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International Shipholding Corporation (NYSE:ISH)

Q3 2012 Earnings Call

October 26, 2012 10:00 am ET

Executives

Manuel G. Estrada – Vice President and Chief Financial Officer

Niels M. Johnsen – Chairman and Chief Executive Officer

Erik L. Johnsen – President and Director

Analysts

Bruce C. Baughman – Franklin Templeton

Mark Suarez – Euro Pacific Capital

Operator

Good morning, everyone, and welcome to the International Shipholding Corporation Third Quarter 2012 Earnings Call. Please be aware that today’s conference is being recorded and it’s 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 be provided at that time.

I would now like to introduce 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 Corporation’s third quarter 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 overview of the quarter and insight on market trends. Erik will provide an overview of our operating segments. I will return at the end of the call to briefly review our third 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. 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 would like to turn the call over to Niels. Niels?

Niels M. Johnsen

Thank you, Manny, and thank you all for joining us today. I’m pleased to welcome all of you to our regular scheduled quarterly earnings call. Before Erik’s comments and Manny’s review of our financial results, I will make a few introductory comments. Global economic uncertainty has continued to have an adverse impact on the shipping industry, and an increased supply of vessels, which pressure on time charter and freight rates in all segments. Furthermore, bank financing remains tight as European governments work to resolve issues within their banking systems.

However, we have continued to perform well despite these conditions owing to our strategy of operating in niche markets and generating majority of revenues from medium to long-term fixed contracts. Additionally, our long standing relationships with creditworthy counterparties have served us well at a time when counterparty risk has become a significant issue for many shipping companies. Maintaining and developing these relationships has been an enterable to our success and operating strategy and is the core focus for us.

Currently, our handy-sized dry bulk vessels are continuing to operate in a revenue sharing agreement. While the revenue sharing agreement has some contract coverage, the revenue sharing agreement is exposed to the spot market where rates remain at depressed levels. However, these smaller vessels have been fairing better over the last several months than the larger Capesize and Panamax vessels. And we continue to achieve rates that are slightly above the industries. The long-term prospects for Handysize vessels are positive, given the favorable supply and demand outlook for these vessels.

And we are well positioned to benefit from our investments in this niche market as conditions begin to improve. As I have stated in the past, with challenges comes opportunity and we have proven very successful pursuing our growth strategy in this environment. While there are many distressed assets available at attractive prices given current market conditions, these acquisitions are not necessarily immediately accretive.

We have a commitment to our shareholders to focus on accretive transactions. Since our last earnings call, our efforts have culminated in several accretive transactions. As previously announced, we have entered into an agreement to acquire United Ocean Services, the operator of the largest U.S. Flag Jones Act dry bulk fleet, which Erik will discuss in more detail during his remarks. In addition, we have sold one of our older Pure Car Truck Carriers and purchased a modern Pure Car Truck Carrier. These accretive transactions demonstrate our ability to identify and take advantage of opportunities that enhance our presence in niche markets and increase our contracted revenue stream while also realizing value from our fleet.

Finally, yesterday our Board of Directors authorized a quarterly dividend payment of $0.25 per each share of common stock. This is our 16th consecutive quarterly dividend payment since reinstituting our dividend policy in the fourth quarter of 2008 and we are well positioned to achieve our annual target for 2012 of $1 per share.

At this time, I will turn the call over the Erik. Erik?

Erik L. Johnsen

Thank you, Niels, and good morning. To follow on Niels’ remarks, our fleet continue to operate as planned in the third quarter during a time in which we successfully strengthened our operations by capitalizing on several opportunities in the current market. I will provide further details of these transactions in just a few minutes. For the quarter, revenues from our fixed rate charters accounted for 57% of our overall revenues providing us with significant top-line stability. Fixed revenues were primarily from our Pure Car Truck Carriers, Jones Act vessels, Capesize vessels as well as our Indonesian operation.

In our variable business, supplemental cargo volume performed slightly better than expected as demand trended above historical levels. Meanwhile, the Rail Ferry segment was negatively impacted by weather related rail outages. Despite this, demand for our Rail Ferry service remains strong, as we achieve cargo capacity of over 100% southbound and approximately 70% northbound during the quarter. The Rail Ferry business provides a quicker, cost effective, overall transit alternative to our customers, which is validated by our ongoing capacity levels, we are able to generate each quarter. Our team is mindful of this on a daily basis and strive to provide superior service to all of our customers ensuring their ongoing support.

The market for shipping dry bulk commodities remained soft during the quarter. And we believe it will persist into 2013, owing to the depressed market conditions worldwide. While we have one Capesize vessel that is on fixed rate time charters at very attractive rate. The strategic decision to operate the Handysize vessels as part of a revenue-sharing agreement with European partners has produced results that have outperformed the Baltic Dry Index.

It enables us to reduce our exposure to the current spot market condition, while increasing the operating leverage of a larger fleet of 15 ships. We expect these ships to continue to operate primarily on spot cargos, while rates remain at depressed levels. However, when the rate environment does improve, our plan is to operate a portion of these vessels on medium to long-term charters, in order to increase the fixed revenues generated by our fleet.

As Niels briefly mentioned, over the past several months, we have enhanced our operations with strategic acquisitions. Most notably, we have entered into an agreement to acquire United Ocean Services, which is scheduled to close during the fourth quarter. The acquisitions of UOS fits well within our strategy of acquiring assets to fill niche market needs expand contracted revenue with quality counterparts and broaden our customer relationships. This company will greatly enhance our Jones Act presence and allow us to expand in a market we know well. With two vessels, four tug/barge units, an experienced management team and contract business that generates about $28 million to $30 million a year in EBITDA. This will be a significant addition to International Shipholding.

Earlier this week, we also announced acquisition of a modern 1999 built Pure Car Truck Carrier. This was a transaction that enabled us to enhance our fleet and monetize one of our older PCTC vessel. The new vessel, which was renamed Green Cove and reflagged under U.S. Flag is a sister ship of two vessels already part of our U.S. Flag fleet. Together with their high specifications, these three vessels will provide us greater capacity and flexibility to carry supplemental cargo.

Also during the quarter, we concluded the purchase of a railcar repair facility in Mobile, Alabama. The facility is the only repair yard within a 100 mile radius of the Gulf Coast and five Class 1 railroads are running trains through this region on a constant basis. This purchase was a unique opportunity and complementary to our Rail Ferry business.

We believe there is a lot of upside potential in this acquisition and intend to leverage its geographical position in our customer relationships to increase its productivity. So far in the first 60 days of operation, our team has been able to secure a backlog of 4 to 5 months of work with positive results.

Finally, I would like to provide an update on our Military Sealift Command business. The time charter of our multipurpose ice strengthened vessel operating for the U.S. Military Sealift Command was terminated by the government at the end of the quarter under a termination for convenience cause in the contract.

As part of the cancellation, the government is obliged to make a termination payment. We are currently operating the vessel on spot business and see no negative impact to our results for the remainder of the year. While operating on the spot market, we will continue to seek long-term employment for the vessel on attractive return.

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

Manuel G. Estrada

Thank you, Erik. I’d like to provide some details on our financials for the third quarter ended September 30, 2012. We have reported net income of $1.8 million for the three months ended September 30, 2012 compared to $2.9 million in the same period last year.

Results for the third quarter of 2012 and 2011 include a $1.1 million and $2.7 million non-cash loss respectively, which was attributable to our yen-denominated loan facility. For the third quarter, we reported revenues to decrease to $61.2 million or approximately 8.8% year-over-year.

Our gross voyage profit was $15.8 million for the quarter down from $20.2 million in 2011. The year-over-year decline in both revenues and gross voyage profit was primarily due to the expiration of the three operating contracts with the Military Sealift Command and the divestiture of Pure Car Truck Carriers at the end of the first quarter of this year, as well as depressed rate levels in the dry bulk market. These factors were partially offset by higher supplemental cargo volumes and the operations of our ice strengthened multipurpose vessel as well as lower operating costs within our Contract of Affreightment segment.

Operating income for the three months ended September 30, 2012 was $4 million compared to $8.6 million in the prior year period. We generated approximately $34 million of revenue during the quarter from our fixed contract as compared to $42.1 million for the same period in 2011. Variable revenues, which were derived from supplemental cargos or Handysize vessels in the Rail Ferry segment, were $27.1 million for the quarter versus $25.1 million in the third quarter of 2011.

Now I’d like to briefly review our quarterly gross voyage profit results for each of our reporting segments. Our U.S. Flag Time Charter segment declined by approximately $1.7 million year-over-year, this was primarily attributable to the expiration of the three contracts that we had with the MSC partially offset by the operations of our multipurpose ice strengthened vessels and higher supplemental cargo volumes.

The International Flag Time Charter segment reported a decrease in gross voyage profit of approximately $3.3 million from the third quarter of 2011 reflecting the sale of the two PCTCs and the current depressed rate environment in the dry bulk market. Our Contract of Affreightment segment reported an increase in gross profit of $1.2 million only to lower cost reflecting both a drop in operating expenses and the elimination of lease expense on that vessel. Meanwhile, our Rail Ferry segment saw a decline in gross voyage profit of $540,000 due to rail outages in Mexico that were result of inclement weather. The decrease in other segments, which consists primarily of our brokerage and agency services, was not material to our third quarter results.

During the three-month period ending September 30, 2012, the exchange rate of the yen to the U.S Dollar appreciated from 79.81 to 77.93, which resulted in the recognition of a foreign exchange loss for the quarter of $1.1 million. Results from our unconsolidated entities increased during the quarter when compared to the same period a year ago. The results from a 25% investment in the company which owned 10 mini-bulkers reflect operating income slightly above break-even levels. While last year’s results had the non-recurring mark-to-market adjustment on an ineffective interest rate swap contracted and reported in 2011.

As of September 30, 2012, our working capital was approximately $2.3 million. Cash and cash equivalents were approximately $12.7 million and we have approximately $13.4 million invested in marketable securities. During the third quarter, the company funded the purchase of the railcar repair facility with $4.5 million of available cash.

In addition, the Company’s Board of Directors has authorized a dividend payment of $0.25 for each share of common stock owned as of the record date, November 16, 2012, which is payable on December 3, 2012. We remain committed to providing a return to our shareholders in the form of a dividend on a quarterly basis. And while all future payments remain subject to the discretion of our Board. We expect to meet our stated $1 annual target for 2012.

Looking ahead to 2013 following the completion of the pending acquisition of United Ocean Services, we expect full year net income on a pro forma basis to be between $18 million to $20 million, with pro forma EBITDA to be in the range of $65 million to $75 million.

When setting this pro forma guidance for 2013, management made the following assumptions, our fixed revenue from medium to long-term charters will account for approximately 68% of total revenue. Revenue from the Rail Ferry segment would be inline with annual reserves from the past two years, historical levels of revenue from supplemental cargo and dry bulk market conditions similar to the past 12 months.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Bruce Baughman with Franklin.

Bruce C. Baughman – Franklin Templeton

Good morning.

Manuel G. Estrada

Good morning Bruce.

Niels M. Johnsen

Good morning Bruce.

Bruce C. Baughman – Franklin Templeton

Could you update us on financing for the UOS acquisition?

Niels M. Johnsen

Certainly Bruce. We have a term loan in place for approximately $30 million. In addition to that we are pursuing sale leasebacks on two of our unencumbered assets; one is a U.S. flag car carrier; the other is the vessel, the Sulphur Enterprise that operates in our Contract of Affreightment segment. The combination of those three pieces of funds meaning, the term and the two sale leaseback coupled with drawing down on our line of credit and the available cash, those are the components to fund the acquisition.

Bruce C. Baughman – Franklin Templeton

And is there anything we should know about how the transaction and the related financing will affect the covenants on the various loan agreements?

Manuel G. Estrada

Sure. Clearly Bruce as we have said, the acquisition is very accretive to us on an EBITDA and on an earnings basis. So factoring in the acquisition and the fact that we would only be taking on $30 million of additional leverage, actually improves our projected covenant levels both on a leverage basis and certainly from a liquidity perspective.

Bruce C. Baughman – Franklin Templeton

Okay. Will the – would the contemplated sale leaseback transactions have any affect on network?

Niels M. Johnsen

You mean immediately?

Bruce C. Baughman – Franklin Templeton

Yeah.

Niels M. Johnsen

No.

Manuel G. Estrada

No.

Bruce C. Baughman – Franklin Templeton

Okay. And then finally, on the ice strengthened contract that was terminated, can you – are you disclosing the size of the termination payment? And can you tell us, when it will be recognized an income?

Manuel G. Estrada

We’re not disclosing the amount Bruce, but it has been recognized in the third quarter numbers.

Bruce C. Baughman – Franklin Templeton

Okay. So it’s already in there?

Manuel G. Estrada

Yes it is.

Bruce C. Baughman – Franklin Templeton

And is the contract already terminated or is there a period during which it should be continuous, such as safe for the rest of the year. You mentioned that you don’t think it’s going to affect the income for the balance of 2012, is it because it’s well operated under the contract or is it – that just lined up work?

Niels M. Johnsen

Bruce, this is Niels Johnsen. The contract has terminated. A notice was given to us pursuant to the government’s rights under the contract actually during the month of September and terminated at that time. We immediately put the ship into a lay up status to reduce operating cost and Manny’s comments that it would not affect the results for the remainder or Erik’s comment excuse me that it would not affect the results for the remainder of the year, its based upon the fact that we have included the termination settlement in the numbers at this point as Manny said. But the contract is over.

Bruce C. Baughman – Franklin Templeton

Okay, all right. Thank you.

Operator

(Operator Instructions) Next we’ll hear from Mark Suarez with Euro Pacific Capital.

Mark Suarez – Euro Pacific Capital

Good morning guys.

Niels M. Johnsen

Good morning Mark.

Manuel G. Estrada

Good morning.

Mark Suarez – Euro Pacific Capital

I – just looking at your guidance, I know you released the – for your EBITDA net income pro forma, net income guidance for 2013. I’m just wondering if you can help us understand how much is that driven from the top line growth of United Ocean Services, your recent acquisition or any sort of margin improvements. I know that the recent trend, I think we talked about this in the last call, was a top-line from that subsidiary. I’m talking about the UOS was actually – was down as opposed to up. And I’m wondering, do you see that trend reversing, what are you seeing there that, so just to help us understand how you get to the pro forma EBITDA numbers of $65 million to $75 million?

Manuel G. Estrada

Yeah, Mark, let me see if I can answer this and please, Niel. When you say you’re looking at the trend of UOS, you’re looking at the revenue from UOS and the downward trend from I guess 9 and 10 to 11.

Niels M. Johnsen

That is correct.

Manuel G. Estrada

Yes. As we said, while we announced the acquisition, try to remember that one of the contract pieces of the business, its actually the Westbound piece of the contract business, has been stopped in the fourth quarter of 2010 as a result of a suit that was put in place against that customer by an environmental group. That suit has been settled and the movement of that commodity started in this month, in October. So the trend that you saw in UOS is really driven by the fact that there was not a movement in that commodity.

The trend going forward, is one that we are comfortable with and comfortable and announced that we’ll be able to provide from some forward-looking guidance has approximately 85% to 88% of the UOS revenue is going to be tied to the contracts that are in place for UOS. So, given that we feel comfortable to be able to provide that guidance. I think, Erik in his remarks indicated that UOS would add $25 million to $30 million of EBITDA, that’s what we were projecting. So, we don’t give guidance specifically right now on ISH, so we gave it on a pro forma basis, but I think you could probably do the math and figure that out.

Mark Suarez – Euro Pacific Capital

Got it. And now with regards to your purchase of the new PCTC, is that a trend that we should continue to see, in other words, as you continue to – assuming that you continue to see accretive opportunities that you will continue to modernize that fleet going forward at the right price?

Niels M. Johnsen

This is Niels Johnsen again, Mark. That is a correct assumption. In fact when we first entered this business in the mid 1980s and acquired the original Pure Car Truck Carriers that we operated, at that point we called them simply Pure Car Carriers. If you look at the history of the company, we have routinely upgraded vessels, so that we were operating in the most modern and high specification vessel as possible. This is important for the future deployment of the vessels, given change in cargo mix and that’s been our objective with this current transaction.

Mark Suarez – Euro Pacific Capital

Got it. And I know you had an outage in Mexico due to the weather and that affected your Rail Ferry business. I think you mentioned, you’re back to sort of normal demand, strong, in fact I think with that capacity of 100% you gave us the numbers southbound and 70% in northbound. And I’m wondering if demand continues and I assume that it will, is there any, is there a case to legitimize the expansion of that business going forward assuming that trend continues into 2013?

Erik L. Johnsen

Mark, this is Erik. The easy answer is, yes, we are looking at expansion. That is something that we’ve continually looked at for the last several years. I would also tell you that the shipyard pricing for new buildings is extremely attractive. But as we go into an expansion where the cost of new buildings even though they are attractive, we want to make absolutely sure that when we make that job, but it’s not just a leap of faith and that we’re comfortable that, we go from filling two ships to filling, say, three or four ships that the cargo is there. We certainly believe there is an opportunity not only in Coatzacoalcos, but other ports along the Gulf Coast, the Mexican border. So, I would tell you that that is under discussion.

Mark Suarez – Euro Pacific Capital

Got it. And now turning over to the ice strengthened vessels, I know you just recently said that that contract has been terminated you’re getting a terminal payment and it’s being recorded in the third quarter. How – just to give us a sense of it’s market demand, how difficult or how easy I mean will be to lock in that vessel, charter that vessel, given current market conditions. And if it’s in fact challenging, will you consider other options such as for example, selling that asset at the right price?

Niels M. Johnsen

We always – obviously, we always look at disposal of assets if the price is right. We are currently evaluating all of the options for the employment of that vessel both under U.S. Flag and under International Flag. Our preference is to keep the vessel under U.S. Flag. If we can arrange employment, there are a number of opportunities that are available at this point.

None of those opportunities are long-term employment, because they wouldn’t provide acceptable results more or less inline with the long-term contract that we had. So, we were reserving judgment on this ship. We’re working through the process. This is – it’s not the first time we’ve been involved in this type of situation. And we’re confident that we’re going to achieve an acceptable long-term result on that vessel. It’s fundamentally a good vessel and we prefer to keep it in our fleet at this time.

Mark Suarez – Euro Pacific Capital

Got it. Okay. That’s all I got for now. Thanks guys.

Niels M. Johnsen

Thank you.

Manuel G. Estrada

Thanks Mark.

Operator

There are no additional questions in the meeting. I’d like to turn the call over to Mr. Niels Johnsen for any additional remarks.

Niels M. Johnsen

Thank you and I wanted to thank everybody again for joining us today. This is an exciting time for our company. And we look forward to having discussions with you in future quarters. Again, thank you for calling and have a good day.

Operator

Ladies and gentlemen that will conclude today’s presentation. You may now disconnect.

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