Angeliki Frangou – Chairman and CEO
Ted Petrone – President, Navios Corporation
George Achniotis – CFO
Jon Chappell – JP Morgan
Natasha Boyden – Cantor Fitzgerald
John Parker – Jefferies
Doug Garber – FBR Capital Markets
Justine Fisher – Goldman Sachs
Navios Maritime Holdings (NM) Q2 2010 Earnings Call August 19, 2010 8:30 AM ET
Thank you for joining us for this morning’s call. With us today from Navios Maritime Holdings are Chairman and CEO 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 go to the investor section of Navios’ web site, www.navios.com, for reference.
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 fact. Such forward-looking statements are based upon the current beliefs and expectations of Navios' management and are subject to risks and uncertainties, which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in Navios' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Navios does not assume any obligation to update this information contained in this conference call. Thanks.
At this time, I would like to outline the agenda for today’s call. First, Ms. Frangou will offer opening remarks. Next, Mr. Petrone will provide an operational update and an overview of market fundamentals. Following Mr. Petrone's remarks, Mr. Achniotis will review Navios' second quarter 2010 financial results. Finally, Ms. Frangou will offer concluding remarks. At the completion of formal remarks, the company will open the call to take your questions.
At this time, I would like to turn the call over to Navios Holdings Chairman and CEO Ms. Angeliki Frangou.
Thank you and good morning to all of you joining us on today’s call. We continue to benefit from a strategy of fixing the fleet for long-term periods, with quality counter parties. As a result, in the second quarter of 2010 we end almost $91 million over EBITDA and $46.5 million of net income. We also remain one of the few dividend-paying companies in the dry bulk sector, and we once again declared a $0.06 dividend per share for the second quarter of 2010. The dividend is payable on October 6 to stockholders of record on September 22.
The global economy has improved significantly over the past year, driven primarily by healthy industrial production in emerging countries. More recently, developed countries, the OECD countries, are experiencing sluggish growth. This development, coupled with a significant order book, makes us cautious in our outlook. As a result, we are focused on the operating fundamentals of our dry bulk business and on maintaining a healthy balance sheet. We want to be positioned to weather unexpected volatility and take advantage of opportunities.
Now let’s turn to slide 2. Navios has been successful in creating value through its core fleet, as well as through its private and public subsidiaries and affiliates. First, let’s turn to the Navios partners. Navios Holdings owns 31% of Navios Partners, an MLP, trading on the New York Stock Exchange under the symbol NMM.
Navios Partners has grown significantly during the past three years, and today has a market capitalization that is approaching $1 billion. Navios Holdings’ stake is worth over $220 million, and we anticipate receiving almost $22 million in distributions from Navios Partners in 2010.
Next, let’s turn to Navios Logistics. Navios Logistics is a private subsidiary that focuses on South America. It was formed in 2008 and we have a 53.8 ownership stake. Navios Logistics is a key provider of integrated logistics in the Hidrovia region. Core operations include storage and port terminal facilities for grain and liquid products, [unintelligible] transport and a cabotage business.
Today, Navios Logistics is one of the few regional providers offering both wet and dry services, and we are seeking to expand into other related areas such as storage and transshipment of mineral commodities, and we will remain independent financially. We are currently taking active steps to achieve this.
Finally, there is Navios Acquisition, most recently we have spent considerable time and capital in developing Navios Acquisition into a leading tanker company.
As you can see on the bottom of slide 2, and as you turn to slide 3, Navios Acquisition acquired an attractive fleet of product and chemical tankers for $457 million. Today, Navios Acquisition has taken delivery of two LR1 product tanker vessels, each of which is chartered out with a base daily net rate of $17,000, plus 50-50 profit sharing. These charters limit our downside risk to the base rate, and allows Navios Acquisition to enjoy some of the upside volatility through the profit sharing.
The combined EBITDA of these two vessels is approximately $7 million annually, without including any profit sharing. Navios Acquisition also recently announced a transformational acquisition of seven VLCC tankers for $487 million. We believe that Navios Acquisition was able to capture this deal because it was uniquely positioned given the Navios Group’s close relationship with a banking syndicate and a strong balance sheet.
We believe that this transaction is significantly [unintelligible]. The purchase price is $487 million for the seven VLCCs, which [will have] very favorable charter-out coverage averaging 8.8 years. Adjusting for this embedded contract, we arrive at a value of $687 million. Thus, we believe, and [Klaxos?] agrees, that we are paying almost 15% less than the value of these vessels, or a $100 million discount.
In addition, this fleet should generate about $650 million of an aggregate base EBITDA during the charter duration. Of course, it can be more, because these figures do not include the profit-sharing that five of the vessels have. This profit sharing arrangement can provide a significant upside while the base rate protects our downside.
All in all, we believe this is an excellent entry into the sector. To help fund this transaction, as well as to reduce the [overhang] that creates an obstacle in accessing the capital markets, Navios Acquisition announced a warrant program. Under the program, warrant holders have a limited time to which they can exchange their warrants for shares on favorable terms. Navios Acquisition needs to raise approximately $100 million and Navios Holdings has committed to funding about 80% of the requirement.
We have also created liquidity for Navios Holdings via a drop-down of the Navios Pollux for $110 million. This deal was an all-cash transaction and we used the profits to de-lever and improve our cash balances.
Slide 4 presents our new building program. As you can see, our capital expenditures are fully funded. We expect eight new Capesize vessels to be delivered during the next six months. These vessels have an average charter-out of more than 10 years. The nominal acquisition price for these vessels is $575.4 million, or $71.9 million per vessel. However, as you may recall, we used the [mandatory re-convertible preferred stock] to acquire many of these vessels, so our effective price was over $100 million lower, at $477.1 million, or per-vessel is slightly below $60 million, $59.6 million to be exact.
Both of these acquisition prices compare very favorably to the aggregate EBITDA of $697.9 million that generate over the duration of the charter. I would note here that in addition to the new building program being fully funded, these vessels are fully hedged by long-term charter contracts, and many of them have profit sharing. Moreover, when the vessels are delivered, you will see our credit ratios materially improve as a debt that is currently on our balance sheet but the revenues and EBITDA have not yet been created.
Slide 9 shows our current liquidity excluding Navios Acquisition is favorable, with total liquidity available of $359.5 million, of which $350.2 million was cash on hand as of June 30, 2010. Also, our net debt to total capitalization was 48.1%.
Now let’s turn to slide 6, which shows our substantial cash flow cushion from our low operating break even. As you can see, our estimated break even rate of $19,263 per day for 2009, and $19,101 per day for 2011, compares well with our contracted rate of $26,938 and $30,763 per day for 2010 and ’11, respectively, giving ability to create a good free cash flow.
At this point, I would like now to turn the call to Mr. Ted Petrone, who will review the company and the industry sectors. Ted?
Thank you Angeliki and good morning all. Please turn to slide 7. Navios Maritime Holdings long-term core fleet consists of 59 vessels totaling 6.4 million deadweight after the sale of the Navios Pollux and the Vanessa. Navios has 39 vessels in the water, with an average age of 4.8 years, which is considerably younger than the industry average of 14 years.
The Navios Group, which includes Navios Partners and Navios Acquisition, controls 73 dry bulk vessels, of 7.5 million deadweight as well as 20 tankers of 2.8 million deadweight including the VLCCs.
Please turn to slide 8. Navios average charter-out rate for its core fleet is $26,938 for 2010. Annual average rates continue to increase to 2013. The percentage of Navios owned and long-term fleet that is chartered out is 97.5% for 2010 and 70.4% for 2011. We will enjoy contracted revenue of over $1.1 billion through the end of 2013.
We have also insured our revenue with an EU-backed AA+ entity. During Q2 2010 we fixed the Navios Magellan for about two years at $22,800 day net, the Navios Heracles for about a year at $21,850 a day net, and the Navios Primavera for about a year at $22,138 a day net.
Please turn to slide 9. Through our in-house technical management we continued to enjoy vessel operating expenses significantly below the industry average. Average current daily op ex is $4,411 a day, 26% below the industry average. Navios’ established reputation allows us to charter vessels to high quality counterparties for long periods at favorable spreads of $16,825 a day in 2010, which increases to $19,796 in 2011.
Please turn to slide 10. We currently own 31.3% of Navios Partners, including our 2% GP interest. Navios Partners operates a fleet of 14 vessels and 1.3 million deadweight tons with an average age of 5.8 years. Two Panamex vessels that chartered in with purchase options providing partners with current earnings without capital outlay.
Please turn to slide 11. Our 31.3% interest in Navios Partners has a market value of about $225 million. Navios Partners provides a significant cash distribution to Navios Holdings. For 2010 we received about $30 million in distributions from Partners. We anticipate, based on current run rate, receiving about $21.9 million in distributions during 2010, which will fund about 90% of Navios Maritime Holdings dividends to our shareholders.
Partners’ increasing EBITDA, operating surplus, and net income for the ten quarters since Q1 2008 have allowed Navios Partners to steadily increase distributions. The consecutive higher results primarily reflect the significant profitable growth by the company from increases in the number of operating vessels and favorable changes in the daily charter-out rates.
Please turn to slide 12. Navios South America Logistics, one of the premier providers in the Hidrovia region, has two divisions composed of a barge and cabotage business, along with the port terminal operations.
We formed Navios South America Logistics in January 2008, through the combination of our existing port operations in Uruguay with an Argentine company operating and wet and dry barge fleet, [unintelligible] liquid terminal and a cabotage fleet. This fleet currently consists of 223 vessels, barges, and push boats. We recently expanded the double hold tanker fleet in the Argentina cabotage business from four to six vessels.
Please turn to slide 13. Navios Logistics has a strong balance sheet. In Q2 2010 cash and cash equivalents amounted to $29.2 million, as compared to $26.9 million on December 31, 2009. Total assets grew by 9% to $549.2 million by the end of Q2. Net debt to book capitalization is a conservative 22%.
Turning to slide 14. The following slides review our ownership in Navios Acquisition Corporation. As shown on this slide, understanding where an industry is within historical shipping cycles is essential to a successful entry. Navios Acquisition acquired 13 young, high quality double hull vessels in the product and chemical tanker sectors at cyclically low prices.
Please turn to slide 15. The slide provides the details of the contemplated acquisition of seven VLCC tankers as Angeliki described earlier. The value of the vessels, plus the attached charters, provides an adjusted market value of $687 million, a favorable difference of $100 million, or almost 17% higher than the purchase price.
Please turn to slide 16. This slide describes the Navios Acquisition warrant program. Navios Maritime Holdings has committed to fund about $80 million on successful completion of this program.
Please turn to slide 17. The dry bulk market performed well during the first part of Q2, with the BDI rising to a quarterly high of 4,209 on May 26. The BDI then dropped for 35 consecutive days, the most since 2002, reaching 1700 on July 15, but has recovered since, and then is over 2,500 for the last couple of days.
Cape [time] charter rates dropped from about $59,000 per day on June2 to $12,600 on July 23. The market has rallied to over $30,000 since then. Volatility in the BDI was the result of a confluence of normal seasonal easing of cargos out of India and Latin America, combined with the Chinese slowdown in construction, which had a negative effect on both iron ore and coal imports. Fixtures of vessels to import coal to China decreased slightly going into the summer. With China becoming the world’s largest energy consumer last year, it is expected to be a net importer of coal for the foreseeable future.
The recent surge in Cape rates seem due to restocking of iron ore as spot prices fell from a high of $186 earlier this year to $116 in July. A reduction in loan availability in China, intended to reduce speculation in an overheated housing market, caused a decrease in car sales and consumer spending, which led to a decrease in iron ore spot prices. We believe that lower iron ore quarterly contract prices, and the normally expected first half 2011 Chinese loan growth, will set the stage for improvement later this year and into next year, driven up by pent up demand.
Please turn to slide 18. Emerging economies are trading 10% more than the pre-Lehman peak. China surpassed Japan as the second-largest economy in Q2 2010, which underscores the strength of emerging markets. The announced Chinese consolidation of the steel industry, and increases in imported steam and meteorological coal, will further expand trade as domestic supplies are too expensive to develop. New steel mills will be sited near the coast to facilitate the import of met coal and iron ore.
Turning to slide 19, demand for dry bulk vessels is driven by both demand for natural resources and the distances that these cargos are transported. Changing trading patterns affect all sizes of vessels. As an example, Brazil passed India as the second-largest supplier of Chinese iron ore imports several years ago. India’s declining share of Chinese iron ore imports forced China to import from outside the Pacific Rim.
The increases in seaborne demand and also increases in ton miles, a key driver to Capesize demand. Vale sold a record of 140 million tons of iron ore to China in 2009, compared to 91 million tons in 2008, underscoring the ton mile increase. Indian coal imports shown on the right hand chart, have a 23% compounded annual growth rate since 2006. According to the central electricity authority in India, this demand will continue to substantially grow as a majority of planned new power generations will be coal-fired.
Please turn to slide 20. Crude steel production in China through July was $375 million tons, up 18% year on year. Iron ore imports are up 1.5%, while domestic iron ore production was up 28%. This reflects a return to production of high cost, low quality domestic ore when import prices are high. China imported 360 million tons of iron ore through July to keep pace with high steel production and demand driven by housing, cars, and durable goods.
In the first half of 2010 iron imports began decelerating at the end of Q2, due to high spot prices for imported ore in a price sensitive market. Spot prices fell from June to July, but have risen recently to about $147 a ton. This has created an incentive to delay contract commitments to buy ore on dips in price. Analysts estimate that Chinese domestic ore accounted for 33% of blast furnace feed stock this year, compared to 27% in the second half of 2009, when import prices were lower. Analysts estimate that when prices for spot drop below $100 a ton, Chinese mills begin to import more, reducing domestic ore usage.
Turning to slide 21, the collapse in the freight market in Q4 ’08 resulted in a dramatic jump in scrapping [unintelligible] last year, when a record 10 million dead weight was scrapped. With the market increase since then, scrapping has been less than the average since 2002, and reached only 3.4 million dead weight tons year to date, equivalent to about 5 million tons dead weight on an annualized basis. Still, 16% of the fleet is older than 25 years of age, and 25% of the fleet is over 20 years old, providing over 120 million dead weight of scrapping potential.
Moving to slide 22, July year to date new building deliveries have slipped 43%, with only 41.8 million dead weight deliveries versus a projection of 73.6 million dead weight. Total 2010 deliveries are projected to be about 72 million dead weight, demonstrating that the dry bulk order book is over-marked. While some yards may have increased capacity, 2010 deliveries reflect orders probably contracted at prices significantly above the current market, making them uneconomical today.
Lack of bank financing continues as [unintelligible] funding to private ship owners, ending the first half 2010 ordering spree. Despite high slippage in 2010, expected deliveries are likely to establish a record year for new buildings.
In conclusion, the recent volatility in dry bulk rates reflect a slowdown in Chinese construction, market reaction to higher, and then lower, iron ore prices, and an increase in vessel deliveries to a seasonally slow market. Usual increases in trade volumes in fourth quarter depend on an active U.S. grain export season aided possibly by this year’s Russian grain export ban, increased activity after the end of the Indian monsoon season, and for the remainder of 2010, a renewed emphasis on imports of iron ore price decline and Chinese steel demand remains strong.
This concludes our presentation. I would now like to turn the call to George Achniotis for the Q2 2010 financial results. George?
Thank you Ted. Before I begin the review, I would like to point out that as of May 28, 2010, Navios Holdings owned 57.3% of Navios Acquisition, and at that date started to fully consolidate Navios Acquisition. That had an immaterial effect on revenue, EBITDA and net income.
Please turn to slide 23 as we review Navios’ financial results for the second quarter and the first half of 2010. Total revenue for the second quarter of 2010 increased by 16.3%, to $165.4 million, as compared to $142.2 million for the comparable period of 2009. Revenue from dry bulk vessel operations for Q2 2010 was $113.8 million, as compared to $107.1 million for the same period during 2009. The increase in revenue is mainly attributable to the increase in the available days of the core fleet, due to the deliveries of nine [rebuilding] vessels. The average TCE rates for the two quarters were approximately the same.
Revenue from Navios South America Logistics was $51.6 million in Q2 2010, versus $35.1 million in the second quarter of 2009. The increase is mainly attributable to the additional [unintelligible] tankers, using the local cabotage business, the increased operations at the liquid terminal in Paraguay, and the increased throughput and storage capacity at the dry terminal in Uruguay. In addition, overall [unintelligible] activity in 2010 increased compared to 2009. [Unintelligible] levels materially improved from the severe drought of 2009.
EBITDA for Q2 2010 increased by over 70% to $91 million, compared to $53.4 million for the second quarter of 2009. The Q2 2010 EBITDA reflects a number of non-recurring events such as $17.7 million gain on our investment in Navios Acquisition, and a $1.8 million gain on the sale of Navios Pollux.
I note that we also have non-recurring events affecting EBITDA for the second quarter of 2009, such as a $16.8 million gain from the sale of Navios Sagittarius to Navios Partners, and a $6.1 million non-cash compensation from Navios Partners. These positive events were partially offset by a $13.8 million unrealized mark-to-market loss on our units in Navios Partners.
After adjusting for non-recurring items, our adjusted EBITDA for the second quarter of 2010 was $71.5 million, compared to $44.3 million in the same period of 2009, an increase of over 61%. The $27.2 million increase in EBITDA is mainly attributable to an increase in revenue of $23.2 million and an increase in gains from derivatives of $5.2 million. We also had an increase in equity and net earnings for our affiliated companies of $2.8 million.
The increase in EBITDA was adversely affected by an increase in time charter voyage and logistics business expenses, by $0.8 million, an increase in direct vessel expenses by $1.6 million, an increase in general and [admin] expenses of $0.7 million, and an increase in net other expenses by $0.9 million. The EBITDA contribution in the second quarter of 2010 from Navios South America Logistics was $10.3 million, as compared to $8.6 million for the same period of 2009.
Net income for Q2 2010 increased by over 110% to $46.5 million, compared to $22.1 million in the same period in 2009. Net income for both periods was positively affected by the same non-recurring items that affected EBITDA. Excluding the effect of these items, net income for Q2 2010 would have been $27 million compared to $13 million in 2009, an increase of 107%.
The increase is mainly attributable to the $27.2 million increase in EBITDA. The increase was mitigated by a $6 million increase in depreciation and amortization, primarily due to delivery of the new vessels in the [home] fleet, an increase in interest expense by $6.3 million, and a $0.9 million increase in income taxes.
Turning now to the six-month results, revenue for the six months ended June 30, 2010 was $319.8 million, compared to $289.4 million for the same period in 2009. Revenue from dry bulk vessel operations for the six months ended June 30, 2010 was $232 million, compared to $224.9 million for the same period in 2009.
As mentioned earlier, the increase in revenue is mainly attributable to the delivery of nine vessels since the end of June 2009, increasing the number of available days by about 1,000. The increase was mitigated by a reduction in the average TCE rate for the first half of 2010 to $25,424 per day, compared to $27,544 per day for the same period last year.
EBITDA for the first half of 2010 increased by 76.5% to $169 million, compared to $95.8 million in the same period of 2009. EBITDA for the six-month period ended June 30, 2010 was positively affected by a $26.1 million gain from the sale of three vessels to Navios Partners, the $17.7 million gain on the investment in Navios Acquisition, and it was negatively affected by a $4 million write-off of an unfavorable short-term charter.
EBITDA for the same period in 2009 was affected by the $16.8 million gain on the sale of a vessel to Navios Partners, the $6.1 million compensation from Navios Partners, and was negatively affected by the $13.8 million unrealized mark-to-market losses on Navios Partners units.
After adjusting for the above items, EBITDA for the first half of 2010 was $129.2 million, compared to $86.7 million for the same period in 2009, an increase of 49%. The $42.5 million increase in EBITDA was mainly attributable to an increase in revenue by $30.4 million, a decrease in time charter voyage and port terminal expenses by $3.8 million, an increase in gains from the derivatives by $3.4 million, an increase in equity in net earnings from [unintelligible] companies by $9.3 million, a decrease in non-controlling interest of $1.3 million, and an increase in net [unintelligible] income of $0.5 million. The above-mentioned increase was mitigated mainly by an increase in G&A expenses by $2.4 million, and an increase in direct vessel expenses by $3.8 million.
Net income for the six-month period ended June 30, 2010 was $77.8 million, compared to $34.1 million in the same period of 2009, an increase of 128%. Net income was affected by the same items that affected EBITDA mentioned earlier. After adjusting for the effect of those items, net income for the first half of 2010 was $38 million, compared to $25 million in 2009.
The increase in adjusted net income of $13 million is mainly attributable to the $42.5 million increase in EBITDA. The increase was offset by $15.4 million increase in depreciation and amortization, an increase in net interest expense by $13.3 million, and a decrease in taxes of $0.8 million.
In terms of Navios Logistics, revenue was $87.8 million in the first half of 2010, compared to $64.4 million during the same period of 2009. The EBITDA contribution from Navios South America Logistics was $14.4 million in the first half of 2010, and remained the same as in 2009.
Slide 24 highlights key balance sheet changes between June 30, 2010 and December 31, 2009. To provide a more meaningful comparison, we have added pro forma numbers excluding the effect of the consolidation of Navios Acquisition.
Navios continues to benefit from a strong balance sheet and a strong liquidity. The cash and cash equivalent balance, including restricted cash on June 30, 2010, improved by $69.1 million to $350.2 million from $281.1 million at the end of December 2009. Restricted cash mainly consists of amounts available to the company for the financing of new building vessels.
Vessels, port terminals, and other fixed assets net of depreciation reduced by $89.4 million, reflecting primarily the sale of three vessels to Navios Partners. I would like to remind you at this point that due to U.S. GAAP accounting, the 31.3% investment in Navios Partners is reflected on the balance sheet at a value of $81.9 million, whereas the current market value of the shares is approximately $225 million, a difference of about $142 million.
Stockholders’ equity increased from $925.5 million to over $1 billion, reflecting the deliveries of the new building vessels and the profitability of the company. The net debt to book capitalization ratio also improved from 52.6% at the end of December 2009 to 48.1% at June 30, 2010. I note that in addition to our new building program being fully funded, the vessels are fully hedged by long term employment contracts. Last, as these vessels are delivered, you will see our credit ratios improve, as most of the debt is currently on our balance sheet, but the revenue and EBITDA has yet to be created.
Turning now to slide 25, we continue our consistent dividend policy and we have declared a dividend of $0.06 per share for Q2 2010. Record date will be September 22, and the payment date will be October 6.
This concludes my review of the second quarter financials. At this time I will turn the call back over to Angeliki. Angeliki?
Thank you George. This has completed our formal presentation and we open the call to questions.
[Operator instructions.] Your first question comes from John Chappell of JP Morgan.
Jon Chappell – JP Morgan
George, I have a question for you on the income statement. In this past quarter there was a pretty big non-recurring item, which obviously we’ll exclude from the numbers, but it was $17.7 million related to a gain on change in control. Can you explain a little bit what that had to do with?
When the Navios acquisitions are [stacked] Navios Holdings ended up having a 57% holding, and we had to consolidate the company at the time. So we had to value our investment in Navios Acquisitions, and that created a gain of $17.7 million. That’s the one item from that.
So if you get to the point where Navios Holdings ownership is less than 50% and you don’t have to consolidate, is that a line item that will be reversed at some point?
This is a one-off. The gain is [unintelligible]. It’s not going to reverse at a later stage.
And is that a cash? Does that have an impact on cash, or no?
It is an accounting gain.
Okay, that’s what I thought. Second question, and I know this is probably a somewhat delicate topic because the warrant program is supposed to end on Monday, but given that you need 75% participation what happens as far as Navios Acquisition Corp.’s financing of the VLCC acquisition if the warrant program doesn’t reach that threshold of 75%?
On this issue we are under registration and we cannot comment. We believe that this is a very creative investment for all the investors involved. Navios is a part of it, and we believe this should be successful, but we cannot comment for the case that it is not successful
And then finally, kind of reading between the lines in your industry commentary and the press release, and Angeliki’s earlier remarks about being a little bit cautious about the order book, that’s the first time in my memory that you’ve shown any caution on the supply side. Does that have to do with any changes in the demand side of the equation? Clear there’s been concerns about China trying to slow their economy. Would you say you’re a little bit more concerned about the near-term outlook than you’ve been over the last year since we’ve come out of the recession?
Yes. This is correct. One of the things that we have to realize, and we have also included it in our industry section, is that after the crisis at the end of 2008 there was a big push that was given by emerging markets. We had, if you’ve seen the volumes of imports and exports from emerging markets it’s 10% more than the pre-crisis level of 2008. So you have seen that there is a really substantial boost that we caught from emerging markets. What really gives us a little bit, thought of concern is really where the OECD countries and developed countries are going, because we haven’t seen them yet being able to keep the pace, to start picking up the weight that they have to do. What we see is that this demand, this [unintelligible] of demand that if you don’t see really OECD countries picking up, this is the area where if you put next to the supply then you have an imbalance. I think very successfully the [sovereignty] risk of the bonds in the Europe has been somehow been resolved by the crisis. I think the one issue we have is to see the OECD countries being able to grow at a better rate. We haven’t seen that, and this is the area where we have to concentrate.
And then just lastly, if I may, you were one of the few companies that actually took advantage of any type of significant price decline in asset prices in a meaningful way, yet the banks were pretty lenient with companies through the last part of 2008 and early 2009. If the developed economies don’t recover, do you think there’s going to be actually more potential opportunities this time around, call it in 2011, than there was in the prior 18 months?
I will not say that – we do not say that we know that there’s going to be a second dip, but I will tell you that usually, and this is not particular to this cycle, but in every cycle usually there is a second side where the banks, and you know, become impatient and you have a second wave of foreclosures and a second wave of consolidation on books, because as companies don’t have healthy cash flows and balances you have the issues about asset prices and values, and then if you have a second dip or a second softness, you see that inevitably that creates a second wave for the banks, that they lose their patience. And usually banks the second time they’re not surprised, they have a better situation in their books, so they’re more prepared to do a move. This is one of the things that in Navios we’re very quick to take advantage. And that’s why we have a good balance sheet and a strong balance sheet, because we believe the opportunities mostly come from distress.
Your next question comes from Natasha Boyden of Cantor Fitzgerald.
Natasha Boyden – Cantor Fitzgerald
Ted, in your remarks, you pointed out, and I think maybe quite rightly, that the banks have been fairly reluctant to perhaps help some of the companies with orders to bring those to fruition. However, it looks like Navios itself has had relatively little problem getting bank financing. So can you just talk about the discrepancy there and what is it that makes Navios a better bet, apparently, for the banks.
The team! [Laughter.] Come on Natasha, the team, the management team. That’s [unintelligible], but another one is also model. To make it simple, you have to realize that we had a drop in the market of 70%, and our business model was [sound], that we were able to give, pay the dividends to our shareholders and of course having all our issues and everything and satisfying a bank. We have a visible EBITDA. Take an example for 2011 that we were discussing previously, that we may have some kind of softness, maybe. You can see that Navios, and you can do your own calculations, that Navios can have [zero], we can keep our vessels with full crew, and we would have sufficient cash flow to provide for everything. So our break evens are very comfortable, our visible cash flows are very comfortable, so the banks feel that we have a model that we can protect in any scenario. Also we are very thoughtful, we have taken bonds ahead of time, we care about expiration dates, we don’t have any financing risk because we go long on our loans and our debt schedules, so we’re very careful and we deal with our debt and our balance sheet the same we deal with our vessel portfolio.
And then looking at, just moving over to NNA, consolidation of NNA into Holdings. Is that going to be a permanent thing, or are you intending for that to be more of a temporary situation?
This is mostly a temporary situation. You can avoid consolidation in a later stage by also – on the way we put our voting rights. So this is not something that we foresee will be permanent.
And then just a couple of questions. Vessels in terms of dropping down to NNM, you’ve been fairly active in doing that. I’m assuming we can continue to see that occurring?
This is something we always see, but it is really up to the board of NNM and it’s really opportunistic. This is very [accretive] to the NNM shareholders and of course the board has to approve that.
Do you have a number of vessels in mind in terms of how many you would drop down, or is it just as you said, as an opportunistic basis?
It’s opportunistic. Navios Holdings, if you remember, we, in 2009 Navios Holdings has taken over eight vessels and with the eight that we are getting this year, the next six months, we have 16 vessels with [the 15 allocated charges for the long duration]. It’s [unintelligible] vessels.
And then lastly, if I may, George, you had a $5.9 million loss from derivatives during the quarter. A couple things, was that realized or unrealized? And what was that actually related to? Was it interest rates? Or was it FFAs?
That is a profit. It is not a loss. It is a gain.
Oh, I’m sorry. I beg your pardon. Okay, it’s a gain.
Generally cash from the valuation of the Navios Acquisition, and nothing to do with FFA trading.
Your next question comes from the line of John Parker of Jefferies
John Parker – Jefferies
I apologize if I’ve had limited time to go through all your filings, but you did quite well in the quarter. Adjusted EBITDA is 70, versus 60, kind of consensus estimates and where I thought you’d come in, and is there anything you can point to why your results came in so well. Was it short-term trading or anything else that you can discuss?
There was no effect from short-term trading or from [unintelligible]. Things that [unintelligible], well, the results from South America were nice. The overall results they were very good. There was nothing special I think during the quarter.
And then can you give me any color on – you have $180 million now of restricted cash – just generally what’s that held for, when do you expect that to go away?
As I said, most of that cash will be used to finance new building vessels, and there are already vessels assigned to specific loans that we take out [unintelligible]. So the only portion that is actually [unintelligible] is about $15 million.
So as the Capesize is delivered you would expect that balance to trend down toward the $15 million?
And then you discussed $80 million of cash going for the warrant exercise program if that is successful, or if it works out. Can you break out how much of that is coming off the Navios Holdings balance sheet and how much is coming from Angeliki’s positions?
The free warrant as you know is a [unintelligible] that was given to Navios Holdings, so Navios Holdings has the warrant, which is a majority. My personal investment is about $1.2 million. The rest is coming from Navios Holdings, which also received the free warrant. This is an investment that we think makes sense, because we are putting the balance sheet of Navios on – we had the opportunity, we bought a lot of very nice vessels in the dry bulk during the first half of 2009, when it was really distressed deals where you bought vessels on – after-crisis values with pre-crisis cash flows, and the same way we found an opportunity during the softness in the market of the tanker market to be entering at a very opportune time with a 15% premium, with a 15% discount to the value of [capital assets] and with long-term cash flows of almost [nine years]. So we believe it is a good use of this cash.
So the bulk – but to answer my question the bulk of the $78 million is coming from Navios Holdings. Is that correct?
And then I think this has been touched on a little bit, but I’d like to ask again. Your long-term plans for the Navios Acquisition equity, I think you said that the consolidation is a temporary thing, which assumes that you would bring your equity stake down, so I guess at some point when you think the value is recognized in the markets you would be a seller of Navios Acquisition shares to get your position down below 50% so you didn’t consolidate results anymore. Is that what you’re saying?
No, never. We have never sold the shares, even in Partners. When we started with Partners we had almost 50%. This is – when a company will grow we have to do 2-3 years and then [unintelligible] whatever and that’s how it comes out.
Okay, so [unintelligible] additional equity raises used for growth.
Not after the warrant program. You have to really see your shareholdings after everything is completed.
And then finally, when you did the Navios Holdings spec deal, I recall, and this is sort of talking my own business here, but you went from a complete reliance on bank debt to a more flexible capital structure with some high-yield debt in there and I think that served you well during the downturn. Would there be any plans to do that with Navios Acquisition, to go to a more flexible capital structure? Right now it looks like you’re completely dependent on bank debt.
You know our strategy is we will use any possible market. We are not shy of using any market depending on the market conditions, on the terms we get, on what we can achieve. So we are not shy on using every possible market and the flexibility is the target. So I wouldn’t exclude it, but it depends on market conditions and other scenarios.
Your next question comes from Robert MacKenzie of FBR Capital Markets.
Doug Garber – FBR Capital Markets
This is actually Doug Garber filling in for Rob. I guess my first question is you guys obviously had some good opportunities to buy assets at low prices last year, and your outlook’s a little bit more muted now. I was curious with your more muted outlook and also prices coming down are you still interested in acquiring assets at distressed prices?
We always like to acquire vessels on a good relative valuation, also if you have seen even though we did a huge purchasing we all bought [unintelligible] positions on the eight vessels that we are getting delivered in the next six months. The [unintelligible] charges that [unintelligible]. Five of them have a 50-50 profit sharing, so you realize we care about cash flows, we are careful to buy in the good evaluation and we are trying also to – if we can have also attractive – on these vessels that we bought from banks that had the problems and we acquired them with 10-year charters is even better. So we are very opportunistic on this.
And then I know you guys have, over the last few years, you’ve gotten into the logistics business, you’ve gotten into the tanker business, and I’m curious as to what your thoughts are on the container ship business and if there are any intentions around that.
We couldn’t comment on that. The only thing I can tell you is that Navios Acquisition has no agenda, and at the time where [unintelligible] spiking, we thought that the sector that was more right for investment was the tankers. So that I think speaks to where we thought the – about the market. We cannot exclude the container market but we are not having also intention to distract ourselves.
And my final question is within the business you guys have, within the dry bulk, the logistics, and the tanker business now, can you rank your priorities for capital allocation from the parent company in terms of investments between those three?
What we have done very successfully is – we like all of them to be publically independent. We don’t guarantee any of the debt. And also, except for the logistics, everyone else is public. So we have no intention on – we like them to be growing by themselves.
Your next question comes from Justine Fisher, Goldman Sachs.
Justine Fisher – Goldman Sachs
So when Navios Holdings investors are looking at the timeframe during which you may continue to consolidate Navios Acquisition, you said it was temporary but you said also that it could take a couple of years depending on the growth strategy of the company. So should people looking to invest in Navios Holdings be thinking of taking both VLCC product carrier risk and dry bulk risk, or is it really a shorter timeframe and is Navios Holdings still going to be a dry bulk investment?
Navios Holdings is dry bulk investment. Of course we – irrelevant to the consolidation, you always get the benefit of the Navios Acquisition percentage ownership. On the cycle of the debt I can tell you that we do not guarantee any of our subsidiaries’ debt. This is [unintelligible]. They are totally independent and there is no guarantee whatsoever on the liabilities. So the consolidation or not is almost irrelevant because even if you don’t consolidate it will still get a percentage ownership. Let’s say we have 49%. You don’t consolidate. But you still have 49% of [unintelligible] tanker company, so you get the benefit of that. The risk and the debt and everything’s different. It’s two different publically held companies.
Well, right, but they’re going to have to start looking at EBITDA for Navios Holdings including the potentially much more volatile results of VLCCs and product carriers as well, right? At least for the next couple of years you said.
I don’t think that the – first of all, I don’t know if you – that’s all we have excluded and [unintelligible] Navios Holdings or – and we believe that Navios Holdings will not need for accounting purposes to consolidate for a long period with Holdings. But there is no volatility per se because as you know the VLCC we have we’re all time-chartered for the next nine years.
No, that’s true. The time charters make a difference but I think people may be looking at Navios as a dry bulk as opposed to a tanker. I just was wondering whether that may be changing for a longer period of time. And then another question that I have is just to clarify what the cash cap ex requirements for the rest of Navios Holdings’ acquisitions are. I know that all except $15 million of the $186 million of restricted cash is going to be used to fund vessel deliveries, but by my calculations there’s still over $400 million that Navios will have to pay for those deliveries. So can you just remind us where that’s coming from?
There is a mandatory re-convertible [unintelligible] there, and there is also equity that has been paid, so in that sense I can tell you that this is fully funded, and on top of it we have two vessels with – fully funded, and we’ll have two vessels without mortgages.
Right, but what’s – how much does Navios owe total for the remaining fleet deliveries. What’s the total – let’s say excluding the mandatory convertible preferred, so the cash portion of Navios’ remaining deliveries. What’s that number?
There is financing in place for all the new building deliveries, so we won’t have to put [unintelligible] equity from Navios cash.
Right, but just how much is required, even if it comes from financing. Just what’s the dollar amount of what’s required for those ships?
We can give you a call and give you the exact number but I don’t – the exact scheduling – but there is no – any equity or cash from the company. And one other thing that is important is that our ratios, our debt ratios will substantially improve the moment we get the vessels in the water, which is within the next six months, because automatically we have the debt right now in the – the majority of the debt is in our balance sheet already. You have it, but you don’t have the earnings, the EBITDA in there. So there is a mismatch between the debt and the ability to see the full EBITDA and see the correct ratio.
Okay, then sorry, last question. The $80 million – around $80 million that Navios Holdings is giving to Navios Acquisition. Is it anticipated that Navios Holdings may have to make more cash contributions like this to support acquisitions, future acquisitions? And does that qualify as a restricted payment from Navios to Navios Acquisition?
No, there is not a restriction – it is not under the restricted – we don’t use any [unintelligible] or any of this kind of thing and second of all, this is – we are exercising the warrant we have, so we are not anticipating any other. So we do it – we are exercising the warrant that Navios Holdings has.
I would now like to turn the call back over to Ms. Frangou.
Thank you very much. This completes our second quarter results.
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