Navios Maritime Holdings Inc (NM) 2006 Q1 法說會逐字稿

-- I will be your conference facilitator today. At this time, I would like to welcome everyone to the Navios Maritime Holdings first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Now with great pleasure I would like to turn the floor over to [Alan Katz], who will introduce the Navios management team. Please go ahead, sir.

Good morning. Thank you for joining us for this morning's call. With us today from Navios Maritime Holdings are Ms. Angeliki Frangou, Chairman and CEO; Mr. Robert Shaw, President; and Mr. Michael McClure, Chief Financial Officer. As a reminder, this conference call is also being webcast. To access the webcast, please refer to the press release at the web address, which will direct you to the registration page.

Before I review the structure of this morning's call, I would like to read 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. Forward-looking statements are statements that are not historical fact. Such forward-looking statements are based upon the current beliefs and expectations of Navios' 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 described in Navios' filings with the Securities and Exchange Commission. The information set forth herein should be read in light of such risks. Navios does not assume any obligation to update the information contained in this conference call.

Thank you. At this time, I would like to outline the agenda for today's call. First Ms. Frangou will offer opening remarks. Next, Mr. Shaw will provide a brief overview of Navios fundamentals. Following Mr. Shaw's remarks, Mr. McClure will review Navios' first quarter 2006 financial results. Finally Ms. Frangou will offer concluding remarks. At the conclusion of Ms. Frangou's remarks, the Company will open the call to your questions.

At this time I would like to turn the call over to Ms. Angeliki Frangou, CEO of Navios. Ms. Frangou?

Thank you, Alan. Good morning to those joining us on today's conference call from the United States and good afternoon to everyone who has traveled to Greece to enjoy Poseidonia. We are having a wonderful week meeting our friends from many parts of the world and I am excited by the prospects of our industry. I am delighted to be with you again and to share with you the results of our efforts over this past number of months as well as for our financial integration and the job for the first quarter of 2006.

I would like to first address our strategic initiatives with South American Logistics. The first quarter was a very successful quarter for Navios from many perspectives. Indeed it was in this quarter that I along with other senior members of the management commenced with a strategic review of our operations in South America. As you know, Navios owns a dry bulk storage and transfer bulk facility at Nueva Palmira in Uruguay which is situated across the Parana River from Buenos Aires, Argentina. This area is a gateway for grains and other minerals being exported from South America and this (indiscernible) has experienced a tremendous growth over the past few years as an example of demand from [Asia] and elsewhere.

Part of our strategic review included several visits by the senior members of the management including me and our guide advisers. In our visits we traveled to Argentina, Brazil, Uruguay, Paraguay, the whole Mercosur area to bring on a further understanding of the business environment and associated opportunities. We had numerous conversations with (indiscernible) our biggest commercial partners and joint ventures. The net result of our effort was that we identified the opportunity of being a compelling South American logistics business using our storage and transfer facility at Nueva Palmira and to building bulk and coal assets. Our intent is to build a logistics business that will capture the [nation's] supplies of the minerals being exported from the area. We hope to do this by focusing on the areas surrounding the Paraguay and Parana Rivers and by adding rivers terminals in Brazil and Paraguay. By incorporating this upriver terminal with our existing and expanding terminal and by adding a river barge capability, we will be able to provide proportional customers a seamless solution while transporting and storing all commodities from grains to mineral.

We intend to accomplish this call by [adding] and/or acquiring assets and business in Asia. We believe that the first stage of this endeavor will take approximately 12 months. Of course we needed to finance our expansion opportunity. To do so we developed a program with our counsellor and our advisers in a broad setting institutional investors on a confidential basis. These investors are going to fund these expansion plans by each arriving at the price of $4.10 per share their [one]. In total we exercised approximately $65.5 million. I participated in this program and exercised all my warrants and paid approximately $27 million to the company. Clearly this is a plan that I believe very much in.

Now coming to our operational performance, I am also very pleased by our team's effort in growing our business. We have continued to grow our own fleet. We took delivery of four vessels in the first quarter. We now own 16 vessels. This compares to only six vessels that Navios owned a mere nine months ago. In addition our long-term fleet, chartered-in fleet consists of 16 vessels. In total our fleet is composed of 32 vessels and approximately 2.1 million of deadweight tons.

I note here that our transitional fleet while maintaining a usual age of five and continue to have one of the youngest fleets in the dry bulk industry with an average age of approximately four years. This is a very big competitive advantage. As I mentioned in our last call, we have focused on provisioning Navios as a shipping company with a trading company benefit. Our trading operation and activities complement our shipping operations. The contribution from our [interest] [rating] operations show how our shareholders will enjoy a more consistent performance using both shipping and rating outlets.

We believe that Navios enjoys a significant operating flexibility. In addition to owning and managing a high quality fleet of ships, the company uses FFAs, (indiscernible) and short-term targeting to monitor (indiscernible). Our vertically integrated business model provides a unique window to the plans within our industry and enables us to react quickly to any emerging opportunities within the market.

Mike will address our financial performance in a moment, but I would like to highlight that our first-quarter return of $24.5 million is an indication of the previous quarter and the corresponding period of last year. Since August of 2005, this has focused on (indiscernible) from shipping operations so that we can enjoy a more consistent result.

Finally before I turn the call to Robert I would like to share with you that we are happy to announce our second quarter dividend of $0.0666 per share to equity holders of June 15. The dividend will be paid on July 5, 2006.

Robert will now at this part handle our shipping industry and the continued demand for [shipping] movements and dry bulk commodities as well as the current supply of the new building fleet.

The dry bulk shipping market has so far this year continued to surprise many participants and commentators with its continued strength. Demand for dry bulk commodities has remained firm and so also has demand for the seaborne carriage of [flex] commodities. This demand has maintained dry bulk freight rates at levels which although substantially lower than the peaks experienced in late 2004 and early 2005 are still exceptionally healthy by the standards of the last 25 years. The catalyst for the current bull market in dry bulk shipping, which began nearly three years ago, has since been attributed by some commentators to China's succession to the World Trade Organization, an even triggering an explosion in demand for dry bulk commodities.

Whatever the true catalyst, the bull market has not only surpassed all prior records in terms of the heights achieved especially in late 2004 and early 2005, but also in terms of its longevity. Even today some three years after the market began its explosive ascent and despite the fact that rates are now over 60% lower than they were at their absolute highs, we are still at levels well above those of the peaks achieved in the prior bulk bull market in 1995.

By way of example, in 1995 the Baltic exchange dry index reached around 2300 before reverting to a range between 1700 and 1000 that prevailed for most of the last 25 years other than in 1995 and 1996 and in the nearly three years since the summer of 2003. Similarly Panamax daily rates stood at an average on June 6 of nearly $18,900. While this level is far lower than the highest daily hire rate of about $52,000 achieved at the end of 2004, today's (technical difficulty) rate is still higher than the previous average daily rate of under $18,100 achieved in early May of 1995 before the present dry market bull took off in Q3 of 2003.

Although there was a marked downward correction in certain commodity prices in late May this year in particular in the price of copper that had climbed to record highs on what seems in large part to have been [sentiments] in certain trading, prices for the states of demand in the dry bulk shipping industry especially for coal and above all for iron ore have continued to be very strong and indeed have strengthened during the last weeks. (technical difficulty) and [Rekal] agreed to 19% increases in price negotiations for iron ore. Chinese steel producers are now under great pressure to accept similar price increases. Although they have steadily resisted, the only issue appears to be now how much of an increase over 10% they will have to accept following the record increases that they had to endure in the last two years.

Overall, Panamax and Capesize rates have remained resilient this year, trading in a fairly narrow range with strong support levels. Supermax rates have proven to the even more resilient during this same period and have been trading at a premium to the Panamax. Today the spot a rate for a Supermax vessel is roughly $1700 higher than the equivalent rate for a Panamax. Even more remarkable is the premium of roughly $1000 today that a Supermax commands over a Panamax for a twelve-month time charter. Even for a twelve-month FFA contract beginning January 2007, the Supermax contract reflects in its forward curve an evident belief that the premium currently enjoyed by the smaller but more flexible size of dry bulk carrier will continue over the course of the next 18 months.

Scrapping has increased significantly at least in percentage terms from the statistically insignificant levels of the last two years, but in terms of the numbers of units scrapped, the amounts involved are still too low to have had an appreciable market impact. That said, scrapping can reasonably be expected to pick up as costs to drydocking and repairs make it uneconomic to operate older vessels in order to comply with classifications authority and applicable international and national port state control requirements.

To summarize, given that the supply of new buildings is large and the scrapping levels are low, the current continuing robust health of freight rates must on fundamentals attributable above all to demand. The main components of this demand growth have again been continuing strong iron ore imports into China; the limitations on coal exports from China requiring other East Asian importers to source coal from further away; and increased grain imports into China and generalized stock cargo demand from a widespread pick up in growth in most of the OECD economies.

To some extent however, the most recent strengthening in rates is we believe also attributable to the compounding affect of developing bullish sentiment among shipowners gaining confidence from the resilience of the market. In the last few weeks, vessel owners have been increasingly unwilling to commit their vessels to longer-term employment, thus sentiment in a classic market psychology pattern is compounding perceived fundamental market strength. In our view, these conditions provide Navios with an opportunity to continue our policy followed throughout this year of steadily building up a defensive position on our forward fleet exposure.

In conclusion, while we are confident that the longer-term outlook for our industry is very promising, we believe that the defensive strategy best positions Navios in particular to take advantage of opportunities likely to arise as fundamentals as accepted supply of new buildings and overanticipation of demand take their effect on the market.

At this time, I would like to turn over the call to our CFO, Mike McClure.

Thank you, Robert. I will now briefly review Navios' financial results for the first quarter of 2006. The financial statements I'm about to discuss were included in this morning's press release.

Revenues for the three months of operations ended March 31, 2006 were $49.2 million as compared to $61.4 million for the same period during 2005. [Algust], the first terminal contributed $1 million for the three months ending March 31, 2006 as compared to $1.3 million the same period in 2005. The decline in revenues were primarily attributable to two factors. First, the redelivery of chartered-in vessels during 2005 and the first quarter of 2006. This factor was partially mitigated by the increase in a number of vessels owned by the Company by the end of the first quarter of 2006.

Second, the decline in the freight market, which resulted in lower chartered-out daily hire rates. The Company utilized 27 equivalent vessels for the three months ending March 31, 2006 as compared to 26.6 vessels for the three months ending March 31, 2005.

EBITDA was $24.6 million for the first quarter 2006, as compared to $14.7 million for the same period within 2005. This increase in EBITDA was primarily attributable to first a gain of $1.7 million from trading Forward Freight Agreement's or FFA's compared with a loss of $4.5 million for the same period in 2005. And second, a reduction in timecharter and voyage expenses which were $20.8 million in this quarter versus $37.5 million in the first quarter of 2005. This 44.6% reduction was mainly due to the employment of higher cost vessels chartered in for short duration within Q1 2005, which were not employed during Q1 2006.

In addition, within Q1 2006, charter hire expenses were reduced on five vessels acquired through the exercise of purchase options which resulted in the expansion of the owned fleet. This reduction in timecharter and voyage expenses more than offsets the decline in revenues that I previously discussed.

Going forward, EBITDA will continue to improve, reflecting the core fleet which is now comprised of 16 owned vessels. Five of the six vessels on which purchased options have been exercised were delivered by the end of the first quarter of this year. The last one was delivered in mid-April. As we discussed last quarter, the exercise of these purchase options will result in an increase in EBITDA by approximately $12 million annually due to the eliminations of costs associated with these leases.

Net income for the quarter ending March 31, 2006 was $5 million as compared to $13 million for the comparable period of 2005. The decline in net income was impacted by the factors I mentioned a few minutes ago as well as a few additional factors. First, a $3.3 million increase in depreciation due to the expansion of the owned fleet from both acquisitions and the exercise of purchase options. Second, a $5.3 million increase in amortization costs related primarily to the intangible assets established on the Company's balance sheet as part of the acquisition in accordance with purchase accounting principles under U.S. GAAP. And finally, an $8.7 million increase in interest expense due to the increased indebtedness to finance the acquisition of the Company and its purchase of nine additional vessels.

Time Charter Equivalent daily earnings including results from Forward Freight Agreements declined by 8.6% to $18,530 for the three months ending March 31, 2006 from $20,277 during the same period in 2005. This decline was less than the general decline in the spot timecharter market on an average quarter-to-quarter comparison.

Direct vessel expenses for operations of the owned fleet increased by $2 million to $4.1 million for the three months ending March 31, 2006 as compared to $2.1 million for the three months ending March 31, 2005. Direct vessel expenses include crew costs, provisions, decks and engine stores, lubricating oil, insurance, repairs and maintenance. The increase resulted primarily from the expansion in the owned fleet by nine vessels from the six owned in the first quarter of last year.

General and administration expenses changed minimally to $3.56 million for the three months ending March 31, 2006, as compared to $3.64 million for the three months ending March 31, 2005. Navios' cash and cash equivalents balance on March 31, 2006 was $31.8 million.

The Company continues to employ a conservative revenue strategy which can be seen our portfolio of long-term charters. Last quarter we reduced our exposure to a downturn in rates by maintaining a relatively high level of long-term coverage in our fleet. We have continued in this vein in the first quarter. Today more than 87.6% of our fleet is fixed for 2006 to first-class charterers and approximately 24% for 2007. The average daily rate is 17,242 for 2006, which is on par with the forward market for the balance of 2006. For 2007, the average rate is 17,434 above the value to the forward curve for 2007.

Navios has spent the past several months working to implement world-class systems and controls which I am pleased to report includes a new accounting system that will allow us to close our records much more quickly. As we have mentioned in the previous quarter, we expect to have this system fully operational for next quarter.

This concludes my review of the financials. At this time I would like to turn the call back over to Angeliki to provide closing remarks.

Thank you Mike. We are now open to questions from all of you.

(OPERATOR INSTRUCTIONS) [Steve Sniper], [SPF Associates].

I have got a couple of questions about this warrant exercise offer that just concluded. First of all I'm just a little confused about the whole way it went about. It seems like you're disclosing that this was a selective offer to select institutionals. Everybody ended up getting this offer through DTC. I personally got it with -- from two different brokerages and one gave me a couple of hours to exercise. One I got it an hour after exercise. So it seemed like it ended up being a public offer to everybody. I'm not really sure why certain people were notified days ahead of time, certain people weren't really notified.

I'm also confused why the people that did exercise are getting now potentially penalties if these shares are not registered by a certain date since these shares all should have been registered at the time of the merger and the attorney simply screwed it up by not including them. Let's start with that and then we can go on a little bit.

I will let Mr. Shaw explain this.

Yes, we were aware or we became aware of a certain problem with DTC very recently and they have been asked and were asked to rectify this by our counsel, and that related to the information that came through. But beyond that until we find out exactly what has happened there in that transmission process, we can't really comment further.

The whole program of the exercise of the warrant was handled by our counselors. We got advice of the way it would be done because we were not able to really approach it (indiscernible). This is a program that is going to be financing an expansion in Navios business. This is really where we're adding value to everyone and it's going to create substantially an opportunity for the Company without diluting anyone.

[Seth Grickenhorth], [Grickenhorth & Co].

I want to congratulate you for having weathered a tough period. The only question I have is there has been an increase recently in rates and I was wondering what your forecast would be for the rate picture into the future. I realize that this is to a large degree uncertain, but nonetheless I am eager to hear your opinion.

I will start with this and I will let Robert comment further. The answer is that we have also told you in our previous conference calls and you have seen it in all economic data we have very strong demand. Everything, everyone had underestimated the whole demand for this year and this is something that we have seen happening. The additional -- it also became apparent that the absorption of the versus -- (indiscernible) new buildings which drove nicely into the market without seeing downward pressure. Of course one thing that I will say is that you can always have -- shipping is not a straight line. You have seasonal patterns that happen over the years and you may have something of that. There is not a straight line now in any market. But demand is the real driver here and one thing that I like to add is something that about the scrapping, okay, the scrapping has not really peaked to 2004 levels, but we have seen it picking up over vessel scrapping, (indiscernible) about 105 vessels to be scrapped this year. Just on the Panamax, we had one final months scrapped for the whole 2005 and you have 11 vessels, 11 Panamaxes this year. So this is something that I believe will play a role in the second half of the year and is something that apart from the demand side, which we see very good, you will be looking also on the scrapping. It is picking up. I think there will be further increase.

I think it is very difficult to give reliable predictions on a market as volatile as this, but that is our business. I think one thing that one can look at is where the forward paper is trading. That tells you something of the markets collective view as to where rates will be and we see now there has been a firming both on the Panamax and on the Supermax [state]. The twelve-month contracts of the Panamax today is trading in a range of -- the bid is about $15,600 a day and they offered at $15,500. This is telling you that for next year as well the market anticipates what are historically very healthy rates, albeit rates lower than we have today. So there is some backwardation but certainly nothing like the degree of backwardation we were seeing last year on the equivalent contract.

Hardin Bethea, DePrince, Race, Zollo.

Is there anything that you -- maybe this is a question for Mike -- in the quarter's results that you would say is onetime in nature or non-recurring related to financing or delivery of vessels or anything else or should we look at this kind of a clean quarter?

What I would say there is the Company continues to transition from a more spot orientation on its vessel usage, so are available days in say Q1 '05 came from many short-term charters. Today the company is transitioning to a long-term core fleet that are both owned and long-term chartered. So our average chartering cost is becoming more constant, and so we will continue to maintain those favorable spreads between the revenue market rates fixed in versus our more fixed if you will charter-in costs.

Of course one thing that just I want to add maybe is that we had deliveries of vessels, as you know we have had all these deliveries of the vessels on first quarter, which is onetime off, as you realize.

Right. How much of the about $12 million of EBITDA improvement from chartering to owning is reflected in the first-quarter results?

I can speak only -- we had approximately two or three start at the beginning of the year and they are starting to come in now. I don't know that percentage exactly, but that will become larger in Q2 and will be fully reflected in Q3, as all of those 10 new vessel acquisitions will be delivered.

If you add in a fully annualized rate, meaning that if you had (technical difficulty) the full (indiscernible) option exercised and you had the full quarter (technical difficulty) usage, you would be looking around $3 million on an annualized basis as well but as all the vessels were not in our fleet from the beginning of the quarter, this is not really reflected yet. It is a much lower percentage.

Okay, and would you be willing to break out the port revenue and expense as components of revenue and the other expense line item that includes those numbers?

We actually break that out in our quarterly reporting to the SEC in the S1 and so it is broken out for public review.

In the first quarter, what were those numbers?

Well, the revenue in Uruguay was about $3 million I think I mentioned earlier. And our first quarter is our lowest period -- I'm sorry, the revenue was about $1 million for the first quarter and the operations get a very slow start. The South American grain season doesn't really kick in until March or so, so operationally wise it was not a major contributor at all.

This is a seasonal business, as you realize, and the first quarter is usually the worst quarter. Just to advise you some on the call, we last year when I took over after I took over around end of September there was a completion of a storage facility that had started a year ago and has increased our storage capacity in the port about 35% which gives us a very good opportunity and really this is not reflective of 2005 numbers. It is something that this year we will be able to capture as well be having a storage facility on the full season of the grain.

Okay. Can you describe kind of the magnitude of investment in the logistics business and the timeframe for generating incremental results from those investments?

It is -- we're looking of making an investment of about $65 million in the logistics, and this will be included upriver ports that are in Brazil and Paraguay. This is on really bringing the full iron and ore and minerals as well as grains that we capture from the Mata Grossa area of Brazil and Paraguay down the river and to the (indiscernible) terminal that we have an almost the edge of the river system. This is upriver of course. The river barges will push boats in the consequent terminal. This will be in six month stages; we are looking about $65 million investment. We will be producing around $20 million, $25 million EBITDA and in reality at this moment you have in other ports we see them inside the shipping company. The logistics company, the logistics business you have a much higher multiples than the shipping company and we are able to reach to our shareholder values (indiscernible) in our home. With a $65 million investment, $25 million of it was valued dilution of our $250 million of market cap. Of course this takes -- I have already stated about 12 months of shoulder. We will have to give ourselves some time. We have already -- we have grown over three times in this year. We have been negotiating with a lot of our clients that we have there and we have long relationships and we will be able very soon to give you more direction about this. Of course this is always a very (indiscernible) area. Just want to advise you you will have the full -- we will be giving you our full notice of all the steps we are taking, but I am very excited. That area of South America is really exporting area of all commodities from grains to minerals and this is a trend that does not stop. The long-term trend is annually increasing every year and you have seen what has happened with iron ore and with grains and the manganese also. You really know that the potential is there. Every immediate -- there are things in other areas you see you have a more complete system. There is not really one provider, reliable provider of the full service. So I believe it is (inaudible) real opportunity and after we have examined the whole situation, we see the potential.

Seeing there are no further questions, I would like to turn the floor back to management for any closing remarks.

Thank you all and we thank you very much for this morning.

Thank you ladies and gentlemen. This does conclude today's Navios Maritime Holdings conference call. You may now disconnect your lines at this time and have a wonderful day.