NNA (NNA) 2018-11-08 Earnings Call Transcript

Thank you for joining us for Navios Maritime Acquisition Corporation's Third Quarter and 9-Months 2018 Earnings Conference Call. With us today from the company are Chairman and CEO, Angeliki Frangou; Vice Chairman, Ted Petrone; and Chief Financial Officer, Leonidas Korres. As a reminder, this conference call is being webcast. To access the webcast, please visit the Investors section of Navios Acquisition's website at www.navios-acquisition.com. You'll see the webcast link in the middle of the page, and a copy of the presentation referenced in today's earnings conference call can 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. This presentation does not constitute an offer to sell or the solicitation of an offer to buy any securities. In connection with the proposed acquisition of Navios Maritime Midstream Partners LP on October 30, 2018, Navios Maritime Acquisition Corporation filed a registration statement on Form F-4 and related prospectus with the Securities and Exchange Commission pursuant to which shares of common stocks and preferred stocks of Navios Acquisition are to be issued to the proposed acquisition will be registered. Investors are urged to read the registration statement and the related prospectus, including all amendments and supplements because they contain important information regarding the Navios Acquisition shares in the proposed acquisition. Investors may obtain free copies of the registration statement and the related prospectus as well as other filings containing information about Navios Acquisition and Navios Midstream without charge at the SEC's website, www.sec.gov. The agenda for today's conference call is as follows: first, Mrs. Frangou will offer opening remarks; then Mr. Ted Petrone will give an operational update and industry overview; next, Mr. Korres will review Navios Acquisition's financial results; and lastly, we'll open the call to questions. Now I turn the call over to Navios Acquisition's Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

Thank you, Laura, and good morning to all of you joining us on today's call. For the third quarter of 2018, Navios Acquisition reported revenue of $41.6 million and adjusted EBITDA of $9.9 million. We also declared a quarterly distribution of $0.02 per share for the third quarter, representing a distribution of $0.08 per share annualized. Since September, tanker rates have extensively improved with the TD3 VLCC spot rate increasing by 213% to about $51,000 per day, and the 1-year time charter rate increasing by about 44% to $28,000 per day. In light of this, the timing of the acquisition of Navios Midstream is favorable, as the acquisition will increase our available days by 17% to about 15,000 days in an improving market. Slide 5 discusses NNA acquisition of Navios Midstream Partners. NNA has agreed to acquire all of the publicly held units of NAP as a result of which we will fully own NAP. This transaction will grow our franchise, increase our available days to about 15,000, improved credit profile in that to cash flow. In addition, the acquisition is expected to create about $1.5 million in annual cost savings in G&A expenses. As part of the acquisition, NNA will acquire 6 VLCC vessels, two of them with long-term charters. The merger agreement was signed on October 7, 2018, and we subsequently filed an F-4 registration statement with the SEC. We are hoping to close the merger by the end of 2018 or early 2019. Slide 6 highlights our fleet and investment. Our 37 vessels will grow to 43 vessels when NAP is acquired. We also own 47.5% in two other special purpose entities. These entities, which come out of proprietary deals with German banks, own 24 vessels and add to NNA's NAV per common share. We question whether the common stocks' market price appropriately values the implicit value of our investment and the cash flow ability of our core fleet. Slide 7 details the substantial improvement in charter rates in the past two months. Since September, the VLCC's spot rate TD3 increased by 213% to about $51,000 per day and the 1-year time charter rate increased by about 44% to $28,000 per day. As demand for VLCC vessels increased, we have seen the rate discount for other vessels disappear. Some of the other vessels have been fixed at significantly higher rates for short-term charters. In the current improving rate environment, our incremental cash flow will be even more robust. Thus, from the combined fleet, for every $5,000 increase in rate, we expect to have an additional $18 million of EBITDA in 2019. Slide 8 shows our strategy of increasing and renewing our VLCC fleet at a time when the VLCC market fundamentals are improving in rate and on the -- in an upward trajectory. We'll have a sizable VLCC fleet comprising of 15 vessels with an average age of 10.2 years once we integrate the six VLCCs from NAP and the two new building bareboat VLCCs. Slide 9 dives into the details of the recently finalized bareboat chartering for the two VLCCs. We're chartering two Japanese-built VLCCs with scrubbers installed for 12 years with purchase options. The implied price for each VLCC is about $84.5 million, and the bareboat charter has a 6% effective interest rate. We have also at the same time charter out these vessels at a great -- to a credit-worthy counterparty, and we expect to generate $5 million of annual net cash flow for minimum 10 years, having a net present value of about $32 million. If the purchase option is exercised at the end of the 10 year, NNA is expected to have an additional $20 million in net present value. Slide 10 demonstrates our liquidity position. We have $48.3 million in cash on September 30, 2018. Pro forma for the acquisition of NAP, cash position will increase to about $71 million. Our net debt to book capitalization is 69.4%. We have fully funded growth CapEx and no significant debt maturities until the fourth quarter of 2021. Slide 11 shows the expected cash flow breakeven for 2019. 32.7% of available days are fixed at an average rate of $14,721 net per day. Our fully loaded cost is about $17,257 per day, and our $9,373 open plus floating rate days provide a breakeven of about $18,177 per day. Pro forma for the acquisition of NAP, this breakeven is expected to reduce to $15,555 per day or a 14.4% reduction from the current level. Our daily cost include operating expenses, drydocking, general and administrative expenses, interest expense and capital repayment. Slide 12 has some of our company's highlights. NNA has a core fleet of 37 diverse tankers with an average age of 7.3 years. We have significant embedded value in our subsidiaries. The NAP acquisition will add 6 VLCC vessels with $250 million in long-term contracted revenue. We are also due about $70 million in receivables that compounds interest at 12.7% and 18% on our investment in Navios Europe I and Navios Europe II, respectively. Our fleet is 32.7% fixed for 2019 and 65.2% of our 2019 fixed days include profit-sharing arrangements. At this point, I would like to turn the call over to Mr. Ted Petrone.

Thank you, Angeliki. Please turn to Slide 14. Navios Acquisition's diversified fleet consists of 37 vessels with an average age of 7.3 years totaling 4.2 million deadweight. The fleet consists of nine VLCCs, 18 MR2 product tankers, and eight LR1 product tankers and two chemical tankers. Two VLCC bareboat new buildings are scheduled for delivery 2019 and '20, respectively. Please turn to Slide 15. Slide 15 details our chartering strategy, which we use to balance market opportunity and credit risk. We seek protection from market volatility by obtaining charters of different durations in order to better manage market cyclicality. For 2019, about 27% of our fleet's available days are fixed at a base rate or at a base rate plus profit share; and about 6% are fixed on floating rates. We continue to monitor the market and look to gradually charter out our fleet at recovering rates. Any market improvement will be captured through one of three methods: one, days with fixed rate; two, days with floating rates; or three, days with base rates plus profit sharing. Please turn to Slide 16. Our chartering strategy revolves around capturing market opportunity while also developing dependable cash flow from a diverse group of first-class charters. Through our profit-sharing arrangements, we can capture benefit from market improvement over our current charter rates. Please turn to Slide 17. As Angeliki previously mentioned, Navios Acquisition enjoys vessel operating expenses estimated at 17% below our peers. In 2017, these estimated savings total approximately $22.3 million. We achieved these operational savings through a management agreement with Navios Holdings with cost that are fixed until May of 2020. The daily operating expenses for commercial and technical management for the VLCCs and the LRs are $9,500 and $7,150, respectively. The expenses for the MR2s and chemical tankers are $65,000 per day. The Navios Group of companies does not charge any fees to affiliated or intercompany entities. Turning to Slide 19. According to the IEA, refinery capacity is expected to increase by 12.5 million barrels per day between 2018 and 2023, including all additions, expansions and upgrades. About 67% 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 per day and 2.5 million barrels per day, respectively. Turning to Slide 20. As expected, refineries have opened or expanded in Saudi Arabia and China. Those refineries are now contributing significant volumes of product export. Saudi Arabia product exports are 40% or about 0.5 million barrels per day year-to-date. The next Saudi Arabia refinery expansion will be 400,000 barrels per day in 2019. Chinese exports totaled just over 1 million barrels per day in 2017, up 8% over '16. And through July, Chinese exports are up a further 24%. The most recent Chinese refinery expansions added 500,000 barrels per day of capacity in October of this year. These developments, combined with continued strong Asian demand, should support product tanker rates east of Suez for the remainder of this year and into next. Turning to Slide 21. U.S. crude production has doubled since the end of 2008, reaching 11.3 million barrels per day in August of this year, the highest level of production since records were started in 1920. The U.S. has increased its total product exports by about 500% to about 5.7 million barrels per day since 2004. Please turn to Slide 22. OECD products stocked in Europe and the Americas have finally fallen below their five year averages. This should once again drive arbitrage trades as regional surpluses and deficits, combined with relatively low-cost transportation, increase product ton miles. Please turn to Slide 23. Through September, the fleet has grown by only 1.4% on deliveries of 4.4 million deadweight plus 2.2 million deadweight of demolitions. About 5% of the product tanker fleet is 20 years of age or older. As of the beginning of October, there were 224 product tankers on order, and 312 which are 17 years in age or older. Total order book is much less than those ships 17 years of age or older, particularly given historical nondelivery rates and scrap prices remaining high. As a result, projected net fleet growth for 2018 is a low 1.6%, the lowest growth in five years, which should support current time charter levels. Turning to Slide 25. The IMF projected global GDP growth for 2018 and '19 at 3.7% for each year with emerging and developing markets growing at 4.7% for both '18 and '19. The main structural drivers going forward are moderate VLCC fleet growth; increasing demand from the Asian economies, particularly China and India; and increasing supply from the Atlantic basin. Increases in world GDP growth year-on-year have generally led to higher time charter rates for VLCCs. Please turn to Slide 26. Although crude oil destocking has taken significantly lower than initially expected, OPEC production limits have continued to lower crude oil inventories. OECD inventories have now declined about 200 million barrels in the past 12 months and are now about 40 million barrels below their five year average. With crude oil demand increasing and low inventory requirements for seaborne transportation, this start to increase going forward. Please turn to Slide 27. China is the world's largest importer of oil and the second-largest consumer of oil, importing about two third of its requirements. Chinese imports have more than doubled since January '09, representing a 12% CAGR. Chinese crude imports averaged 9 million barrels per day since September, up 4.8% from the same period last year. Additional refinery openings going forward should add about 3.4 million barrels per day to come onstream between '18 and 2020, with 0.5 million barrels per day that came onstream in October of this year. As you can see in the table below, on a per capita basis, U.S. oil usage is 6.7x that of China. European usage is 1.3x, and world usage is 1.4x. If China goes to world per capital consumption levels, China would require an additional 249 VLCCs. Assuming all crude is supported by sea, this represents an expansion of existing fleet by about 34%. Turning to Slide 28. In terms of ton miles, the movement of crude from West Africa and South America to China uses about as many VLCC as the movement from the Arabian Gulf, even though the Arabian Gulf shipped about 2x more oil to China. Increases in Atlantic basin crude oil going to China in 2017 created additional demand equal to 31 VLCCs, based on 90-day round trips. The VLCC supply declines and Iranian sanctions, coupled with strong demand, have led to recent resurgence in rates. With a typically strong Q4 and Q1 upon us, rates should maintain in this recent surge. Turning to Slide 29. The graph on the left-hand side of Slide 29 shows the balance between the new building order book and the pool of scrap candidates. Even with the most recent new building orders, the order book as of November 2 of this year of 102 VLCCs compares favorably to the 85 vessels that are 17 years of age or older. Year-to-date, 38 VLCCs were removed from the fleet. Turning to Slide 30. The forecast for the net fleet growth continues to decline. With 35 VLCC new building deliveries so far, combined with the previously mentioned 38 VLCC removals, net fleet growth year-to-date stands at a negative 0.2%. Given the outlook for continued ton mile growth, the supply-and-demand fundamentals look favorable going forward. Thank you. This concludes my review. And I'd like to turn the call over to Leonidas Korres for the Q3 financial results.

Thank you, Ted. I will discuss the financial results for the third quarter and the 9 months of 2018. Please turn to Slide 32. Revenue for Q3 2018 was $41.6 million compared to $54 million in Q3 2017, mainly due to the lower rate environment for tankers during the quarter. In Q3 2018, we had a 99.2% fleet utilization. We achieved a time charter equivalent of $12,394 per day compared to $16,486 per day achieved in the third quarter of 2017. Time charter expenses include the $7.4 million backstop commitment to Navios Midstream Partners accrued in the third quarter. Operating expenses were $23.3 million, and G&A expenses were $3.2 million. Equity in net earnings from affiliated companies mainly reflected in our equity portion of Navios Midstream Partners earnings, was $4.5 million. EBITDA for Q3 2018 was $9.6 million compared to $23.3 million in Q3 2017, primarily due to the decrease in revenue discussed above. Other expenses include depreciation and amortization of $13.8 million and interest expense and finance cost of $19.3 million. Net loss for the quarter was $23.4 million or $0.16 per share. Turning to the financial results for the 9-month period ended September 30, 2018. Revenue was $129.2 million compared to $177 million last year, reflecting a time charter equivalent of $13,287 per day and a 99.4% fleet utilization. Operating expenses were $69.7 million, and G&A expenses were $11.2 million. EBITDA for the 9 months of 2018 was $29.1 million compared to $28.7 million in 2017. I would like to remind you that our results in the 9 months of 2017 have been negatively affected by $59.1 million of impairment loss on equity investment in Navios Midstream Partners. Depreciation and amortization was $41.8 million, and net interest expense and finance cost was $57.9 million. As a result, we reported a net loss of $69.9 million. Slide 33 provides selected balance sheet data as of September 30, 2018. Cash and cash equivalents, including restricted cash, was $48.3 million. Vessels net book value was $1.2 billion. Investment in affiliates of $118 million reflects Navios Acquisition interest in Navios Midstream Partners, Navios Europe I and Navios Europe II. Receivables from related parties of $67.6 million reflect working capital contribution to Navios Europe I and II and their respective accrued interest as well as the management fees under the terms of our management agreement to Navios Holdings. Total assets amounted to $1.5 billion. Total debt as of September 30, 2018, was $1,016,000,000, resulting to a net debt-to-book capitalization ratio of 69.4%. Turning to Slide 34. As for return of capital to shareholders for the third quarter, we declared a dividend of $0.02 per share, equivalent to $0.08 per share on an annualized basis. The dividend will be paid on December 5, 2018, to shareholders on record as of November 27, 2018. We also repurchased 9.2 million common shares so far in 2018, providing an additional 6.1% return to our stockholders. Our Board of Directors approved the 1-for-15 reverse stock split of our common shares. The reverse stock split is subject to stockholder approval at a special general meeting of our stockholders scheduled for November 9, 2018. And now I will pass the call back to Angeliki. Angeliki?

Thank you, Leo. And we open the call to questions.

The merger will be completing end of 2018, beginning of 2019.

Okay, so you can basically acquire the NAP fleet and G&A for the next year, I think. Is that what you're saying.

Yes.

I'll now return the call to Angeliki Frangou for closing remarks.

Thank you. This concludes our results for the quarter. Thank you.

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

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

I wanted to ask about the company post merger and get a sense of what the key priorities are. I guess, maybe first question, can you give us a sense of what sort of the combined leverage of the entity will be going forward? And then, what are your thoughts around debt paydown? You've done some buybacks on the NNA side, dividends. Can you just give us a sense of maybe how you might think about sort of the capital structure and capital allocation post deal?

Very good. The one thing I will say is that, as you know, our merger agreement signed in October 7. And SEC, we filed on October 30, and we're going to be closing somewhere at the end of 2018 or beginning -- very early beginning of 2019. So we'll be looking on the combined company when everything completes from 2019. Overall, the transaction improves substantial -- improves the leverage ratios; increases our fleet by about 17% of our available base, which is in a real base; and improves the credit profile and cash flow. Just to give you a marker, nobody knows the market. But if you say about $5,000 in -- $5,000 of increase in the deal rate, increase $18 million our EBITDA. And that is quite significant. You can see it in Page 7, where the $5,000 increase in VLCC rate increases our EBITDA for 2018 on a combined basis of $18 million. And that's something that can create quite significant cash flows and further delever the overall entities. Because the combination already brings down the leverage, but the cash flow generation can significantly delever the company further. I will say one thing that the increase in the renewing of the fleet, this happen on the right time. I mean, after the mergers, post completion of the mergers with NAP and the new building commitment that we have with the two VLCCs that we are getting, you have increasing in VLCCs at a very attractive part of the cycle.

Would you think about the charter strategy going forward? Obviously, taking a sort of a termed-out charter strategy with NAP? And then maybe a bit more of a mixed dynamic at NNA? Any reason to think you might sort of changes the way you approach that? Obviously, if the market strengthens, are you going to be looking to put more ships away on term?

I think that on the deal, because we will in a post completion of the merger, you will have a lot of contracted revenue. So one of the things that we're looking is that today, the discount between an older VL, as you see from the rate that we are able to achieve on Page 7, and a new VL is not really significant. So on a strategy, some of our vessels, we will try to get spot exposure. Because we think that what we went through, this is what will going to becoming is a multiyear strengthening of rate. I mean, we have experienced that from the past, so the right solution, because we have a balanced portfolio with charters on some of the vessels, will give us the ability to really capture the spot market.

And then just one sort broader one on the market. In terms of IMO, how do you think about -- maybe if you can touch on sort of your thoughts around crude and product opportunities in terms of potentially new, emerging trade lanes? Any potential growth from a ton mile perspective relative to the IMO 2020 rules? And then just sort of refresh us or remind us what your thoughts are in terms of your approach, presumably not really much on the scrubber side, but just wanted to make sure that we're kind of clear on how you guys are thinking about these things.

Very good question. I'll start first not from the religious scrubber question. I'll start first with what we think about the market. I think that overall, we think that overall the 2020 regulation will create a lot of transportation, I mean, multiple year of -- we'll have a lot of transportation of product that will also strengthen that market. On top to a 2018 market, where you have negative real growth, which has not changed for a very long time, we see the environment for 2019 developing very nicely. And now on the scrubbers, I'll say that we are agnostic about this. I think, as you can see, if we are paid, we will install scrubbers, and we have done that in new buildings. But overall, we are agnostic about this. This is about a spread and how you capture the spread. Overall, if the -- we think that the market and the overall shipping market will have to be compliant with the oil at 2020, and then it's a matter of really whatever our clients would like, we will do at their cost. I mean, we do not want to be part of a spread economics, but mostly to cover our cost and time.

And then last one, just to quickly follow-up on that. Any thoughts on the availability of appropriate compliant low-sulfer fuel? Just want to get a sense of what you're hearing from your suppliers, and how you think the market might develop as we move through 2019 in terms of fuel availability.

We have been talking to different clients and charterers. You can see that there is -- I think, there will be availability, but it may be in different locations. That's why we create the arbitrage on a lot of movement of product. The other thing that you should be aware is that there is a lot also of combine fuels that will be tested, and we have been asked from certain charters, long-term charters and we have agreed to test. So there is multiple strategies. But overall, we firmly believe that the availability will be there. The issue is that it will be in different areas, meaning there is more refine on this, requirement more on the way. So that will create a lot of inefficiencies.

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

Most of the questions are addressed. But I did want to ask a follow-up on the IMO 2020. You guys just have a few VLCCs that are up there in age in the high teens. One thing that comes up is the storage of heavy fuel oil. How does that enter into kind of your decision-making? Or is that something you consider when you decide on scrapping or not scrapping or keeping all those ships?

I will tell you in this market -- I'll let Ted talk to you about the market. But I will tell you that in the market we're seeing today, you are not scrapping on -- I mean, we have negative fleet growth this year basically on VL. And the rate we're developing today, I think, this makes a lot of sense to, as I referenced -- a good call to reference to use them until their sell rate, which is at least another two years out. So I will not think that it makes -- I mean, you can see that spot market is really at a good premium.

To just go on with what Angeliki said. I think on the IMO side, you have a lot of compatibility issues. Remember in '16, floating storage basically disappeared. I think it's going to come back in a big way, certainly, with the Iranian sanctions and also with the IMO issues, with people having fuel and clean oil, and some of the bigger ships waiting to ship into different geographic areas when they see a price arbitrage, whether it's a product tanker or crude also. But then the U.S. is looking like their capacity issues on the pipeline is being addressed. I think you're going to go from 2 million barrels a day to 3.5 million exporting in a couple of years. That's good for ton miles for VLCCs. I think the whole IMO issue plays into better ton miles and less vessels in transit with a lot more floating storage.

Good. That's helpful. And then just quickly, are you going to talk about the G&A expense savings? Can you give an idea what the run rate's going to be combined? I think it fell quite a bit quarter-over-quarter. Is it kind of where we expect it to be?

As a rule, we have a -- you can see in the presentation. The incremental G&A is $1.5 million. We think you'll have a savings of $1.5 million from NAP side and have $3 million of G&A annually.

Yes, $1.5 million from this quarter, combined with this quarter?

No, this is the annual run rate of NAP. So the addition to NNA we be this $1.5 million.