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Navios Maritime Holdings Inc. (NYSE:NM)

Q3 2008 Earnings Call

November 18, 2008 8:30 am ET

Executives

Thomas J. Rozycki, Jr. - Vice President, Investor Relations

Angeliki N. Frangou - Chairman of the Board, Chief Executive Officer

George Achniotis - Chief Financial Officer

Ted C. Petrone - President

Analysts

Natasha Boyden - Cantor Fitzgerald

Omar Nokta - Dahlman Rose

Natasha Boyden – Cantor Fitzgerald

Urs Dur – Lazard Capital Markets

John Parker – Jefferies

Operator

Good morning and welcome to the Navios Maritime Holdings third quarter 2008 financial results conference call. (Operator Instructions) Now, I would like to turn the conference over to Tom Rozycki.

Thomas J. Rozycki, Jr.

Thank you for joining us for this morning’s call. With us today from Navios Maritime Holdings are Ms. Angeliki Frangou, Chairman and CEO, Mr. George Achniotis, Chief Financial Officer, and Mr. Ted Petrone, President. As a reminder, this conference call is also being webcast. To access the webcast, please refer to the press release for the web address, which will direct you to the registration page.

Before I review the structure of this morning’s call, I would like to read the Safe Harbor statement. This conference could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Navios. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios’ management and are subject to risks and uncertainties which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in Navios’ filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios does not assume any obligation to update the information contained in this conference call.

At this time, I would like to outline the agenda for today’s call.

First, Ms. Frangou will offer opening remarks. Next, Mr. Petrone will provide an operational update and an overview of market fundamentals. Following Mr. Petrone’s remarks, Mr. Achniotis will review Navios’ third quarter financial results. Finally, Ms. Frangou will offer concluding remarks. After the completion of Ms. Frangou’s remarks, the company will open the call to take your questions.

At this time, I would like to turn the call over to Ms. Angeliki Frangou, Chairman and CEO of Navios.

Angeliki N. Frangou

Good morning to all of you. The third quarter of 2008 was a challenging quarter for our industry and the company. Despite these challenges, I’m very pleased with our financial and operational performance.

From a financial perspective, adjusted EBITDA was $58.6 million and $142.7 million for the quarter and the first nine months of the year respectively. Net income for the quarter in the first nine months of the year was $30.6 million and $124 million respectively. George Achniotis our CFO will discuss our financial results in greater detail shortly.

In light of the global financial crisis, we embarked on and recently concluded an exhausting review of our business, its capital needs, and prospects for our industry. We have considered what would be the best use of our cash from various perspectives. As a result of this review we have opted to trim CapEx as well as charter-in expenditures by canceling the delivery of vessels that do not have any associated charter-out coverage.

In terms of the market opportunity, freight rate and assets values are seeking new levels. However, we believe that our business model will continue to shape as well. We have consistently entered into long-term charter-out agreements with high-quality counterparties. We have also consistently ensured this agreement through our EU-backed entity with an AA class rating.

Consequently, we are optimistic about Navios’ future. We are also hopeful about our industry, the result being a global coordinated response by several banks to the financial crisis which precipitated our industry paralysis.

Despite prospects for a more favorable environment than the current one, our planning has been conservative and we have prepared Navios for an extended drop in the market. If we are correct in our positive assessment, we will be positioned through our risk management and other groups to capitalize on a more robust market. If our worst fears are realized, we will be positioned to survive and prosper as well through our core fleet and COA business.

At this point, I would like to review the concrete steps we have taken to prepare Navios for the current market. As you can see on slide 4, we reduced capital maintenance by cancelling three Capesize buildings. None of these vessels were chartered out to third parties. As a result of this cancellation we reduced capital expenditure by approximately $265 million. The original installments we had paid to the shipyard for the cancelled vessels have been re-allocated to the remaining three vessels on order.

The shipyard has agreed to accelerate the delivery of the remaining three vessels by approximately 90 days. As the new vessels been delivered have all been chartered out for long periods, they will be accreted to our results immediately. We paid the shipyard an aggregate termination fee of $1.5 million total. In addition, as set forth on slide 5, we also terminated without penalty nine long-term charters. None of these vessels were charter-out to third parties. These cancellations resulted in an annual saving of $61 million.

We have also paid significant attention to our liquidity. Slide 6 shows that liquidity as of September 30, 2008, was favorable. Our net debt to total capitalization was 40%. We also had total liquidity available over $168 million of which $121 million was cash in hand. In addition, after the end of the quarter, we entered into a revolving facility providing for an additional $90 million bringing our available liquidity to $258 million.

Slide 7 sets forth the funding requirements for our new buildings that we are expecting to be delivered during 2009. As you can see, Navios needs $282 million of additional financings which we expect to be funded with $270 million of debt financing and $52 million of equity. We expect to resolve the debt requirement shortly, and George will provide an update on our loan negotiation with various commercial banks.

We are optimistic about completing this new loan agreement because all associated Capesize vessels are subject to favorable long-term coverage averaging almost 7-1/2 years. Six Capesize vessels are subject to long-term charter with the third parties and one is being used to service a long-term COA commitment.

Assuming a worse case where we are unable to conclude any loans due to the continuing financial crisis, we have sufficient liquidity to fund the acquisition of this vessel from our own resources. Please note however that this assumption is not something we consider possible at this point, but something that we simply consider in reviewing future capital requirements.

Slide 8 addresses our operating break-even rate for 2009 and 2010. As you can see, 82% of our fleet is fixed for 2009 and 59% of our fleet is fixed for 2010. We have also provided our break-even operating cost for the next two quarters. If one were to use this break-even rate as a proxy for cost for all of 2009 and 2010, you can see even assuming zero revenue from our unfixed vessels, we will still be profitable. Of course, we assume that we will be able to charter-out our vessels that come open during this period for amounts in excess of zero.

Turning to slide 9, greater devotedness is perhaps the single biggest issue in our industry. Thus, we have taken two critical steps to maximize the likelihood of payment from any commercial arrangement we entered into. After all, there is no value to a piece of paper promising significant payment if payment is not forthcoming during difficult times.

The first step we have taken is to establish internal committees addressing credit and market. To my knowledge, we are probably the only company that has these functions internally. Our view is that this is too important to be left to third parties and we prefer to build the knowledge base and skill sets. The credit committee meets monthly to educate its policy in light of the market conditions. The market committee meets daily and reviews market conditions, field coverage, and FFA exposure. We have established internal controls governing FFA duration terms and exposure amount, and establishing a list of acceptable counterparties.

Today, approximately 70% of Navios FFA trade is on exchange. We anticipate that at least 80% of FFAs we trade on an exchange in 2009 thereby reducing further a counterparty risk.

Slide 10 sets forth the second step we have taken to assure payment. We have secured insurance from an AA class rated EU-backed entity. This insurance covers our entire core fleet, meaning all our owned and long-term charter-in fleet, and also it includes contractual freight. In addition, the insurance covers the entire duration of charters of all vessels including future deliveries that under this program is approximately $2 billion in total amount of revenue is covered.

Let’s now turn to slide 11. As you read in yesterday’s press release, we announced third quarter 2008 dividend of $0.09 per share. The record date would be December 22, 2008, and the payment date will be January 6, 2009. We also announced a new dividend policy. Under this policy, we anticipate that commencing from the fourth quarter 2008, we will be paying a quarterly dividend of $0.06 per share or an annual amount of $0.24 per share and uniquely sensitive to returning capital to our shareholders.

I have personally invested a significant amount in Navios and have never sold any shares. Indeed, I have filled a schedule 13D that will allow me to purchase an additional 10 million worth of shares. Navios is extensively increasing its share repurchase program by $25 million. Taking the reduction of the dividend and the increase in the share repurchase program into account we are on a net basis increasing the amount of that being returned to shareholders by about $12 million on a tax deferred basis. I would also like to add that it is our intention to immediately regain market purchases under this program.

With that, I would like to turn the call over to Mr. Ted Petrone, Navios’ President, who will take you through the company operations and industry.

Ted C. Petrone

Please turn to slide 13.

The Navios Maritime core fleet is 53 vessels having 5.2 million deadweight. Today, we are one of the largest US listed dry bulk fleets. Navios has 34 vessels currently in the water with an average age of 4.6 years. Our fleet is one of the youngest in the industry, has 16 Capes, 16 Panamaxs, 18 Ultra Handymaxs, and 3 Handys. Of our 53 vessels, 25 vessels are owned and 28 vessels are controlled through long-term charters.

Navios holds purchase options on 12 of the chartered-in vessels. These purchase options are exceedingly valuable where capital is scarce. Navios also controls between 15 to 20 short-term vessels at any given time via its management division.

Turning to slide 14, Navios Holdings continues to lock in long-term cash flow with credit worthy counterparties. Navios’ average charter-out rate for vessels with core fleet is 28,515 for 2009. This rate increases in each subsequent year to 35,917 in 2010, 37,533 for 2011, and 37,914 for 2012. In addition, 82% of Navios’ core fleet is chartered-out for 2009, 59% for 2010, 49% for 2011. Contracted revenue is $232.7 million for 2009, $260.8 million for 2010, $229.7 million for 2011, and $204.9 million for 2012.

We have insured our cash flow from an EU-backed AA entity. This insurance provides coverage in the event of non-payment. This coverage is also uniquely user-friendly, and no official decoration of bankruptcy or insolvency is required to trigger the payment, rather, payment commences effectively after non-payment by the charter.

Please turn to slide 15. Navios continues to enjoy vessel operating expenses which are significantly below the industry average. We achieve this through our in-house technical management team and by proactively maintaining our vessels. Navios’ established reputation and strong operating history allows us favorable spreads between its long-term charter-in contracts and medium to long-term charter-out contracts. Positive average daily spread of 18,562 for 2009 will increase to 24,988 in 2010.

Turning now to a status report on our industry, please turn to slide 17.

A confluence of events has left the dry bulk shipping market in a perfect storm. Virtually all markets suffered historical losses which started in Q3 and extended into Q4. The financial crisis combined with the slow-down in Chinese skill demand and associated reduction of iron ore imports sent dry bulk rates at the end of Q3 to levels not seen since Q3 2006. From a level of 9379 on July 1st, the BDI was two-thirds of its value over the course of the third quarter through the end of September. Further, the global credit crisis made it impossible to fund letters of credit, thereby effectively shutting down basic international transactions. Credit freeze has almost completely halted dry bulk trade causing dry bulk rates to drop to levels not seen since the mid 1980s.

Current spot rates are reaching daily OpEx costs for vessel owners. On an inflation adjusted basis, the 1-year time generated is near the historic level.

Turning to slide 18, the rates for larger size vessels have been hit particularly hard. Continuing falls in steel prices have led to a second round of cuts in production while several iron ore producers have also announced output reductions. China’s iron ore imports total only $30.6 million in October, the lowest monthly total in one year representing a decline of almost 9 million metric tons compared to September. Spot Indian iron ore prices of $63 per metric ton compared to highs of $150 while at China’s discharge ports have risen to a record level of approximately $75 million metric tons.

For Panamax and Handymax vessels, steel trade is the barometer of fleet utilization and economic condition. Initially during the first half of 2008, the impact of sharply falling US steel import demand was offset by growth in Europe, the Middle East and the Far East Asia. Aside from the US, the strength in global demand continued to support Chinese steel exports. This led to shortages in the price hike which in turn enabled Chinese exports to be priced competitively again.

During the third quarter of 2008, world steel demand softened. Chinese exporters focused their attention on one of the remaining growth markets, the Middle East. Once this area became over-supplied, there was no remaining support for prices.

Turning to slide 19, according to the latest IMF figures, world GDP growth is expected to grow by approximately 3% in 2009. Emerging economies led by China will be driving growth and may for the first time account for 100% of world GDP growth in 2009 as the developed countries are projected to be in recession.

Turning to slide 20, China in particular has been propelling industrial production over the past few years. China today is the largest consumer of all basic industrial raw materials except oil. It consumes approximately 50% of seaborne iron ore, 35% of steel, 34% of aluminum, 27% of copper, and 24% of nickel. The urbanization and industrialization and resultant infrastructure development requires massive amounts of raw materials for steel manufacturing and power generation. This continued internal growth will continue to support commodity demand going forward and should act to buffer the Chinese economy from the economic slow-down of the developed countries.

Turning to slide 21, what is also interesting to note in terms of China is that the net exports account for only 8.9% of the 2007 GDP. The biggest contributor to GDP were investments which accounted for 42% and household consumption which accounts for 35%.

Now turning to slide 22, emerging economies and more specifically China and to a lesser degree India take an ever-larger share of world steel production. The aggregate production of Europe and the US percentage decreased from 37.6% in 2000 to 26.1% in 2007. During that same period, China and India’s cumulative percentage grew from 17.6% in 2000 to 38.8% in 2007.

Turning to slide 23, new buildings. At the end of Q3, the dry bulk industry had recorded a large order book in history with some 288 million deadweight or 70.3% of the total fleet on order for delivery over the next 4 years. Just 5 years ago, shipyards showed only limited orders with no plans for expansion. The freight boom created high demand for vessels by owners and soaring new building prices. Shipyards consequently developed plans to expand existing yards and build new yards. The new vessel deliveries were scheduled to begin in earnest in 2009 with delivery of approximately 65 million of deadweight and continue in 2010 with delivery of some 104 million of deadweight.

These new building deliveries are suspect for a number of reasons at this point. Prior to the financial crisis, there were questions related to the existence of the necessary expertise to building the vessels at the Greenfield shipyard. Today, in addition, there is no financing from normal funding sources nor did the shipyards obtain funding from owners.

The current credit crisis is making funding virtually impossible in many cases. Many industry insiders speculate that funding crisis could cause 50% cancellations in the order book. There are reports of over 150 new building orders already cancelled in some Greenfield yards, Chinese yards already failing, with 200 plus Greenfield yards in China for the 30% of the new building orders and new facilities whether the Green or Brownfield. The industry may see up to 30% to 50% slippage as well as a similar percentage of cancellations.

Turning to slide 24, scraping a revival, the collapse in dry bulk rates has created a renewed interest in scraping. During the past several years, scarping was less than one-quarter of 1%. Indeed, it has been 6 years since the demolition sector has seen real activity. Weak market fundamentals are now firmly driving acceleration of scraping. In October, approximately 1 million deadweight of dry bulk was sold for scraping, the highest monthly level since July 2002. It appears that the results for November will exceed October with activity concentrated in the Cape and Panamax sectors.

Halfway through Q4, 23 vessels of 1.8 million deadweight have been reported for scraping. Additionally, it is reported that over 50 vessels with prompt re-deliveries are noted to be canonized for scraping. In sum, the last quarter of 2008 may well see up to 4 million deadweight or 1% of the fleet head to scrap, more than the last 4 years combined. It appears that 2009 could break the scarping record of 12.3 million deadweight tons since 1986 and closely match my 1998 total of 12.2 million deadweight.

In conclusion, the dry bulk market is currently posting the worst deadweight freight returns in the quarter century. However, with an expected significant increase in scraping and reductions in new building construction, rates for the medium and long-term demand may firm-up. Much of the deterioration in the freight rates resulted from liquidity and credit crisis as opposed to underlying economic conditions.

And now, I’ll pass the call to George Achniotis our CFO.

George Achniotis

I would now brief you Navios’ financial results for the third quarter and the first nine months of 2008. The financial information that I am about to discuss was included in last night’s press release and summarized in the slide presentation on the company’s website.

As shown on slide 26, total revenue for the 3 months of operations ended September 30, 2008, increased by 74% to $371.3 million as compared to $212.9 million for the comparable period of 2007. Revenue from vessel operations for the three months ended September 30, 2008, grew by 61% to $337.7 million as compared to $210.1 million for the same period during 2007.

The increase in revenue is mainly attributable to the increase in the average time charter equivalent rate achieved and the increase in the available days of the combined long and short-term fleet. The average TCE rate excluding FFAs for the quarter was $49,769 per day compared to $31,122 per day for the same period last year, an increase of 60%. The available days of the fleet increased by 16% from 5207 days in the third quarter of 2007 to 6036 days in the same period of 2008.

Revenue from Navios South American Logistics were $33.6 million in the third quarter of 2008 versus $2.8 million in the third quarter of 2007. The increase is mainly attributable to the acquisition of the Horamar Group in January 2008.

Gains on FFAs were $5.2 million during the three months ended September 30, 2008, compared to $10.2 million for the same quarter of 2007. We recorded change in the fair value of derivatives at each balance sheet date. The FFA markets similarly to the physical market has experienced significant volatility in the past few months, and accordingly, recognition of the changes in fair value of FFAs can cause significant volatility in earnings.

The extent of the impact on earnings is dependent on two factors; market conditions and Navios’ net position in the market. Due to the recent volatility and the reduced liquidity in the market, our focus is neutral.

EBITDA for the third quarter of 2008 was adversely affected by $1.6 million non-cash write-down relating to the accounting of the warrants acquired in connection with the idea of Navios acquisitions.

Excluding the effect of this item, adjusted EBITDA for the third quarter of 2008 was $58.6 million compared to $57.9 million in the same period of 2007. The increase in EBITDA was achieved despite the sale of 5 vessels to Navios’ partners in the last quarter of 2007. EBITDA for the quarter was also negatively affected from the sudden drop in the market due to the timing of fixing cargos and short-term vessels. This was compounded by the accounting of loss-making voyages at the end of the quarter where we recorded total loss of the voyage the day the trip begins whereas we record the profit on a voyage on a pro-rata basis.

The $0.7 million increase in adjusted EBITDA is mainly attributable to an increase in revenue by $158.4 million between the third quarter of 2008 compared to the same period of 2007, an increase in equity and earnings by $3.6 million mainly due to the earnings from Navios’ partners, an increase in gain from the sale of assets by $24.9 million due to the sale of the Navios Aurora I to Navios’ partners, and a decrease in direct vessel expenses by $0.6 million.

The above increase of $187.5 million was mitigated mainly by an increase in time-charter voyages and logistics business expenses by $174.8 million, a decrease in gain of FFA trading by $5 million, an increase in general and administrative expenses by $4.5 million mainly due to the acquisition of Horamar, the introduction of a new bonus scheme for the employees of the group which became effective in the last quarter of 2007, an the cost of the credit default insurance which was also set up in the last quarter of 2007, an increase in minority interest of $0.9 million, and a net decrease in all other categories by $1.6 million.

The EBITDA contribution from Navios South American Logistics was $8.9 million in third quarter of 2008 compared to $1.7 million in the same period of 2007. The increase is mainly due to the acquisition of the Horamar Group in January 2008.

Net income for the three months ended September 30, 2008, was $30.7 million compared to $36.5 million for the same period in 2007. The decrease of net income of $5.8 million is mainly attributable to a $6 million increase in depreciation and amortization expense primarily due to the effect of precious price accounting of the Horamar acquisition, a $1.1 million decrease in interest income, a $0.1 million increase in amortization of dry dock and special survey, the $1.6 million unrealized loss on the Navios acquisitioned warrants, and a $0.7 million increase in share-based compensation expenses due to the employee bonus scheme which became effective in the last quarter of 2007.

The decrease was mitigated by $0.7 million increase in adjusted EBITDA, a decrease in interest expense by $1.1 million, and a $1.9 million decrease in income taxes.

As mentioned earlier, time charter and voyage expenses increased by $174.8 million in the three-month period ended September 30, 2008, compared to the same period in 2007. This was primarily due to the increase in market rates which negatively affected the charter-in expenses relating to Capesize vessels, servicing the related COA business, the increase in the short-term fleet activity, and the acquisition of Horamar which had the further impact of $20.7 million.

Direct vessel expenses for the operation of the owned fleet decreased by $0.4 million to $6.5 million for the three-month period ended September 30, 2008, as compared to $6.9 million for the same period in 2007. Direct vessel expenses include crew cost, provisions, deck and engine stores, lubricating oils, insurance premiums, and maintenance and repairs.

The decrease resulted primarily from the net reduction of the owned fleet by 3 vessels in the third quarter of 2008 compared to the same period in 2007.

Heading now to the 9-month results, revenue for the 9 months ended September 30, 2008, increased by 136% to $1.64 billion as compared to $449.9 million for the same period in 2007. Revenue from vessel operations for the 9 months ended September 30, 2008, was $983.4 million compared to $442.2 million for the same period in 2007. The increase in revenue is mainly attributable to the increase in the average time charter equivalent rate achieved and the increase of the available days of the fleet. The average TCE rate excluding FFAs for the first 9 months of 2008 was $47,798 per day compared to $25,561 per day for the same period last year, an increase of 87%.

The available days of the fleet increased by 37% from 13,125 days in the first half of 2007 to 18,040 days in the same period of 2008. Revenue from Navios South American Logistics was approximately $80.5 million in the first 9 months of 2008 compared to $7.7 million during the same period of 2007. This is mainly due to the acquisition of the Horamar Group in January of 2008.

As mentioned earlier, EBITDA for the 9 months of 2008 was especially affected by the $1.6 million non-cash write-down relating to the accounting of the warrants acquired in connection with the IPO of Navios Acquisitions. Excluding the effect of this item, adjusted EBITDA for the first 9 months of 2008 was $142.7 million, compared to $135.1 million in the same period of 2007. The increase in EBITDA was achieved despite the sale of 5 vessels to Navios Partners in the last quarter of 2007. As explained earlier, EBITDA for the 9-month period was negatively affected by the sudden drop in the market. This was compounded by the accounting of loss-making voyage at the end of quarters where we recorded total loss of the voyage at the date that it actually begins where as we record the profit on that voyage on a pro rata basis. The $7.6 million increase in adjusted in EBITDA is mainly attributable to an increase in revenue by $614.1 million between the first nine months of 2008 compared to the same period of 2007, an increase in equity and earnings from affiliated companies by $10.8 million mainly due to the earnings from Navios Partners, a decrease in direct vessel expenses by $2.1 million, and a gain of $27.7 from the sale of assets.

The above increase of $654.7 million was mitigated mainly by an increase in time charter voyage and logistics business expenses by $625.1 million between the first nine months of 2008 compared to the same period of 2007, an increase in general and admin expenses by $12.6 million mainly due to the acquisition of Horamar, the introduction of a new bonus scheme for the employees of the group which became effective in the last quarter of 2007, and the cost of the credit default insurance which was also set up in the last quarter of 2007, a $3.8 million decrease in gains, an increase in minority interest by $2.7 million, and a net decrease in all other categories by $2.9 million.

The EBITDA contribution from Navios South American Logistics was $21.1 million in the first nine months of 2008 compared to $2.9 million in the same period of 2007. The increase is mainly due to acquisition of the Horamar Group in January 2008. Net income for the 9-month period ended September 30, 2008, increased by 67% to $124.1 million compared to $74.5 million in the same period of 2007.

Net income for the first 9 months of 2008 was positively affected by $57.2 million write-off of deferred Belgian taxes. After the effect of these items, adjusted net income for the first nine months of 2008 was $66.8 million compared to $74.5 million in the same period of 2007. A decrease of adjusted net income by $7.7 million is mainly attributable to the $19.8 million increase in depreciation and amortization expense primarily due to the effect of purchase price accounting of the Horamar acquisition, a $2.2 million increase in share-based compensation expense due to the new employee bonus scheme which became effective in the last quarter of 2007, the $1.6 million unrealized loss due to the accounting of the acquisition warrants and $0.1 million increase in amortization and deferred write-off expenses. The decrease was mitigated by a $7.6 million increase in adjusted EBITDA, an increase in interest income by $1.4 million, a $2.7 million decrease in interest expense, and a $4.3 million decrease in income taxes.

Turning to the next slide, number 27, I will highlight key balance sheet changes between September 30,, 2008, and December 31, 2007. Navios’cash and cash equivalents balance excluding the restricted cash on September 30, 2008, was $121.2 million versus $427.6 million at the end of December 31, 2007. The reduction is mainly attributable to the acquisition of the Horamar business in January 2008, the exercise of a purchase option of the acquisition of the Navios Orbiter, the advanced payments to shipyards for the cape-size vessels under construction and the cash used for the share buyback program.

Total assets grew by $235 million to $2.2 billion, reflecting primarily the acquisition of Horamar, the exercise of the purchase option for the Navios Orbiter, and the addition of the vessel into the owned fleet from the long-term chartered in fleet, and the payment of additional installments for the construction of the new building capes.

The long-term debt including the current portion increased to $455 million at September 30, 2008, versus $316 million on December 31, 2007, due to a new loan obtained for the expansion of Navios South American logistics fleet, the assumed debt following the Horamar acquisition, and the drawdown of one of our facilities for the installments of the new building program. The net debt to book capitalization ratio remains low at 40% as of September 30, 2008. I would like to point out that since our vessels were acquired through the exercise of favorable options, they are reflected in our balance sheet at values between $19 and $26 million each, which are below the current market values for these vessels.

Turning now to slide 28, Angeliki talked about the capital expenditure earlier. On this slide, we break down the CapEx requirements between 2008 and 2009. I’d like to highlight several points. We only have $11.1 million outstanding CapEx for the rest of 2008 which can be financed out of the existing cash on our balance sheet. In 2010, we have no CapEx commitments, and the majority of 2009 payments will take place in the second half of the year. What is also important to know is that we are in advanced negotiations with the banks in order to obtain financing for the biggest part of the $282 million of required financing. We will inform you when these are finalized.

Turning to slide 29, the company has recently entered into a new revolving facility of up to $90 million which can be used for general corporate purposes. The facility is for a minimum period of 2 years with subsequent extension periods. This enhances significantly our liquidity position in a difficult financial market.

This concludes my review of the financials. At this time, I’ll turn the call back over to Angeliki.

Angeliki Frangou

With this, we have completed our formal presentation. We are opening the call to questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from Jonathan Chappell from J.P. Morgan.

Jonathan Chappell – J.P. Morgan

Angeliki, my question is on the cancellations of the chartered in fleet. How are you able to cancel those at no cost? Did it have to do with the fact that maybe the ships are not going to be built? I noticed that they are not for delivery in 2010 or 2011. Was there a yard issue there or is it just your relationship was able to back out of these contacts? Finally, what does that mean for the industry as far as maintaining long-term chartered-ins?

Angeliki Frangou

First of all, the vessels that we cancelled were new buildings. These were vessels that were going to be delivered to us in Q4 of 2009 and Q1 of 2010. As you remember, we did not have any of our new building program going beyond Q1 2010, so the reality is that we realized as early as August that market conditions were changing, and we did not want any unhedged positions because this is the biggest risk for our company, so we immediately started negotiations because we knew the moment this started, a lot of other companies will follow, so our advantage on this was to negotiate early the cancellations because today you have almost every company going there negotiating which may not be able to get the same favorable terms, so this way, we cancelled the three vessels that were totally unhedged, and then we continued on the chartered-in vessels. On those vessels, we had no payments down, but they removed it from our open day which in essence created a much more visible future in front of us. We know exactly how 2009 and 2010 is developing and also clearing up 2011. The biggest benefit of Navios is that having cleared our book, today we are fully hedged on our position. If we consider zero income on our open days in 2009, which I don’t believe achieve such a number, we only have a delta of $30 million, so I think it puts us in a very comfortable position.

Jonathan Chappell – J.P. Morgan

I know with your credit default insurance this isn’t an issue that will necessarily directly impact Navios, but with your ability to back out of the nine chartered-in vessels at no cost, do you think that’s something that can become more prevalent in the industry, more contract defaults?

Angeliki Frangou

I believe that a lot of cancellations will happen. There is going to be cancellation from shipyards and owners across the board as well as what we experience and we are viewing today. A lot of dry bulk owners are converting vessels to tankers thinking that the prospects of the tanker market is better than the dry, so what we are going to be seeing and you will see this developing in Q1 and Q2 next year because it will take time to really see the book. It’s going to be changing dramatically in the dry sector. I think that whatever we were looking as one-third, it may fluctuate between one-third with 50% of the book not delivering.

Jonathan Chappell – J.P. Morgan

Can you talk about your risk management business? Have you been lessening your exposure to FFAs given the volatility in that business and also it looked like your short-term chartered-in was about 51% of your operating days? Are you trying to lessen your exposure to short-term chartered-in in this weaker market as well?

Angeliki Frangou

Short-term time charter business is usually here, so it is coming to a conclusion. One thing that happened from our experience is that with a lot of financial firms going out of the market, the liquidity has dried up, so our corporate position today is that our FFA trading is limited and there is almost neutral book because of the liquidity. Even though you may have volatility, that may sound exciting and you can make money. As there is illiquidity in this market, you cannot take positions where you can exit, so today our trading book is neutral on the neutral on the FFA. Now our COA book, the way we positioned ourselves for 2009 is we have a very valuable, in our opinion, COA book that in the current market conditions, it will develop for us into a very nice asset.

Jonathan Chappell – J.P. Morgan

That’s actually a good transition to another question. We’ve been reading a little bit about COA agreements being cancelled. Have you heard anything from your counterparties on the COAs?

Angeliki Frangou

The COAs we have are extremely huge entities. As you have noticed, our COAs are also insured. On our $200 billion approximate insurance revenues, all are COAs which means if any counterparty wants to renegotiate with us, we have to first clear it with our insurance company if we want to mitigate losses, so unless we get that permission, there is no reason for us to renegotiate.

Jonathan Chappell – J.P. Morgan

It looks in the EBITDA reconciliation table that cash provided by operating activities was negative $82 million in September, in the third quarter. What’s behind the big loss in operating cash flow in the third quarter?

George Achniotis

As you know in the previous quarter through the trading, we were in a net receivable position, and we received basically cash from all those clearinghouses. Now we have paid in the last quarter more than $140 million to the clearinghouses, and we expect to receive cash back from them. That is what created this negative operating cash flow.

Angeliki Frangou

One thing that I would like to add in this is first of all the value of the contracts is now decreasing. We are going from a Panamax environment of $70,000 per day to a Panamax environment of $15,000 per day. The contract values are reduced. Also we do not perceive that on our FFA trading platform we will be doing so much trading as this market will be far more illiquid. It’s a working capital readjustment on our decision so cash from that division will be reallocated to our main business, so we are looking at about $80 to $100 million reallocation by this method.

Operator

Our next question comes from Natasha Boyden from Cantor Fitzgerald.

Natasha Boyden – Cantor Fitzgerald

I just want to dig a little further from Jonathan’s question on the cape cancellation. Regarding the capes, is there any specific reason why the cancellation fee was so low?

Angeliki Frangou

I think we like to do a good job.

Natasha Boyden – Cantor Fitzgerald

I understand that. Don’t get me wrong. We’re very pleased with it, but we’ve seen other companies walk away, and they’d have to pay or leave behind a much larger piece of their deposit, and $1.5 million seems to be really low for 3 cape sizes. Was that Angeliki just from how you managed to negotiate, and I am just wondering why the yard would let three capes go for such a large low fee. What’s their motivation?

Angeliki Frangou

Let me explain. The difference that you see in some of the cancellation is that the public companies did not negotiate directly with the yard. What they did is they abandoned the 10% they had given to the counterparties that they acquired the contract from. The difference from this is that we went and we negotiated very early on and very quickly because when you see market deteriorating, you have to decide on moving away from your unhedged and unfixed positions. You have to not be emotional about it. So one thing we did is immediately we went and we started negotiating directly with the yard. That is the difference. Also we provided assurances that we will get delivery on the vessels that we have agreed, and basically it is a very comfortable environment because we did not disrupt very much their program. They could organize their production line. You make sure that the vessels that you cancelled were the later ones, which anyway they had not started to work, so in any event, you were giving a very advanced notice in a very timely manner. So I think this was the strategy, and in the way we had also worked charters, this gave us the opportunity to actually move everything a little bit forward.

Natasha Boyden – Cantor Fitzgerald

So nobody is losing out?

Angeliki Frangou

Yes.

Natasha Boyden – Cantor Fitzgerald

Now moving on to the Handys, now those were chartered in whereas the cape sizes were owned, so in canceling those vessels, who actually cancels them? Is it the owners of those vessels or you because obviously at that point, you are not negotiating with the yard, right, because they are not the owners of the vessels?

Angeliki Frangou

We are negotiating with the owners of the vessels, and we’ve been in essence negotiating with the yard. We explain to them that they themselves will be losing if they took delivery of these situation, and we managed to persuade them that it is in the best interest of everyone it should be cancelled.

Natasha Boyden – Cantor Fitzgerald

I just want to move on to the dividend here, with the dividend cut. You just had a line in your press release that your banks are able to limit your dividend payout. Did you have any pressure from your banks at all to limit the dividend?

Angeliki Frangou

No. I want to remind everyone that Navios is the only dry bulk company that has a bond outstanding which is a permanent un-amortizing part of our debt. This creates a much more flexible situation for us because as you realize we have not the same requirements on loan to value calculation on our whole debt structure. Also we have a harmonized covenant package as we follow a consistent update following that bond. On the overall position, the way we look in the board in Navios, we had to review 2009. We know 2009 is going to be a very severe year. Even restarting the economy will take some time. So looking at the situation we have to take, even though our financial condition is in a good shape and our balance sheet is in a good shape, we have to look overall. In designing the dividend, we have been pretty much consistent over the years, Navios Holding, on our dividend policies. We also saw that we will enhance the dividend payment with repurchases of $25 million in buyback programs. So, the overall package is $12 million higher than dividend policy of this year.

Natasha Boyden - Cantor Fitzgerald

And then George, may be this question you can answer, you may have addressed this, but I think may be I missed it. Just looking towards the balance sheet, your debt I think increased over the quarter and your cash position decreased by about $163 million, can you just let us know if you used cash flows during the quarter to just let us know why the cash decreased by that much?

George Achniotis

The efficacious use of the cash was for additional payments to the shipyards for the contractual agreement.

Natasha Boyden - Cantor Fitzgerald

I thought you mentioned that, I think I just missed that. And then lastly, the $90 million credit facility, is there a reason why you chose this amount as opposed to a larger facility. Just kind of seems like a fairly small amount, and if you just let us know what the spread is on that facility please?

Angeliki N. Frangou

This was done in the middle of the oil crisis and we did it as an additional safety guard because what we have cared about is to have about $268 million of cash plus liquidity in order to cover almost all our new building program. So, if I was reacting, I am doing it in Q1 or at the end of the year and you have the material. We managed to do all this in a very short period when the spreads were going crazy and the banks didn’t want to hear anything about lending.

Natasha Boyden - Cantor Fitzgerald

What’s the spread on that facility, George?

George Achniotis

It’s 235 basis points.

Operator

Our next question comes from Omar Nokta from Dahlman Rose.

Omar Nokta - Dahlman Rose

I just want to revisit just the three Capesize cancellations because it does seem like a really good deal to walk away with just $0.5 million due for each. What was the order price for those?

Angeliki N. Frangou

It’s around $90 million.

Omar Nokta - Dahlman Rose

Do you think other travel companies can do that if they are dealing directly with the yard; I know you addressed the question before that people were dealing with re-sales, but is that how easy it is, to just walk away?

Angeliki N. Frangou

I don’t think it’s quite as easy.

Omar Nokta - Dahlman Rose

I would understand that your other orders there are basically what allowed that to happen?

Angeliki N. Frangou

Yes.

Omar Nokta - Dahlman Rose

And then just switching gears, just to the short-term trading business…

Angeliki N. Frangou

I think I want to explain that. We are a company that they know that will business in the future. So, yes, we have a system and you will receive the business and that’s the way it works.

Omar Nokta - Dahlman Rose

Understood, and just with respect to the short-term business, it looks like you guys missed earnings from that. Did that business operate basically at a loss during Q3?

Angeliki N. Frangou

Yes, as George said earlier, it was about $14 million of delta. There are some accounting issues with how you recognize the revenues. If you have a loss after recognizing the quarter immediately and then the benefit you get in the following quarter, and also, don’t forget that within the quarter, if you had the balance for the quarter and cargos and vessel, fixing the cargos in the beginning of the quarter and vessels at the end of the quarter, you have a delta of 80%. So, there was a huge volatility within that quarter that is unusual for any market conditions.

Omar Nokta - Dahlman Rose

Okay, what should we expect for Q4? Should we expect a positive result or negative?

George Achniotis

We are having a very good book now and we expect that 2009 will be a very positive year for us on the COA business in the short term.

Omar Nokta - Dahlman Rose

And then just finally, with the FFAs, I know you mentioned that 70% is exchange traded right now, how do you feel about the remaining balance of that; there’s been a lot of worry and concern from settlement day, there’ll be some defaults, is there any bad debts that you expect to see?

Angeliki Frangou

One of the issues that we see usually is that a company that is going to default, we will see their books. We make that decision when they show their books to see if the company is not covering. I find it unusual that they will make the settlement of October and then they will not make the following settlement. Also, there is a very nice initiative of doing multi-netting. I don’t know if you’re aware, but that happened with about 40 counterparties in October, and this is something that the investor is going to be doing then also and nothing in November, and this alleviates the whole issue of millions of dollars moving around for individual netting. This is an issue of another two settlements, November and December, because after that you don’t have really a lot of exposure.

Operator

Your next question comes from the line of Urs Dur from Lazard Capital Markets.

Urs Dur – Lazard Capital Markets

This is more for Ted to talk a little bit about what we’re seeing now in the shorter-term markets. I know there have been a lot of questions about the COA business, but you guys really have your finger on that pulse. What is the influence of the trade credit markets going forward for the remainder of the year? What’s your outlook there?

Ted Petrone

As everyone knows, obviously the banking system is in turmoil here, and credit is going to take some time. There was a WGO meeting in Geneva the other day. Not a lot of news came out of that, but it looks like you can see some kick-up on the Panamaxes and the Handys because I think some of those letters of credit just have to move on the grain, but on the coal and the iron ore, I think it’s pretty much stuck in the ground. A lot of the letters of credit are moving through. A lot of the iron ores aren’t moving. So we don’t see a lot of things happening in the market in the next 4 to 6 weeks.

Urs Dur – Lazard Capital Markets

You’ve expanded the share buyback to 25 million further. How much is the total remaining then? Is it the 25 plus what’s remaining?

Angeliki Frangou

It is 25 million.

Operator

Your next question comes from the line of John Parker from Jefferies.

John Parker – Jefferies

It looks like your revolver availability was brought down a little bit. Is that a function of declining fleet value or is that just function of something else, because it’s a $125-million facility, and you showed in your presentation you have $97 million facility.

George Achniotis

We used part of the revolver after the end of the quarter for the acquisition of the Handymax business that delivered in October.

John Parker – Jefferies

But what is the size of your old facility? I thought it was $120 million?

Angeliki Frangou

The previous facility was $108 million.

John Parker – Jefferies

And that remains unchanged?

Angeliki Frangou

That remains unchanged. It is reduced every year by a prearranged amount that was determined when we did our loan agreement in 2006.

John Parker – Jefferies

The two construction loans that you were able to secure before things got really ugly here. Are those still available at the same amounts they were negotiated at or have those been reduced at all?

Angeliki Frangou

No. They have remained.

John Parker – Jefferies

Okay, and can you tell me how much is drawn on those facilities right now?

Angeliki Frangou

We will give you that, but one thing you have to understand is that the new building vessels that we have in our facility, those vessels are either 10-year lease, 5-year lease, or 7-year lease. The average lease is a 7-1/2-year lease, so all of these vessels are hedged. It’s a totally hedged position for the bank.

George Achniotis

From the old revolving facility, we drew the balance for the acquisition of the Handymax, as I mentioned earlier. So now we have the new facility.

John Parker – Jefferies

I can get to you later on the other balances, but the other question I had was as part of the negotiation with the shipyards, was there any acceleration of payments on the remaining ships or were the payments that went about just what had already been planned for the ships that remain in your new belt program?

George Achniotis

There is no change in the timing of the payments.

Operator

This concludes today’s Q&A session. At this time, I will turn the conference over to Ms. Angeliki Frangou for closing comments.

Angeliki Frangou

Thank you very much everyone for attending our Q3 call.

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Source: Navios Maritime Holdings Inc., Q3 2008 Earnings Call Transcript
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