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Navios Maritime Acquisition Corporation (NYSE:NNA)

Q4 2013 Earnings Conference Call

February 11, 2014 8:30 AM ET

Executives

Angeliki Frangou – Chairman and Chief Executive Officer

Ted C. Petrone – President

Leonidas Korres – Chief Financial Officer

Analysts

Jonathan B. Chappell – Evercore Partners

Urs Dur – Clarksons Capital Markets

Taylor Mulherin – Deutsche Bank Securities, Inc.

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

Operator

Thank you, for joining us for this morning’s Fourth Quarter and Full Year 2013 Earnings Conference Call. With us today from Navios Maritime Acquisition are Chairman and CEO, Ms. Angeliki Frangou; President, Mr. Ted Petrone; and Chief Financial Officer, Mr. Leonidas Korres. This conference call is also being webcast. To access the webcast, please visit the Investor Relations page of Navios Acquisition’s website at www.navios-acquisition.com.

I’ll now read the Safe Harbor statement. This conference call could contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Acquisition. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectation of Navios Acquisition’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 Acquisition’s filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios Acquisition does not assume any obligation to update the information contained in this conference call.

I’d now 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 industry overview. After Mr. Petrone, Mr. Korres will review Navios Acquisition’s financial results. We finally, we’ll open the call to take your questions.

And now let’s turn the call over to Navios Acquisition’s Chairman and CEO, Ms. Angeliki Frangou, Angeliki?

Angeliki Frangou

.

Thank you, Laura, and good morning to all of you joining us on today’s call. I’m pleased with our results for 2013. This was a pivotal year for Navios Acquisition. We grew our fleet by 15 vessels. We increased the revenue and adjusted EBITDA by 38.7% and 33.4% over the fourth quarter of 2012. As a result of our strong performance, we declared a quarterly dividend of $0.05 per share, resulting may yield of about 5%.

Turning to Slide 3, today Navios Acquisition is one of the premier tanker companies in the world, with a fleet of 43 vessels, having an average age of about four years. Currently we have 35 vessels in the water, and eight vessels to be delivered over the next few quarters.

As a result of four VLCC that we acquired in 2013, Navios also has one of the largest VLCCs fleet in the water among publicly listed peers. Our growth has been disciplined. We identified the market opportunity in tankers years ago, enhance its focus also good in quality vessels while entering into previous charters with strong counterparties. The previous charters provide comfort should the charter age weaken, however we also focus on capturing ending market upside as we have increased our profit sharing in almost all of our contracts. With this process we have developed cash flow visibility, we are almost 85% fixed in 2014 and 44% fixed for 2015, and 78% of our contracted fleet has profit sharing.

In fact, for every $1,000 of profit sharing, we receive in our vessel result in $11 million in incremental free cash flow or $0.08 per common share on an annual basis.

Side 4, I shall give you Navios strength and growth in 2013. We raised a total of $931 million in the capital markets. Of this amount $610 million was raised the debt market to refinance our existing bonds in acquiring new vessels, another $320 million of the equity was raised. Not withstanding these offerings Navios stock price appreciated by 80% and trading volume increased by 210% in 2013. We used this money for acquisitions well, as we increased our fleet by 48% and enjoy almost $105 million of appreciation in the value of the vessels we acquired. We take pride in our intellectual capital and disciplined options at the last make investment decisions during difficult moments in the second cycle.

Turning now to Slide 5, we continue to focus on the current year we enjoyed in 2013. Navios’ strength in its balance sheet through debt and equity offerings. As a result there is $610 million bond refinancing, we lower our coupon by 50 basis points and extended a bond maturity by Navios fourth year until Q4 of 2021. Currently, we have no debt maturities in the next two years and almost 70% of our debt is due in 2021 and beyond. In addition, we deleveraging balancing by 15.3% since December 31, 2012.

Our big industry relationships provide us access to distracting our long-term focus by executing ways that are related to our company. During 2013, we acquired 15 vessels to a total purchase price of $505 million. Today, the value of these vessels had increased by almost $600 million or 21% providing an ability to execute on transaction seamlessly.

Furthermore, the HSH Transaction provided a compelling opportunity to acquire vessels with minimal equity exposure a significant potential we are looking. We’ll to do more of this deal in the future.

Our brand name continues to attract quality counterparties. Navios had 2013 full year adjusted EBITDA over $123 million. For 2014, EBITDA should increase because of our contracted vessels that have been delivered in 2014, although not in the previous for 2013. EBITDA should also grow because of our full product tankers being added in 2014 and 2015.

Finally, we expect the EBITDA to grow from the two VLCC that operates with slow demand.

Finally, profit sharing of our product tankers provide with $4.5 million for 2013. We would hope that this will be upgraded in 2014 and we remind you that 78% of our contracted fleet, includes profit sharing. We also improved the collateral package of our senior secured mortgage notes by $7 million. We did this first by adding two VLCCs in Nave Galactic and Nave Quasar. These announced that we release $17.4 million in cash on the sale of the Shinyo Navigator and three other vessels with VLCC Shinyo Splendor, Nave Atropos and Nave Rigel from the collateral package. Thus one for this collateral was improved. As two LR1s that we have released on the package we used them to secure a $51 million in bank finance with a favorable 16 year amortization profile and add LIBOR +3.10% margin.

Slide 6, shows that Navios has become a premier owner of VLCC vessel. Our growing and diverse portfolio of 10 VLCCs make us one of the top 10 public owners on VLCCs among our peers. All 10 of the vessels have been chartered out to quality counterparties. Eight of the vessels are fixed rate with an average duration of almost five years in an average net charter rate of $38,473. We also have profit sharing on six of these eight vessels. The remaining two VLCCs are on a floating rate with an average duration of a year.

Slide 7, our slides have VLCC Chartering Strategy. Our goals on the charter vessels is to balance risk reward in the current position in the shipping cycle. Regardless of our position in the cycle, we always seek to managed credit risk, which we have done here by chartering out two of our ancient VLCC acquisition to high quality counterparties and this has been placed in well-regarded VLCC pool.

We manage market risk by chartering out the vessel full one year period. This one year charter provide protection for many immediate market downside, but allow us to reposition the vessels in the long-term. And we can capture market upside in the interim through profit sharing by linking our profits with the adjusted TD3, which captures premium to the index through fuel savings and other adjustments, and by placing one vessel in the VLCC pool, which allows to capture the average market rate.

Slide 8, shows the exponential growth of our company. After a blockbuster 2012 our available days and fleet grew by 67% and 74% respectively in 2013. EBITDA grew by 26% in 2013 and as you can see our available days and fleet will continue to grow in double-digit in 2014 and 2015, so we’ll anticipating the current rate environment to also and must be an increase in EBITDA during this year.

Slide 9, represents our CapEx requirement delivery schedule of our fleet. As of today CapEx is fully funded. When the eight vessels should be delivered we need to pay a total of $78.6 million, of this amount $72.3 million is used. In 2014, when we take delivery of the six vessels and $6.3 million is used, in 2015 when we take delivery of the remaining two vessels.

Slide 10, our most recent our liquidity. We have a total liquidity of $178 million at the end of the year, including a $108 million in cash. Our balance sheet must be considered in the context of our capital requirements. We have enough cash on hand to fully fund the remaining balance of our new building commitments.

Also, we have bond refinancing we have no significant debt maturities until the fourth quarter of 2021. We expect the leverage ratios, to reduce naturally as we enjoy the cash flow benefit of our vessels in the water.

Indeed, our net debt to capitalization of 65.2% at the end of the year, this a significant reduction from previous years.

Slide 11, shows the cash flow cushion from our low breakeven. 84.6% of our fleet is contracted for 2014 and we will earn in average contracted daily charter-out-rate of $19,365 per day. For 2015, 44.2% of our fleet is contracted out and we will earn in average contracted daily charter-out-rate of $22,628.

As to our all-in costs or average fully loaded cost is $16,235 per day in 2014 and this will be reduced to $15,780 per day in 2015. As you know our daily operating cost include drydocking, general and administrative expenses, interest expense and capital repayments.

At this point I would like to turn the call over to Mr. Ted Petrone, who will take you through the fleet and the industry. Ted?

Ted C. Petrone

Thank you, Angeliki. Please turn to Slide 13. With the recent acquisition of three modern VLCCs, our fleet has grown to 43 vessels. In 2013, we committed $505.3 million to buy 15 vessels; nine MR2s, two chemical tankers and four VLCCs, all at favorable prices. Five MR2s and the two chemical tankers are on charter, two MR2 new buildings will deliver in 2014 and two in 2015. Three VLCCs are chartered and one VLCC has replaced the 1996 VLCC under the existing contract for the remaining duration of about three years at $42,705 a day daily net. In 2013, with a delivery of 15 tankers; two LR1s, 10 MR2s, two chemical tankers and one VLCC.

Please turn to Slide 14. Navios Acquisition’s diversified fleet consists of 43 vessels, totaling 4.8 million deadweight. The fleet consists of four chemical tankers, 21 MR1 product tankers, 8 LR1 product tankers and 10 VLCC crude tankers. All the fleet statistics excludes the vessels in the Asia Pacific agreement. Navios Acquisition currently has 35 vessels in the water with an average age of 4 years.

Since January 1, 2013 our product tanker fleet in the water has grown by 120% to 22 and the total fleet in the water grew 84% to 35 vessels. 12 product tankers have delivered since the beginning of 2013, five will deliver in 2014 and two in 2015. Available fleet days will grow from 13,552 in 2014 to 15,514 in 2015, representing a 40% growth in available revenue days in 2014 and about 15% growth in 2015.

Please turn to Slide 15. Navios Acquisition continues the Navios Group policy of locking in secured cash flow with credible counterparties. Since the beginning of 2013 we have chartered out 12 MR2s with the total of 19 years coverage, similarly we extended the charters of six LR1s for nine years and four chemical tankers of six years coverage.

All 22 vessels are contracted to high quality counterparties at rates above our fleet cash breakeven with upside potential through profit sharing agreements. In fact, 2013 we earned $4.5 million in profit sharing. Including the new acquisitions we have fixed about 85% of our capacity for 2014, in what is expected to be improved conditions we’ve also fixed 44.2% in 2015 and 22% of revenue base of 2016. Remember 78% of our fleet has profit sharing. The average daily charter-out-rate for our fleet is $19,365 per day for 2014. The rates for 2015 and 2016 are $22,628 and $31,197 respectively.

Please turn to Slide 16. Our chartering strategy revolves around capturing market opportunity while also developing dependable cash flow, from a diverse group of first class charters. As a result the average duration of our charters is two years, and our VLCC charters have an average duration of 4.1 years.

Please turn to Slide 17. Slide 17 recaps our strong relationship with key participants in our industry. We continue to build a portfolio of quality counterparties which provide vessel employment with a strong diversified customer base. One of the attributes we seek in our counterparties is a strong credit quality.

Turn to Slide 18. Navios Acquisition enjoys vessel operating expenses significantly below the industry average. Currently, Navios Acquisition’s daily OpEx is about 17% below the industry average. We achieve these operational savings through a management agreement with Navios Holdings. The operating expenses under this management agreement extended until May 2014 at current levels. Please note that the operating cost shown here include all drydocking costs.

Please turn to Slide 20. According to the IEA refinery capacity is expected to increase by 9.5 million barrels per day in the period of 2013 to 2018. About 80% of that capacity will be added in Asia and the Middle East with the IEA projecting China and other non-OECD Asia to increase refinery capacity by about 4.3 million barrels per day and 1.3 million barrels per day respectively.

New low-cost capacity in Asia is forcing nationalization of old high-cost capacity in the OECD. Recent refinery closures in Europe and the Caribbean as well as closures due in Australia and Japan can be partly attributed to the age and inefficiencies of these facilities. Because of this structural shift, the growth in ton miles of refined product tankers is expected to continue to outpace the general demand for refined oil products in the long run.

Turning to Slide 21. U.S. crude production has increased by over 54% since the end of 2008, reaching 7.7 million barrels per day in October. Since U.S. crude oil exports are prohibited by law, the U.S. has increased its total product exports by almost 300% to about 4.9 million barrels per day since 2004. U.S. exports have exceeded imports consistently since 2011.

U.S. Gulf refineries which benefit from inexpensive domestic crude and natural gas supplies are finding a natural export market in neighboring Mexico and Latin America, as well as Africa. U.S. product imports have declined over the past couple of years, but continue to come from further away adding to product ton tanker miles. The fundamentals of product tanker trading patterns continue to adjust in relation to all these changes.

Turning to Slide 22. Oil refineries vary greatly in the quantity, quality and specifications of products that they produce. As depicted in Slide 22, regional surpluses and deficits combined with relative low-cost transportation drive arbitrage trades and increase product ton miles. As an example, requirements for gasoline in Europe and Latin America can be met by shipping the oversupply westward from Asia and the Middle East or eastward from the U.S.

Similarly, requirements for gasoline in Asia can be met by shipping the excess supply eastward from Europe and the Middle East, increasing worldwide product imbalances point to increased ton mile development going forward. Global multi-directional trade pattern enables product tankers to triangulate thereby minimizing balance time and maximizing revenue.

Please turn to Slide 23. In the product tanker sector, demand for transportation expressed in terms of ton miles increased by about 77% in the period 2004 to 2013 equivalent to a CAGR of 6.5%. Projections indicate similar growth in 2014. The increase in tanker demand was greater than the increase in overall trade due to the growth of long haul product tanker trades. The map at the bottom of the Slide 23 depicts existing product tanker trade routes as well as prospective trade routes based on anticipated eastward shift in global refinery capacity.

Please turn to Slide 24. Tanker non-deliveries in 2013 equaled approximately 35%. The fleet experienced limited growth as 5.4 million deadweight was delivered, but 2.1 million deadweight was scrapped. About 6.5% of the product tanker fleet is 20 years of age or older.

The order book totaled 24.2 million deadweight or about 18% of the fleet, a level usually considered adequate for regular replacement of the existing fleet with little or no demand growth. Higher scrap prices should encourage further scrapping of older or single haul units, demolition prices appear in depend on overall steel prices and not to supply vessels.

Turning to Slide 26. The IMF projected global GDP growth for 2014 and 2015 at 3.7% and 3.9% led by emerging and developing markets growth of 5.1% in 2014 and 5.4% in 2015. The IEA projects global demand growth to rise by 1.3 million barrels per day to 92.5 million barrels per day in 2014. This growth remains well below the historic averages, is expected that all of the projected growth will come from non-OECD companies.

Please turn to Slide 27. China is the world’s second largest consumer of oil, importing more than half of its requirements. China’s imports have more than doubled since January 2009. However, on a per-capita basis, China’s consumption is less than one-third of European usage and one-eighth of U.S. usage. In December, China imported 6.3 million barrels per day of crude currently projections show China’s crude oil imports will likely surpass the U.S. next year going to about 14 million barrels per day by 2035 as the country continues the urbanization, industrialization, and motorization of its economy.

Please turn to Slide 28. Tanker demand is driven by demand for oil and distance of transport. As noted in the chart in the lower left, in terms of ton miles, the movement of crude from West Africa and South America to China uses about as many VLCCs as the movement from the Arabian Gulf even though the Arabian Gulf shipped 1.9 times more oil to China. The growth in VLCC ton miles will continue as China imports more crude from South America and West Africa as it diversifies its sources of oil from offsetting any decline in the U.S. imports.

In addition, Indian companies have recently secured oil – crude oil from Brazil to reflect existing Iranian supplies increasing VLCC terminal demand. The IEA expects Brazil to increase net crude oil export to about $3.5 million per day by 2035 from being a net imported this year. With demand for oil increasing only marginally on an annual basis, distance has to be been a key driver to tanker market demand.

As you can see in the upper part of the slide, an increase of 53 VLCCs will be needed by 2016 according to Clarksons projections. The shift is expected VLCC trading patterns to Asia and to the Far East away from the Atlantic basin can also be seen in these projections.

Please turn to Slide 29, 2013, new building deliveries represented 49% of the projections, with 9.5 million deadweight delivering on a preliminary basis versus 18.7million expected. With 190.5 million deadweight at the end of 2013, net fleet growth slowed to 3.9 million deadweight or only 2.1% due to continued high scraping and non-delivery levels. The high price of steel combined with high fuel prices led to continued high scrapping in 2013 with 17 vessels of 5 million deadweight scrap, of its three were 15 years or younger. Clarksons recently reiterated its belief that the VLCC fleet is expected to contract in both 2014 and 2015.

Please turn to Slide 30, the graph on Slide 30 depicts nominal inflation adjusted prices for five year old VLCC since 1990. Our recent purchase of three VLCCs with an average age of three years and average price of $54.5 million compares very favorably to these historic value particularly after the recent appreciation in value.

Please turn to Slide 31. The 1991 increases in the world GDP growth year-on-year had generally led to rises in one year VLCC time charter rates. According to the IMF world GDP growth is expected to be higher in 2014 than it was in 2013, which if past patterns continue with lead to improve VLCC rate.

In conclusion, world crude oil and refined product consumption has generally grown for 30 years with declines in 2008 and 2009 due to the global financial crisis. Starting in 2010 world crude oil and refined product consumption return to this pattern of growth, and the main drivers are increasing demands from the Asian economies particularly China as well as the increased of refinery capacity in the broader Asia and Middle East regions. Going forward, we see this trend continuing.

Thank you. I would like to now turn the call over to Leonidas Korres for the Q4 financial results. Leo?

Leonidas Korres

Thank you, Ted. Now we will discuss the financial results for the fourth quarter and the year ended December 31, 2013. In order to make the comparison with previous periods more meaningful we have attached EBITDA and net income for certain items such as the $34 million loss on bond extinguishment, the $21.1 million book loss from the sale of Shinyo Navigator and the $1.1 million non-cash stock-based compensation.

As shown in Slide 33, our operating metrics for the fourth quarter of 2013 have improved compared to the same period in 2012 mainly due to the 83% increase in the number of available days of our fleet from 1,679 to 3,080 days.

Revenue for Q4, 2013, increased by 38.7% to $57.8 million from $41.7 million in Q4 2012. We enjoyed a 99.8% fleet utilization and time charter equivalent of $18,155 per day.

Operating and voyage related expenses were $23.9 million and G&A expenses were $3.4 million. We continue to demonstrate significant EBITDA growth for another quarter, adjusted EBITDA for Q4 2013 increased by 34.4% to $36.1 million from an EBITDA of $27.1 million in the same period of 2012.

Other expenses include depreciation and amortization of $16.7 million and interest expense and finance cost of $16.2 million. Other income includes $4.6 million recognizing the quarter following the court decision on the rehabilitation plan of the older charters. Our adjusted net income improved by $2.2 million from a net profit of $0.3 million in the fourth quarter of 2012, to an adjusted net profit of $2.5 million or $0.02 per share.

Turning to the financial result for the year ended December 31, 2013 our operating metrics have improved as well compared to 2012, again due to the increasing the number of available days of our fleet. Available days increased by 67% to 9,653 days from 5,786.

Revenue increased by 34% to $202.4 million from $151.1 million last year. Our strategy to charter our vessels on time charter contracts with profit sharing is paying off. As a result, we achieve a stable base revenue stream less profit sharing reflecting a time charter equivalent of $20,267 per day and a 99.6% fleet utilization.

Operating and voyage related expenses were $78.2 million and G&A expenses were $7 million. Adjusted EBITDA for the year ended December 31, 2013 increased by 25.8% to $122.6 million from $97.5 million in 2012. Depreciation, amortization was $53.9 million and net interest expense and finance cost was $58.4 million. Adjusted net loss improved by $1.4 million to $2.4 million from a net loss of $3.8 million in 2012.

As you can see the graph at the bottom of the slide, we will commence operations in 2010, we have grown our operating metrics significantly reflecting the growth of our fleet; with a 40% increase with the available days in 2014 we expect our metrics to continue increasing substantially.

Slide 34, provides the latest balance sheet data as of December 31, 2013. Cash and cash equivalent including restricted cash was $107.8 million, our cash position increased by $43.8 million compared to December 31, 2012. Vessels, net of depreciation increased $1,353.1 million compared to $940.7 million as of December 31, 2012, reflecting the increase of our fleet by 14 vessels. Vessel deposits of $100.1 million represent deposits and capitalized cost of vessels to be delivered over the next 18 months.

Total assets amounted to $1.7 billion. Total debt as of December 31, 2013 was $1,164.4 million. Total debt increased by $125.4 million due to the drop down for the delivered vessels. However the Company deleverage by 15.3% following the $320.5 million of equity raised in 2013. Resulting to a net debt to book capitalization ratio of 65.2% as vessels delivered to our fleet and we started repaying the respected debt facilities, the ratio is expected to further decrease. As of December 31, 2013 Navios Acquisition was in compliance with all of the covenants of its credit facilities and ship mortgage notes.

Turning to Slide 35. Our financial strength has enabled us to announce a dividend of $0.05 per share for the fourth quarter, equivalent to $0.20 per share on an annualized basis. Based on last night’s closing price, our dividend provides an annualized yield of about 4.8%. The dividend will be paid on April 8, 2014 to shareholders on record as of March 19, 2014.

Please turn to Slide 36. Navios Acquisition has a prudent financial strategy. Approximately half of our debt is non-amortizing, which provides significant cash flow flexibility. Following the issuance of $610 million, the maturity of our Senior Notes was extended to the fourth quarter of 2029 and the coupon was reduced by 50 basis points. On the bank debt we have no maturities until 2016. Overall, our strategy has provided lenders an additional level of comfort relating to the stability of our balance sheet. Our liquidity position is strong, our CapEx is fully funded and we have significant cash flow visibility, since 84.6% of our available days are contracted in 2014 and 44.2% in 2015.

Moreover, our company is very well positioned to capture the upside of the tanker market, since 78% of our contracted fleet has profit sharing.

And now I will pass the call back to Angeliki. Angeliki?

Angeliki Frangou

Thank you, Leo. And we’ll open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jonathan Chappell with Evercore.

Jonathan B. Chappell – Evercore Partners

Thank you. Good afternoon and good morning.

Ted C. Petrone

Good morning, Jon.

Jonathan B. Chappell – Evercore Partners

Angeliki, the first thing I wanted to ask you about, this seemed to be a little bit more focused in this presentation on the VLCCs and obviously you spent a fair amount of capital in that segment and its bounced pretty hard off the bottom. Is this kind of, I don’t know if the change in strategy is the right word, but is this going to be your focus of growth going forward, and this may be speak a little bit about your views on a VLCC market and where that is in the cycle relative to the product tanker market and where that is in the cycle?

Angeliki Frangou

Thank you, Jonathan. We have really focus – even though we have done a large acquisition on product tankers we had in the product tankers in the young fleet with brand new vessels, additional acquisitions have been on the VLCCs, which we has a very stable position if you remember with long-term charters and profit sharing on five of the seven and we now have acquired this year, four VLCCs in what we say is their on inflation of that is historical low.

This is a segment that was big enough for a long period. We have seen that net fleet growth is as per Clarksons is even negative this year for 2014 and 2015, so even the potential is even stronger and we have seen a recovery of the developed world, which means that the growth will be on one and a half of ton mile of a 2%, and you have really no growth on the fleet. So the supply demand characteristics is good and we believe that this will give you the higher upside, and if you have seen the strategy who have done today we have 10 VLCCs rates have been – eight are fixed with six of them having profit sharing, and we have kept two of the vessels really on the this [indiscernible] that provides you, I mean if you see year-to-date is around $43,000 will be earning on adjusted TD3 or generally the market has been nearing around $34,000, so this is opportunistic and we see that the highest upside will happen in a segment where there is no new release and there is negative fleet growth.

Jonathan B. Chappell – Evercore Partners

So when you think about opportunities, inflation adjusted lows, that chart that you had is very compelling the price that you were able to get them at. They bounced off the bottom a little bit, I think there has been a general change in sentiment from very negative just six months ago till a bit more positive, are there other opportunities available weather there “distressed” or just good price point opportunities in VLCCs. Or is that kind of a short little window that’s closing fast?

Angeliki Frangou

As you know we are always opportunistic and there is opportunities around of course you have to see also the price may have moved a little bit, but in our vessels you have to also realize that the earnings visibility has also changed. So, I think there is opportunities around of course, you have to be a disciplined buyer and focus on good quality vessels at appropriate time, as there is always opportunities on the segment.

Jonathan B. Chappell – Evercore Partners

All right, just one more and I will turn it over, also on the VLCCs. Just a little bit more clarity on the way that the Galactic is chartered? Is there any way to give parameters around the premium or may be just may be explain Page 7 a little bit more? Is that darker bar kind of representative of the premium that we should expect in the Galactic relative to the other or just TD3 or market averages.

Angeliki Frangou

Yes, if you are going to see from in this type of the market, on the adjusted TD3, we are getting about $10,000 premium over $10,000. We have provided for a full cycle analysis with you. The far right you can see that there is about $6,000 differential if you take also the top of the market. In the lower market your potential upside of adjusted TD3 of $10,000 that should go to more higher levels it will becoming more close and evening out.

Jonathan B. Chappell – Evercore Partners

Okay. Understood.

Angeliki Frangou

And the approach we had is – we use a quality counterparty which gives a credit worthiness, so we have a full exposure on the export market, but at the premiums, so you can see even in 2013, which was one of the lowest point on VL market. You would cover that over $25,000, so it creates a very nice downside protection, you will not see below, if you remember the actual TD3 during the year even went negative to equity. So you have average $25,000 in a difficult year and you can have $10,000 upside of the spot.

Jonathan B. Chappell – Evercore Partners

Got it. Thanks very much, Angeliki.

Angeliki Frangou

Thank you.

Operator

Our next question comes from the line of Urs Dur with Clarksons Capital.

Urs Dur – Clarksons Capital Markets

Hey, good morning, good afternoon.

Angeliki Frangou

Good morning.

Leonidas Korres

Hi.

Urs Dur – Clarksons Capital Markets

Hey, market questions, little bit on the product tanker market, freight rates according to some investors were quite as exciting on the spot particularly on the MR as some had hoped over the winter months. Clearly you’re covered by contract, I clearly the long-term thesis is in tact, there is no dispute of that, at this point in time. But can you talk about a little bit about the near term drivers of what was pushing the product market in the last three to five months. And what you expect maybe in the next three to five months?

Ted C. Petrone

Remember besides being the cyclical market, it’s a seasonal market, and as you know as you had some arbitrage closing between the gasoline diesel between Europe and the States, you had some cold weather in the States that brought some product inland more, so all that is what the product tankers slightly lower. But again on the overall trend we are seeing product ton miles increasing and except with the colder seasons which will be some low points. We are expecting higher numbers and I think the period market shows that.

Urs Dur – Clarksons Capital Markets

Yes, no, yes, we see it in the period market that’s for sure, so it was in the asset value seemed to be holding up, against the next not only holding up by going up. The next question is about the chemical market, it seems to be a fairly compelling order book it self and I know you focused a lot on the VLCC today and product tanker markets but, is there expansion available there? Is that a market where you believe you can grow your IMO II fleet or is that something that you are very happy to own but focusing elsewhere?

Angeliki Frangou

Urs, if you remember last year we did some beautiful acquisition of 45,000 ton IMO II and we have done that very opportunistically; plus we have the 25,000 toners. And so this is an area where if we see opportunities we step in. There is not really so many you have to really find correct shipyard that can provide you this kind of opportunities, but we are open to that.

Urs Dur – Clarksons Capital Markets

Okay and maybe if you have any commentary on the chemical tanker markets in your longer term regardless that I know that you’ve covered largely on contract if you could – any commentary there. What are the trends you’re seeing there?

Angeliki Frangou

They are driven by the same drivers that this economic activity and industrial production, so you know that as a market – as the economies recover this will also flow very well. There is a lot of distress still in that market, so if you’re careful by it, we are only concentrating on the large chemical tankers. We do not see a lot of value – there is value on the smaller ones but we see that there is not the upside potential really on revenues as you get on the big one. So our concentration is 25,000 and big because that’s where you make money, you can really view easily earnings of the equity margin vessels. So this is an area where we like very much, but again only on the large size. We do not like a smaller type because it really cannot see the upside as much.

Urs Dur – Clarksons Capital Markets

Excellent, yes, that’s very helpful. I appreciate it. Thanks for your time guys.

Operator

Our next question comes from the line of Justin Yagerman with Deutsche Bank.

Taylor Mulherin – Deutsche Bank Securities, Inc.

Hi, everyone. This is Taylor Mulherin on for Justin. How are you?

Angeliki Frangou

Very well.

Taylor Mulherin – Deutsche Bank Securities, Inc.

I wanted to ask you a couple of questions about just chartering strategy in general. First off, for the VLCCs for the two that are on one year charters that have the spot exposure. Is that something that continuing your balanced risk reward strategies, is that something you’d want to have those two continue to be exposed with the spot market going forward after those two are off the current charter or is that something late year planning to reevaluate once you have a better sense of where the market is in here?

Angeliki Frangou

This is always all three in the – all the three vessels as we got in the end of November. We put them in very much spot exposure. The two totally and then one with a floor and 50-50 profit sharing. So the realties that we see great upside on this, we are after all in the cyclical business and we see cyclical upturn. On the VL is a vessel that is really volatile but it’s volatile also on the upside, so you can have quite a substantial revenue potential on that. So we like to keep us as exposed to the spot market and when we see a very healthy level, we may seeing at a later point, but we don’t see that something to do quickly because anyway we would have even for 2015, we have $150 million of contracted revenue, so we have very well protected, so we can have exposure to the spot market.

Another thing that I think it is important to realize is we have this year 2014, we have about 2,800 days open. Of this 2,800 days open about 800 are VL days, so if you let’s say, assume today spot rate that will generate about $24 million just [ph] 800 days. So, we like that because we have cover our cost for our entire fleet so we can’t really afford to be on the spot market and capture the upside.

Taylor Mulherin – Deutsche Bank Securities, Inc.

Right, that make sense. And then just to jump over to the product tanker side, there is quite a few new buildings coming on. There is also a decent number of MRs coming off current contract in 2014, and so and is this kind of just a way to back ended trying to get a sense of how you – how positive you hear about the market right now? What sort of strategy or kind of length of time do you plan on using when you are re-chartering those or is it - it’s just kind of the same strategy as usual of trying to balance out the risk and reward?

Angeliki Frangou

I think that you balance anyway the majority of the vessels although fixed for 2014 and we have end 2015 a good percentage of our product tankers have flow plus profit sharing. And in the profit sharing we’ll have approximately 80% of our vessels are with profit sharing and on the product tanker I think it is 86%. So what you have to realize there will be a portfolio approach for our fleet. And usually this from the downside volatility but also give us the ability to get either average earnings of product either Atlantic index plus [indiscernible], or a very good trading the [indiscernible] of their open book approach.

We have used a portfolio approach on the way we release the product tankers and 86% of the profit sharing, so that we can maximize that with the best technique because anything if you are in one type of the Atlantic [indiscernible] more focused we will never be able to get the full spectrum.

Ted C. Petrone

I think when you talk about your question with the new buildings after the orders have come in you are still looking at net fleet growth being well below 2% to 3% at least below ton mile growth. So, I think that’s very attractive for the product tankers going forward even after you had this new building order surge.

Taylor Mulherin – Deutsche Bank Securities, Inc.

Great, okay and my last question is kind of related to the profit sharing side of things. So you have mentioned in the past few quarters and we’ve seen it just in the market just about how the trade lanes kind of don’t always follow sort of your traditional routes anymore, and so I was kind of curious if that had any impact on your profit sharing agreements, whether they reflects or don’t reflect the lanes that the ships are actually moving out at this point, any color into that?

Ted C. Petrone

Remember we are putting out ships to others who are directing world wide, so the trade patterns really aren’t affecting. It’s the overall number for the market going up and down that affects the profit sharing.

Taylor Mulherin – Deutsche Bank Securities, Inc.

All right, thanks for your time.

Angeliki Frangou

And we use a diversified approached on this, so we have found at last we focus more on the east, which has a better returns and they started – as we have seen that this much better to focus on the east on the large, they have produced above average returns on the Atlantic, with our MRs more concentrating on the Atlantic side. So our portfolio approach also, yes, we see both sides but what we like is that we have seen that the MR potential is much higher Atlantic wise, so you focus everything on your profit sharing there.

Taylor Mulherin – Deutsche Bank Securities, Inc.

Great, thanks for our time.

Angeliki Frangou

Thank you.

Operator

And our final question comes from the line of Ben Nolan with Stifel.

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

Yes, can you hear me?

Angeliki Frangou

Yes, very well.

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

My question, I guess relates surely to the strategy going forward as it relates to acquisitions and versus maybe the continued demand ring in the balance sheet. Now obviously you’ve talked a whole lot about expanding these, because the crude tanker market, or products or chemicals [ph], but a year from now effectively your build will have [indiscernible] as it stands today. And I was curious what do you think of the capital structure, there is warning through this [indiscernible].

Angeliki Frangou

Ben, I apologies but I think your line is not very….

Ted C. Petrone

Breaking up…

Angeliki Frangou

Yes, breaking up, so…

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

I’m sorry.

Angeliki Frangou

Now, if you can say quickly now, I think you’re a little bit better?

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

Okay, I was just asking if you – where you stand in relation to more aggressive debt repayment versus further spending of CapEx?

Angeliki Frangou

You not well deliver as vessels come and don’t come to our service and this is the one thing that you will see. I mean, last year we had $123 million EBITDA and we have about $41 million that is – some of that that comes from the new vessels that we acquired in 2013, not fully reflected there and once we are getting in 2014 plus an additional four product tankers and that we have no charter and the two VLCCs. So and this is only on the contracted level, so without profit sharing.

So your upside potential as you get a more normalized EBITDA, with all your vessels into the fleet will be quite more substantial. I mean last year on available days we grew over 60% and 2013 – 2014 is another 40%. So I think you will see that’s 2014 is shaping at even on the – not on the contracted level as a strong quarter and then as a strong year and as it develops in 2015 and recovering of the market will give you the ability also to have substantially pay your fleet.

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

Okay, that’s helpful. And then my next question would be, you guys have obviously been very on the crude side and very focused on VLCC market, are there any aspirations of extending may be to the Suezmax or the Aframax business?

Angeliki Frangou

We are fortunate that we like the VL story because you mentioned is easily receiving new partner developing on that and we have seen the negative fleet growth on this projected negative fleet going on this asset class for the next two years. So we like vessels in the water where you can capture this potential. To be honest the VL is more of the type of vessel that will give also the more upside potential.

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

Okay, that’s helpful. And the last question, it relates to the HSH Transaction and now that is, I guess completed. Is there, do you see there being any potential on the near-term sort of follow on either similar transactions or additions to that situation.

Angeliki Frangou

I think issues will happen but as you have already seen that it takes time on the transaction process, moving transactions. So I guess, we believe that there will be.

Ben J. Nolan – Stifel, Nicolaus & Co., Inc.

Okay, well, that’s it from me. Thanks, I appreciate it.

Angeliki Frangou

Thank you.

Operator

Here we have no further questions at this time.

Angeliki Frangou

This completes our Q4 presentation, thank you.

Operator

Thank you. This concludes today’s conference call, you may now disconnect.

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