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Edited Transcript of NM earnings conference call or presentation 28-May-19 12:30pm GMT

Q1 2019 Navios Maritime Holdings Inc Earnings Call

MONACO Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Navios Maritime Holdings Inc earnings conference call or presentation Tuesday, May 28, 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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Conference Call Participants

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* Noah Robert Parquette

JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst

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Presentation

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Operator [1]

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

As a reminder, this conference call is being webcast. To access the webcast, please go to the Investor 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 will also be found there.

Now we will review the safe harbor statement. This conference call could contain forward-looking statements within the meanings 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 information contained in this conference call.

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

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

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

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Thank you, Doris, and good morning to all of you joining us on today's call. I am pleased with the results of the first quarter of 2019.

For the first quarter, we reported revenue of $140.3 million and adjusted EBITDA of $68.5 million. Our financial results were particularly strong given the weak rate market during the quarter. Charter rate in the dry bulk sector was devastated by the tragic dam collapse in Brazil that occurred in the first quarter. The closure of certain Brazilian mines not only removed a significant amount of iron ore from the supply chain but also did show in the longest route to China, the bigger user of iron ore.

Overall, there was a disproportionate negative impact on charter rates. Since the end of the first quarter, there has been a material rate improvement in the market and the current spot rate for Capesize vessels of approximately 12,200 is up about 110% from the average spot rate for the months of February and March.

Please turn to Slide 3, where we highlight how we are simplifying our group. We completed the acquisition of Navios Midstream by Navios Acquisition in December of 2018. We also completed the direct listing of Navios Maritime Containers on NASDAQ and commenced the next phase in the growth of NMCI by controlling 30 container ships.

On Slide 4, we focus on our diversified group. As you can see, Navios Partners was recently upgraded to B2 by Moody's following an upgrade by S&P in 2018. It has low levels with 35.7% net debt-to-book capitalization and strong cash flow with about $600 million of contracted revenue.

NMCI, our container-focused entity, has conservative leverage. NNA, our tanker company is operating in a healthy charter rate environment. In addition, the opportunities set in South America for Navios Logistics remains excellent and will continue to build a robust business there including adding a river port capacity in Mato Grosso do Sul area that we'll address later in this presentation.

Slide 5 highlights recent developments. We continued to deleverage and purchased $35.5 million of face value of our senior mortgage notes at an average price equal to 50% of par value. We also substituted collateral under 11.25% senior secured notes [but worth repeating] 1 Capesize vessel through the collateral package in exchange for ownership of 1.9 million of NMM unit and 0.2 million of NNA shares, that were currently part of the collateral securing the notes.

We're extending $39.5 million maturities of 1 bank loan by 1 year and substituting the vessel Navios Serenity for the Sea Victory, which will be renamed Navios Victory.

We also completed an offer to exchange Series G and Series H preferred shares for cash and 9.75% notes with maturity in 2024. The exchange offer program retired about $2 million of ADS tendered and -- for $17.2 million in cash and notes.

We have been renewing our fleet. Our own fleet average age decreased by 20% while the fleet capacity remained about the same. During the last 17 months, we acquired 8 vessels with an average age of 4.2 years for $176.3 million and sold 9 vessels with an average age of 14.1 years for $133.5 million.

Slide 6 shows the cash flow potential for our fleet. For the remaining 9 months of 2019, our fleet has 14,359 available days, of which 8,201 days or about 57% of our days have market exposure. At the current combined rate of $12,945 per day, our fleet will generate $17.5 million of free cash flow. If rates were to increase to a 20-year average, we would generate about $91 million of free cash flow. Our fleet is expected to generate an additional $8 million for every $1,000 increase in charter rates.

Slide 7 sets forth Navios' cost structure. Our expected daily revenues for the remaining 9 months of 2019 is $12,601. We fixed 42.9% of our available days at an average daily rate of $11,095. Daily revenue may increase by $449 based on the current NNA and NMM dividend and further increased by $1,057 for the effect of the current rates on the open/index days.

Our break-even cost for the same period is expected to be $11,382 per day. Our cost includes all operating expenses, scheduled drydocking expense, charter-in expense for our charter-in fleet, G&A cash expenses as well as interest expense and capital repayment, net of management and administrative costs to affiliates.

Slide 8 highlights our strong liquidity position. Net debt-to-book capitalization was 72.1% and we had cash of $129.4 million at March 31, 2019. 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. Tom?

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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 9 presents our diversified dry bulk fleet consisting of 60 dry bulk vessels totaling 6.2 million deadweight, 18 Capes, 28 Panamax, 12 Supermax and 2 Handysize. We continue to be one of the largest US-listed dry bulk operators established over 60 years ago. The average age of the fleet is 7.7 years, 22% younger than the industry average.

Navios Group's total fleet of 201 vessels includes 55 tankers, 47 container vessels and 99 dry bulkers and is a highly diversified public shipping group.

Please turn to Slide 11. The IMF forecasts world GDP growth at 3.3% for 2019 and 3.6% in 2020. Emerging and developing Asian markets, which drive dry bulk demand, are expected to grow at a healthy 6.3% in 2019 and 2020.

Following an improved market during the second half of 2018, Q1 2019 was unexpectedly weak, mainly due to the tragic downburst of the Vale mine in Brazil and severe weather issues in Western Australia that have disrupted iron ore shipments.

Turning to Slide 12, through March 2019, worldwide steel production has increased 4.2% and Chinese production through April is up 10% on the same period last year. The Belt and Road Initiative remains the cornerstone of Chinese economic plans for the next few years and supports steel and power demand domestically and abroad.

After the tragic downburst at a Vale mine in southern area of Brazil, forecasters are reviewing the potential impact on iron ore shipment as the story continues to unfold. With the partial reopening of the Brucutu mine and increased production elsewhere, particularly in the northern flagship S11D mine, Vale expects to sell between 307 million tons and 332 million tons of iron ore this year.

Other Brazilian iron ore exporters such as Anglo American are exporting more than last year and will continue to do so given very high iron ore prices. So far, forecasts are for a decline of about 30 million tons of Brazilian iron ore exports from 2018. Preliminary data for May shows that the pace of Brazilian iron ore exports has picked up from a very slow April, which has helped recently to support cape rates. Also, Australian iron ore exports, hit earlier this year by cyclones, have begun -- have also begun to make up some of their lost exports with high volumes of fixing in the spot market.

China continues to cope with the evolving Brazilian and Australian iron ore export problems by drawing port and [ventures] stocks down and by increasing production of low-quality domestic ore. Chinese port stocks are down by 34 million tons since June of 2018.

Please turn to Slide 13. In 2018, seaborne imports into Asia were up 67 million tons. India and China account for 35 million metric tons of that increase. Other Southeast Asian countries, which have completed new coal-fired power plants and new steel mills account for the balance of the growth.

The Chinese government continues to rationalize domestic coal production, closing down small, inefficient, hazardous mines and encouraging consolidation of large mining groups. This has kept Chinese domestic coal prices high and encouraged imports.

Through February 2019, Indian coal imports were up 17% on steady demand and continued issues with local production. India is expected to surpass China as the largest importer of coal in Asia in 2019. Coal imports to India are expected to grow by a further 5% in 2019.

Turning to Slide 14, worldwide grain 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 have reduced U.S. exports in the 2018-'19 crop year. Instead, Chinese buyers have relied on South American crops. In 2019, the harvests in South America were expected to be near record levels and we continue to see Chinese buyers favoring crops from Brazil and Argentina helping ton miles. Large harvests keep crop prices low helping to encourage further shipments going forward.

Projections are for the worldwide grain trade to grow about 1.3% or about 6 million tons in 2019. A resolution of the U.S.-China trade negotiations should positively impact grain shipments going forward.

Moving to Slide 15, 2019 forecasts are for net fleet growth to be 2.4% lower than 2018. Based on the current order book and discipline in new-vessel contracting, low net fleet growth is expected to continue over the next few years.

Turning to Slide 16, the current order book before nondeliveries is about 11% of the total fleet, which is one of the lowest on record. In addition vessels over 20 years of age are about 8%. Forecasted deliveries compare favorably to the overage fleet.

The expected disruption caused by the IMO 2020 fuel regulations should provide support to the dry bulk market through 2019 and beyond. Tonnage supply will tighten as about 400 vessels from Panamax to VLOCs are currently expected to go to dry dock for extended periods to retrofit exhaust gas scrubbers.

In addition, the expected increase in fuel costs in 2020 provides an incentive to bring shipments forward into the second half of 2019 and slow steam vessels to reduce fuel consumption in 2020.

The added cost for complying with IMO regulations from ballast water treatment systems and fuel regulations are expected to result in scrapping of older vessels going forward.

With demand increasing and improving throughout the rest of the year, and supply restricted and disrupted due to preparations for IMO 2020, rates should continue to improve.

I would now like to turn the call over to our CFO, George Achniotis, for the Q1 financial results. George?

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

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Thank you, Tom, and good morning. Please turn to Slide 17 for the review of the financial highlights of the first quarter of 2019. I would like to remind you that as from November 30, 2018, Navios Holdings consolidates Navios Containers.

Adjusted EBITDA for the quarter excluding the results of Navios Containers increased by 100% to $56 million, compared to adjusted EBITDA of $28 million in Q1 of '18. EBITDA and net income for Q1 in both 2019 and '18 were adjusted to exclude book losses relating to the sale of 2 vessels. In Q1 '19, we recorded a book loss of $5.5 million relating to the sale of the Navios Meridian, a 2002 built Handymax vessel that was sold for $6.8 million net.

In Q1 '18, we recorded a $6.7 million book loss relating to the sale of the Navios ship Achilles, a 2001 built Handymax vessel. The increase in EBITDA is mainly due to an $11 million increase in the equity pickup from affiliated companies, mainly due to the significant improvement in the results of Navios Acquisition, and about $16 million gain from the repurchase of our bonds.

The EBITDA contribution of Navios South American Logistics also increased by about $5 million or 29% due to the improved results of all business lines. The improvement in EBITDA, combined with reduced depreciation and amortization, resulted in an adjusted net income of $237,000 compared to a loss of $34 million in 2018.

Please turn now to Slide 18, where the balance sheet highlights are presented. We continue to maintain a healthy cash balance. As of March 31, 2019, the cash balance was about $129 million compared to $151 million at the end of December '18. The balance sheet reflects the effects of the adoption of the new lease standard. Total assets include $349 million of operating lease assets and total liabilities include $363 million of operating lease liabilities.

I would like to point out that we have no significant debt maturities until 2022.

Over the next few slides, we will briefly review our affiliates. Please turn to Slide 19. Navios Holdings owns 20.5% of Navios Partners, including a 2% GP interest. Navios Partners owns a fleet of 37 vessels, 32 dry bulk and 5 containers. Navios Partners also owns about 34% of Navios Containers. We expect to receive about $3 million in cash dividends from Navios Partners during 2019, and since 2008, we received about $200 million in dividends.

Turning to Slide 20, Navios Holdings owns about 36% of Navios Acquisition. Following the completion of the acquisition of Navios Midstream Partners in December, Navios Acquisition has a fleet of 42 tankers, including 14 VLCCs. We expect to receive about $6 million in cash dividends from Navios Acquisition during 2019, and since 2011, we received about $90 million in dividends.

Moving to Slide 21, Navios Holdings owns about 4% of Navios Containers including the GP interest. Navios Containers has grown its fleet to 30 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 national global select market, marking the next stage in its growth. This concludes my presentation.

At this point, I will 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 [5]

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Thank you, George. Slide 22 provides an overview of the Navios Logistics business. Navios Logistics operates 3 port terminals. These are complemented by our barge feet for river transportation, and product tanker fleet for coastal cabotage trade.

Please turn to Slide 23. Port terminals are the driver of our overall business and we are currently developing a new river port facility in Mato Grosso do Sul in Brazil. The area offers significant potential for exports and imports via the river with the development of new modern infrastructure. We plan to develop a multipurpose river port to service exports of agricultural commodities and imports of fertilizers and fuel. The upriver terminal should create additional volumes for our barge business and transshipment port in Uruguay. We are still in preliminary stages, but we are excited by the opportunity.

Please turn to Page 24. In the first quarter of 2019, EBITDA increased 44% to $24.2 million from $16.8 million in the same period last year. Q1 2019 port segment EBITDA increased 27% to $14.7 million, as all 3 terminals performed better compared to the same period last year. Q1 is a seasonally low quarter for grains. However, the grain terminal generated higher EBITDA compared to Q1 2018, mainly due to an 82% increase in throughput. Of course, 2018 was adversely affected by weather so improvement is overstated compared to normalized conditions.

In the Barge segment, Q1 2019 EBITDA increased 179% to $6 million from $2.1 million in the same period last year, mainly due to more liquid and dry cargo transported as well as lower operating expenses. Cabotage business Q1 2019 EBITDA increased to $3.5 million compared to $3.1 million in the same period last year, mainly due to more operating days.

For Q1 2019, net income was $5.3 million compared to $1 million loss in the same period last year. The increase is mainly attributable to the improved operating performance of all segments.

Please turn to Slide 25. Navios Logistics has a strong balance sheet. Cash at the end of Q1 2019 was $70.8 million compared to $76.5 million at the end of 2018. Net debt-to-book capitalization was 56%, unchanged compared to year-end 2018.

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. 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 your first question is from Noah Parquette with JPMorgan.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [2]

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I wanted to ask -- I guess my first question is on the collateral substitution of the NMM units. Can you talk a little bit about the rationale for that and what kind of options that gives you going forward?

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

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We have done that -- we have used a lot of tanks on the collateral as per the agreement and you have seen that be done numerous times. We thought that that was a more appropriate asset, and we have taken that opportunity. And we continue to -- we prepaid the cape. So this created a free collateral.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [4]

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Okay. And then I want to ask on Logistics. The barge number, I think, EBITDA was the highest in like 2 years. Can you talk maybe what you saw there? I mean, is the soybean trade boosting things? Is the change in iron ore? What was different in Q1, I think, versus previous quarters?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [5]

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I think this is a good question, and we have seen that -- and if you see overall dynamics of Logistics between Q1 last year to Q1 this year, we have seen a 44% increase from below $17 million to over $24 million. Reality all barging has been recovering for -- both on grains and liquids. We have not seen yet an effect on iron ore, which is something that will be additional to this as well as all our other lines of business.

I think what we have seen is, finally, we have seen market stabilizing, and we have seen a recovery. So another very important thing that we think will further enhance, apart from iron ore, our businesses are upstream river port in Murtinho with again bringing grains in an area -- Mato Grosso do Sul has about 16 million of grain, about 6 million -- over 6 million is exported. If we capture some via a more efficient river transportation, that will enhance our barging and -- retaining our port.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [6]

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And for that new port, are you able to -- I mean is it too early to give some idea for CapEx and potentially maybe EBITDA expansion on that? And -- is there -- are there any kind of long-term contracts that you have against that or is that -- is it kind of [backloaded]?

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [7]

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We are -- the CapEx is around $30 million I mean in fully loaded -- on a fully developed stage. We are looking on the grains about -- at a capacity of about 2 million that will give us around circa on a fully committed situation about 2 million. We are starting -- but this is a very early stage. We are just on the process of creating the business and we have a client, which will invoke regional grain houses that we have worked for a long time and this will be something that we will build on that basis.

Also, what it will provide us is it will give us back -- also we will import in the area of fuel and fertilizers to the farmers there. So it's around [3 million] is very beneficial. Of course, as I said, we are building a 2 million grains capacity. It will take time to fully utilize that in a full capacity will be circa around $10 million EBITDA.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [8]

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Great. And I just have one more, this might be a modeling question for George? Looks like there was, I don't know, maybe $22 million gain from the preferred. Was the gain from the tender included in that? And I guess how much of it was -- in that line and how much was for dividends and how much was the gain and will there be another again next quarter?

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [9]

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The gain that we have in our P&L this quarter is from the buyback of the ports. There's no gain from the preferred.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [10]

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Okay. How does...

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [11]

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This is only reflected in the balance sheet. It doesn't go through the income statement.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [12]

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No, when you said net loss is negative $5.3 million but then the income attributable to common stockholders is [$16.4 million], what's the delta there? Usually, the preferred dividend is the difference.

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [13]

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On the EPS you mean?

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [14]

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Yes.

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [15]

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Yes, that's correct.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [16]

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So -- but it increased by $22 million instead of having a preferred dividend. So what's that increase?

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [17]

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Yes. That's from the preferred on the EPS. The difference from the...

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [18]

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From the tender.

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [19]

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Yes.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [20]

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Okay. And then how much was dividends and how much was a onetime gain? That's what I'm trying to...

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Georgios Achniotis, Navios Maritime Holdings Inc. - CFO [21]

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I don't remember the numbers off the top of my head. I can call you up later and give you the details.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [22]

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Okay. We'll take it off-line.

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Operator [23]

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And that is all the time we have for questions at this time. I would now like to hand the call back over to Angeliki for any additional comments or closing remarks.

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Angeliki N. Frangou, Navios Maritime Holdings Inc. - Chairman & CEO [24]

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Thank you. This completes our first quarter earnings.

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Operator [25]

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Thank you, ladies and gentlemen. This concludes Navios Maritime Holdings' Q1 2019 Earnings Call. You may now disconnect.