Octave Specialty Group Inc (OSG) 2002 Q1 法說會逐字稿

Welcome to the OSG Shipholding Group Inc. first quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. At that time, if you have a question, please press the one, followed by the four, on your telephone. As a reminder, this conference is being recorded Wednesday, May 8, 2002.

I would now like to turn the conference over to Mr. Bob Cowen, chief operating officer of OSG Shipholding Group Inc.

Please go ahead, sir.

Thank you, and welcome to the conference call. Before we start, let me just make the following statement: This conference call may contain forward-looking statements regarding the company's prospects, including the outlook for tanker markets, the company's fleet renewal program, prospects for certain strategic alliances, anticipated levels of scrapping, implementation of certain overhead and operating cost reductions, and the forecast of world oil demand. Factors, risks, and uncertainties that could cause actual results to differ from expectations reflected in these forward-looking statements are described in the company's annual report on form 10-K.

At this time, I would like to turn the conference over to Mort Hyman, chairman and chief executive officer of OSG.

Mort.

Good morning. I apologize for the delay. Apparently, the conference call operator was having some difficulties, but I want you to all know we were ready. Yesterday, we released our first quarter earnings. As you saw, we earned about $750,000, which is down rather dramatically from the comparable period of over $40 million, and of course these results reflect a significant weakening, further weakening, continuing weakening, particularly for the VLCC rates, which are now at probably 15-year lows.

On the other hand, I'm pleased that our restructuring program has been completed and is behind us. We always look for additional ways to increase efficiency, but we have taken $60 million a year out of our overhead and operating expenses, and this is the first year that we will benefit from the full amount of that program, which was implemented over several years.

We continue to have a very strong balance sheet at the end of the quarter. Our net equity - our adjusted debt to equity ratio was at about 43%, which I think puts us among the lowest of any publicly trading company. And it's significant that we've achieved this, the debt-to-equity ratio, while renewing our - while completing our $800 million fleet renewal program, which was comprised of an original price of 21 vessels. The completion of the program will require additional capital expenditures on our part of about $55 million during the balance of this year, and approximately $70 million next year, and that end is below the anticipated depreciation expense in each of those years.

We remain quite liquid. We have today liquidity of more than $400 billion, and it is not unlikely that we will be increasing that liquidity within a relatively short period of time.

The incidence of scrapping continues to be an important factor for our industry, and I think in at least three of the last conference calls, I stressed the importance of watching that figure, and today, since the beginning of this year, 24 VLCCs have been scrapped. There has been one converted to a floating storage platform, and that is, of course, significantly ahead of last year at this time. I believe only two vessels were scrapped in the corresponding period in '01, and if you look at the scrapping, 29 for the full year in '01, as compared to 24 so far this year.

The balance of the vessels that were retired last year were 10 conversions, and one vessel was lost at sea.

I'm not sure that there are any other items in the release that I want to refer to other than a release that was just put out this morning by Tanker's International, which indicated that Frontline will be withdrawing its vessels from the pool. For those of you who are not familiar with Tanker's International, who started about two years ago. The founding partners were Frontline, Euronav, AP Moller, Klaus Oldendorff, and OSG. And the pool today is about 60 vessels, and after the withdraw of the Frontline vessels, it will still be somewhere between 40 an 45, and the reason I cannot fix on the specific number, is that the number of the vessels in the pool are owned in joint venture, and as long as those vessels continued to be owned, they are required by the terms of the joint venture agreement to remain in the pool and the majority ownership in those joint ventures which are, I think, eight. Five are the Ferguson [phonetic] that we purchased and Euronav and OSG have the 60% interest in those ventures, and of course both Euronav and OSG are remaining in the pool, and then there are two ships in which you have a 50/50 interest with Frontline, and there is one ship I think that's 60% by OSG and Euronav. So the likelihood is that those vessels will at least remain in the pool. I just came back from London. We had a meeting with the other partners, and all of us are committed to continuing the pool, which still comprises of, by far, the largest fleet of VLCCs in the world.

I'm going to turn it over to questions now.

Operator.

CALLER INSTRUCTIONS) Jordan Alliger from Goldman Sachs. Please go ahead.

Hi. A couple of things. On the Tanker's International release story, can you perhaps discuss to the extent you can, you know, the Frontline thinking and their plans now? Is it just sort of just to go it alone? And then, secondarily, what are the implications? I know the pool is planning on staying together, but sort of the implications going forward? Will you look for additional partners, or will it stay together sort of as is for the time being?

The first question is very - you'd have to ask John Frederickson what Frontline is thinking. I don't know, and I wouldn't speculate. With respect to the pool, it is likely that we will be entering into discussions with other partners to the extent that we'll be successful. I can't say, but it is our intention to grow the pool.

Okay. Just sort of just tied into that, you know, it seemed that all things considered, the VLCC rates that you guys were able to generate relative to the market were reasonable, and I'm just wondering even in this down market, are you seeing favorable or any favorable implications, or is just, you know, from being in a pool situation, or is it just too tough a market to make a huge difference at this point?

Well, I think one point has to be stressed, that the relationships and all of the contracts of the freight and all of the existing charters are with the pool, so all of that continues.

Okay.

And to the extent that the pool provides increased utilization, less downtime, triangulation and back haul, those benefits remain with us. Obviously, when the rates are this low, the amount of that benefit in dollar terms is reduced accordingly, but there surely remains that benefit, and we would anticipate that our business will continue as usual.

Okay. Great. Thanks very much.

The next question comes from Jonathan Chapel [phonetic] with J.P. Morgan. Please go ahead.

JONATHAN CHAPEL [phonetic]: Two questions. First one, I don't know if Myles might want to take this one, but with all the liquidity that you're generating now as far as the balance sheet and cash flow, what are your priorities for uses of cash? I know you have a couple of new buildings in order, but would you think you might want to be a bit more aggressive in the new buildings given the asset values have been coming down, maybe be active in consolidation, or share buybacks?

I'm going to answer that, if I may? Myles will just add anything that he wants. We are in a very interesting time in our industry. It's a time of stress for any owners and there aren't too many companies that begin to approach the liquidity of OSG. Challenging times are usual also times of opportunity. What form that opportunity might take, obviously, we'll have to see, but it could be any of the areas in which you've indicated a possibility. The foundation acquisition of [indiscernible] secondhand tonnage. New buildings are probably down at the bottom of our list. There are many vessels around, although the yards are going to, I believe, make very, very attractive offers. As you know, they have most of '04 still open, and the competing uses for berths aren't there. I don't think anybody is building or placing orders for container ships and not placing orders for ferries. The LPGs have slowed. So I suspect the yards will be very eager to increase their autobook in the bulk sector, the dry bulk and the tanker sector, and the way to do that is to continue to reduce the prices.

JONATHAN CHAPEL [phonetic]: Right.

But as we see things today, the likelihood of opportunity with existing tonnage, whether through a corporate form, or ship by ship, are certainly more in line with our thinking. As far as a share repurchase program, that's always an option that we have. As you know, we've done that in the past from time to time, and we will continue to look at that and analyze whether it may, in our judgment, made sense.

JONATHAN CHAPEL [phonetic]: Well, that's good to hear that you'd look at secondhand tonnage before adding to the already large order book.

Second question regards the operating strategy. A lot of the other publicly traded companies have been talking in the past couple of press releases and earnings calls about adding their time charter exposure to kind of smooth out the earnings volatility in this industry. Do you have any plans on increasing your time charter exposure, maybe not right away, but [indiscernible] pick up from their current low levels?

Certainly not right away, and it is a definite interest on the part of Tanker's International, and on the part of OSG to increase the percentage of vessels on time charter. Timing is critical in this business. Obviously, with benefit of hindsight, I wished we had fixed last May and June, but we didn't, and this is a cyclical business. Right now we're pretty much at the bottom, and we do believe that we're going to see recovery and there are those who feel the recovery will be quite strong and, obviously, at that point, we'll look at charter rates that will be different. That will have [indiscernible] putting a percentage of fleet time on time charter [indiscernible]. I should mentions, as Myles just reminded, that substantially all of our U.S. fleet is under long-term time charter.

JONATHAN CHAPEL [phonetic]: All right. Thanks a lot, Morton.

Right.

CALLER INSTRUCTIONS) The next question is Allen Ginsberg from Bank of Nova Scotia. Please go ahead, sir.

Good morning. A couple of questions. First, in your prefaced remarks, you indicated that liquidity was in the region of 400 million, and I'm quoting, and will increase in a relatively short period of time. Could you elaborate on that a little further?

Yes, that's what happens when you just get off a jet from London, which I just did. What I'm saying is that there are opportunities which we are receiving - indications of opportunities to provide financing on attractive faces. We, obviously, don't have an immediate need or requirement for that financing, but rates are quite attractive, and as I said, in response to another question, challenging times do breed opportunities, and we would like to have the maximum flexibility to move quickly to take advantage of those opportunities. And with the liquidity we have now, we are comfortable, but we may well increase that in the coming months.

Indiscernible]. The second question, would you be willing to give us your net income by month for the first quarter?

I don't - I'll tell you, obviously, I don't know the figure, and I don't know how we could - Myles?

We don't do monthly closing. We could probably derive, Allen, if you divide it separately.

I just wanted to get an idea for the trend and following on from that, understanding it's a forward-looking question of how the month of Apri looked, and whether or not, as one of the previous questions, there are a lot of tanker equity calls these days, so there tends to be a variety of views as to when the upturn is going to occur. I didn't hear any forward-looking statements as to when OSG feels the upturn might occur in what quarter of this year or next?

I'm giving that to Mort.

I'll tell you, honestly - we would certainly look for stronger rates in the fourth quarter than exists today, and maybe that could even begin towards the end of the third quarter, but our stronger feeling is that by the fourth quarter we should see some significant improvement in rates, and I think that's a consensus that's shared by most of the tanker owners that I know.

All right. Thank you very much.

CALLER INSTRUCTIONS) There are no further questions at this time, gentlemen. Please go ahead with your presentation or any closing remarks.

Thank you very much for attending the call, and we will speak to you at the end of next quarter. Thanks for your interest.

Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and ask that you please disconnect your lines.