Aegean Marine Petroleum Network Inc. (NYSE:ANW)
Q2 2016 Earnings Conference Call
August 10, 2016 4:30 PM ET
Spyros Gianniotis - Chief Financial Officer
Nikolas Tavlarios - President
Ben Nolan - Stifel Nicolaus
Randy Giveans - Jefferies
Good evening and welcome to the Aegean Marine Petroleum Network Second Quarter 2016 Conference Call and Presentation. I would like to advise everyone that there will be a slide presentation accompanying today’s conference call. That presentation can be obtained from the Aegean’s website at www.ampni.com.
I also want to inform everyone that this conference is being recorded and is now being webcast on the company’s website. We will conduct a question-and-answer session after the opening remarks, and instructions will follow at that time. A replay of the conference will be accessible through the next two weeks by dialing 888-203-1112 for U.S. callers; and 719-457-0820 for those outside the U.S. To access the replay, please enter the pass code 2586478.
At this time, I would like to turn the conference over to the company. Please go ahead.
Good evening and welcome to Aegean Marine’s second quarter 2016 conference call. On the call today are Aegean Chairman, Peter Georgiopoulos; Aegean President, Nick Tavlarios; and Aegean’s Chief Financial Officer, Spyros Gianniotis.
Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on Aegean Marine Petroleum Network, Inc.’s current plans and expectations, and involve risks and uncertainties that could cause future activities and the results of operations to be materially different from those set forth in the forward-looking statements.
Important factors that could cause actual results to differ include our future operating or financial results, our ability to manage growth, adverse conditions in the marine fuel supply industries, and increased levels of competition. For further information, please refer to Aegean Marine Petroleum Network, Inc.’s reports and filings with the Securities and Exchange Commission.
I would now like to turn the call over to Nick Tavlarios, Aegean’s President to discuss highlights from the quarter.
Thank you for joining us to discuss our results for the second quarter of 2016. I’d like to begin by providing an overview of our strategy and business, which has continued to successfully grow and evolve over the years. I’ll then highlight the macroeconomic and industry trends impacting our sector, and review high-level financial results from the quarter. Spyros Gianniotis, Aegean’s Chief Financial Officer who will provide further details on our financial results, and I’ll conclude by discussing key performance indicators and initiatives already underway to strengthen Aegean in the near long-term.
Since becoming a public company in 2006, Aegean has expanded its global footprint through strategic acquisitions and entered into new markets to become a worldwide leader in the physical supply and marketing of marine fuel. Today, we’re proud to be able to serve customers across our global footprint in approximately 30 markets and 60 ports.
Aegean’s consistent growth and stable financial performance against the backdrop of a long-term slump in the marine maritime sector and volatile commodity prices is driven by our diverse and flexible platform that allows Aegean to operate efficiently in a variety of market types and conditions.
Our business has developed over the years to include delivery logistics to integrated and supply models, a growing back to back sales team, and storage and vessel revenues that leverage our built-in infrastructure. We are able to protect our business against industry headwinds, while remaining nimble enough to capitalize on attractive opportunities.
Our unique business model allows to respond quickly to market fluctuations and capitalize on increased demand and demonstrate by a record of strategic expansion. Just as every market is important to us or to our success, we have also scaled back in areas that experienced more significant challenges.
Our decision to suspend operations in the Port of Algeciras reflects our focus on aligning resources to areas, where we believe will generate the most value. This action also follows the closure of our important service center back in the fourth quarter 2015. Another example of our commitment to when the business performance and outlook warranted. We continue to evaluate the performance of all of our markets in assets and lender [ph] in exit markets as appropriate to ensure we’re allocating resources effectively and deliver the greatest value to shareholders.
Let’s turn to our improved results for the quarter. I’m pleased to report that we achieved record EBITDA of $37.9 million, an increase of 58% over the prior year. While growing volumes 30% year-over-year, our net income and EPS for the quarter when adjusted for the sale of non-core assets, which Spyros will discuss in great detail shortly, were $60.32, respectively.
This growth has been organic and from our recent expansion for us and businesses, including South Africa, Brazil and our back-to-back trading businesses. This includes 49,642 tons of bulk trading volume, net of which sales volumes were 4,043,147 million metric tons or a sequential decrease of 1.9%. I’m pleased to note that our 30% volume growth has come without the addition of a significant operating expenses resulting in improved net performance. This quarter, we delivered 4.1 million metric tons of bunker fuel, our 2nd consecutive quarter of more than 4 million metric tons.
Looking to the current quarter, our sales volume continues to moderate and July total approximated 1.35 million metric tons.
I would now like to touch on success in delevering our balance sheet and our enhanced financial flexibility, which has been a key priority and achievement for Aegean.
Spyros will highlight our debt structure later. But I want to point out that we have significantly paid our debt, which is now only $9.6 million net. Additionally, our real EV to EBITDA, including net debt is currently 2.67 times as seen on Slide 5. We’ve previously discussed delevering is a focus for Aegean and we have clearly delivered on that promise.
Additionally, our EBITDA per ton increased 44% quarter-over-quarter. As we mentioned in the last couple of quarters, we believe that EBITDA per metric ton that reflects the complexity of our platform and the diverse business models we now imply in various markets around the world.
As I pointed out earlier, our business has developed and become far more sophisticated over the years. In addition to the back-to-back physical supply model, we now have an integrated supply model in the USA, a storage leasing business, physical sales and cargo sales.
All these businesses operate at different gross and operating margin levels, and therefore, makes it impossible to compare our historical gross margin to the diverse platform we have today. Accordingly, a more appropriate metric is that EBITDA per ton.
While we continue to provide our traditional gross spread metric ton, as outlined in Slide 7, we believe EBITDA per metric ton reflects our business growth and the bottom line effect of the performance of all our business initiatives. We are confident in our ability to continue generating strong results.
I’d like to turn the call now over to – to some highlights, macroeconomic trends that may have impacted on our businesses. Oil and refined product prices have been extremely volatile through the first-half of 2016. In the second quarter, crude oil prices increased 25%, while marine fuel prices rose 35% to 40%. We believe, these prices moves – reflect deeply, bunker market prices were depressed in the first quarter and now recovered, as crude oil stabilized around $50 per barrel at the end of Q2.
Despite crude, we’re tracking around 10% since the end of the quarter, the relative strength of the bunker value seem to have held, bunker fuel prices remain 50% to 60% higher than we started the year as compared to Brent Crude Oil prices have increased 20% to 25% during the same period.
Crude oil markets continue to be contango. This structure indicates continued oversupply. Fuel oil prices in many world markets have flattened out when the contango structure getting weaker in the near-term. We believe, this indicates that some of the fuel oversupplies worked off, contribute to rising relative bunker prices. While prices are still low for our customers based on historic values, bunker fuel have strengthened.
Shifting by sector has been mixed. Tankers have recently been the strongest performance in the shipping space, besides seasonal – despite seasonal rate pressure in the current environment. In the first-half of the year, the tankers space experienced a dramatic reduction in the U.S. shale oil supply, which directly led to increase tanker mileage for crude oil movements to the U.S.
Additionally, the contango structure contributed to floating storage opportunities. A ranch [ph] production increases have been absorbed in the Far East also contributing contango utilization. Dry bulk shipping seems to be nearing the early stages of recovery, after an extended period of oversupply. We are keeping a close eye to this sector in the near further.
Crude ships continue to perform well, while containerships seem to be under pressure, leading to some recently announced consolidations in the industry. We have seen some minor volume weaknesses in our business recently that maybe attributable to container freight slowdown. As always, we will continue to monitor our customer relationships and our overall credit exposure.
Brexit added volatility in oil markets, but it’s not otherwise seem to have a significant impact, as UK accounts for only 1.6 of overall demand. As a global player, with little exposure to the UK, Aegean has not been impacted by the Brexit beyond the opportunity we saw in fixing some interest rates on our debt.
With that, I’ll turn the call over to Spyros to provide additional detail on our financial results in the quarter.
Thank you. As Nik mentioned, we sold two older non-core vessels in the quarter, the motor vessels Sara and the motor vessel at Aegean Champion, resulting in a book loss of $2.4 million. I will discuss the use of proceeds and the significant progress we have made on our paying down debt later in the call.
For the second quarter, gross profit was $93.4 million, representing a 19% increase from the prior-year period. Operating income when adjusted for the sale of non-core assets was $31.3 million, representing 112% increase from the prior-year period as we continue strategically positioning assets to more profitable areas.
Interest expense increased to $12.5 million, as a result of a negative mark-to-market of two interest rate swaps we executed in June. However, this we believable will allow us to take advantage of rates well below typical levels and we lower our rate exposure over the next five years.
Net income adjusted for the sale of non-core assets was $16 million, a 125% increase from $7.1 from the prior-year period. Adjusted earnings per share for the quarter was $0.32 per basic and diluted share, representing a 113% increase from $0.15 per basic and diluted share for the prior-year period. EBITDA adjusted for the sale of non-core assets was $37.9 million compared with $24.1 million for the prior-year period.
Moving to the balance sheet, cash and cash equivalents are $127.8 million as of June 30, 2016 compared with $42.2 million in the prior-year period.
Turning to Slide 17, I would now like to provide an analysis of our strong balance sheet and our debt, which we feel is [indiscernible] understood aspect of our business. What I want to highlight is that, over 65% of our total debt of $758.6 million, exclusively finances, receivables and inventory, high with assets, which turn every turnover every 30 days to 35 days, in which we view as [indiscernible]
Looking at it another way, if you take our total debt and our trade fair favorable had netted then out against our current assets, primarily receivables and inventory and costs [related with] [ph] with total net debt of only $9.6 million, down significantly from $112.4 million one year ago.
Taking this a step further, our high-quality receivables are built on strong credit controls and favorable sales trends that have yielded only $5000 in bad debt write-offs on nearly $40 billion in sales over the past years – the past 10 years.
And as mentioned earlier, our high with inventories can be easily sold and converted to cash in short order. While the traditional calculation for enterprise value is not recognizing in these elements, they do represent tremendous value and very liquid items in our balance sheet.
The positive impact to enterprise value translates to $620 million, which converts to cash rapidly. Accordingly, our enterprise value to EBITDA multiple on a net debt basis is currently 2.67 times, which is a historic low for Aegean.
Moving on to the vessel sales mentioned earlier allowed us to make progress on our priority to strengthen our balance sheet by paying down $5 million of debt and we’ll eliminate about $6.4 million in operating costs on an annual basis.
We continued to closely evaluate our capital allocation strategy by keeping a close eye on the markets to ensure we are in a position of financial strength with ample liquidity. During the quarter, we used $60.4 million cash in operations, which reflects an increase in inventories and receivable, values as oil prices rebounded from low levels in the first quarter.
Now, I will turn the call back over to Nick.
Thank you, Spyros. During the second quarter of 2016, we continued our efforts to deploy our resources and assets into the most effective and profitable markets. Accordingly, as I mentioned earlier, we made a strategic decision to suspend operations in the Algeciras market and sell two non-core vessels. This is in line with our focus on constantly evaluating our markets and redeploying our capital, assets, and resources into opportunities we feel will generate the best return.
As mentioned, we deployed – redeployed a bunkering tanker into the South African market. That vessels is in place and the business meeting our expectations. We are extremely pleased with our performance to-date and recognize that our strong results in the face of a difficult and volatile market are due to our dedicated team of professionals.
We’re very proud of our staff and the results of our hard work over the years. We have delevered and strengthened our balance sheet, while driving the results to the bottom line We have and will continue to actively manage on our business with a focus on enhancing value for all of our shareholders.
With that, I would like to turn the call over for questions. Operator?
Thank you so much. [Operator Instructions] Thank you. The first question comes from the line of Ben Nolan. Please go ahead.
Yes, thanks. I wasn’t expecting to be first. So the most obvious question is, obviously the profitability went up quite a bit there, whether you measured gross spread or EBITDA per ton or whatever. And I know that maybe you just talked about closing some of the ports like Algeciras that maybe were underperforming and reallocating resources to places like say West Africa.
I’m curious if maybe you can breakdown, at least, roughly what some of the main contributors to the really substantial increase and profitability was this quarter? I mean, is there an element of higher oil prices making the market a little bit less competitive than it had been, or is it just shifting round of assets, or how should I think about this and how sustainable do you think it is?
Well, let’s start with saying, the study as you go, right, we’re doing a good job and we – when we see something that’s not working well, we’re going to fix it. And that’s been our plan for the past 10 years and we’re going to continue doing that if it’s something that again is underperforming, we’ll continue to make those changes. So the Algeciras decision was one where we sold the ship, we didn’t – we were getting what we wanted out of it. We still have the license there.
So, in fact, we suspended operations, but there’s going to be a substantial savings by not having an underperforming business and that was one of them. So, yes, there’s definitely a benefit coming out of that and the [same how true] [ph] with Portland that we closed at the end of 2015. The – there was an improving – well, let’s say, we’ve also got a tremendous benefit out of entering our South African business, which we’ve just spoken up, and I don’t want to say too much more than that, but we’re happy with it.
The only thing it is, I think it’s a a lot of little things that we’ve been doing over the years. In every call, we get on the call and say that we’ve cut this expense. We’ve moved assets here. We’ve done this, we’ve done that. And I think what’s happening is, every quarter things get a little bit better, and I think that’s what you’re seeing. And I think this quarter a lot of the things that we’ve been doing over the past couple of years have started to come together.
Okay, good. Hopefully, that can be replicated like you said next study as you if this is the direction that it’s going, I think that everybody be pleased. The – my next question relates to the working capital and obviously saw the receivables and inventories go up a little bit, which absorbed a lot of the cash flow. Is that a function of how higher oil prices and higher bunker prices and simply more receivables and inventory or are you sort of continuing to add to the platform so to speak?
It means a couple of things. It’s more – it’s higher oil prices and also we increased our inventories as we’re moving oil around to new ports that we’re servicing.
Okay, that make sense. So and then that gets to the last question. Here we’re or I would be surprised if the shares went up materially tomorrow. But away from that, it’s been a while since you guys have increased the dividend, haven’t – it doesn’t look like you’ve been terribly active in the share repurchase program, and obviously, you have paid down some debt. But if this is the path here and you guys continue to make pretty good profit relatively consistently what’s the next step with all the capital, given that there’s not really much in the way of CapEx?
I think the three things you mentioned are three things that we’re looking at.
Okay. All right. Thanks to you, Nick.
Thank you, Ben. Thanks.
The next question comes from Randy Giveans of Jefferies. Please go ahead.
Thank you, operator. Good afternoon, gentlemen, it’s Rand Giveans on for Doug. Congrats on a very strong quarter and record EBITDA, pretty strong results there. So first, thanks for the update on the July volumes, I think, you said 1.35 million tons. Is it fair to assume a run rate in that range for a month – for the rest of the quarter?
Yes, I think it’s fair to assume. Yes.
Okay, so another quarter of 4 million tons. And then what about the spreads? Are we seeing bunker prices, I think, the average developed $240 per ton for the first-half of the quarter and that’s up from, I think, $214 per ton in 2 Q. So with that, are you expecting improvement from the 20.90 [ph] spread to maybe $22, $23 for 3Q?
Yes, that’s really hard to answer. I don’t think I can answer that question. But I will tell you, again, we feel pretty strong about where we were in the past quarter, and I think nothing has really changed since then. So it’s hard to tell what’s gong to happen next month.
Sure, it’s fair. And then I guess the last question. So, Fujairah storage, is that still running at the 100% utilization? And then if so, how is the leasing rate has been trending on that facility?
Again pretty steady. Quality of our tenants has improved. We’re at a 100% occupancy in the terminal and it’s moving as planned, yes.
It’s sounds good. We have not much else from us, so great job on the quarter. Talk to you soon.
[Operator Instructions] Thank you. All right. There are no further questions on the phone lines. This concludes the conference call today. Thank you for participating in the Aegean Marine Petroleum Network conference call.
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