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Edited Transcript of NMCI.OQ earnings conference call or presentation 5-Feb-20 1:30pm GMT

Q4 2019 Navios Maritime Containers LP Earnings Call

Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Navios Maritime Containers LP earnings conference call or presentation Wednesday, February 5, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angeliki N. Frangou

Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC

* Doris Estrada;Executive Assistant

* Erifili Tsironi

Navios Maritime Containers L.P. - CFO of Navios Maritime Containers GP LLC

* Ted C. Petrone

Navios Maritime Containers L.P. - Director of Navios Maritime Containers GP LLC

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Conference Call Participants

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* Omar Mostafa Nokta

Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst

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Presentation

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Doris Estrada;Executive Assistant, [1]

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Thank you for joining us for Navios Maritime Containers L.P. Fourth Quarter and Full Year 2019 Earnings Conference Call. With us today from the company are Chairman and CEO, Mrs. Angeliki Frangou; Vice Chairman, Mr. Ted Petrone; and Chief Financial Officer, Mrs. Erifili Tsironi. As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors section of Navios Containers website www.navios-containers.com. You will 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'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 Containers. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Containers' 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 Containers' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risk. Navios Containers does not assume any obligation to update the information contained in this conference call.

The agenda for today's conference call is as follows. First, Ms. Frangou will offer opening remarks. Then Mr. Ted Petrone will give an operational update and industry overview. Next, Mrs. Tsironi will review Navios Containers' financial results. And lastly, we will open the call to take questions.

Now I turn the call over to Navios Containers Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [2]

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Thank you, Doris, and Good morning to all of you who joined us on today's call. I am pleased with the results for the fourth quarter and full year of 2019. For the fourth quarter of 2019, Navios Containers reported an $18.2 million of adjusted EBITDA, $5.9 million of adjusted net income and $0.17 of adjusted earnings per unit. For the full year of 2019, Navios Containers reported $59.6 million of adjusted EBITDA, $10.5 million of adjusted net income and $0.30 of adjusted earnings per unit.

Our statements today do not attempt to project the impact of the coronavirus in China, as the facts are developing and the potential damages are too difficult to measure. Prior similar events, such as SARS, suggests that the negative economic impact can be short term. However, China today accounts for about 16% of global GDP compared to 4% when SARS happened. Only time will tell what the actual impact will be. We will monitor the situation carefully.

Slide 6 highlights Navios Containers' strength. We acquired Vessels at prices near scrap value, and we have been building our operating platform through stormy weather. We believe that NMCI offers an attractive platform in the containership segment as we are well positioned for 2020. In 2019 and for the first quarter of 2020, we have benefited from materially improved charter rate environment, having fixed our operating costs while maintaining relatively low leverage.

Slide 7 reviews our accomplishment in 2019. Market rates increased by 66% for the 4,400 TEU container asset class and by 36% for the 3,500 TEU container asset class. As measured in Q4 compared to Q1 2019, our Q4 financial results reflect the strength with adjusted earnings per unit of $0.17. For Q1 of 2020, Navios Containers have charted out 93% of its available days from which we expect to generate $38.2 million of revenue. This does not include any revenue from our index-linked charters.

Our balance sheet is strong. The principal amount of the bank debt is covered by the scrap value of our fleet. Also, we are refinancing our 4 new Panamaxes through a sale-leaseback facility. Compared to the current bank facility of the vessel, the new facility will have an extended duration, reduced margin and an improved age-adjusted amortization profile. As an update to our S&P activity, we did not exercise our right of first refusal on the 10,000 TEU 2011-built containership, which was subsequently sold to a third party. As I mentioned in the previous quarter, we have revenue visibility through the extension of charters of the 2 10,000 TEU vessels through May 2024. We also have cost visibility as we renew the management agreement, which fixes operating cost for a 2-year period.

Slide 8 highlights our cost structure and shows our expected cash breakeven for 2020. Approximately 46% of our available days are fixed or fixed with index-linked charters. Our days contracted on fixed rates provide for an average rate of $17,066 net per day. Our total cost is estimated at $11,931 per day and are 6,316 open and index-linked days provide a low breakeven of $8,437 per day. Assuming current charter rates observed in the market, we expect to generate about $91 million in revenue for 2020. Our total cost includes operating expenses, general and administrative expenses, interest expense and capital repayment.

Slide 9 shows our liquidity. As of December 31, 2019, we have total cash of $18.1 million and total debt of $245.7 million. And our net debt to book capitalization is 52.2%. Moreover, we have no sizable debt maturities until 2022.

At this point, I would like to turn the call over to Mr. Ted Petrone, who will take you through our fleet operation and the industry overview.

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Ted C. Petrone, Navios Maritime Containers L.P. - Director of Navios Maritime Containers GP LLC [3]

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Thank you, Angeliki. Please turn to Slide 11. Navios Maritime Containers' diversified fleet consist of 29 vessels with an average age of 11.6 years, totaling approximately 143,000 TEU. The fleet is split between new and baby Panamaxes and consists of 4 new Panamaxes ranging from 8,204 TEU to 10,000 TEU, and 25 baby Panamaxes ranging from 3,450 TEU to 4,730 TEU.

Please turn to Slide 12. Our charting strategy revolves around leveraging stable cash flow from the new Panamaxes while capturing market opportunity from the baby Panamaxes. We seek protection from market volatility by obtaining charters of different durations in order to better manage market cyclicality. For the first quarter of 2020, approximately 93% of our fleet's available days are fixed excluding index-linked charters. We continue to monitor the market and look to gradually charter out our fleet at recovered rates.

Turning to Slide 14. The IMF projected global GDP growth at 3.3% for 2020 and 3.4% for 2021. Increases in container trade have generally grown at a higher rate than world economic growth due to the containerization of former break bulk cargoes as well as increased container ton-miles as retailers and advanced economies seek cheaper product production centers around the world that are farther from existing consumers.

On the back of global economic growth, including the current effects of the U.S.-China trade war and associated Phase 1 trade deal, container trade is forecasted to rise by 2.8% in 2020. While it is too early to gauge the full impact of the coronavirus on world container trade, economic indicators continue positive. Initial industry reports remain unchanged on the back of the initial response by both China and the international community to this latest viral outbreak.

Please turn to Slide 15. Phase 1 of the U.S.-China trade deal was signed on January 15. Under this agreement, China has agreed to buy an additional $200 billion of U.S. goods and services over the next 2 years as compared to the 2017 baseline, $77.7 billion of which will be in the form of manufactured goods. In 2017, China imported about $101.3 billion worth of U.S. manufactured goods. The envisioned expansion of manufactured imports would increase the value of U.S. exports to China by about 75% over a 2-year period with a continuing escalation of U.S. exports to China from 2022 to 2025.

Turning to Slide 16. Fleet growth for 2019 equaled 4% on deliveries of 1,058,000 TEU, less 179,000 TEU of demolitions. Projected net fleet growth for the full year of 2020 is at 3.1% which should support time chartered levels. We also note that vessels over 20 years of age equal about 7.4% of the fleet.

New IMO regulations for ballast water treatment systems as well as a 0.5% global sulfur cap restrictions should accelerate scrapping of older, less-efficient vessels. Effective fleet capacity for 2020 should be reduced by approximately 2% as owners retrofit scrubbers. Additionally, in response to rising fuel costs expected due to IMO 2020, the average fleet speed could reduce by 0.5 knots absorbing about [2.5%] of fleet capacity. Applying the speed reduction alone to the current net fleet growth estimate of 3.1% would result in an effective net fleet growth rate below 1% in 2020. Scrubber retrofits and speed reductions are expected to lower effective fleet growth to a good portion of 2020.

Turning to Slide 17. The current orderbook before nondeliveries is historically low at about 10.6% and is considerably below the average of 30% over the last 2 decades. Approximately 60% of the current orderbook is for vessels of 13,000 TEU or larger, and 80% is for vessels of 10,000 TEU or larger. There is no orderbook for the baby and new Panamaxes.

Turning to Slide 18. Containership idle capacity adjusted for scrubber retrofits stood at 2.2% at the end of January, a marked decline from the 4.3% peak reached at the beginning of March last year as slow steaming and scrubber retrofits decreased fleet efficiencies. About 1.5% of total fleet capacity is out of service in 2019, as owners retrofitted scrubbers in advance of the IMO 2020 coming into force. Approximately 1.9% of the fleet is expected to be out of service in 2020. About 3.1% of the fleet over 8,000 TEU is expected to be absorbed in 2020 as retrofits take longer than initially expected.

Turning to Slide 19. Since the beginning of 2014, there has been a net decrease of 128 containerships in the 4,000 to 5,100 TEU segment. This was led by a record 60 vessels or 272,400 TEU scrapped in 2016 and only 3 deliveries since then, with no deliveries since the end of 2017. Decreased fleet size and increased fleet deployment, particularly in intra-Asia trading, has been instrumental in supporting time charter rates for this segment.

Please turn to Slide 20. Post the expansion of Panama Canal in 2016, there has been a shift in trading patterns which has caused greater need for baby Panamaxes that have shallow drafts and shorter lengths. This is a result -- about 75% reduction in Panamax vessels used for the Far East to North American trade, but an increase in these vessels being used in the high-growth regions for intra-Asia and Africa. The baby Panamax share of intra-Asia trade has increased by about 90% from 2012, making its [size] with the highest deployment growth in this trade. Intra-Asia trade is forecasted to grow by 3.6% in 2020, higher than the overall container trade.

Turning to Slide 21. Approximately 60% of global trade utilizes vessels in the 7,500 to 10,000 TEU size range. Disruptions in the container trade such as the expansion of the Panama Canal in 2016 have created favorable dynamics for certain vessel sizes that have benefited from the increased demand from redeployment across trade lanes while their orderbooks remain nonexistent. The fundamentals for new Panamaxes remained positive.

Turning to Slide 22. Before the Panama Canal expansion, the primary trade route for these vessels was the Far East to Europe trade. While these routes increasingly use larger vessels, the growth in trade for vessels in the 7,500 to 10,000 TEU size range in other routes has more than offset the reduced use in the Far East to Europe trade route.

Thank you. This concludes my review, and I'd like to now turn the call over to Navios Maritime Containers' CFO, Erifili Tsironi, for the Q4 financial results. Eri?

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Erifili Tsironi, Navios Maritime Containers L.P. - CFO of Navios Maritime Containers GP LLC [4]

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Thank you, Ted, and Good morning all. I will briefly review our unaudited financial results for the fourth quarter and year ended December 31, 2019. The financial information referenced is included in the press release and summarized in the slide presentation available on the company's website.

As shown on Slide 24, revenue for the fourth quarter of 2019 increased to $39 million compared to $34.4 million for the same period in 2018. The increase was due to the increase in both the number of vessels operating during the period and the charter higher rates. More specifically, our available days in the fourth quarter of 2019 increased by 13% to 2,576 from 2,281 in the fourth quarter of 2019.

Our time charter equivalent rate for the fourth quarter of 2019 was $14,615 per day, compared to $14,387 per day for the fourth quarter of 2018, despite the expiration of some of our legacy contracts that were fixed on higher rates.

Adjusted EBITDA for the fourth quarter of 2019 was $18.2 million compared to $15.3 million in the same quarter last year. The $2.9 million increase in adjusted EBITDA was primarily due to a $4.6 million increase in revenue, a $0.5 million decrease in time charter voyage and other expenses, partially offset by a $1.9 million increase in management fees and general and administrative expenses as a result of the expansion of our fleet, and a $0.3 million increase in other direct vessel expenses.

Effective January 1, 2020, our management fees for the vessels, excluding drydocking expenses and including the $50 per day technical and commercial management fee are fixed for a 2-year period at $6,265 per day for our baby Panamaxes, $7,830 per day for our post 8,000 TEU containers and $8,320 for our post 10,000 TEU containers.

Net income for the fourth quarter of 2019 was $2.9 million compared to a $0.2 million net loss for the same period in 2018. Net income for the fourth quarter of 2019 was affected by a $3 million expense relating to a vessel purchase option that was not exercised. Net loss for the fourth quarter of 2018 was affected by $2.6 million expense relating to the company's listing on a U.S. exchange. Excluding these items, adjusted net income for the 3 months ended December 31, 2019, increased by 146% to $5.9 million compared to $2.4 million for the same period in 2018. The $0.5 million increase was mainly due to a $2.9 million increase in adjusted EBITDA, a $1.1 million decrease in depreciation and amortization expenses relating mainly to the lower amortization of intangible assets and a $0.1 million decrease in the interest expense and finance cost net, partially offset by $0.6 million increase in amortization of deferred drydock and special survey costs relating to the increase in the size of the fleet.

Moving to the full year 2019 operations, revenue was $141.5 million compared to $133.9 million in 2018. The $7.6 million increase was mainly due to the increase in the number of vessels operating during the year, resulting in 10,261 available days compared to 8,442 available days for 2018. The increase in revenue due to more available days were partially offset by the decrease in time charter rates, reflecting primarily the expiration of certain legacy time charter contracts.

Time charter equivalent rate per day declined by 14% to $13,232 in 2019 compared to $15,369 for 2018. Adjusted EBITDA for 2019 decreased to $59.6 million compared to $69.3 million in 2018. The decrease in EBITDA was primarily due to a $16.2 million increase in expenses mainly relating to management fees, general and administrative expenses and time charter and voyage expenses as a result of the expansion of our fleet and a $0.6 million in other income net and a $0.5 million increase in other direct vessel expenses. The overall increase in the above expenses was partially offset by $7.6 million increase in revenue.

Net income for 2019 was $7.5 million compared to $12.7 million in 2018. Net income for 2019 was affected by a $3 million expense relating to a purchase option that was not exercised. Net income for 2018 was affected by a $5 million expense relating to the company's listing on a U.S. exchange. Excluding these items, adjusted net income for 2019 decreased to $10.5 million compared to $17.7 million in 2018. The $7.2 million decrease in adjusted net income was mainly due to a $9.7 million decrease in adjusted EBITDA, a $5.1 million increase in interest expense and finance cost net and a $2.4 million increase in amortization of deferred drydock and special survey costs as a result of our fleet expansion. Partially offset by a $10 million decrease in depreciation, amortization expenses, relating mainly to the lower amortization of intangible assets.

Please turn to Slide 25 for the balance sheet highlights. As per December 31, 2019, cash and cash equivalents, including restricted cash, was $18.1 million. Long-term borrowings, including the current portion and the seller's credit net of deferred fees amounted to $245.7 million. We retain a comfortable leverage level with financing that has attractive pricing and repayment profile. We have no maturities under our bank and leasing facilities until 2022. As per December 31, 2019, the book value of our equity was $190 million. Net debt to book capitalization was 52%.

I'll now pass the call back to Angeliki for any closing remarks. Angeliki?

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Omar Nokta with Clarksons Platou.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [2]

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Yes. So yes obviously, a very good quarter, the best quarter of 2019. And the rates you guys have been achieving have been getting better and better. As we could tell, you've entered into several new time charters where you could tell that earnings are going to continue to push higher. As we think about -- you mentioned a lot of the uncertainty with the coronavirus. Do you have a sense of what's happening, snapshot, right now in the chartering market from, say, the charter's perspective? Have you noticed any sort of initial takeaways on how they're viewing vessels that are coming up for rehire? Any sort of change in how they're acting or behaving?

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [3]

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Good morning, Omar, you're right. We came in 2020 very well positioned. And we have over 90% of our fleet available days fixed at a very good rate. But basically, the corona -- so we are well positioned in Q1. But we see that the coronavirus is an unknown, it's a negative unknown. What we will say is that in -- usually -- the usual reaction of charters is to come back a couple of weeks after the Chinese New Year for renewal of services. What we have seen is that a lot of these inquiries have been postponed for later in March. So I think every -- at this point, there is no really -- nobody can really tell you. I mean I've seen the reports giving different growth percentages -- reduction on growth. But it's really very early to really make that determination. The one thing that we know is that you have factories closed. That means there will be -- with an extended Chinese New Year, that means until they come back, production will be delayed.

And of course, then you have the additional event of consumption as basically China -- a lot of people are trying to compare this to the SARS epidemic virus. But the one thing that we have to be -- to think about is that China at that time was a first -- 4% of the world GDP. Today, China is 4x that. It represents 16%. So nobody really can know but we are very [agree] to that. The very good thing is that we are nicely covered for Q1, so that gives us time to take advantage of opportunities.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [4]

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Yes. That's helpful. And when you think about some of the delays potentially and enter into sort of negotiations and set up in February, it's going to be in March. Is that -- would you say that's kind of across the board charters as a whole? Or is it more just the Chinese charters?

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [5]

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It is -- we are seeing it a lot on the -- in the region of Asian -- future of all the charters. I mean they delay their requirements until they see what is actually happening. So -- but don't forget that purchases cannot -- I mean if you have an extended Chinese vacation, cargoes don't go in, don't go out. It's whatever is already in the system basically. So we will need to assess the situation. Basically -- take, for example, I mean -- and you can see it from shipyards from everywhere. There is basically no activities, whatever work is remaining in the shipyards will work, whatever -- people cannot move unless we see some kind of what is in the next day, which will happen, let's say, after Monday where they reopen. So we need to see how this -- the factories and consumption will react.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [6]

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Yes. That definitely -- that makes sense. And sort of next sort of question was, the body language that you guys have had over the past couple of quarters has maybe indicated this or you previewed this but with respect to the purchase option on that 10,000 TEU ship, you -- it looks like you declined to exercise it. It's been subsequently sold to someone else. Maybe just any reason for why you wouldn't have wanted to acquire the vessel?

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [7]

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It would have stressed our balance sheet. I mean we already have bought 4 new Panamaxes that created a lot of stable cash flows. But in order to do that acquisition, we'll have to stress our balance sheet, and we like to be conservative. I mean it's part of a balanced approach.

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Omar Mostafa Nokta, Clarksons Platou Securities, Inc., Research Division - Head of Shipping Research & Analyst [8]

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Okay. And maybe just finally then, when we think about the fleet, you're obviously very -- obviously it's very sort of heavy in the Panamax of 3,000 to 4,500 TEU segment. When we think about whether it's fleet renewal or fleet additions, is that where you prefer to focus? Or would you still would like to go higher, assuming that you don't have to worry about stretching out the balance sheet?

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [9]

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Listen, the 4,250 has been the majority of our vessels. [These are 4,250s] except 2. The reality is that 4,250 has been -- we took the opportunity when vessels reposition from what used to be old Panama Canal to really in intra-Asia trade. And if you see, as Ted has been talking about, you see a tremendous redeployment in that segment. But the reality -- at that time, we're buying it at a scarp plus. So it was a good opportunity. I think today, what we are looking -- it depends whether the economic -- the deal that makes economic sense.

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Ted C. Petrone, Navios Maritime Containers L.P. - Director of Navios Maritime Containers GP LLC [10]

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I think we like -- as we said, we came into the year well positioned. We -- outside of corona, the supply and demand fundamentals are very good across the board. We particularly like the asset classes that we're in because there's no orderbook for them. And if you look at a non-mainline trade, specifically, say, intra-Asia, it's growing higher than the world trade will grow. And it has been and it will continue to grow, it looks like, going forward. So we think we're very well positioned in this asset class, and let's see what comes up if -- and look you talked about maybe there's opportunities this year.

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [11]

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One other thing that I'd like to add, I mean, we like the opportunities on both segments. The difference is on the larger vessels, we are talking of far bigger investment. So you can be a little bit more nimble on the smaller size because that doesn't -- if you find the right opportunity, it may not request the amount of capital that we need on a much larger transaction.

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Operator [12]

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I would now like to turn the call back over to Angeliki.

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Angeliki N. Frangou, Navios Maritime Containers L.P. - Chairman & CEO of Navios Maritime Containers GP LLC [13]

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Thank you. This completes our quarterly results.

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Operator [14]

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