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Navios Maritime Partners L.P. (NMM) Q4 2018 Earnings Conference Call Transcript

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Navios Maritime Partners (NYSE: NMM)
Q4 2018 Earnings Conference Call
Jan. 1, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

-- for Navios Maritime Partners fourth quarter and full-year 2018 earnings conference call. With us today from the company are Chairman and CEO Miss Angeliki Frangou, Chief Financial Officer Mr. Efstratios Desypris, and Executive Vice President of Business Development Mr. George Achniotis. As a reminder, this conference call is being webcast. To access the webcast, please go to the investor section of Navios Partners website at www.navios-mlp.com. You'll see the webcasting link in the middle of the page, and a copy of the presentation referenced in today's earnings conference call can also be found there.

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

The agenda for today's call is as follows. First Miss Frangou offer opening remarks. Next Mr. Desypris will give an overview of Navios Partners' financial results. Then Mr. Achniotis will provide an operational update and industry overview, and lastly, we'll open the call to questions. Now I turn the call over to Navios Partners Chairman and CEO Ms. Angeliki Frangou. Angeliki?

Angeliki Frangou -- Chairman and Chief Executive Officer

Thank you, Laura, and good morning to all of you. Join us on today's call. I'm pleased with the results of the fourth quarter and full year of 2018. For the fourth quarter of 2018, Navios Partners reported 71 million of EBITDA and 5.1 million of adjusted net income. For the full year of 2018, Navios Partners reported 159.1 million of EBITDA and 56.7 million of adjusted net income. Market improved in 2018, and as a result of [inaudible] premium rate for our dry bulk fleet was 18% higher than 2017. We declared a quarterly distribution of 2% per unit for the fourth quarter. We're presenting a current yield of approximately 8%.

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As you can see from slide 5, NMM owns 38 vessels. Nearly two years ago we leveraged the weakness in the container sector by establishing Navios Containers. NMM owns 33.5% of NMCI, which has grown to 30 vessels. Today Navios Containers trades on NASDAQ and has a strong balance sheet and competitive positions.

Slide 6 sets forth the reasons we believe that Navios Partners is a premier dry bulk fleet [inaudible]. Based on the charter age of last Friday, Navios Partners should generate about $65 million of free cash flow for 2019. We have also decreased our net debt/book capitalization we are in 2018 after more debt, 34.7%, a 6% decrease compared to here in 2017. Moreover, we have no debt maturities until the third quarter of 2020.

Slide 7 highlights our records of returning custom to our unitholders. We rewarded our unitholders with an $18 million in distribution for the full year of 2018. These distributions include $10.7 million in cash distribution equating to eight $0.08 per unit annually and a $4.2 million in-kind distribution of 855,000 units of our ownership in NMCI. We also set in motion a 50 million unit repurchase program that will be active for the next two years.

Slide 8 highlights our proactive approach to address upcoming debt maturities, including the Term Loan B. We have highlighted $175 million in bank refinancing with four banks to fund 12 vessels. All the bank financing comes with favorable terms that includes low-interest rates and a [inaudible] term and a long vessel age and size amortization profile. You can find the details of each facility on slide 8.

Slide 9 shows a significant cash flow potential. For 2019 we have 8,578 open days plus days on index jobs. Therefore, NMM's fleet is expected to generate significant fleet cash flow. Our timing great and with our time capital structure, NMM's fleet would generate about $55 million of free cash flow. If tug rate recovered the total 20-year averages, NMM fleet could generate about $155 million in free cash flow, which would present an 82% of potential upside. NMM is well-positioned to get the benefit of this recovery and generate significant cash flow.

Slide 10 shows our liquidity. Out of December 21, 2018, we had total cash of $61.5 million and total borrowings of $507.5 million. In our debt/book capitalization is a modest 34.7%, a 6% reduction compared to our fourth quarter of 2017. Moreover, we have no debt maturities until the third quarter of 2020 and have high bar for future growth.

At this point I would like to turn the call over to Efstratios Desypris, Navios Partners CFO, who will take you through the jobs of the fourth quarter of 2018.

Efstratios Desypris -- Chief Financial Officer

Thank you, Angeliki, and good morning, all. I will briefly review you on the financial decisions for the fourth quarter of the year, ended December 31, 2018. The financial commission is including the present list in summarizing the slide presentation on the company's website.

Before I start discussing your financial highlights, turn your attention to certain one of items that are listed in slide 11. These items are taken both at quarter and the year-end of December 31, 2018 and 2017. What's implicit here is that is causal to the finance on the charts below exclude the effect of the one-off items listed in the slide.

I'll show you slide 11. EBITDA for Q4 of 2018 decreased by 2.9% to $57.5 million compared to $59.3 million in Q4 in 2017. The decrease was likely due to the decrease in available days of the container ships as we shoaled two vessels in the current year of 2018. The decrease was partially mitigated by the 2.8% increase in the Navios Partners available days fleet. Adjusted EBITDA for the fourth quarter of 2018 decreased to $51 million compared to $57.1 million in Q4 of 2018, mainly due to the $1.7 million decrease in revenues, $0.9 million decrease in liquid [inaudible] companies, and $3.5 million net increase in all other expenses. Adjusted net income for the fourth quarter of 2018 amounted to $5.1 million, compared to $10.4 million in the same quarter of last year. Operating surplus for the fourth quarter of 2018 amounted for $2.8 million. Replacement and maintenance Capex reserve for $7 million. Liquidation for fourth quarter of 2018 was approximately 99%.

Moving to the [inaudible] operations, during 2017 our results were affected by the results of Navios Containers, which was consolidated in our accounts until August 29, 2017. During that period, Navios Containers reported $12.1 million of revenues and $6.7 million of EBITDA. In order for the period-to-period comparison to be meaningful, we excluded these amounts from the discussion below. Time-[inaudible] revenue for 2018 increased to $251.4 million compared to having $99.3 million in 2017, mainly due to the 10.3% increase in available days as well as the increase in the combined time-[inaudible] to $16,458.00 per day. Adjusted EBITDA for 2018 increased to $159.1 million compared to $126.6 million for 2017. Adjusted net income for 2018 amounted to $56.7 million, $15.7 million higher than 2017. Operating centers for the year ended December 31, 2018 for $77.9 million.

On slide 12 I will briefly discuss some key balancing data. At the end of the year, cash and cash equivalents was $61.5 million. Long-term debt, including the current portion, net of deferred fees and discount, amounted to $507.5 million. Net debt/book capitalization was 34.7%, decreasing by 5.7% since the end of 2017.

Moving to slide 13, we declared the cash distribution for the fourth quarter of 2018 of $0.02 per unit, equivalent rate set per unit on an annual basis. Our current [inaudible] distribution provides for an effective yield of approximately 8% based on yesterday's closing price. The record date is February 11, 2019, and the payment date is February 14, 2019. Total cash distributions for the quarter amount to $3.5 million. Our common unit coverage for the quarter is 4.4 times. In addition to the class distribution, in December, we distributed approximately 855,000 sales of common equity of Navios Containers to our unitholders. The value of these units that were distributed is estimated at $4.2 million.

Moving to slide 14, you can see some recent developments in the relation of the financing of our vessels. We concluded a $25 million bareboat lease structure for two of our older capsized vessels that advanced approximately 70% for another [inaudible] 5.4 years and an age-adjusted amortization filed approximately for 25 years. The verbal lease provides for an average daily payment of $5,200.00 per day per vessel. This results in an implied fixed interest rate of 7.6%. Navios has the option to buy the vessels starting at the end of year three for a price that deescalates until maturity. The purchase obligation of maturity is lower than the scrap value of the vessels. This financing structure has no financial covenants and no loan to value requirements.

Slide 15 shows the details of our fleet. We have a large modern, diverse fleet with a total capacity of 4.3 million deadweight tons and an average age of 9.19 years. Our fleet consists of 38 vessels, 14 capsizes, 16 Panamaxes, 3 Ultra-Handymax, and 5 container ships.

In slide 16 you can see the list of our fleet with their contracted rates and their expected expiration dates per vessel. Our charters have another remaining contract duration of approximately 2.2 years. Currently, we have contracted 68.1% of our available days for 2019, including days contracted and indexed link charters. The expiration dates extend to 2028.

In slide 17, you can see the details of Navios Containers. This entity was listed in NASDAQ in December 2018. Currently, it controls 30 container ships with a fairly visible gold pipeline. Navios Partners has a 33.5% ownership in Navios Containers. I know pass the call to George Achniotis, Executive Vice President of Business Development, to discuss the industry section.

George Achniotis -- Executive Vice President of Business Development

Thank you, Efstratios. Please turn to slide 19. The IMF forecast wide GDP growth at 8.5% for 2019. Emerging and developing Asian markets, which dry bulk demand, I expect it to grow at 6.3% in '19. On the back of global economic growth, dry bulk trade grew by 2.4% in '18, slightly lower than the 2.9% net growth. Clarksons forecast dry bulk trade to increase by 2.6% in '19 and ton mile to grow by 3.4% as commodities travel longer distances to market. The average dry bulk index increase by 18% in '18 compared to '17. The dry bulk market, too, has substantial upside as charter rates are well below their long-term averages.

Turn to slide 20. Worldwide steel production increased by about 5% in '18 versus '17. Chinese steel production rose by an impressive 10%. Chinese steel exports continue to decrease on the back of increased domestic demand, which has been stimulated by large infrastructure projects. The Belt and Road Initiative continues to be the cornerstone of Chinese economic plans for the next few years and supports steel and power demand domestically and for exports. Substitution of Chinese expensive, low-quality iron ore with high-quality and lower-priced imports continues. For 2018, domestic production was down by 40%, while imports were estimated slightly down. Chinese steel mills have been eating through their iron ore stockpiles, and they have been using more scrap in the steelmaking process.

After the recent tragic dam burst at the Vale Mine in the southern area of Brazil, forecasters are reviewing the potential impact on iron ore shipments, and the story continues to unfold. Vale announced the closure of 10 dams built in the same manner, which will cause temporary closure of nine mines which account for about 40 million tons of iron ore per year. Vale says that this will be offset by production in other mines. On a positive note, the Anglo American iron ore mine in Brazil, Minas Rio, which has been closed for much of 2018, is expected to export about 60 million tons in '19.

Please turn to slide 21. The Chinese government continues to rationalize domestic coal production, closing down small, inefficient, hazardous mines and encouraging consolidation of large mining groups. It is expected that their destruction of the Chinese coal industry will continue to keep domestic coal prices high and encourage high-quality imports as inefficient polluting mines are closed. Chinese seaborne coal imports are estimated to be up by about 4% in 2018. Indian coal imports have increased by about 16% through November '18 and look likely to continue as power plants continue to demand more coal.

Turn to slide 22. Worldwide grain trade has been growing by 5.4% CAGR since 2008, mainly driven by Asian demand. Chinese tariffs on US soybeans are causing trade disruptions, which were initially positive for dry bulk as Panamax increase. Exports of soybeans from the US have dropped significantly so far this crop year as China substitutes US soybeans with soybeans from South America. Projections are for the worldwide grain trade to grow 4.2% or 20 million tons in 2019.

Moving to slide 23. In spite of a significantly better market last year, the non-delivery rate remained at about 18% of the expected deliveries. 2018 net fleet growth was 2.9%. 2019 forecasts are for net fleet growth about the same as '18. Based on the current order book and shipyard availability, low net fleet growth is expected to continue over the next few years.

Turn to slide 24. The current order book before non-deliveries is about 10% of the product 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 regulation changes should provide support to the troubled market through 2019 and beyond. Tonnage supply well-tied-in is about 400 vessels, from Panamax to Violosis, are currently expected to go to dry dock for extended periods to [inaudible] the closed gas scrubbers.

In addition, the expected increase in fuel costs in 2020 provides an incentive to bring statements forward into the second half of '19, insulating vessels to reduce fuel consumption in 2020. The other cost of complying with IMO regulations for ballast water treatment systems and fuel regulations are expected to result in higher scrapping going forward. We are currently seeing decision [inaudible] in the market, which is exacerbated by the uncertainty in trade talks and uncertainty in how the recent events at the Vale Mine in Brazil may affect the market. With demand looking positive and supply restricted and disrupted due to preparations for IMO 2020, the rate should correct upwards going forward.

And this concludes my presentation. I would now like to turn the call over to Angeliki for her final comments. Angeliki?

Angeliki Frangou -- Chairman and Chief Executive Officer

Thank you, George. We open the call to questions.

Questions and Answers:

Operator

Thank you. At this time, to ask an audio question, please press *1 on your telephone keypad. Your first question comes from Noah Parquette with JP Morgan.

Noah Parquette -- JP Morgan -- Senior Analyst

Oh, thanks. I just wanna follow up on such big news now as on the Vale news and the disruption. Can you talk a little bit about how you think the timing would play out in terms of Russia coming online and disruptions to shipment? And then on the supply side, are there are any issues that we should be looking out for? I mean, do some of the Vale maxes, do they become underutilized or is there anything that kinda the market hasn't really thought about? Thanks.

Angeliki Frangou -- Chairman and Chief Executive Officer

Good morning, Noah. I think the Vale news is something that we have to -- the capacity -- we have to really digest. I mean, we have seen the Vale changing their present list three times. It seems that the least capacity on there is the [inaudible] Mine, and they -- But Minas Rio, you know, Anglo American and other miners have additional capacity somewhat...with this, but the story is still unfolding. On the Vale maxes, you have also the occasional collide that is also developing on the same time, on the all the...Vale maxes or are they another level of complexity there? Overall, I think this is something that...we crystalize, and you may have additional also Vale maxes. We've got the longer, the bigger vessels with the long hulls. You may have also Vale maxes go for struggle. So they may have different levels of...going that will be followed. I don't know. It seems to be available, and it will be transported. The [inaudible] case also may be a complexity there that it may be favored.

Noah Parquette -- JP Morgan -- Senior Analyst

Okay, good. Oh, that's awful. Thank you. And then just talking about the sharer purchase program, I mean, you guys were obviously pretty active in buying ships in the last year and a half or so. Now you have this. How do you kind of balance the two? I mean, do you clearly see sharer purchases as attractive versus ship purchase at this point? Or maybe just talk about how you see the two.

Angeliki Frangou -- Chairman and Chief Executive Officer

Listen. The reality...The reality is that we, in 2017 fairly early, we stepped in there with both vessels. We increased our capacity by 50%, and we increased our age divided by 20% of our vessels. And we did that in '17 and early '18. We are now at the size that is a very good size of fleet. We have seen that that level of below 50% or around 50%. I may give them $5,500.00 per open day, so again they're in a very good position to take that rudder. So considering all the different things, you see that your sales is a good return. Let's also understand that we return to our investors $18 million this year.

Noah Parquette -- JP Morgan -- Senior Analyst

Right. Okay. And then just a quick modeling one. For the vessel, the refinancing, how much of that debt is associated with the term loan and how much is it other debt?

Angeliki Frangou -- Chairman and Chief Executive Officer

It's entirely with the term loan. What we're doing, we give -- I mean, to be honest, you have to be worried at how dead markets have been last quarter. I mean, yes, we do not have a lean against maturities, but we have to prepare well in advance. And as we show the capital markets being, the dead market disappearing last quarter, we stepped in and we created the -- we have agreements with...a large European bank where we will refinance about $175 million of the vessels at the interterm loan. So that gives us a possibility to either reduce an entire month or, you know, do other arrangements if we like.

Noah Parquette -- JP Morgan -- Senior Analyst

Okay, yeah. Makes sense. Just cheaper interest. Etc. I understand. I just wanted to make sure. Okay, thank you.

Operator

Your next question comes from the line of Christopher Robertson of Jefferies.

Christopher Robertson -- Jefferies -- Analyst

Hi, good morning, and thanks for taking my call. You mentioned earlier on the call that the use of recycled steel in China was up in 2018 as well as some inventory drawdowns of the lower quality iron ore. What do you think about, in terms of the trend of use of the recycled steel? Does this continue into '19 or do you have any insight about what was driving that?

George Achniotis -- Executive Vice President of Business Development

I mean that will, of course, depend on the amount of vessels that are global scrapping. 2017, '18, we, especially '17, we had a lot of scrapping. This year, you know, it's still too early to see how do we quote. If the scrapping increases, of course, they will be using the steel bits. Now in terms of the inventors, we don't have precise data out of China, but it seems like they are drawing about 20 million of iron ore stuffs.

Christopher Robertson -- Jefferies -- Analyst

Okay. And can you give us an update around your thinking on scrubbers versus use of compliant fuel? I know last quarter that you mentioned that you didn't wanna take any vessels out of service while rates were improving, but has that view changed recently in light of some of the downward pressures on the capes? And are you seeing any signs of potential rate premiums?

Angeliki Frangou -- Chairman and Chief Executive Officer

Actually, we have committed to put the scrubber in one of our capes, but we got a very good rate for four years. So as we said previously, we are agnostic about the scrubber. If we get cost plus, we are more than willing, and a nice employment, we're more than willing to do that. We like to make sure that our Capex is full-covered and the time spent there is covered.

Christopher Robertson -- Jefferies -- Analyst

Okay. That's it for me. Thank you very much.

Operator

Your next question comes from Amit Mehrotra of Deutsche Bank.

Amit Mehrotra -- Deutsche Bank -- Lead Analyst

Hi, this is Chris Niter on for Amit. So we've all seen the volatility in spot rates over the past two months. You guys are obviously more exposed to the time charter market. Can you take about how the term market has trended? You know, when you're talking and having negotiations with charters?

Angeliki Frangou -- Chairman and Chief Executive Officer

I mean, listen, until two weeks ago you could do hear charters on capes that we'd be at $18,000.00 for deliveries, so this is a very abrupt drop. I mean, especially when the capes [inaudible] in the next three weeks, starting...And generally, I mean, you have a really negative sentiment. I don't think -- I don't know if the activity's really negative. It's mostly a sentiment issue. And let's not forget that we are about in the Chinese New Year. I wouldn't take a lot -- There's too many extending points to make a decision where the market is also necessarily...slow down around the world. On [inaudible] particular, your left with [inaudible] isn't in good shape, and what you see of the market around the world, it looks OK. So I wouldn't take that...one or two that you associated also on a weak quarter for dry. And on top of this you have -- you have also the sentiment of Vale, which is quite significant. I mean, everyone is now -- It's a major event.

Amit Mehrotra -- Deutsche Bank -- Lead Analyst

Okay, yeah, for sure. I think that's fair. The next question is on the Chinese coal market. The Q4 import restrictions kind of started this downward momentum. So my question is just kinda how do you see the Chinese coal imports playing out over the next two years. And I ask because I feel like historically the view has been that, you know, there are LNG is obviously taking share but that is gonna be offset by falling domestic production and we're gonna get maybe a flat to slightly up in imports. But when you're looking at the data, Chinese domestic coal production has actually increased the last two years. So just kind of any of your view on that market, because it is kind of pretty important on the midsize segments.

Angeliki Frangou -- Chairman and Chief Executive Officer

Yeah, one thing that -- We follow the coal and coal is something that is a...really...you have to see from a lot of different ways, but if you go to page 21 you'll see here, China has a big production of...coal but it is importing also about -- It imported about 225 million tons, about 10% last year. So even though -- So you have an increase coal [inaudible] mostly around the beginning of the year. I will wait to see, because China always have a -- Sometimes they may have early depletion that we come back. We have seen it in the past. And it doesn't seem that they have -- I mean, and if you see all the -- You may have additionally...additionally...imports this year. Overall, their domestic production is quite significant. It's over 3.5 billion, so we have to realize that, no matter what it is, a good investment for next year is that all imports will increase by 4%.

Amit Mehrotra -- Deutsche Bank -- Lead Analyst

Okay. Makes sense. And then just finally kind of bigger picture. So the travel stocks across the border are all trading well at below NAV, despite low order books and the group having relatively healthy balance sheets. In your opinion, what is the best way for ship owners to close this valuation gap? You know, it seems like the consensus view is that we're seeing a lot of buybacks or buyback announcements, at least. Is there anything else, or do you just kind of agree that just keep buying back stock and hope sentiment turns more positive?

Angeliki Frangou -- Chairman and Chief Executive Officer

Sentiment is sentiment. I don't think you can change that, and we have seen it in all the broader market. I mean, we saw a fluctuation in...November, December, that really created the...unnerved everyone. So that you cannot change. You have to seek economic conditions. The sentiment needs time. There are political issues with the Fed. You know, it takes time, and when [inaudible] come, [inaudible] reversal of sentiment, otherwise you cannot do anything. You can take the opportunity, but there's nothing else you can do.

Amit Mehrotra -- Deutsche Bank -- Lead Analyst

Okay. That does it for me. Thanks for the time, guys.

Operator

Thank you. We have reached our allotted time for questions. I will now turn the floor back over to Angeliki Frangou for any additional or closing comments.

Angeliki Frangou -- Chairman and Chief Executive Officer

Thank you. This completes our corporate quarterly call.

Operator

Thank you. That does conclude today's conference call. You may now disconnect.

Duration: 30 minutes

Call participants:

Angeliki Frangou -- Chairman and Chief Executive Officer

Efstratios Desypris -- Chief Financial Officer

George Achniotis -- Executive Vice President of Business Development

Noah Parquette -- JP Morgan -- Senior Analyst

Christopher Robertson -- Jefferies -- Analyst

Amit Mehrotra -- Deutsche Bank -- Lead Analyst

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