TBS International Limited Q4 2008 Earnings Call Transcript

TBS International Limited (TBSI)

Q4 2008 Earnings Call

April 1, 2009 10:00 am ET

Executives

Joseph Royce - Chairman, President and Chief Executive Officer

Fred Lepere - Executive Vice President and Chief Financial Officer

Lawrence Blatt – Senior Executive Vice President

Analysts

Doug Mavrinac - Jefferies & Company

Dave [Bidders] – Private Investor

Presentation

Operator

Welcome to the TBS International Limited fourth quarter and full year results ended December 31, 2008 financial results conference call. We have with us Mr. Joseph Royce, Chairman, President and CEO and Mr. Fred Lepere, Executive Vice President and Chief Financial Officer of the company. (Operator Instructions)

We now pass the floor to one of your speakers today, Mr. Fred Lepere. Please go ahead Mr. Lepere.

Fred Lepere

Thank you. Good morning everyone. Thank you for joining TBS International Limited’s quarterly conference call. The purpose of today’s call is to discuss the results of TBS’ fourth quarter and year-ended December 31, 2008. On Monday we issued a press release after the close of the stock market in New York with financial and operational information for the fourth quarter and full year 2008. If you have not received this release you may log onto our website at www.tbsship.com and navigate to the Investor Relations page or you can call Capital Link at [phone].

We will also post a transcript of this call on our website once it has been prepared. Our remarks today will be followed by a question-and-answer session and for those of you who want to follow our slide presentation please go to the TBS website which again is www.tbsship.com and click on the web cast link. Note that the slides are user controlled. Those of you who want to follow the web cast please click on the arrow at the bottom of the web cast screen to make the slides turn.

Also please note the web cast will be archived on our website. Now I would like you to please turn to slide number one. This slide refers to forward-looking statements. During the course of the conference call we may make forward-looking statements. Such statements are just predictions and involve risks and uncertainties such that actual results may differ materially. I’d like to refer you to our filings with the Securities and Exchange Commission, in particular our quarterly reports on Form 10-Q and our annual reports on Form 10-K. These documents contain and identify important factors that could cause the actual results to differ materially from those expressed in these forward-looking statements.

Joseph Royce is traveling on an extensive business trip in South America. He is making this conference call from our office in Lima, Peru. We have asked Lawrence Blatt, our Senior Executive Vice President, to participate in this call in the event we experience technical difficulties during Mr. Royce’s presentation or during the question-and-answer period.

With that I would like to introduce Joseph Royce, our Chairman, CEO and President.

Joseph Royce

Thank you Fred. Good morning everyone and welcome to TBS International’s conference call for the results of the fourth quarter and year-end December 31, 2008. We will begin our presentation with slide number two; the challenges of the first quarter 2009.

The year 2008 brought the dry cargo bulk market to unprecedented highs only to be followed by a precipitous drop. The global economic slow down has impacted the dry shipping market dramatically, decreasing both volumes of cargo and trade rates as reflected in the accompanying Baltic Dry Index graph. There has been a corresponding negative impact on asset values as well.

Now let’s turn to slide number three; proactive initiatives. In the current environment we are staying the course to safeguard the value we have created and remain alert to new opportunities that may arise. We have a strong franchise in our core markets of Asia and Latin America with 300 dedicated worldwide employees of TBS and our affiliate agencies in constant communication directly with our customers to work together through these challenging times.

They deliver the TBS five-star service, ocean transportation, logistics, port services, operation and strategic planning to further cement our relationships. TBS has added heavy lift capacity and more warehouses to further enhance our offerings. We are aggressively seeking to leverage our five-star service to increase market share in our existing trade lanes and penetrate new trade lanes. To support this effort we are locating senior executives to Houston, Texas and Shanghai, China.

Now let’s look at slide number four; TBS taking a cautious approach. To address these challenging times we have taken a series of defensive measures. We cancelled our program to build an additional 12 Roymar Class Multipurpose Tweendeckers with no cost of penalties to TBS. We will of course continue our existing Newbuilding program of six Roymar Class Tweendeckers and have in place fixed time financing. Multipurpose Tweendeckers are an important segment of the TBS fleet and the first new vessel is expected to join the fleet in June of this year.

In order to conserve cash we cancelled 2008 bonuses, aggregating $15 million and implemented a salary freeze for our offices and office staff. We continue to evaluate our entire cost matrix to identify potential savings and very importantly we obtained covenant waivers from our lenders with respect to certain 2009 financial covenants. Fred will speak about this in more detail shortly.

Now slide five, looking forward. Turning an eye towards the future, we expect to see some balance returning to the supply and demand of handysize handymax dry bulk vessels. Scrapping of older vessels has accelerated. Newbuilding orders are being cancelled and many ships have been laid up that will likely never return to trading.

On the demand side of the equation China and India remain the main drivers in the dry cargo industry. Both countries are expected to achieve positive growth in 2009 despite the slow down caused by the recent crisis. According to Clarkson statistics China is expected to grow by approximately 6.7% and India by 5.1% in 2009. This growth reflects the continued infrastructure development which would [cost] imports of core commodities. This concerted effort of governments around the world to inject liquidity into the credit markets and to implement stimulus programs aimed mainly at infrastructure development should eventually result in increased dry cargo movement.

Now I would like to turn to slide number six, our fourth quarter and year ended December 31, 2008 overview.

Our record 2008 financial results have quickly become history. Since the last quarter of 2008 we have been experiencing a dramatic decline in the global economy and we now operate in a completely different financial and economic environment without clear visibility as to when the turmoil will end. The near-term effects of this dramatic decline have been devastating on the dry cargo shipping industry. The freezing of the credit markets and the virtual elimination of letters of credit which are the traditional financing mechanism of global trade have caused a significant decrease in the volumes of cargo transported, thereby affecting trade rates, vessel utilization and asset values.

As a result, revenues, earnings and cash flows for the shipping industry are under significant pressure and are expected to suffer during 2009. TBS has not been immune to these conditions and for the first three months of 2009 our revenue has declined significantly. Though it is the stated policy of our company that we do not offer guidance, in light of these extraordinary times I believe it is appropriate to discuss how these events have impacted TBS.

Our preliminary estimates for the first quarter of 2009 indicate that our financial results will fall into the following ranges: Revenues between $55-60 million, producing a net loss of between $20-25 million and an EBITDA between $0 and $5 million. Despite the lack of immediate visibility into prevailing market conditions we are cautiously optimistic for a gradual return to an improved market environment in the second half of the year.

Now I would like to turn the floor over to Fred Lepere, our Executive Vice President and Chief Financial Officer.

Fred Lepere

Thank you Joe. We should all now be on slide number seven, the full year 2008 operating and financial highlights. Before I begin to review the 2008 operating and financial highlights I would like to mention that as previously announced we are pleased to have obtained waivers of our key financial covenants; namely loan-to-value, minimum consolidated tangible net worth, maximum consolidated leverage ratio and minimum consolidated fixed charge coverage ratio for all of 2009.

This is indicative of our excellent relationship with our lenders. In connection with these waivers we pre-paid all principle installments that would have become due under our term loan facilities during 2009 reducing our total non-construction debt to $247.5 million. Even after making these prepayments our current cash balance, which fluctuates day to day, is approximately $70 million.

Now for the year ended December 31, 2008 total revenues were $611.6 million, an increase of 73% over the same period in 2007. Our voyage revenues for the full year 2008 were $518.9 million, an increase of 98% from the $261.5 million during the same period in 2007. We would like to make a note here that we have intentionally separated the logistics revenue of our business from other revenues. TBS Logistics Inc. which is a wholly owned cargo and transport management subsidiary started during the fourth quarter 2007 to focus on project transportation logistics, a growth area of strategic interest for TBS which is producing results.

Time charter revenues for the year ended December 31, 2008 decreased by 5% to $83.9 million from $88.4 million for the year ended December 31, 2007 reflecting the increased number of vessels that were utilized in our established voyage business.

Net income was $191.8 million, an increase of 95% over the same period in 2007. Earnings per share on a diluted basis for the full year 2008 were $6.54 per share, an increase of 87% from the earnings per share of $3.50 for the full year of 2007. We also experienced improved margins in the year ended December 31, 2008. EBITDA, which is a non-GAAP measure, was $283.9 million for the full year 2008, an increase of 97% over the same period in 2007. A reconciliation of EBITDA, which is a non-GAAP measure, is provided in a slide in the Appendix.

Please now turn to slide number eight. This slide demonstrates the revenue metrics of our business for the year ended December 31, 2008. Let me begin with our voyage revenue metrics on the top of the slide. During the full year 2008 we operated an average of 33 vessels in our freight voyage business and had 11,900 freight voyage days as compared to an average of 22 vessels and 8,209 freight voyage days during the full year 2007 reflecting the growth of our business. Our average daily voyage time charter equivalent was $29,526 per day in the year ended December 31, 2008, an increase of 36% from the $21,658 per day during the same period in 2007.

During the full year 2008 we had considerable increase in tons of cargo shipped and freight rates per ton. The tons of cargo shipped excluding aggregates accounted for slightly more than half of the significant increase in total tons of cargo shipped during the year.

We now turn to our time charter revenue metrics on the same slide. Time charter days for the year ended December 31, 2008 decreased to 3,004 days from 3,659 days reflecting the increased number of vessels utilized in our core voyage business. Our average daily time charter equivalent for time charter-out tonnage was $26,134 per day in the full year 2008, an increase of 13% from the $23,078 per day during the same period of 2007.

Please now turn to slide number nine. This slide provides the highlights of our consolidated balance sheet. As of December 31, 2008 we had $131.2 million of cash and our net debt to capitalization ratio stood at 29.6%. After making the prepayments of principle required under the waiver agreements our cash balance was approximately $70 million.

We have now reached the end of our presentation. The slides in the Appendix provide the fourth quarter financial data comparisons, our EBITDA reconciliation and additional information on our business model, trade routes, our fleet and our global network. Please take a look at them at your convenience. We thank you for your interest in and support of our company. I would like to open the conference call to questions from our investors.

Operator please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Doug Mavrinac - Jefferies & Company.

Doug Mavrinac - Jefferies & Company

Clearly within the guidance and even if you didn’t provide guidance everyone knows this is a challenging marketplace right now. My question has to do with what you are seeing in terms of recent activity, say within the last month or so, specifically within your Central American and South American businesses. Have you seen a further slowing, a stabilization, maybe an improvement in that sector of your business? Then maybe if you can highlight kind of what you are seeing coming out of Brazil kind of over the last month or so?

Joseph Royce

What we have seen, I will take a little step back from your time frame. Our business out of Asia, our parcel business coming from Asia into South America has remained even during the last quarter of last year is pretty consistent. Where we did suffer some set back was obviously in Brazil where our business is based on the steel parcel service and it pretty much came to a halt in the last quarter of 2008. What we are seeing is that with renewed credits and we have seen an increase now. We had one parcel sailing in January. We have had two parcel sailings in February and we have had three parcel sailings in March. It looks like we will have at least another three parcel sailings in April.

So we are starting to see an improvement in volumes. I just spent a week in Brazil speaking to many of our customers especially our steel customers and they are starting to see increased inquiry. I think they all remain cautiously optimistic as the pricing is not where they would like it to be but they are starting to see an increased demand. They are starting to see improved credits and we are starting to see an increase in volume from our customers. I think the important thing is that for us is that as the volumes start to increase we are also starting to see an increased level in the freights.

These trades are coming back slowly but I think that we are starting to see a positive momentum and hopefully as the year progresses, especially as we look towards the second half of the year, there will be a more consistent stability in the marketplace.

Doug Mavrinac - Jefferies & Company

My second question has to do with your existing business that you may have contracted. How would you describe the percent of your operating days or the percent of your business that is now contracted versus maybe what has historically contracted? If I recall you typically roll over a number of your contracts in November and as we know November was quite weak. Can you remind us how much of your business per se is contracted at this point?

Joseph Royce

I’ll address that by our historic traditional contracts are about 75% of our business. This is fixed contracts, franchises, our evergreen contracts, etc. What happened was that at the end of last year and we year after year sit down with our customers and look into the upcoming year and discuss contracts and finalize business during November and December. Obviously that was a very, very difficult time. A vast majority of our customers were just as confused and uncertain about the upcoming year as we were. What happened was instead of sitting down and doing and finalizing contracts like we normally did is we more or less fixed a monthly requirements for January and monthly requirements for February.

As the beginning of the year started to unfold people started to take a more positive view going into 2009. As a result, two of our major copper people exporters, for example, out of Peru, one big mining company and one international mining company, both now have fixed contracts with us for the balance of the year. The volumes are a little bit below what we traditionally carry but I think it is more of a fact they are taking a cautious approach to 2009 and I think all indications, and I am calling from Peru and I spent yesterday with a couple of our customers and will spend the rest of today with them, they feel again with the situation in China that the second half of the year they expect the volumes to continually improve.

It is hard to put a percentage around the contracts because again our steel customers the market is developing. The one thing I can assure everybody is that we still are their chosen carrier. We have built great relationships over the years and again it is great in an up market but it is just as important if not more so in a down market that they have the insurance they have a first-class carrier that they are dealing with people they can work with and people that understand the situation. This is where we sit right now. My personal feeling is that as the year starts to unfold, and I think we are now looking into the second quarter where people are starting to see a year with increased demand especially towards the second half of the year, will probably get back into a more contract oriented system. Right now all the cargo that our traditional customers have we are carrying.

Doug Mavrinac - Jefferies & Company

One final question has to do with perhaps modeling and consistent with the guidance you provided. Are you able to or do you feel comfortable providing perhaps what your freight business dollar per ton is contracted on at an aggregate or average basis or ballpark? Second, clearly with your decision to not take bonuses for 2008 that impacts G&A expectations for 2009. For modeling purposes is there a run rate or is there a way we should think about that topic as well?

Fred Lepere

Of the two questions, the first one providing rates I would mostly because of what we are seeing in the marketplace and disruption in the marketplace I would prefer not to give any guidance on anything having to do with rates, earnings per time charter equivalents or anything of that nature for 2009. I think that would be a mistake.

On the G&A front which is obviously much more under our control we are probably looking at a run rate of $9 million a quarter for G&A for 2009.

Operator

The next question comes from Dave [Bidders] – Private Investor.

Dave [Bidders] – Private Investor

Good morning. Thank you very much for the opportunity to participate in this conference. I want to thank Mr. Royce very much for calling me some time last fall after business hours. I don’t recall the date but I found the conversation very helpful. I find your business very interesting. I confess I don’t understand many of the ins and outs of it. I am a private investor. I followed the movement of your stock price from the middle of last year until right now and of course at the end of the year in December the market seemed to be forecasting bankruptcy.

When you announced you were delaying the quarterly meeting because of the covenants I again became concerned this might be a possibility. Therefore, I sold about half of the stock holdings that I had. I don’t want to continue with that position. I would prefer to be a long-term investor in your corporation. I admit I don’t have the skill to be a day trader, as lots of people seem to be.

The question I have, based on the stock price movements in the marketplace indeed telling us that the company is heading for bankruptcy or is this a red herring?

Joseph Royce

I think what happens with the market in general is the fact they just see the general shipping community and they judge it as a whole. I think again with the very, very difficult environment starting with the last quarter of last year and the beginning of this year a lot of companies have some serious problems and in fact a few of them were forced into bankruptcy. I think the thing that we have and we have always had from day one is we have a business plan. Our company has always been focused on our five-star service, on servicing our customers and growing our business.

I really feel it does separate us from the rest of the owners that in many cases have to wait for the market to come to them. We, on the other hand, go to the market. We have relationships. We are expanding our services not only in shipping but certainly in the ports and in the warehousing and this has become a very, very important fact with many of our customers. In addition to this we are growing our logistics business and our project business not only for 2009 but for 2010.

I am confident that as we stay focused and true to our business plan and our high level of service with our employees throughout the world as the market starts to improve and certainly as these projects continue to grow throughout the various areas that we serve that our business will slowly come back to a very respectable level.

Operator

We have no further questions at this time. Mr. Royce I will turn the call back over to you for closing remarks.

Joseph Royce

Thank you very much. Again, I would like to thank you for your interest and support and look forward to our next conference call for the first quarter 2009 results. Again I would like to wish everybody a nice day. Thank you and goodbye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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