Navios Maritime Partners LP (NMM) 2016 Q3 法說會逐字稿

Thank you for joining us for Navios Maritime Partners' third-quarter 2016 earnings conference call. With us today from the Company are Chairman and CEO, Mrs. 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 Investors 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 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 are 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 in this conference call should be understood in light of such risks, Navios Partners should not assume any obligation to update the information contained in this conference call.

Now the agenda for today's call is as follows: first, Mrs. 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 Laura, and good morning to of you joining on today's call.

For the third quarter of 2016, we recorded a $50.3 million of revenue and $13.4 million of EBITDA. Our quarterly results were affected by a one-time impairment charge on the $20.8 million [shay closings] from [8 million] shares that we issued in connection with the out-of-court restructuring of HMM.

While this impairment was substantial, we believe that the net result of (technical difficulty) this transaction was very beneficial for the Company, given the (inaudible) impact on our balance sheet and liquidity. Adjusting for the impairment charge, we had EBITDA of $32.8 million and $6.1 million in net income.

Slide 5 details our management of our balance sheet during this difficult year in the drybulk and container market. Since the beginning of 2016, we have reduced debt by almost $107 million. To do that, we prepaid $25 million of principal on the Term Loan B, and $81.9 million under the bank credit facilities. This $107 million reduction in debt excludes our issuance of a $29 million working capital facility bearing interest rate of LIBOR plus 4%.

We also agreed to sell them MSC Cristina for a net sale price of $125 million. We expect to receive proceeds of $106.25 million upon delivery of the vessel, and $18.75 million balance will be in the form of a guaranteed seller's credit and payable to us in 16 equal quarterly installments. The credit will accrue interest of 6% per annum which will total about $2.2 million for the term of the loan.

NMM also agreed to acquire Capesize vessels for the purchase price of $15.1 million scheduled for delivery in December 2016. The vessel will be chartered out until September 2017 at a net rate of $9,418 per day adjusted for a 50% of the full P&L.

This vessel, along with six other drybulk vessels will be added to the Term Loan B collateral package held to increase the overall collateral in 2016 by about $100 million, of which $48.5 million was through the contribution of the container vessel YangMing Unity. Finally, as I mentioned in my opening remarks, we increased liquidity by $20.8 million through the sale of shares we received as part of the HMM charter restructuring.

Please turn to slide 6. During the quarter, we prepaid and partially modified our commercial bank facility. Through this effort, we moved certain collateral out of the facility and contribute them to the Term Loan B facility.

Diving into the details, we reduced our commercial bank loan by $30.2 million of nominal value through a $28 million prepayment. We had a $2.2 million benefit to the nominal value in doing so.

Six drybulk vessels valued at $37 million were removed from a collateral package and then modified bank facilities now secured by three drybulk vessels. The facility had a $31.9 million balloon payment, which we believe should be easy to refinance due to the improved collateral package.

As a example of the above mentioned notification, a $50.5 million in additional collateral was contributed to the Term Loan B facility. This includes a six drybulk vessels valued at $37 million that we transferred from the commercial bank facility, and the $13.5 million in cash collateral which will be replaced with a Capesize vessel that we expect to be delivered to our fleet in Q4 of 2016. The addition of these seven vessels to the Term Loan B should provide additional collateral security as the drybulk market improves.

We would also like to provide an update regarding our counterparty hedging that filed for rehabilitation on August 31, 2016. NMM has two Capesize vessels chartered to Hanjin for a net rate of $29,356 per day through December 2020.

Both vessels will attempt to Navios commercial management in September as they will be recharted to third parties. The net impact to our annual EBITDA in the current market is expected to be about negative $12 million annually. Navios stands with progression claims for all of the EBITDA as well as managing these vessels to mitigate these lost amounts.

Slide 7 demonstrates NMM position as a unique platform for growth in the diabolic sector. Our contracted revenue covers all our costs for 2017, and our commission and secondary management costs are fixed through December 2017 at the rates that are about 17% below industry averages.

Let me remind you that we pay no additional fees for sales, purchases or financing of our transactions. Moreover, we have the ability to generate significant free cash flow.

The table on slide 7 sets forth our contracted cash generation for the remainder of 2016 and 2017. As you can see, even this low charter rate environment of today we should be able to generate about $21 million for the remaining three months of 2016, and about $84 million for 2017. Assuming steady operating costs and current market rates for our open days.

Slide 8 shows our liquidity. As of September 30, 2016, we had a total cash of $42.2 million and a total debt of $554.5 million. We have a loan debt to book of utilization of 42.9%, 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 third quarter of 2016. Stratos?

Thank you, Angeliki, and good morning. I will briefly review our Navios financial results for the third quarter and nine months ended September 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 in slide 9. Our revenue for the third quarter of 2016 decreased by 11.8% to $50.3 million, compared to $57.1 million for Q3 of 2015. The decrease was mainly due to lower (inaudible) in the quarter of $16,968 per day compared to $20,305 per day for the same quarter of 2015.

EBITDA for the third quarter of 2016 was negatively affected by the $19.4 million gross on the sale of HMM shares. Excluding this one-time item, our resulted EBITDA for the quarter of 2016 decreased by 19.7% to $32.8 million. Primarily due to the decrease in (inaudible).

Except for the items that affected EBITDA discussed, net income has been also negatively affected by the $20.5 million non-cash accelerated amortization of intangible assets. Excluding the one-off items adjusted net income, amounted to $6.1 million.

Operating surplus for the third quarter of 2016 amounted to $23.2 million. Replacing their maintenance CapEx to zero was $3 million. Fleet utilization for the third quarter of 2016 was almost 100%.

Moving to the nine months operations, time charter revenue for the nines months decreased by 17.3% to $140.9 million, compared to $170.4 million in the same period of 2015. The decrease was mainly due to the decrease in (inaudible) equivalent rate (inaudible) in 2016 of $16,165 per day compared to $20,267 per day in 2015.

EBITDA for the nine months of 2016 was negatively affected by the $19.4 million gross on the sale of HMM shares, and a $17.2 million impairment loss recognized on one of our vessels. Excluding these one-off items, our resulted EBITDA for the nine months of 2016 decreased by 23.5% to $89.9 million. The decrease was mainly due to the decrease in revenue discussed.

Net income excluding the one-off affect of the items that effected EBITDA, as well as the accelerated amortization of intangible assets amounted to $6.7 million. Operating surplus for the nine months ended September 30, 2016 was $60.9 million.

Turning to slide 10, I will briefly discuss our key balance sheet data as of September 30, 2016. Cash and cash equivalents was $42.2 million. We do not have any significant immediate debt maturities or [culminated] growth CapEx. Net debt to book of utilization was 42.9% at the end of the quarter.

As Angeliki explained earlier, in 2016, we reduced our debt by $106.9 million and we increase the Term Loan B collateral by almost $100 million. Furthermore, the expected completion of the sale of the MSC Cristina in Q4 is estimated to further deleverage our balance sheet and increase our available liquidity.

Slide 11 shows the details of our fleet. We have a large modern-day vessel fleet with a total capacity of 3.4 million dead weight tons, with an average age of 9.5 years. Including the newly-acquired Capesize vessel to be delivered, our fleet consists of 32 vessels, 9 Capezises, 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 2.7 years. Over 75% of our contracted revenue is from charters longer than three years.

Currently, we have fixed almost 100% of our available days for 2016, and we're approximately 60% fixed for 2017. The expiration dates are (inaudible), and the charter durations extend to 2028.

As shown on slide 13, we're an efficient locals operator. We are benefiting from the economies of scale of our sponsor, and we have fixed our operation's cost at lower 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 section. George?

Thank you, Stratos. Please turn to slide 16 and the drybulk market fundamentals.

Growth in world GDP generally coincides with growing raw material demand for steel and energy production. Particularly as emerging markets (inaudible) and industrialize. According the IMF the aid 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.

The emerging and developing markets are expected to grow by 4.2% in 2016, and 4.6% in 2017. Between 2014 and 2015, drybulk trade remained flat, with 2016 forecast to show an increase of between 1% and 2%. Since the all-time low of 290 BDI in mid-February of 2016, the drybulk market has increased with a BDI as of last Friday of 1,045.

Turning to slide 16. Import of iron ore into China have exceeded more than forecasted expectations. Through September, they were up 9% year on year. This is a result of the displacement of low-quality expensive Chinese domestic production which is down 7% through September, with high-quality low-cost iron ore imports. Steel production in China is expected to remain flat in 2016 versus 2015.

Chinese steel exports increase at the beginning of the year but have now decreased as more steel spaced home to supply the improved domestic market. With demand for iron ore up, the deliver price to China has recovered. This has seen exporters outside of Brazil and Australia increase their shipments over the quarter, a reversal in the declines seen over the last few years.

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 local (inaudible) and economic capacity is being shut down.

Domestic core 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 I expected to be up 14% by year end, a complete turnaround from the decline in imports we have experienced in 2014 and 2015.

Indian coal imports started the year declining by 4.3% in Q1. Since May, imports have increased year over year, as domestic coal sometimes have reduced and electricity production has grown. By year end, Indian imports are projected to be up by about 4%. Combined Indian and Chinese imports are now expected to increase by about 8% annualized, a major improvement for forecasts at the start of 2016.

Moving to slide 18. As of January 1, the 2016 order books stood at 92.7 million tons through October 42.8 million tons delivered versus 81.9 million expected, a 48% non-delivery rate. This is the highest non-delivery rate in the last few years.

The order book as of January 1 for 2017 and 2018 decreases substantially. In today's market with low charter rates, low vessel volumes and lack of bank financing, their fleet could contract further going forward as there's leading incentive to out orders for new ships.

Turning to slide 19. The scrapping pace has reduced in the past few months, however, we are still running at an annualized pace of about 32 million deadweight tons. The seven highest a quarter in terms of tons, and close to the all-time record of 33.4 million scrapped in 2012.

Looking at debt fleet growth, the Capesize and Panamax fleets have shown minimal fleet growth over the last 18 months. The Panamax fleets has seen negative growth since the beginning of 2016. Overall, net fleet growth for 2016 is projected to be around 2%.

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 of age being scrapped. Looking at the total drybulk fleet, these 57 million deadweight tons 20 years or over and 117 million tons 15 years or older giving plenty of potential scrap candidates going forward. With new balance for the treatment and regulation said to be implemented next September, there will be further encouragement to scrap older vessels.

Moving to slide 20. Over the past 19 years, container trade has expanded at 7.2% CAGR. In 2016, container growth is forecast to increase by 3.4%, and in 2017 by a further 4.9%.

Maersk Lines, the largest container line operator, said in its Q3 report that there are signs that markets such as China, Brazil and West Africa have bottomed in recent months. I want to remind you that Navios Partners container vessels are fixed on long-term charters, so they're not affected by the sluggishness in 2016.

Turning to slide 21. At the beginning of November, the container fleet consisted of about 5,200 vessels of about 20 million TEU capacity. Vessels carrying 750,000 TEU have delivered [June] 2016 versus a projection of vessels carrying 1.2 million TEU, giving an undelivered rate of 37%. versus a non-delivery rate of just 11% in 2015.

With an extended period of low tractor rates, continuous scrapping has increased dramatically. So far in 2016, 145 vessels of about 0.5 million TEU have scrapped, which gives an annualized pace of over 600,000 TEU or about 3.1% of the total container fleet.

In 2015, only 92 ships were scrapped. Estimates of the TEU growth will be about 1.5% in 2016, lower than the estimated increase in container demand. With no incentive toward 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 her final comments. Angeliki?

Thank you, George. This opens the call -- concludes the formal presentation and we will open the call to questions.

(Operator Instructions)

Noah Parquette, JPMorgan.

Thanks. I just wanted to ask -- you guys have been really active and really on top of the term loan and staying in front of the covenants. That doesn't mature for a bit, but how do you think about what the next part of the capital structure is going to be when 2018 comes? Could you see this put it into more the typical term credit facility, or what are your thoughts there?

That's a very good question. I think the one issue is that we have seen that the debt maturity and the flexibility of the Company relies on being in a good step there.

We addressed the commercial banks. You saw that we prepaid $30 million in banks and we're going to also benefit from that. And we have now a very manageable maturity for Q4 2017 of $30 million with [three vessels].

On the Term Loan B, we have prepaid. We have added collateral of $100 million this year. From 2015, [$150 million], and we prepaid $50 million.

They way we look on the Term Loan B, which is a 2018 maturity, you have to realize that we are mark to market. So loan-to-value is really what is today. So most probably we're going to have to (inaudible), either we split it with two -- in the two consortium of banks -- and that is why we prepaid one commercial packet and we take in the commercial bank sector, which that was the purpose of all these prepayments and the additional collateral.

And the one thing that we can say that we see recoveries is we hear that the debt market coming back. They are reviving. We follow them very closely.

Okay. That leads into my next question is, you bought the Capesize. It's interesting; it's a good value probably right now. How do share repurchases factor into this calculus? Do you still have the ability to do it? The stock is such a discount to NAV, and is that something you are looking at as well?

I think adding collateral, we show the bank that Capesize made a lot of sense. We bought it at 100% cost, and it immediately contributes to our bottom line.

And the other very important thing on the way we are structured, after the restructuring of HMM and the Hanjin development, you have realize that we have a very healthy cash flow. Our contracted revenue covers our entire cost, and we have about $10 million for next year free cash, and we have 7,000 days approximately open. So our strategy (technical difficulty) now on all our drybulk vessels is to have a flow and profit-sharing index.

So we really can capture this healthier market, albeit from a very small, low level. I think we're only 1,000 of the BDI, but you are able to really -- and despite existing, to be able to capture it.

Yes. So, with the Hanjin and HMM, that took a lot of the risk off the table, the uncertainty. But there's still a couple of charters that are still above market. Have you had any other issues with your counterparties, any delayed payments?

No. At this point, HMM needs restructure, so we have visibility of that. We then, if you have seen, we already showed our equity position, the sales we had, and that gave us $20 million of free cash immediately. And based on other companies, the Yang Ming is owned by the Taiwanese government.

Okay, that's all I had. Just a real quick modeling question: What happened to the depreciation expense in the quarter? It looks like it went up quite a bit.

Due to the fact that we had this Hanjin development and we had to take the delivery of the vessels during the last quarter in Q3, tons of (inaudible) were associated with that had to be written off. So you have an exceptional trudge of approximately $20.5 million in this quarter, which, of course, it's one item that will not be repeated.

Got it. So then it will go back to a more normal level. All right, thanks.

Your final question comes from the line of Prashant Rao of Citi.

Hello, good morning, just two quick follow-ups. The operating cash flow for next year looks pretty strong, and you guys have paid down a lot of debt and made a lot of progress there on the capital structure. Just wanted to confirm, should we think of that operating cash flow as exclusively to pay down debt? And getting a sense of how much will that reduce the needs for the amount that might need to be refinanced in 2018? Any thoughts around uses of that operating cash flow would be great.

Listen, we are very mindful of our balance sheet, and we are very quick of addressing issues well in advance. That's why we have, between 2015 and 2016, added $200 million to the collateral of the term loan, and we prepaid $50 million, almost 20% of the term loan.

When we use -- see the use of proceeds from this growing cash flow, number one, we are mindful that we are in a cyclical and seasonal business. So, yes, I don't believe we are at a high environment; this is really a merely part of a recovery, but it's going to have seasonalities.

And we may have Q1, different quarters as we have seen, being affected even from weather pattern. We will see Q1 how it develops. Then container [sales really] is unclear. You had the ripple effect of Hanjin, which will be settling down at one point, but you have to be mindful. So we have seen that let's say that the drybulk has bottomed and is clearly in a well-supported level, going slowly in a recovery, so we're mindful and we're watching opportunities in the sector.

Okay, that makes sense. Just a quick one on some of the charters that are above market remaining, for example, the Melodia charter with KLC, those -- that insurance suspension in April while KLC is realigned and now it seems to be back at charter at the normal rate. It might be asking a little bit too much to guess at this, but how would you think about incremental risks and modifications on some of those above-market charters now that Hanjin risk is behind you, the HMM risk is behind you? Is it settled in the market now going forward? You feel like what's done is done, and now this is the new -- ?

I think this is whatever is done is done. Let's realize that what is your risk -- is as I mentioned before, Yang Ming, the Taiwanese government, you have HMM which is already restructured, and then you have Rio Tinto which is well established, you have Constellation, and you have [in essence] (inaudible) which is restructured out of chapter 11 restructured company.

Okay. That's great. And just one quick modeling question: What's your maintenance CapEx expectation for sustaining CapEx for 2017?

Actually, these are part of our operating expense. So you [consider diagnosed] vessel expenses, so there is not an amount that is budgeted. We expect to have a couple of vessels coming in drydock in 2017.

Okay. Thank you very much. I appreciate the time.

Thank you.

I will now return the call to Mrs. Angeliki Frangou for any additional or closing remarks.

Thank you, this completes Q3 results.

Thank you for participating in today's conference call. You may now disconnect.