Octave Specialty Group Inc (OSG) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Overseas Shipholding Group third 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 one followed by the four on your telephone. As a reminder, this conference is being recorded, Tuesday, October 28th, 2003. I would now like to turn the conference over to Robert Cowen, Chief Operating Officer with Overseas Shipholding Group. Please go ahead, sir.

Thank you and good morning, everyone.

This conference call may contain forward-looking statements regarding prospects for the company's business including outlook for tanker markets, forecasts of world economic growth and growth in oil demand, prospects for certain strategic alliances, anticipated levels of scrapping of older tonnage, possible passage of tax legislation and schedules of new building orders. 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.

With that out of the way, I'd like to turn the conference call over to our Chairman and Chief Executive Officer, Mort Hyman. Mort?

Thank you. Good morning, ladies and gentlemen.

I'm delighted to share with you the results of nine months. We earned slightly in excess of $100 million net after tax and this compares with the similar quarter last year of -- I beg your pardon. I'm looking at the wrong sheet.

Net income for the quarter was about $14 million or 40 cents a share. And this compares with a net loss of $29.6 million or 86 cents per share in the third quarter of last year. You may recall that the loss in the third quarter of last year resulted primarily from the writedown of certain securities in accordance with the relatively new interpretation of FAS 115.

Time charter equivalents for the quarter increased to $84 million, up from $62 million in the same period last year. And operating income for the current quarter on a comparable basis to last year increased by over 200%.

The net income for the nine months of $2.89 cents a share compares with a net loss of 73 cents per share for the corresponding period of '02. Time charter equivalents in revenues in the first nine months of 2003 were somewhat in excess of $325 million or 72% greater than the corresponding period in '02 and operating income increased by 475% up to $175 million from $30 million in the first nine months of '02.

The results reflect the earnings powers of our modern VLCC and Aframax fleets which have been enhanced as they continue to participate in both the tanker international pool and the Aframax international pool. And also have been enhanced by our competitive cost structure.

Looking out towards the end of the year, the general consensus is that there will be a resumption of growth in key world economies which normally is accompanied by a projected increase in oil demand and we believe that these factors should favorably influence tanker rates as we head into the traditionally stronger winter market.

Some highlights for the year. In October, we took delivery of a new 112,000 deadweight ton Aframax. We have one more Aframax of similar size to be delivered under our new building program. Actually, it's the last vessel in the 21-vessel, $800 million modernization program and it's important to note that these vessels have all been paid for and their capital cost is reflected fully in the balance sheet.

In August, we completed as announced restructuring of certain joint ventures with Euronav and Frontline and as a result of which we ended up with a net increase of one-third of a vessel. I'm pleased to tell you that in September, Scorpio Ship Management joined the Aframax pool increasing the number of participants to five, and bringing the number of vessels in the pool to 31, which includes four committed newbuildings.

In August and October, we entered into two senior unsecured revolving credit facilities which aggregate $330 million which gives us the ability to extend the maturities of a significant portion of our debt obligations.

Two other factors that I would mention which have significance for us, the new EU rules which have now been adopted will increase pressure on limiting employment of older single hull vessels and obviously this will benefit owners such as OSG where we have all but one of our vessels are double hull.

The other point that I would mention is one that I spoke about at our last conference, and that is the pending U.S. tax legislation, both in the Senate and the House, which includes provisions that would restore tax deferral for OSG's foreign shipping income until such time as that income is repatriated to the United States.

This continues to move along well. We expect to be in the House mark-up bill today but as with any legislation, until it's actually passed and signed, one must apply all of the usual caveats.

The events in the world tanker market during the quarter or actually during the year, one has to take into account Iraq, Venezuela, Nigeria and these disruptions and dislocations positively affected ton mile demand as much of the short haul, particularly with respect to Venezuela and Nigeria was replaced by long haul Arabian crude.

In the V-sector during the third quarter, rates out of the AG averaged approximately $28,500 a day. That was lower than the previous quarter of close to $40,000 a day but substantially higher than the $9,500 per day achieved in the comparable 2002 quarter.

In the end of August, the V market began a recovery from its abbreviated summer slowdown and moved up rather sharply to over $70,000 a day by the third week in September. Then when OPEC decided to reduce production by 900,000 barrels a day, the markets reversed dramatically, but I'm pleased to tell you that they are now moving back up. At the current time, the AG East rate is about $34,000 a day, and AG West also in the 30s.

The Aframaxes are doing very nicely now. They had experienced the same run-up and the same market decline as the V's and now the Afra's are back to about 21, $22,000 a day in the Caribbean, over $30,000 a day in the Med and in the North Sea, between 30 and $35,000 a day.

With respect to the size of the world fleet, the V's were down slightly during the third quarter. The Afra's rose during the third quarter and we are looking to, particularly in the Aframax sector, the accelerated phaseout of single hull vessels to moderate the effect of the size of the Aframax fleet and in particular the substantial Aframax new building program.

On the financial profile, we now have equity of $880 million at the end of the quarter. During the first nine months, our outstanding long-term debt declined by about $120 million to $814 million down from $933 million.

A very significant factor that we looked at in terms of the company's strength or any shipping company's strength is the adjusted debt to capital equity, and in adjusted debt, we give credit to ourselves for cash and marketable securities. The quarter end figure was 41%, which is down from 49.5% at the end of the year.

And this gives us, I think, one of the strongest, if not the strongest debt-to-equity ratios in the industry. And it's important to note that even without the adjustment of cash and marketable securities, our long-term debt-to-equity is still less than one-to-one.

The company today has over $650 million of liquidity and access to alternate sources of capital. And the company, I think, is extremely well positioned for any opportunities that may present themselves.

I think that I'm going to turn the call now over to questions and we'll be glad to respond or talk about any of the issues that may be of interest or concern to you.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from the line of Natasha Voyden with Sidotti and Company. Please proceed with your question.

Good morning, gentlemen. An excellent quarter, congratulations.

Thank you.

I just wanted to first of all ask a quick question on your tax rate. It looked like this quarter that it was significantly lower than it has been the last couple of quarters and I was wondering what sort of rate we could use going forward?

Well, it's above 30. Myles, you want to respond?

Going forward, you can use a marginal tax rate of 35.

35. Which is basically what we've been showing.

What you are currently seeing is a reversal of evaluation reserve.

Okay. Then on to the bigger picture, I guess. I just wanted to touch on what you just mentioned about sort of opportunities that present themselves. You've just have come up this, or you're just finishing this [NEBO] program which obviously has really modernized your fleet. I guess looking ahead, would you, with all of this availability you have, would you be looking at more new build or would you be looking at acquiring, say, a company that maybe specializes in sectors of the tankers that you have don't?

I think we should look at all opportunities. I think any program has to be a balance and I would anticipate that any expansion of the company would probably include some newbuildings, some existing tonnage and certainly we should be looking at expanding through corporate opportunities as well. I don't think there is any bias towards any one part of that program. I think a balanced program has served us well in the past and will serve us well in the future.

Right. I'm guessing just from my point of view, would you be looking at for example, if you were to look at another company, would you look for a company that special ordered, that operates tankers in classes that you don't or would you look at a company that operates VLCC's as opposed to say, [Suezmaxes]?

I think we should look at all opportunities.

Okay. And then, Myles, I actually didn't hear Mort on the call when he said what the Aframax rates he was saying at present.

We're seeing about in the 20s in the Caribs higher, about 30 in the Meds and as high as 35 in the North Sea.

Thank you very much, gentlemen. I'll turn it back.

Thank you.

Our next question comes from the line of Tim Hudfelds with Goldman Sachs. Please proceed with your question.

Hi, good morning. I was just wondering if you had an update at all and maybe I missed it on the search for a new CEO?

Actually, I just spoke yesterday on the subject with the chairman of the search committee. I would hope and expect that within ten days to two weeks, one or more candidates will be presented to the board. And the only other comment I would make is that the original timetable will be met or should be met and there will be a change before the end of the year.

Okay, thanks.

Our next question comes from the line of Walter Lovato with Passport Capital. Please proceed with your question.

Good morning.

Good morning.

It says that the Aframax that will be delivered in January is the last newbuilding you have on order.

Yes. Yes it is.

What's the remaining sort of payment required on that vessel?

I think she's been pre-paid.

Okay. And I see you have a bulk carriers. Is that, that's market has been very strong recently. Could you comment, A, on what the rates are in that business, and if you're -- the foreign flag fleet and the U.S. flag fleet bulk carriers generate the same types of returns? Where they operate and et cetera?

Let me take the international side first. We had two cape-size bulk carriers which we announced we recently sold to an investing group and chartered the vessel back for a seven-year period. We subsequently rechartered them out for three years at a very significant differential. So those two vessels will, at the end of seven years, either be returned to the investment group or we have the option, but not the obligation, we have the option to buy them back or to extend the charter.

The international bulk market is seeing new highs. The demand fueled in large measure by China and the beginnings of recoveries in most of the Asian and even some of the European countries has placed those ships in very strong demand. And rates today, we estimate, around $70,000 a day. I believe a [fixture] was we have done in excess of $100,000 a day which is unheard of. So that market is very strong. And we continue to participate with our two cape-size vessels.

On the U.S. side, it's an entirely different market. We have two bulkers, the Harriet and the Maryland. They are very old vessels, they're in excess of 25 years of age. They have been under long-term lease financing.

We recently extended the lease for, I think, about a year on one vessel and two years on another vessel. I would expect that, at the end of that period of time, the vessels may well be scrapped and the earnings are very, very different for the U.S. flag and much, much lower. They still are profitable.

The two cape size, the international flags, they were sold subsequently to the end of the quarter?

Myles, we closed that, didn't we?

Yes.

So they are not on the -- they are still on the balance sheet?

Correct.

Okay. Last question, if I may. What is your target sort debt-to-cap ratio and assuming investment opportunities that don't arise, what would you be -- what's the target that you want to get at and what are the uses of cash going to be?

Well, at the upper limit, we like to be below 1-to-1 on an adjusted basis, which as I indicated earlier takes into account both the cash and the marketable securities. At that level or below, we feel very comfortable. Today, we are considerably below that.

And I think that there are always opportunities in our business and I think the money should be utilized in our business. It doesn't make any sense to pay down any more debt as we continue to generate cash and I think it's important that you keep in mind that our depreciation, Myles, is running what, over 75, 80?

About $90 million including amortization.

Including amortization, about $90 million a year. So we will continue to generate a lot of cash. Either you invest in your business or you buy back your shares or you make a large special dividend like one of our competitors does from time to time.

Obviously, these will be decisions to be made by the next CEO and by the board, but I would suspect that we will not be buying back shares, that we will have opportunities to employ that liquidity and that cash flow in our industry, and I would expect that the fleet will be further expanded and that we will look, as we indicated earlier, at corporate opportunity as well. But, as I say, that's a decision that will be made by the board and by whoever succeeds me as the new CEO.

Thank you very much.

Ladies and gentlemen, as a reminder, to register for a question, press the one, four. Ladies and gentlemen, to register for a question, press the one, four. Our next question comes from the line of Natasha Voyden with Sidotti and Company. Please proceed with your follow-up question.

Thank you. Just a quick question. Could you just let me know what the average age of the international fleet is now?

Ours or the world?

No, for yours.

I think our V's are what, about five, six?

That's right. And the Afra's are a little more.

Okay. So about six years then. How does that compared to the world? I'm thinking about 13 years, is that right? The world fleet?

It's a little high.

On what. On the V's?

Yes, on the V's.

I think it's closer to 11.

To 11. Okay.

Am I right, Bob?

You are right.

Okay. Great. Thank you.

You're welcome.

Our next question comes with the line of Richard Greenburg with Donald Smith and Company. Please proceed with your question.

There's been a tremendous amount of insider selling in your stock. It seems everyday there's another announcement and I know that concerns a lot of investors, whether it's York Shipping or [Akanodes] you, Mort or Bob Cowen or the CFO, and I know that some of that is just option expiration and the way that's accounted for but some of it is outright selling which doesn't necessarily instill investor confidence that management has confidence in the stock price of the company. I'm just wondering what your comments on that would be?

Sure. First of all, I've sold my position in the company not because of lack of confidence in the company, but because I'm starting a new phase in my life and I want to diversify my assets and it has absolutely nothing to do with the company other than for both diversification reasons and also just, I guess, emotional. If I'm leaving the company, I want it get on with whatever it is I'm going to be doing.

The balance of the selling, with the exception of York and that's where the [Reconatti] shares have picked up in York, the balance of the selling is all options. I don't think that there have been any sales, except some very small shares -- small number of shares by free board trusts for grandchildren. I don't believe there has been anything selling, Bob?

That's right.

So, I know it looks strange, but I will also tell you from an investment point of view, I don't think the company has ever looked more attractive. The strength of the balance sheet is unique in the company's history. The earnings, of course, one year, we earned in excess of $100 million and here we are doing it in nine months. The extraordinary liquidity of the company, the debt-to-capital ratio, the access to institutional and other markets has never been stronger or greater.

I think that the best years of the company lay ahead of it. So, please don't take my sale as a reflection of anything other than I'm 67, soon to be in two months, I'll be 68 and I'm moving on with my life, and that's a very personal decision and with respect to the balance of the shares, you're absolutely right, it has to do with options. They are under plans. Bob, what's the technical term?

10b51 plans.

10b51 plan. The individuals that you referred to have absolutely no control. It is discretionary after certain limits have been met and the discretion is with, I think it's Merrill Lynch in all cases. This is not a situation where any of the individuals are saying, oh, let's sell now or not. These are plans that have been in effect for, what, a couple of years?

Yes.

For well over two years. And the individual's targets have been met. These are the targets that we set several years ago and that's all you're seeing is really programmed exercise of options and sale of shares with respect to those options.

Okay. Thank you very much.

Right.

Ladies and gentlemen, as a reminder, to register for a question press the one, four. Ladies and gentlemen, as a reminder, to register for a question press the one, four. Mr. Hyman, there are no further questions at this time. I will now turn the call back to you. Please continue.

All right. Well, thank you very much for your interest and for participating in this call, and for your courtesies to me personally over the period that we've been making these calls and the period that I've had the pleasure of meeting with many of you and talking with some of you. I know that you will continue that interest and extend those courtesies to my successor and I wish you all a very good day.

Ladies and gentlemen, that does conclude the conference call for the day. We thank you for your participation and ask that you please disconnect your lines.