Aegean Marine Petroleum Network, Inc. (NYSE:ANW) Q3 2016 Earnings Conference Call November 17, 2016 8:30 AM ET
Spyros Gianniotis - CFO
Peter Georgiopoulos - Chairman
Nick Tavlarios - President
Doug Mavrinac - Jefferies
Ben Nolan - Stifel
Good morning and welcome to the Aegean Marine Petroleum Network Incorporated Third Quarter 2016 Conference Call and Presentation. I would now 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 1842325.
At this time, I would like to turn the conference over to the company. Please go ahead.
Good morning and welcome to Aegean Marine's third quarter 2016 conference call. On the call today are Aegean Chairman, Peter Georgiopoulos; Aegean President, Nick Tavlarios; and Aegean's Chief Financial Officer, Spyros Gianniotis.
Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on Aegean Marine Petroleum Network, Inc.'s current plans and expectations, and involve risks and uncertainties that could cause future activities and the results of operations to be materially different from those set forth in the forward-looking statements.
Important factors that could cause actual results to differ include our future operating or financial results, our ability to manage growth, adverse conditions in the marine fuel supply industries, and increased levels of competition. For further information, please refer to Aegean Marine Petroleum Network, Inc.'s reports and filings with the Securities and Exchange Commission.
I would now like to turn the call over to Nick Tavlarios, Aegean's President to discuss highlights from the quarter.
Thank you for joining us to discuss our results for the third quarter of 2016. I'd like to begin by providing an overview of our strategy and business, which has continued to successfully grow and evolve. I'll then discuss the macroeconomic and industry trends of our sector, and review high-level results from the quarter. Spyros Gianniotis, Aegean's Chief Financial Officer will provide further details on our financial results.
Next month, we will celebrate our 10th anniversary of being a public company. In our first year of operation as a listed company, Aegean had operations in five ports sold $3.4 million metric tons of fuel and generated $36.1 million of EBITDA.
Today, Aegean physically serves over 30 markets, covers more than 60 ports worldwide and over the last 12 months has sold 16.6 million metric tons of fuel and generated $135.5 million in adjusted EBITDA.
Our business has continued to grow over time from physical bunking operations to a sophisticated global enterprise with delivery logistics, integrated supply, and growing retail sales channels and diversified streams including bunk storage and vessel revenues that leverage our built-in infrastructure. We're proud of what we have created and our ability to serve our customers across our global footprint as a leader in the physical supply and marketing on marine fuel.
To support this growth, we've built a platform through both strategic acquisitions and prudent capital allocation. Our unique platform has enabled our team to operate effectively in a variety of markets and conditions over the last 10 years. We have and we'll continue evaluate all of our markets and assets and will as appropriate ensure prudent and appropriate allocation of resources to drive value for our shareholders.
I'm proud of our team's hard work and look forward to continuing to execute on our proven strategy, serve our customers, and deliver value for our shareholders.
I would like now to turn to a brief overview of the macroeconomic environment. Oil and refined product price volatility continued through the third quarter with Brent Crude trading between $41 per barrel and $52 per barrel. This volatility was largely driven by OPEC talks have agreements to reduce our cap production.
Bunker fuel prices move with crude during the quarter ending at approximately the same price levels as the end of the second quarter.
Crude oil markets continue being in a contango structure of roughly $0.50 per barrel per month indicated a continue oversupply in crude markets is keeping prompt prices depressed. The structure of the fuel oil market, the primary component of bunker fuel, has flattened out with a contango of only $0.05 to $0.10 per barrel per month. This seems to indicate that the current oversupply in fuel oil is minimal as compared to crude. While fuel oil price revolved during the third quarter, the net change quarter-on-quarter was a negligible 2% increase. Overall, prices remain low for our customers based on historical values.
Moving to the shipping sector, we've seen continued volatility and consolidation as company's work to manage a challenging marketplace. The container sector in particular continues to experience a low rate environment driven by lackluster global trade and vessel oversupply and have seen a merger into parts for many key players. The recent bankruptcy filing of Aegean has seriously impacted the industry and the merger in the container segment with NYK, Mitsui, and K Line, who has lost a total some $1.5 billion since 2012, follows the combination of other large players including Cosco with CSCL, CMA CGM with APL, and Hapag-Lloyd with UASC. These consolidations should generate scale and savings that should help these company's compete in a challenging marketplace.
For Aegean, while consolidation in the container industry could lend customers more buying power, it also strengthens their credit profiles and could offer opportunities to provide services to a global player. As always, we take our credit exposure seriously and monitor these conditions regularly.
Finally, as many of you've heard, on October 27 The International Maritime Organization or IMO announced the confirmation of a Global Sulfur Capital of 0.5% on marine fuel, which will be effective January 1, 2020. The reduction of the Global Sulfur Capital from 3.5% to 0.5% in 2020 will have winners and losers. We anticipate the capital benefit moderate eco-friendly vessels and their owners that per less fuel per mile versus older tonnage. It will benefit well capitalized marine fuel suppliers capable of segregating qualities and sourcing and blending component cargos to meet the strict requirements.
Scrubber manufacturers and vessels that can install and run abatement technology and diesel refiners has demand for diesel as marine fuel blend stock will dramatically increase. We also expect capital to be challenging for high sulfur residual fuel refiners who like capital to upgrade, older tonnage and vessels that cannot be retrofit with abatement technology and small suppliers who lack the liquidity to finance more express inventory.
While this camp does not go into effect until 2020, Aegean supports the implementation of the new regulation which will have a positive impact on our business. Our amount of tonnage, flexible infrastructure and team of global specialists ensure that Aegean will continue to successfully navigate in ever changing marketplace.
During the third quarter, we also used $100 million of cash to repurchase approximately 22% of Aegean's outstanding shares owned by the company's founder. The repurchase underscores the board's confidence in Aegean's prospects that provides meaningful earnings accretion for all Aegean shareholders.
Let's turn to our results for the quarter. I'm pleased to report that we achieved adjusted EBITDA of $37.7 million, an increase of 19.7% over the prior year. Volumes of 4,258,904 tons, an increase of 25.6% year-over-year, and net income and EPS for the quarter when adjusted for the sales of non-core assets and the accelerated investing of the shares of the founder which Peter we will discuss in great detail later were $17.7 million and $0.36 respectively.
Pro forma adjusted EPS assuming the repurchase of shares occurred at the beginning of the period was $0.45. While the company continues to evolve, our expanding businesses include new geographic markets and our retail sales business commanding a higher overall working capital level than we have experienced in the recent past.
As always, we continue to monitor our liquidity requirements to maintain sufficient cash and working capital to operate efficiently and fund further growth.
This quarter, we sold 4.2 million metric tons of marine fuel of which 518,000 tons was retail sales trading volume. This is our fourth consecutive quarter of more than 4 million metric tons.
Our EBITDA per ton decreased approximately 4.5% quarter-over-quarter to 8.84 per metric ton as we increased sales in our retail sales business. As we mentioned in the last couple of quarters, we believe that EBITDA per metric ton better reflects the complexity of our platform and the diverse business models we now employ in various markets around the world.
Gross spread per ton decreased to $18.6 from $20.9 from the prior quarter.
With that, I will turn the call over to Spyros to provide additional financial results for the quarter.
Thank you. In the quarter, we sold two older non-core vessels resulting in a book loss of $3.9 million. I will discuss the use of proceeds and the significant progress we have made on paying down debt later in the call. During the last three quarters we have sold five older non-core vessels for $8.9 million. The sale of vessels is in line with our focus on evaluating our business to ensure we generate efficiency across our operations.
For the third quarter gross profit was $88.4 million representing a 4.8% increase from the prior year period. Operating income when adjusted for the sale of non-core assets and the accelerated sales was $29.6 million representing a 28.8% increase from the prior year as we continue to strategically position assets to more profitable areas. During the quarter interest expense decreased by $1.1 million year-on-year to $8.4 million as our interest rate swaps are benefiting from the current increasing interest rates.
Net income adjusted for the sale of non-core assets and the accelerated sales was $17.7 million, a 45.9% increase from $12.1 million for the prior year period. Adjusted earnings per share for the quarter was $0.76 per basic and diluted share representing a 44% increase from $0.25 per basic and diluted share for the prior year period.
EBITDA adjusted for the sale of non-core assets and the accelerated sales was $37.7 million compared with $31.5 million for the prior year period.
Moving to the balance sheet, cash and cash equivalents were $58 million as of September 30, 2016, compared with $115.4 million in the prior year period, as we utilized cash to fund the share buyback.
While our total debt of $756 million goes in line with the previous quarter, our net debt increased by $64.5 million as we used cash to buy back shares from our founder. While we continue to payback our fixed asset debt, our total debt has remained at roughly the same level as price increases and our growing business has increased working capital requirements.
The vessel sales mentioned earlier allowed us to make progress on our priority to strengthen our balance sheet by paying down vessel debt and eliminate approximately $9.5 million in operating costs on an annual basis.
In September, we announced the renewal of our $1 billion secured global borrowing base multicurrency revolving credit facility and the $250 million secured U.S. borrowing base revolving credit facility.
Now, I will turn the call back over to Nik.
Thank you, Spyros. During the third quarter of 2016, we continued our efforts to deploy our resources and assets into the most effective and profitable markets. While the industry still faces headwinds into consolidation of volatile oil prices, we're committed to evaluating our markets and redeploying our capital assets and resources as opportunities that we believe will generate the greatest value for our shareholders.
As we celebrate 10 years of being a public company, we look back and appreciate the hard work and dedication of all those involved. It wasn't always easy and the markets have been less than cooperative but we have continued to grow and thrive because of the incredible team of professionals that are Aegean's backbone.
As we look forward to the next 10 years, we see a company setting out on our new journey one that will be marked by change and no doubts some challenges and met with the same intelligence, dedication, and professionalism that have bought us this far. We believe that the change in growth underway at Aegean will position the company for continued success and we look forward to sharing our vision with you. Thank you. Operator?
Thank you, sir. [Operator Instructions].
Our first question comes from Doug Mavrinac with Jefferies.
Thank you, Operator. Good afternoon guys. I just had a handful of follow-up questions for you all but the first being, looking at your 3Q results it's interesting because as you guys mentioned, you redeploy some assets during the quarter, you sold a couple of non-core assets yet you were still able to grow your sales volumes. So my question is, is there any one particular business segment or one particular geography that was responsible for an acceleration of sales volumes during the quarter or was it just kind of overall you've seen an uplift kind of everywhere?
Yes. Doug that we've seen, we have a new market in there too, by the way we talked about the introduction of our South African market in Brazil. So those are certainly contributing to the growth and the volume. And the rest of the core business certainly had growth. But I would say the other component that has had biggest growth is our retail sales component, which you refer to as a back-to-back business, yes, that's the other piece.
Got it. And actually that was kind of would be my follow-up is that in addition to the new geographies kind of how is that business evolving I mean how much is it contributing and my question is got to be is it going to be an area of growth and it sounds like it already is. So how do you see that particular aspect of your business evolving over the next two to four quarters?
No, it's an asset like business, as we pick up new teams and people, we can build that business out. So it's like a brokerage business.
Right, right, right. Got it. Thanks Peter. And then kind of switching gears a bit from the overall and then how you guys are strategically attacking it, from a cost standpoint you guys laid out as an initiative that you were going to be focusing on reducing cost and whatnot and so as part of that obviously we've seen some of the non-core assets being sold. So my question on that is are there any other kind of assets that you've identified in terms of may be low hanging fruit that you can dispose of or when it comes to the cost and whatnot should we think of 3Q as kind of the run rate going forward?
Well, Doug, I think the key here is to continue to monitor your business and the things do change. So we're going to move to where things are doing best and that's really it. And so I could tell you one set of circumstances may exist today that are different six months from now. So again we'll monitor all our markets and just make sure we are nimble and very much in tune with how banks are performing, and if there is an underperforming element, we will certainly look to adjust it or remove it and if this area where we can overperform, we will look to move towards that. And as you've seen, a new wave of that existing within our business.
Got it, very helpful. And then two final questions, one is going to be quick, sales volumes quarter-to-date, do you guys have an update as far as kind of how October look?
October and November I mean we're on at the same rate with Q2, so $1.4 million, $1.5 million.
Perfect, perfect, thanks Spyros. And then final question and I don't know how you're going to be able to answer this even if you will but I'm going to ask anyhow that when you look at your profitability clearly it's accelerating, your cash flow is strong but you guys as you mentioned have bought back a bunch of stocks, your net debt is down like 74 million bucks. So when you think about your growing business, strong cash flow, how do you think about cash usage going forward given that you have already down a lot on the buyback front and on the deleveraging front?
We will always continue to look to de-lever. I mean we are looking for capital support to us, it is always useful when again if you look to expand in a market you have to have capital available, so you could buy cargos and be there in armed to execute your business that's our priority number one by de-levering we're able to do that. So I think we already talk about a strategy that involves something else we will certainly be vocal about it.
Okay. All right thanks. Actually that's all I have. Thanks for the time guys.
Our next question comes from Ben Nolan with Stifel.
Great. Congrats on a good quarter guys. Have a handful of questions as well. The first really is actually first really is you, what's the run rate share count at the moment, I mean how should we model outstanding shares going forward?
It's approximately $39 million.
Okay. And then now on to the little more complicated one. Your sales volume has grown 26% and I appreciate a lot of that's from the retail side of the business looks like it's continuing to grow given what you did in the last quarter. How should we think about that going or how do you think about that going forward, I mean is this a business where you guys could collectively get to 5 million tons a quarter at some point in 2017 or is this you know you're shooting for 5% annual growth, 10% annual growth, I mean what's the goal?
It's hard, it's hard to as you've seen over the years to sit and say okay; we're going to pick five million tons because it's being opportunistic and seeing again where in the commodity market. So it's where we can find the opportunities but it's hard for us to put down a model and say okay, we are going to grow 5% every quarter or something.
Okay. But is it fair to say there are opportunities and the trajectory is still upward in terms of the volume?
Yes, I think I want to go back to what I just said a few moments ago there, Ben, is to be nimble again, there is a part of the business doing better than other we're going to focus on that. See might put down on something else and again the circumstances change so much 10 years we're doing this now, we see there is movements in this. Look I think our exciting thing is something I spoke about earlier in March about the upcoming and I have 10-years to focus on this too, while the 2020 regulation for low sulfur that I think is going to be have a real positive impact to our business.
And we're really trying to prepare ourselves for that. We're trying to understand where are we going to source the cargo from and just be prepared for them. I mean we know it's ways off but these things have a way of catching up to you.
And being in touch with our customers and finding solutions for them, so our platform, our retail piece, the piece that we do in terms of lending our product all that matters and it's all going to play into giving our customers better solutions.
Right. And actually that leads to what I was going to ask next, it seems like this is going to be really a big deal, I agree and it does seem like there are going to need to be changes in things like infrastructure and that sort of thing in order for the market to respond. Are you guys considering adding may be to your storage capacity or to your blending capacity, I mean is that an area that you feel like in order to really capitalize on the opportunities, you need to be investing in.
Yes absolutely, we're getting ready for the secrets.
Okay, fair enough.
You like, but sure enough again it's -- we think it's a really important thing in the bunkering industry.
Right, okay. And then just lastly for me, could subsequent to your purchase of the foundry stake, which obviously I think was a very good thing, how do you see that in relationship playing out going forward. I mean obviously you still have some interplay with the Greek operation there and that's owned by him and is that would you imagine things gravitating increasingly more towards New York or is it status quo, how should we think about how this is going to play out going forward?
No as you look deep there are various things going on, we're in the middle of that right now. Less on the side effect that's probably 30% of world's tonnage is in Greece, so Greece will always have a play in our business, it's very, very important. We are front filer as you know, but [indiscernible] get into that. I will just again get back to the issue that we will have our presence in Greece.
Okay. That's fine that's -- that does it from me, I think that's again nice job this quarter but I'm especially kind of cost anything else it's pretty impressive.
Thank you. Thanks.
At this time, there are no more questions. This concludes the Aegean Marine Petroleum Network Incorporated Conference Call. Thank you and have a nice day.
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