Navios Maritime Holdings Inc. (NM) JPMorgan Aviation, Transportation & Defense Conference Call March 15, 2012 8:45 AM ET
Ted C. Petrone – President
George Achniotis – Chief Financial Officer
All right, well good morning everyone. For those of you that don’t know me, my name is (inaudible), I work in the high-yield credit research side covering Navios and shipping industry in general. So our first presentation this morning will be from Navios Maritime Holdings.
And with us, we have presenting Ted Petrone, President of Navios Holdings and George Achniotis, CFO of the company. So thank you guys for being here. I appreciate your time and I will turn it over to you. Thanks.
Ted C. Petrone
Thank you [Janet], it’s always a pleasure to be here to be associated with JPMorgan. It’s a privilege for the Navios Group. My name is Ted Petrone, I’m the President of Navios. With me is George Achniotis, the CFO.
We will do some slides, I will take the first half, George will take the more important financials on the second half. You can see the management team Angeliki Frangou, our CEO and Chairman is in Athens. Unfortunately, couldn’t make it. George [Achniotis], we have [Stratos] our Chief Financial Officer, myself, Leonidas Korres is also here. You will be seeing Navios if you stay in this room all through the morning. We blocked up the morning, so you get to see all the Navios Group.
And it’s a seasoned team, we realize shipping is a not a 100 yard dash, but it’s a marathon. It’s seasonal, it’s cyclical, it was our job to first build an industry of cooperation that can make profits in all parts of the cycle and then to explain that to you.
Navios started in 1954, we’ve created a very strong brand name and through those years in 2005 is an important year when we went public. We have accretively grown our fleet from six owned vessels and 22 charter to if you include the South American operations, over 110 vessels today, dry and wet.
We’ve raised over $2.3 billion in debt. Since 2008, we have proven access to the markets, capital markets. The policy again of the Navios Group of companies and specifically Navios Holdings is to secure long-term cash flow. We don’t play the spot market with our ships. We take that cash flow which reduces volatility and brings us fuel for future growth.
Here is a quick picture of the Navios Group of companies. On top you will see Navios Holdings and below is the three other associated companies in the Group. Navios Maritime Holdings gets its value from one, the core fleet that sits within Navios Holdings. 28 owned and 17 long-term charters and many of the above market leases that go along with this field that we control.
You can see that the other public companies we have number one, Navios Partners which is our MLP, a high dividend yielding product. The acquisition was – both of these you will be hearing about, no need to go into detail. We have the South American Logistics operations which we’re quite confident and pleased about going forward.
If you take a look at the numbers there in the circles and you see if you add up the ownership that we have and the value of the shares and do some multiples on South America, to a certain extent anybody who buys Navios at today’s levels is getting the Navios fleet and all the future earnings for free.
In uncertain economic times, our conservative approach has positioned us very well. We believe that what’s going on in South East Asia were a growth story. We have very high fleet coverage, as you can see almost 80% in 2012 already. We have been strengthening our balance sheet. We’ve been bringing down our leverage. We’ve been looking, because we feel there is a landscape here this year that brings itself to distressed deals.
We’ve been involved in distressed deals since 2009 on both the dry and the wet side. We’d like to be involved on the positive side on distress deals, but let see we are just not going to do a deal just for the sake of doing a deal.
I’d like to draw your attention to specifically the box in the center. Basically what is telling you is that our fixed revenue is already today greater than our total cost for the year. So we could take the 23% of our fleet, and not prudently but we can anchor it for the rest of the year not do anything and not burn cash. You will find the same thing on the acquisition side and the partners. It’s something that no other group of companies or no other company I think in shipping can actually talk about.
Our CapEx is fully funded, as a matter of fact, we are going to get inflow of almost $6 million in the two Kamsarmax delivered in the spring and we get, again that’s accretive that comes up from the subsidiaries that we have, on the partners side we have dropped down two vessels we received a $130 million and the dividends we receive from those two companies are about 125% of the dividends of what Navios Holdings put out in any current year. So you see we’re sort of well subsidized from our subsidiaries.
We have one of the largest drybulk listed fleets in the world, outside of COSCO and Japan Inc. Navios has actually grown as a Group to quite a number of vessels, look at the bottom stop with the green box at the bottom. 104 vessels, that doesn’t include some of our small cabotage types in Argentina down South America, but let’s say 104 vessels for now.
But on the holding side, 57 vessels almost 6 million deadweight, 45 currently in the water and an average age of 5.3, this is very important because unlike the tanker industry, the dry side has a very old fleet. It’s over 13, almost 14 years of age and we have very young assets with a long life learning to passage ahead of us.
You could see our diversification, when we invest we don’t we are not captive to any one asset class. We can anyone asset class, We have Capes and Panamaxes, Ultra-Handymaxes and 2 Handys and on the same side keep going all the way to the right we have 30 owned, 27 on long-term charter.
So there is a balance of controlling steel. We own some and we put out of the cash for the new-buildings but on half of that, we don’t take any way of front because we time charter shipping for say seven or 10 years, and we have a purchase option that’s solely in Navios option. And it devalues or deescalates during the term of the charter, I think over the last number of years, we’ve done at least a dozen if not more than that in terms of adding to the fleet, we can go into that probably latter.
Again we are try to take out the volatility, we do long-term charters with first class charters we have some insurance. I would try to get this green box on the right hand side blinking if I could, but I don’t think we can do that, but going back our average daily charter out rates for this year on a daily basis we received almost $24,000 a day on the vessels we put out., almost 30,000 next year and over 31,000 almost 32,000 in the following year.
Now days to track this year is 77%, 41%, 25% going up. It’s been our rules of thumb from day one, 75% for the first year 50% and 25% for the third year out. We believe in growing the company and not taking risk on the spot side – on the spot basis.
Our contracted revenue you can see is, in the next few years is 600 million, 700 million the itching thing here is the insurance. We have the sort of internal discussion about the insurance. It’s from a Belgium own company. 100% own by the Belgium Government and it is twice AA rated. It’s on all our charters out. We’re the only company that has it in the world, the private Belgium company used to have it. They don’t have it anymore.
Our contract goes to 2007 and if we take a ship on in 2016 and do a 10 lease that lease will be fully covered by the insurance, like any other insurance policy we’ve actually had pad on this, we had some Korea Line vessels we had Pacific King. What we do is we fixed a ship on the market, we mitigate damages, they pay the differential.
There has been no cash flow. It’s just been great pay off. This is a significantly important assets that Navios has that on one lease has in the industry. We love to manage the market, but we go to jail if we do that.
So you manage your risk and you manage your costs. And on the left hand side, you can see that our OpEx is almost one third less than the industry average. We do that obviously because we have economies of scale with such a large fleet and secondly but just as importantly, we have a great technical management in-house team in Athens that does intrinsic repairs. It’s a great group of guys.
They want to keep the ships running, they want to keep the quest and obviously that also goes to the bottom line. If you take the number of owned ships we have in the waters, and take at about $2,000 differential a day, which is what, 725,000 a year, it comes to about $20 million in savings that goes right to the bottom line.
On the right hand side, you can see, now let’s talk about the ships that we are leasing. In the left hand side was the ownership side. This is where Navios, we leverage our brand name and our balance sheet. The ships that we take are costing us about $12,500 a day on a long-term basis. Those ships have been put at $23,800 a day.
There is a reason people want to fix with the first class owner. They need to have their ship on time, (inaudible) no rest, this is becoming increasingly more important and that is one of the reason we’ve actually been involved in profit sharing because we would love to have it – even though we have the insurance we have to do in commercial credit analysis we’re own vetting.
We would love to have a first-class (inaudible) so the charter, they want to make sure the ships got to be presented well and not have speed claims and show up on time and the cruise are going to be paid, they won’t be arrested and this is why people come to Navios for these rates, were able to leverage going forward.
I’ll talk a little bit about the drybulk industry and then George will come up and do some financials in our subsidiaries. Many of you may know this Baltic Dry Index, if you look at the bottom; it’s a bit more clear. It’s a Dow Jones of the spot, it’s not the one your time charter rates, it’s what happens on the spot basis, which is certainly less than the one you have time charter rates today.
There is two lines quickly, the bottom line is the red line. That’s been the average of the index since it’s inception in 1985 or ‘86 I think. The yellow line it’s not a magical date, but we think there was a tipping point as Malcolm Gladwell talks about. December 2001 China joins the WTO really what happens about that point was in shipping, they were growing at such a tremendous rate about an average of what was it 10% for 20 years that the numbers in terms of what they were importing, actually became significant that they started to move the market.
And so we believe this whole process of some of these older ships having to be pushed out by the newer ships, which we’re going through now because the market is basically on its knees for the next year. We believe that it will return to higher levels and more sustainable levels going forward.
One of the reasons we show in the GDP growth by emerging economies is unlike the container industry which is linked to the GDP of the Western OECD countries because they’re more finished goods we have both right, we have the raw materials that you build cities with. For example, iron ore, you need iron ore to make iron and you put the coal and the carbon you get steel.
About 15 years ago the amount of iron ore and coal that was moved around the world was only 45% of all the bulk material, today it’s 55%. About a billion tons of each gets moved around the world these days and is about 3.5 billion move worldwide in all other material.
But you if you watch the GDP, those of us just who sit here and we see the good and bad the weeks going on and those of us who’re sitting in an Athens office in Europe. I’d like to go to another chart and a little bit detail to talk about the essence of we need to stop weighing the local information a bit more heavily.
Yes, the market is on its knees, there has been a lot of building, but that looks like it’s coming to an end. Demand is not a problem in shipping. It’s been the over supply that’s hit us and here is what I’ve like to talk about. Southern Trade, since you have already head about the Silk Routes in the old days. What’s happening here is there has been such a massive expansion in trade between China and India.
They’ve been investing overseas, but more specifically Africa and South America they need, they have a logistics problem. They have a chain problem. They need to make sure that their raw materials are coming in on a consistent basis.
So they are getting these back in return for investing in oil and steel products overseas. So trade routes are moving south and east to where they used to be. Those of us who live in the sort of old OECD countries, the Western OECD, we need to remember the growth is not right in front of us. Why is that? Look at the Chinese urbanization in steel production.
If you look at the red line on the chart on the left in the higher part, Chinese urbanization is somewhere around 51%. It’s scheduled to be about 73% by 2050. They’re moving about 15 million people a year into the cities. You heard about this has continued – it’s on going I mean there is a lot of talk about the problems on the – within China and that’s true but if you go inland more we think the GDP is certainly better. Again, don’t get me wrong, shipping is at a low point here. We’re at a seasonal and cyclical low, but the demand we think going forward is actually quite good India is right behind it.
Go over to the right there is ore projects. There is a lot more iron ore coming online to be shipped to China, which is a very good we think because we’re not price driven, we’re volume driven. And with all the stock piles they have, they have steel and iron ore, the iron ore price has been holding up around 140.
We would think, by 2013 certainly by ‘14 when you have almost a 0.5 billion more iron ore that gets to be shipped the price will go down to a 100, 110 maybe 90. That will knock down anywhere from a third to 50% of the Chinese domestic production, which is actually a very worse material than the actual that gets imported.
And again right behind China is India. Their coal imports on a yearly basis are more than Germany, France UK and Italy combined these days. They are also on an urbanization scale. Obviously it’s not linear, both China and India maybe step in some pot holes along the way, but the steel production on a per capita basis is quite low compared to the rest of the world and we think that will continue to grow going forward.
Scrapping, let’s take a step back and say that there is about 600 million dead weight of drybulk on the water these days. Look at the lower left hand of the slide about a 110 were 17%, 18% of that is over aged, which once you get over 20 years you’re in the scrapping zone. These ships are 20% smaller, 25% less fuel efficient it’s much higher fuel costs and of course with the prices of steel being high, the scrapping prices are high.
So you’ve seen last year’s – if you look at the chart on the slide on the right, it’s about $22 million the scrap this year the annualized number would be about $30 million. We need that, because you have this 110 million and needs to be sort of get out of the way, because we’ve had a tremendous amount of new-building deliveries.
There has actually been a lot of non-deliveries over the last few years, 38%, 40% last year was 30%. The early numbers this year is showing us over 50%, but let’s wait and see how March comes in and let’s do a quarter-by-quarter, but it looks like non-deliveries will be higher.
Having said that, you’ve got a lot of deliveries coming in, so the new deliveries will come in and they’ll push out the old deliveries. For example, on paper today between now and the next three years, everything that’s recorded, it’s about 180 million of new tonnage that’s about to be delivered in the next three years.
Put that against, so let’s say 180 million let’s say a third of that doesn’t deliver and we can go through the reason in the Q&A later why it won’t deliver, bring that down to 120 million. You have a 110 million that’s [overrated], I’m not saying all 110 is going to be scrapped.
But it looks like the tipping point for drybulk could be somewhat closer than people think. It certainly isn’t next week and I don’t think it’s going to be Friday, you goes on vacation, but I think sometime in 2013, maybe early 2014, you will have again Malcolm Gladwell talked about tipping points and we think there will be a tipping sooner than later.
Having said that, I’ll turn it over to George, he can through our subsidiaries and our financials.
Thank you, Ted. I don’t want to spoil the presentations of Navios Partners and Navios Acquisitions that follows. I am not going to talk a lot about these two subsidiaries. The only thing I want to say about Partners is that Navios Holdings owns about 27% including a 2% GP interest and Navios Partners provides steady cash flows through the dividends up to Navios Holdings.
In 2011, we received more than $25 million of cash dividends and the total cash dividend paid by Navios Holdings for the shareholders was less than that. It was about $24 million. So it’s all carried by the dividend we get from our subsidiary.
Navios Partners also provides good value to Navios Holdings even though this is not full reflected on our balance sheet. And finally, it also provides cash through the dropdown of vessels. In 2011, we dropped two vessels and we received $120 million in cash from Navios Partners.
In terms of Navios Acquisition, that is our tanker company, we duplicate basically their model that we have at Navios Holdings on the tanker side. So we’re looking at long-term steady cash flows for that. The subsidiary I want to talk about is Navios Logistics. This is not publicly traded yet. Our stated strategy is that at one point we want to take the company public.
Unfortunately, the IPO markets are not as healthier as we would have liked them to be yet. So we are monitoring the market and we will be very opportunistic. We don’t have any need – immediate capital needs to take the company public so we’ll be very opportunistic.
Now South American Logistics operates in three distinct but interrelated sectors. We have port terminals. We have the barge business, the river business and the cabotage business. In terms of the port terminals, we have two, one in Uruguay, which is a dry terminals, it’s the largest independent storage and transport facility in the Hidrovia region. And we also have a wet terminal up in Paraguay, which is the largest independent facility in the country.
On the river business, we operate about 300 barges and push boats. We are the second biggest fleet operating on the river. And on the cabotage business, we have six vessels operating on Argentina and cabotage is a similar type of businesses that (inaudible) in the U.S.
Again in South America, we try to duplicate the model we have for Navios Holdings. So we’re looking at long-term steady cash flows. We do business almost exclusively with international, multinational companies. So we like to take or minimize the counter-party risk in the region. Our biggest clients are ADM, Louis Dreyfus, Vale, Shell, Petrobras.
This is a region where we have seen significant growth in the past decade. Just to get a sense of the numbers, 10 years ago Uruguay did not export any soybean, last year they exported almost 2 million soybean. And this is a river system that we operate which is similar in size to the Mississippi in the U.S., but whereas in the Mississippi you have about 27,000 barges operating, in Hidrovia you have about 2000 just to get a sense of the potential for growth there.
And again, it’s a region that exports a lot of grains, mainly to China and the Europe and now there is a lot of export of iron ore in the new mines under development in the Corumba region of Brazil and the only way to bring the ore is start coming down the river and that’s where they use our facilities with the barging and the port facilities.
In terms of the campaign, it has grown significantly. Navios always have the presence in the region since the ‘50s. The port in Uruguay was setup early in the mid 50s. In 2008, we acquired a company in Argentina, which provided the business in barging and cabotage. And even since 2008 after the acquisition, we more than doubled the capacity of the new company and we see significant growth going forward.
Some of the new projects that are either underway or we had just completed. In the port in Uruguay, we are in the process of completing a new 100,000 ton silo, this will be fully operational at the end of this month. So it will be ready for the new crop season and the effect will be shown in the exhaust of 2012.
We are also in the process of installing a second conveyor belt line that will increase the capacity of the port by about 60%. And we have just renewed most of the contracts we have with our clients there, the rates at around 25% higher than the existing base rates that we have, plus about 50% higher throughput, minimum throughputs.
Now we are managed to do that because they started a lot of demand for storage capacity and there is no capacity basically. And the way we have grown the port and the rest of the business, there is at the back of contracts, so now for the new silo press, we have the demand from the clients, they came to us, they signed five year contracts, and now they doubled those contracts, we constructed the new silo.
Similarly in the port in Paraguay we just finished the construction of a new tank and we are in the process of installing and adding another two tanks. On the barge business, we took delivery of three convoys, one delivered and become operational in September of 2011 and the other two in December. Again similar to report, first we have the demand from the customers, they signed a contract, at the back of those contracts we go out and we pay the (inaudible) for the equipment.
At the same time in 2011, we renewed most of the contracts we had on the barge business and the renewals were at the rates of about 20% higher, now the effects of all these is not shown in 2011 and will be showing in the 2012 results. So despite the increase between ‘10 and ‘11 there’s already built in increase for the results of 2012 compared to ‘11.
And then talking about the results, if you look at the full year results, take out any effect of quarterly fluctuations. You will see that we had an EBITDA increase of 20%. And as I said, the build in increase we have in both the renewal of the contracts and the new equipment we have in the river, we expect the increase to be significantly higher in 2012 compared to that.
In terms of the balance sheet, we like to maintain a cash position of around $40 million, we’re comfortable, well that it’s enough to make us sleep at night and it’s also enough to take advantage of any potential CapEx that we want to do.
If you look at the debt ratios, they are extremely low, basically the only debt we have on the balance sheet right now is at $200 million bond that is traded here in Europe that was set up last year, last April. And there is also a $30 million capital lease that is few this year, but we are in discussion with the owners of the vessels to see whether we will exercise that or whether we will extend it.
Looking at the results of Navios Holdings, Ted has talked about the liquidity. We spent the last few quarters strengthening the balance sheet of the company, we paid down a little debt. But at the same time, we build up our cash position. We do that in anticipation of potential significant distressed transactions that may come our way in 2012. And you see that at the end of the year, we are sitting at over $200 million of liquidity.
Most importantly for us because again, Ted mentioned, we are very risk conscious as a company. We like to manage our risk. You see that debt maturities there is nothing significant coming up until 2012 where we are the first bond expiring. So, if the banks cannot sort out their positions, their balance sheets by 2012, I think everybody will have significant problems.
Now another way of managing our risk is looking at our breakevens and we constantly monitor our breakevens. Ted talked about the operating expenses and how low they are compared to the rest of the industry.
If you look at the top chart on the left hand side, you see that for the 77% of our available days that are fixed. Those are fixed at just under $24,000 per day. And the total cost of the whole fleet for the year is around $17,500 per day, so you see that days are at healthy spread there for us. And the total cost includes everything, capital amortization, interest on the launch, operating expenses, charter-in, and G&As everything.
And if you look at the chart at the bottom, you see that the total cost for the whole fleet is about $257 million and the revenue, the contracted revenue that we have for the 77% of the fleet is $261 million. So we have more revenue than expenses for the whole year and we still have about 3,500 open days.
Now, if you assume that 2012 maybe lower than last year. Last year, we fixed our vessels at an average of $14,000 per day, so if you assume 10%, 15% lower than that, fixing at $12,000 per day, the open days that could give us a net free cash flow position of more than $14 million at the end of the year. I don’t think there are a lot of companies in the market that can claim that, I mean if you do the analysis and we have seen the senses of companies going to Chapter 11 most of them are actually burning cash in these markets.
Now looking at the results, we published the detailed results couple of weeks ago in our 6-K. If you look at the full year results, adjusted EBITDA for the full year was almost the same as 2010 and that’s despite a significant deterioration in the market and the drop down of two vessels into Navios Partners during 2011.
The balance sheet again as I mentioned, we have spent a lot of time in the last few quarters trying to deliver the company and prepare for potential acquisitions in 2012, but you can see that we’re still sitting on strong cash position of over $175 million. And our leverage is around 50%, which is extremely low for any shipping company and especially at this low time in the market.
We always like to reward our shareholders, so we have never stopped paying our dividends even though when Navios became public in 2005, all gathered drybulk companies at the time were paying a high dividend. We always said that we’re a growth company, we don’t want to pay high dividend.
And all the high dividend yielding companies cut their dividends at the end of 2008, but as I mentioned, we never cut our dividend. We feel we have to reward our shareholders and all our stakeholders and because we have this more conservative charting strategy where we had the visibility of the cash flows, we’re confident that and that’s why we keep paying our dividend. On top of that, what I mentioned earlier, we see if as cash dividends from our subsidiaries about $33 million and we actually payout to our shareholders about $24 million.
And that concludes our presentation. We’re hoping for questions.
Can you talk a little bit about acquisition? Thank you. Acquisition potentially in 2012 will be a priority for you and you’re kind of keeping your eyes open for them. What sort of opportunities are being passed along your way? What are you seeing? I mean and what’s attracted to you and though they are passing on, what are some of the key reasons that maybe you’re passing on those?
We are one of the few companies that since 2008, since the crisis, we have done a number of distressed transactions. If you see, we’ve done a lot of them in 2009 and 2010. Last year we didn’t do anything. And this year again, we’re looking at new opportunities, ideally for us and we know it’s very difficult to find these days is to do what we did in 2009 where we bought assets at low prices, low steel value. Those were assets that came with long-term contracts.
So they were contracts that were signed pre-crisis. So we bought with post value crisis and pre-crisis cash flows, that’s the idea, which is very difficult to find these days. But values have come down a lot now, so even if you buy a vessel at desk price and you put it on the market, you can still make money.
Now what we have seen in the last two Kamsarmax’s that we bought. These are vessels that the initial ship owners basically cannot complete their new-building, so they are losing their equity and we get that as a discount from the shipyards. And there are also contracts where long way available to the initial owners and the banks are happy to pass on the launch twice at very favorable terms, because we have never and we don’t want to buy any new-building assets without financing in place, especially at these times where we see that bank financing, it’s very scarce.
And you just kind of touched on it, but with respective to some of the non-deliveries going on and not driving some of the acquisition opportunities. And then you said the year-to-date is trending a little bit over 50% or so. If you could just sort of compartmentalize some of the buckets of the key drivers of it, maybe half or so that’s related to financing point view or just delays or cancellations, if you could just put that into bucket for us, that will be great?
Ted C. Petrone
But you’re singing our song because we’ve been talking about this for a long time before many of the market where and a little bit of a history, unless if you go back to 2008, obviously at Lehman Brothers it was more like credit cards. At that point, we believed a lot of what you called Greenfield yards, which were brand new yards that will just fence around the beach and the Brownfield yard, which is expansion, we’re not going to come into play.
We were talking to research firms and they were telling us, not to worry, every ship is going to deliver, we are drilled down and our research didn’t see that. Although, this is sort of a okay type of industry because a lot of the new-buildings are not public companies to a target to see, but you can track that through engine purchases and then runners in that type of thing.
Our initial estimate was that let’s take 25% off the top of the new-buildings going forward that never existed. It was a Greenfield, Brownfield, orders that may even placed, owner’s options that they have counted because the market was either – so either research firms, well that’s going to be taken and now let’s deal with the other 75% and a lot to do with – now let’s talk about the lack of financing.
So we are also, we felt going forward and that we were looking at least 35% non-deliveries and that’s been the case certainly in dry and it’s been about that number on the west side. So, we expect that to go honorably, we really do expect it to be higher this year. We’re really surprised that it came in at 55% from the first two months, but let’s see how the quarter runs out, but we do expect it to run certainly above 40% for this year.
Good morning. Could you please explain the rationale of the costs and benefits of your ownership structure and the overall organizational structure? Thank you.
The most obvious benefit you see is in our operating expenses are 30% below the industry average is different managing 10 vessels and different managing over 100 vessels. And they are also benefits, you don’t see the full benefits there in terms of valuation as Ted mentioned, if you look at the value of the Navios Holdings share is basically the sum of the three subsidiary. So you’ll get the Navios fleet for free right now.
We believe there is a lot of value that’s not been appreciated in Navios Logistics and that’s why the intention is to take our company public at some point. We believe we will not get other value because that is loss now within the balance sheet of a shipping company. But we have the different companies that follow different strategies and we don’t want to mix them all together. So Navios Holdings is drybulk with growth. Navios Partners is drybulk dividend yielding, and Navios Acquisition is tankers, again growth in Navios South American Logistics is of course a business of its own.
Can you talk a little bit about whether slow steaming is a dynamic in the sense right now in the container shipping market that’s had an impact on capacity trends? And then separately, I think you showed a slide on operating costs for you versus the industry, maybe talk a little bit about some of that aged capacity in the tanker side, what disparity in operating costs that aged fleet versus the younger fleet? And what’s really the tipping point to see that aged capacity move offline maybe in terms of fuel costs or other cost drivers?
Ted C. Petrone
Firstly, specifically to the drybulk sector, there has been a lot more talks and has been in action in terms of slow steaming the vessels that’s been more on the tanker side. On the dry side number, our ships are leased out to other to direct them. So we’re not giving them day-to-day daily orders, expect to navigate safely and prudently but there has been some of them that have been slowed, but some have also been [spud] up because you need to get to a certain port because the coal or the iron is ready for that shipment, the steel mill needs it.
So I can tell you, it really hasn’t come into play on the dry side. When you talk about the costs escalate, those costs that you see there are for a vessel that is, I think is five to ten years old that’s the – where we get them and that’s basically our fleet. Obviously the fleet that’s out there is certainly older. When you get, your cost dramatically go up as the ship gets older, obviously this is where it comes to the scrapping question.
Every five years, a ship has to go through a special survey. It’s like an MRI. They actually check the thickness of the steel and when somebody is sitting on a ship two or three years ago that was paid for and on the cape size it was earning $30,000 to $40,000 a day while the newer ships are earning $80,000. It was easy to put in $5 million worth of new steel and new equipment that the classification side he said was required.
Today obviously it’s a much more difficult situation I don’t see an owner anywhere, ships at over 20 years of age having to put even $2 million or $3 million. They are just about earnings OpEx and the utilization rate on these ships I would say it’s close to 50%. So they are sitting and waiting between cargoes. So it’s not only the costs go up as you get older but your revenues go down.
Just a question about the cap structure, you guys have done a masterful job of financing asset depreciate pretty quickly with fixed-rate bullet bond which just means you probably have to make up the depreciation and sort of increased earnings.
So two questions, are there other boxes that look attractive today? For instance, is there is a logistics business in another part of the emerging world that you could start up and one of the other thing and obviously you mentioned taking the logistics business public, there are all kinds of things you can do to increase value that way. What other ways can you increase value and give us confidence that there is going to be additional equity value there to pay off these bonds in 2017?
Well we keep nothing, we keep adding to our fleet and if you saw our presentations in 2005 when the company became public, we have (inaudible) about five years. If you see the presentation today, it’s not much high that that. So we keep adding new capacity into the fleet and we keep we maintain the averages of the vessels around five years. We’ve already done one refinancing of the fresh bonds that we issued in 2006. We refinanced at the beginning of 2011 very successfully at lower rate.
So we like to take care of all our stakeholders both the shareholders the bond holders and everybody that is involved around Navios name. We have created a brand name that we are proud of and we want to maintain that.
Now going forward, as I said, we are now at the bottom of the market and we see a lot of distress in other companies and we believe this is the best way right now to add to the fleet at discounted prices and in going into the future when the markets recover the asset value will also recover and that will more than cover the value of the bonds that are outstanding.
What are your target IRRs when you are looking at distressed assets and if you think your stock is cheap with free options in it how do you balance buying back stock versus investing in distressed assets and then also versus paying dividends to shareholders?
The dividend of the shareholders let me answer the question backwards, the dividend to a shareholders we believe something that we have to do. We have to reward our shareholders. We never had paid a high dividend, but we maintain with, the $0.06 that we have paid since the beginning of the company, since the company became public and as a strategy we believe that the shareholders should be rewarded and as I mentioned this dividend is more than covered by the dividend that we received from our subsidiaries.
Again we were one of the few companies that do the big buy back here last year. At the end of last year, if you remember we bought we spend about $50 million buying back mandatorly compatible equity that we had issued two years before at a discount of the then share price to shipyards to buy distressed assets. It’s something we did very creatively, so we should – they spoke at the same – at that time to the shipyards at about 2.5 times higher than share price.
We did that, so that the shipyards could say phase and say that they sold the vessel flash at full price where they actually sold it by the discount. So last year because the shipyards needed cash, we went back to them and we bought that stock I referred the discount. We also bought back a small tank of convertible debt that we had again at a discount that was again issued two years before to buy two assets.
So we were using cash in all kinds of ways. We have a buyback program in progress. We bought some stock back, but we haven’t been very aggressive in doing so, because we want to maintain our cash position also. And in terms of new projects, we don’t look at IRR as much as look at the residual value of the vessels, now we are buying at a very low in the cycle.
If you look at inflation adjusted values, they are probably the lowest for the last 30 years or so. And you’re buying an asset that has 25 years of life, so there is plenty of time to recover both the value and profits from that asset.
And just going back to the cash position that you mentioned, with respect to Navios Logistics you said that $40 million was probably around the right level. Do you have something similar for just the Holdings and the drybulk engineer consolidated as a total amount of cash? They kind of feel the right comfortable level?
Well, for Holdings to be extremely conservative, we want to maintain at least $100 million of cash, so we have over that now. And as I said we are building that in anticipation of distressed transactions.
Hi, just really quickly, are there any guarantees between your company and subsidiaries or any other debt or any way there is, so they are totally independent?
We are very clear about that, we don’t want any kind of disputes in the companies.
Ted C. Petrone
I think we are out of time, I just want to give one commercial, we have sticks at the end of the table here for any one of the three company Navios group of companies is going to present today.
It’s where the presentation around the sticks.
Ted C. Petrone