Navios Maritime Holdings Inc. (NYSE:NM)
Q2 2012 Earnings Call
August 23, 2012 8:30 AM ET
Angeliki Frangou – Chairman and CEO
Ted Petrone – President
Ioannis Karyotis – SVP, Strategic Planning
George Achniotis – CFO
Chris Wetherbee – Citi
Natasha Boyden – Global Hunter
Good morning and thank you for joining us for this morning’s Navios Maritime Holdings Second Quarter and First Half 2012 Earnings Conference Call. With us today from the company, are Chairman and CEO Ms. Angeliki Frangou; President Mr. Ted Petrone; SVP of Strategic Planning Mr. Ioannis Karyotis; and Chief Financial Officer Mr. George Achniotis.
As a reminder, this conference call is also being webcast. To access the webcast, please go to the Investors Section of Navios Holdings website, www.navios.com. The copy of the presentation referenced in today’s earnings call can also be found there.
Before I review the structure of this morning’s call, I’d like to read the Safe Harbor statement. This conference call could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Holdings. Such Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Holdings management and are subject to risks and uncertainties which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in Navios Holdings filings with the Securities and Exchange Commission. The information set forth in this conference call should be understood in light of such risks. Navios Holdings does not assume any obligation to update the information contained in the call. Thank you.
The agenda for today’s call is as follows. First, Ms. Frangou will offer opening remarks; next Mr. Petrone will provide an operational update and an industry overview, Mr. Karyotis will go through an overview including recent financials for Navios South American Logistics, then Mr. Desypris will review Navios Holdings financial results. Lastly, we’ll open the call to take your questions.
I’d now like to turn the call over to Navios Holdings Chairman and CEO, Ms. Angeliki Frangou. Angeliki?
Thank you, Laura, and good morning to all of you who’ve joined us on today’s call. We are pleased to report our results for the second quarter of 2012. We had a solid quarter in a market environment that continues to be challenging. Our dual focus during this difficult time has been undoubtedly control. The efficiency of our global fleet in maintaining a solid balance sheet. As a result, we can continue to return capital to our shareholders through dividend payment and consequently declare efficient dividend for the second quarter of 2012 to shareholders of record on September 18th.
We cannot control the market, but we can in the meantime pay close attention to company specific matters. The failure to pay a very good attention to this matter has put some of our peers in a precarious position. As they are seeking significant liquidity, when capital markets are only open selectively and financial institutions are reducing shipping industry exposure and dollar denominated loan portfolios.
Slide two shows our guidance structure. The value of Navios Holdings play mainly derives from four areas. The drybulk fleet within Navios Holdings and three principal operating subsidiaries. The whole continues to be valued at a less than some of its blocks.
As you can see the value of Navios Holdings interesting to publicly at least its subsidiaries is $2.80 per share. The market values the remaining two businesses at only $0.87 in total. Navios Holdings drybulk fleet consists of 50 vessels in the water. This fleet has long-term charters with creditworthy counterparties that insured with AA rated insurance company in the EU.
Our charted part covers is unique and should continue to provide great comfort, our total stakeholders at us it has done the same historically. The value of Navios Logistics is growing. We have a strong management team addressing the market opportunity. Together we have around four Navios Logistics into a key provider in the Hidrovia Region of South America. Ioannis Karyotis will address Navios Logistics results in further detail later.
Slide 3 shows our strong competitive positioning. As I mentioned a minute ago, we remain in a difficult drybulk market. However, we have focused on what we can control, which is the expense side of our business. We continue to raise the bar on our operational performance and reducing our operating cost. Today, our operating cost which is always favorable when compared to our peers is about 33% below the industry average. At the same time, our fleet utilization is close to 100% over the last three years.
We are also vigilant about our balance sheet, which we believe is one of the best in our industry. Our net debt to capitalization is 50%. This reflects in 1 percentage point reduction in the last six months since the end of 2011. The strength of our balance sheet can also be viewed based, the options of raw material debt maturities until 2017 or CapEx funding requirement. Finally, our balance sheet strength can be seen based on the industry’s position in the market cycle, which we believe is near below.
During the quarter, Navios also accessed debt capital markets but issuing $88 million of add-ons, 8 7/8 notes due in 2017. The add-on notes issued at par eliminated the refinancing risk of $28.5 million otherwise coming due in 2015 also the notes replace bank amortizing debt and that reduced our cash flow breakeven. Not to be ignored, also is the elimination of an LTV covenants, which as we have seen has created instability in other business, as asset values decline in this part of the cycle.
Over the past few years, Navios devoted immense time and effort in developing its organization in relationships with the financing community. It is this good work today that offers Navios continued access to capital at favorable terms and we believe that Navios has established a standard within the industry.
As I mentioned, we continue to deleverage when it make sense to do so. We sold Buena Ventura to Navios partner for $67.5 million during the quarter for which process we repaid $26.8 million of debt and have another $41 million available on our balance sheet. In July, we also repaid $20 million of promissory note that came due.
In an environment, where the current Capesize spot rate is well below operating expense level and appear struggle just to cover cost, let alone return in profit, we are well positioned to write-out the store. Our current breakeven cost represents a 17% reduction from year-end 2010 and a 10% reduction from year-end 2011. We have been able to achieve this significant cost savings over the year, as a result of our competitive operational, technical and financial management abilities.
As you can see from the chart on the bottom of slide three, even with almost 944 days open for the year, Navios generated substantial free cash of about $45 million. Even if the stock markets were to completely dry up and we were not to charter a single vessel for the rest of the year, we will generate substantial free cash flow.
Slide four shows our liquidity, of about $249 million of which $179 million in cash, striving towards Navios goal of building a solid capital structure, we have delivered our balance sheet prudently. At this point in the cycle, where asset filers are separate, our leverage is to get Navios devotion to form a well-capitalized in the price with a disciplined capital structure.
Our debt is long-term stable with no material maturities until 2017. Bonds represent about 70% of our outstanding debt with no amortization until maturity. These bonds have favorable covenants, allowance operational and financial flexibility in this kind of market and we continue to have access to the debt market while the commercial lending market tightens.
Slide four, that’s for Navios substantial cash flow generating capabilities from its fixed revenue and low operating cost. About 93.5% of Navios revenues have been fixed for 2012 at about $20,870 per day. In other words, even if the company does not find charters for the open days, which is more than unlikely, we will still earn about $45 million in free cash flow from the fixed base; our fully loaded cost is only $15,950 per day per vessel.
In addition, as you can see from the chart, $1,000 per day we see from each open day Navios would earn almost $1 million in addition on the revenue. Thus assuming our chartering activities generate an average of $10,000 per day for the rest of the year, which is reasonable in this market, we will earn another $9.4 million. Cash generation will therefore total to about $54.4 million. Cost includes everything. All operating expenses, dry dock expense, the chartering expense, on our chartering fleet, general and administrative expense including credit before insurance, as well as interest expense and capital repayment.
And now, I would like to turn the call over to Mr. Ted Petrone, Navois’ President, who will take you through Navios operation and our industry perspective. Ted?
Thank you, Angeliki, and good morning all. Please turn to slide six. Our long-term core fleet consists of 54 vessels totaling 5.5 million deadweight. We have 50 vessels in the water with an average age of 5.3 years, which is less than half of the industry average of about 11 years.
Please turn to slide seven. Navios’ average charter out rate for its core fleet is $20,870 a day for 2012, which increases through 2014. 93.4% of Navois’ fleet is chartered out for 2012, 21.3% for 2013, 24.4% for 2014. In total, we have contracted revenue of over $400 million through the end of 2014. We have insured our charters to an EU double AA rated insurance company.
Please turn to slide eight. We enjoy vessel operating expenses about one-third below the industry average in all asset classes. Navios’ current daily OpEx is $4,284 a day. This $2,135 daily savings per vessel in operating expenses aggregates to over $23 million in annual savings which goes directly to our bottom line. We aim to continue leveraging our economies of scale and operating proficiencies advantages. We also benefit from technology management services provided to our affiliates.
Please turn to slide nine. The BDI rose in the second question and averaged $1,024. Over the first half average of 2012, of $943 was the lowest since 1999. Panamaxs and Supermaxs both showed higher earnings in Q2 than Q1 while Cape earnings in Q2 slipped below Q1 levels. Adverse weather and record quarterly additions to the fleet were among the reasons for Cape’s remaining the lowest earnings asset class and our shipments from Australia and Brazil returned to normal seasonal levels at the end of Q2.
Grain and coal shipments held steady which led to a relative stability in Panamax and Supermax rates. Subsequent to Q2, lower rates for all sizes has drawn the BDI down from $1,162 on July 9, with 31 consecutive days to $709 on August 21, its lowest level since the first week in February declining 56% from its peak at year opening of $1,624.
The BDI close up slightly yesterday to end its long decline but sentiment remains weak. Weakening worldwide steel production on the back of falling steel prices along with reduction in U.S. grain exports due to severe drought and rising vessel supply provide little confidence for rate improvement in the near term. However lower charter rates should induce more scrapping which is expected to pick-up in the autumn after the monsoon season ends in South Asia.
Please turn to slide 10, growth GDP continues to be driven by developing economies. Developing economies now contribute a higher percentage of total world growth in the developed economies, representing over half of the global consumption of most commodities.
The IMF expected this trend to continue for the foreseeable future. The IMF recently lowered its forecast for world growth to 3.5% for 2012 and 3.9% for 2013. Emerging economies projected to grow at 5.6% in 2012 and 5.9% in 2013. IMF lowered its forecast due to the continuing Euro crisis and a slowdown in China, India and Brazil. The IMF now expects the Chinese economy to grow at 8% in 2012 and 8.5% in 2013. India’s economic growth is expected to be at 6.1% for 2012 and 6.5% for 2013.
Please turn to slide 11. We continue the urbanization and industrialization. China and India continue to invest heavily in infrastructure throughout Latin America, Africa and the Middle East. Both countries are securing supplies lines for natural resources with these infrastructure investments to ensure continued growth. As a larger portion of world trade is occurring between emerging and developing economies, trade patterns are shifting eastward and southward.
Turning to slide 12. Currently just over 50% of the world population resides in urban areas. As figures expected to grow to 67% by 2050, adding approximately 2.8 billion urban residents, with large portion of urbanization occurring in the Asia-Pacific region. As you could see on the right and graph, growth and income supports increased metal demand. The rising global incomes and the shift in the global economy towards Asia should support world growth trade by increasing movements of raw materials as shipping patterns adjust to the new global market.
Moving to slide 13. Development and urbanization of the western and central parts of China will contribute significantly to the steel consumption in 2012 and onwards. Infrastructure and housing construction, consumer spending growth will underpin development in 2012 and beyond. Crude steel production in China through July 2012 418 million metric tons or about 1% more than the same period last year. Even with supply disruptions in Brazil and Australia, China imported 425 million metric tons of iron ore through July about 9% more than the same period last year.
China also imported 64.2 million tons from minor exporters in the first five months of 2012, up 17% over the same period last year. Future growth in worldwide iron ore imports will be constrained until new iron ore mines and expansion projects become operational. We’re trying to re-operate to fix apparent per capita steel use for selected countries and shows that both Brazil and China are still in their expansionary stage of steel consumption.
Turn to the slide 14. India has taken initial steps in industrialization and urbanization. As you can see on the lower right-hand chart, India is expected to increase its urban population to almost 600 million people by 2030. That means India will have to build about 1.5 New York Cities per annum during that time.
Keep pace with the expanding steel and electricity production, India coal imports shown on the left hand chart have increased to the 25% compound annual growth since 2006. According to the Central Electricity Authority of India, substantial demand will continue at 65% of current plan new power generations will be coal-fired. India currently generating 72% of its power using coal, as a comparison the U.S. uses coal to generate about 40% of its electricity.
Please turn to slide 15, low freight rates, expensive fuel and high ships scrap prices led to surge in scrapping in 2011 and so far this year. Scrapping rights for older, less fuel efficient vessels have continued to accelerate this year. Through August 20th about 19.7 million deadweight, has been scrapped, this represents an annual scrapping rate of over $31 million deadweight ton or close to 5% of the fleet.
The current rate environment should keep scrapping levels high as over 8% of the fleet is 25 years of age or older and about 14% of the fleet is over 20 years old providing about 93 million deadweight of scrapping potential. Of note is that the current 2012 scrapping totals include 14 ships that were between 15 and 20 years old as well as – one that was 15 years old and vessel prices appear – depend on ongoing steel prices and not to supply vessels.
Moving to slide 16, non-deliveries continue to be a substantial part of the drybulk order book. Through July non-deliveries amounted to 26%, as newbuilding deliveries were 67.0 million deadweight against an expected 92.1 million deadweight and output revision of about 6 million deadweight tons to June deliveries appears to have been caused by yards pushing to provide newbuildings before new paint coating regulations came into effect on July 1. Later this and this year is expected to be about the same as 2011 the net deadweight growth should be lower after scrapping is taken into account. The order book declines dramatically in 2013 and beyond.
Please turn to slide 17. We currently own 25.2% of Navios Partners including a 2% GP interest. Navios Partners operates a fleet of 21 vessels equaling 2.3 million deadweight with an average age of 5.6 years. Since its inception in 2007 Navios Partners fleet has grown by 261%.
Please turn to slide 18, Navios Partners provides significant cash flow to Navios Holdings. Since it started operations, Navios Partners has grown distributions by almost 27% and we received about $92 million in distributions from Partners. In 2011, we received $25.6 million in distributions. This is more than 100% of Holdings expected annual dividend. Including Navios Acquisitions dividend, Navios Holdings receives about a 137% of its expected annual dividend from its ownership in these two companies.
Please turn to slide 19. We have an approximate 54% economic interest in Navios Maritime Acquisition. Navios Acquisition’s current fleet consists of 29 tanker vessels, totaling 3.3 million deadweight. Navios Acquisition currently has 16 vessels in the water with an average age of 5.9 years. We anticipate Navios Acquisitions newbuild program for product tankers positions them to take advantage of favorable long-term industry dynamics.
Please turn to slide 20; Navios Acquisition is summarized on slide 20. Navios Acquisitions has a large, modern and diversified tanker fleet worth more than $1 billion. Navios Acquisition has long-term contracted revenue and its well above the company’s low operating breakeven.
This cash flow can sustain Navios Acquisition for a long period in distressed market conditions. Navios Acquisition also has profit sharing arrangements in many contracts. These agreements limit the downside risk to the base rate and allows Navios Acquisition to enjoy the upside volatility. For example in 2012 profit sharing has been triggered for all asset classes and year-to-date totals approximately $1.2 million.
This concludes my presentation. I would now like to turn the call over to Ioannis Karyotis, Senior VP of Strategic Planning. Ioannis?
Thank you, Ted. As you can see on slides 21 and 22, Navios Holdings own 63.8% stake in Navios South American Logistics. Navios Logistics has three segments, all enjoying significant growth prospects. We’re seeing – we seek long-term revenue from a diverse portfolio of high quality clients. Our strategic relationships, investments and the overall favorable export market fundamentals position us well.
Slide 23, sets forth our recent developments. Our new 100,000 metric tons silo in Uruguay is now operating and we have contracted out 100% of its capacity to major global and regional commodity houses. Overall, we have agreed to contract 94% of the port’s storage capacity for five years at increased rates, annually adjusted for inflation and with higher minimum guaranteed rotations compared to previous contracts. The effects of these renewals are already evident in our improved results.
In addition, we are adding a second conveyor belt to effectively double our vessel loading capacity. The construction of the new conveyor belt is expected to be completed in the first half of 2013. We are also adding capacity to our Liquid Port Terminal in Paraguay. A new 5,000 cubic meter tank is operating as of August 2012 while a new 2,100 cubic meter tank is expected to be completed in September 2012 increasing the liquid port’s capacity to 45,700 cubic meters.
In the second quarter of 2012, we started the construction of four tank barges each with 3,400 cubic meters capacity. The total investment will be $7.6 million or $1.9 million per barge. The barges are scheduled to be delivered gradually September 2012 through June 2013. These barges replace similar barges were previously charted in and so will result in annual savings of about $1.8 million.
Please turn to slide 24 to discuss the results of the second quarter and the first half of 2012. We had a strong second quarter achieving significant EBITDA growth in all our business segments. Overall, revenue increased by 34% compared to the same period last year to 73.3 million. EBITDA for Q2, 2012 was 15.4 million, 4% to 6% higher compared to Q2 of 2011.
Looking in the segments, you can see that port terminals increased revenue by 67% because of higher volumes and tariffs in both our dry and liquid ports. The segment EBITDA increased by 75% to 6.4 million. Revenue in the barge business increased 27% and EBITDA expanded 78% to 3.7 million from 2.1 million in the second quarter of 2011 mainly due to the expansion of barge fleet with three additional iron ore conveyers.
Capitals business reported 4% increase in revenue while EBITDA increased 11% to 5.3 million from 4.8 million in the second quarter of 2011. Interest expense and finance cost net were 5.1 million in both the second quarter of 2012 and 2011. Depreciation and amortization expenses increased to 6.1 million as compared to 5 million in Q2 of 2011. Our net result for the quarter was the net income of 2.4 million compared to a net loss of 0.7 million in the respected period last year.
Turning to the six month period ended June 30, 2012, revenue increased by 25% compared to the first half of 2011 to 123.4 million. EBITDA grew 20% to 24.1 million. Interest expense and finance cost net were 10.1 million compared to 6.2 million in the first half of 2011 due to the interest expenses generated by the senior notes issued in 2011.
Depreciation and amortization expenses increased to $12.9 million from $11.1 million in the first half of 2011. As a result, we were effectively breakeven for the period at the net income level.
Please turn to slide 25. Slide 25 provides selected balance sheet data as of June 30, 2012. Navios Logistics has a strong balance sheet. At the end of Q2, cash and cash equivalents were $44 million compared to $40.5 million at the end of 2011. In May 2012, we extended our capital leases for four years and the rate obligation has been reclassified as long-term liability. Net debt to book capitalization was 33% down from 35% at the end of 2011 and still conservative overall.
Now, I would like to turn the call over to George Achniotis, Navios Holdings’ Chief Financial Officer. George?
Thank you, Ioanni. Please turn to slide 26 for a review of the Navios Holdings earnings highlights.
Q2 was another good quarter with strong EBITDA generation, revenues increasing by 4% to approximately $172 million, compared to $165 million in 2011. Revenue from drybulk operations reduced to approximately $99 million from $111 million in the same period in 2011.
The decrease is caused mostly by a reduction in the daily TC rate achieved in the quarter from $23,608 in Q2 2011 to $19,821 in Q2 2012. I would like to note that the $19,821 daily rate achieved in the quarter is more than double the market average of the period which was under $9,000 per day. This is a reflection of our prudent long-term chartering strategy. The decrease in TC was mitigated somewhat by 6.1% increase in available days of the fleet due to new vessel deliveries during the year.
As Ioannis mentioned a moment ago, revenue from the Logistics business also increased, which counter the reduced drybulk activities. Revenue for the first half of 2012 increased by $2 million to $324 million compared to $322 million in 2011. The trend for the first six-month period was the same as for the quarter with decreased revenue from drybulk vessel operations and increased revenue from the Logistics business.
EBITDA for the quarter was strong at $61.1 million. This was affected by a $300,000 gain from the sale of one vessel to Navios Partners in June. Excluding the gain, adjusted EBITDA was $60.8 million compared to $64.9 million in the second quarter of 2011. The decrease was primarily due to the lower TC rate achieved in the quarter compared to last year. The decrease was mitigated by a significant increase in the EBITDA contribution from Navios Logistics. Adjusted EBITDA for the first half of 2012 was $123.3 million compared to $132.4 million in the first half of 2011. Similar to the quarterly results, the decrease was mainly due to a reduction in the TC rate achieved in the period.
Net income for the second quarter of 2012 was also adjusted by $300,000 from the sale of one vessel to Navios Partners. Adjusted net income for the quarter was $5 million compared to $12.1 million in 2011. The reduction is mainly due to the reduction in EBITDA and higher depreciation and amortization in Navios Logistics due to the increase in the ongoing voice.
Adjusted net income for the first half of 2012 was $14.4 million compared to $31.9 million in 2011. In addition to the reduction in EBITDA and higher depreciation and amortization in Navios Logistics, net income in the first half was also affected by higher interest expense of Navios Logistics following the issuance of its senior notes in April 2011.
Please turn now to slide 27. We continue to strengthen our balance sheet and de-lever the company. At June 30, 2012, we had $178.6 million in cash compared to $177.5 million at December 31, 2011. The current portion of long term debt reduced significantly from $70.1 million at year-end 2011 to $56.3 million at the end of June 2012.
This was further reduced in July after the repayment of a $20 million promissory note and the refinancing of bank finance with $88 million add-on 8 and 7/8% non-amortizing bond. Following these repayments, we currently have very low debt payments for the next 12 months of approximately $22 million and no CapEx commitments.
The long-term portion of our bank debt also reduced to $412 million compared to $438 million at the end of December. As Angeliki already mentioned, we don’t have any significant debt maturities until 2017 and we do not have any breaches on our long covenants. The net debt-to-book capitalization ratio also reduced from 51% to 50% since the end of 2011.
This is a very low ratio for a shipping company operating in a capital intense industry. It’s particularly strong as we are at a very low point in the cycle. Furthermore, I would like to remind you that the full market value of our investments in our affiliated companies is not reflected on our balance sheet. If these investments were valued at the current market values, our leverage ratios would be even lower.
Turning to slide 28, as Angeliki already mentioned, the company continues to provide a return to its shareholders through a dividend. We declared a dividend of $0.06 per share to common shareholders as of September 18 to be paid on October 4, 2012. I would like to remind you that the total cash dividend inflows from the two investments in Navios Partners and Navios Acquisition exceeded by over $9 million, the cash paid out by Navios Holdings to its shareholders.
And this concludes my review of the financials. At this point, I turn the call back over to Angeliki for her closing remarks. Angeliki?
Thank you, George. With this we complete our formal presentation and we open the call to questions.
(Operator Instructions) Your first question comes from the line of Chris Wetherbee with Citi.
Chris Wetherbee – Citi
Hey. Thanks. Good morning, guys.
Hi. Good morning.
Chris Wetherbee – Citi
I just had a question kind of when you think about CapEx and then cash flow as you start to move forward here towards the end or the end of your CapEx schedule, how do you – how should we be thinking about kind of incremental cash flow relative to maybe other opportunities or maybe debt service when you think about debt to capping in the 50% range. I just want to get a sense of how we should start thinking about what you do with cash going forward?
Chris, I think that we do not have any CapEx, I mean natural newbuilding CapEx. This has been completed last year as you know. So, we are sitting now in about $180 million of cash which is a nice capitable position. And we have free cash flow generation in today’s market environment.
The one thing we view is that, we care very much to return – we return to our shareholders, we’ll continue to have dividend and we are one of the few companies and we are reviewing market opportunities. We will only be willing to do a transaction if we see that this is cash flow positive in today’s market, meaning that our breakeven on any transaction is below the market – the current market environment.
Chris Wetherbee – Citi
So this is the way we look at it. If we see opportunities of that mature and we see a lot – there is a lot distress in the market, we constantly – we’re willing to – we are not going to decide and move in very quickly. The other issue we care in the market, we have been very actively reducing our cash flow cost. We have been active in eliminating any refinancing risk. I mean having these two ingredients makes us very comfortable on moving many transactions we get.
Chris Wetherbee – Citi
Okay. And maybe a – give us any thoughts about the target kind of debt to cap levels that you would like to see going forward does debt pay down become a bigger emphasis if you can’t find interesting deals in those market?
Transactions at risk, I think that current debt to cap is very comfortable especially if you consider where we are in the cycle and values in the cycle. So opportunities will arise and I’m very sure that we will have the opportunity to move forward. The thing is that we’re a very disciplined buyer.
Chris Wetherbee – Citi
One of the things that you have seen is even though we did – we did some – we are one of the companies that we did very quickly 8Ks. If you remember in 2009, we reported that post crises levels with yesterday’s cash flows and we did it very quickly.
We never went into a newbuilding spree in 2010 what a lot of other companies did in the drybulk. So we always will do a transaction where we have the finance, the equity and the debt. This is a rule for us. We’re like a full funded CapEx and that’s why we never run into problems in today’s market. I mean for us it was not a surprise that (inaudible) finance of banks will be moving out of lending. But we’re well prepared for this environment.
Chris Wetherbee – Citi
Sure. Okay. That makes sense and then. I guess a question about the market relative to the Capesize class, when you think about just the very, very pronounced weakness that we’re in the midst of now. Do you get a sense that are owners laying up vessels, I mean, do you have a sense of kind of what those levels look like as it stands right now or is there any impedes to do that anytime soon just given where we kind of stand with rates is currently?
I mean you have vassals laid up. You have a lot of Japanese trading houses that have laid up amount – large amount of Capesizes in – laid up in Singapore and Malaysia. You have seen – and also you have seen that the scarp that comes earlier and earlier, meaning that you can see here all vessels going for scrap.
So I think one of the things you’re seeing today is that this is – there is going to be continues scrapping. You have a little bit of a reduction in the rate because of the monsoon period in India, the seasonal monsoon time which doesn’t allow for scrapping, but I think as we move out of the monsoon in India this will accelerate.
And also you saw some delivery of vessels, that I think is more (inaudible) because there was a regulation that was active as of July 1, 2012. So, you saw some registered vessels that should not have been there. So, apart from these two events, you’ll see that you’ll have – the next full growth will be in single digit and I think this accelerated scrapping in non-delivery of the vessels we will clean up somewhere in 2013 backlog.
Chris Wetherbee – Citi
Okay. Okay. Okay. That’s very helpful. I appreciate the time as always. Thanks very much.
Your next question comes from the line of Natasha Boyden with Global Hunter.
Natasha Boyden – Global Hunter
Thank you operator. Good morning everybody.
Good morning, Natasha.
Natasha Boyden – Global Hunter
I guess each of a question for you on your transit coverage. Next year it looks like a fair amount of size comes of charter and I’m assuming at this point that you have no desire to refix those vessels given where rates are at the moment. But where do you need to see rates to be to start refixing some of those ships that are going come off charter?
I think one of the things that I’d like to point to you is that Q4 is usually seasonally up. So, we are a little bit opportunistic of how we do it. And even in today’s rate environment one-year rate environment, we will fix 2013 exposure. I mean you’re circle around 9,500 to 10,000 in today’s environment, the one-year rate.
So as we’re going to be moving onto Q4, our strategy is to fix one year and two year exposures and also you have to see that we are relaxed on doing that in a very less mode because our breakdown, if you do the calculation for next year, the equivalent of what you see in the breakeven analysis, you realize that break-evens are well below today’s current market. So even though we have a 60% fleet open, our breakeven for 2013 is well below today’s market.
Natasha Boyden – Global Hunter
Okay. Great. That’s helpful. Thank you. I actually just have a couple of macro questions that I would love to get some color on Angeliki, if you don’t mind. Iron ore prices have obviously the moving level quite dramatically recently and recently had mid some lows, how much of this do you think could spur more importing demand into China and how much of this is just an indication of for demand out of China?
Natasha. Hi, the prevailing research tells us that once you get below 115, you’ll probably start to knock at least the third of the domestic iron ore production in China. And with today’s prices at 106, it looks like well they’re – they’re not going to immediately just stop digging out of the ground the day when they go negative, they’ll probably wait a month or two.
What you can already see in the July figures, they’re down 10 million tons compared to the month before. Now, is that a trend, we’ll wait till next month. But you would tend to think that there’ll be less being dug out of the ground and more being imported going forward.
Natasha Boyden – Global Hunter
And I guess, that could spur a potential stronger fourth quarter, I’m assuming?
Yeah. I think along with the seasonality they tried. I think you could see it, I don’t think you’ll see a strong fourth quarter like last year, but you’ll certainly see higher rates in Q4 than Q3.
Natasha Boyden – Global Hunter
Right. And then just one another question, we’ve read recently that the Australian Resource Minister said that the country’s mining boom is over particularly after BHP is where considering the economics of its big down line. What kind of comments do you have for that, I mean I know in the presentation you have a long-term bullish view on the market. But, sort of more of a short-term perspective what are you seeing particularly in light on those comments?
Natasha, you’re asking about BHPs?
Natasha Boyden – Global Hunter
Yes. About the reconsidering of the BHP cap line...
Yeah. They had this uranium and platinum. Now there is a lot of cut back on infrastructure or mining investment. But there are reports just kind of about valley which is get to 100% of their revenue for the iron ore that they should double their iron ore export in the next six years. We are Rio Tinto was kept about 75% of their earnings from iron ore in this last 12-months.
They’ve cut back on investments but not on iron ore. BHP is looking to reduce their port structure, so there is some cut back, but I think what you see out there in terms of the pull back on the mining companies is mostly non-iron ore. So, we’re still bullish in terms of more iron ore hitting the market, but that number may be 75% of what we’re thinking it was six months ago.
Natasha Boyden – Global Hunter
Okay. Great. And then just one last question if I may. I wanted to talk about financing particularly the sort of drought that’s coming out of Europe with a lot of banks pulling back on their willingness to finance vessels.
I mean Angeliki you’ve talked a lot of times about the fact that Navios Holdings has still has access to the capital market and has access to the banks. What is that, that you think puts you apart from other companies that are maybe struggling and do you think that, there is even more room for squeezing out of the banks of the European market and that’s the borrowings might need to be eased?
I think the one thing that sets us apart is that we are very conservative and we are not conservative today. We have a way of thinking for the long time. We always manage our maturities. We always have strong cash, I mean we protect the downside, this is a strategy that we didn’t implement today. You had it even in the high over market in 2008, if it’s five and 10-year deal. You make sure that you always look on your low breakeven, the cash breakeven that means that you do give a mark about your operating expenses that today is critical for a company.
Today $2,000 below your industry, below your peer means you are profitable or you are – and if you are $2,000 above you will be wiped out. You care about maturities; you care about your CapEx. We are not, and obviously we’re never going to bank vessels without having the equity and debt in the balance sheet.
So you never go on hedge. All this things makes banks very comfortable with us and we also have worked very much on the bond market with the investments and the rating agencies for a long time. So this makes you different from your peer that you care about that. That have (inaudible) is to have zero debt. That is another model. Navios selected to have debt, but are very conservative of how we deal with our balance sheet.
Natasha Boyden – Global Hunter
Okay. Great. Thank you very much for your time.
And it was our final question and now I’d like to turn the floor back over to Angeliki for any closing remarks.
Thank you. This completes our second quarter earnings. Thank you.
Thank you. This concludes today’s conference call. You may now disconnect.
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