Navios Maritime Holdings Inc. (NM) Q2 2016 Earnings Call Transcript
Published at 2016-08-25 14:23:33
Angeliki Frangou - Chief Executive Officer Thomas Beney - Senior Vice President, Commercial Affairs George Achniotis - Chief Financial Officer Ioannis Karyotis - Senior Vice President, Strategic Planning
Prashant Rao - Citi Noah Parquette - JPMorgan Chase & Co.
Thank you for joining us for Navios Maritime Holdings Second Quarter 2016 Earnings Conference Call. With us today from the company are Chairman and CEO, Mrs. Angeliki Frangou; Chief Financial Officer, Mr. George Achniotis; Senior Vice President of Commercial Affairs, Mr. Tom Beney; and Senior Vice President of Strategic Planning, Mr. Ioannis Karyotis. As a reminder, this conference call is being webcast. To access the webcast, please go to the Investors section of Navios Maritime Holdings’ website at www.navios.com. You will see the webcast 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 meanings of the Private Securities Litigation Reform Act of 1995 about Navios Holdings. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Holdings’ 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 Holdings’ filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Holdings does not assume any obligation to update the information contained in this conference call. The agenda for today’s conference call is as follows. We will begin this morning’s conference call with the formal remarks from the management team and after we will open the call to take questions. Now, I will turn the call over to Navios Holdings’ Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?
Thank you, Doris. And good morning to all of you joining us on today’s call. Slide 3 provides our company highlights. Navios Holdings controls a diverse fleet of 61 modern vessels. Our size and purchasing power create efficiencies and cost savings. We have operating leverage from our world-class employee and technical capabilities. As a result, our OpEx is 42% below the industry average. Slide 4 highlights our current corporate structure. Navios Holdings’ volume derived from five areas: the dry bulk fleet of Navios Holdings and four principle operating entities. The market’s volume a total as listed on the sum of the public parts. Slide 5 shows our strength through diversification. Navios Holdings invest directly in dry bulk, and then total companies have invested in tankers, ports, containers and dry bulk. Each of these companies has strong balance sheet, good cash flows and favorable industry dynamics. While the value of these entities may not be currently appreciated by the market, we believe that the intrinsic value of this company will be recognized over time. Slide 6 details how we have positioned NM to weather the current difficult market. NM had a solid Q2 performance having $31 million in EBITDA, which was relatively in line when compared with the same period last year. We have $143.2 million of cash as of June 30, 2016. And our balance sheet is flexible with about 83% of our total debt in bonds, thus have no loan to value maintenance covenants. We have acted opportunistically to reduce debt by repurchasing bonds in the market and have purchased $32 million in face value of debt. This will save $2.6 million in interest annually or $6.5 million in the interest through the maturity of the bond. We also expect to receive for $14.6 million in annual dividends from Navios Acquisition. We are also very proud of our overall cost management as witnessed by reviewing SG&A and OpEx. Today, SG&A on a per available basis makes us one of the lowest cost operator compared to our publicly-listed shipping peers, and we are constantly reducing our cost. On a run rate basis, we expect to reduce 2016 G&A by approximately 40% or $8.2 million to around $12 million. In addition, Navios Holdings’ OpEx is 42% less than the industry average as measured and defined by Drewry. These savings do not include in embedded fees that certain peers charge that allow charters cope [ph] with the Drewry report. Our scale provides us with significant operating leverage, which translates into cost savings for the company. We estimate that this has resulted in tens of millions of dollars of savings annually. We have worked our fleet size. Our fleet utilization was almost 100% and we have achieved an average time charter rate of $7,678 for the first-half of the year, which we believe exceeds the spot market by 72%. We have also 86.6% of our fleet days available fixed for the second half of 2016, and 34.2% overall fleet available days fixed for 2017. Finally, we have significant embedded value in unencumbered assets comprised of our ownership interest in NNA, NMM, Navios Logistics, Navios Europe I and Navios Europe II. On a mark-to-market basis generally, ignoring the intrinsic value of these assets or any control premium, this group of assets is likely worth [$700 million] [ph]. Slide 7 highlights our strong liquidity position. Our conservative balance sheet has net debt to book capitalization of 57.5% and cash of $143.2 million. As of our cash requirements, the company has no committed shipping growth CapEx and no material debt maturities until 2019. Slide 8 provides an overview of our operating leverage. Unlike many of our competitors, we manage our vessels in-house thus enjoy cost savings and sit with scale and increased purchasing power. As a result, Navios Holdings OpEx is amongst the lowest in the industry, translating into approximately $34.9 million in annual OpEx savings. Slide 9 sets forth Navios’ low-cost structure. For the second-half of 2016, we have 86.6% of our available days including our index-linked days at an average contracted daily charter-out base rate of $8,813 per day. For 2017, we have 34.2% of our available days at an average contracted daily charter-out base rate of $15,319 per day. Our fleet open days plus days contracted with index-linked charters could provide incremental revenue with an improving charter market. We also expect to receive about $7.3 million in dividends from Navios Acquisition for the six months till the year-end 2016 and $14.6 million in dividends from Navios Acquisition in 2017. I would like to remind you, as I do in every quarter, that our breakeven analysis includes all operating expenses, dry dock expenses, charter-in expense for our charter-in fleet, G&A expenses as well as interest expense and capital repayment. And now, I would like to turn the call over to Mr. Tom Beney, Navios Holdings’ Senior Vice President of Commercial Affairs, Tom?
Thank you, Angeliki. Slide 10, presents our diversified dry bulk fleet, consisting of 61 dry bulk vessels, totaling 6.3 million deadweight split between Capesize, Panamax and Supramax Handy. We continue to be one of the largest U.S.-listed dry bulk operators in the world, established over 60 years ago. We have 57 vessels on the water with an average age of 7.8 years. This is 9% younger than the industry average. Navios Group’s total fleet of a 160 vessels includes 49 tankers, 20 container vessels and 91 dry bulkers. Turning to Slide 12, GDP forecast for 2016 and 2017 suggest continued healthy dry bulk demand with emerging market growth, predominantly in the Asian region as the major driver. In the largest oil-consuming economies such as China, India, Japan, Europe and the USA, low energy prices tend to stimulate GDP growth over time, further aiding the dry bulk market, as was experienced in the late ‘80s. After a slow start of 2016, demand for major dry bulk commodities; iron ore, coal and grain; have exceeded forecasts. The BDI bottomed in February 290 and has risen to 706 as of today. During the ultra-low market, vessels deactivated. According to analysts, many of those vessels, approximately 200, reactivated as rates improved through the Q2 and into the Q3. Even with this increased tonnage supply rates have improved, but the upside potential limited by the approximate 2% increase in the available fleet. Please turn to Slide 13, as shown in the right-hand-side table, overall worldwide seaborne iron ore is now forecasted to grow by 2.8% in 2016, an increase from the negative growth forecasted during Q1. China accounts for about 70% of the world’s seaborne iron ore imports. Chinese iron ore mines cannot complete with the high-quality ore coming from Australia and Brazil at current low prices, encouraging increased imports. So far in 2016, Chinese iron ore imports have increased by about 9% and domestic production of iron ore has reduced by approximately 6%. Australia and Brazil will maintain or grow market share in China, with Australia experiencing over 5% growth and Brazil experiencing over 20% growth in total exports to China so far this year. China exported a record 111 million metric tons of steel during 2015 versus 92 million in 2014. So far in 2016, Chinese steel exports are up about 9%. Please turn to Slide 14. Additional efficient coal-fired power stations continue to be built in emerging markets as coal is needed for base load power generation in many developing countries. Environmental concerns, structurally cheap natural gas and restructuring of domestic coal mining industries have caused forecasters to lower demand for seaborne coal by 2% this year. This may be too pessimistic. The huge Chinese domestic coal mining industry is reducing uneconomic capacity. Annualized Chinese domestic coal production could be down by about 12% in 2016, a decrease of about 400 million metric tons for this year. As we predicted, this encourages additional imports, which are now up almost 5% through June, a complete turnaround from the negative numbers we saw for Q1. Indian coal imports will continue to disappoint as domestic production exceeds expectations. Combined Indian and Chinese imports annualized are now expected to increase by 0.5% indicating the coal market may have bottomed. Turning to Slide 15, the scrapping pace year-to-date is 24 million in deadweight. Scrapping annualized would be over 37 million deadweight for 2016; an all-time record. There has been a slowdown in scrapping recently due to the monsoon season and higher freight rates recorded in Q2, which have continued into the third quarter. With additional investments needed in vessels for third special surveys or beyond, the high level scrapping can continue. The Capesize fleet in 2016 has increased by two vessels, 70 vessels have scrapped versus 72 delivered reflecting data just obtained. The cumulative total for 2015 and year-to-date 2016 is minus five vessels. The Panamax fleet in 2016 has contracted by 8 vessels, as 90 vessels scrapped versus 83 delivered. The cumulative total for 2015 and year-to-date 2016 is plus 21 vessels, again basis information just received. In Slide 16, we see as of January 1, the 2016 order book stood at 92.7 million deadweight. By end July, the latest full month statistics 31.7 million deadweight has actually delivered versus 65.9 million deadweight, which was expected, a 52% non-delivery rate by deadweight, the highest non-delivery rate since 2009. If we assume a more conservative 40% non-deliveries then we estimate 2016 we’ll see about 55.6 million deadweight actually deliver. With the current 2016 scrapping rate annualized, net fleet growth will be between 1% and 2%. The order book as of January 1 reduces dramatically in 2017 as shown on the slide. With freight rates and second-hand asset prices also low, there is currently little to no incentive to place additional new building orders. Slide 17, gives an illustration of the growing scrapping pool. The average age of scrapping has reduced to about 23 years old from about 32 six years ago. During the last 12 months, we have regularly seen vessels scrapped to 20 years or under. And recently, a number of 15-year-old dry bulk vessels have scrapped. An extended low rate environment encourages owners to scrap younger vessels. As the scrapping age reduces the scrapping pool increases. And the right hand chart shows the current scrapping pool. Vessels of 20 years or over, total 59 million deadweight or about 8% of the total dry bulk fleet growing to over 120 million deadweight or 15% of the total fleet for vessels 15 years or more. Slide 18 is a recap of the trends in deliveries, scrapping and net fleet growth since 2009. As we have discussed scrapping is running at a record-high annual pace. Non-deliveries are also running at a record high. If scrapping and non-deliveries continue then 2016 could end with very small net fleet growth, up between 1% and 2%. With the order book staying very low for 2017 and non-deliveries expected to continue, negative fleet growth in 2017 is a real possibility. The dry bulk demand rising in 2016 and continuing to surprise the experienced forecasters, the market fundamentals should continue to improve. I would now like to turn the call over to our CFO, George Achniotis for the Q2 financial results. George?
Thank you, Tom. Please turn to Slide 19, for a review of the Navios Holdings’ financial highlights for Q2 and the first-half of 2016. EBITDA for the quarter was $31.1 million compared to $32.7 million in 2015. The decrease is mainly attributable to a 11% reduction in the available days of the fleet due to the redelivery of number of charter-in vessels and an 81% reduction in equity net earnings from affiliated companies from $18 million in 2015 to $3.4 million in 2016, mainly due to an impairment charge recorded in Q2 of 2016 from the anticipated sale of a Navios Partners vessel and a gain in Q2 of 2015 from the dropdown of two vessels from Navios Acquisition to Navios Midstream Partners. The decrease was partly mitigated by 13% increase in time charter equivalent rate achieved due to the efficient employment of our fleet, a 38% decrease in time charter voyage and logistics business expenses, mainly due to the redelivery of a number of charter-in vessels and a reduction in the charter-in costs that will be in effect until the end of Q1 2017, and $2.3 million reduction in G&A expenses. EBITDA for the first half of 2016 was $76 million compared to $59 million in the first half of 2015. The results were affected by the same factors that affected the quarterly results and by about $15 million compensation from the early settlement of charter claims in Q1 of 2016. During the quarter, we recorded net loss of just over $26 million compared to a net loss of about $25 million in 2015. The reduction is mainly due to the decrease in EBITDA. Net loss for the first half of 2016 was about $34 million compared to a net loss of $51 million in 2015. Similar to the quarterly results, the improvement was mainly due to a $15 million compensation from the early settlement of charter claims in Q1 of 2016. Please turn now to Slide 20. At June 30, 2016 we had $143 million in cash compared to $177 million at December 31, 2015. The reduction is mainly due to the delivery of two vessels in January of 2016 and the construction of the port in Uruguay. This is also reflected in the increase for deposits for vessels, terminals and other fixed assets. Net debt to book capitalization was 57.5% compared to 54.6% at the end of last year. As Angeliki mentioned, after the end of the quarter, we put bonds of $32 million nominal value for $15.6 million cash. The reduction in debt is not reflected in our balance sheet as of June 30. This transaction will result in a gain of $16.4 million that will affect our Q3 results. Going forward, we will have an interest saving of $2.6 million annually or $6.5 million until maturity. Over the next few slides, we will briefly review our subsidiaries. Please turn to Slide 21. Navios Holdings owns just over 20% of Navios Partners, including a 2% GP interest. Navios Partners owns a fleet of 31 dry bulk and container vessels. NMM is positioned as a unique platform for growth in the dry bulk sector. Its balance sheet and credit ratios are healthy with net debt to book capitalization of 42.5% and interest coverage of 4.3 times. NMM has the ability to generate significant free cash flow. Even in the low charter rate environment of today, it should be able to generate about $45 million in the next six months, assuming steady operating cost and current market rates for the open days. Turning to Slide 22, Navios Holdings owns about 46% of Navios Acquisition. Navios Acquisition has grown to become a leading tanker company with 38 modern high-quality vessels with an average age of 5.4 years. All the vessels are on the water and are generating cash flow. The fleet is 98% fixed for 2016 and 57% fixed for 2017. The company had a strong performance and generated $103 million of EBITDA, a $36 million of net income in the first six months of 2016. NNA is also the sponsor of Navios Midstream Partners, an MLP with six VLCCs providing a platform in the wet sector for dividend seeking investors, and bringing flexibility and liquidity to NNA. Now, I will turn the call over to Ioannis Karyotis for his review of the Navios South American Logistics results. Ioannis?
Thank you, George. Slide 23 provides an overview of the Navios Logistics business and Slide 24 presents the company’s highlights. As we have already announced, Vale advised in writing that they will not perform the 20-year take-or-pay service contract for the iron ore facility currently under construction in Nueva Palmira in Uruguay. The contract is under English law and we had initiated arbitration proceedings in London. We continue the construction of the new terminal. And as of Q2 2016, we have paid approximately $94 million. In addition, we have remaining contractual obligations of about $48 million. In total, we have paid or incurred approximately $142 million out of a total budgetary CapEx of approximately $150 million. Slide 25, reviews our results. In the past five years Navios Logistics EBITDA has been growing at 20% CAGR. In the first half of 2016, EBITDA increased by 9% to $41.8 million. Looking at the results of the second quarter, in the port segment revenue decreased 24% compared to the same period last year. The decrease is mainly attributable to lower sales of liquid products in our liquid port terminal as well as less cargo moved in our dry port terminal. The operations of the dry terminal, we are affected by bad weather, especially during the month of April. The decrease in revenue resulted to a 24% decrease in Q2 EBITDA to $7.8 million. Barge segment performed relatively stable compared to the same period of last year. And Q2 EBITDA reached $9 million compared to $9.3 million last year. Cabotage business Q2 EBITDA increased by 21% to $3.9 million from $3.2 million in the same period last year. Overall, Q2 EBITDA decreased by 9% to $20.7 million. Net income in Q2 2016 was $7.4 million compared to $9.4 million in the same period last year, mainly due to the decrease in EBITDA. Turning to the financial results for the six month period ending June 30, 2016, revenue decreased by 13% to $114 million, EBITDA increased by 9% to $41.8 million, and net income increased by 27% to $13 million. Please turn to Slide 26. Navios Logistics had a strong balance sheet. Cash at the end of Q2 2016 was $72.3 million compared to $81.5 million at the end of 2015. Net debt to book capitalization was 45%. As of June 30, 2016, we have drawn approximately $24.2 million net under the unsecured export financing facility related to the new iron ore terminal. The undrawn amount under this facility was $14.1 million including interest and all related costs. This facility has an eight year term. Now, I would like to turn the call back to Angeliki.
Thank you, Ioannis. This completes our formal presentation. We open the call to questions.
[Operator Instructions] Your first question comes from the line of Chris Wetherbee of Citi.
Hi, this is Prashant on for Chris. I wanted to ask a question, follow-up on logistics. On the Vale contract, I understand you’re in arbitration proceedings, but if you could give us some color as to how far long you are and maybe a timeline, from where you sit now how much longer could the process continue. Trying to get a sense of, could we see a resolution, final award, or some sort of settlement in this calendar year or is it too early to tell?
Actually, it’s very difficult to give you this kind of an answer. It’s following the regular - it is - as any arbitration that it goes through processes. And there is a timeline with different dates and et cetera. So it is not really - we cannot really comment on that. The only thing I can say is that the arbitration has been initiated, further to the termination notice from Vale, it’s in London. And this goes as - it is in the arbitration.
Okay. I can appreciate that. Thank you, Angeliki. And then, related to the same terminal, is repurposing the facility for other commodities or having some optionality there, maybe for grain or other commodities, is that a potential alternative either to replace with supplement, any modification of contract? And if so, what would be some of the incremental costs to achieve this as a strategy that maybe you’ve thought about along the options, given that arbitration is still pending?
We already have a grain terminal, which we have already done, the expenses we need to do. On the CapEx, we have already permitted with Vale it is a facility that is dedicated for iron ore. So at this point it’s very premature to saying. We have a contract. We are on arbitration. And I think this is why we are spending the money. It is part of this contract.
Okay, that makes sense. And then just one last question on the dry bulk fleet, your rates are coming in a lot stronger as you pointed up in the rest of the market, which is great. I was wondering, on the time charter equivalent rate, is there something structural with your rates versus the market that gives you an advantage? I’m just trying to see just for modeling purposes, there’s some sort of gap you should be thinking of going forward that sort makes difference?
Yes. I think we are doing our job, which is really work hard, control your cost. If you see, the cost has been reduced on G&A, on OpEx. This is - you control your costs, number one. And number two, chartering-wise, when we ended the crisis we had long charters. These are now that one point. What you’re doing now in this market, you believed as a portfolio. Yes, the market has been 40% low, as of the year, low in Q1. But don’t forget you had last year, of September-October, you could see some Capes [ph] at 11,000 and higher. The BDI was over 1,000 on the BDI. So what you do, you bring your portfolio. What we did last year is we build a lot of the contracted revenue that we have this year and that gave us - it protected us from other severe drop in the first half. And today, we are in a more stabilized market. We see that shipping has stabilized. You can see that - even though commodities have moved up in pricing we have not seen rate move - it has moved from the low but not substantially because we saw the vessels that had - they were laid off, reactivate - coming into the - reactivate and come into our fleet. But we see that this level of the BDI, the rate we see today is well supported and with any incremental - with all the vessels into the fleet and we see the opportunity for - at any point of another pickup in the market. So we worked very much this portfolio. And we are very active with short durations, longer - we work in a very meticulous way in order to maximize and have the opportunity, not to look in just a very low rate for long periods, but really to fix it at the appropriate time.
Okay. Thank you. That was really helpful color. I will pass through on.
Your next question comes from the line of Noah Parquette of JPMorgan.
Hey, thanks. I just wanted to ask a little bit around the repurchasing of debt. One, what gave you kind of comfort, to use some of your liquidity to do this? And can you disclose which securities you repurchased?
This public disclosure you will see whatever is there. I mean this was an opportunistic purchase, which we’ll do as we already have disclosed from time to time. The reason we’ve got comfort is we saw shipping markets stabilize, as I said previously and it’s well supported. Asset values have also went off their bottoms and is well supported. So today you have visibility that you feel far more comfortable on acting on this kind of an investment, which, let’s realize, is dealing with maturity, and it’s also reducing your cash breakeven, which is the two things we are always focusing.
Okay. And then moving onto the logistics, I know there’s not so much you can comment on the arbitration. But Vale is a big customer on the barge side. Is there been any impacts there? Are you comfortable with - you can keep those bin separate?
There is no really any - anything different on what we have already said. And they’re performing. Of course, as you well known we have disclosed it in arbitration in New York, which is we have backed with - we have a security on that.
Okay. I guess, for Vale’s contracts on the barge side, are those generally long-term contracts, are they short-term? I mean, is there some stability to that?
There is long - I mean, there are contracts that when we started them they were five years up to 2020. I mean, there are different durations. I think you have all our disclosures in that.
Okay. And then finally, can you give more color about the macro effects that drove the terminal business. And you said there was less liquid terminal activity and a little bit of less on the grain side. Do you expect that to rebound or was that short-term or more a macro situation?
I have Ioannis to give a little bit of the background on this.
Yes, hello. The decrease that you see in revenue and EBITDA in the port terminals in the second quarter was affected by a decrease in the sales of liquid products that sell in the liquid terminal. This has been always an opportunistic business. It varies from quarter-to-quarter. So it is not the trend that can comment. And the other factor that affected the result this quarter was less throughput in the dry terminal. This was mainly because in April we had severe bad weather that prevented loadings in the terminal. So this was what affected the results of this quarter.
Okay. That’s helpful. That’s all I have. Thanks.
Thank you. I will now turn the call to Mrs. Angeliki Frangou for any additional or closing remarks.
Thank you. This completes our Q2 results. Thank you.
Thank you for participating in today’s conference call. You may now disconnect.