or 3.8% respectively, led by emerging and developing markets growth of 4.2% in 2015 and 4.7% in 2016. Increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs as we have seen since the middle of last year. The IEAs broadcast of global oil demand for 2015 has been raised 5x this year mostly recently to 94.2 million barrels per day or a increase of 1.6 million barrels per day, the largest yearly increase in five years. The IEA further increased its forecast for 2016 to 95.6 million barrels per day on a persistent macroeconomic strength. Please turn to Slide 33. According to the April IMF report, the largest oil consumers and importers will benefit from the recent drop in oil prices. The top five crude oil importers are expected to get a GDP increase as a result of lower oil prices. This could move global output by 0.5% to 1% higher by 2016 and it's one of the reasons that the IAA once again recently raised its oil consumption estimates for this year. Lower oil prices and increased consumption has been beneficial for VLCC peer rates as you can see in the lower graph. Please turn to Slide 34. As noted on top hand of slide 34 in terms of ton miles, and moving of crude from West Africa and South America to China uses as about as many VLCCs as the movement from the Arabian Gulf even through the Arabian Gulf shipped 1.9x 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 more than offsetting any decline in U.S. imports. The bottom half of the slide shows that fixtures of following this trend of long haul trades fixtures have increased substantially this year from the last year. Please turn to slide 35. 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 of 2009, representing a 15% CAGR. Crude imports reached a record 7.4 million barrels per day in April, surpassing U.S. imports for the first time, July imports of 7.3 million barrels per day are just a shade below the April record. Additionally, refinery openings this year will add another 400,000 barrels in crude demand. As you can see on the upper right and in the table below, on a per capital basis, U.S. oil usage is 7.5x than China. European usage is 3.5x and world usage is 1.6x China. If China grows to world per capita consumption levels, China would require an additional 285 VLCCs, assuming all crude is imported by sea. This represents an expansion of the existing fleet by about 50%. Please turn to Slide 36. Refinery expansion in both the Asia-Pacific and Middle East regions is a key driver to VLCC demand. As the Middle East refines more crude in the expanding refinery network, there will be less crude available for export. As a result of new refineries being built in the Far East will have to source crude from further away. The lower graph spotlights the additional crude demand that is likely to come as the Chinese completes its 100 million barrels section as part of the second phase of the strategic petroleum reserve or SPR. New refinery climates additionally requires stockpiling by existing refineries and the SPR fills should be met by shipments on VLCCs to the economies of scale. Current projections show China's crude oil imports will grow to about 13 million barrels per day by 2035 as the country continues the urbanization, industrialization, and motorization of its economy. Please turn to Slide 37. In 2014, VLCC non-deliveries equaled 25%, at 7.6 million deadweight delivered out of a projected 10.2 million deadweight. Net fleet growth in 2014 equaled 2.1% through July of this year non-delivery is worth 30%, ended 3.5 million deadweight delivered against an expected 5 million deadweight and scrapping amounted to almost 1 million deadweight, this led to modest fleet growth of 1.7% so far this year. This concludes my review and I'd like to turn the call over to Leonidas Korres for the Q2 financial results. Leo?

[Leonidas Korres:]

Thank you, Ted. Now we'll discuss the financial results for the second quarter and the first half of 2016. As shown in Slide 39, our operating metrics for the second quarter of 2015 have significantly improved compared to the same period in 2014. With older or vessel single water we were able to benefit from the strong tanker market, as a result we enjoyed the best performance as we started operations. Revenue from Q2 2015, increased by approximately 29% to $80.4 million from $62.2 million in Q2 2014. We had almost 100% fleet utilization and an increased time charter equivalent of $22,541 per day compared with $18,500 per day time charter equivalent of Q2 2014. During the quarter we earned $8.6 million in profit sharing. Operating and voyage related expenses were $25.3 million and G&A expenses were $3.9 million. Equity in net earnings from affiliated companies was $3.7 million, reflecting mainly our equity portion in Navios Midstream Partners earnings. We continue to have significant EBITDA growth. Our adjusted EBITDA for Q2 2015 increased by 58.1% to $55.3 million from $35 million in the same period of 2014. EBITDA has been adjusted to exclude $5.8 million gain on sale of the VLCCs Nave Celeste and C Dream to Navios Midstream Partners and $0.7 million of share based compensation expenses. Other expenses include depreciation and amortization of $15.2 million and net interest expense and finance cost of $18.8 million. As a result, we reported net income of $26.4 million or $0.17 per share. Excluding the $5.8 million gain of the sale of two VLCCs, the $0.8 million rise of the first financing piece and debt prepayment expenses and the $0.7 million share based compensation expenses, our adjusted net income increased to $22 million or $0.14 per share from a loss of $0.4 million in Q2 2014. Turning to the financial results for the six months period ended June 30, 2015, revenue increased by 29.1% to $159 million from $123.2 million last year, reflecting a time charter equivalent of $22,531 per day and 99.7% fleet utilization. During the first half, we had $16.2 million of profit sharing. Operating and voyage related expenses were $50.5 million and G&A expenses were $7.1 million. The equity net earnings from affiliated companies for the six month period was $7.1 million. Adjusted EBITDA for the first half of 2015 increased by 54.1% to $109.2 million from $70.8 million in 2014. Further to Q2 adjustments, adjusted EBITDA for the first half of 2015 excludes another $0.7 million of share based compensation expenses incurred in Q1. Depreciation and amortization was $30.5 million and net interest expense and finance cost was $36.7 million. As a result, we reported net income of $46.4 million or $0.29 per share. Excluding the gain on the sale of the two VLCCs the write-off of deferred financing fees and future debt prepayment expenses and the share based compensation expenses. Adjustment income for the third half of 2015 increased to $42.7 million from an adjusted net income of $1.1 million in the first half of 2014. Slide 40, provides a latest balance sheet data of June 30, 2015. Cash and cash equivalents including restricted cash was $80.6 million. Vessels, net of depreciation decreased to $1.2 billion mainly reflecting the sale of two VLCCs to Navios Midstream Partners partially mitigated by the addition of two MR two product tankers in our fleet in the first quarter 2015. Investment in affiliates was $183.9 million mainly reflects Navios Acquisition subordinated units in deep interest in Navios Midstream Partners accounted for under the equity method. Total assets amounted to $1.7 billion. Total debt as of June 30, 2015 decreased $1.1 billion following the repayment of $47.2 million of bank debt for three product tankers. These tankers will substitute collateral EBITDA debt securing the senior secured notes in exchange for the two VLCCs sold to Navios Midstream. As a result net debt to book authorization ratio declined by approximately 5% to 62.9%. With all our vessels in the water and there no remaining new building or acquisition CapEx we expect the company to deleverage, while continuing to return capital through the existing dividend and share repurchase program. As of June 30, 2015, Navios Acquisition was in compliance with all of the covenants of its credit facilities and the ship mortgage notes. Turning to Slide 41, our financial strength has enabled us to announce a dividend of $0.05 per share for second quarter, equivalent to $0.20 per share on an annualized basis providing a yield of about 5.1%. The dividend will be paid on September 24, 2015, to shareholders on record as of September 18, 2015. Furthermore the company has repurchased $0.5 million common shares through its share repurchase program. At this point, I would like to highlight that given our 60.9% ownership we expect to receive in the next 12 months a minimum of $21.5 million in dividends from Navios Midstream Partners at an expected distribution of $1.71 per unit. Please turn to Slide 42. Navios Acquisition has a prudent financial strategy. Approximately half of our debt is non-amortizing and expiring at the end of 2021, providing significant cash flow flexibility. Overall, our financial structure provides lenders additional comfort relating to the stability of our balance sheet. Our liquidity position is strong. We have no remaining CapEx and we have significant cash flow visibility since 97.2% of our available days are contracted in 2015 and 43.3% in 2016. With profit sharing in majority of our contracted base and with our vessels open in an respected manner in an improved rate environment we are well positioned to benefit from the strong tanker market. Moreover, Navios Midstream Partners provides a platform to increase liquidity and grow through the dropdown of vessels at favorable prices into the MLP. And now, I will pass the call back to Angeliki. Angeliki?

[Angeliki Frangou:]

Thank you, Leo. This completes our formal presentation. We'll open the call to questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Amit Mehrotra of Deutsche Bank.

[Amit Mehrotra:]

Thank you. Good morning, afternoon, everybody. I had a few questions first on the share repurchase. Can you talk about the cadence of the repurchase activity in the quarter? It’s hard to glean anything from the average share count in the period and share count and the release. I am just trying to get a sense of all that was done at some specific point in the quarter or was it sort of more balanced. And then also can you given that we are now at the almost end of August here can you just give us an update if you purchased any shares so far in the third quarter and what we can expect prospectively on the share repurchase?

[Angeliki Frangou:]

This is the most current numbers that we gave, so 0.5 million shares, [indiscernible] we had 90,000 as of yesterday and this is part of a $50 million program that we have affected. So this you will see that as we announce our quarterly results, we will be updating you on the progress of that program. And in essence we see that the way to give back to our investors together with a dividend policy.

[Amit Mehrotra:]

Right, should we, let me ask just a little bit more specifically, I mean should we expect that pace to accelerate any time or is that just really market dependent?.

[Angeliki Frangou:]

It is market dependent.

[Amit Mehrotra:]

Okay, that's fine. Can I just ask another question on the TCE, the 19300 for 2015, you mentioned in the presentation is that for the remainder of 2015 or for all of 2015 and I would assume that does not include any profit sharing arrangements. And so in that context, would you expect to see a further sequential improvement in the third quarter versus the really sort of record results you guys to put up in the second quarter?

[Angeliki Frangou:]

Actually, first of all it’s for the entire period and we expect actually the way we see Q3 developing with the numbers we have, we see that these are actually better than Q2. Of course the remaining one month from the quarter, but what we see as numbers is better - even though you’ll see there is usual procedure seasonally low. It has been extraordinary strong relatively.

[Amit Mehrotra:]

Right. One last question from me and then I’ll hop off is that, in terms of leverage and debt capacity we are getting pretty close here to - I guess net leverage going under 60%, which is pretty significant progress from where you were may be just three to four quarters ago. So what’s the thinking on that just given the company has - I guess complete visibility for the remainder 2015, a good chunk of 2016 plus you have proceeds from future dropdowns and then the dividends from NAP. I mean the visibility is just really strong and so are you in that back drop or is the company sort of more inclined to add some assets given that visibility and if so what segments of the tanker market sort of interesting to you. And then Angeliki just with respect to that, what you think the Navios Acquisition corps I guess fire power is vis-à-vis asset acquisition at this point?

[Angeliki Frangou:]

We have a very strong free cash flow generation. Don't forget with the dropdown that we did at 19% far better volumes in our book values, these cash provided deleveraging and ability and fire power. So we have a strong cash generation no new building, no commitment, inability to really go after any attractive transactions we see. We have delevered quite significantly I mean if you see that we have delivered - from 2012 we have done a deleveraging of over 18% up to now and we are looking that by the end of this year, mid next year we can easily see approaching below around 55% on leverage 50% to 55% So with that as a positioning, we can acquire either vessels with low levels or without any mortgage and we can further strengthen our earning capacity.

[Amit Mehrotra:]

Right. Very good, congrats on a great quarter. That's all I had. Thank you very much.

[Angeliki Frangou:]

Thank you.

[Operator:]

Our next question comes from the line of Spiro Dounis of UBS Securities.

[Spiro Douni:]

Good morning everyone. Thanks for taking the question. Just want to pick up on the last question there. So something you have done in the past obviously is the two deals with HSH Nordbank. Just wondering if I think you mentioned maybe doing a third deal sometime down the road there is still a large inventory of distressed assets out there that would be of interest to you and would you prefer may be diverting cash there right now as opposed to buying something not distressed that’s on the water?

[Angeliki Frangou:]

We are always reviewing, I mean transactions with of the type of Navios you have taken long time and they develop a lot of quarter so this is something we’ll always be reviewing and trying to see. And also we always view different kinds of asset acquisitions. We will always focus on something very attractive otherwise we prefer to delever and create value otherwise.

[Spiro Douni:]

Okay. And just may be on chartering several tanker peers you as of allude to may be increased interest in chartering VLCCs for five years and sometimes more. Just wondering if you’re seeing that same sort of similar level of elevated interest in VLCCs and if you are starting to see that too in the product tanker space?

[Angeliki Frangou:]

We assume that the three-year time charter it has been very active and we are also pursuing assets. So this way we can - actually we see that this market is going to be at good level and you can even achieve good levels and profit sharing which is something that it’s very interesting to us. So on the I think the longer period charter will be well up we haven’t seen three developing.

[Spiro Douni:]

Okay. That's good color. And then just slice one from a modeling perspective I believe two of your oldest MRs come off charter in November this year and I think they would be up for their second special survey. Just wondering if the plan would be to maybe reup the charters on those after during the dry-docking or could they potentially be sales candidate?

[Angeliki Frangou:]

We had most of it we’ll do the dry-docking and you can better with the market way these you can attractive at much higher rate to be re-chartered.

[Spiro Douni:]

Great I appreciate the color and enjoy the rest of your summer everyone.

[Angeliki Frangou:]

Thank you.

[Operator:]

Your next question comes from the line Christian Wetherbee of Citi.

[Unidentified Analyst:]

Hi, hello guys this is Prashanth in for Chris. Congrats on the strong quarter I just wanted to pickup on kind of a strategic question following up on a previous two. The return of capital story is excellent. And I just wanted to make sure that I’m understanding correctly with no new CapEx and it sounds like still acquisitions are an option, is there still you’ll be thinking that positionally maybe the incremental appetite for adding to the fleet right now has decreased as you focus more on the return of the capital and deleveraging the balance sheet. And if so maybe if second part of that question are the vessels out of this second hand market especially in the crude side of in relatively sticky. How does that kind of weigh against your appetite for acquisitions and what are the opportunities there or do you expect that to change in the back half of the year and it’s something maybe that’s?

[Angeliki Frangou:]

You can weigh the one thing you can say that we can reviewed every possible transactions around the world so they see that if we see something very attractive we will allocate the capital there we have the balance sheet and we have the ability to do it if its very attractive. On the way we see right now it makes a lot of sense also to follow buyback and then our capital and deleveraging I think, but we can easily if we see an attractive transaction moving and we something want all the time.

[Unidentified Analyst:]

Okay excellent. And a question sort of out would there be opportunities would you consider outside of what the classes of vessels in the current fleet specifically some of the you’ve been hearing on the crude side that some of the incremental demand from India being satisfied by West Africa or the Arab Gulf has been on Suezmaxs there less in the OCC tankers is that something that you would consider for NNA or is that outside of the scope still?

[Angeliki Frangou:]

As far as maxes it’s not going to be our type respect to overall the crude side I mean we prefer that the good because given the higher levels as a transaction, but we’ll not exclude Suezmax as a vessel on our fleet.

[Unidentified Analyst:]

Okay, excellent. And then just final question just on more sort of a macro view on rates we’ve seen some people talk about the sequential step down in rates and part of that is definitely seasonality. It seems like underlying dynamics are still supportive of rate increases. Do you I mean what is your view going the 2016 are we sort of hitting a peak in the cycle or is there more headroom and how does that speak to sort of the chartering rates as we look forward the next 12 months just in terms of an overall macro view?

[Angeliki Frangou:]

Overall we think the market positive I mean we’ll not going to have a straight line and there’s always going to be a volatility along the way. But one of the things we’ll – that in a relatively weak quarter seasonally weak quarter I mean your real estimate today at about $10,000 above what was last years have average of $27,000 so that shows you that you will have volatility that is inevitable in our business, but you have a high lows and I mean you see that this is happening a consecutive way that has I think can give you a little bit more color.

[Ted Petrone:]

Listen there’s no seasonality right now in the product tankers right, I mean they’re moving at ever higher levels. However, that Vs what you have is a slight slowdown before the refinery maintenance season right. There’s some higher stocks out in the Far East, so I think that the touch slow here if you look at the seasonality wise I think by the end of Q3 I think at least to be seeing the Vs really start moving again, pre-winter to stocking of the refineries. So we supply demand fundamental is a very good, I mean look at the products they’re going to annualize a fleet growth of over 5% and you have record levels, and the Vs are going to be very well below that or maybe 2%. And people worried about that Vs new buildings, we’re not really worried about them, 80% order book competitive is on the water, [indiscernible] 15 years older it’s 17, lot of the deliver so the supply here is let’s do a drill down. We are getting a lot of people talking to us on period in a seasonally low point. That means this is the best deal I think they’re going to get in next year or two, that tells you everybody is you.

[Unidentified Analyst:]

Thanks very much for the time guys I appreciate it.

[Angeliki Frangou:]

Thank you.

[Operator:]

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

[Unidentified Analyst:]

Good morning. This is Donald [indiscernible] stepping in for Mike. Can you talk a bit more your cash flow optionality as you weigh the options between further deleveraging share buybacks increasing this recent or potentially organic growth. And it sounds like you’re evaluating all the above, but is there one that your prioritizing about the others?

[Angeliki Frangou:]

Number one is to delever because we have to be - calculate at around 50-55% which is a very comfortable position. And second is retail because our customization is very significant. We also return to our investors by our dividend and buyback, so deleveraging is an important but we also activate with a dropdowns that we’re doing don’t forget that we reduced that and with additional cash flow acquisitions.

[Unidentified Analyst:]

Great, thank you for that color. And now as we think about organic growth moving forward, is there a preference for a second hand versus new build, we were getting to second hand assets have run off and we are seeing some advantages for new build prices with following steel and additionally in 2017 on a spec basis. Can you just talk to how you would evaluate second hand versus new builds at this point new asset cycle?

[Angeliki Frangou:]

You have to always - the vessel – capacity. Sometimes you may have interesting situation on new build, I find a little bit more difficult in this market on average, but it will be far more difficult in these market I think.

[Unidentified Analyst:]

Okay. I appreciate the color and thanks again and congrats on good call.

[Angeliki Frangou:]

Thank you.

[Operator:]

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

[Noah Parquette:]

Thanks. Going back to the deleveraging from mile purposes that $47 million that you prepaid what facilities was that associated with?

[Leonidas Korres:]

These were MR2s for that package that was facility of Deutsche Bank that was a -

[Noah Parquette:]

And as you guys potentially deleverage further, how you prioritize the debt that’s prepaid is it based on interest, is it based on -

[Angeliki Frangou:]

From a balance sheet issue you have $700 million in a bond and you have about $450 million in bank debt that does not have prepaid than have been most very minimum. So in essence what we will be preparing is, our sufficient capacity to deleverage is to prepay the bank debt. Also another way to delever is by assets without really debt or very minimal debt, so this is two ways of under. But you have plenty of capacity to prepay without any penalty.

[Noah Parquette:]

Okay. And then you mentioned 50% of kind of target at this - where we’re in the cycle - I’m sorry, is that net debt or gross debt?

[Angeliki Frangou:]

Net debt. It is not immediate, I mean we’re talking about in next year or so we could achieve it very early, but I’m talking about what - how we see our balance sheet and where we see ourselves position for the [indiscernible].

[Noah Parquette:]

Okay. And then Ted to your point I think you nailed it with the fact that the price of tanker fleet gone 5%, you’re saying record rates. And you know, we’re at peak supply now. You looked at 17 as almost no worse and new built prices are actually still pretty good. I mean, is that an option as you guys looked at placing orders for 2017, just wondering your thoughts there

[Ted Petrone:]

Navios usually does. We’re looking at everything. We’re looking at the new buildings, we’re looking at prompt, we are looking vessels under water, it’s an option.

[Noah Parquette:]

All right.

[Operator:]

Your next question comes from the line of [John Scipel] [ph] Evercore ISI.

[Unidentified Analyst:]

Thank you. Just a couple of quick follow-ups. Ted, you mentioned the, one year time charter activity being really strong in the VLCC’s but it seems like most of those are one year. I was little confused by some of the Q&A commentary about how active the three to five year, is as it relates to getting the VLCC’s charter for potential dropdown. So, how active is the three to five year market? And then is it relates to profit sharing, you’ve obviously done a great job using lot of profit sharing on the product tankers. Would you sacrifice some profit sharing to get a higher base and to get longer duration so you can improve the drop down pipeline?

[Ted Petrone:]

That's always an option to - how much you have to give up to get the profit sharing, right, getting that base rate. So, going forward, it’s a matter of each individual deal, how it is presented to us but if you are going to go three or five years probably our bank would be more to a fix rate but if this profit sharing evolve we wouldn’t say no, I would say the conversation for three and five years has picked up considerably. I wouldn't expect it to pick up more in the full. It may sound silly but the summer months, that’s the most conversations usually just start but there is a lot of one year out there. And our numbers –and the market shows the ships deliver at – redeliver a few years from now. The market will be no worse than today. So, we’re comfortable into one year. It's really a matter of just signature for three and five years at this point.

[A –AngelikiFrangou:]

And you got few years, and also if you’re asking about the profit paying, necessary a very simple calculation, to give up something on the fix rate and then we have our internal calculation what how many times multiple, what kind of a multiple do we receive for giving a fix part of the rate. If it is four times the premium, let’s say, the premium of having these optionality is profit and that's how you value that.

[Unidentified Analyst:]

I mean that seems to be beneficial to the NNA structure but is having the profit sharer beneficial to the NAP structure? The yields already incredibly high there. So, I wonder do you get any valuation benefit from having a flooding upside as opposed to just a higher base.

[A –AngelikiFrangou:]

This is a strategy of NNA and in essence the NNA strategies either maximize on certain issues and you have other vessels as the end that we may do it on a fix rate because then we get the better drop down evaluation to NAP. So that decision depending of what is a potential candidate for drop downs.

[Ted Petrone:]

And to give up sacrifices 2% - if it’s a $1,000 and a $50,000 charter, it's 2% give up. So, we don’t think we’re giving up that much for the upside potential here and I don’t think that’s to NAP at all.

[Unidentified Analyst:]

The other follow up I had was in regards to the third quarter. Ted, I think you had mentioned, I think you said 58000 a day but I wasn’t sure if that was an industry average or is that is something that NNA has booked so far for to VLCC

[Ted Petrone:]

No, that’s industry average. It’s industry.

[Unidentified Analyst:]

Do you have a number for VLCCs and product tankers quarter to date? And what percentage you booked?

[A –AngelikiFrangou:]

We cannot give you the exact number but we say that what we are seeing is developing Q3 numbers are higher than Q2.

[Unidentified Analyst:]

Okay. That’s all I had. Thanks.

[Operator:]

Ladies and gentlemen, we have reached the allotted time for questions and answers. I will now turn the call to Angeliki Frangou for any additional or closing remarks.

[Angeliki Frangou:]

Thank you. This completes the second quarter result. Thank you.

[Operator:]

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