Nov 14, 2017
Executives
Angeliki Frangou - Chairman of the Board, Chief Executive Officer and Director Efstratios Desypris - Chief Financial Officer George Achniotis - Executive Vice President-Business Development and Director
Analysts
Christian Wetherbee - Citi Research Noah Parquette - JP Morgan Peder Nicolai Jarlsby - Fearnley Securities AS
Operator
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 the call to take questions.
Now, I turn the call over to Navios Partners, Chairman and CEO, Mrs. Angeliki Frangou.
Angeliki?
Angeliki Frangou
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 one for the dry bulk and container sectors. Many maritime companies were tested.
Navios' strong balance sheet, disciplined cost management and position as a growth 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.
Recently, we formed 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 for 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 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 recovery market. We expect about $625 million in remaining contracted revenue, 80% of this revenue is through charters longer than three years.
The average charter duration of our entire fleet is about two years. Our credit ratios are strong with 37.3%, 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 can generate significant free cash flow.
Free cash flow generation is expected to be about $100 million of 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 seven vessels and sold one.
As a result, we increased our fleet by 33% on a deadweight tons capacity scale. This 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.
To-date Navios Containers raised $150.3 million of equity and purchased 20 container vessels. Navios Partners assisted in by investing $50 million, receiving a 34% equity stake plus 6.8% in warrants.
We have created Slide 7 to signify the improvement in market fundamentals since the low of the Q1 of 2016, and also to highlight the room for further recovery given improving industry fundamentals. I would like to focus on three data points that all signifies this improvement.
Number one, the BDI has improved by 425%. Number two, Capesize 5TC rate have increased by 836%.
Number three, 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 TC 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 a contracted revenue of about $89 million. Therefore, our fleet can generate significant expected free cash flow through our 9,404 open and indexed days.
As charter rates recovers towards a 20-year average. At current rate, our fleet has 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 firepower 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 of the third quarter of 2017.
Efstratios Desypris
Thank you, Angeliki, and good morning all. I will briefly review our unaudited financial results for the third quarter and nine 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 59.9%, 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 share of NMM in Navios Containers' earnings for subsequent period.
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 of the fleet and the $9.3 million revenue from 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 it was negatively affected by a $0.5 million equity compensation expense and $0.4 million reactivation costs of Navios Containers.
EBITDA for the third quarter of 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% to $57.9 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 nine months operations, time charter revenue for the nine 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 nine 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 the revenue discussed and was 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 nine months ended September 30, 2017 were $67.1 million.
Turning to Slide 11, I will briefly discuss on 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 the 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, three Ultra-Handymax and seven Container vessels. In Slide 13, 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 approximately two years. 80.2% of our contracted revenue is from charters longer than three 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 charter durations extend to 2028.
As shown in 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 costs until December 2019. Based on the new agreement, the fixed fees of Capesize and Container vessels remained the same at $5,250 per day for Capsize 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 of our Panamax and Ultra-Handymax vessels will increase by 3% to $4,325 per day and $4,225 per day per vessel respectively. The total impact on Navios Partners cost is expected to be less than $1 million annually based on our current fleet.
There is no additional charge or 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, four 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?
George Achniotis
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 2018, accelerating from the 3.2% growth in 2016. Growth in emerging economies is forecast to increase from 4.3% in 2016 to 4.6% in 2017 and 4.9% in 2018.
On the back of synchronized global economic growth, dry bulk trade growth is expected to double from 1.2% in 2016 to 1.4% in 2017. At current BDI levels, the dry bulk market is above 400%, above the all-time low of 290% in February 2016, with substantial upside as it still remains 45% below the 20-year average.
Turning to Slide 19. Substitution of Chinese expensive low-quality iron ore with fair quality and lower price imports, 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 2018. Up to the end of September Chinese 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 into a full-year high in steel prices, with lower imported iron ore and coal prices, Chine 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 the housing market. The One Belt One Road project is a cornerstone of the Chinese economic plans for the next five years, and supports steel and power 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 2017, and a further 20 million tons in 2018 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 started 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 insufficient polluting mines are closed.
The electricity consumption in China continued to rise in 2017, by about 7% up to the end of September with thermal power generation rising by 7% as well. To September 2017, 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 building delivered versus unexpected delivery of 54 million tons, maintaining a 33% on delivery rate.
As of January 1, 2017, order books stood at 58 million deadweight tons. Using a 33% non-delivery rate for the year, it is estimated that about 39 million tons will be actually delivered.
About 13.2 million tons has scrapped so far in 2017. So net fleet grow will continue to be low.
With an order book that hit a 15-year low of 7.4% of the fleet earlier this year, the forecast for fleet growth in 2018 is 1.2%. This would be the lowest fleet growth since 2000.
I'm certain that over the next, the new Tier 3 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 non-deliveries, we'll produce another low net fleet growth this year. The current order book before non-deliveries is about 8% as compared to the total fleet.
And we know that vessels of 20 years of age equal about 7%. The reported delivery should be matched 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 fundamental 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 the 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 rate has expanded at a 7% CAGR. In 2017, container growth is expected to grow by 5.2% and a further 5.3% in 2018.
Maersk Lines recently stated that demand growth remains solid at 5%, while supply growth grew 3%, helping 3Q 2017 box-freight [ph] rates increased 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 become to improve significantly. At the same period, the record scrapping reduced the growth of the fleet dramatically, a trend which has continued into 2017.
The larger part of Q3 2017 has seen an increase in deliveries of large ships bringing TEU capacity up, by keeping the fleet size by number of ships slightly less than 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 size 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 book stood at about 1.7 million TEU.
Through September 1 million TEU have delivered versus an expected 1.45 million TEU, giving a non-delivery 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 the 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 forecasted at 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 demand and supply continues to improve, causing higher 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?
Angeliki Frangou
Thank you, George. Let's open now the call to questions.
Operator
[Operator Instructions] Your first question comes from the line of Chris Wetherbee of Citi.
Christian Wetherbee
Hey, thanks. Good morning.
Thanks for taking the question. I wanted to touch, Angeliki, on a comment you made earlier on the call about growth opportunities and sort of when you think about debt maturities being out in 2020, there is an opportunity here maybe to grow the fleet.
Sort of where do you want to focus and how should we be thinking about that pace of growth? What are the opportunities set?
What does the opportunities set look like right now?
Angeliki Frangou
Very good question. One thing I'd like to say 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 fleets. We increased our fleets by 30%, going to higher margin vessels and we improve our age profile by 10%.
Of course, this process is never ending, and you'll always have a replacement of vessels on your portfolio. But a quite significant improvement of our fleet has already happened.
Now, one of the things that we see very important is that the company has done all this. And at the same time, we have one of the best and lowest breakeven, 5,350.
And you know all the dry bulk platforms around the capital markets. I think this is the lowest with no debt maturities.
Yes, we have one in 2020, easily taken out in today's markets, no CapEx and 9,450 open and index days in 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 dropped down to 90T [ph] Navios Containers where we clean up now the structure and we'll become full-focused dry bulk platform.
Christian Wetherbee
Okay. So, okay, so there could be some dropdowns 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 dividends? Is that something that enters the discussion anytime sooner or will it be too premature to talk about that?
Angeliki Frangou
Okay. That's a good - let's be honest.
I mean, we saw a recovery on the dry bulk from the low 2018. So, there is clearly a path towards dividend.
The one thing that as a counterbalance 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.
Christian Wetherbee
So, yeah, that's helpful, so you need to see some sustainability in a period market before you can feel comfortable that reinstituting a dividend is the right way to go.
Angeliki Frangou
We can see a path, I mean, it may be a modest, but you can see the path from where we are. It's also a Board decision.
But you can see clearly a path from where we are.
Christian Wetherbee
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 of what the - what may be the cost inflator would look like beyond that?
Angeliki Frangou
I think you have seen that in the previous one there was - I mean, there is a minimal increase on two asset classes, and there was zero increase on the other two. So, it's purely what inflationary situation will see.
And I have not - on the 10 years that we operate on management agreement, we have never seen more than 3% increase.
Christian Wetherbee
Okay. So that's what you should be thinking about going forward beyond the 2019 date?
Angeliki Frangou
I mean, you have long records of that, of 10 years.
Christian Wetherbee
Yeah, okay. Okay, that's very helpful.
Thanks for the time. I appreciate it.
Angeliki Frangou
Thank you.
Operator
Your next question comes from the line of Noah Parquette of JP Morgan.
Noah Parquette
Thanks. I just want to ask - you guys have been pretty active on fleet renewal and then inspecting, looking at ships.
Have you seen firming in asset values at all? I mean, and the brokers has kind of showed them at flat for a while now despite improving market.
Just wanted to get a sense of what you're seeing.
Angeliki Frangou
What you don't see - reports always don't give the full situation. I think one of the things you see is that you don't have very willing sellers in this market, Q4.
So, you see a lot of cash flow generation. Let's say on the - I'm talking now especially on the good assets, the Capesizes, you are generating over 22,000.
And if you had above index for a good Japanese vessel that is a 110 or the 120 of the index, 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. It does jump, plateaus and it does jump.
One of the things we are very proud on the way we did the replacement is that we went early on, pick up the asset and we got the entire fleet that we acquired. The seven vessels were all in our fleet within July.
And August was the last one. So, we had the full ramp-up on the market with an increased rate of Q4 with the entire fleet in there.
You may see that - I mean, relative to where you had earnings in the beginning of the year to the end, you can see a very good ramp up of over 20%.
Noah Parquette
Okay. And then, in terms of the financing for unchartered dry bulk ships, it looks like you knew that - or you took a little bit more on the term loan for some of the vessels.
What's the financing availability like for secondhand uncharted-ships?
Angeliki Frangou
I mean, if you have seen, we have done facilities with Bandpay [ph]. We extended the DVB facility and we add it on our term loan.
So, we did all of them.
Noah Parquette
Yeah, so the DVB facility, that was extended. So, there isn't a bullet payment in November anymore, right?
Angeliki Frangou
No, no, it was extended.
Noah Parquette
Okay, okay. Thank you.
Efstratios Desypris
That's up to 2020, Noah.
Noah Parquette
Okay, thanks guys.
Operator
Your final question comes from the line of Peder Jarlsby of Fearnley.
Peder Nicolai Jarlsby
Hi, there. Just a quick few questions for me, you touched briefly upon the - on streamlining the company and you're dropping the container vessels down to an NMCI.
Could you talk a bit more about the timeline for that and what we should expect?
Angeliki Frangou
I mean, one of the things I will say we have couple of vessels next year that they roll off. And as the vessels roll off this is a natural home, Navios Containers.
So, can see it is vessels are from Q2 to Q3, something like that.
Peder Nicolai Jarlsby
Okay, so with those, is it fair to assume that we'll see a gradual streamlining of the company rather than just one larger transaction?
Angeliki Frangou
I cannot comment to that. I mean, this is capital market.
And I think that what I want to say is the logics. In that, the logic is that as these vessels were lost, they come down and it's a natural home for the company to grow.
And then you have the possibility of this becoming a very clear traction.
Peder Nicolai Jarlsby
Okay, thank you. And then - and just finally in terms of - you're expecting 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?
Angeliki Frangou
That's very good. I mean, one of the things I doubt is that, listen, literally knowing whether we have done a quite significant one, we are of course going to buy vessels and renew our fleet portfolio if necessary.
But I think we see also that the company inevitably will have a path towards dividend. And, of course, you have to be very - we have to always balance that with the fact that we have not seen period charters on dry bulk, but there is clearly a path.
Peder Nicolai Jarlsby
Yeah, okay. And just in terms of - 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 potential to do that or is it more just taking up single assets or you don't - just trying to get in terms of what you're seeing in terms of opportunities out there.
Angeliki Frangou
Listen, the reality is we're not about - you're talking about one company that absorbs a whole company out of Singapore. We have done more capital market transaction than anyone.
And we have done also single vessels. The reality is that the big transactions that sched lines and it's not a distress is the easiest thing to do in the world.
It's a matter of brokers getting information. The reality is how you really try to find the best portfolio and try to get a deal that makes sense.
So, don't worry, we can do anything from a single to 20 vessel at onetime.
Peder Nicolai Jarlsby
Okay. That's good to hear.
Thank you very much.
Angeliki Frangou
Thank you.
Operator
Thank you. I will now return the call to Ms.
Angeliki Frangou for closing remarks.
Angeliki Frangou
Thank you. This completes our Q3 results.
Operator
Thank you for participating in today's conference call. You may now disconnect.