Navios Maritime Partners LP (NMM) 2017 Q3 法說會逐字稿

Thank you for joining us for Navios Maritime Partners Third Quarter 2017 Earnings Conference Call.

With us today from the company are Chairman and CEO, Mrs. Angeliki Frangou; Chief Financial Officer, Mr. Efstratios Desypris; and Executive Vice President of Business Development, Mr. George Achniotis.

The conference call is being webcast. To access this 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.

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 does not assume any obligation to update the information contained in this call. The agenda for today's conference call is as follows. We'll begin this morning with formal remarks from the management team, and after, we'll open up the call to take questions.

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

Thank you, Laura, and good morning to all of you joining us on today's call. For the third quarter of 2017, Navios Partners reported revenue of $60 million and EBITDA of $41 million.

Last year was a challenging run for the dry bulk and container sectors. Many maritime companies were tested. Navios' strong balance sheet, disciplined cost management and position as a gross platform allow us not only to weather the storm but also to prosper.

As you can see from Slide 4, today, NMM owns 37 vessels, consisting of 30 dry bulk vessels and 7 container vessels. We simply reformed Navios Maritime Containers Inc., a growth vehicle dedicated to opportunities within the container sector. Navios Maritime Containers has grown its fleet to 20 vessels, of which Navios Partners owns 34% and has warrants to an additional 6.8%.

Slide 5 provides some of Navios Partners highlights. NMM is expected to generate significant cash flow with no major near-term maturities -- debt maturities and low leverage. We are in the process of renewing our dry bulk fleet with younger and larger vessels, which will provide us with significant additional free cash flow in the current recovering market.

We expect about $625 million in remain contracted revenue. 80% of this revenue is through charters longer than 3 years. The average charter duration of our entire fleet is about 2 years. Our credit ratios are strong with 57.3% net debt to capitalization as of Q3 2017.

Slide 6 focuses on NMM's ability to generate significant cash flow. With a low cash breakeven per day for 2018, supported by $89 million in contracted revenue, NMM has generated significant free cash flow. Free cash flow generation is expected to be about $100 million at current market rate and about $170 million assuming 20-year average rate.

We have been investing in the future. We are engaged in a renewal program for our dry bulk vessels. We acquired 7 vessels and sold 1. As a result, we increased our fleet by 33% on a deadweight ton capacity scale, which also decreased the age of our dry bulk fleet by 9%.

We created Navios Maritime Containers. We launched Navios Containers to leverage the weakness in the container sector. Today, Navios Containers made $150.3 million of equity and purchased 20 container vessels. Navios Partners assisted by investing $50 million and sealing a 34% equity stake plus 6.8% in warrants.

We have created Slide 7 to signify the improvement in market's fundamentals since the low of the 2 lines of 2016 and also to highlight the room for certain recovery given improving industry fundamentals. I would like to focus on 3 data points that are -- that all signify this improvement. #1, the BDI has improved by 425%. #2, Capesize 5TC rate have increased by 836%. #3, Capesize 10-year old vessel values have increased by 75%.

Although, the industry has experienced this recent recovery, there is still significant upside remaining as the BDI, Capesize 5TC rate and Capesize 10-year old vessel values are still 45%, 56% and 65% below 20-year average values, respectively. There is clearly more room for further recovery.

Slide 8 further explains what I highlighted earlier, our expected breakeven per open day for 2018 is only $5,351, assisted by our contracted revenue of about $89 million. Therefore, our fleet can generate significant expected free cash flow through our $9,404 open and index day as charter rates recover towards a 20-year average. At current rate, our fleet has the ability to generate an additional $100 million of free cash flow. At 20-year average rate, our fleet can generate an additional $170 million in free cash flow.

Slide 9 shows our liquidity. As of September 30, 2017, we have a total cash of $31.4 million and total debt of $500.6 million. We have a low net debt to book capitalization ratio of 37.3% with no significant debt maturities until 2020 and additional fire power for further growth.

At this point, I would like to turn the call over to Mr. Efstratios Desypris, Navios Partners' CFO, who will take you through the results for the third quarter of 2017.

Thank you, Angeliki. Good morning all. I will briefly review our unaudited financial results for the third quarter and 9 months ended September 30, 2017. The financial information is included in the press release and is summarized in the slide presentation on the company's website.

As Angeliki mentioned earlier, on August 29, 2017, Navios Containers completed a $50 million private placement where Navios Partners invested $10 million. As a result, Navios Partners owner's percentage dropped from 59.7% to 39.9%. And from that date onwards, Navios Containers is not fully consolidated into Navios Partners results. The financial results of the quarter includes the operating results of Navios Containers for the period until August 29, 2017 and the sale of NMM in Navios Containers earnings for subsequent periods.

Moving to the financial results as shown on Slide 10, our revenue for Q3 of 2017 increased by 19.1% to $60 million compared to $50.3 million for Q3 of 2016. The increase was mainly due to the 13% increase in the Navios Partners available days for the fleet and the $9.3 million revenue for Navios Containers.

EBITDA for the third quarter of 2017 was positively affected by the $4.1 million gain on the deconsolidation of Navios Containers and was negatively affected by $0.5 million equity compensation expense and $0.4 million reactivation costs of Navios Containers.

EBITDA for the third quarter 2016 was negatively affected by a $19.4 million loss on the sale of HMM shares. Excluding these items, adjusted EBITDA for the third quarter of 2017 increased by 15.3% or $37.9 million compared to $32.8 million in Q3 of 2016, primarily due to the increase in revenues, which was mitigated mainly by the $4 million management fees of Navios Containers and $1.4 million increase in Navios Partners management fees due to the increased fleet.

Net income for Q3 of 2017 amounted to $9.2 million, or $6.1 million adjusted for the items that affected EBITDA described previously.

Operating surplus for the third quarter of 2017 amounted to $27.2 million. The replacement and maintenance CapEx reserve was $4.1 million. Fleet Utilization for the third quarter of 2017 was almost 100%.

Moving to the 9 months operations, time charter revenue for the 9 months increased to $152.4 million compared to $140.9 million in the same period of 2016 mainly due to revenue from Navios Containers.

Adjusted EBITDA for the 9 months of 2017 increased to $95.9 million compared to $89.9 million for the same period of 2016. The increase was mainly due to the increase in revenue discussed and were mitigated mainly due to the $4.7 million management fees of Navios Containers and $1.1 million increase in management fees of Navios Partners as a result of its increased fleet.

Net income amounted to $8 million. Operating surplus for the 9 months ended September 30, 2017, were $67.1 million.

Turning to Slide 11, I will briefly discuss our key balance sheet data as of September 30, 2017. Cash and cash equivalents was $31.4 million. We do not have any debt maturities until 2020, and we have no committed growth CapEx as we have completed our recent acquisitions.

Net debt to book capitalization remained at low levels to 37.3%. This is a decrease of approximately 12% compared to the end of last year. Our debt balance decreased by approximately $23.2 million in 2017 and amounted to $500.6 million at September 30, 2017.

Slide 12 shows the details of our fleet. We have a large, modern, diverse fleet with a total capacity of 4.2 million deadweight tons. Our fleet is young, with an average age of 9.9 years. Our fleet consists of 37 vessels, 13 Capesizes, 14 Panamaxes, 3 Ultra-Handymax and 7 container vessels.

In Slide 13, you can see the list of our fleet with the contracted rates and their respective expiration dates per vessel. Our charters have an average remaining contract duration of approximately 2 years. 8.2% of our contracted revenue is from charters longer than 3 years. Currently, we have contacted approximately 98% of our available days for 2017, and approximately 36% for 2018. The expiration dates are as target, and the chartered durations extend to 2028.

As shown on Slide 14, we are an efficient low-cost operator. We are benefiting from the economies of scale of our sponsor. We have agreed to extend our management agreement until December 31, 2022, and fixed our operational cost until December 2019. Based on the new agreement, the fixed fees for Capesize and container vessels remain the same at $5,250 per day for Capesize vessels. $6,700 per day for 6,800 TEU container vessels and $7,400 per day for 8,000 TEU container vessels, while the fixed fees for Panamax and Ultra-Handymax vessel's will increase by 3% to $4,325 per day and $4,225 per day per vessel, respectively.

The total impact to Navios Partners cost is expected to be less than the $1,900,000 based on our current fleet. There's no additional subject commissions for technical and commercial management nor any fees for S&P in financing transactions. For 2016, our total costs were approximately 10% below the average cost of our listed peer group. This translates in estimated savings of approximately $7.6 million.

In Slide 16, you can see the ownership structure of Navios Containers. This entity completed its listing in the Oslo OTC market in June 2017 and has raised a total of $150.3 million of equity since its inception. Currently, Navios Partners has a 33.7% ownership interest in Navios Containers, plus 6.8% warrants. Navios Containers has a fleet of 20 container vessels, 4 of which are expected to be delivered by the end of 2017.

I'll 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 18. World GDP growth in 2017 is expected to be 3.6% and will increase to 3.7% in '18, accelerating from the 3.2% growth in '16. Growth in emerging economies is forecast to increase from 4.3% in '16 to 4.6% in '17 and 4.9% in '18.

On the back of synchronized global economic growth, dry bulk trade growth is expected to double from 1.2% in '16 to 4.7% in '17.

At current BDI levels, dry bulk market is about 400% above the all-time low of 290% in February 2016, with substantial upside as it still remains 45% below the intermediate average.

Turn to Slide 19. Substitution of Chinese expensive [low-quality] iron ore with fair quality(inaudible) and lower price inputs, particularly from Australia and Brazil continues. Imports into China for 2017 are forecasted to rise by about 7% or 67 million tons and a further 3.6% in '18. Up to the end of September, Chinese seaborne iron ore imports were up 7% year-on-year.

Steel production in China continues to expand, up 6% year-to-date. High domestic demand has translated in to a 4-year high in steel prices, with low import on iron ore and coal prices, Chinese Steel Mills are enjoying their best profit margins in the last decade.

High Chinese domestic steel demand has been stimulated by large infrastructure projects in the recovering housing market. The One Belt, One Road project is a cornerstone of the Chinese economic plans for the next 5 years and supports steel and coal demand inside and outside China.

Chinese steel exports have decreased by over 30% this year to manage the impressive growth in domestic demand. As a result, steel production in the rest of the world has increased by about 5.5% year-to-date.

Of note, the Brazilian iron ore exports, which are forecast to grow by 70 million tons in '17 and a further 20 million tons in '18, has values flagship mine S11D reaches its 90 million ton annual capacity, which will further help ton miles.

Please turn to Slide 20. 2016, so the Chinese coal market start to restructure. Domestic coal production reduced by about 9% or approximately 300 million tons. And imports of coal surged by 20% or about 40 million tons. The Chinese government continues to rationalize domestic coal production, closing down small inefficient mines and encouraging consolidation of large mining groups. It is expected that the restructuring of the Chinese coal industry will continue to encourage imports as inefficient polluting mines are closed.

The electricity consumption in China continues to rise in 2017 by about 7%, up to the end of September with thermal power generation rising by 7% as well. To September 17, coal imports are up by about 8%. As we enter the winter peak season, we should experience an increase in imports as power plants stock up. China imports less than 10% of its annual coal consumption, but with the domestic coal price above import prices, the market continues to incentivize strong imports.

Turning to Slide 21. Agricultural production worldwide continues to increase. In 2017, forecast are for an increase of 6.3%. Worldwide grain trade has grown by 5.2% CAGR since 2008, mainly driven by Asia. Demand increases are focused on Asian economies and especially, China, where incomes are rising and diets are changing. Chinese imports of soya beans by the end of October were up 16% year-to-date.

Moving to Slide 22. After the end of October, about $36 million deadweight tons of new buildings delivered versus unexpected delivery of 54 million tons, maintaining a 33% on delivery rate. As of January 1, the 2017 order book stood at 58 million deadweight tons. Using a 33% nondelivery rate for the year, it is estimated that about 59 million tons will be actually delivered.

About 13.2 million tons has scrapped so far in 2017. So net fleet growth will continue to be low. With an order book that see a 15-year low of 7.4% of the fleet earlier this year, the forecast for fleet growth in 2018 is 1.2%. This will be the lowest fleet growth since 2000. I'm certain the overhead mix to renewed Tier III designs, incorporating new folks and NOx requirements as well as new ballast water systems, makes ordering new buildings risky and encouraging scrapping of water vessels.

Turning to Slide 23. 2016 ended with net fleet growth of 2.2%, the lowest percentage for many years. Through early November 2017, the pace of scrapping has fallen as charter rates have improved. However, 13.2 million tons has scrapped year-to-date. Maintaining the current scrapping pace in nondeliveries, we'll produce another low net fleet growth this year.

The current order book before nondeliveries is about 8% as compared to the total fleet, and we know that vessels over 20 years of age equal about 7%. The reported delivery should be much by vessel reduction over the foreseeable future. With the new IMO regulations soon to come into effect, all the vessels should continue to scrap.

The fundamentals for 2018 and beyond remain positive, and the balance between supply and demand supports high charter rates going forward. In fact, forecast for 2018 show that demand growth of 2.7% will be more than twice the level of supply growth at 1.2%. As a result, we expect that we will reach higher lows and higher highs through the end of this year and through 2018.

Moving to Slide 25. In the container market. As world GDP grows, consumption grows and so does container demand. Over the past 20 years, container trade has expanded at a 7% CAGR. In 2017, container growth is expected to grow by 5.2% and a further 5.3% in '18. Maersk lines recently stated that demand growth remains solid at 5% while supply growth grew at 3%, helping 3Q '17 [growth trade] rates increase by 14% compared to 2016.

Please turn to Slide 26. This slide highlights the recent positive developments in the container market as trade growth exceeds net fleet growth. Starting in the second half of 2016, demand began to improve significantly. At the same period, record scrapping reduced the growth of the fleet dramatically, a trend which has continued into 2017. The latter part of Q3 '17 has seen an increase in deliveries of large ships, bringing TEU capacity up by keeping the fleet size by a number ships slightly less at the same time last year. This has been reflected in improved time charter rates this year compared to last year, particularly for the smaller-sized vessels.

Turning to Slide 27. At the beginning of January '17, the container fleet consisted of about 5,100 vessels, with about 20 million of TEU capacity. As of January 1, 2017, order books stood at about 1.7 million TEU. Through September, 1 million TEU have delivered versus an expected 1.45 million TEU, giving a nondelivery rate of 30%. Net fleet growth year-to-date in 2017 has been a low 3.2%. I would like to point out that over 80% of the order book is focused in the larger, over-10,000 TEU ships with minimal order book for smaller sizes.

Turning to Slide 28. Forecast for 2017 net fleet growth at 3.4% compared to demand growth of about 5.2%. Next year, demand growth is forecast at about 5.3% while net fleet growth is expected to be 4%, which will mean that 2018 will be the third straight year that demand growth exceeds supply growth.

With little incentive towards the new buildings in the current environment, the balance between and demand supply continues to improve, causing high charter rates going forward.

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

Thank you, George. Let's open now the call to questions.

(Operator Instructions) Your first question comes from the line of Chris Wetherbee of Citi.

I wanted to touch, Angeliki, on the comment you made earlier in the call about the growth opportunities and sort of when you think about debt maturity being out in 2020. There's an opportunity here maybe to grow the fleet. Where do you want to focus? And how should we be thinking about that pace of growth? What are the opportunities set? What are the opportunities set look like right now?

Very good question. One thing I'd like to say is that NMM has done a lot of work, and we are the best dry bulk platform. Don't forget that we already have done quite a significant improvement of our fleet. We increased our fleet by 30% going to higher-margin vessels. And we improved our age profile by 10%. Of course, this process is never ending, and you will always have a replacement of vessels on your portfolio. But it's quite significant, improvement of our fleet has already happened. Now, one of the things that we see very important is that the companies has done always. And at the same time, we have one of the best and large breakeven, $5,350. And you know all the dry bulk platforms around the capital market. I think this is the lowest with no debt maturities. Yes, we have one in 2020, easily taken out in today's market. No CapEx and 9,450 open and index days in the 2018 market. So I think this is an important positioning for the company for a very significant free cash flow generation. Also we see a path on our containers that are coming to near maturities to be drove down to Navios Containers where we'll clean up now the structure, and we'll become a full focused dry bulk platform.

Okay. Okay so there could be some drop downs in there as well. So in the context of that, when you think about free cash flow and your allocation, how do you think about dividend? Is that something that enters the discussion any time soon or is it too premature to talk about that?

Okay. That's a good -- let's be honest, I mean, we saw a recovery. A recovery from -- on the dry bulk from the low 2018. So there is clearly a path towards dividend. The one thing that -- the account of balance that we are looking and contemplating is that we have not seen long period charters on the dry bulk. But clearly, you can see that there is a recovery from Q1.

I see. That's helpful. So you need to see some sustainability in the period market before you can feel comfortable that distributing dividend is the right way to go?

We cannot see it fast. I mean, it may be a modest. But you can see the path from where we're at, it's also a modest season. But you can see clearly a path from where we are.

Okay. And then just one final question on the management agreement. We should be assuming a fixed rate for 2018 and 2019 on the OpEx. And then could you give us a sense on what the -- maybe the cost inflator would look like beyond that?

I think that actually, in the previous one, I mean, the minimal increase to asset classes and it was 0 increase on the other 2. So it's purely what -- inflationary situation we see and have not -- on the 10 years that we've operated on management agreement, we have never seen more than a 3% increase.

Okay. So that's the way we should be thinking about going forward, beyond the 2019 day?

I mean, you have a long record of that of 10 years.

Your next question comes from the line of Noah Parquette of JPMorgan.

I just want to ask you -- you guys have been pretty active on fleet renewal, inspecting, looking at ships. Have you seen any firming asset values at all? I mean, the brokers just kind of showed them at flat for a while now despite improving market. I just wanted to get a sense of what you've seen.

What you don't see -- reports don't always give the full situation. I think one of the things we see is that you don't have very willing sellers in this market in Q4 because you see a lot of cash flow generation. Let's say, I'm talking about especially the good assets, the Capesizes, we are generating over $22,000. And if you have above index for a good Japanese resin that is 110 or 120 of rebates, it's generating this quarter $25,000, $26,000. So it's a peculiar market. I think -- you will not -- you will never see the market going smoothly. That jumps, it plateaus and it does jump. One of the things we are very proud on the way we did that replacement is that, we went early on, picked up the asset and we've got the entire fleet that we apply these have investments were all in our fleet away within July and August was the last one. So we had the full ramp up on the market with the increased rate of twofold with the entire fleet in there. You may see -- I mean, relative to where you have earnings in the beginning of the year to the end, you can see us a very ramp up of over 20%.

Okay. And then in terms of the financing for unchartered drive-off ships, it looks like you -- you took a little bit of the term loan for some of the vessels. What's the financing availability like for a second hand unchartered ships?

So. I mean, if you have seen we have now facilities with bad debt(inaudible). We extended our B2B facility, and we added on our term loan. So we did all of them.

So the B2B facility, that was extended. There's no -- there isn't a bulk payment in November anymore, right?

No, no. It was extended.

That's going to 2020, Noah.

Your final question comes from the line of Peder Jarlsby of Fearnley.

Just a few quick questions from me. You touched briefly upon on streamlining the company and dropping the container vessels down to NMCI. Can you talk a bit more about the timeline for that? And what we should expect?

I mean, one of the things I would say, we have capital vessels NMCI have rolled off. And as the vessels roll off, this is a natural home Navios Containers. So you can see it is a vessel out of Q2 to Q3, something like that.

Okay. So for those vessels, we'll see a gradual streamlining of the company rather than just 1 larger transaction?

I cannot comment to that. I mean, this is capital market. And I think that, what I want to say is the logic -- the logic is that as these vessels were lost, they start come down and is in their natural home for the company to grow. And then you have the possibility of this becoming a very clear traction.

Okay. And then just finally in terms of your -- you're expected to generate quite a bit of free cash flow next year. So what do you believe is the best proceeds for that free cash flow going forward?

That's very good. I mean, one of the things I've got is that -- listen, we are doing more and we already have done quite a significant one. We, of course, are going to buy vessels and drop, renew our fleet for the portfolio as necessary. But I think, as we see also that the company inevitably will have a path towards dividend, and of course, you have to be a very -- we have to always balance that with the fact that we have not seen period charters on dry bulk, but there's clearly a path.

Okay. And just in terms of renewing the fleet. You've done a good job so far. But in terms of larger deals out there, fleet deals, did you see any -- is there a potential to do that? Or is it just more taking up, seeing less that sort of -- you're not just trying to get them in terms of what you're seeing in terms of opportunities out there?

Listen. The reality is, we are not about -- you are talking about 1 company that absorbed a whole company out of Singapore. We have done more capital market and assumption than anyone. And we have done also single vessels. The reality is that, the big transactions that (inaudible) line and it's not a distress is the easiest thing to do in the world. It's a matter of growth and getting a commission. The reality is how you really try to find the best portfolio and try to get bills that make sense. So don't worry, we can do anything from a single to 20 vessels at one time.

Thank you. I will now return the call to Mrs. Angeliki Frangou for closing remarks.

Thank you. This completes our Q3 results.

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