Navios Maritime Partners LP (NMM) 2011 Q3 法說會逐字稿

Thank you for joining us for this morning's call. With us today from Navios Maritime Partners are Chairman and CEO, Miss Angeliki Frangou; SVP of Business Development, Mr. George Achniotis; and Chief Financial Officer, Mr. Efstratios Desypris. The conference call is also being webcast. To access the webcast please go to the Investor section of Navios Partners' website at www.Navios-MLP.com, and you'll see the webcasting link.

I'd like to now 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 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 risks and uncertainties which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in Navios Partners' filings with the Securities and Exchange Commission.

The information set forth herein should be understood in light of such risk. Navios Partners does not assume any obligation to update the information contained in this conference call.

At this time I'd like to review the agenda for today's call. First, Miss Frangou will offer opening remarks; next, Mr. Desypris will provide a review of Navios Partners' third-quarter 2011 financial results; then Mr. Achniotis will give an operational update and an overview of market fundamentals. Miss Frangou will then offer concluding remarks and we'll open the call to take your questions.

I'd now like to turn the call over to Angeliki Frangou, Chairman and CEO of Navios Maritime Partners. Angeliki?

Thank you, Laura, and good morning to all of you joining us on today's call. I am pleased with our strong results for the quarter. We enjoyed steady net income and increased EBITDA by 24%. The strong results in our stable business model allowed us again to declare a quarterly distribution of $0.44 representing an annual distribution of $1.76.

Although we are seeing good news on the demand side we continue to be plagued by an absence of capital in our industry. The additional [chief] lenders are not active. While the European financial crisis continues European financial institutions have focused on reducing their balance sheet and their all capital needs. At the same time the capital markets are selective at best and have been unwilling to fill the vacuum left by the commercial lending bank.

We are today a capital constrained industry. As a result there are a number of shipping companies being forced to address their capital leases with their lending banks directly by restructuring. We have been very fortunate as Navios Partners maintains excellent commercial relationships with its lending institutions and at the end of May ended in a new credit facility to finance the acquisition of two vessels.

In terms of demand, drybulk shipping rates have recovered from recent lows. Capesize rates have (inaudible) over the past few weeks with spot rates up 12.5% week over week to $31 [129]. There are multiple reasons for this strength.

We are seeing congestion of major Australian and Brazilian ports, elevated Chinese thermal coal imports due to the strong Chinese electricity demand, increased Chinese iron ore imports and firming up over the Japanese import activity as the country recovers from the earthquake and tsunami. However, we remain cautious given the ongoing financial crisis within Europe.

The shipping market continues to rationalize the supply of vessels. Non-deliveries were about 33% for the first nine months of 2011. Scrapping is setting new records on a deadweight basis. To date 3.65% of the fleet was scrapped representing about 300 vessels and 19.6 million deadweight tons. This is more than a 160% increase over the previous scrapping record of 12.2 million deadweight tons set in 1986.

Despite the accelerated activity in scrapping, about 18% of the drybulk fleet is older than 20 years of age -- 20 years, and steel prices are still very healthy. As a result, it makes more sense to scrap an old vessel [in the investor process] into a young vessel.

Slide two reflects our current structure. Navios Holdings owns about 27% of Navios Partners and Navios Partners operates 18 drybulk vessels of an average age of about five years. We have ended in the long-term charters with credit worthy counterparties with an average remaining charter duration of about four years. These charters are covered by insurance from a AA+ rated entity.

Slide three sets forth recent developments for our Company. We note the management and administrative agreement with Navios Holdings. The original agreement was scheduled to expire on November 16, 2012 and the term of the new agreement is for five years through December 2017. The agreement (inaudible) to fix administrative overhead and operating expenses for our fleet.

We feel that this agreement allows us to leverage Navios Holdings' economies of scale in terms of purchasing power. It (inaudible) allows Navios Partners with a benefit of Navios Holdings world-class technical and commercial management teams.

Under the agreement we have agreed a 3% increase on a two-year period ending December 2013. This places our operating expenses new rate at $4,650 per Ultra-Handymax vessel per day, $4,550 per Panamax vessel per day, and $5,650 per Capesize per day. We believe this 3% increase for a two-year period is very competitive as we have seen estimates for increased cost of about 10% annually.

I'm also pleased to advise that all our counterparties are performing in accordance with their agreements and we are very hopeful that we are past this issue in our industry. At this point I would like to turn the call over to Mr. Efstratios Desypris, Navios Partners' CFO, who will take you through that results for the quarter. Efstratios?

Thank you, Angeliki, and good morning all. I will briefly review our unaudited financial results for the third quarter and nine months ended September 30, 2011. The financial information was included in the press release and is summarized in the slide presentation on the Company's website.

Before I dive into the results for the period I wanted to address certain operational issues that had a one-off effect during the quarter and suppressed our operating metrics including net income. The Navios Sagittarius suffered a grounding and was off hire for its 71 days in the third quarter of 2011. The vessel has since resumed normal operation. The lost hire for the quarter amounted to $1.9 million.

In addition, the Navios Apollon was acquired for 70 days in the third quarter following an engine breakdown earlier in the year and resulting in a lost hire of $1.7 million. As a result of the extended off-hire period the vessel's initial charter was terminated. We have since re-chartered the vessel which resumed operation in September.

These events are now past us. All vessels are now operational and earning revenue. Overall we have a strong cash flow and will continue to develop our earnings and distribution capacity.

Turning to slide five, our revenue, EBITDA and net income were all adversely affected by $3.8 million from total unscheduled off-hires. However, timed charter revenue for the third quarter of 2011 increased still by $9.9 million to $48 million. The 26% increase in revenue was mainly attributable to 386 more available days in the third quarter of 2011 compared to the same period of 2010.

As for EBITDA and net income, EBITDA increased by $7 million or 24.1% to $36 million for the third quarter of 2011 as compared to $29 million for the same period of 2010. Net income increased by $0.3 million to $16.3 million.

Net income was also adversely affected by the $6.2 million increase in depreciation and amortization expense. Of this amount $4.1 million relates to amortizing favorable leases attached to the newly acquired vessels. This favorable lease component is amortized over the remaining duration of the charter out contract as opposed to the longer remaining useful life of the vessel.

During the third quarter of 2011 Navios Partners operated 18 vessels, an increase of four vessels as compared to the same quarter last year. Operating surplus for the quarter ended September 30, 2011 was $29.4 million, 24.1% higher than the corresponding quarter in 2010.

Moving to the nine-month operations, time charter revenue for the nine-month period increased by $35.8 million to $136.5 million. The increase in revenue by 35.6% was mainly due to the acquisition of four vessels and was achieved despite a $6.9 million effect of the unscheduled off-hires. EBITDA net income for the nine months has also been adversely affected by the unscheduled off-hires of the two vessels.

Additionally, they have been affected by the $4 million non-cash charge for [writing] over intangible assets associated with the Navios Apollon initial charter contract which was terminated. Excluding these non-cash sales, adjusted EBITDA increased by $28.3 million or 37.8% to $103.2 million for the nine months of 2011.

Adjusted net income increased by $8.6 million or 20.4% to $50.7 million. Adjusted net income was further affected by an $18.1 million increase in depreciation and amortization expense due to our (inaudible) fleet. Operating surplus for the nine months ended September 30, 2011 was $84.6 million which is 39.6% higher than the corresponding to period of 2010.

Turning to slide six, I will briefly discuss some key balance sheet data for September 30, 2011. Cash and cash equivalents including restricted cash was $58 million. Total assets grew to $930 million. Long-term debt including current portion increased by $12.5 million, reflecting the additional facility of $35 million for the acquisition of the two vessels in the second quarter and the debt repayment of $22.5 million in the nine months of the year.

The effective average interest rate for the first nine months of 2011 was 2.4%. Net debt to asset value on a charter adjusted basis remained at 35.1% at the end of the period. As of September 30, 2011 Navios Partners was in compliance with the financial covenants of its credit facilities.

As shown on slide seven, Navios Partners' quarterly distribution is $0.44 per unit. The distribution run rate on an annual basis is $1.76 per common unit and provides an effective annual yield of approximately 10.7% based on Friday's closing price. The record date for the distribution is November 8 and the payment date is November 11, 2011.

Total distributions amount to $24.8 million of which $20.6 million is attributable to common units. We have comfortable distribution covenants; total unit coverage is 1.18 times. For US tax purpose Navios Partners reports the cumulative annual distribution to common unitholders on form 1099.

On slide eight the favorable quarterly pattern of EBITDA, operating surplus and net income as shown for the quarters from Q1 of 2008 through Q3 of 2011. The consecutive increase primarily reflects increases in the number of operating vessels through accretive drop downs from our sponsor.

Navios Partners has consistently paid quarterly distributions since its inception in November 2007 uninterrupted by market conditions. Furthermore, we have increased our dividend distributions in eight out of the 15 quarters of our operation. Our annual distribution has been growing at an average rate of more than 6.6% per year. This rate of increase exceeds the average US inflation rate by more than 4.5%.

Slide nine demonstrates our strong relationship with key participants in our industry. We have quality charters with an average remaining period of for years. These charters are spread among a diverse group of counterparties. In addition, we have insured our long-term charter-out contracts for credit default with a AA+ rated European entity.

As shown on slide 10, our fleet consists of 18 vessels -- six Capesizes, 11 Panamaxes and one Ultra-Handymax vessel. Our fleet has an average age of 5.4 years as compared to the industry average of 12.3 years. Currently we have contracted 100% of our available days on a charter-out basis for 2011 and 92% for 2012. The expiration dates have cycled and the charter durations extended to September 2022. It is our objective to continue to grow Navios Partners' fleet on an accretive basis and increase cash available for distributions.

I will now pass the call to George Achniotis, our Executive Vice President of Business Development, to discuss the industry section. George?

Thank you, Efstratios. Please turn to slide 11. The drivers for world GDP growth continue to evolve as developing economies contribute 100 percentage to total world growth than the developed economies and the IMF expects this trend to continue for the foreseeable future. The IMF September forecast shows that emerging economies will continue to grow at 6.4% in 2011 and 6.1% in 2012.

The primary engines of trade growth continue to be China, India and Brazil with other emerging countries adding strong growth. China's economy grew by 9.1% in Q3. For 2012 the IMF expects Chinese economy to grow at 9%. India's economic growth is expected to reach 7.5% in 2012. More importantly, global growth is projected at 4% this year and 4% next year.

Moving to slide 12, in 2010 seaborne iron ore trade set a new record as imports increased for the ninth consecutive year. This increase has been the result of higher demand from most steel-making countries. Going forward the growth in worldwide iron ore imports will be constrained until new iron ore mines and expansion projects become operational.

Over the medium- to long-term miners are investing heavily in additional protection. The chart on the upper right shows potential new iron ore mining capacity of about 600 million tons per annum on a cumulative basis through 2014. These expansions will increase the tons carried and the ton miles. The development and urbanization of the western and central parts of China will contribute significantly to steel consumption in 2011 and onwards.

Crude steel production in China for the first nine months of 2011 was 526 million tons, up 11% year on year. China imported 60.6 million tons of iron ore in September, the highest monthly volume since January. Iron ore imports have increased by 11% year on year to 509 million tons for the first nine months and domestic iron ore production was estimated to be up 21% to about 937 million tons. In addition to iron ore imports, China continues its imports of coal for use in steel making and for power generation.

Turning to slide 13, India has taken initial steps to industrialize and urbanize. As you can see on the lower right hand chart, India is expected to increase its urban population to 590 million people by 2030. That means India will have to build about 1.5 New York City's per year during that time.

To keep pace with expanding steel and electricity production, Indian coal imports shown on the left hand chart have increased dramatically at a 25% compound annual growth rate since 2006. According to the central Electricity Authority of India, substantial demand will continue as most planned new power generators will be coal-fired.

India now imports more coal per year than the UK, Italy, France and Germany combined. Indian companies are buying coal assets globally to ensure future supplies meet projected growth.

Turning to slide 14, the confluence of low freight rates, expensive fuel and high ship scrap prices has led to a surge in scrapping of vessels. In the first half of 2011 bulk Capesize vessels have been scrapped than in the five-year period of 2006 to 2010. The high steel prices mean that a Capesize owner can earn $11 million to $12 million on scrapping the vessel or approximately 30% of the value of a five-year-old vessel.

Through October 14, 299 vessels, including 64 capes, totaling 19.6 million dead weight tons have been sold for demolition. This dead weight tonnage total [already saw] prices in the record 12.3 million scrap in all of 1986 and represents an annualized scrapping rate of approximately 25 million tons or almost 5% of the fleet.

The current environment should lead to higher scrapping levels as about 12% of the fleet is older than 25 years of age and 18% of the fleet is over 20 years old providing about 106 million tons of scrapping potential. There is potential for yet higher demolition in 2012 as scrap prices remain high and a major new Chinese recycling facility at Dalian is due to enter service.

Moving to slide 15, 2010 new building deliveries were 77.9 million dead weight tons against an expected 125.6 million tons, a slippage of approximately 40%. The order book for 2011 ballooned from about 120 million dead weight tons to 137 million as statisticians classified many ships that were not delivered in 2010 to 2011 deliveries.

Through Q3 2011 non-deliveries continued at about 31% as new building deliveries were 71.2 million dead weight tons against an expected 102.5 million. This demonstrates that non-deliveries continue to be a substantial part of the drybulk order book.

Additions to the fleet this year are on pace to be somewhat higher than 2010, but net growth in dead weight tons should be lower after expected scrapping is taken into account. The order book declines in 2012 and again in 2013.

Please turn to slide 16, the latest research shows downward revisions to 2011 trade estimates due to lower than anticipated shipments in the first half of 2011 where shipments were negatively affected by natural disasters. Steady recovery on the raw material production side since the middle of the year increased vessel demand and by October 14 the BDI reached its highest point for the year at 2,173 driven by rapidly increasing cargo volume and port congestion.

The biggest increases have been from iron ore and coal exports from Australia and Brazil raising total Q3 exports of these commodities to 462 million tons. This represented a 16% increase above the restricted Q1 levels.

Although below this year's peaks, iron ore and coal prices remain at historically high levels suggesting solid demand and increased trade as cargo availability continues to rise. I would like to remind you that Navios Partners continues to operate its vessels on long-term time charters to ensure creditworthy counterparties and has little re-chartering risk until 2013.

This concludes my presentation. I would now like to turn the call back to Angeliki for her final comments. Angeliki?

Thank you, George. And I open now -- this completes our formal presentation and we open the call to questions.

(Operator Instructions). Urs Dur, Lazard Capital Markets.

You really covered everything sort of well. I think people still might have some minor concerns on underlying sustainability of the contracts. Where do you see the rates where we are currently? How long do you think this can be sustained or have you an idea things are much better? And what opportunities do you have to drop-down vessels from the parent or buy drop-down vessels and where is the further growth coming from?

This is -- okay, this is two questions in one. So let's (multiple speakers).

Sorry.

Let me start on the first one. On the drybulk we have seen a recovery in rate. Of course we have to of course see how the European crisis develops and how this ends up on the global market. But undeniably we can say that -- and you have seen on the BDI of individual spot market we have seen a recovery in rate. Not only in that, we have seen also availability of one- and two-year contracts now on almost every size which is a good thing.

Now how lasting will continue? This is something we will have to monitor. In today's market on the Handymax market you see that rates are between -- on a year now at around [15.5] and you can do two-year deals in this kind of a situation. Now -- so we are not -- if we see a breakeven in how we are with the dividends model we have, we feel very comfortable on whatever we see opening up next year.

Now if we go to the second question which is how we see ourselves growing, one of the things I'd like to say that we have a strong balance sheet, we have visibility more than any other company. With a very -- and we have (inaudible) in today's market. And we feel comfortable.

We have very good relationships with our financial institutions and we are able to extend credit. And on the other side, and we showed also in the case of other shipping MLPs is that we have a strong sponsor which can (inaudible) hold the position. So we can expand our Company if we find that this is an accretive deal through our ability with our banks and a sponsor without needing to access the capital markets if that is not there.

That would be great, that would be great. We've seen some other MLPs doing that now in the bad equity situation. And it would be nice to see further growth. But thanks again; very informative call.

Ken Hoexter, Bank of America-Merrill Lynch.

It's Wilson Chen actually sitting in for Ken. My first question I guess would turn to the upcoming ship Apollon when it comes up for I guess re-charter in the spring of 2012. Given how strong rates have gone recently and, like you said, the uncertainty around the resolution of the European crisis, are you guys looking to perhaps lock in a more attractive rate and limit your downside now? Or how do we think about the Apollon as it comes up for re-charter?

I think we see that actually we will be able -- I mean the Handymax market is very firm and we can do -- we're going to extend this duration. We may even try to do it earlier before the expiration.

Sure. And I guess turning over to the other parts of your fleet. In the past you've reiterated that you would prefer to keep your ships at a younger age relative to the overall industry. I'm looking just over quickly at the three ships, Gemini, Libra and Felicity. Both of those -- or all three of those were built more in the '90s as opposed to after 2000 for the majority of your fleet.

I mean how to we think about how you guys intend to modernize the fleet? I mean, do you can run these ships off and until the -- then charter to sell them? Or would you look to sell the ships and be over market and use the proceeds to buy -- take a job down from your parent or how do we think about that?

We'll have multiple ways. I mean, the one thing do you have a profitable charter; you're not going to sell that vessel. With a profitable charter most likely will -- at least have a completion of a charter and then sell it. But there's multiple ways.

There is not -- these are vessels well maintained and you can always sell when this is a decision of the sales and purchase market. And depending on how you can substitute, you can do that at any point. We are not in an area that we feel that we are -- need to do it tomorrow. So at an appropriate time we will do it.

Okay, sounds good. Thank you for the time.

Joshua Katzeff, Deutsche Bank.

Just want to maybe continue on your comments about the ship lending market. Can you go maybe a bit further into it -- availability of banks, maybe how many -- I guess maybe a percentage of banks that you think aren't lending? And are there any concerns with the current bank marketing ability to get US dollar funds? Has that impacted any bank's ability to extend new loans or even perform on current loans?

Just to clear, Navios Partners has excellent relationship -- we didn't have any problem or experience any problem with a banker. But in general the problem is quite significant in Europe. As you know, majority of the ship lending is from European institutions, the (inaudible) found them a situation now on dollar in the major European countries with France being one of the targets.

So there is, even though Navios is not experiencing something like that, I know that there is -- we have seen in the market that there is a lot of tightness on the ship lending far more than you had in 2009.

Got it. And maybe switching bases. With regard to your new ship management agreement. It looks like it's still pretty -- below a lot of your peers right now. And so I guess you guys have been able to control costs pretty well. But across maybe the industry can you give us a sense of how much wage inflation you've seen or just maybe insurance and overall OpEx increases?

We like to talk about Navios because we have seen other industry -- in the industry we have seen average increases of 10%. Navios has not seen something like that. That's why we very comfortably fixed the operating expenses for two year at 3% for the fixed two-year period. But if you're only going through the OpEx, I'd say that on the insurance side you have benefits because this is a soft insurance market.

So I foresee that in the new ones that are coming up, most probably will be able only if they have a group record and they been -- in a good management on that and will be able to renew at repeating last -- last year's result and increase.

Also you might, in our own judgment, we will see our operating expense on stores, spares, paint and [lubricants] most probably remaining at the same level because in essence you have -- they used (inaudible) oil prices in the world will translate in lubricants, paint and all the rest.

So we do not see that this should be any -- with (inaudible) around the world. We do not foresee that we'll have an inflationary situation in our operating expenses. On the other side I can say that Navios Partners takes advantage of Navios Holdings' economies of scale and purchasing power and in that we are very -- we like to give that benefit with -- we don't see at a profit center.

We like to keep -- Navios Holding likes to have its gold standards or, in essence, is able to get -- Navios Partners is able to get this very favorable deal. But it is really the purchasing power of the holdings.

That was some good color. Thank you for that. And just one last question. When I look at your unit coverage ratios, it's been trending around 1.2 for the past couple quarters. Does the port target a specific coverage ratio when it looks at increasing distribution? And if so can you maybe expand a bit on that?

What we have said previously, I mean we consistently try to keep this coverage around 115 to 120. And this is the target that we have said over the past few quarters. This is the distribution that we feel is very comfortable for us and allows us to absorb (inaudible) fluctuations in the market. So I think that this is something that will be taken into consideration going forward on this. It is a ratio that we'll try to maintain, around 115 to 120.

Thanks and thanks for taking my questions.

Ben Nolan, Knight Capital.

Kind of I guess building on a few of the questions earlier, with respect to lending and certainly some of the comments that Angeliki made at the start of the call. I know that if anybody should be able to get financing it probably should be you guys given your balance sheet and the whole corporate structure.

But have you seen any change in the margins or the amount of lending that's available? And if so, has that impacted at all your hurdle rates with respect to looking at drop-downs? And maybe could you give some color on what you're thinking currently with respect to drop-downs and how to go about financing those?

No, in our facilities we have no problem. But what we have seen in the market is that a lot of the banks that were lending, they are not able this period to finance because of the whole uncertainty that is surrounding Europe.

So this is the one thing that we can say clearly. In the case of Navios we don't see, that's why we also had -- renew a new facility that we did in May for two vessels, and we have an effective rate of 2.5%. So we are in very good shape.

But we -- what I was describing is that this market is changing for a lot of companies. We have seen the stress situation; we have seen a chapter 11 situation in the shipping segment, so -- not particularly in the drybulk. This is not something that Navios is -- cares about, but we give you that -- the conditions of the Commercial Bank are not as good because they are tied up with the European crisis and this is inevitable.

Any proposed here (inaudible) in Europe will have an effect on the balance sheet of all the major lending banks in Europe, which in essence also provides the ship finance.

You guys should be relatively unimpacted, so your thinking is no different really with respect to the hurdle rates that you might be looking for with respect to drop-downs and also whether or not you would go forward with them?

Yes. Our situation is unaffected, but the industry as a whole will have a different situation, that's all we are saying.

Okay, yes, no, that makes sense. And then just for modeling purposes. Could you maybe give at least a little bit of color, maybe a breakdown of what the dry docking schedule is for some of the vessels going forward?

As we already said in this call, we are expecting the Navios (inaudible) go under special (inaudible) this quarter. And then we have only a couple of vessels for the first half of 2012, only two vessels that are coming off (inaudible).

All right, perfect. That's very helpful. And then I guess lastly, it sounds like the whole COSCO issue is solidly behind you guys and nothing to be done on that front going forward, correct?

Yes, I think this is -- and the entire industry has gone with that issue -- finished with that issue.

Okay, perfect. Well, thanks for taking my questions.

This concludes our Q&A portion for today's call. I would now like to turn the floor back over to Miss Frangou for any closing remarks.

We thank you very much; this completes our third-quarter results. Thank you.

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