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Aegan Marine Petroleum Network, Inc. (NYSE:ANW)

Q2 2012 Earnings Call

August 14, 2012, 8:30 a.m. ET

Executives

E. Nikolas Tavlarios – President, Principal Executive Officer

Peter Georgiopoulos – Chairman of the Board

Spyro Gianniotis – CFO

Analysts

Douglas Mavrinac – Jefferies & Co.

Kevin Sterling – BB&T Capital Markets

Ben Nolan – Knight Capital

Chris Snyder – Sidoti & Co.

Peter Mann - Dougherty

Peter Imber – North Point Partners

Operator

Operator

Good morning, and welcome to the Aegean Marine Petroleum Network, Incorporated second quarter 2012 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 Aegean’s website at www.ampni.com. I also want to inform everyone that today’s conference is being recorded and is now being webcast at the company’s website www.ampni.com. 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 6300415.

At this time, I would like to turn the conference over to the company. Please go ahead.

E. Nikolas Tavlarios

Thank you, and welcome to Aegean Marine’s second quarter 2012 conference call. My name is Nick Tavlarios, Aegean’s President. With me today are Peter Georgiopoulos, Chairman of Aegean, and Spyro Gianniotis, Aegean’s Chief Financial Officer.

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 by 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, the ability to manage growth adverse conditions in the marine field supply industries, and increased levels of competition.

For further information, please refer to Aegean Marine Petroleum Network, Inc’s report and filings with the Securities and Exchange Commission.

As outlined on page four of the presentation, I will provide our recent highlights. I will then review our financial results and Peter will review our company’s strategy. After that, we will open the floor to questions.

I will not turn the call over to Peter.

Peter Georgiopoulos

Thank you, Nick. During the second quarter, management continued to steadily enhance Aegean’s operational and financial performance in the challenging market environment. The cumulus success we have achieved executing our strategy outlined a year and a half ago has enable Aegean to significantly strengthen its’ work class integrated marine field logistics chain and deliver strong and sustainable results for shareholders.

We continue to markedly increase operating efficiencies to the sale of non-core assets. And maintain a diverse customer base with strong credit quality while strengthening the company’s future prospects. Specifically, we recently announced expansion plans in Barcelona providing an attractive opportunity to further leverage Aegean’s high quality of logistics infrastructure and increase utilization. With an expansive and more efficient global full service platform combined with a strong financial foundation, we remain well positioned to strengthen Aegean’s leading brand as an independent supply of marine fuel on a worldwide basis and expand the company’s future earnings power.

I will now begin my discussion on slide six with a presentation. During the three months ended June 30, 2012, sales volumes increased slightly to 2,714,176 metric tons.

While Nick will provide more details regarding our financial results, I’d like to note that based on the ongoing implementation of our strategy and the enhancing profitability combined with higher sales volumes, gross profit in Q2 was $80 million, an increase of 15% to the year earlier period. For the three months ended June 30, 2012, we reported adjusted operating income of $19.5 million and EBITDA of $21 million on an adjusted basis, which excludes a net non-cash loss from the sale of non-core vessels EBITDA for the second quarter was $25.2 million representing an increase of 34% from the year earlier period when there were no vessel sales.

The considerable growth in EBITDA demonstrates the inherent operating leverage in our integrated supply model. We increased EBITDA approximately 12% from $66 million in 2010 to $74 million in 2011. For the first half of 2012, we have already generated $43.5 million in EBITDA. And $47.7 million in adjusted EBITDA, which excludes the net non-cash effect of the sale of non-core vessels that we spoke about a moment ago. Based on management’s current projections, we intend to further expand annual EBITDA by approximately 20% to 25% over the next year.

Now further highlighting Aegean’s profitability and taking into account the non-core vessel sales, adjusted net income for the second quarter more than doubled to $6.9 million or $.15 basic and diluted earnings per share. We continue to expand our integrated marine fuel logistics chain in order to meet the strong demand for our comprehensive services and increase our long-term earnings potential.

During the second quarter, we completed our full funded new build program, a major milestone for our company. We also extended our global reach to mainland China by entering into a strategic alliance with one of the top supply companies in China.

In addition, as I said earlier, we recently announced expansion plans in Barcelona, a significant development for our company that we will discuss in more detail later on in the call.

In terms of our performance in the markets in the second quarter, sales volume increased significantly on a sequential basis due to strong overall ship traffic, which is partially attributable to the summer cruise season. As a reminder, we have not been affected by the current turmoil in Greece, which represents approximately 7% of our total sales volumes. Nor do we have any exposure to Greek financial markets.

Sales volume in the UAE also registered a positive growth rate during the second quarter with our new 465,000 cubic meter on-storage facility, which is expected to open in mid-2013 combined with the recent completion of the Abu Dhabi pipeline. All prospects in this broad market remain strong.

In Q2 Jamaica, North America, both reported higher sales volumes on a sequential basis due to an overall increase in ship traffic in these markets.

Aegean Northwest Europe or Aegean NEW formerly Verbeke exceeded our expectations in Q2. We continued to leverage Aegean’s global brand recognition and utilize our robust working capital base to gain market share in this vast market.

In Singapore, sales volumes remained relatively stable during the second quarter as we maintain our focus on executing more profitable transactions with top counter parties.

Sales volumes in Gibraltar, the Canary Islands, and Trinidad and Tobago were also relatively stable in Q2.

Second quarter sales volumes in Tanger-Med were essentially flat as compared to the previous quarter. We expect to commence operations of our new on-shore storage facility totaling 218,000 cubic meters by the end of the third quarter. With this new facility, we maintain exclusive storage rites. We expect to increase our market share going forward as this region is well positioned for future growth.

In the UK, sales volumes decreased on a sequential basis during the second quarter. We remain focused on taking advantage of the positive demand for low sulfur fuel and growing sales volumes over the long term in this strategic market.

In the Panama, we generated strong sales volumes during the second quarter after resuming operations in April. Our program operations combined with our on shore storage facilities position our company well as we expect to benefit over the long term with the current expansion of the Panama Canal.

Going forward, we believe Aegean is poised to drive future performance by leveraging its vast global network for the physical supply of marine fuel. During the month of July 2012, we generated total sales of approximately 922,000 metric tons.

I will now turn the call over to Nick.

E. Nikolas Tavlarios

Thank you, Peter. I will begin my discussion with slide number eight.

Since Peter highlighted our consolidated year-over-year results, I’ll provide sequential results for the second quarter of 2012.

Since market conditions change frequently at each port around the world, we track our business quarter-over-quarter. As such, the remainder of our financial presentation will compare results for the second quarter of 2012 to the first quarter.

In summary, our sales volumes increased 10%. Net revenue increased 5.3%. And on an adjusted base, which excludes the cost of the non-core vessels in Q2, 2012, operating income and EBITDA climbed 45.4% and 12% respectively. Depreciation totaled $5.6 million both Q2 and Q1, 2012. Net income for the second quarter increased 15.4% on an adjusted basis.

Our performance for the second quarter, 2012, reflects the cumulative efforts over the past year and have by management to strengthen the company’s operating platform combined with higher fuel sales volume. We also benefitted from lower expenses due to the sequential decrease of marine fuel.

While we were pleased by the steady improvement in the profitability of our results, we continue to maintain a cautious outlook as overall market conditions remain challenging in light of the ongoing softness in the international maritime shipping industry.

On slide number nine, we illustrate our sales volume and gross spread. As we mentioned earlier, sales volume for Q2 increased to 2,714,176 metric tons. Including our sales volume during the second quarter, Aegean has achieved a cumulative annual growth rate of approximately 27.9% since going public.

During the three months ended June 30, 2012, the gross spread per metric ton of marine fuel remained relatively stable at 26.1 per metric ton compared to 27.7 per metric ton in Q1, 2012.

On slide ten, we provide a companywide utilization, which is measured as volumes delivered per vessel per day. Gross utilization increased considerably to 289.6 metric tons to 210.4 tons per vessel per day in Q1 primarily due to higher sales volume. Adjusted utilization when it excludes both scheduled and unscheduled non-operating off-hire days increased to 526 metric tons in Q2 compared to 423.7 for the previous quarter. As a reminder, our utilization does not include Aegean NEW, which operates a spot based business focused on providing same day sales and delivery services.

We believe our significant built-in fleet delivery capacity following the recent completion of our new build program positions Aegean well to further scale the business and increase utilization as we enter new and attractive markets including Barcelona.

During the second quarter, we reported a total of 118 non-bunkering days, which we define as scheduled and unscheduled off-hire for our bunkering fleet plus days associated with the strategic positioning of our vessel. This compares to 64 days in Q1. For the current third quarter, we anticipate approximately 69 days. Of note, chartering days are not included in this estimate.

We also generated voyage revenues of $6.3 million in the second quarter versus $5.9 the previous quarter as we maintain our focus on achieving a level of consistency in our results by chartering out select bunkering tankers on shore term contracts.

Turing now to slide number 11, we illustrate the fixed cost structure associated with our sales volume. Bunkering vessel-operating expenses per metric ton sold including and excluding the consumption of marine fuel decreased in Q2 compared to the previous quarter.

In addition, general and administrative expenses excluding shared base compensation as well as storage costs decline quarter-on-quarter. The net effect was a notable increase in operating income for metric tons sold in Q2.

On slide 12, we depict historical trend in net revenue and EBITDA. Net revenues, which are calculated as total revenues less cost of goods sold and cargo transportation costs have posted accumulative annual growth rate of approximately 29.7% since the fourth quarter of 2006.

Our EBITDA margin, which is calculated as EBITDA divided by net revenues increased quarter-on-quarter on an adjusted base to 29.8% in Q2 despite a slightly lower gross spread per metric ton.

As we have stated in the past, we believe Aegean’s integrated supply model creates the opportunity to generate significant operating leverage as gross margins and sales volume improve relative to our stable fixed cost operating structure.

Turning to slide 13, we detail our working capital position. During Q2, our days payable outstanding and days receivable outstanding both quarter-on-quarter while our days inventory outstanding increased. The net effect was a decrease in our cash conversion cycled to 23.3 days.

Further, Aegean reported net cash provided by operating activities of $86.3 million for the second quarter. And generated free cash flow of approximately $69.2 million for the quarter ended June 30, 2012.

On slide 14, we highlight our strong balance sheet, a core differentiated for our company. As of June 30, 2012, our cash position increased significantly to $85.4 million. And our working capital position totaled $77.4 million.

As a reminder, in reviewing our balance sheet strengths, it is important to note that while trade finance debt at the end of Q2 totaled $463.8 million to fund working capital, this debt figure has a rapid turnover between 30 and 45 days.

In addition, our trade finance debt could be paid in full along with our entire trade payables, corporate debt, as well as a majority of our vessel debt based solely on the liquidation of our current assets. The only debt then remaining in our books will be approximately $124.7 million, which is secured by 33 vessels of $3.9 million in debt per vessel. As a result, we would have debt free assets that include 27 on bunkering vessels, four floating storage facilities, and three existing on-shore storage facilities, which operate in 19 countries worldwide. As of June 303, 2012, our fixed asset debt to adjusted EBITDA multiples was only approximately 2.4 times.

Currently, Aegean has more than $940 million in total working capital credit facilities, or $1.2 billion including the supplier credit positioning our company well to continue to manage volatile marine fuel prices. And procure large quantities of supply at a discount relative to our competitors.

The discussions with our lending group to replace our various existing facilities with one new credit facility in the amount of approximately $1 billion are progressing. The new facility, which would include the participation of nearly all our current banks is expected to be finalized during the fourth quarter of 2012. We believe our substantial financial liquidity provides Aegean with a distinct competitive advantage as we further expand our integrated marine fuel logistics chain and strengthen our industry leadership for the benefit of the company and its shareholders.

I will now turn the call over to Peter.

Peter Georgiopoulos

Thank you, Nick. I will now provide a brief overview of our company’s strategy beginning on slide 16, which illustrates a significant growth in Aegean’s global marine fuel platform.

During the second quarter, we entered into a strategic alliance that has enabled Aegean to establish initial footprint in mainland China. By partnering with CCBC, one of the top bunker supply companies in China, we have enhanced our ability to meet the needs of our customers in some of the world’s largest ports.

And further expanding our global presence, we recently announced plans to commence physical supply operations in Barcelona, Spain by the end of the first quarter of 2013. The port of Barcelona serves as a key transportation hub located along major sea born trade routes totaling approximately 10,000 transits per year. And generating more than 1 million metric tons of annual fuel sales volumes. The port is ideally located in the vast Mediterranean and also benefits from extensive cruise passenger travel. We tend to capitalize on the port’s current modernization and expansion plan, which is expected to increase capacity upon completion in 2014 by leveraging our leading reputation for operational excellence and considerable financial strength. We’re excited by Barcelona’s growth prospects. And initially plan to deploy one double hull bunker tanker to this new market.

Complementing our physical supply operations, we signed a definitive agreement with Meroil, a leading local energy company, to secure two on-shore storage facilities on exclusive basis over the long term in the port of Barcelona with an option for a third.

On slide 17, we detail the significant growth in our storage capacity. The on-shore storage facilities in Barcelona total approximately 50,000 cubic meters in capacity. The use of these facilities supplements our on-shore storage expected to be commissioned in the near future in Tanger-Med and the UAE as I mentioned earlier as well as our existing on-land storage facilities located in the UK, Las Palmas, and Panama.

Upon completion of our own operated on-shore storage facilities combined with our on-shore storage in Barcelona, we expect to have a total of approximately 1.6 million cubic meters in capacity earning our company with important strategic benefits.

Number one, it enhances our purchasing power of marine fuel, provides the ability to reduce cost of goods sold, and improve gross spread. Number two, it supports our core physical supply operations by insuring the availability of product in key markets enabling Aegean to increase its’ global market share while maintaining a conservative commodity risk approach. Number three, it enables Aegean to leverage its’ on-site blending facilities and sell all grades of fuel oil in distillates further diversifying our product mix with higher margin potential. Number four and finally, it provides the opportunity to take advantage of increased demand for on-shore storage and generate substantial income from leasing space to third parties effectively offsetting our cost of storage.

Turning to slide 18, we highlight our bunkering fleet growth. During the second quarter, we took delivery of the Symi, the final vessel under our fully funded new building program. Including the Symi, we have taken delivery of 31 double-hulled bunkering tankers since going public in 2006 enabling Aegean to significantly strengthen its leading competitive position. With one of the largest double hull bunkering delivery fleets in the world combined with our expanding global presence, we expect to increase utilization and drive future earnings growth.

As we maintain our focus our leveraging Aegean’s high quality logistics infrastructure, we remain committed to reducing operating expenses and improving our cost structure. Consistent with these critical objectives, we’ve entered into separate agreements to sell the Fost, a 1981 build storage tanker, the Vera, a 1985 build single hull, and the Hope, a 1980 build tanker. While reporting non-cash book loss in the sales of these vessels, we generated cash, combined cash proceeds totaling $7.1 million further increasing our financial liquidity. In addition, we expect to [inaudible] operating cost savings and efficiencies to the illumination of OpEx totaling approximately $5 million on an annual basis related to these vessels.

Since 2010, we have sold a total of eight vessels representing total cost savings of approximately $16 million on an annual basis. As we continue to seek opportunities to divest non-core assets and further strengthen our operational performance, I would like to note that the value of our current modern bunkering fleet alone, the fleet of 68 vessels remains well above our book value as a whole.

On slide 19, we provided a breakdown of sales by sector. Throughout the current downturn in the shipping industry, Aegean has maintained a highly disciplined approach in extending credit by focusing on a diverse group of high quality customers that encumbers all sectors within the international maritime shipping industry and leading cruise lines. By actively mitigating our exposure to any one particular customer segment combined with our sophisticated credit management systems, we remain well positioned to effectively manage counter-party risk.

Highlighting our success in this critical area, all of our customer payments remain current. As we have in the past, we will maintain our focus on executing transactions with top counter parties at the risk of sacrificing sales volumes.

Finally on slide 20, we provide an update on our marine lubricant business. We continue to achieve notable progress marketing and distributing branded re-lubricants in more than 550 ports and more than 40 countries. For the second quarter of 2012, the volume of marine lubricants sold was approximately 7,950 metric tons, which is more than doubled compared to the year earlier period. Year to date, we have already sold 13,837 metric tons of marine lubricants. Since entering this highly complementary business in 2007, we’ve experienced a [inaudible] growth rate of 55.6%. We remain committed to expanding our position as a global independent business supplier of quality marine lubricants and providing valued added solutions on behalf of our customers.

That concludes our opening remarks. I’d like to now open the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question will come from Doug Mavrinac with Jefferies and Company.

Douglas Mavrinac – Jefferies & Co.

Thank you, Operator. Good morning, guys, and congratulations on putting up your best quarter in, it looks like, two years.

E. Nikolas Tavlarios

Thank you.

Douglas Mavrinac – Jefferies & Co.

You’re welcome. Great job. My first question pertains to the key performance. The one thing that jumps out at me is how much sales volumes increased sequentially from one – I think you went from 2.4 million tons to over 2.7 million tons. Obviously, to see that kind of increase, you know, you did well kind of across the board. My question is, was there any one particular service center or geographic region that you saw a bigger increase in some of the others? So is there something geographically that you did well during the quarter or was there some sort of increase in demand from a particular customer base? Or was it just that, you know, kind of across the board you saw good momentum?

E. Nikolas Tavlarios

Doug, it’s Nick. We saw obviously new contributions for our port in Panama that was there. It was good performance in the Port of Patras, better than the prior quarter, so there was additional volume that came through there. And just in general, when you saw fuel prices come off of it, the buying patterns of the customer base improved and they [inaudible] their quantities. So all the above – all those reasons.

Douglas Mavrinac – Jefferies & Co.

Yeah, I figured it had to be something like that to see such a big increase just kind of for the total company.

Nick, you mentioned Panama. You know, what sort of contribution did Panama make during the quarter? I mean, you know, obviously going from a little bit late last year to something is great, but can you give us an idea for the contribution maybe from a sales volume standpoint or something in a way that you feel comfortable describing the contribution that Panama made to the bottom-line performance in the quarter?

E. Nikolas Tavlarios

Yeah, I would say roughly 100,000 tons came out of that market. And then there was additional tonnage over and above the prior quarter that came from Patras. [Inaudible] it was distributed over the other ports.

Douglas Mavrinac – Jefferies & Co.

Got you. Got you. And then, you know, as it relates to kind of the ramping up of some of your new investments, obviously during 2Q, you know, the alliance in China went into effect. Can you describe how that perhaps contributed to the second quarter or perhaps how it’s even ramping up during the third quarter?

K. Nikolas Tavlarios

It’s ramping up slowly but surely is the best way to describe it. You know, it’s building a nice foundation, it’s a good relationship and I think it will take some time. People have to find their comfort levels in dealing with the new relationships. So yeah, we have a better longer-term view on how successful that will be.

Douglas Mavrinac – Jefferies & Co.

Got you, got you. And just finally, getting off the volume topic, just for confirmation, in Peter’s comments, you guys said it was 922,000 tons that you’ve sold quarter to date or at least for the month of July?

Peter Georgiopoulos

That was just the month of July.

Douglas Mavrinac – Jefferies & Co.

Right, okay. Got you, perfect. All right, so then second, you know, looking at the spread, you know, to me that was very impressive given how strong it was in the context of a weakening commodity price environment. Can you explain to us basically how you guys did so well in maintaining the spread during 2Q when crude was plummeting, whereas in late 2010 you had a similar environment where commodity prices were falling and it had a more negative effect on the spread. So can you explain the differences between now and then and how you were able to maintain such a good spread even in a face of a declining commodity price environment?

Peter Georgiopoulos

I don’t know if you guys remember, we sort of, you know, back at that time when we had that experience, we sort of look inward and did a lot of work internally on our hedging, on how we’re hedging and how we’re buying fuel. I think that’s what you’re seeing over these last six quarters, is that internal work that we did, you sort of couldn’t see because it was behind the scenes, you know, of just sort of getting our systems tighter. I think that’s what you’re seeing and I think that’s what this is a result of.

E. Nikolas Tavlarios

Yeah, I mean, it’s greater stability there on how we manage our commodity picture, and again, you know, it’s just been an effective risk program. Over and above, if you look at the earnings, why they’ve been so successful I guess is, you know, we’ve been also generating operation efficiencies too at the same time. So utilization is going up, we’ve got new ports coming in play now, that being in Barcelona, another place to put our ships to work and you know – You know, all these new ports, and as we said, we’ve got Barcelona, we believe that we’ve got another announcement coming relatively soon and hopefully a second one before year end, say two more.

One thing that’s good about all these, there’s no CapEx. We’ve spend the money already. We’ve got the ships. The CapEx has already been spent so it’s just getting these ships into those ports and increasing our utilization with the same asset base.

Douglas Mavrinac – Jefferies & Co.

Got you. Got you.

Peter Georgiopoulos

As Nick was saying, we’ve gotten rid of some of the older ships, which had high depreciation, high operating costs and high repair costs, which, you know, that’s why, if you notice, our cost is coming down too, by getting rid of some of the older assets.

Douglas Mavrinac – Jefferies & Co.

No, that’s perfect. And you know, as an observer, this is the first time really where you saw a really hostile commodity price environment and the investments that you guys have made show up. That’s fantastic. That’s actually all I had, guys. Thank for you for the time.

K. Nikolas Tavlarios

Thanks, Doug.

Operator

And next we’ll hear from Kevin Sterling with BB&T Capital Markets.

Kevin Sterling – BB&T Capital Markets

Thank you, operator. Good morning, gentlemen.

E. Nikolas Tavlarios

Good morning, Kevin.

Kevin Sterling – BB&T Capital Markets

Nick, in Fujairah, you know, it looks like you’ve been scraping some older vessels, storage vessels. How many more do you have to scrap or are we near the end of that?

E. Nikolas Tavalrios

Well, Kevin, you know, scrap may not be the right word. We sold the vessels and sometimes they go to scrap, sometimes they don’t. We can envision moving two more vessels and could it be three? Yeah, it potentially could, but probably two vessels.

Kevin Sterling – BB&T Capital Markets

And are those mainly your floating storage vessels?

E. Nikolas Tavalrios

No, that would be the bunkers, there probably will be one more floating storage vessel to move along too.

Kevin Sterling – BB&T Capital Markets

Okay. And following up on Doug’s question about volumes, can you walk us through how the trend through the quarter so that they get better as the quarter progressed?

E. Nikolas Tavalrios

The quarter, I would say, Kevin, it was probably better in the second month in the quarter and the third was sort of close to that too. The first month was probably the weaker of the three, you know. So it was more middle loaded.

Kevin Sterling – BB&T Capital Markets

And let me – okay, thank you. And I think you said July, 922,000 metric tons. How is August tracking so far?

E. Nikolas Tavalrios

Well, you know, August is tracking quite similarly to July as well.

Kevin Sterling – BB&T Capital Markets

Okay. You now, you focused on utilization, it looks like you had a really nice improvement in utilization the second quarter. What was the primary driver of this improvement and how should we think about utilization going forward?

E. Nikolas Tavalrios

Well, again, utilization is just a matter of how much tonnage you’ve been able to sell and your operating days and the number of ships that you have. So we sold more volume in Q2 over Q1 and hence, we had a better utilization factor. You know, if we continue to do that in Q3, which so far looks so good, right, I would expect that to continue. And as we put more ports into our mix, and Peter mentioned before, we have – well, we have announced Barcelona and he expects that relatively soon we’ll announce another port and maybe another towards the end of the year other than the two I mentioned. You know, we’ll obviously drive our utilization even higher. Obviously, it’s good for your operating efficiency.

Kevin Sterling – BB&T Capital Markets

Right, absolutely. And it seems like, too, you had, I think, 118 non-bunkering days in the quarter because I think you’re forecasting for 69, so you have lower non-bunkering days in third quarter too. That should also help utilization. Am I thinking about that the right way?

E. Nikolas Tavalrios

Yeah, that’s correct. And obviously that’s – again, when you have an efficient business, obviously, you know, if we keep everything else the same, we hope to be better.

Kevin Sterling – BB&T Capital Markets

Right, right. Okay, and one last question here. It seems like recently you’ve been really focused on land storage. What are the advantages of on-shore storage versus say floating storage?

Peter Georgiopoulos

I mean, first of all, a lot of places are banning floating storage. That’s one of the issues.

E. Nikolas Tavlarios

From a maintenance perspective, land storage can go different – you know, it’s a little cheaper to operate.

Kevin Sterling – BB&T Capital Markets

Right, okay. Well, I appreciate your time this morning, Nick and Peter. Thanks again.

E. Nikolas Tavlarios

Thanks.

Operator

(Operator Instructions). Next, we’ll take a question from Ben Nolan with Knight Capital.

Ben Nolan – Knight Capital

Hey, guys.

E. Nikolas Tavlarios

Hi.

Ben Nolan – Knight Capital

Nice quarter, and Peter, it’s nice that they didn’t make you read off that list of all the Chinese ports this time.

Peter Georgiopoulos

Yes, I was looking for it. I was looking for it in the script but it wasn’t there. I’ve got – I don’t know if you guys could hear it, I’ve got allergies so my – I’m extra horse so it would be even funnier I think.

Ben Nolan – Knight Capital

Yeah. Well, maybe next time. I guess my first question sort of goes to sort of the utilization topic but maybe along the same lines of what Doug was asking. More specifically, you’ve got the new port in Barcelona, you’re going to put a vessel there, it sounds like maybe there’s one or two more new facilities coming online by the end of the year. How much capacity under the existing fleet that you have today, even, you know, if you were to get rid of a few more buffering tankers, how much can you sort of take out of the existing fleet of bunkering tankers to supply these new facilities without having to come to acquire new ships outside of the existing fleet? Is there ample capacity or…

E. Nikolas Tavlarios

Ample capacity. There’s ample because don’t forget, we have a bunch of ships on short-term charter. We have five ships on short-term charter to third parties, you know, that we’ve been chartering, you know, to make money on them, but it’s obviously better for us to use them in our own system so we can, you know, there’s five right there that we can use and we can ship things around from other ports if need be. So we have plenty of room to expand the fleet and you know, in some of the ports, frankly, some of the ships get pushed to higher utilization. So there’s plenty of room to increase that number without having to spend a penny for a long time.

Ben Nolan – Knight Capital

Okay. And at – I thought that might have been the case, but – so certainly through the end of the year, maybe three or four more facilities as long as they’re not massive, no problems at all I guess is sort of the…

E. Nikolas Tavlarios

Well, through the end of the year, like I said, right now we think we can open two by year end, two more on top of Barcelona. We can easily do, you know, over the next couple of years, three or four facilities and wouldn’t need any more ships.

Ben Nolan – Knight Capital

Right, perfect. And then kind of jumping over to the gross margin, or the spread, it sounds like, you know, given, again, like you talked about, the volatility in the underlying bunkering price, but yet the stability of the spread, is this fair to assume to be a relatively decent run rate, somewhere kind of in the mid-20s? Is that – do you feel like you have a good enough handle on sort of the underlying business to ballpark that as kind of a – the steady state?

E. Nikolas Tavlarios

Ben, we’d like to think so. I mean, the interesting thing about gross spread is it’s, again, our figure represents our operations from around the world on all our markets. It’s not really – we don’t have the same spread in each and every market. We don’t have the same spread in each and every product that we sell. So what you see – that figure is just basically a tabulation that you take your cost of goods and you compare it against what your sales were and you divide over your tonnage and we come up with that figure. So yeah, we have a generalized – again, that’s definitely a target and we often try to outperform that target and we have been doing so. So yeah, we’d like to think that that will be it.

Ben Nolan – Knight Capital

Okay. That’s helpful

Spryo Gianniotis

This is Spryo. I mean, also we set targets. In specific markets, we set the target and we like to make specific split. So this also has to do with volumes. I mean, if we don’t increase volumes, a part of that is [inaudible] has to do also with the margin we want to generate.

Ben Nolan – Knight Capital

Right, okay. And actually, Spryo, since you’re there, maybe my – this next question is more directed at you. You talked about the possibility of doing a billion dollar credit facility, sort of an all-encompassing sort of a deal and hopefully getting that done by the end of the year at some point. Is that just sort of a working capital facility, you know, backed by inventories and receivables and that kind of thing and obviously, the one facility that comes due in January that would probably be involved in that, or are we talking about something that would just be all the debt including some of the first lien…

E. Nikolas Tavlarios

No, no, that’s just a working capital facility.

Ben Nolan – Knight Capital

Okay.

Spryo Gianniotis

It will combine the working capital [inaudible] the values, the ones we have now, we’ll combine them into one.

Ben Nolan – Knight Capital

Okay, including the ones that come due in January?

Spryo Gianniotis

Right, including those, yes, yes.

Ben Nolan – Knight Capital

Right. Okay. And so obviously that would eliminate a lot of the short-term or current maturities of long-term debt…

Spryo Gianniotis

Mostly.

Ben Nolan – Knight Capital

…by doing so. Yeah. Okay. And then last question, this is more just sort of something that I was – didn’t expect to see. It’s not that big of a deal but there’s the income attributable to minority interests, or non-controlling interest. I hadn’t really seen that before in the income statement. Any color as to what that is from and you know, how to think about it going forward?

Syryo Gianniotis

This has to do [inaudible]. As you know, we have the start up. We have the bunkering opportunities as well. On the [inaudible], we have a local partner and that’s what this has to do with.

Ben Nolan – Knight Capital

Okay, I see. So to the extent that Panama grows, that number should get a little larger or you know, but it probably is not going to be dramatically different from where it is now, is that correct?

Spryo Gianniotis

Yes.

Ben Nolan – Knight Capital

Okay. All right, that does it for me. Nice quarter, guys. Thanks a lot.

E. Nikolas Tavlarios

Thank you, Ben.

Operator

We’ll now hear from Chris Snyder with Sidoti and Company.

Chris Snyder – Sidoti & Co.

Good morning, guys. Congratulations on the quarter and a really great job.

E. Nikolas Tavlarios

Thanks, good morning.

Chris Snyder – Sidoti & Co.

So I know that Doug had asked earlier about kind of volume and I know you said quarter over quarter they’re up because like Panama, the addition of Panama. But year over year, is the increase there mostly driven by U.S. and Jamaica, the higher traffic flowing through those ports?

N. Nikolas Tavlarios

No, no. It’s – again, it’s contribution from the new ports that didn’t exist before, that’s what your difference would be. So we have Tenerife port in there, that wasn’t there a year ago. You now have Panama there that wasn’t there a year ago, so that would be the year-over-year increase.

Chris Snyder – Sidoti & Co.

Okay. So the gross spread is still strong. I think it was at like 26.1, but it was obviously down from the first quarter. Is that just the result of the oil prices decreasing during the quarter after the increase in the first quarter?

E. Nikolas Tavlarios

I mean, you know, Chris, what we’ve said in the past is we don’t – we don’t really get a lot of impact by the value of the commodity, you know, it doesn’t have a big impact, but there’s a small amount and so, sure, that can weigh in. It’s really kind of hard to gage that. Again, as I said, we’re tabulating all our sales of all our products from all our ports around the world and our performance. So it’s possible that, again, we don’t hold inventory for a very long time. Our inventory has a sort of locked-in price. So it’s hard for us to really get either a benefit or an adverse impact for the commodity. But could it get finally in there from what’s on a ship? Yeah, maybe a bit. So you know, I’ll say part of it could be that.

Chris Snyder – Sidoti & Co.

Okay, yeah. The income tax, the rate on the income tax was the highest it’s been in a pretty long time. What was driving that being higher? Obviously, the increased profitability, but was there something else there and kind of how can we look at that going forward?

E. Nikolas Tavlarios

We don’t pay tax but two – maybe – no, excuse me, three locations around the world. So if that particular location happen to – and again, we have a pretty good tax mitigation strategy but if that particular location happened to have a good performance, it will have higher tax, okay?

Chris Snyder – Sidoti & Co.

Okay.

E. Nikolas Tavlarios

And that’s really it. So it’s not – I wouldn’t sort of peg it as your rate going forward.

Chris Snyder – Sidoti & Co.

Right, okay. My last question is, the strategic alliance in China, is that like we’ll be starting immediately? Do you guys have any idea on how much volume you’re going to be expecting from there?

E. Nikols Tavlarios

Well, China’s in an enormous market and we, obviously the potential that exists on what goes on with the ship traffic in China is quite large. At the same time, there’s a very large Chinese [inaudible] fleet which we can serve around the world in our business. That volume falls within the volume we report.

We expect – this is something that will mature and be done over a year or two years, and it’s, again, it’s going nicely, but it’s a little slower, that’s all. Establishing new buying patterns.

Chris Snyder – Sidoti & Co.

Okay, well, thanks for the insight. Thanks for taking my calls and congratulations on the great quarter again.

E. Nikolas Tavlarios

Thank you.

Operator

We’ll now hear from Peter Mann with Dougherty.

Peter Mann - Dougherty

Good morning, guys. Great quarter. I have a few follow-up questions, the first being, I think you guys discussed expecting EBITDA growth of 20 to 25% this upcoming year and I believe that you meant 2013. I think previously you had noted that you expected that kind of rate for the next maybe three or so years. Is it a changing of your tune or is it simply just that you guys have focused on 2013 opposed to a three-year time horizon?

E. Nikolas Tavlarios

No, I think maybe we just said it that way, but we still have the same – there’s no change, we believe that we’ll do that over the next few years.

Peter Georgiopoulos

Yeah, we actually made that comment back in 2010 and as we’ve called out earlier on, that’s exactly what’s been happening. So we’ve…

E. Nikolas Tavlarios

Yeah, if we just said 2013 on the call, it was just, you know, wasn’t meant as any kind of signal that we don’t believe the outer years will do the same.

Peter Mann - Dougherty

Okay, perfect. And then I just wanted to kind of get an update on your UA storage facility; one, where are we in terms of starting that – starting up the operations at that facility? And two, what kind of debt do we still have to pay on that?

E. Nikolas Tavlarios

Nothing’s changed there. We’re looking to start operating that facility in mid-2013. The debt picture will be around the $70 million level on a fixed asset base.

Peter Mann - Dougherty

Okay, so – but you have yet to pay 70 million, is that correct?

E. Nikolas Tavlarios

No, no. We – well, we’ve been paying the progress payments so far with cash.

Peter Mann - Dougherty

Okay.

E. Nikolas Tavlarios

From operating income, yeah.

Peter Mann - Dougherty

Got it. Okay. And then help me understand the Tanger-Med storage facility, what I’m trying to understand is exactly how that’s really going to impact your business? I mean, obviously I think you’re going to be able to utilize the facility well enough to offset much of the cost, your costs of the facility, but what are your expectations in terms of like driving additional volume or really more efficiently helping your operations there run more efficiently? What are your expectations for that?

E. Nikolas Tavlarios

Well, for starters, when we expect to pull our floating storage vessel out of that market, so let’s just say there’ll be some new efficiency that will come out of not having the land storage. Excuse me, the floating storage.

The second thing is, the port itself of Tanger-Med is going through its construction and they’re actually going to their last stage right now. So it’s going through its own expansion. That whole basin of Gibraltar, [inaudible], Tanger-Med and some of the other markets total roughly 7 million tons, almost 8 million tons of marine fuel sales. So it’s a big market. Now that we’ll have that storage there, we’ll be able to offer various products that maybe we couldn’t do before. So it puts us in a position to be competitive, to again, offer a variety of products and also to pick up new volume that we didn’t have as the port itself expense. So it’s going to come from a bunch of those areas that I pointed out.

Peter Mann - Dougherty

Got it. So that will really help your Gibraltar market since that’s the one – you just have the floating facility there currently?

E. Nikolas Tavlarios

Right, it will help Gibraltar and also help Tanger-Med itself, yes.

Peter Mann - Dougherty

Okay. And then final question for me is, low-sulfur fuel regulations. I just wanted to get you guy’s view on how that’s changed buying patterns and things like that and whether or not you’ve really noticed an impact this far in the markets as those regulations have become effective?

E. Nikolas Tavlarios

Low-sulfur fuel demand in other ports that don’t necessarily get impacted by the regulation, you have, again, a customer maybe leaving a particular port knowing that they’re going to reach one other, they start asking for low-sulfur fuel. So again, our infrastructure is set up to be able to deliver low-sulfur fuel and we have the working capital to buy it and you know, again, we have the customer base that’s looking for it. So again, we’re configured to deal with this and we think other competitors may not be. So this is a very, very good driver for us as this regulation unfolds.

Peter Mann - Dougherty

Okay, great. Thanks a lot, guys.

E. Nikolas Tavlarios

Our please.

Operator

And now we’ll hear from Peter Imber with North Point Partners.

Peter Imber – North Point Partners

Hi, guys. Great quarter.

E. Nikolas Tavlarios

Thanks, good morning, Peter.

Peter Imber – North Point Partners

Two questions. One is anecdotally, or subjectively, can you give us a little more color on the balance between demand and credit quality? What are you seeing? Is demand increasing and credit quality staying the same? Is it deteriorating? I think it’s great to put up a quarter like this in what I would think is getting to be a tough environment in terms of credit quality for the industry.

E. Nikolas Tavlarios

We’re very conservative on credit so we think for the customers that we have that we’ve been dealing with, there’s plenty of demand and so we’re not concerned that we’re going to have to go down in credit quality to meet our numbers. I don’t know if that helps answer your question.

Peter Imber – North Point Partners

That does. I think I was even looking at – and then I assumed, I guess part of what I’m asking is how much is on the – you know, are you leaving on the table? I mean, is there a ton of demand out there?

E. Nikolas Tavlarios

We’re definitely leaving some on the table. I’m not saying we’re leaving a ton, but we definitely are not taking because of the credit quality. We did 2.7 million tons in the quarter. We easily could have broken the 3 million ton level, well over that.

Peter Imber – North Point Partners

Got it.

E. Nikolas Tavlarios

But we make credit decisions along the way. And that’s not to say that that extra 10 to 15% isn’t going to pay, it is going to pay, but you know, we like to sleep at night. We have enough headaches in our life. And we’ve had this going on for some time now. This isn’t a new thing. It’s just been a company policy of being on the conservative side on credit.

Peter Imber – North Point Partners

Right. And I think it’s obviously working and I was just looking for a magnitude and that’s helpful. [Inaudible] solid footing, not that you weren’t before, but you’ve got a lot of momentum, you know, the balance sheet looks better every quarter. At some point, the question comes up, what do you do with the cash, when do we start having that conversation?

E. Nikolas Tavlarios

I think we start having that conversation next year.

Peter Imber – North Point Partners

Okay. As I said, we’ve got a couple more expansion plans that don’t require a lot of cash, that will just add to it. So you know, we want to get a couple of these things under our belt and we want to get this facility in Fujairah, you know, finished and then I think we start talking about that stuff.

Peter Imber – North Point Partners

Great. Thank you, guys.

Operator

And at this time, there are no more questions. This done conclude the Aegean Marine Petroleum Network, Incorporated second quarter, 2012 conference call. You may now disconnect.

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