Navios Maritime Partners LP (NMM) 2016 Q2 法說會逐字稿

Thank you for joining us for Navios Maritime Partners' second quarter 2016 earnings conference call. With us today from the Company are Chairman and CEO, Ms. Angeliki Frangou; Chief Financial Officer, Mr. Stratos 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 will also be found there.

Now, I will 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 facts.

Such forward-looking statements are based upon the current beliefs and expectations of Navios Partners management and subject to numerous material risks and uncertainties, which could cause actual results to differ materially from the forward-looking statements. Such risks are more fully discussed in Navios Partners' filings with the Securities and Exchange Commission including the Company's most recent 20-F. The information discussed on this call should be understood in light of such risks. Navios Partners does not assume any obligation to update the information contained in this conference call.

The agenda for today's call is as follows. First, Ms. Frangou will offer opening remarks; next, Mr. Desypris will give an overview of Navios Partners' financial results; then Mr. Achniotis will provide an operational update and an industry overview; and lastly, we'll open the call to take questions.

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

Thank you, Joyce, and good morning to all of you joining us on today's call. For the second quarter of 2016, we recorded $44.9 million of revenue and $11.8 million of EBITDA. Our results were affected by the one-time impairment charge on the anticipated sale of the container vessel MSC Cristina. Adjusting for the impairment charge, we had adjusted EBITDA of $29 million and a positive net income.

Slide 4 outlines recent developments. Since the beginning of 2016, we have worked to fortify our balance sheet and we have reduced debt by $44.6 million. To do that, we have repaid $25 million principal repayment of our Term Loan B and $48.6 million under our bank credit facilities. The $73.6 million debt reduction was partly offset by $29 million increase in debt through a working capital facility. The working capital facility is with ABN Bank and bears the interest rate of LIBOR plus 4% payable by January 30, 2017.

We also increased the Term Loan B collateral package by $48.5 million through the contribution of the container vessel Yang Ming Unity. During the quarter, we also agreed to sell subject to signing of definitive documentation one of our container vessels, the MSC Cristina, for a net sale price of $125 million.

We expect to receive proceeds on $106.25 million upon delivery of the vessel and the balance of $18.75 million will be in the form of guaranteed sellers credit, payable to us in 16 equal quarterly installments. The sellers credit will accrue interest of 6% per annum totaling about $2.2 million for the term of the loan. We anticipate that the vessel will be delivered to its new owners by January 17, 2017.

Slide 5 provides details of the HMM charter restructuring. As you may know, we have five container vessels chartered to HMM for $30,119 per day for a period of five years. Under the restructure charter, rates for these vessels are reduced by 20% to $24,095 per day for a period of three-and-a-half years, after which the rate of $30,119 per day will apply until December of 2023.

NMM total charter revenue loss of $38.6 million was compensated by HMM through the receipt of 3.7 million of HMM shares representing a value of $30.9 million and $7.7 million senior unsecured notes due in 2024 bearing interest of 3% per annum. We recently sold the HMM shares for $21.4 million. We estimate that we will have a $16.3 million net cash benefit for 2016. Overall we anticipate having a $7.7 million total loss.

Slide 6 highlights the annual savings we enjoy by harnessing the economies of scale created by Navios Holdings. Under the relevant agreement, NM provides technical and commercial management services for a fixed fee and administrative services at cost.

Importantly, NM does not charge any transactional fees whether for originating loans, arranging sales and purchase, or otherwise creating value. To the extent that such fees are paid, these fees are paid to third parties based on the market prices as compared to some of our peers that are paying tenant commissions ranging from 0.75% to 1.25% of the charters.

The premise of the overall relationship is that there is a fair allocation of cost in the pricing of the services on terms and conditions that third parties generally would agree. As a result, OpEx is fixed through December 2017 at rates that are 17% below industry averages. Our G&A expenses are $718 per day, one of the lowest among publicly listed shipping companies.

Slide 7 demonstrates NMM's position as a unique platform for the growth in the dry bulk sector.

Our balance sheet is strong and our credit ratios are healthy with net debt to book capitalization of 42.5% and interest coverage of 4.3 times as of Q2. And our enterprise is valued relatively inexpensively as NMM trades with a backward EV to EBITDA of about 4.7 times. We also have the ability to generate significant free cash flow.

The table on slide 7 sets forth our potential cash generation for the remainder of 2016. As you can see even in the low charter rate environment of today, we should be able to generate about $45 million assuming steady operating cost and current market rate of our open days.

Slide 8 shows our liquidity. At June 30, 2016 we had a total cash of $26.9 million and total debt of $555 million. We have a low net debt to book capitalization of 42.5% and no significant debt maturities until 2018.

At this point, I would like to turn the call over to Mr. Stratos Desypris, Navios Partners CFO, who will take you over the results for the second quarter of 2016. Stratos?

Thank you, Angeliki, and good morning all. I will briefly review our unaudited financial results for the second quarter and six months ended June 30, 2016. The financial information is included in the press release and is summarized in the slide presentation on the Company's website.

Moving to the financial results as shown on slide 9, our revenue for the second quarter of 2016 decreased by 20.5% to $44.9 million compared to $56.5 million for Q2 of 2015. The decrease was mainly due to lower time charter equivalent rate achieved in the quarter of $16,005 per day compared to $20,679 per day for the same quarter of 2015. EBITDA for the second quarter of 2016 was negatively affected by the $17.2 million impairment loss recognized on one of our vessels.

Excluding this one-off item, adjusted EBITDA for the second quarter of 2016 decreased by 25.1% to $29 million primarily due to the decrease in the revenues discussed.

This was mitigated by a $1.9 million net decrease in all other costs. Net income excluding the one-off effect of the impairment loss amounted to $0.4 million. Operating surplus for the second quarter of 2016 amounted to $19.4 million. Replacement and maintenance CapEx reserve was $3 million. Fleet utilization for the second quarter of 2016 was 99.9%.

Moving to the six months operations, time charter revenue for the six months decreased by 20.1% to $90.5 million compared to $113.3 million in the first half of 2015. The decrease was mainly due to the decrease in the time charter equivalent rate achieved in the first half of 2016 of $15,764 per day compared to $20,248 per day in the first half of 2015. EBITDA for the first half of 2016 was negatively affected by the $17.2 million impairment loss recognized on one of our vessels.

Excluding this one-off item, adjusted EBITDA for the first half of 2016 decreased by 25.6% to $57.1 million compared to $76.7 million in the same period of last year. The decrease was mainly due to the decrease in the revenue discussed and was mitigated mainly by the $5.8 million increase in other income. Net income excluding the one-off effect of the impairment loss amounted to $0.6 million. Operating surplus for the six months ended June 30, 2016 was $37.7 million.

Turning to slide 10, I will briefly discuss some key balance sheet data as of June 30, 2016. Cash and cash equivalents was $26.9 million. We do not have any significant immediate debt maturities or committed growth CapEx. Net debt-to-book capitalization was 42.5% at the end of the quarter. As Angeliki mentioned earlier, in 2016 we reduced debt by $44.6 million and we increased the term loan B collateral by $48.5 million.

Furthermore, the expected sale of the MSC Cristina is estimated to further delever our balance sheet and increase our available liquidity.

Slide 11 shows the details of our fleet. We have a large, modern, diverse fleet with a total capacity of 3.3 million deadweight ton. Our fleet is young with an average age of 9.1 years. Our fleet consists of 31 vessels; 8 Capesizes, 12 Panamaxes, 3 Ultra-Handymax, and 8 container vessels.

In slide 12 you can see the list of our fleet with the contracted rates and the respective expiration dates per vessel. Our charters have an average remaining contract duration of 2.4 years. Over 75% of our contracted revenue is from charters longer than three years. Currently we have fixed 94.3% of our available days for 2016 and we have 55.5% fixed for 2017. The expiration dates are staggered and the charter durations extend to 2027.

As shown in slide 13, we are an efficient, low cost operator. We are benefiting from the economies of scale of our sponsor and we have fixed our operational cost at low levels until December 2017. Our fixed costs are almost 17% below the industry average. I now pass the call to George Achniotis, our Executive Vice President of Business Development, to discuss the industry sections. George?

Thank you, Stratos. Please turn to slide 15 and the dry bulk market fundamentals. Growth in world GDP generally coincides with growing raw material demand for steel and energy production, particularly as emerging markets urbanize and industrialize. According to the IMF, the rate of world GDP growth declined between 2014 and 2015 and is expected to remain stable at 3.1% in 2016. The rate of growth is forecasted to increase to 3.4% in 2017.

Emerging and developing markets are expected to grow by 4.1% in 2016 and 4.6% in 2017. Between 2014 and 2015 dry bulk trade remained flat with 2016 forecast to show a small increase of about 1% to 2%.

Turning to slide 16. Global seaborne iron ore demand has been surprisingly high for the first half of the year. Imports of iron ore into China have exceeded most forecasters' expectations.

Through June, Chinese iron ore imports were up 9% year-on-year. This is the result of the displacement of low quality expensive Chinese domestic production, which is down 6% through June with high quality low cost iron ore from Australia and Brazil.

Chinese steel production rebounded in March and has remained above last year's levels since then. The Chinese government committed to a controlled restructuring of the steel industry with cutbacks in production alongside stimulus in demand. Steel production in China is expected to fall by about 1% in 2016. Steel exports from China remain robust and are up by over 9% year-on-year.

Australian and Brazilian iron ore producers are gaining market share from higher cost producers. At the same time, the price of delivered iron ore into China has increased recently showing a healthy demand and the effects of China's stimulus program.

Please turn to slide 17. The Chinese domestic coal industry seems to be going through a phase of restructuring similar to the one that the iron ore industry went through in the past several years whereby low quality, uneconomic capacity is being shut down. Domestic coal production is expected to be down by about 12% in 2016, a decrease of over 400 million tons. This has been replaced by additional imports, which are now up almost 5% through June, a complete turnaround from the negative numbers we saw at the beginning of this year and over the past few years.

Indian coal imports have continued to disappoint as domestic production exceeds expectations. Domestic production is projected to grow by 4% in 2016 and imports to reduce by 1.4%. Combined Indian and Chinese imports are now expected to increase by 1% to 2% indicating that the coal market may have bottomed.

Moving to slide 18. As of January 1, the 2016 order book stood at 92.7 million deadweight tons. By July, 31.6 million delivered versus 65.9 million expected, a 52% non-delivery rate. This is the highest non-delivery rate in the last few years. If we assume 40% non-deliveries, then we estimate 2016 will see about 55 million deadweight tons delivered.

With the current scrapping rate annualized, net fleet growth should be between 1% to 2% this year. The order book as of January 1 for 2017 and 2018 decreases substantially. In today's market with low charter rates, low vessel values, and lack of bank financing; the fleet could contract further going forward as there is little incentive towards orders of new ships.

Turning to slide 19. The scrapping pace has reduced in the past couple of months as the monsoon season tempered activity by the traditional scrap buyers in the Indian Ocean.

However, we are still running at an annualized pace of about 40 million deadweight tons, a record high scrapping in terms of deadweight tons. More specifically, the Capesize fleet has shown negative growth since the beginning of 2015 and the Panamax fleet has seen negative growth since the beginning of 2016.

That kind of negative fleet growth becomes more compelling based on the projected order book of 2017 and 2018. Overall net fleet growth for 2016 is projected to be between 1% to 2%, about the same as the projected growth in demand. The table in the bottom right shows that there is an increasing pool of scrap candidates as the average age of scrapping reduces. The fleet average age of scrapping has reduced from 30 years five years ago to 23 years today. We regularly see evidence of vessels under 20 years of age being scrapped.

Looking at the total dry bulk fleet, there are 59 million deadweight tons 20 years or over and 121 million deadweight tons 15 years or older giving plenty of potential scrap candidates going forward. If the current low rate environment persists, we expect non-deliveries and scrapping to continue.

Moving to slide 20. Over the past 19 years, container trade has expanded at a 7.2% CAGR. As the rate of world GDP growth declined between 2014 and 2015, there was also a reduction in the rate of container trade growth to just over 2% in 2015, the lowest increase since 2009. However, demand is expected to increase by about 4% in 2016. As demand growth is projected to be close to net fleet growth, we should expect an improvement in charter rates. I want to remind you that NMM's container vessels are fixed on long term charters so they are not affected by this sluggishness in 2016.

Turning to slide 21. At the beginning of August 2016, the container fleet consisted of about 5,200 vessels of 20 million TEU capacity. Vessels carrying 576,000 TEU have delivered during 2016 versus a projection of vessels carrying 1 million TEU giving a non-delivery rate of 41% versus a non-delivery rate of just 11% in 2015. As non-deliveries have increased so has the rate of scrapping.

So far in 2016, 94 vessels of 315,000 TEU have scrapped, which gives an annualized pace of over 0.5 million TEU or about 2.6% of the total container fleet. Estimates are that TEU growth will be about 3% to 4% in 2016, about the same as the estimated increase in container demand. With no incentive towards the new buildings in the current environment, the balance between demand and supply should improve as we progress into 2017 and 2018.

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

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

Thank you. (Operator Instructions) Chris Wetherbee, Citi.

This is Prashant on for Chris. I guess my first question I wanted to talk about the Cristina sale. I wanted to get a little bit more color on the motivations or thought process behind the sale of that vessel. And also you don't have any maturities until 2018 so kind of wanted to get a sense of how much of that cash will be used to pay down debt, are there other maybe uses of the cash proceeds from those sales? So, just a little bit more detail on sort of what was behind the sale of the Cristina, particularly given that it was acquired I guess just 18 months ago?

I think one of the issues we have seen in Q1, we saw values really moving at a level that we had not seen ever before and that even though the Company was very well contracted and with good cushion, we had to do a lot of prepayments, we had to do around $75 million of prepayments in order to have the loan to values being rectified. So being conservative, we are selling MSC Cristina which is a good vessel with good cash flow, but also gives us opportunity to really generate additional cushion and cash up front.

Overall we are very well contracted and you can see that in the rest of 2016 we have about 1,400 days open and even in today's environment, exact days rates have about $45 million of cash generation. This creates additional cushion and that provides us. We like to be conservative on this environment to see 2017 how the markets develop.

Okay. Thanks Angeliki; that makes sense. And so following the sale of the Cristina, you are within where you feel comfortable on LTV and in terms of covenants so is this --?

We are in full compliance of our LTVs. You always have to have extra cushions and that's the reality and that's how we do [credits].

Okay. That makes sense. Looking at the dry bulk side of the fleet, there's a couple of smaller, older vessels and sort of wanted to know about the disposition of those. And I guess broader picture given the environment, are further asset sales, either on the container or the dry side, a consideration? Have you rationalized the fleet or maybe looked for coverage? I just kind of wanted to get a sense of how you think about that or that's something that you just would be more opportunistic with.

I think at this point we like that we have a very clear fleet definition, we have clear cash flows. The interesting thing is most probably you have it in your models and you can see from the disclosure, we already have. Apart from 2016 if you move to 2017, NMM is a unique company where your contracted revenue of $122 million more than covers your total expenses and you have a net cash of $21 million with about 6,000 open days more or less. So with that in mind, you realize that you're in a good platform, you're there to be able to have a good cash generation and to see the opportunities and maybe add on different vessels that you see as the best, more attractive asset class.

Okay. That makes sense. And on the HMM charter restructuring, I think this is maybe in line or slightly better than what we may have expected coming into earlier this year. I just wanted to sort of circle the bases and just make sure. Are there other charters that may be either parties that may want to renegotiate at this point or do you see that as sort of like the big risk is now kind of behind you and we should sort of be settled through this recovery now?

There is no other counterparty that is part of NMM. As you all know there is Hanjin, but Hanjin is not part of the charters of NMM. And if you can see on the HMM because this is not really a Chapter 11 was a reorganization now. Sorry, I made a mistake. There's two vessels of Hanjin in NMM and most probably we follow the same kind of roadmap as HMM. As you know, Hanjin is the largest container company of Korea and what we see is that Korean Development Bank supports Hanjin and also the sponsor, Korean Lines most probably will follow a similar idea.

The structure at Navios, the way that Navios looked at this is that immediately upon receiving also compensation, we wanted to remove risk so we sold our shares and automatically we have a benefit of $16 million net cash benefit for 2016 and we are cash neutral until second half of 2018. So this makes full visibility on our cash flows, it takes the risk out. In HMM, Korea Development Bank is a major shareholder with a low cap for two years.

Noah Parquette, JPMorgan.

I want to ask -- obviously you guys are being conservative here with your liquidity. Can you talk a little bit about farther out what kind of roadmap or strategy you have to return a dividend or go back to paying a dividend and how you think about that time frame?

Again, we value the MLP structure and as you know today with the market even though with very short-lived cash flow, contracted revenues, and we have the [cash flow]. With the condition of the dry bulk and container market, I think that doesn't make a lot of sense. But as markets [stabilize], I think we have cleared the bottom for dry bulk and we had (inaudible) and I think this is now moving upwards at a slow pace, but it's moving. As soon as we see the visibility of cash flows, this is a platform that can easily turn to an MLP dividend when we see the normality of this market. We have to admit that we're in a period that we are very, very unique on dry bulk and shipping.

You traded at a massive discount to NAV and you have this great liquidity and cash flow situation so it seems like a lot of opportunity to create value. What kind of things are you thinking of? Would you consider share repurchases here given the massive discount?

The first thing is that we like to see stability. You saw that even though we had solid cash flow, we needed to do a lot of prepayments. So, I think your Number 1 priority is stabilize the structure, stabilize the conditions, be conservative on your cash flows, and then you have all the choices which we are very well aware of providing additional value. But I think that cash is number one.

Amit Mehrotra, Deutsche Bank.

First of all, congratulations on all the development since the first quarter call. I have a few specific questions for Angeliki or Stratos. Just following up the question on the sale of the Cristina, I may have missed it, but I just wanted to know what the net cash proceeds are of the $125 million, how much will actually hit the balance sheet as cash and how much will actually go down to pay down debt?

Amit, there is a loan that is associated with the vessel, which today it's approximately $72 million of balance. So out of the $125 million, you will have to repay this loan and the remainder will be cash on the balance sheet plus the note that is payable in the next four years.

So if I look at the pro forma cash balance of the Company from the end of the second quarter, add the HMM security proceeds of $21 million plus maybe $53 million, a little less than that, you're looking at a pro forma cash balance of a little under $100 million. Is that right, Stratos?

Yes, but don't forget that you have approximately $19 million that will be payable. Out of the $125 million, around $19 million will be payable in installments over the next four years. So, you have to deduct that as well.

So, it's a little over $80 million in pro forma cash balance?

Yes. On a pro forma basis, this calculation makes sense.

Okay. So if I take the $82 million or $80 million of pro forma cash balance and add it to, I guess, your annual operating cash flow of say $80 million, plus or minus, you're still kind of from a cash balance standpoint well below what you need to repay or deal with the 2018 maturity. So the question is first of all, is that math correct and how do you think about your ability to address that cash call in 2018, which is really not that far away and maybe it's just more opportunities like what you did with Cristina to maybe crystallize or pull forward the annual cash flows?

You have to realize that there is one thing that is important is that the LTV is about 80% on the term loan. So, you do not have here values that are not reflected in today's market. And also your bank loans are around 70%, 60%, 70% let's say so it can easily be refinanced. So, you have the ability to really refinance this rate and you will be generating, let's say, circa $45 million this year for the remaining of the year and next year about $80 million excluding the sale of the Cristina, I think that you have quite a significant cash flow. I cannot imagine a lot of companies with this kind of cash generation.

So if I understood you correctly is basically, Angeliki, what you're trying to say is that a lot of the surplus cash flow between now and then will go down to pay the LTV of the Company, which then can be recollateralized to roll the remaining balance in 2018, is that right?

Yes. You're never zero debt so you will get the loan of 60%, 70% of debt so you're not going to be zero. Additionally you have to realize the charter adjusted evaluation because on the term loan there is an additional very significant cash flow associated with the container vessels that are in there apart from the charter free evaluation. In the restructure model, if you sit down and you look at what is really the cash flows are quite significant. You do your own calculation and you see what we are discussing, it may be double the values of whatever the charter free values are.

Okay. That makes sense. So given, I guess, the operating cash outlook for the Company, your ability to pay down debt between now and 2018, and then roll the remaining balance over which makes sense, you've effectively derisked the business in a tough environment.

Now with that being said, I mean there are other areas of the Navios complex, specifically holdings that has not been derisked. And the question I had, Angeliki, you talked about sort of your support of the MLP business model. But when the distributions are zero and I would say line of sight probably not going to increase in the near to mid future, just wanted to understand why you have such a high commitment to the MLP business model specifically for NMM? And one last sort of follow up to that, would you ever consider collapsing NMM into NM to take advantage of those cash flows or is that just maybe completely off the table given the dilution that would entail for NM equity?

I cannot comment on this. But on the commitment to the MLP, we value the MLP. We are one of the companies that we dedicated earlier on and we have seen the growth and the ability in that structure. In today's environment the way we view our companies is on a conservative basis, what makes sense in the shipping environment at the time and would it make sense for the Company going forward. So, NMM has solid cash flows and going through a very tough shipping evaluation market which we navigated nicely. So, at this point we will review our options as we go forward.

Okay, I thought I'd try to ask that question but I understand your answer. One last quick one for me is one thing I noticed, maybe this one is for Stratos, I noticed that the amounts due on the balance sheet to the related parties was pretty high last quarter and I think it was cut in half in the second quarter. Just wanted to understand sort of was that just the pull forward of some management fees or how should we think about that because that balance was quite high last quarter?

The balance mainly is a timing issue. You have to understand that the vessels are going into drydocks. There are a lot of things that add to this balance and also there just to mention that we are also including there some balances from the Navios (inaudible) that we participate in the working capital. So, naturally this balance will come down as we repay our obligations towards these companies.

That was our final question. I would now like to turn the floor back over to Ms. Angeliki Frangou for any additional or closing remarks.

Thank you. This completes our second quarter earnings.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.