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International Shipholding Corporation (NYSE:ISH)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 AM ET

Executives

Niels M. Johnsen – Chairman and Chief Executive Officer

Erik L. Johnsen – President

Manuel G. Estrada – Vice President and Chief Financial Officer

Analysts

Mark Suarez – Euro Pacific Capital, Inc.

Katja Jancic – Sidoti & Co. LLC

Andrew P. Casella – Imperial Capital, LLC

Operator

Good morning, everyone, and welcome to the International Shipholding Corporation’s Second Quarter 2014 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. We will conduct a question-and-answer session after the opening remarks and instructions will follow at that time.

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

Manuel G. Estrada

Good morning everyone, and thank you for joining us today for International Shipholding Corporation’s second 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 second 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 to our second quarter 2014 earnings call. Before Erik’s comments and Manny’s review of our financial results, I will make a few introductory remarks.

In the second quarter of 2014, we continue to follow our long standing growth strategy of deploying our diversified fleet with high quality counterparties primarily on medium to long-term charters in niche maritime segments. This strategy continues to provide us the stable, predictable cash flows and enables us to provide a sustainable dividend to our shareholders. In the quarter, we strengthened our predictable cash flows by extending contracts, ensuring long-term employment for multiple vessels while also insulating our Capesize vessel from the volatile dry bulk spot markets through at least the end of 2015.

We continue to focus on opportunities to expand our contracted revenue stream and to optimize our asset allocation in such a way that we maximize fleet utilization and minimize operating costs. Also, as evidenced by the equity investments that we have made in both chemical and asphalt tankers during the quarter, we are constantly engaged in evaluating opportunities to make accretive acquisitions that either strengthen our leadership position in our current market segments or that established a position in other promising niche markets. In the current challenging market because of our diversification and successful track record, we routinely received proposals for niche market opportunities.

While many of these proposals are not immediately accretive given current market conditions, we are positioned to see as an accretive opportunity and we will continue to evaluate and identify ways for us to grow our fleet in such a way as creating long-term value for our shareholders.

Lastly, before turning the call over to Erik, our Board of Directors yesterday declared a $0.25 dividend, maintaining our $1 per share target for the full year 2014.

The second quarter dividend represents our 24th consecutive dividend payment to common shareholders, since we reinstituted our dividend policy in the fourth quarter of 2008. Since 2008, we have returned accumulative $8.50 per share to our common shareholders.

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

Erik L. Johnsen

Thank you, Niels, and good morning, everyone. This morning, I will provide you with an update on our operations as well as some additional color on the developments that Niels as just mentioned. Throughout the quarter, market conditions in certain of our segments continue to be quite challenging. That being said, we were able to take a number of steps that have strengthened our contracted revenue streams, increase the efficiency of our fleet deployment, and increased our exposure to profitable new niches of maritime transportation.

Our business segments have done a good job this quarter renewing and expanding our existing contracts to ensure that we have a solid contracted revenue stream, granting us the forward visibility and financial flexibility that enables us to successfully execute our strategy.

First, we completed a long-term extension to our existing contract to the large mining company in Indonesia for our specialty contract segment. This contract allows us to maintain the full deployment of five vessels to six vessels delivering necessary supplies to their mine site.

Secondly, and then probably our most visible segment the Jones Act, our team has been successful in continuing to build out our cargo base. We are pleased to have recently completed a multi-year extension, and more importantly, the restructured employment of our self-unloading coal carrier for deliveries of coal (indiscernible). Under this contract, we will be able to more efficiently deploy the vessel for discrete periods on the Atlantic coast, while using it primarily in the Gulf of Mexico.

Our Jones Act team continues to demonstrate its ability to carryout ISH’s mission of optimizing the deployment of our fleet. We are now able to utilize this vessel more effectively by putting it to use in multiple geographies with multiple customers on different cargo contracts. While we have not finalized the agreement, we are making good progress on a long-term extension to our contract with Tampa Electric.

Putting all this into some context, we lift about $7 million to $8 million tons of Jones Act cargo per year. As we complete the process of renewing this cargo base and continue to optimize the efficiency of our vessel deployment strategy, we will now have vessel capacity available to aggressively pursue additional business.

Turning to the international dry bulk space, the environment continue to be very difficult throughout the quarter, particularly in our Handysize vessels. Despite this we were able to secure an extension to our Capesize vessels existing time charter contract. Locking it up at a charter rate in the low 20s and insulating ourselves from the volatile Capesize spot market through the end of 2015. We still believe that the international dry bulk market will recover, but we were also aware that the market wide expectation was for the recovery to already be well underway.

As we do on an ongoing basis as a central part of our strategy, we are paying close attention to this divergence from our previous expectations and are evaluating our exposure to that market. Should we ultimately determine that there is a better place than the Handysize dry bulk space for us to deploy our capital, we are strategically positioned and unafraid to do so. Similarly, in our U.S. Flag PCTC fleet demand on supplemental cargos in the second quarter continue to be below the level that we have seen traditionally, which is in line with the guidance that we provided on the last quarters call.

We do expect to see some recovery in that space in the later part of the year. At the same time, the U.S. Flag PCTC business is a niche segment for us. And our PCTC team continues to evaluate the options that exist to better calibrate our fleets disposition to expect the demand levels moving forward including by reflagging vessels to international flag.

Finally, our ship management team as continue to effectively manage our fleets daily operating cost, reasonably renewing our fleet Whitehall Insurance at attractive rates as well as aggressively and continuously monitoring budgets without sacrificing the performance of the fleet.

In summary, we continue to evaluate our optimum level of exposure to a wide range of niche maritime segments, as well as the profitable and cost-effective ways for us to operate within those segments. We actively manage our fleet on an ongoing basis and our significant contracted revenue stream and balance sheet ran us the strategic and financial flexibility to adjust in a variety of ways to changing maritime transportation markets.

We have made meaningful progress on this truck during the second quarter. Now, we are well positioned to continue to reduce daily operating costs and generate our projected EBITDA in the coming quarters.

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

Manuel G. Estrada

Thank you, Erik. I would now like to provide some details on our financials. For the second quarter ended June 30, 2014, we reported a net loss of $664,000, compared to net income of $1.9 million, which included a non-operating gain of $1.8 million in the 2013 period.

For the second quarter of 2014, revenues increased to $76.8 million, compared to $74.9 million in the same period of the previous year, while revenues increased, our gross margin dropped slightly as our gross voyage profit was $13.3 million, which was similar to our 2013 results.

Operating income for the three months ended June 30, 2014 was $1.7 million, which compares favorably to $1.4 million in the second quarter last year. We generated approximately $58.8 million of revenue during the second quarter from our fixed contracts, as compared to $51 million for the 2013 period.

This represents 76.6% of our total revenues; the other 23.4% was derived from our variable revenues consisting of supplemental cargos, our Handysize and Handymax vessels and Rail Ferry segment. While we target to generate approximately 60% to 70% of our revenues from fixed contracts, current levels are products of the challenging market facing our Handysize and handymax vessel. With our strong fixed contract coverage, we ensure that we continue to generate stable cash flow to support a dividend and are able to participate in the upside as our variable revenues rebound.

I will now briefly review our year-over-year second quarter gross voyage profit results for each of our reporting segments. For the quarter, our Jones Act segment gross voyage profit increased to $6 million from $5.5 million in the prior year period. this is due primarily to increased gross revenues on the company’s United Ocean Services fleet, as those operations benefited from a higher number of operating days in the 2014 period.

In the Pure Car Truck Carrier segment declined by $2.3 million, primarily attributable to a drop in supplemental cargo volumes and an increase of 28 non-operating days to fulfill schedule drydocks. Our Dry Bulk segment results improved by $1.3 million, primarily due to the fixture of Capesize vessel at higher rates.

The Rail Ferry segment, which continues to contribute steady results, increased slightly as a result of higher southbound volumes. The Specialty segment reported higher revenues reflecting the results of the charted-in/charted-out multi-purpose heavy lift vessel that was not operating in the 2013 second quarter. Our other segment, which consists primarily of our chartering brokerage and agency service, was up $400,000 and higher chartering brokerage revenues and bills experienced in the second of 2014.

Administrative and general expenses incurred in the second quarter of 2014 were approximately $900,000 lower than in the 2013 period, as bonus levels were not earned in the 2013 second quarter period. no bonus levels were earned in this 2014 second quarter. Interest expense in the three months ended June 30, 2014, was slightly lower than the comparable 2013 period. total debt obligations were at similar levels for the 2014 and 2013 periods ended June 30.

As you will recall, the company has hedged its exposure on the Yen currency. As a result, we had no material impact from outstanding Yen debt facility. As of June 30, 2014, working capital was approximately $10.9 million, an increase of $6.2 million from the previous quarter, attributable primarily to our operating cash flow and a $10 million drop from our available line of credit. These were partially offset by the investment in the asphalt tankers joint venture and dividend payments. Cash and cash equivalents were approximately $15.8 million with an available capacity under our line of credit of approximately $15.5 million.

Our total debt obligations at June 30, 2014 were approximately $200 million and EBITDA for the running 12-month ending June 30, 2014 was approximately $71.4 million. As we continue to actively manage our balance sheet, including our capital structure, we are pleased to report that we’ve reached an agreement with the lessor of our 2007-built U.S. Flag PCTC the Green Bay, the purchases vessel in the third quarter. we have obtained permanent financing for this acquisition, and concurrently, refinance one of our international flagged PCTC, the Green Dale through which equity capital was provided.

Taking together, these transactions add a 2007-built PCTC to our owned fleet frees up $2 million of our previously restricted cash balance required under the Green Bay lease, and we’ll generate a non-cash gain of approximately $11 million in the third quarter. Yesterday, the company’s board of directors approved dividend payment of $2.375 and $2.25 on its Series A and series B Preferred Stock respectively, as well as, $0.25 dividend payable on September 4, 2014 for each common share owned as of the record date of August 15, 2014.

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

As a result of the factors, which we have discussed here today, we have reaffirmed our expected EBITDA for the fiscal year 2014 to be in the range of $60 million to $64 million. Additionally, we estimate that our cash outlays for capital expenditures, including drydock 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 questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) and we’ll take our first question from Mark Suarez from Euro Pacific Capital. Please go ahead.

Mark Suarez – Euro Pacific Capital, Inc.

Good morning, guys.

Erik L. Johnsen

Good morning, Mark.

Mark Suarez – Euro Pacific Capital, Inc.

And thanks for taking my call here. Maybe we can just, if you can – if you can just maybe talk a little bit more about your recent investment on those two asphalt tankers, I’m wondering how you came across these assets, are they chartered a patch and while they’ve been employed and for how long if you will?

Erik L. Johnsen

Good morning, Mark. This is Erik. We have a longstanding relationship with the partners in Norway. And this was brought to us through that network, and we have done as you know, other ventures in Norway through that partnership, as you remember that we had the summit business, and we had the gas business back in the early 1990s, and that deal enters through that group, we put it together and those vessels now are committed on a long-term that should go seven years to 10 years.

Mark Suarez – Euro Pacific Capital, Inc.

Okay. That’s fair, okay. And just this is sort of consistent with your minority investment on those, two chemical bankers, which I believe I’ve already been delivered. And I’m just having one issue, we expect sort of more of these additional minority investments, or you see good going opportunities, given your dry powder and your balance sheet. How should we think about this equity minority investment? Is it the new trend, and maybe you can buy, you think about doing over the long haul?

Erik L. Johnsen

Yes. Mark, we have always taken the position that we will have creditworthy partners and ventures, and we’ve done that throughout the history of the company, and we will continue to do that as opportunities present themselves. And certainly, we’re not opposed to managing our risk and sharing the risk with other partners.

Mark Suarez – Euro Pacific Capital, Inc.

Got you, okay. And maybe, we can turn to the Jones Act segment, I know you mentioned in beginning of the call that you’re pleased with what you have the capacity not to potentially have more business. Do you feel this business can stem from your existing relationships, or you fairly, you will have to go out there and go to new accounts altogether.

Erik L. Johnsen

Mark, we have existing relationships that require additional carrying capacity. So to answer your question, it will be a combination of expanding our existing relationships, but we do have a number of potential new customers that would be added to the portfolio. So it’s a combination of both of those possibilities.

Mark Suarez – Euro Pacific Capital, Inc.

And do you feel you can add that business is based on 2014 event, or would this be something in 2015 potentially?

Erik L. Johnsen

There is some potential in the fourth quarter of 2014, but it will extend into the future.

Manuel G. Estrada

Just to add on to that Mark, we have contract coverage currently on the ships through 2014 under the older contracts. so as we transition to these new contracts we’re renewing at this point gives us more – what we call a firepower going into 2015.

Mark Suarez – Euro Pacific Capital, Inc.

Got it, okay. That’s helpful. And then just turning on to your remarks on the Dry Bulk segment also, we – I know you’ve extended a case now through Q1 2016 consistent with sort of that strategy of locking that vessel up. Should we read this as maybe you guys going into and thinking about locking into handy, strengthened markets recover, and then sort of getting rid of the variability, or how should we read this. Do you think that you can maybe translate that setting into the handy’s, once that recovering the Dry Bulk segment?

Niels M. Johnsen

This is Niels Johnsen. Just to remind you previously, we advice that we were going to continue to watch for opportunities to fix the handy’s on longer-term employment.

Mark Suarez – Euro Pacific Capital, Inc.

Correct.

Niels M. Johnsen

As we speak today, we have not seen the opportunity that we think is wanted for locking up those ships on the long-term. There is, as Erik commented, and as you’ve probably read in other publications, or heard on other calls, there is a feeling that in the market that’s reflected in the paper market as well that the fourth quarter will show some improvements. And if we see an opportunity as we did on the Capesize, during the balance of this year, you can expect us to move into locking in longer-term employment. That’s part of our fundamental business strategy as you know.

Mark Suarez – Euro Pacific Capital, Inc.

Right.

Niels M. Johnsen

So we definitely expect those to do that.

Mark Suarez – Euro Pacific Capital, Inc.

Right. And I guess that when the sort of the variability will just basically come from the supplemental cargo, sort of that’s opening strategy, we have that?

Niels M. Johnsen

And…

Mark Suarez – Euro Pacific Capital, Inc.

(Indiscernible) but I guess it’s more bullish about. Okay. Okay, great. Thanks for your time and I’ll get back in the queue guys.

Niels M. Johnsen

Thanks.

Erik L. Johnsen

Thank you.

Manuel G. Estrada

Thank you.

Operator

Thank you. (Operator Instructions) We’ll now take our next question from Katja Jancic from Sidoti & Company. Please go ahead.

Katja Jancic – Sidoti & Co. LLC

Hi guys. how are you doing?

Niels M. Johnsen

Good morning, Katja.

Manuel G. Estrada

Good morning.

Katja Jancic – Sidoti & Co. LLC

My question goes regarding the Handysize’s, I know a lot about you spoke that there would be a possibility of expanding in this market. Now considering how the Handysizes are doing, is this still something you are looking potentially at? I would guess the diverses, right now would still be pretty cheap or is that not the case?

Niels M. Johnsen

We continue to – first of all, with fundamentals as we’ve told you before. If you look at the supply side of the four major bulk fleets capesize, panamax, supramax and handysize. The fundamentals in the handysize market are still positive on the supply side.

There has been some uncertainty on the demand side and cargo generation that we’ve been concerned about that we expect that to correct itself in the fourth quarter. However, right now, there is a – in our view there is a disconnect between the daily time charter values and the pricing of the vessels. The pricing of the vessels has not – has come down a little bit, but has not come down to the level that we see in the spot market.

If you look at the indexes, since the beginning of the year, the Handysize Index started the year, during the month of January at a time charter value of around $11,000 a day. And this week the spot index is something just over $5000 a day, so there has been a very significant change there since the beginning of the year. However, the vessel evaluations have held up, so we’re temporizing, we’re watching carefully because we do expect the time charter rates to come back.

The paper market for Handysize as you probably know is a pretty a liquid market, but there is some trading that goes on there. Current Q4 paper market for this year is about $8500 a day. So there is a bios there that’s going to come back and as that come back we’re going to watching that for two reasons, acquisition, but also the opportunity to fix our vessels on longer-term employment. I hope that gives you some feel for our strategy in that segment.

Katja Jancic – Sidoti & Co. LLC

That’s very helpful. I just have one more question. Manny, you mentioned that there is going to be $11 million of non-cash gain in the third quarter. Is that correct?

Manuel G. Estrada

That’s correct. That’s associated with us purchasing back the Green Bay which we had leased out in 2012. It’s a quark really of the accounting associated with the time that we sold that vessel in 2012 and leased it back, but we sold it, we generated about $15 million cash positive or a gain associated with that sale. Unfortunately, GAAP does allow us to recognize it at that point and so it’s been sitting as a deferred gain on our balance sheet since that time. When we buy it back, it freeze up that gain that’s been sitting in our balance sheet and allows us to recognize it into the income statement. So that’s a long answer to tell you, yes, it’ll be about $11 million gain associated with that transaction in the third quarter.

Katja Jancic – Sidoti & Co. LLC

And that’s reflects in your guidance?

Manuel G. Estrada

It is now reflected in my EBITDA guidance now.

Katja Jancic – Sidoti & Co. LLC

Okay. That’s all. Thank you so much.

Niels M. Johnsen

You’re welcome.

Manuel G. Estrada

Thank you.

Operator

We’ll now take our next question from Andrew Casella from Imperial Cap. Please go ahead.

Andrew P. Casella – Imperial Capital, LLC

Hi, guys. Thanks for taking the question. I guess first, if you could just give us a sense of timing of when we can hear from Tampa Electric and get an update on that contract or how you guys are feeling about that as far as incrementally I think last quarter you had expected something that come out around earnings, just some color on that would be helpful?

Erik L. Johnsen

Andrew, this is Erik, good morning. Tampa Electric is a utility and this is not specific to Tampa Electric its utilities move slowly. We are in discussions with them in terms of finalizing an agreement, but until that agreement is finalized, we’re not going to sit and give you a 100%. But we are working with them and we are positive about where we are going with them, but we can’t give you any finite determination of the existing contracts does go until the end of the year. And what we feel very comfortable that we’re going to be in a positioned that the new renewed contract will be in place well before the end of the year.

Andrew P. Casella – Imperial Capital, LLC

Got it. Thank you. And then moving on to guidance and I guess kind of your outlook for the international dry bulk market, obviously with second quarter not being as fruitful on the day rate environment perspective as expected. I mean how you guys kind of thinking about your guidance for the rest of the year and what kind of rates are you I guess originally assuming and potentially do you have to review those in light of kind of where the BDI is right now?

Manuel G. Estrada

Yes, Andrew. Good morning, this is Manny. Right now, in our guidance embedded in our guidance, we’ve the Handy market believing they are about $9500 range – $99500, so as Niels made this statement a little earlier right now that the forward paper market seems to reflected those numbers are in the ballpark, but certainly as we move closer to the fourth quarter we’ll reevaluate and determine the impact on the guidance. It’s roughly whatever it is for those three ships, for those numbers of days that will be the impact on EBITDA.

Andrew P. Casella – Imperial Capital, LLC

Got it. And then I guess just finally, I know you guys do have a stock buyback plan authorized, how do you guys kind of looking at the opportunity in the marketplace to pickup some shares, I know there are kind of around $20, just some perspective on how you view deployment of capital for that purpose?

Manuel G. Estrada

Well. You’re right; we do have their program available to us. We have historically looked at that as an opportunity when we don’t see any capital investment opportunities to grow the business. We are seeing and continue to see on a regular basis, opportunities broad our way and as such right now we’re not gear to deploying the cash to buyback the stock.

Andrew P. Casella – Imperial Capital, LLC

Okay, great. That’s all I had. I’ll get back in the queue. Thanks.

Manuel G. Estrada

Thanks, Andrew.

Erik L. Johnsen

Thank you.

Operator

And this does conclude our Q&A session. I would now like to turn the call back to Niels Johnsen for any closing comments.

Niels M. Johnsen

Thank you very much. Again, thank you all for joining us today. We appreciate the opportunity to speak to you each quarter and we certainly intend to continue having these earnings conference calls each quarter going forward. So thank you and have a good day.

Operator

This does conclude today’s conference. Thank you for your participation.

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