TBS International Limited Q2 2008 Earnings Call Transcript

TBS International Limited (TBSI)

Q2 2008 Earnings Call

August 7, 2008 10:00 am ET

Executives

Ferdinand V. Lepere – Executive Vice President and Chief Financial Officer

Joseph E. Royce – Chairman, President and CEO

Analysts

Ben Nolan – Jefferies & Company

Michael Pak – Banc of America Securities

[Chris Sim – PMG]

Michael Markowski – Overbrook Capital, LLC

Presentation

Operator

Welcome to the TBS International Limited second quarter and six months 2008 financial results conference call. We have with us Joseph Royce, Chairman, President and CEO and 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, Fred Lepere.

Ferdinand V. Lepere

The purpose of today’s call is to discuss the results of TBS’s second quarter and six months ended June 30, 2008.

Yesterday we issued a press release after the close of the stock market in New York with financial and operational information for the second quarter. If you have not received this release, you may log on to our website at www.tbsship.com and navigate to the Investor Relations Page, or you can all Capital Link at 212-661-7566. We will also post a transcript of this call on our website once it’s been prepared.

Our remarks today will be followed by a question and answer session. 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 Webcast link. Note that the slides are user controlled. Those of you who want to follow the Webcast, please click on the arrow at the bottom of the Webcast screen to make the slides turn. Also please note that the Webcast will be archived on our website.

Please let’s 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. And with that, I’d like to introduce Joseph Royce, our Chairman, CEO and President.

Joyce E. Royce

We will begin our presentation with slide number two, the second quarter and six months overview.

For the second quarter of 2008 we are pleased to have achieved the best quarterly results in our company’s history in terms of revenue, EBITDA, net income and earnings per share. Fred Lepere will take you through the financial information in more detail later in the presentation.

Now let’s look at slide number three, TBS today. The core of the TBS business model emphasizes our TBS Five Star Service, Ocean Transportation, Logistics, Port Services, Operations and Strategic Planning. It has stood for professionalism and dedication of the 290 worldwide employees of TBS and our affiliate agencies, who deliver the TBS Five Star Service that cements customer relationships while expanding cargo volumes. This foundation of direct customer relationships sets our company apart from the traditional dry bulk cargo companies, who focus on chartering their vessels to other companies.

Now let’s turn to slide four, the TBS Five Star Service. Service is the essence of our business. Our goal is to build long term relationships. Our customers rely on us to be their shipping arm in the markets we serve. We add value by offering our customers a menu of services, including ocean transportation, operations, logistics, port services and strategic planning. Our Five Star service is a strong barrier of entry.

Now I’d like to show you some examples of our Five Star Service in action on slide five. As you can see, TBS’s business is a complex, logistical operation that requires a high level of cargo expertise. Our 18 full time port captains are constantly working with the shippers and receivers to coordinate cargo movements within the ports. This combined with our fully staffed agency networks and representative officers on five continents continue to strengthen TBS’s position in our core markets as well as offering new opportunities for further expansion.

On slide six, this shows our project and logistics business is expanding. And here is an example of how we work with our customers. Mitsubishi’s building power plants on the west coast of Mexico and Chile. The total requirement consists of 100,000 revenue tons of various components, including heavy lift pieces up to 275 tons. This project will move over 12 months.

The TBS team worked with Mitsubishi. We fixed the schedule. We charted specialized ships for the heavy lift pieces. The TBS port captains supervised the loading, stowing and discharging of this cargo. And we delivered the cargo on time and free of damage.

The world superstructure today is being built or renewed, and TBS will be a part of it. Now let’s continue along to slide seven, which represents a typical parcel voyage. As you can see, we load steel parcels in the lower holds and complete the voyage with general and project cargos. As you can see on the right on the bottom, between decks go down and then we’re able to load rolling stock and machinery.

Also as you can see, these cargos are not suited for containers. In our business, performance counts. On time delivery, reliable schedules and cargo expertise separate us not only from our competitors but from the typical commodity pricing that you see in the spot market. People today with projects are not going to negotiate nickels and dimes or dollars when you have billion dollar projects that require a high level of performance.

Now on slide eight this is how we compare our net income to the Baltic Dry index. Unlike a traditional dry bulk company, which is affected by the fluctuations of the Baltic Dry index, we have been able to achieve consistent growth in earnings with the implementation of our business first, fleet second strategy. Our loyal customer base, franchise businesses and liner trades insulate TBS from the spot market volatility. We see solid fundamentals in the industry with strong cargo requirements and firm freight rates. As a result, we believe that we have the ability to achieve growth in our business and look forward to continued positive results.

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

Ferdinand V. Lepere

We should now all be on slide number nine, second quarter operating and financial highlights. Our second quarter 2008 operating and financial highlights increased significantly as compared to the second quarter of 2007. For the second quarter ended June 30, 2008 total revenues were $156.9 million, an increase of 105% over the same period in 2007. Voyage revenues in the second quarter of 2008 were $128.7 million, an increase of 113% from the $60.4 million during the same period in 2007.

Net income was $52.6 million, an increase of 142% over the same period in 2007. Earnings per share on a diluted basis for the second quarter of 2008 were $1.82, an increase of 136% from the earnings per share of $0.77 for the second quarter last year. We also experienced improved margins in our second quarter 2008.

EBITDA which is a non-GAAP measure was $72.8 million for the second quarter 2008, an increase of 125% over the same period in 2007. This is indicative of our strong cash flow generating capacity. I will provide a reconciliation of EBITDA in a later slide.

Please now turn to slide number ten, the second quarter 2008 revenue metrics. This slide demonstrates the revenue metrics of our business for the second quarter of 2008. We begin with our voyage revenue metrics on the top of the slide. During the second quarter of 2008 we operated 30 vessels in our freight voyage business and had 2,758 freight voyage days, as compared to 22 vessels and 2009 freight voyage days in the second quarter of 2007.

Our average daily voyage time charter equivalent was $31,212 per day in the second quarter of 2008, an increase of 52% from the $20,538 per day during the same period in 2007 and an increase of 10% from the $28,303 per day during the first quarter of 2008. During the second quarter of 2008, we also had significant increases in tons of cargo ship and freight rates per ton.

Now let’s turn to the time charter revenues on the same slide. Time charter revenues in the second quarter of 2008 increased by $9.2 million, or 57% to $25.3 million from $16.1 million for the three months ended June 30, 2007. This despite a decrease in the time charter days to 777 days from 839 days, reflecting an increase of 69% in daily charter out hire rate. Our average daily time charter equivalent for our charter out business was $30,563 per day in the second quarter of 2008, an increase of 63% from the $18,727 per day during the same period of 2007, indicative of the continued strength in overall worldwide market rates.

Now slides 11 and 12 depict our operating and financial highlights, as well as key metrics for the six months of 2008. These slides are self explanatory and the information is presented in more detail in our second quarter and six months 2008 earnings press release we issued yesterday, as well as in our 10-Q for the period. I’ll be happy to answer any questions you may have during the question-and-answer session of the conference call.

We now turn to slide number 13, our consolidated balance sheet highlights. This slide provides the highlights of our consolidated balance sheet. As of June 30, 2008 our net debt to capitalization ratio stood at 30.3%, which is moderate for industry standards and affords us significant flexibility for further growth.

We now turn to slide 14, EBITDA reconciliations. EBITDA is a non-GAAP financial measure. For the three months ended June 30, 2008 we realized net income of $52.6 million with EBITDA of $72.8 million while in the three months ended June 30, 2007 we realized net income of $21.7 million with EBITDA of $32.3 million. So in the six months of this year net income was $98 million with EBITDA of $137.1 million as compared to income of $36.1 million with EBITDA of $57.7 million during the same period last year.

We now turn to slide number 15. Slide 15 shows the reconciliation of net income and earnings per share before the non-recurring items that we presented in earlier slides. We have now reached the end of our presentation. The slides in the appendix provide some more information on our business model, our trade routes, our fleet and our global network. Please take a look at them at your convenience. We thank you for you interest in and support of our company, and I’d like to open the conference call for questions from our investors. Operator, please open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ben Nolan – Jefferies & Company.

Ben Nolan – Jefferies & Company

On the freight business it looks like the aggregates were pretty flat quarter over quarter but the other freights grew pretty substantially. Was there any, I guess, specific types of cargos or areas that caused that growth? And kind of along with that, the rates that you guys earned went up pretty substantially as well. Would you attribute that maybe to just maybe some contract repricing or was it, you know, maybe higher margin cargos or just a better pricing environment in general?

Joseph E. Royce

First of all, the aggregate rates will stay the same as we go forward, because these are long term contracts that we have over the course of the next 12 to 24 months. But our general environment has improved, especially in our line of parcel services. We see increased volumes. We also see increased demand in the project area. There is a tremendous amount of projects that are starting to be shipped, especially to South America.

We just had our media agency meeting and we had all our people from all throughout the TBS offices. And when you talk to the people in South America, Brazil, Peru, Chile, Colombia, just to give you some ideas, they have a long, long list of projects that are going to be developed in these various countries. Either from the energy mining sector, from construction infrastructure, etc., which, you know, fits right into the TBS model. Not only the Five Star Service but the type of ships that we run and the cargo expertise.

Again we are very positive on this type of movement, not only for the balance of this year but also in next year, going into 2009. And in addition, in the second quarter we added six more ships and we’ll be taking delivery of two ships within the next 25, 30 days.

Ben Nolan – Jefferies & Company

On the higher pricing that you guys got, is that mostly, I guess, attributable to just better pricing in general? Or, I mean, were there some contracts that rolled over at better rates?

Joseph E. Royce

Again, our contracts are always a work in progress. A lot of our contracts again that we have fixed for 2007, I’m sorry, for 2008 were finalized at the end of 2007. And again this is pretty much how our business is done. But we’re really seeing an increase again in our liner parcel business, again, very, very solid demand. In fact as I’ve said in earlier conference calls and I’ve said at different conferences, I wish we had more of these multi-purpose tweendeckers because the demand is that strong.

Ben Nolan – Jefferies & Company

Along with that, you guys have the orders for the new tweendeckers and you’ve talked, I guess, for a couple quarters now about the possibility of placing orders for some more. And there were some comments in the press release about discussing the financial feasibility of that with your banks. Could you maybe give an update on where that process is? And maybe just in general how you envision that playing out, and maybe a rough timeline?

Joseph E. Royce

Our present situation right now, with our original six ships that we’re building, is pretty much on schedule. I think the first ship roughly is about almost 90 days delayed, which today in China is not too bad. We expect the first two ships to be delivered in ’09, probably May the first one and probably November for the second one. And then the balance of the four ships will be delivered in 2010.

Regarding new ships, we’re talking to people. We see again the opportunities to build more of these ships in China, and right now we’re in the discussion area. And there’s nothing really firm to tell people right now.

Ben Nolan – Jefferies & Company

And then lastly just something I noticed in the press release here. The dry docking days that you guys have given guidance to for the third and fourth quarter went up a little bit from the previous quarter. Is that just maybe the pulling forward of dry docking days that you would have otherwise had in 2009? Is it maybe some of the new vessels that you’ve acquired you’re going ahead and adding steel or replacing steel I guess and proactively addressing those ships? You know, maybe give some color as to why the dry docking expectations are higher.

Joseph E. Royce

Ben, its a few things that play here. One, we are noticing that there is increased congestion in the yards in China. We make reference to that in some of our information, especially when you see the Q you’ll see it in there. So the actual experience is causing us to modify somewhat how we view the second half of the year. We also have at play the new vessels that we take on.

You know we do the best estimate that we can but as we get into the ship, as we ride the ship and then as we subsequently take it over, then we can really do the gaugings and plan the dry docking with a little more insight and information. So it’s those two factors that are sort of driving the days up a little bit.

Ben Nolan – Jefferies & Company

Any idea what the number of days may be roughly for 2009?

Joseph E. Royce

Not at this time. No, not yet.

Operator

Your next question comes from Michael Pak – Banc of America Securities.

Michael Pak – Banc of America Securities

Just a few things I’d like to run through. During the quarter, exiting the quarter how did you feel in terms of the renewal rate environment for your business? And can you give us a sense maybe in terms of maybe in order backlog how shipments are shaping up this year going into next year?

Joseph E. Royce

This is a little bit too early in the year to be talking to customers about actual hard renewals. But we have been talking to customers and we have this conversation on an ongoing basis about how they see 2009. And in fact one of our guys just came back from talking to our mining customers in the west coast of South America and internationally. And pretty much everybody is looking at 2009 as being a very positive year in the demand. They’re actually like a lot of us. They’re seeing pressure on shortages. They would like to move more cargo.

And we’re going to be a part of it. So that to me will not change. We will sit and discuss, usually between October, November, December which is what we’ve done year-in and year-out with our customers, when 2009 becomes a little bit clearer for everyone. Today there is a tremendous demand for our services. For example, out of Asia alone our ships are booked anywhere from two to three months in advance. We’ve seen an increase in the export of steel out of China in just this past 45 days.

We saw inquiries of up to about 300,000 tons of steel just coming out of China for South America in our steel parcel service. And we’ve booked in excess of 70,000 tons just for August and September. So again we see a tremendous activity in the parcel business. We’re also starting to see steel going into South America out of the United States.

We’ve already booked car steel parcel cargos from the United States back into Brazil on our return trips for the balance of this year. So there is a lot of activity. The demand continues to be strong. I think that when we sit down and renew our business at the end of the year, which we do on a regular basis. So I’m confident on the demand side of our business.

Michael Pak – Banc of America Securities

I want to touch upon the dry docking guidance. It seems that, you know, if I refer back to your first quarter release that the dry docking days have increased significantly. Are there any implications in terms of utilization rates in the second half and, you know, earnings? I would think that would imply you would have a lot more off hire days in the second half. Can you guys comment on that?

Joseph E. Royce

Well certainly I wouldn’t say that we’re going to have more off hire days in the second half as compared to the first, but we are adjusting our estimates to deal with the congestion. And the current reporting that we have in the press release and subsequently in the Q will, we think, now very fairly and accurately represents what we see in the marketplace. That doesn’t mean that, for instance, China could not get more congested and increase the number of days that we have to spend in the dry dock.

But we do have – you know we’ve taken on the new ships. We have a good handle on what we think those will take into dry dock. And I would use the current quarter estimates of, you know, the estimates we’re giving with this quarterly report for Q3 and Q4 as pretty straightforward and accurate.

Michael Pak – Banc of America Securities

In terms of the - I guess there’s 460 days remaining of dry docking days that you guys expect. Now is that more weighted to 3Q versus 4Q? How should we think about it in terms of, you know, the vessel dry docking there?

Joseph E. Royce

Yes, it’s pretty flat, Michael. There’s maybe, you know, 18 to 20 days more in the fourth quarter than the third quarter, but it’s pretty evenly spaced.

Michael Pak – Banc of America Securities

And then 17 vessels, so how many vessels do you expect to dry dock in 3Q? Or during this quarter?

Joseph E. Royce

In the third quarter we expect to dry dock about four vessels.

Michael Pak – Banc of America Securities

The other thing I wanted to touch upon real quick is the SG&A run rate. Now it came in a little higher than what we thought. Were there any one time or nonrecurring items or can you just talk about the SG&A line?

Joseph E. Royce

Michael, in SG&A for the second quarter we have about $2 million for the re-engineering of our technical management business processes, our ship management business processes. So that would definitely affect your run rate if you were working off Q1 for example.

Michael Pak – Banc of America Securities

So then is this $2 million an ongoing expense or non-recurring?

Joseph E. Royce

That’s non-recurring. We’ll have a little overhang into Q3 of about $0.5 million, but the majority of it is in Q2. And I’ll also point out that we do have our discretionary cash bonus accrued for, but that was there partially in the first quarter but you see it now fully accrued in the second quarter.

Michael Pak – Banc of America Securities

Your leverage is about 30% as you stated in the slides. What’s the, Fred and Joe, what would you say the optimal capital structure for your business?

Joseph E. Royce

Well I think Michael out of necessity to be able to renew the fleet we’re going to have to incur more debt. And so I would see that maybe going to 42 to 45%. I don’t know if I would use the word optimal, but I would use the word necessary in that we’re going to have to as I say renew the fleet, and that’s going to require some debt.

Operator

Your next question comes from [Chris Sim – PMG].

[Chris Sim – PMG]

My question is with the Olympic halt of production over in Beijing, China do you foresee that having a lasting effect on your shipping routes and expected demand throughout the third and fourth quarter?

Joseph E. Royce

No, in fact as I mentioned earlier we are moving more steel, more cargo. We usually have on average about three sailings a month out of Asia and into South America. In August and September we’ll have nine sailings. So actually the cargo volumes are picking up for these two months. So we really haven’t seen any impact on volumes.

[Chris Sim – PMG]

Do you foresee – as far as the rest of the year is concerned, third and fourth quarters and your guidance, do you foresee any slow down in the global economy? Or do you think that you’ll be able to maintain or exceed your current expectations?

Joseph E. Royce

Well from a business point of view we see the – well, we’re in the third quarter right now and the fourth quarter as being consistent. We see again as I mentioned earlier our volumes being steady, some areas increasing, new opportunities for the company. We continue to look for areas to grow the business. So we’re confident that for 2008. And of course, again as I mentioned a bit earlier, that we’re starting to talk with our customers and we have ongoing discussions about their views in 2009. And the consensus is that the people that we’re speaking to is looking at 2009 again as a solid year demand wise.

[Chris Sim – PMG]

So basically what you’re saying is that this drop that we’re seeing in global commodity prices should not have an affect on demand on the way that it has, say, on oil for your sector.

Joseph E. Royce

Well, when you look – when you’re talking about the general market again the cape sizes and all these other ships that are more commodity priced ships really does not affect us, as you can see from the chart that we presented. And again from our sector of the business, we see a steady demand going forward. We see a steady demand in our general business and we see a steady and increased demand in the project business going into next year.

Again as I said on our bulk side, all our mining people, people like Mitsui, DHP, Glencore, etc., our steel people, Mittal, Usiminas, etc., the people in Brazil, again are projecting very strong demand for 2009. So based on that demand and the business that we’re in which again is not in the spot market, I feel comfortable about the company’s prospects not only for the balance of this year but in – starting to develop for 2009.

Operator

Your next question comes from Michael Markowski – Overbrook Capital, LLC.

Michael Markowski – Overbrook Capital, LLC

I wanted to talk a little bit about the Baltic Dry index and hopefully get some clarification on the impact it would have on your business. Your company as well as the other stocks in the sector pretty much seem to follow the trend of that index and I wanted to get some clarification on whether there is that direct correlation on your average daily rates or your business in general.

Joseph E. Royce

Well again we’ve always said from day one when the company went public we are not like your spot market players. We are a company that is the end user of these ships. We have a customer base. We move our customer’s cargo. And as you can see in page eight of our presentation, where we try to show the strength and the consistency of the TBS story versus what’s happened on the Baltic Index again re-confirms what we’ve said, call after call, conference after conference. We are a different company.

Now obviously no one is immune to what happens in the general overall trade environment. But again all indications from what we hear and what we see that we in combination of a summer lull and I think, also, the Chinese have taken a step back and stockpiled for this Olympic event that presently experiencing, all indications are for the balance of the year that the market’s going to be very strong.

And we see it also with the demand or the inquiries in the overall market from the different ship operators as well as some of the bigger companies for our ships for long term time charter. So again I think that in the general overall market that the balance of this year should be strong. And as I said earlier in the call before we’re very confident in our business and again, as we’ve tried to show with our slides, this time we showed pictures of our business that we are a different company.

Our business is more customer oriented. Our customers need us. We put a large level of service in our business. And the goal has always been to take us away from the spot commodity pricing and really build a business that is based on service, and all the positive elements that service brings to the table.

Operator

There are no other questions in queue at this time.

Joseph E. Royce

Well thank you very much. Again I would like to thank you and everybody on the phone for your interest and support and look forward to our next conference call for the third quarter 2008 results. And I’d like to wish everybody a nice day.

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