Earnings Transcript for INSW - Q1 Fiscal Year 2024

James Small: Thank you, Jennifer. Good morning, everyone, and welcome to International Seaways' Earnings Call for the first quarter of 2024. Before we begin, I would like to start off by advising everyone with us on the call today of the following. During this call, management may make forward-looking statements regarding the company or the industry in which it operates. Those statements may address, without limitation, the following topics

Lois Zabrocky: Thank you very much, James. Good morning, everyone. Thank you for joining Seaways' earnings call for the first quarter of 2024. You can find our presentation on our website in the Investor Relations section. Starting on slide 4, our results for the first quarter represent our eighth consecutive quarter of strong earnings. Net income was $145 million, $2.92 per diluted share. This quarter came in higher than our prior two quarters. Adjusted EBITDA was over $190 million. On the upper right-hand slide, we highlight enhancements that we have made to our already strong balance sheet. At the end of the first quarter, we had $626 million in total liquidity, including $411 million of undrawn revolver. Now we have consolidated our term loan and converted them into more revolver capacity. In the execution of this facility, we have saved about $80 million per year in mandatory repayments or about $3,000 per day across our spot fleet. For some perspective on how Seaways have evolved our balance sheet, two years ago in 2022, we had mandatory debt repayments of $180 million. Now for the forward 12 months, our mandatory payments are under $50 million. This is a tremendous work by Jeff and his finance team, along with our valued relationships with our bank group. This gives us extensive flexibility embedded in the balance sheet. As a result of these efforts, our spot vessels need to earn $13,600 per day to break even. With 52% of our spot base booked in the second quarter, it looks like we will generate a significant amount of free cash flow again in the second quarter. We now have $559 million in undrawn revolver capacity, putting Seaways in a position to respond to market opportunities. On the lower left-hand slide, we give detail on our fleet upgrading progress. In the last couple of weeks, we have taken delivery of 3 of 6 eco MRs that we purchased in February. The remaining ships delivered before the end of May. The 6 vessels are under contract for $232 million in aggregate. We also declared our options for an additional two dual-fuel ready LR1s expected to deliver in the third quarter of 2026. Overall, our program of building 6 LR1 has the first 2 deliveries in the second half of next year. The lower right-hand slide outlines our continued return to shareholders. Our strong earnings and our strong balance sheet allow us to return a substantial portion of our net income to our shareholders. Today, we declared a combined dividend of $1.75 per share. This represents 60% of our adjusted net income and another quarter of a double-digit yield for our shareholders. Over the last 12 months, we have returned and actualized greater than 13% return. Here at Seaways, we are focused on a balanced approach to capital allocation. This continues to create value for the company and our shareholders. We utilized the cash we're generating in this up cycle to strengthen our balance sheet and put us in position for the next opportunity. We're now renewing our fleet by acquiring these 6 more modern eco MRs. We are building vessels for our niche premium LR1 trade, and we are selling some older vessels. These older MRs have more than [ paid ] but have less efficiency and have lower utilization. With an increasing percentage of the fleet falling into this category, the industry will put the new ships to work covering the increasing seaborne demand. Overall, this sets the stage for a strong up cycle over the next few years and Seaways remains well positioned to capitalize on these market conditions. You can count on Seaways to utilize our balanced capital allocation approach to renew our fleet and adapt to industry conditions with a strong balance sheet while returning to shareholders. I'm now going to turn it over to our CFO, Jeff Pribor, to provide financial review. Jeff?

Jeffrey Pribor: Thanks, Lois, and good morning, everyone. Turning to slide 8, net income for the first quarter was just about $145 million or $2.92 per diluted share. On the upper right chart, adjusted EBITDA for the first quarter of 2024 was $192 million. In the appendix, we've provided a reconciliation from reported earnings to adjusted earnings. Our expense guidance for the first quarter fell largely within the range of expectations, but I'd like to point out a few items of note within our income statement. On the revenue side, our lightering business continues to outperform, earning about $14 million of revenue in the quarter, with about $2.5 million of vessel expenses, $3.5 million in charter hire and $1 million of G&A, the lightering business contributed about $7 million in EBITDA in the first quarter, just shy of its record of nearly $8 million. Turning now to our cash bridge on slide 9, we began the quarter with a total liquidity of $601 million, which was composed of $187 million in cash and $414 million in undrawn revolving capacity. Following along the chart from left to right on the cash bridge, we first add $192 million in adjusted EBITDA for the quarter, less $44 million in debt service, which is composed of scheduled debt repayments and cash interest expense, less our dry dock and capital expenditures of about $14 million in the quarter and to draw up our working capital due to timing of about $13 million. We therefore achieved our definition of free cash flow of about $121 million for the first quarter. This represents an annualized cash flow yield of 18% on today's share price. The remaining bars on the cash bridge reflect our capital allocation for the quarter. We spent $23 million as a deposit for the 6 eco MRs that are delivering in the second quarter as well as mentioned, and we paid $1.32 per share or about $65 million in dividends during the quarter. These components then lead us to an ending liquidity of $626 million, comprised of $215 million in cash toward term investments and $411 million in undrawn revolving capacity. Now moving to Slide 10, we continue to have a strong financial position detailed by the balance sheet you see on the left-hand side of the page. Cash and liquidity remained strong at over $626 million. Vessels on the books at cost are approximately $2 million versus current market values of nearly $3.5 million and with $700 million in gross debt at March 31, this equates to a net loan to value of just about 14%. Our debt today is 85% hedged to our fixed rates, therefore, equating to an all-in weighted average interest rate of about 6% or less than 100 basis points above so. In the table on the bottom right of the slide, our debt balances as of April 30 reflect the amended extended [ $750 ]million facility, which we now call the $500 million RCF. As Lois mentioned earlier, this facility has no mandatory debt repayments at this time, representing a savings of about $80 million per year. We continue to enhance the balance sheet to create the financial flexibility necessary to facilitate growth and returns to shareholders. We have $559 million in undrawn revolvers. Our nearest maturity in the portfolio is in the [ total ] of the next decade. We continue to lower our breakeven costs, and we share in the upside, the double-digit returns to shareholders. On the last slide that I'll cover, slide 11, which reflects our forward-looking guidance and our booked to date TCE, aligned with our spot cash breakeven rate, starting with TCE fixtures, for the second quarter of 2024, I'll also remind you, as I always do, that actual TCE earned that you'll see on our earnings call may be different. But as of today, we have a blended average spot TCE of about $43,700 per day fleet-wide for the quarter. On the right-hand side of the slide, you can see how that lines up against our spot cash breakeven rate. The methodology here is exclusively using expenses on our spot vessels, less the excess of our time charter revenues above chartered vessel costs and dividing that by spot days. This then relates to the average spot TCE, which, as I said, was $43,700 per day for more than half the days in the second quarter. Looking at the bottom left-hand chart for the modelers out there, we provided some updated guidance on our expenses in the second quarter and our estimates for 2024. We also included in the appendix, our quarterly expected off-hire and capex schedule for 2024. I don't plan to read these items line by line, but I want to encourage you to use them for modeling purposes. That concludes my remarks. So I'd now like to turn the call back to Lois for her closing comments.

Lois Zabrocky: Thank you very much, Jeff. Slide 12 details our investment highlights. In brief, over the last 7 years, International Seaways has built a track record of returning to shareholders, maintaining a healthy balance sheet, while growing the company. Our total shareholder return is over 490% since our inception, representing a 24% compounded annual return. Over the last 12 months, our combined dividend of $5.74 represent a 13% yield. We continue to upgrade our fleet, purchasing 6 eco MRs and building 6 LR1s for our strong niche Panamax International joint venture. We've taken advantage of strong balances by selling some of our older MRs. These MRs have gains on the sales that are higher than what we paid for the vessel. This is all while quietly improving our balance sheet. We now have 36 unencumbered vessels and under $700 million in debt. We have $559 million in undrawn credit capacity, which we will carefully utilize to opportunistically grow our balanced fleet. Finally, our balanced fleet of spot ships now need earn below $14,000 per day to break even in the forward 12 months. At this point in the cycle, we expect to continue generating cash that we will put to work creating value for the company and most importantly, for our shareholders. Thank you very much. And with that said, Jen, we'd like to open up the lines for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Omar Nokta with Jefferies.

Omar Nokta: I apologize in advance because I'm going to ask this question about the Panamax LR1s, which I feel like I'm asking habitually on your calls. But here we are again with a very strong performance in the mid-60s in the first quarter and again here into 2Q, well above global averages, whether it's in Panamaxes on the dirty side or clean LR1s. Is there a seasonal element underway, and that's why we're seeing this strong performance at the moment? And then also just kind of thinking about that in terms of -- I know it's a niche trade in South America, you've added to the LR1 newbuilding tally, you're up to 6 ships now. Are those planned to all be deployed into that market on delivery?

Lois Zabrocky: Omar, thank you for the compliment on the performance on that sector. I would say that in the first quarter, you again saw a very strong performance across the midsized sector. You're now seeing in the spot market, the [indiscernible], sort of, assert themselves for the first time really and kind of have a little lift off for the first time in a couple of years. So, I think the seasonality of the first quarter is generally quite a strong quarter in the tanker market, and you see that on the LR1s, which as you know, are trading in the Americas in their niche trades. And we look forward to the additional barrels that will be coming out of Vancouver with the TMX pipeline to even add probably more to Aframaxes mostly, but also to the base trade on the -- for Panamaxes as well. And as far as the building of the LR1s, the intention is to add those into that particular customer base and joint venture. If you look at the LR1 space, it is not a big growth trade. However, it's a very strong customer base there. And the age profile of that sector is quite old.

Omar Nokta: So, a lot of the TMX discussion has been on Aframaxes, but you see potential -- at least Aframaxes that seem like they won't be fully loaded, so perhaps kind of what you're talking about, the LR1s or the Panamaxes may start to capture some of that.

Lois Zabrocky: Well, we're going to have to see here as that trade emerges, how many barrels go down to the West Coast, how many get exported to Asia. For sure, the Aframax is the largest size that you can load directly at the [ first there ]. But overall, it's increased volumes in that arena.

Omar Nokta: And then just a follow-up. You've obviously been adding more and more [ charter recovery ]. You still have predominantly a lot of spot exposure, but you added the [ charge ] on the loan LR2 you have and then you added a couple on the 09 built MRs. What are you thinking here in terms of more cover? Clearly, it sounds like there's opportunities to continue to put ships away if you wanted. Is that something you want to do? And is there a particular segment you'd like to add more cover in -- yes, any color there, please?

Lois Zabrocky: I'm going to start that, and then I'm going to have our Chief Commercial Officer, Derek complete the question. And we have around 15% of the fleet on time charter at the moment. So, we maintain a significant operating leverage to this very strong market. And when we see outsized returns, outsized returns for a longer period, somewhere certainly more than a year, heading towards 3 years at a high level that we can lock in, we tend to seek those opportunities. And then Derek?

Derek Solon: Thanks, Lois. I'll just piggyback on Lois to say we've been able to sort of crystallize the value on some of the 15-plus MRs for 2 years and recently 3 years. So, we've been happy to sort of lock in that value for the 15-plus ships -- and thanks for highlighting the LR2 as well. Like you say, she's our lone LR2. So, putting her away for 3 years seemed like right move. But to your point, with any specific sector, not necessarily, we'll just continue to look for as low [indiscernible] outsized returns for longer periods.

Operator: Our next question comes from the line of Liam Burke with B. Riley.

Liam Burke: Lois, it doesn't look like it, but has there been any pushback from your shipping customers on your older MRs? Have you had any trouble chartering them as they move into that 15 to 20-year range?

Lois Zabrocky: Thank you for that question, Liam, because that really sets Derek up to say, if you look at this sector and the strength of those rates –

Derek Solon: This is Derek. To your point, we're looking at several ships in our fleet that trade spot that are 15 years older, but we're coming in at $38 a day for the quarter and continuing to show strong rates into Q1 -- sorry, correction, into Q2. So, at the moment, with the freight market like this, no, we're not really seeing too much discrimination on ag.

Liam Burke: Jeff, on the dividend policy, it seems to be -- the investors are very comfortable with the fact that you have a variable quarterly, but your cash costs are coming down, your cash flow is accelerating. Any thought to moving the $0.12 up? Or are you comfortable with the base dividend plus the variable right now?

Jeffrey Pribor: Yes, we moved the fixed component from $0.06 to $0.12. I think it was 2 years ago. So, I think it's something we'll evaluate from time to time. It's sort of a natural thing as the company is growing, but there's no set timetable for that. So, I think it's a good question, and it's something we always consider and in the fullness of time, I think that's probably likely.

Operator: Our next question comes from the line of Chris Robertson with Deutsche Bank.

Christopher Robertson: I apologize for my voice in advance. I've been a little bit under the weather. But Jeff, now that you have 14% net loan to value, the cash breakeven has been lowered, especially around this consolidation of the senior secured facilities -- I mean it seems like the company is in a very good place to kind of just sit back here and harvest and return capital. I guess, would you characterize it that way? Is there anything more to do to further lower the cash breakeven, whether it comes to something that you can do with the financing or the cap structure or targeting OpEx, things like that? I mean, where are we at just with the cash breakeven level, plans to lower it further? Or are we just kind of steady as [ she ] goes from this point forward?

Jeffrey Pribor: Chris, I think we're pleased that we've been able to achieve what we have on reducing the cash breakevens to where they are today. I think we're getting -- it all kind of works together, like we're not heading or aiming even for zero debt, but getting debt that's below recycle value and a middle teens range, enables us to do things like the new facility where we switch or transform the term debt to revolvers at these levels doesn't require any fixed amortization. We may choose to amortize but the breakevens are lower, which produces more cash as well as puts us in a place where it's hard to remember and it's up market, but it was only a couple of years ago that we had a terrible market. So having your breakeven such that you would still do well even in a low market is one of our objectives. So, we're really happy about that. So yes, we'll always look for ways to do even a little better. But I think with the debt that we have now, I don't see major changes in the next year or so. It's kind of high-quality debt, we'd like to say, some of it is below the rates of earning and interest and others of it, this is naturally not in place for a while. So, I don't know, Chris, I guess a long way of saying, I think we're not sitting back. I don't think that would characterize the company. And you have seen -- Lois talked about it pretty extensively. We do find opportunities to use cash flow in addition to the returns to shareholders, we've found some good opportunities to use the cash flow to renew the fleet and grow the fleet. So, I think we are harvesting, but we're also looking selectively to grow.

Christopher Robertson: Thank you, Jeff, for clarifying that categorization as well. Speaking of the fleet renewal efforts and just kind of looking at the portion of the MRs that are still a little bit dated, you've had that recent sale. Should we be looking forward to some potential sales of the other MR assets at this point? Or what's the second-hand market looking like today?

Lois Zabrocky: So, Chris, second-hand market is very strong, 38 a day in the first quarter and thus far booked in the second quarter, very strong, putting 6, 7 of these on multiyear time charters very strong, historically strong rates. We will selectively prune and we do it carefully because it's a balance in this very strong market.

Christopher Robertson: And Lois, on the proceeds from any potential vessel sales, would that then in turn be used for further renewal efforts on maybe some acquisitions or even ordering?

Lois Zabrocky: We don't specifically bucket it exactly that way, but it does tend to be how we execute and how we look to continue to high-grade the fleet.

Jeffrey Pribor: Yes, I think I'd say you get free cash flow from operations and you get free cash flow from monetizing older vessels at a significant profit. It all becomes cash to be allocated.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Sherif Elmaghrabi with BTIG.

Sherif Elmaghrabi: So, these LR1 newbuilds are a pretty unique opportunity given how early their delivery is. And I'm curious, if you were to go to yard or today and order a tanker, first, when would that be delivered? And do you have any insight into how many similar open slots for delivery before 2027 may exist at yards?

Lois Zabrocky: I'm going to try a little bit of that, and I'll give it to Derek as well, our commercial man. So yes, we knew -- obviously, this has been a strong sector for us for some time. So, we wanted to take advantage of those slots as we found them. Most slots today are into 2027, really kind of across the tanker space, maybe you can get some MRs in 2026. And Derek, would you give a little more color on that? Or...

Derek Solon: Sure, Lois. The only color I could really add to what Lois said is there are -- like Lois said, most of the first available will be in 2027. And then for us, on these LR1s specifically, what we're trying to highlight is, while there other LR1s being built at other yards, our LR1s are still built to the old Panamax Canal being that 32.2-meter beam. So that's been part of the reason for our strong earnings is being able to go through the Canal, trade on both sides of the Pacific and the Atlantic. And these new [ buildings ] will do the same, while most of the new build LR1s are around 38-meter beam. So really built for that clean trade and can't really compete with us on the crude trade in the Americas.

Operator: There are no questions registered at this time. So, I will pass the call back over to CEO, Lois Zabrocky for any closing remarks.

Lois Zabrocky: I just want to thank everyone for joining us for our first quarter earnings call at International Seaways, and we'll talk to you soon. Thank you.

Operator: That concludes today's call. Thank you for your participation. You may now disconnect your line.