Octave Specialty Group Inc (OSG) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Overseas Shipholding Group second quarter 2003 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1, followed by the 4, on your telephone. As a reminder, this conference is being recorded, Thursday, August 7th, 2003. I would now like to turn the conference over to Bob Cowen, Chief Operating Officer of Overseas Shipholding Group, Inc. Please go ahead, sir.

Thank you. And welcome to the OSG second quarter conference call. This conference call may contain forward-looking statements regarding prospects for the Company's business can including the outlook for tanker markets, forecasts for world economic growth and growth in oil demand, prospects for strategic alliances, participated levels of scrapping, old tonnage, and schedules of new building orders. Factors, risks, and uncertainties that could cause actual results to differ from expectations in these forward-looking statements are described in the Company's annual report on Form 10-K.

With that said, I would like to now turn the conference call over to our Chairman and CEO, Mort Hyman. Mort?

Thank you, Bob. Thank you for joining us for this conference. I'm very pleased to announce, as we did in our written release this morning, that OSG has achieved record first-half results. We report $86 million of net income for the first six months of this year, which is the highest earnings in the Company's history for the first six months of any year. For the quarter ended June 30, our net income was $41.8 million or $1.21 per share, compared with $3.7 million or 11 cents per share in the second quarter of '02. Results for the second quarter of '03 include approximately $2 million or 6 cents a share, after tax, from security gains, compared to a $4 million similar gain or 12 cents a share in the prior year. Obviously reflecting the strong markets, time charter equivalent revenues for the quarter, or $120 million, almost double that, of the second quarter in the preceding year.

I think the statistics in the release speak for itself, except that I would want to mention that the implementation of our frequent renewal program and our operating efficiencies and cost reductions, which have been realized over the past few years, together with our enhanced vessel utilization, which we achieved through our two pools, the tanker international pool for the VLCCs and Aframax International for the Aframaxes, have positioned the company to uniquely take full advantage of the markets that prevailed during the first half of the year. And while we are currently now in the summer -- traditional summer doldrums and are seeing expected seasonable reduction in rates, I think it's fair to say that the overall tone of the market remains positive.

In the highlights of our release, you'll note that we acquired full ownership in what had been previously two joint venture ships with Amarata Hess (ph), one of the ships we sold at an attractive price of $60 million, and took time an 8-year time charter. We during the quarter completed the sale of the second of our 86 Panamax carriers, and as we indicated the remaining two likely sail candidates in the near future. We restructured our joint ventures with Frontline and Euronam (ph)with the net effect that we pick up an additional one third of the ship. And in June, we announced, I think, pretty much ahead of the pack, an increase in our annual cash dividend to 70 cents a share.

Before we leaving the financial part of our report, I do want to mention our significant buildup in equity and our substantial liquidity. Today, with an equity as at the end of the quarter of almost $860 million, the stated book value per share of our company is now just about $25 per share, and it's our liquidity that gives us the flexibility and it's our equity that gives us the strength to make us clearly one of the strongest shipping companies in the world. We have completed our fleet modernization program. We still have two ships to take delivery of, but everything basically has been paid for, and we have approximately $90 million a year in annual depreciation for additional debt service.

During the first half of this year, our long-term debt declined by over $100 million, and most significantly, on a cash-entrusted, tax-adjusted basis, our debt-to-equity ratio fell to a little less than 43%, which is down from 49.5% at the end of 2000. And I think that puts us in a particularly attractive position to take advantage of opportunities as they may arise. We have almost $700 million of additional liquidity, and we continue to have rather easy access to both the public and private debt markets.

Another item of significance is, of course, the effects of the prestige and the recently enacted legislation in Europe which bans older and certainly single-hull VLCCs from either carrying heavy crudes or from even entering into the off-shore protected waters of the E.U. community, and the most significant event which recently occurred is that the IMO has, in principle, adopted many of the accelerated phase-outs which have been proposed by the E.U. The IMO will be meeting again towards the end of the year to make final implementations of changes.

I think what is important to watch in the interim is what happens in the United States and in the Far East. Korea has already, for some time now, been very reluctant to have older ships come in. We're seeing that now in Japan as well, China, and I think it will be important to watch, in particular, what our Congressional leaders are going to do when the older and single-hull vessels increase voyages to the United States because they can't seek employment elsewhere.

The other thing to mention is that even if a ship, under the various rules, may not be forced out by legislation at the current time, almost every major charter is most reluctant to take a chance on the older tonnage. So for OSG, having one of the world's most modern fleets, obviously this means a great deal to us, and we're very pleased to see the progress that's been made in this regard. I'm not sure there's anything else that I wanted to comment on, so, gentlemen, here at OSG, unless I've missed something, operator, we'll go to questions.

q-and-a.

Ladies and gentlemen, if you would like to register a question, please press the 1, followed by the 4, on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1, followed by the 3. If you are using a speaker phone, please lift your handset before entering your request. One moment, please, before the first question. Our first question comes from the line of Jeremy Cramer with Neuberger Berman. Please proceed with your question.

Hi, Mort, how are you?

Fine. How are you?

It's my understanding, Mort, that both Houses of Congress are considering legislation currently that may impact the operations of shipping companies with foreign operations. I was wondering if you could confirm whether that's accurate. If it is, what would passage mean for OSG?

There is such legislation pending both in the House and in the Senate. The legislation which is pending, and it's pretty identical in the two Houses would do two things. First, it would restore OSG and U.S. shipping companies to the tax status of pre-1986.

In 1986, at literally about 3:00 in the morning, some staffers got together in the reconciliation conference and decided they had to do some trading, and someone got the bright idea that U.S. shipping companies should be taxed currently on their foreign earnings. Prior to that time, the earnings were not subject to taxation until actuallyrepatriated repatriated to the United States. When this was enacted without any opportunity for comment, it had a dramatic effect, and the result was, predictably, that most U.S. owners of foreign vessels, one way or another, took them off-shore, which meant that the United States government lost effective control over the majority of the foreign trading vessels that it had up until that time, and I testified both I think in 1989 and 1990, that this would mean the decimation of the U.S. foreign control fleet. Unfortunately, they didn't listen to me.

I'm delighted that they listened to Bob council Cowen because exactly what we forecast would happen has in fact happened, and there is now, in both Houses, legislation that would repeal the change of 1986. Had that been in effect -- you asked me what the effect on OSG would be. Had that been in effect at the current time, and I'm giving you a rough estimate instead of reporting the $86 million that we reported, it would have been over $120 million.

Now, there's another provision that is equally important. We have, in OSG -- and this is disclosed in the footnote -- approximately $430 million, $440 million, of pre-1986 unrepatriated foreign earnings --

475.

475 of unrepatriated foreign earnings. Both bills provide a limited window for repatriation of that income instead at normal corporate rates of 35%, at somewhere between 5% and 7%, which is of great significance to us because it would eliminate almost a $2 or $3 potential charge if we were forced to repatriate that money under the existing legislation. Now, there is reason why we have to repatriate it absent an inducement on our part to do so. So we're very pleased, having said all of that, I want to give the normal caveats.

This is legislation pending in the foreign tax bill. The foreign tax bill is, I don't know, 250 pages. We are a small fly speck in both the Senate and the House bills. What ultimately may happen in reconciliation, in conference -- who knows? There may be last-minute trading. Our sense is that this is basically an uncontroversial issue.

For the first time, we not only have support in both Houses but we also have support of the Department of Navy, MIRAD (ph) and the Administration. I would say the prospects have never looked better, but when you deal with legislation, that's all they are, is prospects. And one would have to consider those caveats very, very carefully, but it certainly is encouraging.

Are there any organized opposition groups to it? You listed a number of organizations supporting it.

No.

So it sounds very favorable. Would it be retroactive? You mentioned what it would have done to first-half earnings.

Probably not, probably not.

Okay. Thanks very much.

Right.

Our next question comes from the line of Robert Welsh, a Private Investor. Please proceed with your question.

Hi. Great quarter, guys. Congratulations.

Thank you very much, Mr. Welsh.

I was interested to know. I notice that oil prices have been very high for some time now. Are there any hedges in place that cover your fuel costs?

We do from time to time hedge our fuel costs. We do it obviously during periods when we believe it's wise to do so. I think, on balance, we've done reasonably well, but I wouldn't like to make a business of it. It's risky business. We cover for our own requirements, obviously, and we never cover 100%. We do take advantage of the hedging opportunities, but as opposed perhaps to some other companies, it's not a major activity.

Understood. Thank you.

Right.

Ladies and gentlemen, as a reminder, to register for a question, press the 1, 4. Once again, ladies and gentlemen, to register for a question, please press the 1, by the 4, on your telephone. The next question comes from the line of C.J.Baldani, Asset Management.

Hello. You spoke of your capacity to reduce debt. Do you have any specific debt-reduction targets in mind? Thank you.

Well, I suppose one would have to look at our depreciation certainly as a key indicator of magnitude, plus the cash flow generated by our earnings. There are really only three ways to use that. We could increase our dividend, but we just did that, and I don't think that that will be a route we will go, to any significant extent, certainly. You pay down debt, or you take advantage of opportunities. And between the two of those, one must weigh the cost benefits, and it's hard to say in advance. We do not have a specific program to reduce debt by X amount per quarter or per month or per year, but I think it's same to assume that that debt will continue to come down.

Can you talk about what pre-payable debt you have right now?

Well, we have bank lines that we can pay off and some short-term indebtedness. Myles (ph), basically -- I think we've just refinanced --

Outside of the public debt, the vast majority of the debt is payable without penalty.

Okay. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, press the 1, 4. Gentlemen, I'm showing there are no further questions at this time. Please continue with your presentation or closing remarks.

Thank you very much for attending the conference, and I look forward to speaking to you three months from now. Either I or my successor. So thank you, and have a nice day. Bye-bye.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your line.