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Edited Transcript of NNA earnings conference call or presentation 21-Aug-19 12:30pm GMT

Q2 2019 Navios Maritime Acquisition Corp Earnings Call

Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Navios Maritime Acquisition Corp earnings conference call or presentation Wednesday, August 21, 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 Acquisition Corporation - Chairman & CEO

* Leonidas Korres

Navios Maritime Acquisition Corporation - CFO & Director

* Ted C. Petrone

Navios Maritime Acquisition Corporation - Director

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Conference Call Participants

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* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

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Presentation

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Operator [1]

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Thank you for joining us for Navios Maritime Acquisition Corporation's Second Quarter 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, Mr. Leonidas Korres.

As a reminder, this conference call is being webcast. To access the webcast, please visit the Investors section of Navios Acquisition's website, at www.navios-acquisition.com. You'll see the webcast link in the middle of the page, and a copy of the presentation referenced in today's earnings conference call can also be found there.

Now I'll review the safe harbor statement. This conference call could contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Acquisition. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Acquisition's management and are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Acquisition's filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Acquisition does not assume any obligation to update the information contained in this conference call.

The agenda for today's conference call is as follows: We'll begin this morning's call with formal remarks from management team. And after, we'll open the call to take questions. Now I turn the call over to Navios Acquisition's Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

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Angeliki N. Frangou, Navios Maritime Acquisition Corporation - Chairman & CEO [2]

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Thank you, Laura, and good morning to all of you joining us on today's call. I'm pleased to report that for the second quarter of 2019, Navios Acquisition recorded revenue of $58.6 million and EBITDA of $24.5 million; increases of about 40% and 130%, respectively, over the second quarter of 2018.

We continued to return capital to our investors. We declared a quarterly distribution of $0.30 per share for the second quarter, reflecting a current yield of about 21.6%. In addition, we repurchased about 735,000 shares under our share repurchase program.

Slide 4 presents some company highlights. NNA has a core fleet of 41 diverse tankers with an average age of 8.1 years. We also have material investments in the 2 Navios Europe entities net of 24 vessels. At the end of the second quarter of 2019, we had $80.6 million in receivable from these entities.

We enjoy significant cash flow visibility. We have $430 million in long-term contracted revenue and have fixed 90.2% of total available days for 2019. About 67% of these days are fixed on the base rate, of which 70% have profit sharing. About 23% of 2019 available days are fixed on floating rate. These charters are with a diverse group of first-class counterparties. We expect to generate more than $200.3 million of contracted revenue from our base rate charters in 2019.

Slide 5 highlights our key developments. We have spent quite a bit of time thinking about and working towards a refinancing of our TLB. We are pleased to announce that we expect to prepay this $196.8 million balance within the second half of 2019. In addition to refinancing the term loan B, debt reduction is a priority. We expect to reduce debt by 3% or $33.4 million by prepaying a total of $218.3 million in debt through $184.8 million in proceeds from new financing arrangements, proceeds from vessel sales and utilization of our balance sheet cash.

As to the recent key activity, we began renewing our fleet in 2018, when asset values were weakened. Since then, we have been selling older vessels and committing to a new bareboat charters. Year-to-date, we sold 3 of our old VLCCs and committed 3 newbuild VLCCs under bareboat contract, which will be delivered in 2020 and 2021. We view these bareboat deals as providing a reasonable financing for acquiring new vessels without initial capital outlay.

Slide 6 details our financing efforts for the term loan B. The outstanding balance of the term loan B of $196.8 million will be repaid using proceeds from $15 million Japanese lease facility, $138 million Chinese leasing facilities, $31.8 million of bank lease facility, which is subject to approval, and $12 million of cash from our balance sheet.

Slide 7 shows our liquidity position. We have $42 million in cash as of June 30, 2019, and $67.2 million in cash pro forma for the sale of the Nave Electron. And net debt to book capitalization is 74.2%. We have fully funded our growth CapEx pro forma for the repayment of the term loan B. We do not have any significant debt maturities until 2021.

Slide 8 shows the expected cash flow breakeven for the second half of 2019. 83.1% of our available days are fixed at an average rate of $17,994 net per day. Our daily cost is about $17,979 per day, and our 2,997 open-plus-floating-rate days are expected to provide a breakeven of $17,956 per day. Our daily cost calculation includes fixed operating expenses, dry-docking amortization, general and administrative expense, interest expense and capital repayment.

Slide 9 shows our expected cash flow potential. For the second half of 2019, we have 2,997 open days plus days contracted on floating rates. Therefore, NNA fleet is expected to generate significant free cash flow. At forward rate, rated by NNA fleet, we will generate about $20 million of free cash flow.

At this point, I'd like to turn the call over to Mr. Ted Petrone.

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Ted C. Petrone, Navios Maritime Acquisition Corporation - Director [3]

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Thank you, Angeliki, and good morning all. Please turn to Slide 11.

Navios Acquisition diversified fleet consists of 41 vessels with an average age of 8.1 years, totaling $5.5 million deadweight. The fleet consists of 13 VLCCs, 8 LR1s, 18 MR2s product tankers and 2 chemical tankers. 3 VLCC bareboat new buildings are scheduled for delivery in 2020 and '21.

Please turn to Slide 12. Slide 12 details our chartering strategy, which we use to balance market opportunity and credit risk. We seek protection from market volatility by obtaining charters of different durations in order to better manage the market cyclicality.

In 2019, about 57.7% of our fleet available days are fixed at a base rate or a base rate plus profit sharing, and about 25.4% are fixed on floating rates. We continue to monitor the market and look to gradually charter out our fleet at recovering rates. Any market improvement will be captured through one of 3 methods: one, days with fixed rates; two, days with floating rates; or three, days with base rates plus profit sharing.

Please turn to Slide 13. Navios Acquisition continues its policy of locking in secured cash flow with creditworthy counterparties. Our fleet has secured about $430 million in long-term contracted revenue. Through the middle of August, we extended the coverage of our fleet for approximately 8 years via new fixtures, continuations and exercised optional periods at higher levels, in some cases with profit sharing.

Please turn to Slide 14. Slide 14 shows in detail our current charters with their respective expected expiration dates. Our chartering strategy revolves around capturing market opportunity while also developing dependable cash flow from a diverse group of first-class charters. Through our profit-sharing arrangements, we can capture and benefit from market improvement over our current charter rates.

Turning to Slide 16. The IMF projected global GDP growth at 3.2% in '19 and 3.5% in 2020, with emerging and developing markets growing at 4.1% in '19 and 4.7% in 2020. The main structural drivers going forward are moderate VLCCs fleet growth, increasing demands from Asian economies, particularly China and India, and increasing supply from the Atlantic basin.

Turning to Slide 17. The April record of 12.2 million barrels per day solidifies the U.S. as the world's largest crude oil producer. The U.S. crude exports have continually expanded since 2015, when it's first reauthorized reaching a record 3.1 million barrels per day in June of this year from almost 0 in 2012.

In terms of ton miles, the movement of crude from the Atlantic basin to China uses about as many VLCCs as the movement from the Arabian Gulf, even though the Arabian Gulf shipped about 2x of oil to China. Increases in Atlantic basin crude going to the Far East will continue to create more demand for VLCCs as U.S. export capacity increases, U.S.-China trade issues get resolved and Atlantic basin countries begin and expand export over the next couple of years. In this short term, measures such as Saudi Arabia's expansion of crude shipments from Yanbu to avoid the Strait of Hormuz will add approximately 10% to typical AG Far East VLCC round trip voyages.

Please turn to Slide 18. In July, 0.8% of the VLCC fleet was out of service due to scrubber retrofitting. The supply of VLCCs that are scheduled to be out of service for the remainder of this year is set to increase to about 2.7%. This should tighten vessel availability and support time charter rates. Overall, 2.1% of the crude tanker fleet is expected to be out of service due to retrofitting.

Please turn to Slide 19. Net fleet growth through last year equaled 5.4% with 45 deliveries against 6 removals. We note that while the order book shows 77 Vs, as of August 12, there are 119 Vs over 17 years of age. With the upcoming IMO 2020 and Dallas Water management regulations, that will lead to some vessel retirements. We believe that the order book and fleet are well balanced.

Turning to Slide 21. According to the IEA, refinery capacity is expected to increase by 13.7 million barrels per day from 2019 to 2024, including all additions, expansions and upgrades. About 74% of that capacity will be added in Asia and the Middle East, with the EIA projecting China and other non-OECD Asia to increase refinery capacity by 5.2 million barrels and 2.4 million barrels, respectively.

Turning to Slide 22. U.S. crude production has risen about 130% since the end of 2008, reaching 12.2 million barrels in April this year, highest level of production since record start in 1920. The U.S. has increased its total product exports by about 500% to about 5.5 million barrels per day since 2004.

Please turn to Slide 23. Record refinery maintenance peaked in May at 7.4 million barrels per day, partly due to preparations for increasing product demand associated with IMO 2020. For the balance of the year, refinery capacity is set to rise by approximately 4 million barrels per day due to a combination of new refinery additions and a significant reduction in refinery maintenance as refineries get ready for this historic fuel switch.

Please turn to Slide 24. Through July of this year, the fleet grew 3.2% on deliveries of 5.7 million deadweight less 0.5 million deadweight of demolitions. About 5.8% of the product fleet is 20 years of age or older. As of August 1 of this year, there were 192 product tankers on order and 362 which are 17 years of age or older. The total order book is much less than those ships 17 years of age and older, particularly given historical nondelivery rates, the coming Dallas Water and IMO 2020 rules and scrap prices that remain high. As a result, projected net fleet growth for 2019 is 3.9%, the second lowest growth in 5 years, which should support current time charter levels.

Thank you. This concludes my review, and I would like now to turn the call over to Leonidas Korres for the Q2 financial results.

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Leonidas Korres, Navios Maritime Acquisition Corporation - CFO & Director [4]

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Thank you, Ted. I will discuss the financial results for the second quarter and the 6-month period ended June 30, 2019.

Please turn to Slide 26. Revenue for Q2 2019 increased by 41.2% to $58.6 million from $41.5 million in Q2 2018, reflecting the increased fleet of Navios Acquisition following the merger with Navios Midstream Partners and the improved rate environment compared with the same period last year.

In Q2 2019, we had 99.8% fleet utilization. We achieved a time charter equivalent of $15,525 per day, improved from the $13,260 per day achieved in the second quarter of 2018. Time charter and voyage expenses of $4.2 million mainly reflect expenses relating to our vessels support voyage during the quarter.

Operating expenses were $26.5 million and G&A expenses were $6.8 million. EBITDA for Q2 2019 increased by more than 2x to $24.5 million from $10.7 million in Q2 of 2018. Other expenses include depreciation and amortization of $17.3 million and interest expense and finance cost of $23.7 million. As a result, we reported a net loss for the quarter of $16.6 million.

Turning to the financial results for the 6-month period ended June 30, 2019. Revenue increased by 54.9% to $135.7 million from $87.6 million last year, reflecting a time charter equivalent of $17,635 per day and a 99.8% fleet utilization. Operating expenses were $54.4 million and G&A expenses were $11.9 million. EBITDA for the first half of 2019 increased by more than 3x to $66.1 million from $19.5 million in 2018. Depreciation and amortization was $35 million and net interest expense and finance cost was $46.6 million. As a result, we reported a net loss of $15.7 million.

Slide 27 provides selected balance sheet data as of June 30, 2019. Cash and cash equivalents including restricted cash was $42 million. Pro forma for the sale of Nave Electron VLCC, our cash position increases to $67.2 million. Vessels' net book value was $1.3 billion. Total assets amounted to $1.6 billion. And total debt as of June 30, 2019, was $1.2 billion, resulting to a net debt to book capitalization ratio of 74.2%.

Please turn to Slide 28. As Angeliki mentioned, we expect to prepay our term loan B within the second half of 2019. The new credit facilities, that will replace the term loan B consist of the following: $15 million sale and leaseback arrangement with the majority of 5 years and interest of LIBOR plus 345 bps per annum to finance 1 product tanker. This facility was drawn in Q3 2019, and the net proceeds were used to partially prepay the term loan B. Up to $90.8 million sale and leaseback arrangement to finance 6 product tankers, which will be repaid through an average period of 6.4 years in consecutive quarter installments with an interest of LIBOR plus a margin ranging from 335 to 355 bps per annum, depending on the vessels financed. Up to $47.5 million sale and leaseback arrangement that will finance 3 product tankers, which will be repaid through an average period of 5.5 years in consecutive quarterly installments with an interest of LIBOR plus a margin ranging from 350 bps to 360 bps per annum, depending on the vessels financed. In addition, NNA is in advance discussions with a commercial bank for a bridge facility of up to $31.8 million to finance 1 VLCC. Following the completion of all the above financing arrangements, along with the recent repayment of $21.5 million bank facility, our debt is expected to decrease by 3% or $33.4 million.

Turning to Slide 29. As for return of capital to shareholders for the second quarter, we declared a dividend of $0.30 per share, equivalent to $1.20 on an annualized basis. The dividend will be paid on October 9, 2019 to shareholders on record as of September 25, 2019. We have also repurchased 0.7 million common shares through our share repurchase program, providing an additional 5.4% return to our stockholders.

And now I would like to pass the call to Angeliki for her final remarks. Angeliki?

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Angeliki N. Frangou, Navios Maritime Acquisition Corporation - Chairman & CEO [5]

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Thank you, Leo. Please, open this call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [2]

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I wanted to ask specifically about Slide 18. You guys, on that highlight, some of the tankers out of service due to scrubber retrofit. When we think about 2020, give a sense of what these numbers might look like. How much carryover potential is there? I don't think that everybody's going to get in for scrubber installs before year-end 2019. Do we have some dynamic that plays out that could help sort of soften the wave of deliveries or early fit the normal sort of scheduled delivers that we would expect next year?

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Angeliki N. Frangou, Navios Maritime Acquisition Corporation - Chairman & CEO [3]

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Chris, what we have seen is something expected. I mean the actual delays on the dry dock is quite significant. I mean we are seeing creeping from -- we always thought it will be around 45 days and we are seeing that this is going over 60 days plus, a huge delay. Shipyard cannot really deliver the time line. The spill over you've heard will definitely be Q1 and most -- over 2020. Now the one thing you can see is that the VLCC environment is strong. I mean we are talking about today around $40,000, previous charter is about 50% above what you had in the beginning of the year. And you're looking at rate -- forward rate of over $55,000. Even though -- and this is going to continue. Yes, one is the delays on the dry dock, but also I think it's a matter of -- as Ted said, that it's a longer-term mile because of exports from our client base. So you have the fundamental, something that we recognized early on. And here you have owners to heave both sides, meaning they are taking vessels off service on the period that we make the most profitable period. And -- but on the other side, we see also that strong mile demand is expanding.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [4]

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Okay. You have 2 different sides of it. You have demand as well as supply sort of interacting there. And just want to make sure I'm clear, while you didn't give a number, the expectation is for some of this dry-docking delay to spill over into 2020, right? There should be some dynamic of that at least in the first half of next year. Is that a fair way to think about it?

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Angeliki N. Frangou, Navios Maritime Acquisition Corporation - Chairman & CEO [5]

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Yes. Definitely. I mean we have seen the situations that are extremely -- I mean vessels are waiting to enter dry docks. You're seeing even regular dry docks without scrubbers being extended to 20, 25 days. So I think these are very, very long queues. Equipment is not delivering on time, overruns. I mean that is something we are seeing very, very much around the market.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [6]

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Okay. Got it. And then further sort of thinking about the VLCC fleet. This is a semi-unique year in terms of the fleet growth being relatively elevated, nondeliveries being relatively low. When you think about sort of turning the page into 2020, given the dynamics with IMO, should we expect a sort of resurgence on some of those either nondelivery numbers? Or how do you think about scrapping next year?

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Angeliki N. Frangou, Navios Maritime Acquisition Corporation - Chairman & CEO [7]

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I think you have now long experience in shipping. You know that when there is a strong environment, people don't scrap. But the reality is that you have a part of the fleet that has arrived to show sterile conditions out there, they will go to scrap. The most important thing I'll say from supply point of view is that the order book next year is about 9 million deadweight tons for VLCCs versus double this year. So if you have a little bit of a softer market at one point or another, it's seasonal. Or -- and you have half of the deliveries that gives you -- and basically, you have no orders that have been placed in -- right now. No new orders. I think that gives you a good situation.

So it is what it is. The order book is what we see. We absorbed it this year. And next year, we are having a very, very modest order book, less than 50% of this year; and the year after, almost nothing. So -- and no new orders, which I think is very critical. So it is what we see right now. Ted wants to...

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Ted C. Petrone, Navios Maritime Acquisition Corporation - Director [8]

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I just want to say, Chris, that the -- overall the order book is less than 10% on the Vs. So it's very low, historically. So -- and we've got high rates in the face of record deliveries at the beginning of the year, the first half of the year which just peaked, as Angeliki said.

So besides the whole IMO issue, these yards, looks like some of them -- many of them underestimated the task. Supply and demand fundamentals are better. There's more -- there's longer ton miles. There's -- U.S. gulf exports improved. The Iranian story just isn't going to go away pretty soon. You got all those refineries opening up in the Far East. They have to be fed with the crude. So I think going forward, the forward curve is telling you something.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [9]

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Yes. Okay. Got it. That's very helpful. And then I wanted to focus a little bit on the balance sheet. Obviously, some progress being made with the 2020 maturities. I know it's a little early yet, but let's -- what are the thoughts or potential options on the table for 2021? So obviously, a bigger number that needs to be sort of tackled at that point, how do you think about that? And sort of when should we think about hearing more from a timing perspective about what you may do around the 2020 maturities -- 2021 maturities that you see?

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Angeliki N. Frangou, Navios Maritime Acquisition Corporation - Chairman & CEO [10]

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Yes. This is something that we are constantly looking. I mean debt reduction is part of our thoughts. We worked on the term loan B, which we worked from last year. We got concluded all the financings. The next thing in it is just the bonds, which yes, as we always -- we are always opportunistic on debt repayments. And also we have a good fleet of assets that we have with our bonds and that is an additional 63 that we have and it will be used.

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Operator [11]

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That is all our questions for today. I would now like to turn the call back over to Angeliki Frangou for any closing comments.

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Angeliki N. Frangou, Navios Maritime Acquisition Corporation - Chairman & CEO [12]

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Thank you. This concludes our quarterly results.

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Operator [13]

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