Navios Maritime Acquisition's (NNA) CEO Angeliki Frangou on Q1 2016 Results - Earnings Call Transcript

| About: Navios Maritime (NNA)

Navios Maritime Acquisition Corporation (NYSE:NNA)

Q1 2016 Earnings Conference Call

May 19, 2016 08:30 AM ET

Executives

Angeliki Frangou - CEO

Leonidas Korres - CFO

Ted Petrone - Vice Chairman

Analysts

Michael Webber - Wells Fargo

Noah Parquette - JPMorgan

Amit Mehrotra - Deutsche Bank

Operator

Thank you for joining us for Navios Maritime Acquisition Corporation’s First Quarter 2016 Earnings Conference Call. With us today from the Company are Chairman and CEO, Mrs. Angeliki Frangou; Vice Chairman, Mr. Ted Petrone; and Chief Financial Officer, Mr. Leonidas Korres.

As a reminder, this conference call is also being webcast. To access the webcast, please visit the Investors section of Navios Acquisition’s Web site at www.navios-acquisition.com. You’ll see the webcast link in the middle of the page and a copy of the presentation referenced in today’s earnings conference call will also be found there.

Now, I’ll review the Safe-Harbor statement. This conference call contains forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995 about Navios Acquisition. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Navios Acquisition’s management and are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Navios Acquisition’s filings with the Securities and Exchange Commission.

The information set forth herein should be understood in light of such risks. Navios Acquisition does not assume any obligation to update the information contained in this conference call. The agenda for today’s conference call is as follows. First, Mrs. Frangou will offer opening remarks. Then, Mr. Petrone will explain the operational update and industry overview. Next, Mr. Korres will review Navios Acquisition’s financial results and finally we will open the call to take questions.

Now, I’d like to turn the call over to Navios Acquisition’s Chairman and CEO, Mrs. Angeliki Frangou. Angeliki?

Angeliki Frangou

Thank you, Laura and good morning to all of you who joined us on today’s call. Navios Acquisition reported EBITDA of more than 58 million and net income of almost 24 million or $0.15 per share for the first quarter of 2016. The net income increased 19% from the prior comparable period in 2015 and reflect the underlying robust charter market. Continued healthy rates for VLCCs and the profit sharing mechanism of our charter agreement created 6.1 million of additional profit during the quarter. VLCC base continue trend profit sharing in the current rate environment. We declared a dividend of $0.05 per share for the quarter resulting in a dividend yield of about 12% on an annualized basis.

Please turn to Slide 3 for our company highlights. NNA has 38 modern high quality vessels with an average age of 5.1 years. All our vessels are in the water and are generating cash flows. Our fleet is 95.2% fixed for 2016 and 53% fixed for 2017. As we will discuss in a greater detail in a moment, we benefited significantly from the economies of scale with Navios Group and that is ramping low operating cost is [indiscernible] embedded in advantage.

Please turn to Slide 4, we are a leading [indiscernible] company and the sponsor of Navios Midstream Partners we expect to receive $21.3 million in distributions from Navios Midstream in 2016 and our common equity interest in Navios Midstream is worth of $149.2 million this adds $0.96 per annum to NNA per share NAV more than half of NNA’s current share trading value. Navios Acquisition had a great quarter as you can see on Slide 5, NNA net income of $23.8 million was approximately 19% greater than the same period in 2015. Adjusted EBITDA increased by 3.5% to 55.8 million representing a run rate EBITDA of 223 million for 2016.

During the quarter we agreed to sell two of the chemical tankers, the Nave Universe and the Nave Constellation for almost 73 million net, resulting in an 11.7 million expected book gain on our investments, proceeds of 33.1 million from this vessels sales will be used to repay debt and the remaining 39.8 million will be retained as cap on the balance sheet. The sales are expected to close in the first quarter of 2016 following the completion of the vessels current chartering commitments. As displayed on the table NNA has 95.2 million of the available days fixed positioning the Company to generate strong cash flows in 2016. Cash flows will be further boosted by our open days and contracted on floating rates.

Slide 6 and Slide 7 highlight the benefit that NNA enjoyed by harnessing the economies of scale created by Navios Holdings. NM provide NNA with technical and commercial management services for a fixed fee and administrative services at cost. Importantly unlike many of its peers NM does not charge any transaction fee where the core originating loans, averaging sales and expenses, are otherwise creating value to the extent any such fees are paid, this fees are paid to third party pay or rent market price. The trends of the [indiscernible] relationship is that there is a fair sharing of the cost savings, the fixed operating expenses for commercial and passenger management were extended for an additionally two year at an overall average cost increase of 3%. As a result NNA OpEx is fixed through May 2018 at rates that are below industry averages however measured. And our G&A expenses is at $1,119 per day, one of the lowest among public tanker companies.

Slide 7 shows the 33.2 million of estimated operating cost savings that NNA generated in 2015 derived through the significant economies of scale created at NM. To quantify the savings we engaged in a deep dive into our peer operating cost as seen through their 20-F and related disclosures. Our analysis revels that NNA’s operating costs were approximately $2,400 per day lower than the peers average resulting in a 33.2 million of estimated savings in 2015. The same critical analysis performed for 2014 revels savings of approximately 32.3 million of estimated savings for the entire year. We believe that this analysis for 2014 that we’ve seen further demonstrates the substantive competitive benefit of the relationship between NM and NNA and the value it delivers to our shareholders.

Slide 8 details our chartering strategy by which we balance market opportunities in long-term employment. The strategy is designed to provide protection from market volatility through previous charter coverage 95.2% and 53% of our fleet is contracted out for 2016 and ’17 respectively. Any market improvements will be captured through one of the three mechanisms. Open days, days fixed on floating rate or days with base rate and profit sharing.

Slide 9 demonstrates our strong liquidity position. We have 70.4 million incurred as of March 31, 2016. We have now committed growth CapEx and also [indiscernible] debt maturities until the fourth quarter of 2021. We intent to just [indiscernible] to de-lever our balance sheet while also returning capital to our investors.

Slide 10 shows the cash flow from our low breakeven, 95.2% of our fleet is contracted for 2016, we expect an average contracted daily charter out rate of $20,107 per day compared to the 2016 average reloaded cost of $16,962 per day. In 2017 53% of our fleet is contracted at an average contracted daily charter out rate of $21,419 compared to our fully loaded cost of $17,291 per day. As you know our daily cost increased operating expenses, general and administrative expenses, interest expense and capital repayment.

You can see at the bottom of the Slide our breakeven analysis. NNA should be able to generate significant cash flow in 2016 further assisted by days that are open and contracted on floating rate.

At this point, I would like to turn the call over to Mr. Ted Petrone. Ted?

Ted Petrone

Thank you, Angeliki. Please turn to Slide 12. With the completion of our new building program last year we have no growth CapEx requirements and can accumulate cash from our previous 38 vessels on the water. We have sold two 2013 built chemical tankers, the sale is expected to close in Q3 of this year following the completion of the vessel’s chartering commitment. Navios Acquisition continues the Navios Group policy of locking in secure cash flow with creditworthy counterparty. In 2015 we extended the coverage of our fleet for 33.5 total years of coverage via new fixtures, continuations and exercised optional period and higher levels with profit sharing. We added further six years of coverage so far this year. Freights continue at healthy levels and charters continue to look for fee re-coverage.

Please turn to Slide 13, Navios Acquisition diversified fleet consists of 38 vessels on the water with an average age of 5.1 years totaling 4 million deadweight. The fleet consist of eight VLCCs, 18 MR2 product tanker, 8 LR1 product tankers and four chemical tankers. Please turn to Slide 14, our chartering strategy revolves around capturing market opportunity while also developing defendable cash flow from a diverse group of first class charterers. As a result the average rate at all of charters is about 1.2 years. There is a continuing share markets for our vessels we earned $6.1 million of profit sharing in Q1 of this year in comparison we earned a total of $32.1 million in 2015.

Please turn to Slide 16. Navios Midstream brings average acquisition flexibility and liquidity providing a new platform in the West Africa for dividend seeking investors. NNA owns 60.85% of Navios Midstream Partners including a 2% GP interest with the market value of approximately $70 million as of yesterday’s closing price.

Turn to Slide 17, Navios Midstream Partners fleet of six VLCC that’s fixed with an average duration of 5.1 years is expected to provide approximately $500 million of long-term revenue with top tier counterparty. In Q1 of 2016 Navios Midstream earned $17.7 million of EBITDA including $1.7 million of profit sharing. In all 2015, Navios Midstream earned $62.2 million of EBITDA including $8 million of profit sharing. Navios Midstream declared a cash dividend of 42.25 per unit this distribution provides NNA with approximately $21.3 million of annualized distribution.

Turning to Slide 19, according to the IEA refinery capacity is expected to increase by 11.8 million barrels per day from 2016 to 2021 including all existing expansion and upgrades. About 65% of that capacity will be added in Asia and the Middle East with the IEA projecting China and other non-OECD Asia to increase refinery capacity by 3.3 million barrels per day and 1.5 million barrels per day respectively. The low cost capacity that Asia is forcing rationalization of old high cost capacity in the OECD. Recent refinery closings in Europe and the Caribbean as well as closures in Australia and Japan can be partly attributed to the age and efficiencies of these facilities. Because of this structural shift, the growth in ton miles of refined products is expected to continue to outpace the general demand for refined oil products.

Turning to Slide 20, as expected refineries have opened or expanded in Saudi Arabia and China. These refineries are now contributing significant volumes of products export. Saudi Arabia is now exporting about 1 million barrels per day of product in order to capture higher revenue per barrels while crude prices remain low, Chinese exports through March of 48% from 2015 led by diesel exports of about 2.8 million tons which was 475% higher than the same period last year. Indeed oil demand continues to grow, its increased demand at 400,000 barrels a day in Q1 2016 represented 30% of the global increase. These developments should support product tanker trades in the East Asia [ph] this year.

Turning to Slide 21, U.S. crude production has increased by 84% since the end of 2008 reaching 9.1 million barrels per day in February. The U.S. has increased its total product exports by over 400% to about 4.7 million barrels per day since 2004. U.S. Gulf refineries which benefit from inexpensive domestic crude and natural gas supplies, are finding a natural export market delivering Mexico and Latin America as well as Africa. U.S. product imports have declined over the past couple of years, but continue to come from further away, adding to product tanker ton miles. There has been little to no effect on U.S. products export after the lifting of the ban on exporting U.S. crude, but this development bears watching. The fundamentals of product tanker trading patterns continue to adjust in relation to these changes.

Turning to Slide 22, oil refineries vary greatly in their quantity, variety, and specification of products that they produce. As depicted in this slide, regional surpluses and deficits combine with relatively low-cost transportation, drive arbitrage trades, and increase product ton miles. Increasing worldwide product imbalances point to an increased ton mile development. And some of the severity started to happen as gasoline exports from the U.S. and Europe have found their way to Singapore during the first quarter of this year. This global multidirectional trade pattern enables product tankers to triangulate thereby minimizing down time and maximizing revenue.

Please turn to Slide 23, in 2015 we saw 37% non-delivery figure with 8.8 million deadweight delivered at a 13.9 million deadweight projected. When combined with the 1.4 million deadweight of scraped, this led to 7.4 million deadweight or a 5.5% net fleet growth in 2015. So far this year we have seen a 30% non-delivery figure, 3.8 million deadweight delivered versus 5.3 million deadweight projected and a scrapping of 0.5 million deadweight giving net fleet growth of 3.2 million deadweight or 2.3%. About 5.5% of the product tanker fleet is 20 years of age or older. As of the beginning of May the order book totaled $21.7 million deadweight or about 50% of the fleet, a level usually considered adequate for regular replacement of an existing fleet with little or no demand growth. Current order book for 2017 onwards is only 12.2 million deadweight.

Turning to Slide 25, as global demand for energy continues to grow, major oil companies and oil producers should seek to secure more vessels on long-term charters. While there’s always seasonality, healthy rates are projected going forward. Note that both the year-to-date average VLCC earnings of 55,000 and three year time charter rate of 38.5 are above the 20 year average of 45,000 and 37,000 respectively. Turning to Slide 26, IMF projected global GDP growth for 2016 and ’17 at 3.2% and 3.5% respectively, led by emerging developing markets’ growth of 4.1% in ’16 and 4.6% in ’17.

Increases in world GDP growth year-on-year have generally led to higher time charter rates of VLCCs as we have seen since the middle of last year. THE IEA raised the forecast of global oil demand for 2015 12-times to 94.7 million barrels per day or an increase of 1.8 million barrels per day, the largest yearly increase in five years. The IEA increased its forecast for 2016 to 95.9 million barrels per day.

Please turn to Slide 27, as noted in the top half of Slide 27 in terms of ton miles, the movement of crude from West Africa and South America to China uses about as many VLCCs as the movement from the Arabian Gulf, even though the Arabian Gulf shipped 1.9 times more oil to China. The growth in VLCC ton miles will continue as China imports more crude from Venezuela, Brazil and West Africa as it diversifies its sources of oil. In addition, with the U.S. shale production decreasing slightly, there has been an increase in VLCC movements from the Arabian Gulf to the U.S. Gulf. The bottom half of the slide shows that spot fixtures are following this trend as long haul trade fixtures have increased steadily over the last two years.

Please turn to Slide 28, China is the world’s second-largest consumer of oil, importing more than half of its requirements. Chinese imports have more than doubled since January 2009, representing a 14% CAGR. Crude imports averaged 6.7 million barrels per day for all of 2015, through April of this year Chinese crude imports have continued to expand averaging 7.4 million barrels per day with both February and April imports reaching all-time records of 8 million barrels per day. As noted in the upper right, Chinese oil production has started to decline the April dropped at 223,000 barrels per day is the third largest monthly and year-on-year decline in the last 15 years and is down over 8% from its June 2015 peak of 4.4 million barrels per day.

Chinese crude oil imports surpassed the U.S. this February and will continue to grow as the country continues to do the urbanization, industrialization and modernization of its economy. And as you can see the table below on a per capita basis U.S. oil usage is 7.3 times out of China, European usage is 3.4 times and world usage is 1.6 times. If China goes to world per capita consumption levels, China would require an additional 285 VLCCs, assuming all crude is imported by sea. This represents an expansion of the existing fleet by about 45%.

Please turn to Slide 29. In 2015, non-deliveries were 31% 6.1 million deadweight delivered against an expected 9.1 million deadweight and scrapping amounted to 1.1 million deadweight this led to a modest fleet growth of 3.1% in 2015 so far through April 4.3 million deadweight delivered against 6.7 million deadweight projected giving fleet growth of 2.1%. There was no scrapping for April. 138 VLCCs or 20% of the VLCCs fleet is 15 years old or older compared with the current 123 VLCCs on order. As of the beginning of May the order book totaled 38 million deadweight or about 18% of the fleet, a level usually considered adequate for regular placement of an existing fleet with little or no demand growth.

Thank you. This concludes my review and I would like to turn the call over to Leonidas Korres for the Q1 financial results. Leo?

Leonidas Korres

Thank you, Ted. I will discuss the financial results for the first quarter of 2016. As shown on Slide 31, our operating metrics for the first quarter of 2016 have improved compared with the same period in 2015. With 38 vessels on the water, we were able to benefit from the strong tanker market.

Revenue for Q1 2016 increased by 2.3% to 80.4 million from 78.6 million in Q1 2015. We had almost 100% fleet utilization and a time charter equivalent of $22,722 per day compared to $22,521 per day in Q1 2015. During the quarter, we earned $6.1 million through profit-sharing. Operating and voyage related expenses were $25.6 million and G&A expenses were $3.5 million. Equity and net earnings from affiliated companies was $4.9 million, mainly reflecting our equity portion in Navios Midstream Partners’ earnings.

We continue to have significant EBITDA growth. Adjusted for those $2.3 million gain on sale of Nave Lucida and the $0.3 million non-cash share based compensation expenses, EBITDA for Q1 2016 increased by 3.5% to $55.8 million from $53.9 million adjusted EBITDA in Q1 2015. Other expenses include depreciation and amortization of $14.9 million and interest expense and finance cost of $19.1 million. Net income increased by 18.6% to 23.8 million or $0.15 per share from a net income of $20 million in Q1 of 2016 or $0.13 a share.

Slide 32 provide the latest balance sheet data as of March 31, 2016. Cash and cash equivalents including restricted cash increased to $70.4 million, rate [ph] of depreciation decreased $1.4 billion reflecting the sale of one of the tanker. Investment in affiliates of $203.9 million mainly reflects Navios Acquisition interest in Navios Midstream Partners. Total assets amounted to $1.8 billion. Total debt as of March 31, 2016 was $1.2 billion. The quarter’s working capital in [indiscernible] markets were broadly affected by $21 million, of this $4.3 million was due to working capital contribution to Navios Europe $8.7 million was [indiscernible] scheduled current and forthcoming dry dockings and approximately $8 million advances for our margin fees, following also the 2.1 million debt repayment in connection with the sale of Navios Acquisition product tankers.

Our net debt to book capitalization ratio decreased to 62.8% from 65.3% as of December 31, 2015. As of March 31, 2016, Navios Acquisition was in compliance with all of the covenants of its debt facilities and see more [indiscernible]. Turning to Slide 33, our financial strength has enabled us to announce a dividend of $0.05 per share for the third quarter equivalent to $0.20 per share on an annualized basis providing a yield of about 12%. The dividend will be paid on June 22, 2016 to shareholders on record as of June 17, 2016.

At this point I would like to highlight that given our 60.9 ownership in Navios Midstream Partners we expect to receive on an annual basis 21.3 million in dividends from NAP at the current distribution of $1.69 per unit.

And now I will pass the call back to Angeliki. Angeliki?

Angeliki Frangou

Thank you, Leo. This completes our formal presentation and we open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Webber of Wells Fargo.

Michael Webber

Angeliki, a couple of questions I wanted to start high level with some of the stuff that happened during the quarter. You mentioned in your remarks the loan of the Navios parent. I just wanted to maybe get some more color for me just around -- just to kind of address the loan, its removal and the thought process behind it? And then more broadly how you see NAA fitting in and what role NNA plays within the broader Navios family going forward?

Angeliki Frangou

Mike, there are adjacencies [ph] of lot of our good work that you can see also in our presentation after your analysis. NNA is a very strong cycle company as you have seen that is how the -- we have big expectations and we have a very strong net income and EBITDA. We have the strategy that really provides for keeping -- having 80% with some kind of flow, but also having the ability to capture the upside. And you can see that on the development of our balance sheet on our cash flows and the visibility we give by having 95% of our base rate.

Now, if you take on the foreign, so we see that a strong company and we think that that provides a very good base for the company going forward. Now, if you actually see our priorities on NNA, number one is de-leveraging and you have seen that we already start de-leveraging by about 2.3% this quarter with a sale of two vessels which we did it at attractive above book values and with a strong actually if you see the cash generation of that those assets were very strong. We will be levered by about 5%, so we’ll have a [Audio Gap] gain from these vessels on a book value strong generation and they will give us the ability to de-lever by about 5% to about 60%.

And with the remaining cash generation we can go down to about 50%-55% which is our target. So, that is the focus and the strategy of the company as for the verification is something that is totally behind us the only thing that is pending is really is explaining fees from the lawyers and as we already have given in our press release we think that this litigation was not made and it was basic not worth.

Michael Webber

And again I am not trying to focus on the litigation or that aspect of it. But it was this quarter, so I wonder if you just kind of go back into the thought process? I know there are some differences around in terms of collateral value. And then maybe the overall thought process behind the loans. And then maybe from our end it's interesting to think about as the strongest vehicle likely was in the complex. What role NNA plays going forward? So again less about the litigation and more just around the thought process behind it and then the reactions what it really is the role going forward?

Angeliki Frangou

If we are talking about the NNA and then relationship I think there is a great benefit that it gets I mean that loan was at a point that there was [indiscernible] for year at that time, there was February. It was perceived in a certain way. It was at the end of the story in the quarter and we have been drawn into the loans. So, for the both of the companies thought that it is in best interest of the companies to avoid expensive and unnecessary litigation. So, the reality is that NNA has great benefits that get from these relationships. And one of the things we did now because we always compared our costs to an industry average.

So what we really did now is we did a deep dive through our peer group. We took the 20-F and all the related disclosures and we said okay what is really these benefits let's go on a deep dive, take the operating expense plus G&A plus any unrelated [technical difficulty] party fee and let’s divide them by the calendar day of reference that we have one the older sheets. And this gives you a 33 million benefit for 2015 and over 32 million for 2014. And this what is a -- this actually give a real magnitude of benefit of the economies of scale and how this is shared in a peer to peer group analysis not just an industry group. So you [indiscernible] of this work and we hope that after all this work we will graduate [indiscernible] rate after that.

Michael Webber

One more and I’ll move on. But just around this is just the premise and the idea that as the strongest entity that NNA benefits from having stronger sponsors and I think that there are distractions in there to both sides of that argument, plus I am curious as you stand today relative to say where we were at the beginning of the year. Do you think any differently about the role NNA could potentially play in supporting a sponsor at a pre and post launch? And maybe if you feel differently about the role it plays?

Angeliki Frangou

There is no need, we don’t see any difference.

Michael Webber

Okay, all right well I will move on, actually just one from a housekeeping perspective. The receivables look like they ticked up from the rate of produce from 34 million to about 55 million. Can you talk about what drove that?

Ted Petrone

As I discussed already in my script there was working capital timing issue in relation to 4.3 million that was paid towards working capital contribution to Navios Europe and other 8.7 million was paid for schedule carried in form dry dockings and another 8 million was advances for our management fees.

Michael Webber

Okay, appreciate that, and I can go back and check if I missed that in the deck. Just one more and maybe one more with a positive note, the significant amount of cash flow generation here both on a contracted basis and from your profit share, the year around something or doing something with the dividend has been around for a while. How do you guys think about that today? I know you’re focused on de-leveraging but there are scenarios in which you can do both. Just how you think about that today, given maybe relative to last quarter?

Angeliki Frangou

I mean we are always mindful of all our stakeholders and shareholders. The yield today is almost 12%, so that’s a reality and as you know we are very consistent we always review and we see how we’re getting better with those investors.

Operator

Your next question comes from the line of Noah Parquette of JPMorgan.

Noah Parquette

I just wanted to follow up on the de-leveraging. You mentioned targets underlying 50%-55% I think for the chemical tankers being sold in Q3 the 40 million of excess cash. Are you committed to using that to de-leverage as well, or is that going to be something that’s put aside for something else just to clarify?

Angeliki Frangou

I mean the 5% is not really on that, it’s just a debt repayment. So we can view and see if we like to further reduce our budget, we also have maturities of about 16 million this year and 16 million next year debt maturities.

Noah Parquette

So for now that 40 million it could be, but we’ll wait and see. And then there is the sale of the chemical tankers make sense in terms of really core segment versus the rest of your fleet. But you have two other chemical tankers and a couple of other older ships. So are you still looking at further vessels sales down the line or was this just an opportunistic thing?

Angeliki Frangou

The chemical tanker is not -- we opportunistically handled, it was good assets we found and we and we acquired them, it was not really a strategic move in that segment. So when we found the opportunity and we had competitive process where three different buyers wanting to enter this vessel is really very attractive because it can control a trade. We thought that that was attractive and we sold it. I mean we may on the rest, buy only opportunistically, if there is a good price, we have no reason of doing it otherwise.

Noah Parquette

And then inversely I assume you guys aren’t really in the market for buying new ships, is it more de-leveraging mature point right now?

Angeliki Frangou

I think the market is -- we like to have cash, we are de-leveraging but we’re also seen a credit transfer is developing, I mean the capital markets debt and equity is closed. Bank and not really extending loans, are very selective. So I think that the balance sheet and the cash next generation and the cash that you have NNA can be very useful in positioning on opportunities that may develop in further second half.

Noah Parquette

And then could you talk a little bit about carried market for VLCCs and what you’re seeing in terms of the out one year and liquidity? And I guess how are you viewing the drop downs now to NAP given the capital markets and where charter rates are?

Angeliki Frangou

That will take us through the marked -- the [indiscernible] on NNA -- on NAP I think is really combination of equity markets and it was only on the previous market with OC, but on the time charter markets Ted will take you through.

Ted Petrone

There’s been a three year deal done and a two year deal done just recently. So I think the charters are warming up to this I don’t think it's -- certainly the volume isn’t there which it was last year and maybe the clean products has a little bit to do with holding back the crude a little bit. I would have thought after the [indiscernible] collapsed you would have seen more people step in, but I think some of it's being held back by what people think the lively billings [ph] coming into the year. I think if people see that that’s not really going to affect the market, I think if you go into winter this year my own guess is that you may see a period market -- long-term period market really come back to maybe the levels even last year in terms of quarterly volumes. But the interest is strong and a lot of charters are just putting out low numbers, but there is a lot of people -- there is a lot of talk out there from what the traders are telling us.

Noah Parquette

And then just one real quick one on the management agreement. I thought it was interesting that VLCC stayed unchanged, great. But the increase is really on the MRs. What was the discrepancy between the percentage increases for the rest of the classes?

Angeliki Frangou

We have not changed the operating -- don’t forget we include operating expenses in commercial management and we haven’t change it for the last -- from 2010 and we feel that the actual costs creped up and we have to adjust it. The increase is steady for two years meaning this will be then used in 2018.

Operator

Your next question comes from the line of Amit Mehrotra of Deutsche Bank.

Amit Mehrotra

Wanted to just start on the moving parts with respect to the gross debt balance as we move through the course of the year, the total debt balance of 1.175 billion at the end of the first quarter, I guess that will be reduced by the 33 million from the two chemical tankers. And then I think I saw that there is about 75 million of current potion or short term debt on the balance sheet. So, is that basically 105 million or so of gross debt pay down between now at the end of the year, is that how you’re thinking about the progression?

Angeliki Frangou

It is a repayment of debt of the Nave Universe and Constellation plus the regular repayment of the Company.

Amit Mehrotra

And Leo is that 75 million this year, or for the rest of the year?

Leonidas Korres

This is a total amount including the repayment for the two vessels.

Amit Mehrotra

Okay so that was reclassified as returns that makes sense. And then just on the de-leveraging following up on an earlier question, Angeliki I guess if we fast forward, a year and half ago the story was also de-leveraging and I think later in the year there was some opportunities that came up and maybe that delayed the de-leveraging a little bit. And so I understand de-leveraging, I understand what that means. But as we fast forward are we actually going to see a reduction in the growth debt of balance of this Company, or could the de-leveraging just open up opportunities for additional acquisitions?

Angeliki Frangou

Listen, the reality is that this is a target and we’re focused. Now, if you remember last year we had the opportunity to buy [indiscernible] in almost immediate delivery, at attractive rate at the time and we were able to also fix them for two years which they actually generated an estimated 32 million of expected EBITDA from each vessel. So I think that is -- if you see this kind of opportunities where you can enter with the process of investing, you have a fixed employment that can generate on 45,000 rate you’re generating two years almost 32 million of EBITDA this is an attractive deal that gives you a good residual value. But in case we see something that develops on an opportunity that arrives with minimal residual risk we will always seeking to take something like that.

Amit Mehrotra

One question related to that is drop down opportunities to NAP I understand the cost of equity of NAP may still be a little bit prohibitive in the mid-teens percentage yields. Is that essentially door closed for now until you see better valuations or is that something you can explore with little bit more creative financing structures?

Angeliki Frangou

I think that it need to be mindful of that. Of course we have problems also we see and MLP markets are recovering. So I think you need to be in a close monitoring situation, you cannot say that -- you need to see how it develops and how this -- it can be done on a more creative ways.

Amit Mehrotra

And then can you just update us on that the $40 million credit facility from holdings to NNA, I think that was going to expire this month. Has that been extended or is it just expired?

Angeliki Frangou

It is already expired.

Amit Mehrotra

Okay, so it's expired. And then one last question from me --.

Angeliki Frangou

But that facility just Amit to add to you, that facility existed for the entire period while we had all the new building vessels and was even extended a little bit, extended quite significantly at need for NNA. So the NAP and NNA facility was existing entire new building the time that the charter was -- [Multiple Speakers].

Amit Mehrotra

And it's basically not there anymore, right?

Angeliki Frangou

Yes.

Amit Mehrotra

Okay, one last question Angeliki, just following up on Michael’s question related to the whole episode with the working capital loan to NM. I think to some degree it's a little ironic, given that you guys have a very good reputation, you and the management team with respect to these types of matters. But with that being said, I just would like to get your take away from the entire episode and what you took away from it?

And then really for the benefit of a lot of the callers listeners on this call I think what people need to see in order to get a little bit more positive on NNA is an unequivocal statement from you that NNA funds will not be used to shore up -- potentially shore up any shortfalls in NM. And are you ready to make that commitment? Or is that still going to be dependent on the situation over the next six to nine months?

Angeliki Frangou

The only thing that Amit that I can say is that what this litigation showed that any NM can do anything with no merit and that is a big lesson we have. And there is no need for this and there is no transaction for new loan today. So you can have a lot of -- anyone can do anything, but they can be without merit.

Amit Mehrotra

And then just the second part on my question, in terms of you being able to unequivocally say that NNA will not be used to shore up NM, or are you not ready to make that confident statement at this time?

Angeliki Frangou

I already answered to you that there is no discussion for any loan right now.

Operator

Your next question comes from the line of Christian Wetherbee of Citi.

Unidentified Analyst

This is Prashant in for Chris. My first question I know it's been talked about quite a bit on the de-leveraging. But just wanted to get one point of clarification, so it looks like you’re well ahead of your previously announced target where you’re saying sub-60 and now we’re talking about mid to low 50s that’s total cap at the end of 2016. How much further -- I know it's a year out, but in 2017 are you willing to talk about maybe how much further you could see in terms of putting a number around that or could we be looking at getting into high to mid-40s de-leveraging rate or after ’16 as most of the strong legwork done?

Angeliki Frangou

I think we’re looking to be somewhere sub-50s.

Unidentified Analyst

Okay, sub-50s. And then just two quick questions on the VLCC side, the non-delivery rates so far this year I think are a little bit interesting and given the -- what the potential order book deliveries from 4Q the back half of 2016. Do you expect to read on the market that we’re going to see some of those -- well first not to back [indiscernible] -- but the first the non-delivery that you saw so far this year. How far are those getting pushed out? And then second, can you give little bit more color maybe on your expectations for non-delivery rates now that we’re getting towards the middle of the year, and we’re getting that big flock [ph] in the order book?

Ted Petrone

The non-delivery is sitting at -- we’re at about 35-36% we don’t really see that coming off. At the beginning of the year everybody had 55 on paper and now we’re talking 40. The big question really is, looks like you had what 10, so far delivered this year, basically I would say eight a quarter going into Q4, we think could deliver. And then what gets delivered in Q4 is the big questions. I wouldn’t have phrased the question about what gets pushed forward because obviously as you go back and see an average of about 35% of the last four years in non-deliveries that means nothing is getting pushed forward, it's just miss-information. Market that’s not there, on a liquidity or credit that’s just not there for these vessels to deliver. So we don’t see a lot getting pushed back if the lot doesn’t delivery in Q4. Our guess is it's going to have below 40% for the year. There is going to be a couple of older ships scrapped. Remember you had just as many ships over 15 years of age it's like a few more than you do have ships below 15, and it's getting more difficult to fix the older ships. So, we don’t see a reason why the market should be any lower than the 20 year average over the next year or two.

Unidentified Analyst

And then one final question, news reports that were out yesterday and today about vessels being used for storage in the Singapore market. And there is some chatter about vessels being used for storage at potentially at loss since the contango curve isn’t there. Are you seeing incremental storage right now? I was wondering to get your thoughts around that, any color and is it possible that storage is coming at a loss in the Asian markets? And if so how it's over like is that sustainable?

Ted Petrone

This whole storage issue has just been talked about a lot so far this year. We don’t see a lot happen. Now there has been some storage on the clean products but remember the traders the day they make that decision of selling to the fully curved so I don’t think let’s say I don’t think that there’s been a lot of speculative storage I don’t think that really gets done or is allowed in some of these trading houses. There has been some lighter clean being moved on some bigger products around. So you see some interesting trade changes. Remember the range still have a lot of ships that they can’t move because after the sanctions there is still some financial restrictions for banks that U.S. senate is not going to pass before this election. So a lot of that is still in storage and if you’re looking at Bloomberg a lot of that is ship delays and just mix delays and they’re carrying out the storage. So I’d be careful reading any into storage these days.

Operator

Ladies and gentlemen, we have reached the allotted time for questions-and-answers. I will now return the call to Mrs. Angeliki Frangou for any additional or closing remarks.

Angeliki Frangou

Thank you. This completes our first quarter results. Thank you.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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