Navios Maritime Partners LP (NMM) 2018 Q3 法說會逐字稿

Thank you for joining us for Navios Maritime Partners' Third Quarter and 9 Months 2018 Earnings Conference Call. With us today from the company are Chairman and CEO, Angeliki Frangou; Chief Financial Officer, Stratos Desypris; and Executive Vice President of Business Development, 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'll 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 risks and uncertainties, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Partners' filings with the Securities and Exchange Commission. 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 industry overview; and lastly, we'll open the call to questions.

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

Thank you, Lauren. Good morning to all of you join us on today's call. I am pleased with the results for the third quarter of 2018, for which Navios Partners had $42 million of EBITDA and $16.3 million of adjusted net income. Markets continue to improve in the -- as a result for Q3 of 2018, the TCE rate for our dry bulk fleet was 35% higher than the Q3 of last year. We declared a quarterly distribution of $0.02 per unit for the third quarter, representing a current yield of about 5.5%.

As you can see from Slide 5, NMM owns 40 dry bulk vessels. About 18 months ago, we leveraged the weakness in the container sector by establishing Navios Containers, which is a growth vehicle now, owning 26 containerships.

Slide 6 sets forth the reasons we believe Navios Partners is a premier dry bulk shipping platform. It expects to generate significant free cash flow of $65 million for 2018 at current charter rates. This can raise approximately $80 million if rates recovered 20-year averages. In addition, since 2016, we have been able to renew and expand our fleet on a timely basis, increasing fleet capacity by 50% and decreasing average age by 20%.

Finally, we have a 36% interest in Navios Containers, which is pursuing a listing on the NASDAQ Global Select Market. NMM is making a distribution to our shareholders of about 900,000 shares of NMCI to grow the NMCI shareholder base to meet the NASDAQ listing requirements. After the distribution, NMM will own 33.5% of NMCI.

Slide 7 highlights our deleveraging efforts. We intend to continue to deleverage through internal generated cash flow plus cash process from containership sales. In July of this year, we repaid $20.2 million of debt from the sale process of the 2 containerships. NMM net debt to book capitalization decreased to 35%. This represents about 16% reduction since the fourth quarter of 2016. In addition, we have built a strong balance sheet. We have no significant near-term debt maturities and healthy credit ratios.

Our corporate net LTV is about 50%, excluding investment in subsidiaries, and our net debt to EBITDA ratio is under 3x. Although we have deleveraged, we have been able to -- at the same time, to renew and expand our fleet.

Slide 8 provides the details of this effort. Since the beginning of 2017, we invested about $270 million and added younger vessels to our fleet with an average age of about 6.9 years. We have also sold our aging vessels with an average age of about 22 years. On a net basis, we have had 9 vessels added to our fleet with sales and [operating] activities resulting in about 50% increase in our fleet capacity and about 20% decrease in our fleet average age.

Slide 9 shows a significant cash flow potential. About 30% of our fleet is covered by long-term charters, some of which are adjustable -- have adjustable-rate charters, having the ability for us to enter fixed coverage for a portion of the remaining term.

For 2018, contracted revenues fully cover total expenses. Therefore, NMM's fleet is expected to generate free cash flow through its 1,300 available days exposed to the market. At current rate and with our current capital structure, NMM's fleet will generate about $65 million of free cash flow. As charter is recovered towards 20-year averages, NMM's fleet will generate about $80 million in free cash flow. As you can see from the chart below, the BPI average increase by 20% year-to-date, and hence, continue to recover nicely towards its 20-year average level. NMM is well positioned to get the benefits of this recovery and generate significant cash flow.

Slide 10 shows our liquidity. As of September 30, 2018, we had total cash of $58.3 million and total debt of about $511.7 million. Our net debt to book capitalization is 35%, a 16% reduction compared to the fourth quarter of 2016. Moreover, we have no debt maturities until 2020 and have built up additional firepower for future growth.

At this point, I would like to turn the call over to Stratos Desypris, Navios Partners CFO, who will take you through the results of the third quarter of 2018. Stratos?

Thank you, Angeliki, and good morning all. I will briefly review our financial results for the third quarter and 9 months ended September 30, 2018. 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 11. During the third quarter of 2017, our results were affected by the results of Navios containers, which was consolidated in our accounts until August 29, 2018. During that period, Navios Containers reported $9.3 million of revenues and $4.4 million of EBITDA. In order for the comparison to be meaningful, we exclude this amount from the discussion below.

Our revenue for the third quarter of 2018 increased by 23.4% to $62.6 million compared to $50.7 million in Q3 of 2017. The increase was mainly due to the 7.9% increase in the Navios Partners' available days over the fleet and the [15%] increase in the times other equivalent rate that we achieved during the quarter.

EBITDA for the third quarter of 2018 and 2017 were affected by a number of items detailed in the slide. Excluding these items, adjusted EBITDA for the third quarter of 2018 increased by 26.1% to $42 million compared to $33.3 million in Q3 of 2017, primarily due to the increase in revenues, which was mitigated by the $3.2 million net increase in all other expenses.

Adjusted net income for Q3 of 2018 amounted to $16.3 million, $10.5 million higher than the same quarter of last year.

Operating surplus for the third quarter of 2018 amounted to $25.8 million. Replacement and maintenance CapEx reserve was $7.4 million. Fleet utilization for the third quarter of 2018 was approximately 99%.

Moving to the 9 months' operations. The below discussion again excludes the $12.4 million revenue and $6.7 million EBITDA of Navios Containers that affected the 9 months of 2017. Time Charter revenue for the 9 months increased to $173.8 million compared to $140 million in the same period of 2017, mainly due to the 13.2% increase in our available days and 7.4% increase in the Time Charter Equivalent rates achieved for the period.

Adjusted EBITDA for the 9 months of 2018 increased to $108.2 million compared to $89.5 million for the same period of 2017. The increase was mainly due to the increase in revenue discussed and was mitigated mainly due to the $5.9 million increase in management fees resulting from our increased fleet, $8.4 million decrease in other income and $0.8 million net increase in all other expenses.

Adjusted net income amounted to $31.6 million, $21 million higher than the corresponding period of 2017.

Operating surplus for the 9 months ended September 30, 2018, was $63 million.

On Slide 12, I will briefly discuss some key balance data. At the end of the third quarter, cash and cash equivalent was $58.3 million. Long-term debt, including the current portion, net of deferred fees and discounts amounted to $511.7 million. Net debt to book capitalization was 35%, decreasing by 4.9% since the end of 2017.

Moving to Slide 13. We declared a cash distribution for the third quarter of 2018 of $0.02 per unit, equivalent to $0.08 per unit on an annualized basis. Our current annual distribution provides for an effective yield of approximately 6% based on Friday's closing price. The payment date is November 14, 2018. Total cash distribution for the quarter amount to $3.4 million. Our common unit coverage for the quarter is 7.5x.

In addition to the above cash distribution, as Angeliki mentioned earlier, we announce that we will distribute approximately 855,000 shares of common equity of Navios containers to our unitholders in connection with the proposed listing of Navios Containers on the U.S. Stock Exchange. The record date is November 23, and the distribution date will be on or about December 3, 2018.

Slide 14 shows the details of our fleet. We have a large, modern, diverse fleet with a total capacity of 4.5 million deadweight tons and an average age of 10.1 years. Our fleet consist of 40 vessels: 14 Capesizes, 18 Panamaxes, 3 Ultra-Handymax and 5 containerships.

Moving to Slide 15 you can see some recent developments on our fleet, demonstrating our continuous active renewal and expansion efforts. On August 31, we took delivery of the previously announced 2016 Japanese build vessels, 1 Capesize and 1 Kamsarmax. Furthermore, in October, we agreed to sell 2 of our older Panamaxes with an average age of approximately 23 years for $9.3 million. The sales are expected to be completed in the fourth quarter of 2018. These sales are expected to result in approximately $6.6 million book loss, of which $5.3 million has already been included in our third quarter results with the remaining $1.3 million expected to be included in our fourth quarter results.

Finally, we managed to take advantage of the solid market during the Q3, and we fixed 6 vessels for longer periods. More specifically, we chartered out the Navios Fantastiks, a 2005-built Capesize vessel, for an average period of 4.5 years at a daily rate of $19,150. We have also agreed with the charterer for the installation of scrubber in the vessel, which will result in increasing our net daily charter rate by $2,740 per day for 3 years following the installation.

Additionally, we fixed the Navios Mars, a 2016-built Capesize vessel, for an average period of 3.1 years, at a net daily charter rate of $22,610. Both the above charters are expected to commence in Q1 of 2019.

Finally, we continue to charter vessels at innovative index-linked contracts that can be switched to fixed rate at our option any time for durations up to the full remaining duration of the charter. We have concluded 4 long-term charters from Panamaxes vessels for average periods between 2.1 and 2.3 years at levels ranging from 100% to 120% of the BPI 4TC Index.

In Slide 16, you can see the list of our fleet with a contracted rates and the respective expiration dates per vessel. Our charters have an average remaining contract duration of approximately 2 years. Currently, we have contracted approximately 97.8% of our available days for 2018 and 45.8% for 2019, including days contracted at index-linked charters. The expiration dates extend to 2028.

As shown on Slide 17, we are an efficient, low-cost operator. We benefit from our sponsors' economies of scale. Our management agreement runs until December 31, 2022 and our fixed operating costs until December 2019. There is no additional charge or commissions for technical and commercial management nor any fees for S&P and financing transactions.

In Slide 18, you can see the details of Navios Containers. This entity listed on Oslo OTC market in June 2017 and has raised a total of $180 million of equity. It has acquired 26 containerships with a further visible growth pipeline. Currently, Navios Partners has a 36% ownership interest in Navios Containers.

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

Thank you, Stratos. Please turn to Slide 20. The IMF forecast world GDP growth at 8.7% for both 2018 and '19. Emerging and developing Asian markets, which drive dry bulk demand, are expected to grow at 6.5% in 2018 and 6.3% in '19. On the back of synchronized global economic growth, dry bulk trade grew by 4% 2017 and is forecasted to rise by 2.5% in '18, slightly lower than the expected 2.8% net fleet growth.

The average Baltic Dry Index over the first 9 months of 2018 increase by 31% compared to the same period last year. The dry bulk market fleet has substantial upside as the EBITDA is about 50% below the 20-year average.

Turning to Slide 21. Worldwide steel production increased by about 5% in the first 9 months of 2018 compared to the same period last year. Chinese steel production rose by an impressive 8%. Chinese steel exports continue to decrease on the back of increased domestic demand, which has been stimulated by large infrastructure projects and recovery in the housing market. The Belt and Road initiative project is a cornerstone of the Chinese economic plans for the next 5 years and supports steel and power demand domestically and for exports. Substitution of Chinese expensive, low-quality iron ore with high-quality and lower-priced imports continues. Through the first 9 months of the year, domestic production was down by 40%, while imports was estimated slightly down. Chinese steel mills have been using more scrap in their blast furnace, and stocks of iron ore in both the major ports and at steel mills have been reducing over the last few weeks.

Vale recently reiterated that they expect to meet their 2018 production target of about 390 million tons, which has resulted in 105.5 million tons export volumes for Q3, about 10 million tons above Q2, and forecasters expect a similar number for Q4. Decreased activity in the spot market from logistical issues in West Australia, iron ore stock reductions in China and a number of Valemaxes arriving recently in Brazil has caused a correction in the Cape spot market. But the fundamentals for 2019 look positive with Brazilian exports expected to increase by about 15 million tons.

Please turn to Slide 22. 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 keep domestic coal prices high and encourage imports as inefficient polluting mines are closed. Chinese electricity production continues to increase, and it's up about 8% year-to-date. Through September 2018, Chinese seaborne coal imports were up by about 11%. Indian coal imports have increased by about 17% so far in 2018 and look likely to continue as product plant stocks remain very low at about 5 days of production. U.S. coal exports have increased over 30% so far year-to-date, driven by Asian demand increasing ton miles.

Turning to Slide 23. Worldwide grain trade has been growing by 5.9% CAGR since 2008, mainly driven by Asian demand. Chinese tariffs on U.S. soybeans are causing trade disruptions, which have been positive for dry bulk. Exports of soybeans from the U.S. have dropped significantly so far this crop year as China substitutes U.S. soybeans with soybeans from South America. In order to cover the additional demand, Brazil and Argentina have been importing soybeans from the U.S.

Moving to Slide 24. In spite of a significantly better market this year, the nondelivery rate remains at about 21% of the expected deliveries. Forecast for 2018 are for a low 2.8% net fleet growth. Based on the current order book and shipyard availability, low net fleet growth is expected to continue over the next few years. New IMO regulations for balanced water treatment systems and fewer regulations are expected to result in higher scrapping going forward. The expected disruption caused by the IMO 2020 fuel regulation changes should provide support to the dry bulk market through 2019 and beyond. Tonnage supply will tighten next year as vessels will have to go to drydock for about 30 days to retrofit exhaust gas scrubbers. In addition, the expected increase in fuel costs in 2020 provides an incentive to bring shipments forward into the second half of 2019 in slow steam vessels to reduce fuel consumption in 2020.

Turning to Slide 25. Net fleet growth so far this year is 2.5%. The number of vessels actually delivered in 2018 is running about 35% less than 2017 year-to-date. The current dry bulk order book before nondelivery is about 10% of the total fleet, and vessels over 20 years of age are about 7%. Forecasted deliveries compare favorably to the overage fleet. The supply and demand fundamentals remain positive, supporting healthy charter rates.

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

Thank you, George. This completes our formal part of the presentation. I will open the call to questions.

(Operator Instructions) Our first question comes from the line of Randy Giveans of Jefferies.

Angeliki, so a quick question on the, just the market in general. It appears the small asset classes have relatively outperformed the Capes, especially in the recent, I don't know, 3 or 4 weeks. So what has been the cause of this kind of firm, Panamax, Supermax trade softening Capesize trade, and how do you see rates playing out in the coming months?

It's a good question. I mean, the basic thing you'll see that we had a -- generally in the last month, you had negative sentiment overall in the markets, financial markets, and we saw a very strong physical market in Capes. Then on -- if you take in consideration the breakdown of the train logistics supply in Australia, that created vessels going more on Brazil, and maybe that affected the temporary distortion. Overall, the fundamentals, meaning net fleet growth and demand, are good. So basically, maybe a little bit of a sentiment issue. But really, still over into the Cape. And also, the logistics of Australia vessels going -- Capes going to Atlantic and creating an oversupply.

Okay. And then looking at the scrubber order. So can you walk us through some of the economics for that install? Basically, at $2,740 per day for 3 years, that's about a $3 million surplus there. So a few questions. How much is the scrubber? And then how did you determine that rate premium? Was it based on a spread differential or just for a payback of 3 years?

The thing is that we're -- that's a note to put the whole conversation. And obviously agnostic about the scrubber. So if a client wants -- a charter wants a scrubber, we will install it on a bulk of a long-term charter. So this is a 15-year-old Capesize that we did a 4-year deal. They ask us for the scrubbers. So we install the scrubber at a cost-plus basis. And the payback of the scrubber is within 3 years. So it is a cost-plus basis. So this is the way that we see, and we will be doing that opportunistically.

Okay. So your other Capesizes that are not on contract, no plans for scrubbers unless they have a contract against that? Is that what I'm hearing?

If there's a contract and a charter wants the scrubber. So in that, we will do the scrubber cost plus a margin and then pay it back within 3 years.

Got it. So no speculative scrubber orders on your end?

No, because we have seen that easily we can fix our vessels beyond 2020. This is really an issue where somebody wants to -- a charter wants to take this risk out of them or they want for their own operational reasons. I mean, we don't see why you should do a CapEx without a definite return on your investment.

Sure. Okay, then one more just quick question. With all this surplus cash, are unit repurchases and option trading at a pretty steep discount to [any of these]?

We definitely are looking on all this because, to be honest, with the kind of -- now the NMM has solidified. I mean, have done so many things has solidified, balance it. We invested $270 million on the best part of the cycle. So we invested in assets. We increase our -- by 50% deadweight capacity, reduced our average age by 20% of our vessels. And at this point, we have no maturities, major maturities until 2020. And we have reduced our debt by -- our net debt to book capitalization by 16% from end of 2016. And basically, net LTV, corporate LTV is below -- is about 50%. So with this kind of a balance sheet and good cash flow generation, I think you -- what we will see now is mostly to accretively use cash. And I think you're right that this can be a very good option.

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

I just wanted to follow up on that last one. I mean, yes, you guys are in a great position on the balance sheet. You chartered a couple of ships long term. Where on the accretive use of cash does distribution increase come into play? How do you think about that now?

I would say that taken -- we already have established a dividend policy. We give about 5.5% return to our investors. I think at this point, with NAV where it looks -- where it is and the supply, I think we have to see the value proposition between the different choices. Don't forget, I want to remind you, and you have been following our company, we did $270 million investment on all what, about 12 -- 15 vessels in the right part of the cycle. So today, you see the cash flows, you see your positioning and you have to allocate the resources to the correct way.

Okay. And then I just wanted to ask about the long-term Panamax contracts. Index linked, you say that you can convert them to a fixed rate. How does that work exactly? And how is that fixed rate calculated?

It is a -- you can -- at any quarter, any moment, we can have the remaining 2 years, 1 year, whatever we've -- now we have selected an option of Navios at the FFA rate. So at any point, you really can do it in fixed-year exposure. And it can be at the index plus a premium if we are -- we have a premium. So this is a -- an extremely viable option where you have, you can say, left the point in the cycle where you want to go long.

Got it. Okay. Great. And then just one last one on the soybean effects on the market. You've seen definitely more out of Brazil. Was any demand pulled forward, do you think, in terms of stockpiling from China? And then what do you -- where are you seeing kind of the U.S. exports going? I know you said that they've fallen, but where do you think those things end up?

I think the commodity will be used, maybe around the world. So depending on the conversation of tariffs, we'll have a distant partner. We -- you may see reduction in U.S. I mean, we saw U.S. beans going down to South America to Argentina. You may see more of that. But in all essence, you will have, I mean, the commodity will be used. It's not going to see -- you're not going to see a reduction. It's just we create more inefficiency.

Our next question comes from the line of Espen Landmark of Fearnley.

I just had a question on really an update on NMCI in terms of the U.S. listing and maybe what kind of role do you think NMM will have here going forward? Including the potential backing and future equity raises.

As you understand, we are in the last stages of the registration statement. And Navios Containers, when it's -- before -- we will have a separate call with the investors. So we are in the final process, where it will be a dividend to NMM shareholders and this will qualify us for NASDAQ Global Listing, which is the main exchange on NASDAQ.

Your last question comes from the line of Max Yaras of Morgan Stanley.

I'd like to follow up on Randy's first question about the Cape market. Any other color you could provide on maybe how much capacity was taken off-line in Australia and how quickly we could get may be a resolution or return to capacity and what that means for near-term rates?

I think the -- one of the things we have seen is that there is a strong program for December, continuing on -- and for December for the iron ore. So the cargoes are there. They balance between Atlantic oversupply and will most probably have to stabilize. And then when we have fresh volume, we will see also rates moving up. So I think this is -- you may think that we may say that maybe also sentiment even, plus the logistics of Australia. Basically, you have good demand, good flows and a restricted supply.

Okay. And then how should we think about your fleet going forwards on a spot-versus-fixed basis? Obviously, a couple fixtures recently. But what percentage should we think about fixed versus spot are you targeting?

Listen, we have about 30% of our vessels in long-term charters, which gives us nice stability. We will have to repeat something we always -- we are very -- I mean, we like exposure in different parts of the cycle. We will not have a problem also fixing nice margins. And this is something that we do it opportunistically, and we build up the portfolio over time.

And thank you. At this time, there are no further questions. I'll turn the floor back to Angeliki Frangou for any additional or closing remarks.

Thank you. This completes our Q3 results. Thank you.

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