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Edited Transcript of NM earnings conference call or presentation 23-Aug-18 12:30pm GMT

Q2 2018 Navios Maritime Holdings Inc Earnings Call

MONACO Sep 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Navios Maritime Holdings Inc earnings conference call or presentation Thursday, August 23, 2018 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

* George Achniotis

Navios Maritime Holdings Inc. - CFO

* Ioannis Karyotis

Navios Maritime Holdings Inc. - SVP of Strategic Planning

* Laura A. Kowalcyk

Navios Maritime Holdings Inc. - VP of Corporate Communications

* Thomas Beney

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

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Conference Call Participants

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* Dongyu Huang

Citigroup Inc, Research Division - Senior Associate

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Presentation

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Laura A. Kowalcyk, Navios Maritime Holdings Inc. - VP of Corporate Communications [1]

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Thank you for joining us for Navios Maritime Holdings Second Quarter and First Half 2018 Earnings Conference Call. With us today from the company are Chairman and CEO, Angeliki Frangou; Chief Financial Officer, George Achniotis; SVP of Commercial Affairs, Tom Beney; and SVP of Strategic Planning, 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 in 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 upon the current beliefs and expectations of Navios Holdings' 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 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 the morning's call 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, Angeliki Frangou.

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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 joining us on today's call. I am pleased with the results for the second quarter of 2018 for which we reported revenue of $132.1 million and adjusted EBITDA of $43.2 million. We continue to see the positive effects of a healthier charter market on our business results. Rates for the dry bulk vessels improved materially, with the time charter rates for our fleet for the first half of 2018 at about 50% higher than the first half of 2016 and about 35% higher than the first half of 2017. This has increased our adjusted EBITDA from core shipping operations by over 3x in 2018 compared to the first half of 2017.

Slide 3 provides company highlights. Navios Holdings directly controls 70 modern dry bulk vessels and manages 209 vessels. Our controlled fleet with an average age of 7.8 years is 16% younger than the industry average age. The scale benefits from managing a larger fleet allow us to maintain industry-leading operating cost, estimated to be 42% below the average of our listed peers.

Slide 4 and 5 illustrate our universal, diverse company. Navios is a global brand with significant scale, management talent and industry relationships. Navios Holdings' value is derived from the dry bulk fleet it holds directly and the equity interest in its subsidiaries owning tankers, dry bulk vessels, container ships and ports.

Slide 6 outlines our operating platform. We believe we are the premier operator in the dry bulk sector. Our overall scale of 200-plus vessels generate significant operating leverage. For 2017, this competitive advantage resulted in about $38 million of cost savings, measured by our estimate of operating cost savings compared to our peers.

We had a cash balance of $166.2 million as of June 30, 2018, pro forma for the agreed sale of 3 of our vessels and repayment of associated debt. Moreover, we have no significant committed shipping growth CapEx or any material debt maturity until 2022.

On the S&P front, we renewed our fleet with minimal capital outlay. Since the beginning of 2017, we added 6 vessels to our fleet on a net basis. As a result of this fleet renewal and expansion activities, we reduced the average age of our fleet by 15% and increased the fleet size by 9%.

Our time charter rate for the first half of 2018 was about 50% higher than the first half of 2016 and about 35% higher than the first half of 2017. In addition, in the second half of 2018, we expect to generate significant cash flow. At current market rates, our fleet will generate $37.4 million of cash flow. If rates were to increase to a 20-year average, our fleet will generate about $71.9 million of cash flow.

Slide 7 reflects our efforts at rebuilding our balance sheet. We agreed to sell 1 Capesize and 1 Kamsarmax vessel for $79 million. $31.8 million of the sales proceeds will be used to repay debt, and $47.2 million balance will be the additional liquidity on our balance sheet. Also, I wanted to mention that NM will save $1.7 million in annual interest as a result of the debt repayment.

The collateral package of our ship mortgage notes was also strengthened by $11.7 million through the removal of 4 Ultra-Handymax vessels that we sold for $27.6 million and the addition of 3 vessels worth $39.3 million.

Slide 8 provides an overview of our fleet renewal program. We have expanded our charter-in fleet at an attractive time. We acquired 12 and sold 6 vessels, thereby adding a net of 6 vessels to our fleet. In particular, we bareboat chartered and time charter-in 10 Kamsarmax vessels, some of them with purchase options. We exercised a purchase option to acquire a 2007 Japanese-built Ultra-Handymax vessel for $10.5 million, and we acquired a 2000-built Capesize vessel for $10 million.

We also sold 6 vessels, which include the sale of 1 Capesize and 1 Kamsarmax vessel to NMM for $79 million and the sale of 4 Ultra-Handymax vessels for $27.6 million, which had an average age of almost 17 years. As a result of these activities, we improved the average age of our fleet by 15% and increased our fleet size by 9%.

Also, our charter-in fleet days have increased allowance for additional revenue generation. Finally, 71% of our charter-in fleet has purchase options.

Slide 9 shows the cash flow potential of our fleet. Our time charter rate for the first half of 2018 was $11,412 per day. For the remaining 6 months of 2018, our fleet has 11,482 available days, of which 5,734 -- 5,735 days or 50% have market exposure. At current rate of $15,936 per day, our fleet will generate $37.4 million of free cash flow. If rates were to increase to a 20-year average, we will generate $71.9 million of free cash flow. In fact, our fleet is expected to generate an additional $6 million for every $1,000 increase in charter rates.

Slide 10 sets forth Navios' cost structure. Our expected daily revenue for the remaining 6 months of 2018 is $15,155. We fixed 50.1% of our available days at an average daily rate of $13,628. Daily revenue may increase by $1,153 based on the expected impact of current market rates on open and index days and an additional $374 based on the current NNA and NMM dividend.

Our breakeven cost for the remaining 6 months of 2018 is expected to be $11,899 per day. Our costs include all operating expenses, scheduled drydocking expenses, charter-in expenses for all of our charter-in fleet, G&A cost expenses as well as indirect expense and capital repayment.

Slide 11 highlights our strong liquidity position. Net debt to book capitalization was 72.9%. We had cash of $121.4 million and total pro forma liquidity of $166.2 million at June 30, 2018. We have no significant committed shipping growth CapEx or any material debt maturities until 2022.

I would like now to turn the call over to Mr. Tom Beney, Navios Holdings' Senior Vice President of Commercial Affairs.

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Thomas Beney, Navios Maritime Holdings Inc. - SVP of Commercial Affairs - Navios Corporation [3]

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Thank you, Angeliki.

Slide 12 presents our diversified dry bulk fleet, consisting of 70 dry bulk vessels totaling 7.1 million deadweights, split between Capesize, Panamax and Supermax Handy. We continue to be one of the largest U.S. listed dry bulk operators established over 60 years ago. We have 63 vessels on the water. The average age of the fleet is 7.8 years, 16% younger than the industry average. Navios Group's total fleet of 209 vessels includes 54 tankers, 43 container vessels and 112 dry bulkers and is a highly diversified public shipping group.

Slide 13 shows about $38 million of estimated operating cost savings for Navios Holdings in 2017. To measure our efficiencies, we compared our operating costs to the published results of our peers. We computed our peers' operating cost by reviewing their 2017 20-Fs and related disclosures. As you can see on Slide 13, our analysis showed that Navios Holdings' operating costs were estimated at approximately 42% lower than the average of the listed peers. We believe that these savings demonstrate a substantial competitive benefit we can generate and the value it delivers to all our stakeholders.

Please turn to Slide 15. The IMF forecasts world GDP growth at 3.9% for both 2018 and 2019. Emerging and developing Asian markets, which drive dry bulk demand are expected to grow at 6.5% in 2018 and '19. On the back of synchronized global economic growth, dry bulk trade grew by 4% in 2017 and is forecast to rise by 2.6% in 2018, about the same as the expected 2.6% net fleet growth.

The dry bulk market continues to recover. The average Baltic Dry Index over the first half of 2018 recorded about 25% increase over the first half of 2017. For Q3 to date, the average BDI is up 33% quarter-on-quarter and up almost 50% year-on-year. The dry bulk market still has substantial upside as the spot Baltic Dry Index is still about 33% below the 20-year average. The Cape market is strong, up 70% year-on-year and 65% quarter-on-quarter as Brazilian iron ore exports increase.

The current trade tensions, particularly between the U.S. and China, are not expected to have a significant effect on dry bulk trade. On the contrary, this may initially have a positive impact on ton miles as commodities find inefficient new routes to the end users. We have already seen this year, grains from the U.S. being sent to South America.

Turning to Slide 16. Worldwide steel production increased by about 5% in the first half of 2018. Through July, Chinese steel production rose an impressive 8%. Chinese domestic demand has been stimulated by large infrastructure projects and recovery in the housing market. The Belt and Road Initiative is a cornerstone of the Chinese economic plans for the next 5 years and supports steel and power demand inside and outside China. Chinese steel mills continue to enjoy high-profit margins as the domestic steel price remains strong. Substitution of Chinese expensive, low-quality domestic iron ore with high-quality and lower-priced imports continues. Up to the end of July, domestic production was down by 39%, while imports are forecast to rise by 2.4% in 2018.

Vale recently reiterated that they expect to meet their 2018 production target of about 390 million tons, which will result in sizable increases in Brazilian export volumes for Q3 and Q4 of 2018 to over 100 million tons per quarter. This increased activity in the spot market has pushed the average Cape time charter index to over 25,000 as ton miles increase. The Chinese continue to favor high-quality iron ore as they navigate new environmental restrictions and capacity restraints.

Please turn to Slide 17. The Chinese government continues to rationalize domestic coal production, closing down small, inefficient mines and encouraging consolidation of larger mining groups. It is expected that the restructuring of the Chinese coal industry will continue to keep domestic coal prices high and encourage imports as inefficient polluting mines are closed.

Chinese electricity production continues to increase and is up over 7% July year-to-date, pushing up coal consumption in Chinese power production. Through July 2018, Chinese seaborne coal imports were up by about 14%. Chinese coal stocks fall into 15 days of supply due to extended summer heat waves and are now at their lowest levels since February of this year.

Indian coal imports also continue to build as coal stocks at power plants in India remain at uncomfortably low levels. U.S. coal exports have increased, over 30% so far year-to-date, driven by Indian and Asian demand, increasing ton miles.

Turning to Slide 18. Agricultural production worldwide continues to increase. After a strong 6.2% growth in 2017, forecast for 2018 are for a further increase. Worldwide grain trade has grown by 5.9% CAGR since 2008, mainly driven by Asian demand. Demand increases are focused on Asian economies, and especially China, where incomes are rising and diets are changing. Most of the increases in grain production are based in the Americas or European regions, increasing ton miles for longer trips to Asia.

Chinese tariffs on U.S. soybeans are causing trade disruptions and inefficiencies. Additional soybeans for China will be sourced from South American, and U.S. soybeans will head to other destinations.

Moving to Slide 19. In 2017, 34% of total expected new buildings did not deliver. In spite of a significantly better market this year, the nondelivery rate is about 23%. Forecasts are for a 2.6% net fleet growth in 2018, the fourth year of low net fleet growth below 3%.

Based on the current order book and shipyard availability, low net fleet growth is expected to continue over the next few years. The total order book remains about 10% of the total fleet, resulting in low deliveries of new buildings for 2019 and 2020. Increased regulations for Ballast Water Treatment Systems and IMO 2020 fuel regulations may accelerate scrapping of older vessels.

Turning to Slide 20. Net fleet growth so far this year is a low 2%. The number of actual vessels delivered in 2018 is about 40% less than 2017 year-to-date.

The current dry bulk order book before nondeliveries is about 10% of the total fleet, and we note that vessels over 20 years of age equal about 7.1%. Given forecasted trade growth, there is a balance between new expected deliveries and potential scrap candidates. The fundamentals for the balance of 2018 and beyond remain positive. We are experiencing a seasonal pickup in shipment pace expected into Q3, which should continue into the Q4.

The disruption caused by the IMO 2020 fuel regulations during 2019 will increase durations of dry docks and off-hire time, restricting supplies of ships if demand continues to improve. The market should continue to recover and support increased charter rates going forward.

I would now like to turn the call over to our CFO, George Achniotis, for the Q2 financial results.

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George Achniotis, Navios Maritime Holdings Inc. - CFO [4]

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Thank you, Tom. Please turn to Slide 21 for a review of the Navios Holdings' financial highlights for the second quarter and the first half of 2018.

Adjusted EBITDA for the quarter increased by 38% to $43.2 million from $31.3 million in '17. EBITDA and net income for the quarter were adjusted to exclude a $6.6 million book loss from the sale of the Navios Achilles. The increase in EBITDA is mainly due to a 29% increase in the time charter equivalent rate achieved in the period compared to Q2 of '17. This has resulted in an almost 100% increase in the EBITDA contribution from our shipping operations. The results were also positively affected by a 19% increase in the EBITDA of Navios South American Logistics due to the iron ore terminal in Uruguay.

EBITDA was negatively affected by a reduction in equity and net earnings of our affiliated companies, mainly due to the weaker results of Navios Acquisition. Adjusted EBITDA for the first half of 2018 increased by 46% to $71.3 million from $48.9 million in the first half of '17. In addition to the item that affected the Q2 EBITDA, the first half results were adjusted to exclude a $6.7 million book loss relating to the sale of the Navios Achilles.

EBITDA from shipping operations in the first half of '18 increased by 3x compared to the same period in '17. If the dry bulk market continues to improve, we expect a significant increase in the profitability of our business.

During the quarter, we recorded an adjusted net loss of $18.7 million compared to a net loss of $27.4 million in '17. The 32% improvement is mainly due to the increase in EBITDA. Adjusted net loss for the first half of '18 was $52.8 million compared to a net loss of $67.1 million in '17.

Moving to Slide 22 and our balance sheet highlights. On June 30, 2018, we had about $121 million in cash compared to $134 million at December 31, 2017. The balance does not include $55.3 million net proceeds from the drop down of 2 vessels from Navios Partners, expected to be completed in Q3, and the sale of the Navios Achilles, which was completed in July.

Net debt-to-book capitalization at the end of Q2 was 72.9% compared to 70.4% at the end of last year. The ratio is expected to decline to below 70% following the sale of the 3 vessels and the deleveraging strategy we are pursuing.

Over the next few slides, we will briefly review our subsidiaries. Please turn to Slide 23.

Navios Holdings owns about 20% of Navios Partners, including a 2% GP interest. Navios Partners owns a fleet of 40 vessels, 35 dry bulk and 5 containers. NMM also owns about 36% of Navios Containers, a growth vehicle dedicated to containers. NMM is a unique platform generating significant cash flow with no significant near-term debt maturities. The company is currently in the process of renewing and expanding its dry bulk fleet with younger and larger vessels. It is also in the process of deleveraging, and it has reduced its net debt-to-book capitalization ratio by 25% since Q4 of 2016. We expect to receive about $2.1 million in dividends from NMM in 2018. And since 2008, we received about $195 million in dividends.

Turning to Slide 24. Navios Holdings owns about 48% of Navios Acquisition. Navios Acquisition has a fleet of 35 modern, high-quality tankers, with an average age of 7.5 years, diversified between crude product and chemical tankers. NNA also owns about 59% of Navios Midstream Partners, including a 2% GP interest. We expect to receive about $6 million in dividends from Navios Acquisition during 2018, and since 2011, we received about $85 million in dividends.

Moving to Slide 25, Navios Holdings owns about 3% of Navios Containers. Navios Containers is a company that was set up in June of 2017, with the intention of taking advantage of opportunities in the container sector. Since its inception, the company raised $180 million at the Oslo OTC market and acquired 26 vessels, mostly through these trade transactions.

Now I will turn the call over to Ioannis Karyotis for his review of the Navios South American Logistics' results.

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Ioannis Karyotis, Navios Maritime Holdings Inc. - SVP of Strategic Planning [5]

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Thank you, George. Slide 26 provides an overview of the Navios Logistics business. Navios Logistics operates 3 port terminals. Navios Logistics complements its port business with its barge fleet for river transportation and product tanker fleet for coastal cabotage trade.

Before reviewing the financial results for the second quarter, I would like to update you on a most recent event. On August 16, 2018, there was a fire at the Nueva Palmira iron ore port terminal. The fire damaged some equipment, but fortunately, there were no human casualties. While it is too early to give a complete estimate of the time required to repair or replace the damaged equipment, we maintain property and loss of earnings insurance coverage for such type of events. We expect the port to continue operations, albeit in a somewhat limited fashion. The grain port terminal operations have not been affected.

Please turn to Page 27. For the overall results of the second quarter of 2018, revenue increased 1% year-on-year to $60.1 million, and EBITDA increased 16% year-on-year to $22.4 million.

Q2 2018 port segment revenue increased 38% compared to the same period last year, and EBITDA increased 74% to $17.4 million. The increase is attributable to the operation of the new iron ore terminal. In Q2 2018, the iron ore terminal generated approximately $10.6 million EBITDA.

The grain terminal had a weaker performance compared to Q2 2017, as grain exports and transshipment volumes were impacted by the drought in Uruguay and Argentina. According to USDA, Uruguayan soybean crop was 49% lower and Argentinian crop was 33% lower compared to the previous year. The reduction in the Uruguayan production directly affected our terminal, as our terminal is the principal port for Uruguayan exports.

The reduction in Argentinian production has affected indirectly our port business. Crushing plants in Argentina to cover the shortfall from the domestic supply imported beans from Paraguay that would otherwise have been transshipped and exported. Our terminal, being one of the main transshipment stations for Paraguayan soybean exports was therefore also affected.

On a positive note, USDA estimates that both the Uruguayan and the Argentinian soybean crops will increase by 76% and 54%, respectively, in 2019 compared to 2018.

The liquid terminals had a relatively stable performance compared to Q2 2017. In the barge segment, Q2 2018 EBITDA decreased 62% compared to the same period in 2017, mainly due to reduced revenue from liquid cargo transportation.

Cabotage business Q2 2018 EBITDA decreased 15% to $2.8 million compared to $3.3 million in the same period last year. The decrease is attributable to fewer operating days due to more off-hire days compared to Q2 2017. In the Cabotage business, we've got delivery in August of the new building river and estuary tanker that will be servicing the 5-year contract with YPF upon its arrival in Argentina in a few weeks. We are expecting to generate approximately $3.5 million of annual EBITDA from this contract.

Despite the increase in the second quarter EBITDA, net income decreased 10% to $4 million from $4.4 million in the same period last year. The decrease is attributable to higher interest expense and finance cost net and higher depreciation and amortization expenses. The increase in interest expense was due to the new Term Loan B issued in Q4 2017. The increase in depreciation was mainly due to the commencement of operations at the iron ore terminal.

Turning to the financial results for the 6-month period ending June 30, 2018. Revenue increased 9%, EBITDA increased 34% to $39.2 million and net income increased 107% to $2.9 million from $1.4 million in the same period last year.

Please turn to Slide 28. Navios Logistics has a strong balance sheet. Cash at the end of Q2 2018 was $70.4 million compared to $79.9 million at the end of 2017. Net debt-to-book capitalization was 57% compared to 56% at year-end 2017.

Now I would 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, Ioannis. And this completes our formal presentation. We open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Chris Wetherbee with Citi.

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Dongyu Huang, Citigroup Inc, Research Division - Senior Associate [2]

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This is Dora on for Chris. The trade war has been around for a while, and this morning, China and the U.S. just launched a fresh round of tariffs, about $16 billion on each other's goods. I know you talked about the impact to soybean just now, but I wanted to get more color on this. Plus, investors are becoming increasingly concerned about a possible slowing in China's economy as a result of the trade war. And this may impact the demand from China for your business. Do you have any comment on this?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [3]

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One thing we have seen is that the market has been recovering nicely, and we have not seen signs of the trade war to affect the BDI or our earnings. One of the things we will say is that even with this -- what we carry as commodities, most probably, we will vacate in a more inefficient way. Meaning, we will vacate from somewhere else because it will make more sense. So we have not seen an effect right now on our earnings. And we think that in the next 2 years, most probably, there will be more inefficiency. I don't know, Tom, if you want...

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Thomas Beney, Navios Maritime Holdings Inc. - SVP of Commercial Affairs - Navios Corporation [4]

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Yes. I would add to that the domestic demand in China is expanding. We see that Chinese steel production is up 8% this year. Power consumption is up another 7%, 8% this year. So we see a very good domestic demand in China, and demand for the goods around Southeast Asia. On -- for the dry bulk, we see very limited impact of China-U. S. long-term trade war. Now there is -- has been a lot of discussion around the soybeans. There suddenly is less soybeans going to China from the U.S. but more going from Brazil, and that's actually additional ton miles. And we've seen some of those soybeans going into -- from the U.S. down in South America to replace for their own domestic consumption. So we see a change in trade flows. That disruption tends to make inefficiencies in the market, which are actually short-term positive, as Angeliki mentioned.

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Operator [5]

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We've reached our allotted time for questions and answers. I will now turn the conference back to Angeliki.

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

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Thank you. This concludes our second quarter results.

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Operator [7]

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This concludes today's conference call. You may now disconnect.