Tsakos Energy Navigation Ltd (TEN) 2003 Q2 法說會逐字稿

Good day in welcome to the Tsakos Energy Navigation second quarter earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to Mr. Thomas Rozycki. Please go ahead sir.

Good morning and thank you for joining us for Tsakos Energy Navigation's second quarter 2003 earnings conference call. By now you should have received a copy of this morning's press release. If you have not, please contact Patricia Menza (ph) of GCI Group at 212-537-8113 and she will fax or e-mail a copy of the release to you. As a reminder this conference call is also being web cast. To access the web cast, please refer to the press release for the Web address, which will direct you to the registration page. At this time I'll like to read the Safe Harbor statement. This conference call contains certain forward-looking statements within the meaning of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, which may affect TEN's business prospects and results of operation. Such risks are more fully discussed in TEN's filings with the Securities and Exchange Commission. Thank you. At this time I would like to turn the call over to Mr. Nikola Tsakos, President and CEO of Tsakos Energy Navigation.

Thank you Tom good morning ladies and gentlemen. Thank you for taking the time to participate in today's call. Together with me today we have our Chairman, Mr. John Stavropoulos; our Deputy Chairman, Mr. Michael Jolliffe; our Chief Operating Officer, Mr. George Saroglou, our Finance Director Mr. Paul Durham; and our Marine Officer, Paul Lambrinakos. On this morning's call for the Chairman we offer some opening remarks I will then provide the review of the second quarter and first half of 2003; offer some guidance as to how we see the second half of 2003 unfolding and discuss our recent actions. I would like to turn the call over to Paul Durham to review the financial information that was released earlier this morning. At that time we will open the call for questions. And now if I may, I would like our Chairman Mr. Stavropoulos.

Thank you Nikola. I also want to thank our participants for joining us for today's conference call. At our last quarter call, I made the statement reporting positive results as a pleasure, reporting exceptional results as a joy. Today, I am absolutely elated. I do hope this is habit forming. A short list of highlight since we last visited includes second quarter profits, 8.5 times the 2002 results. That is earnings per share of $1.08 versus 13 cents in the previous period. First half profits were five times 2002 results with earnings per share of $2.15, versus 51 cents in the like period of 2002. Very importantly, the very constructive fleet expansion program continues. TEN took delivery of the panamaxes, The Inca, in the second quarter with immediate profitable employment. The company also took delivery of an aframax, The Parthenon last week, also at accretive income rates. We will take delivery, this represented the 15th time the total expansion program and in September we will take delivery of the final of a series up for panamaxes, this is The Andes.

The future building program includes three handy size products carriers to be delivered in 2004, 2005 and to suezmaxes to be delivered late 2005. The building program very importantly has been supported by the growing recognition of the Tsakos brand name. This is been reflected in expanded existing relationships and the establishment of new clients. The recently announced strategic alliance with FLOPEC derives from a long-established client and his representative of the value of enduring relationships.

The building program is also supported by the company's access to credit markets. TEN's reputation with its credit bank is noteworthy. Existing lenders are seeking increased exposure and new lenders are competing for credit positions. The foundations laid by 10 years of solid provide TEN the ability to attract the financing at very competitive rates and with timely availability. We appreciate the confidence expressed by our credit banks.

As you know, the shareholders elected a valuable addition to our board in May, Mr. Plakopitas brings a rich business experience and added financial sophistication to our group. Also, as you know, the Board of Directors has authorized an extension of the share repurchase program. The Board believes that the shares of TEN are an excellent investment at today's valuation, and with the balance of prudence we will commit corporate resources to be repurchase initiative. We believe the solid corporate performance of TEN combined with the generous cash dividend policy and an opportunistic stock repurchase program will attract a more appropriate valuation of our stock and thereby enhanced your shareowners value.

I want to congratulate management for the excellent performance and Nikola I think I hear sounds. It is applause and request for an encore. Thank you, Nikola, back to you.

Thank you Chairman. For your good works, but I would rather have a the applause at the later stage rather than now at the end of the year when it seems that the news on the Olympics are not only the good news we're bringing you today from Athens. I think we have some better news as the Chairman said, ladies and gentlemen.

Last quarter we reported record earnings for TEN and expressed our confidence that the business plan would continue to support growth for the second quarter and beyond. As our result announced earlier this morning clearly shows, we are executing our business strategy with precision and the result in another quarter of record earnings. This by the way is the 38th consecutive profitable quarter. Even as we move into the seasonally slow third quarter, we're positive that the demand that we're currently seeing in the marketplace will continue. Even with this optimistic view of the broader industry, we remain mindful of the regulatory and (indiscernible) issues that continue to affect our industry. International maritime budgets and major oil companies continue to engage in discussions regarding the future of single hull vessels particular in Europe, however, no matter what the outcome of this discussion, TEN should be positively impacted as the vast majority of our fleet is over the double design. The favorable charter market and the fortunate timing of the expansion of our fleet combined to the aggressive cost control produced records for quarterly profits. These results (indiscernible) ability to produce (indiscernible) operating results in short market as well as to enjoy major benefits in strong periods.

(indiscernible) corporate policy will continue to maintain a balance in our employment mix and we seek to fix selective vessels on medium and long-term charters. Currently we have 18 vessels on deployment and 8 vessels operating in the spot market. The aftermath from the war in Iraq continues to influence our market and in spite of the (indiscernible) efforts to find an appropriate balance between supply and demand, the rates have remained at healthy levels. We believe that the spot market will still benefit those owners like them who are younger and very efficient. Additionally, because we strive to maintain an advantage mix of spot and (indiscernible) charters, should spot rates open our balance is protected by our strong long-term accretive charters on a large portion of our fleets. Our fleet operation strategy allows us to keep low-cost and remain competitive no matter what the world climate or the spot market dictates. Our balance mix of spot and (indiscernible) deployment will keep TEN well positioned to any manage any change in the market dynamics. As the market changes, we will continue to a optimize and enhance our strategy to improve our operational results and six (indiscernible) opportunities will tend to grow during the balance of 2003 and beyond.

Much like last quarter, we have seen continued strength in our earnings potential and our results reflect that to our shareholders. We still believe that our (indiscernible) volume, especially as we continue to enhance our (indiscernible) with an eye on the future.

At this time, I would first like to give you a top-line review of the second quarter numbers and then take and talk a bit about the operational performance and all that has gone on the last quarter. Paul Durham, our Finance Director will provide you with many more details on the financial results during his remarks.

To date, TEN announced net revenues for the second quarter of 2003 of 61.5 million compared to 27.8 million for the second quarter last year. The company also reported earnings per share of $1.08 for the second-quarter. Turning to operations during the second quarter we made new progress in our efforts to maintain TEN as one of the premier operators in the world. Due to our (indiscernible) and high specification as well as the constant addition of new vessels, we were again able to take advantage of the solid rate in the spot market. However, we have not and will not change our strategy of employing a significant portion of our fleet on the long-term charters or (indiscernible).

Currently, our 26 vessels are on (indiscernible) term employments. Additionally we have also secured 70 percent and 50 percent of the current fleet net operating days for the remaining of 2003 and 2004 respectively, combined this represents almost 180 million in revenues over the next 18 months.

We're aggressively seeking out new opportunities for all of our vessels and have met with the success in securing long-term charters for our fleet and adding value to the bottom line by taking advantage of the current spot market. Our strategy to continue growing our partnerships with our customers, the major oil companies. This strategy with (indiscernible) our growth and add to shareholder values in the long-term.

During the second quarter we made several announcements that showed that TEN continues to establish itself as a market leader. In May we announced the formation of a strategic alliance with FLOPEC the state-owned oil company of Ecuador with our two new panamaxes, the Maya and the Inca. In June, we announced the delivery of the third sister vessel, the Panamax Aztec (ph), the (indiscernible) the state-owned company of Mexico, (indiscernible). Additionally, later in June we announced the extension of the time charter of our vessel the Pella, and later the chartering extension of our Suezmax Silia T, for another year to Navion at the maximum rate. Our fleet continues to grow exclusively to our new building program and we recently announced the delivery of our Aframax Parthenon and the panamax Andes. This in addition to news earlier this month that we have contracted for the construction of two (indiscernible) with an option for another two vessels. These vessels are of great assistance of our (indiscernible) deliveries.

These bring our total new buildings to 26 vessels. As has been our policy, we limited our new building orders to two major (indiscernible). This way we deepen our relationship to ensure timely and accurate delivery of the vessels and ability in our fleet. The opportunity to add new vessels to our fleet with a possibility of long-term fixed-rate employment makes this an extremely advantage move to TEN. Financing for the remaining vessels on our are on new building program is well underway at competitive rates. Our financed cost today is approximately 3 (indiscernible) percent. Our service purchase program continues during the first six months of 2003 the company have repurchased 55,000 shares. During July 2003, we purchased another 85,000 shares. The purchase program has another approximate 2.5 million in remaining authorized funds. The company plans to make share repurchase on the open market in coming months, but has not set the timetable for the completion of the program.

The stock continues to trade at what we believe is a significant discount, considering the service purchase program is a prudent use of our capital and a decision that will ultimately strengthen our income statement. This in turn will provide the company with the added financial security necessary to finance the company's growth. So as you can see we're managing our fleet with great care and with an eye toward the future. We're working diligently to position the company for continued financial strength, extended the reach of our fleet by adding new vessels, and reap the benefits of a spot strong market while balancing our charter portfolio with long-term employment. We believe that the company is positioned to generate the revenues necessary to expand over the coming years.

In the third quarter of 2003, we will experience a healthy market in spite of some seasonal softening. As always, we greatly appreciate the support of our shareholders as we strive to increase the value of their investment in TEN. We want to thank all of you for your time and attention, and many of you taking the time to come and visit our company and see us here in Greece and most recently to the analysts and the shareholders that have visited our aframax, the Madison(ph), or if you made the visit to the Houston Harbor last week. Well again thank you very much. I will ask Paul Durham, our Finance Director to take you down the nitty-gritty of the numbers and then we will await your questions. Thank you very much.

Thank you, Nick and thank you for joining us today. Before I begin, please note that a summary of financial of selected financial and fleet data is included in the press release for your reference. Today, TEN Ltd reported for quarter two another record net income of $18.7 million, versus $2.2 million last year. As a result, basic earnings per share was $1.08 based on 17.3 million shares, compared to 13 cents for the second quarter 2002, based on 17 million shares.

Net revenue for the quarter for 25.4 vessels were $61.5 million dollars. Compared to $27.8 million for 17 vessels for the second quarter 2002. That represents a 50 percent increase in tonnage, but 120 percent increase in revenue. A reflection of the continued strong fleet market in quarters two in contrast with the softer market in 2002. The average time charter equivalent rate per vessel per day in the quarter was approximately $23,300, compared to $16,200 from quarter two 2002. Operating income in quarter two was 22 million, compared to 5.7 million in 2002.

Mortgage expenses doubled to $15.6 million from $7.1 million in the second quarter 2002. Primarily due to 8 vessels being on spot charter by the period end, compared to only four last year. With the addition of eight extra vessels operating in quarter two compared to the previous year, operating expenses increased from $7.4 million in 2002 to $11.9 million in 2003. The increase in average daily running cost per vessel for the fleet was held to 3 percent, rising from $5,460 to $5640, primarily due to the impact of insurance costs and the strengthening euro.

Overhead costs have increased by half a million dollars, but daily overhead cost per vessel remained constant at $ 660. Net interest in finance cost in the second quarter 2003, amounted to 3.3 million compared to second quarter 2002 cost of 3.8 million. These costs include actual interest of $3.1 million compared to $1.7 million last year. The extra interest is due to a net increase of $215 million in debt, but this is being offset by the continued fall in average interest rates.

Last year's quarterly interest charge also included the negative movement of $3.1 million on the market value of non hedging swaps, compared to only 370,000 this quarter two. Due to recent increases in long-term interest rates, a substantial portion of the remaining 6 million negative charges incurred in 2001 and 2002, relating to non-hedging swaps should reverse significantly from quarter 3. We now have five new interest rate swaps since the beginning of the year totaling a notional amount of $160 million. All at very favorable terms and all meeting hedging criteria. Two of the four previously existing non-hedging swaps expired this month. In total, 55 percent of our long-term debt outstanding is now covered by hedging instruments and further coverage is being negotiated. Our results for the quarter also include a $300,000 share of profit in the joint venture J. Lauritzen, and other expenses of $400,000 relating to the write-off of non-recurring charges.

Briefly looking at the results for the six months as a whole, net revenue for the half-year was $117 million with an average of 24.5 vessels, compared to $55 million last year with 16.6 vessels. Operating income was $43 million compared to 12 million last year, and net income was 36.8 million, compared to 7.3 million, a five-fold increase.

Basic earnings per share was $2.15 on 17.1 million of weighted average shares, compared to 51 cents last year on 14.4 million shares. Our new building since 1997 accounted of for 71 percent of the fleet tonnage by the period end. The 14 new vessels enjoyed 99 percent utilization during the six months and contributed 83 percent of the net income. Total cash balances including short-term restricted cash stood at $58 million at June 30, 2003, compared to nearly 47 million at the beginning of the year. Net cash from operating activities in the quarter were $30 million and nearly $48 million for the half-year. Expenditure on dry dockings for the quarter was 1.9 million, primarily relating to the aframax in 2004 and the product carrier, Pella. Total dry-docking expenditure this year to date, which has been an exceptional period for special surveys, has been $6.8 million. While we plan another three dry dockings to start in the second half of 2003, there are only two major dry dockings currently scheduled for all of 2004.

Net cash used in investing activities and assets at$32.6 million relating primarily to the final installments on the delivery of the new panamax, Aztec. In the year-to-date, a total of $129 million has been paid on deliveries and advances for non-delivered vessels. Committed capital expenditure for the second half of the year, relating to the vessels the Parthenon and Andes and the concerned orders for three product carriers and two Suezmaxes announced at $68 million. A total of $60 million is committed for 2004 and 100 million for 2005.

Net cash from financing activities in the quarter amounts to $14 million relating to the new loan of $26 million for the newly delivered Aztec, plus nearly $3 million on exercised stock options. Debt repayment of $11 million and the final 20 cents cash dividend for 2002 amounting to $3.5 million.

Total loans outstanding at June 30, 2003 amounted to $481 million compared to $386 million at the start of the year. The total debt to capital ratio remains approximately 61 percent. Our projections through 2003 and 2004, taking into account new building commitments indicate we will have adequate cash to cover our four to six-month debt service requirements and still leading a healthy surplus beyond those requirements. This concludes my comment on the financial results, now I will turn the call back to Nick.

Thank you Paul. Thank you very much. Very good news. We would like to open the floor to any questions or any comments. Thank you.

The question-and-answer session will be conducted electronically. (CALLER INSTRUCTIONS) Magnus Fare (ph) of Jefferies & Company.

Thank you. Congratulations. Great quarter. Just had a couple of questions here on the current rate environment. We are almost a third into the quarter and I'm sure you guys are booking cargos ahead here, and I just want to see if you could get an update on what you are seeing so far maybe mainly on the suezmaxes, aframaxes and the panamaxes on what you're booking so far in the quarter?

As I said the third quarter is usually quite slow, but surprisingly we are seeing the market maintaining a momentum. We had a slow start in the quarter mainly for the suezmaxes. In the beginning of July, where we have seen the suezmax going as low as 70, 75. This means we are seeing them now moving closer to 85, 90, and as long as what we need this for all of the owners not to panic and keep the market at a healthy rate, the market is moving on the suezmaxes and we are seeing now them earning in the upper teens to early twenties. However, suezmaxes on the continent and the Mediteranean are quite healthier and we just put our good ships to the (indiscernible) in about 45 days value them depending on between 24,000 or 32,000 a day, which is healthy for this time of the year, again what our main focus which has been the Caribbean market on the panamaxes has outperformed the other markets. We have seen the Caribbean being very strong, which again is a surprise and it shows the driving economy in the United States is actually trying to clear its inventories during the slow months and we are seeing the Caribbean close to breaking 200, which is in the upper 20s and 30's, which is a very good rate for August and July.

On the clean market, as you know our three panamaxes have been locked in for close to three years, so we only have one panamax coming for delivery in September, the Andes, and the clean market is very, very strong, it is the mid 30s, close to $40,000 a day so we will be looking to use the clean at these rates. So as we are not seeing winter month rates, we are seeing what I would say for the seasonable low period, very strong market comparing it with a year ago or two years ago.

So despite the fact that we're in a weak market we are seeing rates about 20 to 30 plus percent higher than a year ago?

Exactly what we are seeing, the appetite which is always a good sign is the appetite of our major oil companies, and our clients that allow in the last couple of weeks to try and take for long periods of time, so we are seeing all of the major players out targeting between three to five years because it seems that they expect to the market is going to start going north as soon as the time to take some tonnage. So again, if we have to ask our colleagues and the owners not to make (indiscernible) but to stand back and enjoy the good market and not fix anything up in the rate.

You have a very modern fleet. With the recent changes in regulations, have you see a change in your customer mix with new customers coming to you because of your more modern fleet, or is that have you see in any changes in the last few months?

We have always maintained a modern fleet. It's true that we are continuously enhancing this fleet with sister vessels which is very important and we're getting more and more business from directly from many of our clients because of the quality of this fleet, an we're waiting to see how the legislation will move perhaps in December.

Maybe just two questions for Paul on -- I was trying to look for a construction in progress number. If you have that handy that would be great.

I'm sorry Magnus I lost you.

Would you happen to have a construction in progress number for the what you have spent so far on the new deliveries? Or expected new deliveries?

Construction progress is 20 million approximately and that represents a down payment on the new buildings. The installments on the ones that we ordered sometime ago. Also includes an amount of supervision fees and supervisory fees when the building new ships.

Final question on the dry-docking days. You said only two major dry dockings in 2004. I guess we had prior year four dry dockings in 2004. Would you clarify which vessels there are going in for dry-docking or for planned dry-docking over the next, in the third quarter and the fourth quarter?

In the third quarter, in the last half of the year, we will have the Mario Tsakos, the Dion and the Tamyra.

And in 2004, the Bregen and the Liberty.

Those are around 30 days or what is the --

30 days. Certainly for the Athens there will be 20 to 30 days and for the older ships 30 to 40 days.

Very good. Thank you.

(CALLER INSTRUCTIONS) Crystal Dulas (ph) with Union Securities.

Congratulations gentlemen on a great quarter. I have two quick questions for you. I wanted to know about the dividend policy going forward, and just want to confirm the numbers on cash flow per share for the quarter? I'm looking at $1.70?

If I may, Nikola has asked me to respond on the dividend question. As we have indicated, our dividend policy is to pay cash dividends of 25 to 50 percent of net income. Obviously we're in the bounds of financial prudence regarding cash positions and our anticipated capital requirements. We do this in the form of distributions of declared and paid semiannually in October and April. The October payment is designated as interim, the April payment is final and we basically relate it to the overall performance of the preceding fiscal year. So, in other words, in this coming October we will pay an interim dividend and April after we know the results for fiscal 2003, the board will review and declare a final dividend.

Great. Just on the cash flow per share number, do you guys have a number I got about $1.70 for the quarter.

I got $1.88 actually.

Thanks very much.

Jason Morris (ph) Auspy Fund (ph).

Hi guys, it looks like the modern fleet is starting to pay off. Great quarter. Two-part question for you. First, on your coverage in '03 and '04, I was just wondering if the 70 percent and the 50 percent numbers are spread evenly across classes of vessels. Is there any bullet risk in one class versus another? Those great numbers might hide? Secondly, just a question on what you are seeing as far as capacity in the shipyards to 2.5 years out over in Asia?

I have to say that our -- we're still negotiating and we have more room to charter the suezmaxes out of our four sister vessels, suezmaxes one of them is fixed for one option one year, and the option had been taken, the remaining three are on the spot market. Actually doing very well at that so far. But always looking at the available business to target ships we're negotiating anything between a couple of years up to ten year contracts on those ships that will be very accretive and imaginative rate, I would say. Our aframax excludes the majority of the modern fleet is fixed. And of course the panamax, we only have one -- all three of our modern panamaxes have been fixed already as soon as we took delivery of them, and the only one that is going to be delivered in September is coming up. So in short I think what we are looking to for more long-term employment on three of the suezmaxes, and of course if we add on top of that the two options two that we ordered last month, then that is where we have most of the exposure.

Okay.

On the new buildings, we are seeing right now in that business many owners have covered their positions on all of the yards waiting for a bit more (indiscernible) of the IMO regulations, it was supposed to happen on the 14th of July. It seems that has been postponed until of December, but whatever way to look at it the client, the oil companies, and the traders are taking things in their hands and are actually not starting for a long period of time single ships, so I think we're going to be seeing more and more scrapping going on towards the tonnage and more demand for new ships.

That's great. Thanks very much. Keep it up.

(CALLER INSTRUCTIONS) Alan Kennedy.

Good afternoon. Congratulations on a terrific set of results. I've got two points, the first is on the press release, under other financial data, it looks like a typo in that it says three months ended the 30th of June and I think it should be six and the six should be three months. That is a small point. The other one is I wonder in determining your strategy for the percentage of operating days that you tried to cover, what is your prime consideration is? I note that if you generated or you got about 86 million of revenue covered for the second quarter, that must be remarkably close to the sort of breakeven position for the whole company over the second half. I just wonder whether you got any sort of comment on that because I very much support your new policy of building new tonnage, and yet strangely enough, when you announced the two suezmaxes just recently the share price fell quite considerably, which I thought was slightly sort of contrary-wise so perhaps you would like to comment on that?

Not have a specific form on where we stand today as we always want to have at least two-thirds of our employment started, depending on the cycle we find ourselves. We're not, however -- this is not such a thing we are doing that we have to go out and take every single business that is out there. There are other companies that have their own divisions have their own internal strategies that would go out and fix any piece of business that is out there. But looking back quite low. We're driven by the clients, we build based on clients needs and having in mind picture of business were going to be ending up doing what those, and we will looking to take time to find the right time. We are not always at the right time but find the right time to charter those ships along, but as a rule of thumb we would like to have at least two-thirds of our fleet covering all our obligations and making things profitable and looking at this today is the positive numbers, every single $1000 increase on the ships that we have on the spot market gives us 35 cents to our bottom-line. Which means that even if almost all of our ships go down to zero if all the ships that we have on the spot market will not be earning anything, we will still be profitable because of the way we have fixed the (indiscernible).

On the new buildings, one of the things that the president of the New York Exchange told me a year ago at least a year ago you have to go it do not look at the survive every day to try to run your own business. So we still look to survive every day, we try to run our own business as best as we can and we found it one of the because of our very close relationships actually with three (indiscernible) not with one company that is out there trying to find opportunistic any type or earning new buildings to purchase we only have a 62 (ph) yards in (indiscernible) and we're able to come up with opportunities of this type as we offer early deliveries that we have got for upgraded versions of the suezmaxes. We believe that very good use of our cash and we believe that we were able to offer similar prices to what we did back in the year 2000 in a very depressed market we ordered our existing ships and we went ahead. The price reflects that we will have to work hard on our vessel to bring it up a bit.

Okay. Thank you very much. And congratulations on what I think is a terrific set of results.

(CALLER INSTRUCTIONS) It appears there are no further questions at this time. I will turn the call back over to Mr. Tsakos.

Thank you again I would want to thank you very much for taking up the time and we went to thank you for following our company. Also, we would like to congratulate all of the other shipping companies for the ones that have already reported and the ones about ready to report in the couple of weeks. I think there are doing a fantastic job. I think we need all of our shipping companies to move together in order to enhance their holding value in make this small part of energy transportation more and more important to everybody. So congratulations to all of the guys and enjoy the remaining of your summer and we will be here waiting for you. Thank you.

That concludes today's conference call. We thank you all for your participation. (CONFERENCE CALL CONCLUDED)