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International Shipholding (NYSE:ISH)

Q4 2012 Earnings Call

February 07, 2013 10:00 am ET

Executives

Manuel G. Estrada - Chief Financial Officer and Vice President

Niels M. Johnsen - Executive Chairman and Chief Executive Officer

Erik L. Johnsen - President and Director

Analysts

Mark Suarez - Euro Pacific Capital, Inc., Research Division

Operator

Good morning, everyone, and welcome to the International Shipholding Corp. Fourth Quarter 2012 Earnings Conference Call. Please be aware that today's conference is being recorded and is now being webcast at the company's website, www.intship.com. [Operator Instructions] Now, I would like to turn the conference over to Manny Estrada, Chief Financial Officer. Please go ahead, sir.

Manuel G. Estrada

Thank you. Good morning, everyone, and thank you for joining us today for International Shipholding Corp.'s Fourth Quarter and Year-end 2012 Earnings Call. I am Manny Estrada, the company's Chief Financial Officer. With me today are Niels M. Johnsen, our Executive Chairman and CEO; and Erik L. Johnsen, our president.

Niels will start the presentation today by providing an insight on market trends. Erik will provide an overview of the quarter. I will return at the end of the call to briefly review our fourth quarter results, and then we will welcome your questions.

Before we begin, I would like to point out that statements made today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statement, and certain factors that could cause actual results to differ significantly from our expectations are detailed in our SEC reports. I direct you to our earnings release for the full Safe Harbor statement.

Now, I'd like to turn the call over to Niels. Niels?

Niels M. Johnsen

Thank you, Manny, and thank you, all, for joining us today. I am pleased to welcome all of you to our fourth quarter and year-end 2012 earnings call. Before Erik's comments and Manny's review of our financial results, I will make a few introductory comments.

In 2012, we successfully executed our growth strategy, which is focused on filling transportation needs in niche markets, increasing our contracted revenue, partnering with experienced operators and expanding our customer base with credit-worthy counterparties. As reported earlier, we completed the acquisition of United Ocean Services, giving us the leading position in the United States Jones Act dry bulk market. In addition, this acquisition added creditworthy customers, Tampa Electric and Mosaic, that are serviced by the UOS fleet on long-term contracts. We also acquired a 1999-built Pure Car Truck Carrier, which is deployed on a long-term contract, giving us a more modern, higher-specification vessel. Importantly, both of these transactions met our investment criteria of being immediately accretive to our financial results.

While we made some important strides for the long-term benefit of our company and our shareholders in 2012, 2012 was a challenging year for the shipping industry and this trend has continued into the first part of 2013. We must continue to cautiously manage the various risks that continually confront us. While our contract structures protect us from continued high fuel prices, we cannot turn a blind eye to this risk. Counterparty and currency risks are an ongoing reality in today's world that must be carefully evaluated. And traditional financial sources available to international shipping activities continue to be stressed, requiring alternative financial strategies to provide the capital we require as we develop accretive growth opportunities.

In addition, while we expect 68% of our 2013 revenue to be derived from fixed contracts, which helped insulate us from spot market volatility, the cyclical nature of our industry is an ever-present reality.

The recovery from the financial crisis has been slow, which has weighed on shipping demand. At the same time, newbuilding order books continue to bring additional capacity into the market. The combination of these 2 factors has impacted all areas of dry cargo shipping.

However, while the near-term outlook for the dry cargo market appears challenging, the long-term prospects remain positive. We expect to see a reduction in supply as order books decline and continued scrapping of vessels takes capacity out of the market. As we have said in the past, we believe it is more likely for the smaller vessels, which we operate, such as our Handysize bulk carriers, to be the first to benefit from this dynamics as the fundamentals are much more attractive.

According to our database for vessels of 22,000 to 38,000 deadweight, which total some 2,241 vessels worldwide, by 2015, 443 of these vessels will reach an age of 30 years as compared to the current order book of some 380 vessels.

I would also would like to note in advance of Manny's comments, that we have adjusted our guidance for 2013, which Manny will explain in more detail. We now expect the net income to be in the range of $10 million to $12 million, and EBITDA to be between $63 million and $67 million.

Finally, yesterday our Board of Directors authorized a quarterly dividend payment of $0.25 for each share of common stock, enabling us to achieve our annual target for 2012 of $1 per share. For 2013, we have again set our dividend target at $1 per share.

I'd like to turn the meeting over to Erik now. Erik?

Erik L. Johnsen

Thank you, Niels, and good morning. Our fleet continues to operate as planned in the fourth quarter as we successfully closed several earlier announced acquisitions and concentrated on integrating them into our daily activities. I will provide further details of these transactions in just a few minutes.

During the quarter, we continued to generate significant revenues from our fixed rate charters, providing us with substantial top line stability. Fixed revenues were derived primarily from our Jones Act vessels, Pure Car Truck Carriers, Capesize vessel, as well as our Indonesian operations.

In our variable business, supplemental cargo volumes were lower than expected. But we believe they will trend at historical levels going forward.

The Rail Ferry segment returned to normal operating levels after having been negatively impacted by weather-related rail outages in the third quarter. We are working on life extension plans that, if successful, should allow us to operate the existing vessels through 2025, further improving the profitability of this segment.

The market for shipping dry bulk commodities remains soft during the quarter and we believe it will persist this year as well. While we had 1 Capesize vessel on a fixed rate time charter at very attractive rates through the last quarter, she will conclude that employment in the first quarter of 2013. The vessel is in a revenue-sharing agreement with another Capesize vessel and will trade on spot business during 2013 unless we see an opportunity to fix a longer-term charter at more attractive daily rates. The Handysize ships, which are part of a revenue-sharing agreement with European partners, continue to produce results that outperformed the Baltic Dry Index. Operating these vessels in a revenue-sharing agreement enables us to reduce our exposure to the current spot market conditions while increasing the operating leverage of a larger fleet of 15 ships. We expect these ships to continue to operate primarily on spot cargoes while rates remain at depressed levels.

Our long-term plan continues to be to operate a portion of these vessels on medium to long-term charters as the rate environment improves in order to increase the fixed revenues generated by our fleet.

As Niels briefly mentioned, we completed 2 important transactions during the fourth quarter. Most notably, we closed our acquisition on the United Ocean Services. This company greatly enhances our Jones Act presence and allows us to expand in a market we know well. With 2 vessels, 4 tug-barge units and experienced management team and contract business that generates about $28 million to $30 million in EBITDA annually, we are excited to add UOS to our fleet. The acquisition of a modern 1999-built Pure Car Truck Carrier was completed as well during the fourth quarter. The new vessel, which was renamed the Green Cove and reflagged on the U.S. flag, is a sister ship of 2 vessels already part of our U.S. flag fleet. Together, with their higher specifications, these 3 vessels provide us with greater capacity and flexibility to carry supplemental cargoes.

With that, I would like to turn the call over to Manny, for a review of our financials for the quarter.

Manuel G. Estrada

Thank you, Erik. I'd like to provide some details on our financials for the fourth quarter ended December 31, 2012. We reported net income of $11.5 million for the 3 months ended December 31, 2012, compared to $1.8 million in the same period last year. Results for the fourth quarter include nonoperating gains of $4.7 million from our yen-denominated loan and $12.2 million from the sale of a PCTC vessel, partially offset by approximately $2 million of fees associated with the UOS acquisition.

For the fourth quarter, revenues decreased to $56.8 million or approximately 8.1% year-over-year. Our gross voyage profit was $10.7 million for the quarter, down from $16.9 million in 2011 fourth quarter. This year-over-year decline in both revenues and gross voyage profit was primarily attributable to the expiration of 3 contracts with the Military Sealift Command, the divestiture of 2 international flag Pure Car Truck Carriers and the continued weakness in the dry bulk spot market.

Operating income for the 3 months ended December 31, 2012, was $10.1 million, compared to $5.4 million in the prior year period.

We generated approximately $39.7 million of revenue during the fourth quarter from our fixed contracts, as compared to $43.1 million for the 2011 period.

Variable revenues, which were derived from our supplemental cargoes, our Handysize vessels and the Rail Ferry segment were $17.1 million for the quarter versus $18.7 million in the fourth quarter of 2011.

Before providing you with a review of our gross voyage profit for the quarter, I would like to note that following the acquisition of United Ocean Services, we adjusted our reporting segments to more closely align the operations of the vessels in each segment. For more information on the updated profile of our reporting segments, I will refer you to our fourth quarter earnings release issued yesterday afternoon, which provided an updated vessel profile by segment, as well as a non-GAAP reconciliation table by segment. Our 10-K filing, which we expect to file on or about March 14, will provide additional insight in those segments.

For the quarter, our Jones Act segment gross voyage profit increased $3.2 million, primarily due to the 1 month of UOS operating results and an improved performance from our Molten Sulphur carrier.

The Pure Car Truck Carrier segment declined by $3.5 million, due primarily to 2 fewer vessels in operation that were divested in the first quarter of 2012 and slightly lower supplemental cargo.

The Rail Ferry segment was down approximately $900,000 from the year ago period, owing to lower capacity shipped during the quarter.

Our Dry Bulk segment was $2.5 million lower as dry bulk rates remain at depressed levels.

The Specialty Contracts segment decreased by $3 million as results were impacted by the expiration of 3 MSC contracts during the first quarter of 2012 and the redelivery of our ice-strengthened vessels from its MSC contract in September of this year.

Our other segment, which consists primarily of broker service, was up slightly.

During the 3-month period ended December 31, 2012, the exchange rate of the yen weakened in comparison to the U.S. dollar from 77.9 to 86.7. This resulted in the noncash exchange gain of $4.7 million reported in the quarter.

As of December 31, 2012, our cash and cash equivalents were approximately $19.9 million, and working capital was approximately $12 million, which is an increase of approximately $17.6 million from the previous quarter.

In addition, our balance sheet reflects the recent acquisition of UOS. The intangible balance of $45.8 million reflects valuation, primarily attributable to the UOS contracts while the $1.9 million goodwill balance reflects the implied premium paid for the UOS acquisition.

Yesterday, the company's Board of Directors authorized a dividend payment of $0.25 per share for each common stock owned as of the record date, February 19, 2013, payable on March 4, 2013. We remain committed to returning capital to our shareholders in the form of dividends and fully expect to achieve an annual target of $1 for 2013.

As you'll note, we have updated our guidance for 2013 for both net income and EBITDA. We now expect net income in the range of $10 million to $12 million and EBITDA between $63 million and $67 million. This change in guidance is attributable to our revised lower outlook for the Dry Bulk segment, the redelivery of the ice-strengthened vessel from its MSC contract and an additional sale-leaseback transaction that closed in December.

This ends our prepared remarks. We now would like to turn the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Mark Suarez from Euro Pacific Capital.

Mark Suarez - Euro Pacific Capital, Inc., Research Division

Just -- if you can just speak a little bit about the Dry Bulk segment this quarter. I'm wondering if you can split up for us how much of that business is spot versus revenue share agreements? I know you spoke to that during the presentation here. And if also you can give us a sense as to how many contracts would come up for renewal this year beyond the Capesize vessel you just mentioned?

Niels M. Johnsen

All of the -- this is Niels Johnsen. All of the bulk carriers are in revenue-sharing agreements, which provides the commercial basis for the employment of those vessels. Those revenue-sharing agreements then have certain medium-term contractual business in them that are attributed to the participating vessels in the revenue-sharing agreement. We spoke of the Capesize vessel coming off of its fixed term charter during Erik's remarks. And as he said, that revenue-sharing agreement at the present time only has 2 vessels in it. The one vessel came off. The second vessel is still on. It's a long-term charter, and the results are attributed to both the vessels. To try and answer your question on the contractual requirements under those revenue-sharing agreements, at the present time, a relatively low percentage of the business in those revenue-sharing agreements are medium-term contracts given the fact that the management of the revenue-sharing agreements and ourselves don't feel that the longer-term contractual prospects are worth taking at this time and we're better off having, which I think Erik commented on, we're better off having the vessels trading on shorter-term employment given the fact that the current time charter values on the various classes of bulk carriers, and that would be Capesize, Panamax, Handymax and Handysize, are at historically low levels. If you look at the daily indexes within the last 2 days, you'll see that the Capesize spot rates have fallen to something like $7,000 a day from a level of something like $15,000 to $16,000 a day in the fourth quarter, so just a couple of months ago. And it's a similar phenomenon in the Panamax, the Handymax and the Handysize sector. The only thing that I would elaborate on there is that the Handysize sector, while it is at historically low levels, has a stability that the other 3 segments do not have.

Mark Suarez - Euro Pacific Capital, Inc., Research Division

Got it. And now turning into your sort of minority investment here on the mini-bulkers, what sort of prompt have you given to sort of the dry bulk environment in going after those 4 more vessels there?

Erik L. Johnsen

I think it was a distressed sale. It was extremely attractive financing from the financial institution that took over the vessels. And we have good potential employment that would be taken over with the acquisition that allows us a little bit of stability in that market at an extremely attractive financial terms.

Mark Suarez - Euro Pacific Capital, Inc., Research Division

Okay. And I know you mentioned the UOS. I know that closed in and had a 1-month contribution. Can you sort of give us a sense of how much of the revenue, if you split up -- if you exclude the sulphur carrier, how much of that revenue in that segment in EBITDA came exclusively from UOS?

Manuel G. Estrada

Mark, you're talking about for the fourth quarter?

Mark Suarez - Euro Pacific Capital, Inc., Research Division

That is correct, yes.

Manuel G. Estrada

Remember, there's only one month in there for UOS, but EBITDA for the month, the UOS contributor, was about $2.5 million, which is in line with what we stated today that we think the EBITDA for 2013 from UOS will be about $30 million. So the December results were on line with what we are expecting for 2013.

Mark Suarez - Euro Pacific Capital, Inc., Research Division

Got it. And now turning into the 2 contracts you have going, the TECO contract and Mosaic, I know the TECO expires in 2014. I know you have another one, the 3-year contract, the Mosaic contract extends through, again, December 2014. I'm wondering if you have began negotiating the potential extension of those contracts, or if it's just too early in the cycle right now?

Erik L. Johnsen

There's a constant discussion between the UOS management team and both Mosaic and TECO. But with only 45 to 50 days into the process, I think we're well -- way too early to make a determination of where we're going to be in '14 and '17. But I would tell you the relationship is good. The vessels can certainly meet the requirements. And so I look forward to having further discussions both with TECO and Mosaic, but at this point we can't make any statement one way or the other.

Mark Suarez - Euro Pacific Capital, Inc., Research Division

Okay. And then lastly on the MSC contract, the ice-strengthened vessel, the Green Wave, what's your strategy going forward as to pertain to that vessel? Do you see it -- I mean, is it your priority to employ it again? Is there an option to maybe scrap the vessel and move on, or how do you see that vessel or the strategy concerning that vessel going forward this year?

Niels M. Johnsen

This is Niels Johnsen again. First of all, I should point out to you that we have reflagged that vessel from United States flag to international flag. Having completed that -- successfully completed that reflagging process, we have deployed the vessel into, at the present time, spot employment in the international market. The vessel has gone on voyage from the United States to Brazil and is next scheduled to take a cargo of bulk grain from Brazil to Europe whereafter we have to carry out a routine dry docking on that vessel. We are also planning and pointing toward including that vessel in one of our joint ventures, given its size and flexibility, working together with the other vessels that we have. So our current view with that vessel is that it does have ongoing value under international flag.

Operator

[Operator Instructions] That does conclude the question-and-answer question. I will now turn the call over back to Mr. Niels Johnsen.

Niels M. Johnsen

Again, I would like to thank everybody for joining us today. We appreciate your participation, and we look forward to our future earnings calls to be able to communicate with you. Thank you very much, and have a good day.

Operator

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

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