TBS International Limited, Q4 2007 Earnings Call Transcript

| About: TBS International (TBSI)
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TBS International Limited (NASDAQ:TBSI) Q4 2007 Earnings Call March 13, 2008 10:00 AM ET

Executives

Joseph Royce – Chairman, President & CEO

Fred Lepere – Exec. VP & CFO

Analysts

Ben Nolan - Jefferies & Co.

Michael Hecht - Banc of America Securities

[Seth Leaman - FDIC]

Operator

Welcome to the TBS International Limited fourth quarter and full year end 2007 earnings conference call. We have with us Mr. Joseph E. Royce, Chairman, President and CEO and Mr. Fred Lepere, Executive Vice President and Chief Financial Officer of the company. (Operator Instructions) We now pass the floor to one of your speakers today, Mr. Fred Lepere. Please go ahead Mr. Lepere.

Fred Lepere

Good morning and thank you for joining TBS International Limited’s quarterly conference call. With me today is Joseph Royce, TBS’s Chairman, Chief Executive Officer and President. The purpose of today’s call is to discuss the results of TBS’s fourth quarter and year ended December 31, 2007.

Yesterday we issued a press release after the close of the stock market in New York with financial and operational information for the fourth quarter and full year 2007. If you have not received this release, you may log onto our website at www.tbsship.com and navigate to the Investor Relations page. Or you can call Capital Link at 212-661-7566. We will also post the transcript of this call on our website once it’s been prepared.

Our remarks today will be followed by a question and answer session. Now 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 now turn to slide number two. This slide refers to forward-looking statements. During the course of this 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 registration statement on Form S-1 and our Quarterly Reports on Form 10-Q as well as 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.

Joseph Royce

Thank you Fred. Good morning everyone and welcome to TBS International Limited’s conference call for the results of the fourth quarter and year end December 31, 2007. We will begin our presentation with slide number three, the fourth quarter and full year 2007 overview.

2007 was a record year for TBS in revenues and tons of cargo shipped as well as EBITDA, net income and earnings per share. These results validate our business growth model as a pure dry cargo shipping and logistics company. In the fourth quarter we achieved net income of $35.2 million or $1.26 per share and EBITDA, which is a non-GAAP financial measure, of $47.8 million on revenues of $150.2 million. For the full year 2007 we achieved net income of $98.2 million or $3.50 per share and EBITDA, which is a non-GAAP financial measure of $144 million on revenues of $355.6 million.

We are particularly proud of the 270 worldwide employees of TBS and our affiliate agencies who executed our business plan so capably and efficiently. These employees are our company’s biggest assets and set us apart from the traditional dry cargo shipping companies by enabling us to deliver the TBS Five Star Service to our customers; ocean transportation, logistics, port services, operations and strategic planning. Overall 2007 has been a very strong year as indicated by our financial and operational performance. And I will now take you through these achievements in more details starting with the next slide, number four.

Number four presents our business development. In 2007 we expanded our TBS Pacific service with the introduction of a steel parcel service from China, Korea and Japan to the west coast of South America. We established a steel, general cargo and project service from China, Korea and Japan to Brazil and Argentina. We now service all coasts of Latin America from Asia. We developed a backhaul steam and industrial coal transport business from Columbia and Venezuela to Brazil and Argentina. We introduced a new service from Argentina and Brazil into the Mediterranean. We secured a new, two year contract for the transportation of about 2 million tons of aggregates in the Middle East. We secured a one year contract for the transportation of about 250,000 tons of grain from the United States to the Caribbean. We opened our TBS Logistics headquarters in Houston, Texas to work with our international logistic partners and our affiliate agencies to develop our international project logistics capabilities. But most importantly, TBS is benefiting from the current positive freight environment as we renewed Contracts of Affreightment for 2008 at increased freight rates compared to our 2007 experience.

In conclusion 2007 brought a number of positive results to TBS many of which will carry forward into 2008.

Now let’s turn to slide five, our continued fleet expansion and renewal. We have doubled our fleet in the last three years continuing the implementation of our business first, fleet second strategy. As of today our operational fleet consists of 41 vessels, comprising 22 tweendeckers and 19 handymax/handysize bulk carriers. We expect to take delivery of two more vessels; one multipurpose tweendecker with delivery in Q1 2008 and one handymax bulk carrier delivery by Q2 2008. In 2007 we initiated our new building program ensuring the expansion and renewal of our fleet for the longer term. Our program to build six Roymar Class 34,000 dwt multipurpose vessels with retractable tweendecks is progressing with the laying of the keel of the first vessel taking place this month. We are scheduled to receive delivery of two vessels in 2009 and four vessels in 2010.

Now let’s look at slide number six referring to TBS today. TBS is strongly positioned to participate in the expanding globalization of world trade particularly in the project business relating to the steel, mining, energy and construction industries. We have strong franchises in Latin America, East Asia, the Middle East and Africa. Our TBS fleet of multipurpose tweendeckers is uniquely suited to the transportation of project cargos and our portside and inland portside and inland logistics services enable TBS to provide complete solutions for the project's transportation requirements. We completed our extensive vessel drydock and upgrade program. With this proactive accelerated drydock and upgrade program, we lessened maintenance requirements in later years and improved the operational flexibility and versatility of our fleet.

TBS is a full service transportation provider. We own our own vessels. We have established trade lanes with regular service. In addition to ocean transportation, we provide our customers with port services, logistics solutions, operational capability and participate with their management in long term strategic planning. We have dedicated employees throughout Latin America and East Asia who are in constant communication with our customers to anticipate and service their transportation requirements. This builds customer loyalty and sets TBS apart from the traditional dry cargo shipping companies.

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

Fred Lepere

Thank you Joe, we should now all be on slide number seven, the fourth quarter 2007 operating and financial highlights.

Reflecting stronger market conditions fourth quarter 2007 revenues, net income and EBITDA, which is a non-GAAP financial measure, increased considerably compared to the fourth quarter of 2006. Our net income for the fourth quarter of 2007 increased by over 144% to $35.2 million as compared to $14.4 million during the three months ended December 31, 2006. Fully diluted earnings per share increased to $1.26 per share compared to $0.51 per share in the fourth quarter of 2006. EBITDA, which is a non-GAAP financial measure, increased almost 90% to $47.8 million for the fourth quarter of 2007 compared to $25.2 million in the fourth quarter of 2006.

Voyage revenues in the fourth quarter of 2007 were $79.1 million, an increase of nearly 65% from the $48 million during the same period in 2006. These results are especially satisfying considering the TBS vessels were in drydock for 221 days during the fourth quarter of 2007 compared to 111 days in the same period of 2006.

Please now move to slide number eight. This slide demonstrates the revenue metrics of our business for the fourth quarter 2007. We begin with our voyage data on the top of the slide. In the fourth quarter of 2007 we operated 23 vessels in our freight voyage business and had 2,145 freight voyage days compared to 21 vessels and 1,937 freight voyage days for the same period in 2006. As you can see on this slide, during the fourth quarter of 2007 we had a significant increase in tons of cargo shipped and freight rates per ton excluding aggregates. Our average daily voyage time charter equivalent was $24,149 per day in the fourth quarter of 2007, an increase of 74.9% from the $13,806 per day during the same period of 2006, and an increase of 12.2% from the $21,525 per day during the third quarter of 2007.

Let’s now move to the lower part of the slide for our time charter data. Time charter revenues in the fourth quarter of 2007 increased by $16.4 million or 95.3% reflecting an increase of 95.8% in daily charter-out hire rate. Our average daily time charter equivalent was $30,426 per day in the three months ended December 31, 2007, an increase of 91.4% from the $15,894 per day during the same period of 2006 and an increase of 27.7% from the $23,833 per day during the third quarter of 2007.

Now slides nine and 10 depict our operating and financial highlights as well as key metrics for the full year 2007. These slides are self-explanatory and the information is presented in more detail in our fourth quarter and full year 2007 earnings press release we issued yesterday as well as in our 10-K for the period. I will answer any questions you may have during the question and answer session of this conference call.

Please now turn to slide number 11, our consolidated balance sheet highlights. This slide provides the highlights of our consolidated balance sheets at December 31, 2007 and at December 31, 2006. At December 31, 2007 our net debt to capitalization ratio stood at 31.9% which is low for industry standards. Our moderate leverage, coupled with our strong cash flow generation as you will see in the next slide, and sufficient access to bank financing enabled us to accommodate our fleet expansion program. We are particularly pleased with the support from our banks as TBS has established new credit facilities at competitive terms to accommodate our continued fleet expansion.

We’ll now turn to slide number 12, reconciliations. This slide shows our EBITDA reconciliation to net income. EBITDA is a non-GAAP financial measure and is indicative of TBS’s strong cash flow generating capability. For the full year 2007 our EBITDA increased by 72.9% to $144 million from $83.3 million in 2006.

We now turn to slide number 13, the reconciliation of income before non recurring items. Slide 13 shows the reconciliation of net income and earnings per share before the non recurring items that were referenced 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 fundamentals and our global network. You will also find information on our growth and business development philosophy, our new building program as well as details on our long term ship maintenance program and our drydock schedule in 2008. Please look at them at your convenience.

We thank you for your interest in, and continued support of our company and I would like to open the conference call to questions from our investors. Operator please open the floor for questions.

Question-and-Answer Session

Operator

Your first question comes from Ben Nolan - Jefferies & Co.

Ben Nolan - Jefferies & Co.

Hello Joe and Fred; another nice quarter there. I have just a few questions for you quickly, first of all I was going to just get your sense given the fact that you guys have moved more into the steel trade from China to South America and really I guess from the Far East to South America, the Chinese have cut subsidies for some of the steel makers and their steel exports, have you guys seen any change in the volumes that have been coming out of the Far East in terms of steel to South America?

Joseph Royce

Well there are different types of steels. First of all our new service from Japan and the Far East, Korea and China going into Brazil is based around specialty steels for the automotive industry in Brazil and we see this growing into, with our present customers, into a five year contract business. So that’s very solid. China, in the basic raw steels, we saw a little bit of a tail off towards the end of last year; it’s been quiet in the first quarter and the expectations and one of the reasons that the feeling that it’s been quiet was based on the fact that the iron ore negotiations weren’t concluded. But our expectations are that it will pick up in the second quarter and pretty much follow the same pattern that it did last year. So we’re hoping and with expectations that the steel parcel service from China will pick up in the second quarter of this year.

Ben Nolan - Jefferies & Co.

Okay great and then another thing quickly maybe for Fred, I noticed that the G&A expenses have picked up a little bit quarter over quarter, I was going to see if there was any year end sort of annual one time expenses affiliated in that number or is that maybe a good run rate going forward?

Fred Lepere

Well you know in absolute terms every line in the financial statements are up, especially revenue and other associated expenses as is the G&A’s. However if we look as a percentage of revenue between 2006 and 2007 there is a consistency. In the fourth quarter in particular we had of course our bonus considerations once we solidified the result of the year and feel comfortable then we look at the bonus situation and this year was a bit higher because we have more employees and because of the performance of the company. I do feel on the run rate portion of your question that this run rate given the results we’re expecting for 2008 should be continuing, yes.

Ben Nolan - Jefferies & Co.

Okay and then as it relates to the, you guys have been pretty active in buying second hand ships here recently, could you maybe just give maybe some color on what the market environment is out there, I mean are you continuing to see a lot of perspective deals at prices that you think are equitable and then would that be the area that you’d probably dedicate most of your capital to going forward or potentially would you consider maybe initiating a dividend program or share repurchases or something of that sort.

Joseph Royce

Well let me start with the latter part of your question, again, our company from day one, our business plan has been centered around growth and as you can see from the presentation that we just made, we’re continuing to grow the company. There are tremendous opportunities and we as management feel and continue to feel that the best use of the company’s cash is to continue to grow the company. Now regarding the ship acquisitions going forward, well there are two sides of this. There is the second hand ships which we are continuing to look at and inspecting ships as we speak. The prices that these ships have come down a bit from I would say the, probably the peak of the market towards the end of the last quarter last year. But again the market has come back and the prices really do reflect in many cases what’s happening in the daily spot market and as we’ve seen since the announcement that the iron ore negotiations have been concluded the market has taken a positive step forward and this has been reflected on some of the prices. Probably they’re up anywhere from a half a million to a million dollars in the last couple of weeks compared to what they were prior to the finalization of the iron ore negotiations.

Now we look at our fleet in two ways, we will use the second hand market to continue to acquire ships as we grow the company and of course we have our long term new building program where the goal of the company is over a course of five plus years to replace our multipurpose, our existing multipurpose tweendeck fleet and the first step obviously in that direction was the new building program. Of our six ships we are presently looking to get some builders throughout the world to continue this program going forward.

Ben Nolan - Jefferies & Co.

Okay, great, and then just lastly, on the drydocking that you guys are doing, obviously there’s been a pretty substantial steel replacement program that you guys have been working through over the last year and into this year but going forward and really looking into 2009 and beyond, is steel replacements something that is, and the heavy drydocking that we’ve seen, is that something that is just going to be part of your business given the nature and the age of your vessels or would you say that in the longer term the drydocking and steel replacement and so forth is more I guess one time or near term in nature.

Joseph Royce

Well steel replacement is an ongoing process and that will not change. It’s just the level of steel replacement that obviously will change as well as our drydocking program. We’ll always have ships in drydock. We have 43 ships and so there is no getting around the fact that these ships will continue to be drydocked. But let me give you an example of the results of our program. We went in and we made a decision starting in 2006 the second half, to put these ships especially the ones that will be drydocked for the first time under our ownership through an expensive period of steel renewal based on the concept that these ships trading until they’re 30 years of age that the steel that we put in the ships will outlast the remaining life of the ship. And what we did for example and I’ll use the Iroquois Maiden, when she went in, as she went in and we put about 500 tons of steel in the ship.

And the other side of that was not only would we replace the steel in the ships for a long term program but it will also give us the opportunities when the next drydocking comes to keep the ship where she’s trading as opposed to sending her all the way out and disrupting the operation to China and coming back. And now the Iroquois Maiden is coming back up for drydock, she’s trading in the Middle East to aggregate business and this drydock will be the second half of this year and the drydocking or the steel requirements will be about 25 to 30 tons. So again we implemented our plan, our plan will continue but the positive results of this is in the next drydockings as we go forward where there’ll be a lot less steel, it’ll be minimal steel needed as the ships go through their ongoing drydockings.

Ben Nolan - Jefferies & Co.

Okay well great, that does it for me and thanks again for your answers and nice quarter.

Operator

Your next question comes from Michael Hecht - Banc of America Securities

Michael Hecht – Banc of America Securities

Good morning Joe, good morning Fred. Just wanted to follow-up on the drydockings, so in ’08 you’re expecting about $17 million, can you just give us a sense of what the, in addition to that, any kind of normal capital improvement type spending that you’ll need to do in ’08?

Fred Lepere

Well Michael we’re probably going, you know we have normal equipment replacement. We have additions to the vessels such as grabs, upgrading of the cranes. This is an ongoing cycle that happens throughout the year. It doesn’t just happen in the drydock as you know, as we’ve talked about. You know I would anticipate anything between $5 million and $8 million of additional capital expenditures for a fleet of our size in more let’s say normalized capital expenditures.

Michael Hecht – Banc of America Securities

Okay great and then what was the amount for 2007 for vessel acquisitions and capital improvements?

Fred Lepere

That total number, vessel acquisition portion was $84 million. We had $23.3 million in drydock and about another $20 million in general acquisitions, equipment and whatnot.

Michael Hecht – Banc of America Securities

Okay.

Fred Lepere

It was an extremely heavy year.

Michael Hecht – Banc of America Securities

Now, it sounds like though ’08 these line items, or this amount is going to decrease significantly, is that, am I understanding that correctly?

Fred Lepere

Well in 2008 we have a total of seven vessels which we will take on which will be an amount in excess of $120 million, surpassing the $84 million acquisitions. Plus we have the drydock program which will be slightly less than the previous year and again I would expect the other type more normalized CapEx to be down as well.

Michael Hecht – Banc of America Securities

I see, okay and then Joe and Fred can you give us a sense of your expectations on the fleet utilization, your fleet is now 43, what kind of utilization are you going to expect in 2008?

Fred Lepere

Yes Michael, we have traditionally run these ships somewhere in the 98% of available days and we think that will continue to grow for the fleet again as in response to the growth and the demand for carrying cargo that our customers continuously make upon the company. So that growth of the fleet it harks back to what we’ve been saying pretty much since the IPO which is that we’re a business first, fleet second company and that continues. We could actually use several more ships at this moment if we could plug them into the business. We have the cargo to carry.

Michael Hecht – Banc of America Securities

So out of the 43 ships what do you expect to be, how many ships will be in operation do you feel on average in ’08?

Fred Lepere

Well the ships are in operation for, 43 ships will be in operation in 2008. As they get delivered remember that they come in on a staged basis in the first quarter and one in the second quarter but the point is that those 43 ships, as they come on board for the most part there is sort of a take over timing where we may have to put the ship into the drydock as well as our normal drydock program, but on the whole those ships will be busy all of the time. So if you want to take an average, looking at the total number of days the ships are available for trading it’s about 41 ships.

Joseph Royce

And if I might add to this is that as I said earlier, we’re continuing to inspect ships as we speak. It’s a process and once we inspect these ships et cetera, we feel that we will be adding ships on to support this business growth.

Michael Hecht – Banc of America Securities

And one last question, your voyage revenue for 2008, is it fair to say that most of that is pretty much locked up?

Fred Lepere

Yes, well our business, and we do this year after year, is that we finalize our contracts for the coming year and the end of the quarter 2007 and we have finalized our contracts and our customers have not only have we finalized these contracts at increased rates, but all of our customers have said that they expect more volume to be moved in 2008 so we’re very, very excited where the company is positioned for 2008.

Michael Hecht – Banc of America Securities

Great, thanks a lot guys.

Operator

Your next question comes from [Seth Leaman - FDIC]

[Seth Leaman - FDIC]

Good morning and congratulations on a very strong fourth quarter, I just have a couple of quick questions. Regards to the new building program you mentioned that the total cost will be somewhere over $200 million when you add in the six vessels, with $56 million already basically paid for, how do you expect to fund the remaining costs at this time?

Fred Lepere

The remaining expense of the new building program will be funded partially by our remaining term loan available from a syndicate led by the Royal Bank of Scotland, there’s about $115 million left on that that loan capacity-wise, the rest will come out of cash flow.

[Seth Leaman - FDIC]

So you don’t expect like a secondary share offering for this new building then?

Fred Lepere

We will not require a secondary offering to complete the new building program, no. It will come from normal term loan and cash flow.

[Seth Leaman - FDIC]

Okay great. The next question I have is as your company kind of gets to a level of maturity in terms of vessels and your cash flow builds to a certain level, do you anticipate that you may want us to start offering a dividend to reflect sort of the size of your annual cash flow? Do you think that may be in the cards?

Joseph Royce

Well that’s down the road that that question, I think right now as I said earlier the opportunities for this company our numerous, the markets are very strong. The growth potential is solid and we see this as being again, the best use of the company’s cash to grow the company and take advantage of this very, very strong and solid shipping market.

[Seth Leaman - FDIC]

Okay and then my last question is, I was looking at the Q4 time charter rates versus Q3 and I saw the significant spike from a quarter on quarter basis, and being this far along into the first quarter of 2008 do you see much difference in time charter in the first quarter this year as compared to the fourth quarter last year?

Fred Lepere

Much difference? No, the markets continue to be strong for the most part. There are little blips here and there where the market will take a slight down turn and you know it always depends on where the ship is and what the opportunities for it are, but we see those rates holding firm.

[Seth Leaman - FDIC]

Okay well then, thank you very much and congratulations again on a great quarter.

Operator

And there are no further questions at this time, I will now turn the call back over to Mr. Royce for closing remarks.

Joseph Royce

Thank you very much. Concluding today’s conference call I would like to reiterate that we believe TBS is strategically positioned to benefit from the robust demand for commodities and general cargos on a global scale and from the strength in crate rates. Our global marketing campaign that we introduced in Europe, South America and Asia to inform our customers and perspective clients of the development of TBS and our enhanced operational capabilities has been very successful. This campaign has generated tangible results. Again, I would like to thank you for your interest and support and look forward to our next conference call for the first quarter March 31, 2008 results. Thank you very much everybody and have a nice day.

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