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Navios Maritime Holdings Inc. (NYSE:NM)

Q3 2009 Earnings Call

November 18, 2009; 8:30 am ET


Angeliki Frangou - Chairman & Chief Executive Officer

Ted Petrone - President

George Achniotis - Chief Financial Officer

Mr. Michael McClure - Senior Vice President of Corporate Affairs


John Chappell - JP Morgan

Urs Dur - Lazard Capital Market

Natasha Boyden - Cantor Fitzgerald

John Parker - Jeffries

Chris Wetherbee - FBR Capital Markets


Thank you for joining us for Navios Maritime Holdings third quarter 2009 conference call. With us today from Navios Maritime Holdings are Chairman and Chief Executive Officer, Ms. Angeliki Frangou; President Mr. Ted Petrone; and Chief Financial Officer Mr. George Achniotis. As a reminder, this conference call is also being webcast. To access the webcast, please refer to the press release for the website directly on the registration page.

Before I review the structure of this morning’s call, I’d 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’s 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’s filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios do not assume any obligation to update the information contained in this conference call. Thank you.

At this time I’d 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 the market fundamentals. Following Mr. Petrone’s remarks, Mr. Achniotis will review Navios’s financial results for the third quarter and nine months ended September 30, 2009. Finally, Ms. Frangou will offer concluding remarks. At the completion of remarks, the company will open the call to take your questions.

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

Angeliki Frangou

Thank you Laura, and good morning. During the third quarter, we continue to benefit from our strategy of increasing our fleet on long term periods with high quality counterparties. Our financial performance reflects a high-low throughout the past 12 months. During this time we have worked hard to position Navios in the current market.

For the third quarter of 2009 we earned approximately $56 million of EBITDA, representing an increase of 74% over the adjusted EBITDA of $32 million in the third quarter of 2008. For the nine month period, we earned approximately a $142.4 million, representing an increase of about 25% over the adjusted EBITDA of $113.4 million in the same period of 2008.

We are also pleased to announce a dividend in respect to the third quarter of 2009 of $0.06 per share payable on January 7, 2010, to shareholders of record on December 18, 2009. Navios remains an [Inaudible] company, thus maintains a dividend policy.

As you can see on slide five, our hard work was favorably recognized by the capital market. We recently successfully accessed a high yield market and closed a $400 million note offering with a coupon of 8 7/8%. The notes I think were referenced by mortgages on 15 vessels and have a maturity of [ATS].

Of the offering proceeds $105 million was partially financed, the treasures of Navios Lumen and Navios Phoenix, both of which were expected to deliver in December of 2009. The high yield also is a strategic addition to our liquidity as we have used most of the net proceeds to repay amortizing dead facilities. As a result, we will have additional cash flow which we can put to our creative use.

The secured notes play an important role in the capital structures. Please be informed that the unsecured notes offering in 2006 would have increased our assets and debt structure by approximately more than 100%, thus increasing the portion of our debt structure, but that’s not amortized and is appropriate.

Please turn to slide 7. The high yield offering reaffirms Navios more than strongly proven to position. Our net debt to total capitalization is approximately 61% and we maintained significant cash balance of about $267 million, with overall liquidity of approximately $452 million. Navios Holdings continues to have a low operating dividend and a substantial cash flow.

Slide 8 illustrates Navios substantial [Inaudible] and low operating costs. As you can see, almost 100% of our revenue speaks for 2009 at $24,931 per day, and approximately 85% of the interest for 2010 at $30,243 per day. We have a low operating breakeven of $16,831 per day. The net result of this is that we are drawing a substantial cash flow during 2010.

Please note that the operating breakeven number includes operating expenses, dry docking chartering expenses, administrative expenses including credit before insurers, interest expense and capital requirement.

I would also like now to discuss briefly Asian developments on slide 10. As you can see, we sold Navios Apollon to Navios Partners for $32 million in an all-cash transaction. The Apollon has a monthly [Inaudible] of 52,000. The Navios Apollon will serve as a three year time charter. We also upgraded our fleet by purchasing the Navios Celestial for an effective purchase price of approximately $34 million. The Navios Celestial is currently trading stock.

We also agreed to provide visibility to the investors of Navios Partners by increasing the management fee for an additional three years. As you may recall the original management agreement provides for a fixed fee for two years of 4000 for Panamax vessel to-date, and 5000 to Capesize vessel to-date. With a fee for an additional period ending in November 16, 2011 of 4500 per Ultra-Handymax vessel per day which is a newly established rate, and 4400 to Panamax vessel per day, and $5500 per day per Capesize vessel. This is a 10% increase from the previous period.

With that, I would like to turn the call over to Mr. Ted Petrone, Navios President, who will take you through the Navios operation in the industry. Ted.

Ted Petrone

Thank you Angeliki and good morning all. Please turn the slide 12. Navios Maritime Holdings currently consist of 59 vessels, equal to 6.3 million deadweight. Navios has 38 vessels in the water with an average age of 12.7 years. Our fleet is considerably younger than the industry average age of about 16 years. The fleet is comprised of 23 Capes, 15 Panamaxes, 18 Ultra Handymaxes and 3 Handys. Of the 27 long term charter in vessels, Navios holds purchase options on 11 of these vessels.

Please turn to slide 13. In the third quarter Navios continued its policy of locking in secured long term cash flow by chartering out two Panamax vessel; Navios Star and the Navios Altair, on one year charters to first class counterparties. Navios average charter out rate for the cost league is $24,931 for 2009. This rate increases each year to 2012, with $30,243 in 2010; $35,080 for 2011; and $36,098 for 2012.

Our long term bias is evident from the percentage of revenue days at our core fleet that’s fixed; 99.5% in 2009, 83.3% in 2010, 63.4% for 2011 and 56.6% for 2012. Some niche we will enjoy contracted revenue of over $1.2 billion to the end of 2012. The annual figures are $246.2 million for 2009; $309.8 million 2010; $308.8 million 2011; $298.3 million for 2012. We have also ensured a revenue from an EU-backed AA+ entity.

Please turn to Slide 14. Navios continues to enjoy vessel operating expenses significantly below the industry average. Currently, Navios’s daily OpEx is $4,615 a day, 18% below the industry average. Navios’s established reputation and strong operating history allows a favorable spreads between its long-term charter-in contracts and, medium to long-term charter-out contracts. The positive average daily spread of $14,946 a day for 2009 will increase to $19,893 in 2010.

Please turn to slide 16. As you will note, we own approximately 42% of Navios Partners including General Partner interest. Navios Partners currently have 11 vessels in the world. Navios Partners provides cash flow to Navios Holdings. We anticipate, based on the current run rate, receiving about $18 million in distribution during 2009 was to provide for approximately 75% of our distribution to our shareholders.

Please turn to Slide 18. This provides an overview of Navios South American Logistics, which is becoming one of the premier logistics providers in the region. Navios Logistics have two divisions. The first is the transshipment facility in the Nueva Palmira, Uruguay. The second division is the barge in the upriver terminal, which provides a strong presence in the in-line waterway of the Hidrovia region. In addition to operating an upriver port in Paraguay, we are also operating in the Argentine carbotage business, with the operation of four product oil tankers.

Please turn to Slide 19. The book terminal and the tax free zone located within the Nueva Palmira inaugurated Silo VIII on October 15, bringing total Silo storage capacity to 350,000 metric tons. The Nueva Palmira established record throughput revenues and EBITDA in the first nine months of 2009, assisted by record Uruguayan wheat and soybean crops.

Projections are for Uruguayan to double grain exports over the next five years. Drought conditions in the Hidrovia waterway region continue to impact river operations and consequently barge operations. Paraguay River is part of the Hidrovia waterway which connects four nations to the river plate in Argentina and subsequently to oceangoing ships. The region is rich in agriculture and mineral exports that are dependant on the river system to reach ocean terminals.

Please turn to Slide 21. This slide reviews our ownership in Navios Acquisition Corporation. We closed this offer in July 2008, and have approximately $240 million of net proceeds on hand. We have until June 30, 2010, to complete an acquisition and find that the current environment is presenting favorable target opportunity. Navios Holdings hold a 19% ownership position, as well $7.6 million in warrants, which provides significant investment potential.

Please turn to Slide 23. In September the Baltic Dry Index slipped below 2200 for the first time since May. This was largely due to a weakening of the Capesize market, the Panamax and Handymax markets remain resilient, as was the underlying demand for smaller vessels. In general, Cape rates were negatively impacted by a marked softening in Chinese domestic steel prices, international iron ore and steam coal prices and reduced poor congestion at China’s iron ore terminal.

Subsequent to Q3, the picture has changed dramatically as the demand has once again surprised on the upside. For most of 2009, China single handedly sustained sea-borne trade; however, reviving worldwide steel production and thus increases in demand for iron ore and coal, in turn has caused a dramatic rebound in Cape rates. Although not as dramatic, the increase in daily rates for Panamax and Handymax vessels has been supported by a strong pacific coal trade combined with record US grain cost.

As of yesterday November 17, the BDI stood at 4,381, exceeding the previous high for the year 4,291 set on June 3. Recent health in the dry bulk rates reflect a number of matters, including changing trading patterns, resulting in the inefficient use of the dry bulk fleet, port delays, the strength of fleet growth and increased strapping. The net result was a relatively balanced dry bulk market despite the record new buildings having entered the market so far in 2009.

Moving to slide 24. In October, the IMF again raises forecast for the world GPD growth in 2010 to 3.1%. This includes GDP growth outside of the emerging markets and increased prospects for improved raw material demand globally. World dry bulk trade growth has projected in 2010 to grow at over 5%.

Purchasing Managers Index or PMI, for the major industrial economies continues to point to a recovery in demand, but the PMI is mostly above 50. The JP Morgan global composite PMI rose to 54.4 in October, up from 53 in September. China’s PMI continued to improve in October, with a reading of 55.2 up from 54.3 in September. In this the index has stayed in the expansionary zone above 50 for each consecutive month.

Turning to slide 25. The major driver in the growth of sea borne trade is the increase in demand for natural resources needed for steel, energy and food. The demand is primarily driven by the industrialization and urbanization of the developing nation led by China.

Emerging economies which now contribute over 50% of the world GDP contribute overwhelmingly to dry bulk demand. As an example, the BRIC countries are expected to produce a 13% growth in steel production in 2009. China by itself will account for 24% of world dry bulk trade and 52% of the iron ore trade. China’s economy has strengthened since the beginning of the year and most trading indicators continue to improve.

For example, China’s passenger car sales surged in October by 75.8% from the year earlier to 946,400 units. China’s GDP rose by 8.9% year-on-year in the third quarter; the fastest pace this year and up 7.9% from the second quarter. As previously noted, Chinese appetite for iron ore and coal, net and steam has been the strength in the dry bulk market so far in 2009.

With regard to iron ore and met coal, China’s industrial production in October was up 16.1% year-on-year, compared with 14% in September. Concerning steam coal, China’s power consumption continues to rise, and the total power consumption rose by 16.1% from a year earlier. China’s year-to-date total coal imports are a record breaking 98.9 million metric tons, easily exceeding the previous annual record of 51 million metric tons set in 2007.

China’s has gone from being the world’s second largest exporter of coal in 2000, to one of largest net importers in 2009. Triggered by the global financial crisis, the Chinese government is now trying to balance external and internal growth, which is adding fresh Chinese buyers to the basic resource equation. Specifically, government stimulus is targeting the Chinese consumer and previously neglected infrastructure development in the central and western provinces.

Moving to slide 26. Approximately nine Capes traded front haul in the Atlantic and Pacific, and I wondered if they were trading back from the Pacific to the Atlantic. It is now quite common to go Pacific tonnage to service transatlantic route. This squeeze in tonnage supply was a nip itself in closing when the needs arise. This new trading route and efficiency is replacing port congestion as a major factor in determining rates.

As an example of changing trading patterns, is the coal loading port of Richards Bay. This port has evolved from a supplier to the Pacific market at the beginning of the decade, to an Atlantic supplier, and is now reverted to supplying to a Pacific market again. Today there are virtually no iron ore trading from Pacific to Atlantic, as the Pacific import is dominating.

Changing trading patterns are also having an effect on the Panamax and Handymax sector. As previously discussed, China is becoming a net importer of coal and [Inaudible] for over 100 million metric tons of coal in 2009 as opposed to China’s neighboring coal imported as a positive field for the coal requirement.

Turning to slide 27. The latest rally in the stock market has coincided with an upturn in congestion for both Capes and Panamaxes. This large port congestion has consistently absorbed over 10% of the Capesize fleet. Despite October, the number of Capes are weighted down has coal and iron ore ports has risen again to approximately 124 vessels or 13% of the fleet.

So far in 2009, the peak congestion sided up a 154 Capes in mid-June, which closely coincided with peak Cape earnings. Average waiting time of East Australia’s coal ports has risen above 13 days for the first time in 11 weeks. Line-ups were down in Newcastle and Glass, and all linked in recently. In total, approximately 70 Panamaxes are currently waiting to board off Australia.

Turning to slide 28. Chinese iron imports fell from a record 64.5 metric tons in September to 45.47 in October. However, the general consensus is that this decrease reflects national holidays during the first week of October. Fundamental demand for steel products remains strong, a recovering housing construction, record auto sales and a solid pick up in industrial output. Over the past months, we’ve seen a drawn down of iron ore and steel inventories, increase in domestic iron ore productions, against steadily increasing international prices.

Total iron ore imports by China through the first 10 months of 2009 rose 37% to 514.8 million metric ton. Meanwhile, imported iron ore stock piles at major Chinese ports have declined to a nine month low of 66 million metric tons and the inventory has been below 17 million tons for three straight weeks. According to China’s National Statistics Bureau, Chinese crude steel production for the quarter was at 51.8 million metric tons in October, up 44% year-on-year and in line with production levels over 50 million tons seen in recent months.

Through the first 10 months of 2009, China crude steel production was 472 million tons, up about 12% from the same period last year, and suggesting an eventual 2009 total of approximately 575 million tons. End user demand clearly remained extremely strong in China with apparent steel demand in September up 49.4% year-on-year and flat month-to-month.

Moving to slide 29. As a result of the strong Chinese demand for commodities, the market has allowed for commodities the market has relied on fixed business that is above operating costs. As a consequence there has been strong activity in the demolition market. Fewer drybulk ships resolved for demolition in the third quarter 2009 than any quarter since Q3 of last year. Totaled to a 0.84 million deadweight tons on only 25 vessels.

To put this recent slow down of demolitions in perspective, during the last 12 months almost 13 million deadweight tons were sold for demolition. This exceeds all-time record of 12.3 million deadweight scrap in 1986. On a percentage basis however the ship backs about 3% of the current fleet, compared to more than 6% in the mid 1980s crisis. No Capes have been scrapped since June.

Turning to slide 30. Many question surround the schedule and moving of order book. In 2008 we experienced something to 21%. Towards the end of October slippage has almost doubled to approximately 36%. By vessel the largest slip was in bulk carriers, followed by contained which were down 18% and tankers which were down 10%.

The experience of 2009 has indicated the difficulty of some ships in the space meeting their delivery dates. Nonetheless, there should not have been any deliveries in the year-to-date of approximately 34 million deadweight from exceeding the previous record, and an annual total of 25 million deadweight in 2006.

The order book for 2010 of over 100 million deadweight represents almost 20% of the existing fleet and threatens to dampen any upswing in demand; however, this is on paper. It remains a real doubt as to where we are, we can meet the ambitious delivery schedules and whether these new buildings can be financed. Indeed many forecasters are already discounting 2010 deliveries at 25% to 40%.

In conclusion, the long-term support depends on continued strength in Chinese GDP and some additional recovery of OECD industrial production. Growing sense of demand outside China maybe increasing along with continuing worldwide congestion, the strain in new building deliveries, and changing trading pattern has brought restrained optimism back to the market. A key factor to watch at this point will be the supply side of the equation. Should year-to-date trends continue, current freight rates should be sustained.

This concludes our presentation. I will now like to turn the call over to George Achniotis, our CFO. George.

George Achniotis

Thank you, Ted and good morning all. I will now briefly review Navios’ financial results for the third quarter and the first nine months of 2009. The financial information that I am about to discuss was included in this morning’s press release and summarized in the slide presentation on the company’s website.

As shown on slide 32, total revenue for the three months of operations ended September 30, 2009 was $161 million, as compared to $363 million for the comparable period of 2008. The revenue from vessel operations for the three months ended September 30, 2009 was $121 million as compared to $320 million for the same period during ’08.

The decrease in the revenue is mainly attributable to the decrease in the average time charter equivalent rate achieved and the decrease of the available days of the short-term fleet. The average TCE rate excluding FFAs for the quarter was $24,061 per day, compared to $49,769 per day for the same period last year.

The available days of the fleet reduced from 6,036 days in the third quarter of 2008 to 3,949 days in the same period of ’09. This reduction is attributable to a significant decrease in the short-term fleet activity from 3,112 days in the third quarter of ’08 to 588 days in the same period in ’09; the contract of operation and the short-term activity has declined in ’09.

Revenue from Navios South American Logistics was $39.3 million in the third quarter of ‘09, versus $33.5 million in the third quarter of ’08. The increase is mainly attributable to the increased speed of Navios Logistics, which became fully operational in the fourth quarter of ’08 and the increased throughput at the Port of Nueva Palmira in Uruguay.

In spite of the significant reduction in revenue, cost by the reduction in the short term fleet and POA business, EBITDA for the third quarter 2009 was $55.7 million compared to $67 million for the third quarter of ’08. I want to remind you that in the third quarter of ’08 we reported gain of $25 million from the sale of our vessels in Navios Partners. Excluding the effect of this item, adjusted EBITDA for the third of ’08 were less than $32 million. On a normalized basis, EBTIDA for the period increased by 74% despite the harsh economic conditions which have affected our industry.

The $23.7 million increase in adjusted EBITDA is mainly attributable to a decrease in time charter, voyage and logistics business expenses by $225.6 million between the third quarter of ’09 and the same period of ’08, and an increase in equity in net earnings from affiliated companies by $5.6 million from $3.9 million in the third quarter of ’08 to $9.5 million in the same period of ’09.

The above increase of $231.2 million was mitigated mainly by a decrease in revenue by $202.7 million between the third quarter of ’09 compared to the same period of ’08; an increase in direct expenses by $1.4 million due to the new vessels delivering to our fleet, an increase in income attributable to non-controlling interests by $0.9 million, a decrease in gain from derivatives by $1.2 million and an increase in general and administrative and net other expenses by $41.4 million.

The EBITDA contribution from Navios South America Logistics decreased by 17.5% to $11.4 million in the third quarter of ’09 compared to $9.7 million in the same period of ’08. The increase is mainly due to the increased performance of the port at Nueva Palmira in Uruguay.

Net income for the three months ended September 30, ’08, was also affected by the $25 million gain from the sale of our vessels Navios Partners. Excluding the effect of this item, adjusted net income for the third quarter of ’08 would have been $5.7 million, compared to $21.3 million for the same period in ’09.

The 274% increase in net income between the two periods is mainly attributable to the $23.7 million increase in adjusted EBITDA discussed above, and a decrease in various categories by $0.9 million. The increase was mitigated by a $5.3 million increase in depreciation and amortization, and an increase in net interest expense by $3.7 million.

Turning now to the nine month results; revenue for the nine months ended September 30, 2009 was $450 million as compared to $1.031 billion for the same period in ’08. Revenue from vessel operations for the nine months ended September 30, ’09, was $346 million compared to $984 million for the same period in ’08.

The decrease in revenue is mainly attributable to the decrease in average PCE rate per day achieved, and the decrease in the available days of the fleet. The average PCE rate excluding FFA’s for the first nine months of ’09 was $26,153 per day compared to $47,719 a day for the same period last year.

The available days of the fleet decreased from 18,040 days in the first nine months of ’08 to 11,550 days in the same period of ’09. The decrease in days is mainly attributable to the significant reduction in short term fleet activity by 4580 days from 9,208 days in the first nine months of 2008 to 2059 days in the first nine months of ’09.

Revenue from Brazil, South America Logistics increased by 29% to $103.8 million in the first nine months of ’09, compared to $80.5 million during the same period of ’08. This is mainly due to the increased fleet of Navios Logistics which became fully operational in the last quarter of 2008 and increased throughput at the port in Uruguay.

Despite the reduction in revenue, EBITDA for the first nine months of ’09 increased by 7% to $151.5 million as compared to $141.1 million in the same period of ’08. EBITDA for the first nine months of ’09 was affected by $16.8 million gain from the sale of assets, a $6.1 million non-cash compensation from Navios Partners, and a $13.8 million unrealized mark-to-market loss on common units of Navios Partners, accounted for as available for sale securities.

EBITDA for the same period in ’08 was affected by $27.7 million gain on sale of assets of Navios Partners. Excluding the effect of these items, adjusted EBITDA for the first nine months of ’09 increased by 26% to $142.4 million from the $113.4 million in the same period of 2008.

The $29 million increase in adjusted EBITDA is mainly attributable to a time charter, voyage and logistics business expenses at $627.6 million between the first nine months of ’09 and the same period of ’08, with an increase in equity net earnings from affiliated companies by $7.7 million, from $12.3 million in the first nine months of ’08 to $20 million in the same period of ’09.

These favorable variance was mitigated mainly by a decrease in revenue by $582 million between the first nine month of 2009 compared to the same period of ’08. An increase in direct vessel expenses by $2.7 million, an increase in general and administrative expenses by $4.4 million, a decrease in gain from derivatives by $10.8 million, an increase in income attributable to non-controlling interest by $1.1 million and an increase in net average expenses by $4.3 million.

The EBITDA contribution from Navios South American Logistics was $25.8 million, in the first nine months of 2009 compared to $23.8 million in the same period of ’08. Net income for the nine months period ended September 30, 2009 and 2008 was also affected by the same margins for the affected EBITDA discussed earlier.

Net income for the first nine months of ’08 was also positively affected by a non-cash write off of $57.2 million of deferred bills and taxes. After the effect of these items, adjusted net income for the first nine months of ’09 was $46.4 million compared to $39.2 million in the same period of ’08, an increase of 18%.

The increase of adjusted net income by $7.2 million is mainly attributable to the $29 million increase in adjusted EBITDA discussed above, with $1.7 million decrease in income taxes, and a decrease in share based compensation by $0.6 million. The increase was mitigated by an increase in depreciation amortization expense by $9.7 million, an increase in net interest expense by $14 million and an increase in amortization by $0.4 million.

Turning to the next slide, number 33, I would highlight key balance sheet schedules between September 30, 2009 and December 31, 2008. Navios’ cash and cash equivalence balance including fixed cash September 30, ’09, improved $506 million, with $257 million from $161 million at the end of December 31, 2008.

Therefore for terminal analysis factors net of depreciation, including deposits for vessel acquisitions through by over 60%, $1.7 billion reflecting primarily the deliveries of six new vessels since the beginning of the year and the progress of our new building program.

I would like to remind you at this point that due to US GAAP accounting, the 42% investment in Navios Partners is reflected on the balance sheet at a value of $49.1 million, whereas the current market value of the shares is approximately $178 million.

The long-term debt including the current portion increased to approximately $1.5 billion on September 30, 2009, versus $888 million at December 31, 2008, mainly due to the new facilities put in place for the deliveries of the new built vessels and draw-downs from existing facilities for the installments of the new building program.

Turning now to slide 34, the company declared the dividend for the third quarter of 2009 of $0.06 per share to common shareholders as of December 18 that we paid on January 7. This is the company’s 16th consecutive quarterly dividend payment reflecting a fleet deployment policy that provide stable, insured and long-term cash flows.

This concludes my review of the financials. Before I turn the call back over to Angeliki, I want to inform you that we anticipate filing of the 6-K financial report before the end of the week. Angeliki?

Angeliki Frangou

Thank you George, and with this we complete our formal presentation and we open the call to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Chappell - JP Morgan.

John Chappell - JP Morgan

Angeliki, I don’t think we’ve had a chance to speak about the acquisition of Celestial yet. I am just curious, is that the same structure as far as the mandatory convertible preferred stock as the Capesize that you acquired earlier, with that paper and what I mean by that is, is it both the shipyard and the original owner who ordered that ship that’s taking the stack or is it just one or the other.

Angeliki Frangou

This was, in that sense was given to the shipyard. The only thing that we have lost, I think the amount that they had put was not compensated. This was really done with a shipyard.

The significance of this is that they really are opening to a different market because we did all the dealings with Korea, it is significant that you manage to do these in Japan, which is a little bit different of a market and I think that’s what’s the most significant item of that.

John Chappell - JP Morgan

And why do you think that others haven’t used this method yet?

Angeliki Frangou

I cannot know that. But I can say that very few companies in the drybulk segment have not done the usual deal. I mean the average dilution is 100% and with extreme jump to 600%. Navios prefer that, not only prefer we have issued we will have 14% dilution in five and ten years time, the 14 will be in ten years and we will have generated significant cash flow. So I think it has to do with mainly the way you treat your own shares.

John Chappell - JP Morgan

And assuming that 2010 is going to be even more potential financing issues as compared to 2009. Is it something that you anticipate in continuing next year?

Angeliki Frangou

We anticipate to be more creative even.

John Chappell - JP Morgan

Okay. Quick update on the South American logistics business has the drought issues there completely eased or are we close to returning to “normalized operations?”

Angeliki Frangou

We are now entering summer season; we have also added some information. We are now entering the summer season, so there is low water versus Q3 or Q2. But it seems that this is a phenomenon, in essence is one time in 50 years. I don’t think you expect a similar situation to continue.

John Chappell - JP Morgan

So coming out of the summer you would expect more normalized operations?

Angeliki Frangou

Yes. This is a low season for the water anyway because the summer season is there; the Q4 is always seasonal down the duct.

John Chappell - JP Morgan

Right. One final question on the asset prices and opportunities; I think a lot of people are expecting assets prices to continue to fall into year end and in early next year and that would’ve provided some opportunities for the well capitalized for the creative owners. Given this recent run more than doubling in rates, do you think that we’ve already passed the bottom of asset prices or do you think that there is a potential as financing issues become more prevalent next year that there could a better entry points.

Angeliki Frangou

Listen I didn’t take my crystal ball this morning, but I can tell you that nobody knows exactly where the bottom is. The one reality is that we were well positioned for Navios to acquire even nobody could do vessel.

One thing that we should all recognize as a point is demand is really very healthy. There is issues and this will be the marketing issues for 2010 is going to be the supply development and the availability of credit. Credit has not normalized in our market. Banks for whatever we are going to see, do not take Navios as an example because we have access to debt more than anyone else.

Debt is not available for companies easily. So, this is the two issues that really dominate our 2010. Here is a supply development together with a credit. I don’t think that it will be personal matter. We’re always going to monitor but personally I believe it will provide opportunities over the year.


Your next question comes from Urs Dur - Lazard Capital Market.

Urs Dur - Lazard Capital Market

On the congestion issue, we have had this nice drive and I like your explanation there. Do you expect, say, waiting for discharge because there’s been so much demand of waiting for discharge in China to keep increasing from this 11-week high?

Ted Petrone

Over the short run Urs, I think it will. You are seeing a lot of fixtures being done over the last week or two. So those ships that are on their way to China, the previous high this year was about 30 more vessels than it is today and I would expect that the congestion will continue. But remember congestion is not the driver of the market. It’s the demand behind the congestion that’s really driving the market. If the market goes up, say a 100 points, 80 points is really the demand behind the congestion.

The congestion does build upon itself and give you some extra strength, but it’s really this demand that’s coming from China and now OECD is getting their act together on the steel making process, and it’s not just the discharge ports, it’s also load ports. Look at East Australia on the Panamaxes.

Urs Dur - Lazard Capital Market

Right. I mean I was very interested in the discharge but that’s what sort of where I am going again. East Australia but then can you chat about Brazil. Is there anything going on, say loading delays this for the grain season in the US gulf, anything on the load side?

Ted Petrone

There’s normal delays. The crop in the US gulf was actually slightly late this year. So, you are having a big push. I think two weeks ago was a record week for exports out of the gulf.

I think the congestion is building there also. So, you have Panamax congested in the gulf, you have Panamax congested in, look, when it comes to steam coal, East Australia is really the only place where you can get it these days. So, the ships are sort of piling on top of each other to get in there.

Urs Dur - Lazard Capital Market

I had a very specific question; you've got three ships still with purchase options. Where are those purchase options, and again, today it’s perceived asset values, are those in the money still?

Angeliki Frangou

Yes, all our purchase options are in the money and substantially in the money. But today the cheapest finance, I mean, in Navios we use economic actionale on exercising the options. This is the option that are purely on Navios, it is our options and we can exercise it every year until the expiration. Today the cheapest finance you can find is Japanese market. So, that’s why we don’t exercise them.

Urs Dur - Lazard Capital Market

And John asked a questions about buying and how creative you are going to be and there’s going to be a lot of opportunities next year and asset values. You’ve got a broad range of ships, but any specific sizes of ships that you are looking at to take advantage of any particular markets or would you even consider other sectors?

Angeliki Frangou

Navios is a pure play on drybulk, but we do have acquisition which is a distress play. So, yes, Navios as a group has the opportunity to top every segment. And I do believe that shipping as a whole will give fantastic opportunity as in any cycle. Of course you have to be also very conservative. We have to protect your downside because nobody can tell you the duration of the low.

So you have to be conservative because you don’t have a crystal ball to know if it’s next months or the year after or two years after. So, this is something that we always review, we are well positioned to take opportunities and we have proven that we are very quick on acting.

Urs Dur - Lazard Capital Market

Yes, and finally, I guess with the shipyard, again a market question with the shipyards. With all of that delays, is that going to push what we look at in 2010 into 2011?

Angeliki Frangou

It is in a percentage, as Ted has already said a percent will be total consolation. Nobody will tell you today that is the only thing I can be a 100% sure because everyone is citing that data. Some will be totally conserve, some will be spread out over the next two three years that is true. But I don’t think that whatever we had as numbers will not be, before the crisis will not materialize.

Ted Petrone

Urs, I think everyone realize a year and a half ago how the book was actually over-marked, and when the index was near 11,000, no one really cared that much about it but when ships were going, when owners are doing for option two, they marked it down as six new buildings.

So, the options aren’t coming and who knows how many of them were coming. So, there is a good percentage of the order book that’s really over-marked. So you have to start down 10%, 20-30% just to get to real numbers before you start talking about actual slippages and cancellations.

Urs Dur - Lazard Capital Market

Right. Back to congestion. One thing I just start off that I wanted to ask before is, with port congestion and you’re getting these nice spikes in demand, the demand is better than expected and despite the fleet growing and probably going to grow faster than nominal demand even next year even if you’re optimistic about the order book, is port capacity growing fast enough or is that just going to be a permanent constriction on supply, not permanent but constriction on supply for the next 12 to 24 months and we’re still going to see nice pops in dry rates once in a while.

Ted Petrone

There hasn’t been any real infrastructure development on the port size for a while, and from what see, it looks like whatever facilities are being built in China are actually more for their coastal trade. But China has $600 million going up and down the coast, most of it’s steam coal, and they have got to get that, and they have no good north to south roads of rails. So we don’t really see this changing over the next year or so.


Your next question comes from Natasha Boyden - Cantor Fitzgerald.

Natasha Boyden - Cantor Fitzgerald

I think most things have been covered. But I have a question regarding the sale of the Apollon. How many more vessels in your fleet would you consider dropping down to M&M over the next year or so, or are there any?

Angeliki Frangou

We have no idea. I mean this is a decision on Navios Partners and then this is something to be decided opportunistically depending on access to the capital market, to be a creative as a biggie.

So this is something that, I think we’ve indicated that this was a good strategy to create Navios Partners. We have nicely been able to rebound with a difficulty here in the capital market. Navios Partners has nicely managed to recover and we constantly monitor the market. You know that we do not care to work a little bit more.

Natasha Boyden - Cantor Fitzgerald

Moving over to rate, obviously, we have this huge surge in rates over the last several weeks, and it looks like there’s no end to it in sight. But what do you see in terms of actual period activity in the Panamax and Capes sectors? Are you seeing more in terms of charters for longer periods or are they still looking at it as a once one year?

Angeliki Frangou

There is the year one year and you will get substantial discounts for the two to three years rate. But you see substantial one year activity.

Ted Petrone

And one and two year activity, there is a lot of people that have come to realize that they need coverage, you know, part of their reasoning I think is last spring a lot of the iron ore purchasing done in China seems to be the mini mills, now it seems to be the bigger mills, so, and the end user demand of steel seems to be, the consumption seems to be growing. It does look like this has some more legs, so one and two year deals are actually becoming a lot more popular in the last two weeks.


Your next question comes from John Parker - Jefferies.

John Parker - Jeffries

I realize that all your ships have been carried forward with lined up financing. But can you give us any idea of the CapEx measures for remainder of this year and next year?

Angeliki Frangou

We do not need to; we have covered the entire equity and debt, a part of $12 million for the entire for anything that is in our books.

John Parker - Jeffries

I realize that you have already covered all the financing part. But I just want to try and project what your debt load would look like at year end and year end of 2010?

Angeliki Frangou

No, I am thinking also on equities everything. These 12 million of equities to be put on the entire new building program on all the gates until the last one that will be delivering in 2011, so there is only 12 million of equities to be covered.

John Parker - Jeffries

Okay. I will take this up offline. Can you tell me, if you look at the order book there for Handymaxes and now there is over 2000 ships in the order book, theoretically in the order book, and you have done a couple of nice transactions with stressed purchase, if you look at that order book of 2000, would you venture a guess that how many other distressed purchases out of shipyards might become available?

Angeliki Frangou

I think one thing I can tell you, and nobody can give you that number and we will not even go close to creating something like that. But one thing that you have to realize is that the availability of debt is not there.

I mean and years have progressed, people have depleted their cash reserve, because you might see now it’s a nice market, but don’t forget that people that order vessels and they bought vessels are at very high prices. If they bought a Panamax at $70-80 million, the breakeven of that vessel is much higher. There are break evens with capital and interest is really even above today’s market.

So what you realize is that people with the huge cash reserves will have problems. So it is inevitable that there will be opportunities unless we have an extra ordinary demand driver.

Ted Petrone

John, I just wanted to make sure I understood your question. It’s about 3100 total vessels on the order book today?

John Parker - Jeffries

Okay. No, I’m talking about Handymax and larger, assuming that that’s the class of ship that you would target.

Ted Petrone

I would say that may be about 800 or 900 vessels are on paper right now for the next couple of years on order. We can talk about this offline and go through these numbers if you would like later.


Your final question comes from Chris Wetherbee - FBR Capital Markets.

Chris Wetherbee - FBR Capital Markets

I guess, can I just ask a macro question first. I think Ted you mentioned some activity in OECD nations. Just wanted to get a sense you heard some of the cape sized market share shift to bid in October to Japan and Europe. Just wanted to get a sense of what you are seeing out of the more developed markets and what kind of activity is going on there now?

Ted Petrone

Well I think it all obviously starts with China. But now you have Japan and Korea starting to import more iron ore, and now Brazil diverting some of their iron ore to Europe and that’s why I think you see the iron ore price has moved from below 100 now may be approaching 110 per metric ton and delivered in China. The demand is moving across all sectors right now and I think that is why you have world wide congestion that is causing part of the rates to go up.

Chris Wetherbee - FBR Capital Markets

And on that the price per ton for iron ore; I mean, in the past we have heard numbers in the neighborhood of mid 90s maybe just over a $100 per ton is a level where Chinese domestic production becomes a little bit more competitive. Do you have a sense of where that is; has that been changing at all over the course of last couple of quarters?

Ted Petrone

It must be changing because the China is continuing to import more iron ore, remember you are getting into the winter season in China. So the iron ore fields are going to become less efficient and you have reports from Maguire recently stating that they think the iron ore content is now dropping well below 30 into the twenties.

So instead of taking two tons of dirt out of the ground in China to equal one international, it looks like it’s almost three to one. So, I think this tipping point is actually much higher than is being published. I don’t know exactly what it is, but it looks like it’s got to be above one ten at least.

Chris Wetherbee - FBR Capital Markets

I guess switching gears, just speaking about the South American Logistics business for a minute. You posted about a 29% EBITDA margin in the third quarter and clearly, operations in South America have been a little bit poorer than expected due to the river conditions.

I guess if you could talk a little bit about what you think a potential from a margin perspective, the business has. I know you have some advantages relative to some of your competitors regarding upriver move, I just want to get a sense of where you think this could go particularly now as you have a more full some fleet of assets on the water.

Angeliki Frangou

I think the potential is much higher and you can see from other company’s reporting they had a very miserable reporting season. So, I think now this logistics has proven that in a very-very difficult here, we manage well. I think we cannot really give you exact target but I think we are well positioned for 2010 on this business.

The demand driver, and one thing I want to stress on the Navios Logistics that unlike any consideration on supply side, the consideration that we are have in the dry bulk industry. In the Logistics, as you are only considering commodity movement it’s going to be a very strong period. There is no really any clouds on the horizon on that aspect.

Chris Wetherbee - FBR Capital Markets

And then just finally, I think two quick detail questions for George. I apologize; I think I missed your comment on equity and affiliates. Just wanted to get a sense of what’s in that number it was a little higher than what I was expecting. I just wanted to get a sense on, make sure I am not missing something there.

George Achniotis

There is on the number’s case due to accounting. In Q2, there were not enough accounting profits in NMM to be distributed to the subordinated units even though the dividend was paid normally.

So in NM, for Q2, we could not accrue for dividends. And now, coming to Q3, we account for the cash dividend received and we are also accruing for Q3 dividends, because NMM in Q3 had enough profits. So, we are double counting if you like in Q3. And we also have another small adjustment from the deferred gain from the sale of the vessels into the MLP, the Aurora, Sagittarius. Every time, our percentage holding in NMM changes, we amortize part of that deferred gain into our P&L.

We make sure that we have a confusing enough information from the accountant instead of being able as anyone that we sell a vessel we do not get the profit immediately. They make sure that they penalize us and we all can recognize when our percentage goes down.

Chris Wetherbee - FBR Capital Markets

Also, keeping models we certainly appreciate that confusion. As so, I guess going forward in the fourth quarter you looked at for that step down a bit I guess as opposed to from the double counting in the third quarters, what it sounds like to me.

George Achniotis

Yes, I mean the overall effect from these two adjustments is about $5.5 million.

Chris Wetherbee - FBR Capital Markets

Okay. All right, that’s helpful. And I guess finally, George I think you mentioned a Pro Forma cash number opposed to the notes offering. I just wanted to make sure I know what the debt number post the offering; I apologize if you stated it before but I didn’t get it.

George Achniotis

I think you have seen in our presentation that we have the use of proceeds and you see that most of the $400 million was used to pay down debt.

Chris Wetherbee - FBR Capital Markets

Is that 300, 100?

George Achniotis

The only difference will be about a $100 million extra in debt.


Thank you. I will now turn the call back to Navios CEO, Ms. Angeliki Frangou for closing remarks.

Angeliki Frangou

We thank you. With these, we complete our third quarter presentation.


Thank you. This does conclude today’s conference call. You may now disconnect.

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