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International Shipholding Corporation (NYSE:ISH)

Q1 2014 Earnings Call

April, 1 2014 10:30 a.m. ET

Executives

Manny Estrada - Chief Financial Officer and VP

Niels M. Johnsen - Executive Chairman and CEO

Erik L. Johnsen - President and Director

Analysts

Andrew Casella - Imperial Capital

Mark Suarez - Euro Pacific Capital

Katja Jancic - Sidoti & Company

Operator

Good morning everyone, and welcome to the International Shipholding Corporation First Quarter 2014 Earnings Conference Call. Please be aware that today's conference call is being recorded and is now being webcast at the company's website, www.intship.com. (Operator Instructions)

Now I would like to introduce Manny Estrada, Chief Financial Officer. Please go ahead, sir.

Manny Estrada

Good morning everyone, and thank you for joining us today for International Shipholding Corporation's First Quarter 2014 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 introductory comments and then Erik will provide an overview of the quarter. I will return at the end of the call to review our first 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 statements. 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 everyone for joining us today. I'm pleased to welcome you all to our first quarter 2014 earnings call. Before Erik's comments and Manny's review of our financial results, I will make a few introductory remarks.

In first quarter 2014, we maintained our strategy of operating a diversified fleet primarily on medium-to-long-term contracts with high quality counter parties and niche maritime markets. This strategy has served as well overtime and we expect to continue to benefit from our proven approach as we strive to continue to create long-term shareholder value.

We have recently taken a number of steps to address the events that occurred during the first quarter, which we believe to be limited in both scope and duration. Having completed repairs and return to service, our Jones Act vessel which has suffered a machinery casualty and having decided to transition our international Dry Bulk vessels on to short to medium term time charts as they complete the current voyages.

We believe that our results in no segments should return to levels more in line with our earlier expectations. The fundamentals of ISH's business remains strong and the steps we are currently taking combined with our significant revenues and fixed contracts position us for improvement through the second quarter and the remainder of the year.

During the first quarter, we continue facing extreme volatility and the Capesize Dry Bulk market. The Capesize daily spot index started the quarter at about $35,000 per day and ended the quarter at about $9,000 per day. The daily average for the quarter is 15,850. This average rate is below the daily rate we arrange for our Capesize vessels employment for this entire year and validates our strategic approach, a variety of employment producing predictable results in a volatile market segment.

The other main Dry Bulk segments, panamax, supramax and candysize characteristically have significantly less volatility from the Capesize segment, although all segments ended the quarter at daily rates lower than the beginning of the quarter.

As we have previously reported. Asset values have increased significantly. During the last year, asset values for 10-year old second hand handysize, supramax, panamax and Capesize vessels have appreciated by as much as 40%. This increase asset values occurred even though the daily time charter rates at the end of the first quarter were lower.

Also, new building valuations have increased and are in line with new building valuations last seen in three years ago. We still maintain the view that the fundamentals of the handsize bulk carrier market are positive given the fact that that fleet agent profile is well-balanced against the existing new building order book.

Our robust contract coverage combined with the success we have had in recent quarters bolstering our strategic and financial flexibility put us in a strong position to evaluate a wide range of potential accretive growth opportunities. In pursuing growth, we will remain disciplined and continue to pursue acquisitions across diverse maritime segments. By constantly managing our exposure to different niche markets at pricing the various opportunities that exist for fleet growth, we believe that we can continue to maximize long-term value of creation.

Finally, before I turn the call over to Eric, I can report that our board of directors yesterday declared a $0.25 dividend in line with our $1 per share target for the full year of 2014. The first quarter dividend represents our 23rd consecutive dividend payment to common shareholders since we reinstituted our dividend policy in the fourth quarter of 2008. In that time, we have returned accumulative $8.25 to our common shareholders.

With that, I will now turn the call over to Erik. Erik?

Erik Johnsen

Thank you, Niels. Good morning everyone.

As you all know from our press releases and Niel's introductory remarks, the challenges that we face in the first quarter were effectively in three discrete areas. I would like to provide you some additional color on those issues and on steps that we have taken in order to address them as well as to help you put our first quarter results into a larger context of our on-going operations moving forward.

First, within the United Ocean service portion of our Jones Act fleet with the experience of 21 days of off-hire related to unusual severity of this year's winter storms in the United States. Additionally, one of our Jones Act vessels suffered a machinery casualty that resulted in 25 days of off hire while it was repaired.

As we have completed repairs on that vessel and returned it to service, we expect our Jones Act results for the rest of the year to return to levels that we have previously expected. Second, demand in our supplementary cargo business was lower than expected during the first quarter while expect that supplemental cargos to remain challenging in the second quarter. We believe the demand will recover in the second half of the year bringing our supplemental cargo results for that period of the year closer to levels that we would typically expect to see.

That being said, we expect supplemental cargo demand to provide. We do have the ability to quickly manage our exposure to this phase that these assumptions were to change. We have always used the U.S. flag PCTC in supplemental cargo business as the niche business that we choose to participate in only to the extent that doing so is premonitive while as its very nature volumes in the business are lumpy. If we felt that the lower demand that we are currently seeing was to establish -- was establishing itself as a longer term trend. We have the ability to reflag those vessels, capturing substantially cost savings while continuing to serve the primary contracts with no disruption.

We will continue to monitor the supply demand balance in the space and we'll make adjustments at such time as doing so would be prudent would create value. And third, as many of you are likely aware, the Dry Bulk rate environment continues to be depressed. At the beginning of the year rates appeared to be establishing a positive trend that was widely delayed and would continue.

As such we operate much of our Dry Bulk fleet in the spot market in order to maximize our exposure to improving rates and to capitalize on upside that this variable business provides us. As rates deteriorated, however, much of our international dry bulk fleet was exposed to that deterioration. In retrospect, early decision to fix their Capesize vessel to a charter for the duration of 2014 at rates in the mid to high teams was clearly the right move.

The performance of that vessel allowed us to capture above market rates for much of the quarter and to realize the year over year improvement in that segment despite the effect of lower rates on the older vessels.

Give this rate environment and in line with our strategic focus on generating stable cash flows and avoiding excess volatility, we expect to transition additional Dry Bulk vessels on meeting term time chores. Throughout our Dry Bulk fleet, we are always looking for opportunities to lock in acceptable rates and to provide stability and forward visibility were possible.

We feel that such opportunities currently exist and as such we look to act on them in the near term as our vessels complete with the current voyages. Over the years, we have successful in establishing a level of strategic and financial flexibility that enables us to provide and to respond quickly and effectively to changing marketing conditions.

In line with this, we are actively evaluating a wide range of opportunities that exist throughout the maritime markets and we continue to believe that are acquisitions to be made that would be appropriate for us strategy -- for our strategy of offerings primarily on medium to long-term contracts with strong counterparties and also accretive to our shareholders.

In addition to this, as the market evolves overtime, we maintain an honest on-going dialogue on any measures that we can take in order to optimize our business. Because of this, we have been able to quickly and prudently manage the flagging of our vessels, the nature and duration of our charts and our exposure to various trends, segments and geographies.

We believe that the steps that we have taken in this quarter have strengthen our business and that with our strategic flexibility, its substantial contracted revenue stream we are well-positioned to continue generating significant ETBIDA.

We will continue to seize these opportunities as they arise, maximize the profitability of our business and adopting to the every-changing conditions in the maritime market. With that, I would like to turn the call over to Manny for his review of our financials. Manny?

Manny Estrada

Thank you, Erik. I would now like to provide some details on our financials. For the first quarter ended March 31, 2014, we reported results in line with the preliminary guidance that we offered in early April. For the quarter, we reported a net loss of $3.2 million compared to a net loss of $1.5 million in 2013 after excluding a $3.2 million non-operating gain on our Yen denominated loan.

For the first quarter of '14, revenues decreased to $72.7 billion compared to $81.1 million in the previous year. Gross voyage traffic which represents the results from our six operating segments was $9.9 million which compares to $11.3 million in the 2013 quarter. This year-over-year decrease is primarily attributable to the issues that Niels and Erik have just discussed.

We generated approximately $54.9 million of revenue during the first quarter from our fix contract as compared to $56 million with 2013 period. This represents 76% of our total revenues. The average 24% was derived from our variable revenues consisting of supplemental cargoes our handysize and supramax vessels and Rail Ferry segment.

As we have said in the past, our strategic preference is to generate approximately 60% to 70% of our revenues from fixed contracts. This mix ensures that we have a firm foundation of stable cash flow that supports a dividend but also enables us to participate in outside potential.

I will now briefly review our first quarter 2014 gross voyage profit results for each of our reporting segments. During the quarter, our Jones Act segment gross voyage profit decreased to $4.2 million from $6.3 million in the prior year period due primarily to increase non-operating days on our UOS operations.

The Pure Car Truck Carrier segment declined by $1.8 million primarily due to lower supplemental cargo volumes that we're experiencing the previous year's quarter. Our Dry Bulk segment results and improved by $2.7 million primarily as a result of our decision to fix our Capesize Bulk Carrier to a time charter through the end of '14 at a daily rate in the mid to high teens.

The Rail Ferry segment results decreased by $0.7 million as a result of lower volumes on its northbound voyages. The Specialty Contract segment improved by $0.05 million primarily due to the increased operating days where our ice-strengthened vessel in 2014 relative to the 2013 quarter when they've experienced hard days following its free delivery from a government contract.

Our other segment which consists primarily of our charting brokerage and agency services, was down slightly on somewhat lower brokerage revenues that were experienced in the first quarter of 2013. Administrative and general expenses incurred in the fourth quarter of 2014 were approximately 146,000 higher than the 2013 period as a result of higher legal and professional fees.

Interest expense in the three-month ended March 31, 2014 was slightly lower than the comparable 2013 period as we maybe scheduled that payment in the 2014 period. In the 2013 period, we reported a 3.2 million non-cash gain on the company Yen-denominated loan facility.

At the end of last year, we mitigated our exposure to the Yen by answering the forward currency contracts for the full amount of our Yen facility. As of March 31, 2014, working capital was approximately $4.7 million, a decrease of $11.8 million from the previous quarter. This decrease is attributable primarily to our minority investment in a joint venture to own two chemical tankers and a yard payment for the handysize vessel that is scheduled to deliver in 2015.

One of the chemical tanker vessels delivered on April 9th, one of the second vessel is expected to deliver at the end of the second quarter. Our cash and cash equivalent balance was approximately $11.4 million with an available live (indiscernible) of approximately $25.5 million.

Our total debt obligations at March 31, 2014 were approximately $194 million and EBITDA for the 12-month ended March 31, 2014 was approximately $55.7 million. The company's board of directors has approved dividend payments of $2.37 and $2.25 on our Series A and Series B preferred stock respectively as well as the $0.25 dividend payable on June 3rd, 2014 for each common share owned on the record day of May 16th, 2014.

While common stock dividend declarations are subject to the approval of our board of directors, we remain committed to paying a regular dividend to our commons shareholders. Back by our significant contracted revenue stream, our common stock dividend target for 2014 remains $1, which is consistent with the level that we have paid every two years.

As a result of the factors which we have discussed today, we have adjusted our expected EBITDA for the fiscal year 2014 to the range of $60 million to $64 million. Additionally, we reaffirm our estimate that our cash outlays for capital expenditures including dry dock cost will be in the range of $13 million to $16 million.

This ends our prepared remarks, we would now like to open the call for the questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And then we'll take our first question today from Andrew Casella with Imperial Capital.

Andrew Casella - Imperial Capital

Hi. Thanks for taking my questions. I guess, Manny, if you could just tell for us to understand the next nine months how you kind of see the progression of EBITDA. It still sounds like there's going to be some weakness in the second quarter. If you could just guide us directionally how we should expect the next nine months to shake out on the guidance wise.

Manny Estrada

Well, certainly, you're going to see an improvement from where we were in the first quarter. That's going to be driven primarily by the improved -- the projected improvement in the UOS segment. How much, Andrew, I don't know about EBITDA by quarter. But if you look at the fact that UOS probably about $2.5 million $3 million of the impact in the quarter, we certainly expect to recall that in that second quarter.

The rest will be slightly improvement on the handysize vessels for where we were at the end of the first quarter. So those two will be the drivers in the second quarter from the first quarter.

Andrew Casella - Imperial Capital

Got it. And if you could just remind us on the supplement of cargoes, can you kind of quantify the contribution for this month and how much below the usual quarterly run rate you're running at?

Niels Johnsen

Yeah, Andrew. Again, we don't disclose by quarter in the supplemental cargo. We have disclosed that our normal levels are between $7 million to $8 million a year is what we expect. And I believe Erik, in his comments indicated that we expect to be at a normalized run level starting in the third quarter.

Andrew Casella - Imperial Capital

But just generally speaking, was there no contribution or just the slight contribution? I'm just trying to quantify how much was missing from the quarter that should return kind of in the second half.

Niels Johnsen

There was a slight contribution in the first quarter.

Andrew Casella - Imperial Capital

Got it. That's helpful. And then also, on your guidance, can you kind of -- I want to understand how you guys are looking at the Bulk Dry environment, what you're implicitly assuming in your handysize rates in that $60 million $64 million number relative to where spot rates are today.

Erik Johnsen

The first quarter, if you take today's market rate for the handies, you're probably about where we were for the first quarter. For the on-going course, again, if we could predict the market perfectly, we wouldn't be sitting here. But I think the second quarter will be a good bit higher than the current rate based on some voyage charters and time charters that we put in place.

To what degree will be for the full year, we still think there's a trend up. So we're being a little bit cautious where we're fixing where we can an acceptable rate, but we're not going out, I have to say, year out. The rate is just to the point where that doesn’t make sense.

Andrew Casella - Imperial Capital

Got it.

Niels Johnsen

I think just to elaborate on what Erik said is that we could go out a year but our view is that as we progress through the year as we get closer to the end of the year were likely to see some continued improvement so that we're positioning ourselves as we've said in our remarks with short to medium term time charters rather than going out longer, which we could do.

Andrew Casella - Imperial Capital

Okay. That makes sense. And then just my final question before we get back on the queue. Any update on the Tampa Electric contract and in the guidance this year assuming if that's successfully rebid.

Niels Johnsen

The Tampa Electric Company asked for best and final offers last week, and the process which was supposed to be completed within the month of April, they've delayed it for any announcement until sometime next week. So now they say seven to ten days before they make any determination.

Andrew Casella - Imperial Capital

Okay. Thanks. I'll get back in the queue.

Operator

And next we'll hear from Mark Suarez with the Euro Pacific Capital.

Mark Suarez - Euro Pacific Capital

Hi. Good morning guys.

Manny Estrada

Good morning, Mark.

Mark Suarez - Euro Pacific Capital

Just to maybe follow up on your thoughts and comments on the guidance of $60 million to $64 million, shall we assume that the goal here is to fix most of the remaining (indiscernible) in the short-term and long-term contracts? Would that be a fair assumption behind that guidance? I know it's very difficult to (indiscernible) what to fix and what not to fix. But what sort of the assumption going forward in terms of fixing those contracts?

Niels Johnsen

Yeah, let me talk about contracts and then Manny might answer that. If you look at today, the market rate, the index is at $7600 a day. It doesn't make sense to set charges at these levels. If we see that we can achieve low double digits, we're probably going to take an advantage to that and whether we stay in this marketplaces or acceptable loans, and we're looking for that. And we think that for the second quarter, we have an opportunity to be close to that, but we're not going to be in any way fixing things out for more than, say four to six months.

The fourth quarter, I still believe that we're going to see some upside, and so we're managing through this unfortunate depressed situation.

Mark Suarez - Euro Pacific Capital

So just to be clear, just to maybe -- so you have basically -- you have an opportunity to fix on short-term to medium -- short-term contract in the second quarter and then maybe reopen it in the fourth for reassessment. Would that be a fair assessment?

Niels Johnsen

That's fair.

Mark Suarez - Euro Pacific Capital

Okay. And just to maybe talk a little bit kind of tanker, they are now being delivered one of them by the end of the second quarter. How long have you said this will employ for? I know it's a minority investment but--

Manny Estrada

Well, Mark, just to be clear, one was delivered on April 9th. The second one is expected to delivered by the end of the second quarter. The contribution in this year is not material enough to impact the EBITDA guidance that we've given one way or the other.

Mark Suarez - Euro Pacific Capital

Got you. And on the handysize new builds, maybe you can refresh my memory, but is there a charter contract attached in the vessel already or are you looking for to employ this vessel as it comes, as it's being delivered?

Niels Johnsen

That vessel is going to be employed in all our existing revenue sharing agreement for handysize vessels.

Mark Suarez - Euro Pacific Capital

Okay. And then on…

Niels Johnsen

And, Mark, expected for the delivery second quarter sometime next year.

Mark Suarez - Euro Pacific Capital

Great. And just turning to the balance sheet for a second, I know you have the credit line, you have some room there plus the conscious about -- yes, I do the math right, $37.5 million [dried powder] (ph). And maybe do you feel that you need to do more acquisitions? And it sounds to me like you're looking for targets. Do you feel the need to maybe raise some capital in a medium term, and which sort of formal funding do you prefer if you are to choose one over the next 12 to 18 months?

Manny Estrada

Mark, you did the math right. That's the dried powder that we have on the balance sheet as we have given guidance and booking to our shareholders. Any need to go into the capital markets to raise cash would be done so under an accretive opportunity. So when we feel the time is right and if it returns value to the investor, then we'll access to markets.

Mark Suarez - Euro Pacific Capital

Okay. I'll go back into the queue then. Thanks.

Operator

(Operator Instructions) Next we'll move to Katja Jancic with Sidoti & Company.

Katja Jancic - Sidoti & Company

Hi guys. Thank you for taking my call.

Manny Estrada

Good morning.

Niels Johnsen

Good morning.

Katja Jancic - Sidoti & Company

Could you provide some information on what the cost associated with the machinery casualty were?

Erik Johnsen

The fleet is why we have an insurance policy and the casualty was fully tailored behind insurance. But obviously, when you don't have operating days, you're losing your revenue from your customer. That was machine casual (indiscernible) other vessels over my history. And if the repair was done properly, the ship is back in service and should perform without incident going forward.

Katja Jancic - Sidoti & Company

Now, this happened because of the age of the vessel. Is this something that could be a concern going forward with the U.S. fleet?

Erik Johnsen

No. I think it's a good question but this is not an ISH issue. This is an issue that's, as I said, has happened on other ships, has happened on younger ships, has happened on ships that are older. So I would not say that it's anything for concern going forward.

It is a current case issue that happened. The vessel is out of service. It had to be properly machined to put it in proper alignment and vessels back and service on it today.

Katja Jancic - Sidoti & Company

Okay. Thank you. That's all for me.

Operator

Thank you. It appears there are no further questions at this time. Mr. Niels Johnsen, I'd like to turn the conference back to you for any additional or closing remarks.

Niels Johnsen

I want to thank you all for joining us today. We appreciate the opportunities that we take to communicate with our shareholders on this occasion and we look forward to providing you with further updates in the future.

Thank you very much and have a good day.

Operator

And once again, that does conclude today's conference. We thank you for your participation.

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