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Edited Transcript of NM earnings conference call or presentation 5-Sep-19 12:30pm GMT

Q2 2019 Navios Maritime Holdings Inc Earnings Call

MONACO Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Navios Maritime Holdings Inc earnings conference call or presentation Thursday, September 5, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angeliki N. Frangou

Navios Maritime Holdings Inc. - Chairman & CEO

* Georgios Achniotis

Navios Maritime Holdings Inc. - CFO

* Ioannis Karyotis

Navios Maritime Holdings Inc. - SVP of Strategic Planning

* Thomas Beney

Navios Maritime Holdings Inc. - SVP of Commercial Affairs - Navios Corporation

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Presentation

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Operator [1]

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Thank you for joining us for Navios Maritime Holdings' Second Quarter 2019 Earnings Conference Call. With us today from the company are Chairman and CEO, Ms. Angeliki Frangou; Chief Financial Officer, Mr. Georgios Achniotis; SVP of Commercial Affairs, Mr. Tom Beney; and SVP of Strategic Planning, Mr. Ioannis Karyotis.

As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors section of Navios Maritime Holdings website at www.navios.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 within the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Holdings. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based on the current beliefs and expectations of Navios Holdings management and are subject to risks and uncertainties, which could cause the actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Holdings filings with the Securities and Exchange Commission. The information set forth, herein, should be understood in light of such risks. Navios Holdings does not assume any obligation to update the information contained in this conference call.

The agenda for today's call is as follows: we'll begin with formal remarks from the management team and after, we'll open the call to take questions.

Now I turn the call over to Navios Holdings' Chairman and CEO, Ms. Angeliki Frangou. Angeliki?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [2]

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Thank you, Laura, and good morning to all of you who joined us on today's call. I am pleased with the results for the second quarter of 2019. For the second quarter of 2019, we reported revenue of $147.2 million and adjusted EBITDA of $62.6 million. Charter rate in the dry bulk sector have recovered after the tragic dam collapse in Brazil in January of this year. The capesize 5TC rate is currently over $35,000 per day while NM time charter equivalent rate of $10,500 per day for the second quarter of 2019.

On Slide 3, we highlighted the simplification of the Navios Group. Navios Acquisition acquired Navios Midstream in December of 2018. In the fourth quarter of 2018, we moved the listing of Navios Maritime Containers from Oslo OTC to the NASDAQ. And most recently, we sold our ship management business for $20 million in a favorable 5-year services agreement.

On Slide 4, we focus on our diversified group. As you can see, Navios Partners was upgraded to B2 by Moody's following an upgrade by S&P in 2018. It has low levels with 36.4% net debt-to-book capitalization, and strong cash flow with about $635 million of contracted revenue. In addition NMCI, a container-focused entity, has conservative leverage. NNA, a tanker company, is operating in a healthy charter rate environment.

Turning to South America. The prospects of Navios Logistics remain excellent. Vale recently increased its estimates on iron ore throughput in a transshipment facility Nueva Palmira in Uruguay. Overall, we continue to see opportunity for building an even more robust business in South America.

Slide 5 addresses the sale of -- by Navios Holdings of its ship management division along with certain GP interest for a consideration of $20 million, plus a 5-year service agreement. The Board of Directors of Navios Holdings formed a Special Committee of Independent and Disinterested Directors to consider the transaction. The Special Committee, with the assistance of its independent financial and legal advisers, negotiated and approved the transaction on behalf of the Board of Directors.

Pareto Securities AS acted as the financial adviser and Debevoise & Plimpton LLP acted as legal counsel to the Special Committee. As a result of this transaction, Navios Holdings is now a holding company that owns dry bulk vessels in various investments in entities owning maritime and infrastructure assets. Georgios Achniotis will address this transition in further detail in a moment.

Slide 6 highlights few of the other -- recent developments. We purchased $82.2 million in face value in our senior mortgage note. We have been renewing our fleet. Our owned and bareboat charter-in fleet average age decreased by 26%. Since 2017, we acquired 8 vessels with an average age of 4.2 years for $174.8 million, in short, 11 vessels with an average age of 16.7 years for $83.3 million.

Our charter-in fleet strategy allow us to expand our fleet without an immediate capital outlay. Today, we have 26 vessels charter-in, 21 of which include purchase options.

Slide 7 sets forth Navios cost structure. Our expected daily revenue for the remaining 6 months of 2019 is $14,565, with 62.7% of our available days at an average daily rate of $13,787. Daily revenue may increase by $447 based on the current NNA and NMM dividends and further increased by $1,321 from the effect of the current 1-year Long -- TC Long Historical Series. Our breakeven cost for the same period is expected to be $12,458 per day. Our cost include all operating expenses, charter-in expenses for our charter-in fleet, G&A cash expenses as well as interest expense and capital repayments that are net of charges to affiliates.

Slide 8 highlights our liquidity position. Net debt-to-book capitalization was 74%, and we have cash of $122.1 million at June 30, 2019. We have no significant committed shipping growth CapEx. We also have no material debt maturity until January 2022, unless 11.25% bonds have a [significant] maturity in 2021.

I would like now to turn the call over to Georgios Achniotis, Navios Holdings CFO. George?

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [3]

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Thank you, Angeliki. Please turn to Slide 9, which details certain features of the sale. The consideration for the sale of the ship management company was $20 million, including the assumption of debt, plus a 5-year service agreement. Under the administrative services agreement, NSM will provide all administrative services and will be reimbursed at allocable cost.

Under the management agreement, Navios Holdings will pay a favorable fixed rate of $3,700 per day per vessel. This fee will cover technical, commercial management services and all operating costs, other than dry docking and special surveys. This rate is fixed for a 2-year period, increasing by 3% annually thereafter.

This transaction is beneficial to Navios Holdings from a number of perspectives. Financially, the fixed rate for services is materially below the market. A review of third-party data supports that this rate is at least 30% below other providers. This transaction also eliminates the risk of providing fixed rate ship management services and the risks for various environmental and other exposures associated with managing tankers and containers.

In addition, Navios Holdings financial reporting will be simplified as NM will no longer consolidate Navios Containers. Finally, by virtue of the loan, Navios Holdings was able to convert short-term liabilities into long-term liability.

Please turn to Slide 10. Following the sale of the management operations, a new secure loan facility of $125 million will be provided by NSM. This represents the excess of the liabilities assumed by NSM over the short-term assets assumed. The loan will be secured by assets of Navios Holdings other than those pledged to the bonds, and will -- it will be subject to 5% interest. Out of the $125 million, $47 million would be repayable in equal quarterly installments beginning in Q1 of 2020, with the remaining principal amount repayable in equal quarterly installments over the following 48 months.

Amortization may be deferred in certain cases, provided that no more than $20 million of deferral may be outstanding during the first or second years and $10 million outstanding in the third year. Amounts deferred will bear interest at 7%. The numbers are subject to postclosing adjustments.

Please turn to Slide 11, for a review of the Navios Holdings financial highlights for the second quarter of 2019.

Adjusted EBITDA for the quarter was $62 million. Excluding Navios Containers, adjusted EBITDA was $49.8 million compared to $43.2 million in 2018, an increase of 15%. EBITDA and net income for the quarter were adjusted to exclude the $13.5 million impairment loss on our investment in Navios Acquisition and an $18.3 million book loss from the sale of 4 of our older vessels. The increase in adjusted EBITDA is mainly due to a 14% increase in the EBITDA of Navios South American Logistics and a $5.7 million gain from the repurchase of our bonds.

EBITDA was negatively affected by an 11% reduction in the time charter equivalent rate achieved in the period compared to Q2 of 2018 due to the weaker dry bulk market.

Excluding Navios Containers, during the quarter, we recorded a net loss of $4.5 million compared to a net loss of $18.7 million in 2018. The 76% improvement is mainly due to the increase in EBITDA, a reduction in depreciation and amortization due to the sale of the older vessels and a reduction in interest expense due to the bond buyback.

In addition to the items that affected EBITDA and net loss, EPS for the quarter was adjusted to exclude $20.2 million gain related to the tender of the preferred equity stock.

Please note that during Q3, following the sale of the Navios Containers' GP interest, Navios Containers will be deconsolidated.

Moving to Slide 12, in the first half financial highlights, adjusted EBITDA for the first half of 2019, excluding Navios Containers, increased by 49% to $106.1 million from $71.3 million in the first half of 2018. In addition to the items that affected Q2 EBITDA, the first half results were adjusted to exclude a $5.5 million book loss relating to the sale of 1 more vessel in Q1. Similar to the quarterly results, the increase in adjusted EBITDA is mainly due to a 21% increase in the EBITDA of Navios South American Logistics, a $10.5 million increase in the equity pickup from affiliate companies, mainly due to the significantly improved results of Navios Acquisition and a $21.4 million gain from the repurchase of our bonds.

Adjusted net loss for the first half 2019, excluding Navios Containers, was $4.3 million compared to a net loss of $52.8 million in 2018, an improvement of 92%.

Moving to Slide 13 and our financial highlights, I would like to point out that the balance sheet, as of June 30, does not reflect the sale of the management company. As of June 30, 2019, the cash balance was about $122 million compared to $151 million at the end of December 2018. The balance sheet reflects the effects of the adoption of the new lease standard. Total assets include $336 million of operating lease assets and total liabilities include $349 million of operating lease liabilities.

Over the next few slides, we will briefly review our subsidiaries. Please turn to Slide 14. Following the sale of the general partner, excluding the ideas, Navios Holdings owns 18.5% of Navios Partners. Navios Partners owns a fleet of 37 vessels, 32 dry bulk and 5 containers. NMM also owns about 34% of Navios Containers. We expect to receive about $2.5 million in cash dividends from NMM annually, and since 2008, we received about $200 million in dividends.

Turning to Slide 15. Navios Holdings owns about 36% of Navios Acquisition. Following the completion of the acquisition of NAP in December 2018, Navios Acquisition has a fleet of 41 tankers, including 13 VLCCs. We expect to receive about $6 million in cash dividends from NNA during 2019, and since 2011, we received about $91 million in dividends.

Moving to Slide 16, Navios Holdings owns about 4% of Navios Containers. NMCI has grown its fleet to 21 -- 29 container ships in just 2 years. The company was established in early 2017 to leverage the weakness in the containership sector and scaled up its fleet quickly and efficiently. Since December of 2018, Navios Containers shares have been trading on the NASDAQ Global Select Market, marking the next stage in its growth.

Now we turn the call over to Ioannis Karyotis for his review of the Navios South American Logistics results. Ioannis?

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Ioannis Karyotis, Navios Maritime Holdings Inc. - SVP of Strategic Planning [4]

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Thank you, George. Slide 17 provides an overview of the Navios Logistics business. Navios Logistics operates 3 port terminals, which are complemented by our barge fleet for river transportation and a product tanker fleet for coastal cabotage trade. We are developing a new multipurpose river port facility in Mato Grosso do Sul in Brazil. The proposed facility would capitalize on the significant regional potential for river transportation of grain exports and fertilizer and liquid imports. We are still in preliminary stages, and we remain excited by the opportunity.

Please turn on Page 18. In the second quarter of 2019, EBITDA increased 23% to $27.5 million from $22.4 million in the same period last year.

Q2 2019 port segment EBITDA increased 1% to $17.5 million. Port segment revenue for the period decreased 22%, however, the reduction is attributable to lower sales of fuel products in our low-margin trading business based in our liquids port terminal in Paraguay.

Soybean production in Uruguay has recovered from last year's drought with USDA expecting a 113% increase in production in 2019 to 2.83 million metric tons compared to 1.33 million metric tons in 2018.

Despite higher production in Q2, we experienced delays in exports of soybeans. And as a result, throughput in our grain terminal in Q2 2019 increased by only 6% to 743,000 metric tons from 701,000 in the same period last year.

In Q3, export volumes have picked up. And in July and August, our throughput was 1,025,000 metric tons compared to just 319,000 metric tons in the same 2-month period last year.

We expect the impact of the volume recovery in the grain terminal to port segment EBITDA to be more pronounced in the second half of the year.

On the iron ore port side, Vale has indicated that they intend to increase by 165% the iron ore and manganese throughput for the second half of 2019 compared to the same period last year. Vale estimates that it will conceive approximately 1.2 million tons of minerals in the second half of 2019 compared to 0.4 million tons in the second half of 2018.

Overall, for 2019, we expect throughput will be about 1.6 million tons, a 55% increase over the 1.1 million tons for 2018. At the expected rate of the second half of 2019, Vale will be moving only about 60% of the 4 million minimum guaranteed, for which we are paid annually.

In the barge segment, Q2 2019 EBITDA increased 149% to $5.6 million from $2.2 million in the same period last year, mainly due to more liquid cargo transported as well as lower operating expenses.

Cabotage business Q2 2019 EBITDA increased to $4.4 million compared to $2.8 million in the same period last year, mainly due to more operating days.

For Q2 2019, net income was $9.7 million compared to $4 million in the same period last year. The increase is mainly attributable to the improved operating performance of all segments as well as lower interest expense and finance cost net.

Turning to the financial results for the 6-month period ending June 30, 2019. Revenue increased 4%, EBITDA increased 32% or $51.7 million, and net income increased 409% to $15 million from $2.9 million in the same period last year.

Please turn to Slide 19. Navios Logistics has a strong balance sheet. Cash at the end of Q2 2019 was $68.8 million compared to $76.5 million at the end of 2018. Net debt-to-book capitalization was 55% compared to 56% at the end of 2018.

I would now like to turn the call over to Mr. Tom Beney, Navios Holdings SVP of Commercial Affairs.

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Thomas Beney, Navios Maritime Holdings Inc. - SVP of Commercial Affairs - Navios Corporation [5]

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Thank you, Ioannis. Slide 20 presents our diversified dry bulk fleet, consisting of 57 dry bulk vessels totaling 6 million deadweight, 18 Capes, 28 Panamax, 9 Supermax and 2 Handysize. We continue to be one of the largest U.S.-listed dry bulk fleets, established over 60 years ago. The average age of the fleet is 7.5 years, 24% younger than the industry average.

Navios Group's total fleet of 196 vessels includes 54 tankers, 46 container vessels and 96 dry bulkers. It is a highly diversified public shipping group.

Please turn to Slide 22. The IMF forecasts world GDP growth at 3.2% for 2019 and 3.5% in 2020. In spite of the continued U.S. China tariff issues, emerging and developing Asian markets which drive dry bulk demand are expected to grow at a healthy 6.2% in 2019 and 2020. Due to the disruptions in the supply of iron ore at the beginning of the year caused by the Vale mine accident in Brazil and west -- weather issues in Australia, the BDI reached a low of 595 in mid-February. As iron ore shipments from both Australia and Brazil return to normal and the disruption from preparations for IMO 2020 commence, dry bulk rates have dramatically improved, reaching a 9-year high. The BDI was 2,518 yesterday, levels not seen since November 2010.

Moving to Slide 23. Iron ore prices spiked to a high of $126 per metric ton early -- in early July 2019.

Currently, they are about $90 per metric ton delivered to China, and prior to the Vale disruptions, the price was about $75 per metric ton. Due to restricted supply, Chinese port stocks of iron ore reduced by about 37 million tons in the year to the end of August. Iron ore miners have brought additional production online with Vale and other Brazilian miners increasing exports. Forecast show an increase of about 74 million tons in global iron ore exports between first half and second half 2019, 40 million tons of which will come from Brazil. These Atlantic-based exports will drive ton miles going forward as China produces more steel and restocks iron ore drawn down earlier this year. Coal and grain exports are also forecast to increase between first half and second half 2019 by about 24 million tons.

At the same time, the dry bulk demand is expected to increase. The supply of vessels is expected to reduce during the second half of the year as vessels are retrofitted with scrubbers. About 3% of the Capesize and above fleet is expected to be out of service in the second half of the year. Recent reports indicate shipyards are heavily congested as many ships head for retrofitting scrubbers in preparation for IMO 2020.

Turning to Slide 24, Chinese steel production growth is an impressive 9% through July 2019. Chinese steel exports continue to be high due to large infrastructure projects outside China. The belt and road initiative remain the cornerstone of Chinese economic plans for the next few years, supporting steel and power demand domestically and abroad. The Chinese government continues to stimulate their economy, firstly by supporting new residential housebuilding and secondly, with large infrastructure projects. This has resulted in a 9.5% increase in internal steel consumption through July 2019.

During the Q1 and Q2 iron ore supply disruptions, Chinese steel mills have eaten through their stockpiles, which declined by about 37 million tons between June '18 and the end of August 2019. With additional availability of iron ore in the second half of the year, the stockpiles will be replenished further driving the amount of Capesize vessels.

Please turn to Slide 25. Demand for coal in Asia remains strong. Chinese seaborne coal imports increased by 7% through July 2019. India is expected to surpass China as the largest importer of coal in Asia in 2019. Coal imports to India are up 22% through May. Indian domestic coal struggles to overcome logistical issues and therefore, coal imports are expected to remain strong.

Turning to Slide 26. Worldwide grain trade has been growing by 5.2% CAGR since 2008, mainly driven by Asian demand. The trade war between the USA and China affected the flow of grains in 2018, '19 as the Chinese turn to South America for additional imports and reduced imports from the USA. Forecast for large grain harvest in South America, Russia and Ukraine will promote export sales going forward. The South American crops this year have been very good in soybeans, wheat and maize, and they continue to export in large quantities, taking advantage of the disruption in China-USA trade relations.

Moving to Slide 27. Net fleet growth is forecast to be about 2.9% in 2019, but the effective growth will be less due to scrubber retrofits and ballast water treatment systems installations throughout the latter half of 2019. The current order book before nondeliveries is about 11% of the fleet, which is one of the lowest on record. New building contracting is down about 60% from 2018 levels, therefore, net fleet growth is expected to remain low over the next few years.

Turning to Slide 28. Vessels over 20 years of age are about 7% of the total fleet, which compares favorably with the 11% order book before nondeliveries.

Scrapping so far in 2019 has already surpassed the total scrapping for 2018 by 1 million metric ton deadweight capacity. The added cost for complying with IMO regulations for ballast water treatment systems and fuel regulations are expected to result in higher scrapping going forward. The disruption caused by the IMO 2020 fuel regulations should provide support to the dry bulk market throughout the balance of 2019 and into 2020.

Tonnage supply will tighten as about 440 vessels from Supermax to Valemax are expected to head to dry dock for extended periods to retrofit scrubbers during the balance of 2019. In addition, as discussed earlier, close to 100 million additional tons of 3 major commodities are expected to be shipped in the second half of the year compared to the first. I would now like to turn the call back to Angeliki.

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [6]

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Thank you, Tom. This completes our formal presentation. We open the call to questions.

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Operator [7]

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(Operator Instructions) At this time, I'll turn the call back over to Angeliki Frangou for any additional closing remarks.

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [8]

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Thank you for joining us on today's call. We are pleased that we are in a position to benefit from the very improving dry bulk market.

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Operator [9]

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Thank you, ladies and gentlemen, this concludes today's conference call. You may now disconnect.