International Seaways, Inc. Q1 FY2024 Earnings Call

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: outlooks for the crude and product tanker markets and changes in trading patterns; forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products; the effects of ongoing and threatened conflicts around the globe, the company's strategy, our business prospects, expectations regarding revenues and expenses, including vessel, charter hire and G&A expenses; estimated bookings, TCE rates and/or capital expenditures for periods during 2024 or in any other period, projected scheduled drydock and off-hire days; purchases and sales of vessels, construction of new build vessels and other investments; the company's consideration of strategic alternatives; anticipated in recent financing transactions and any plans to issue dividends, the company's relationships with its stakeholders, the company's ability to achieve its financing and other objectives; and other economic, political and regulatory developments globally. Any such forward-looking statements take into account various assumptions made by management based on a number of factors, including management's experience and perception of historical trends, current conditions, expected and future developments and other factors that management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to risks, uncertainties and assumptions, many of which are beyond the company's control, which could cause actual results to differ materially from those implied or expressed by the statements. Factors, risks and uncertainties that could cause International Seaways' actual results to differ from expectations include those described in our annual report on Form 10-K for 2023, our report on Form 10-Q for the first quarter of 2024 and in other filings that we have made or in the future may make with the U.S. Securities and Exchange Commission. Now let me turn the call over to our President and Chief Executive Officer, Ms. Lois Zabrocky. Lois?

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 loans 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 has 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 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 provide 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 will be 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 LR1s 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 a 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 surpassed their costs 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 upcycle 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 the financial review. Jeff?

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 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 remain 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. 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.

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 represents 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 needs to 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.

Thank you very much. With that said, Jen, we'd like to open up the lines for questions. Our first question comes from the line of Omar Nokta with Jefferies.

I apologize for asking this question again about the Panamax LR1s, but I'm noticing a very strong performance in the mid-60s in the first quarter and continuing into the second quarter, well above global averages for both Panamaxes on the dirty side and clean LR1s. Is there a seasonal factor influencing this strong performance right now? Additionally, considering that it’s a niche trade in South America and given that you've increased your LR1 newbuilding tally to six ships, are all of these planned for deployment in that market upon delivery?

Thank you for your kind words regarding our performance in that sector. In the first quarter, we experienced a robust performance across the midsized sector. The spot market is beginning to show signs of recovery for the first time in a couple of years. Typically, the first quarter is a strong period for the tanker market, particularly for the LR1s, which are operating in their specific niches in the Americas. We are anticipating additional barrels from Vancouver due to the TMX pipeline, which will likely benefit Aframaxes primarily, but also support the Panamaxes trade. Regarding the construction of the LR1s, we plan to integrate them into our customer base and joint venture. Although the LR1 market is not expected to see significant growth, it does have a solid customer base, and the vessels in that sector are generally aging.

There has been significant discussion regarding Aframaxes in the context of TMX, but it appears that there is potential for Aframaxes that may not be fully loaded. This suggests that LR1s or Panamaxes could begin to capture some of that market.

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 terminal there. But overall, it's increased volumes in that arena.

You've been expanding your coverage significantly. While you still have a considerable amount of spot exposure, you've recently added a charter for the LR2 loan and a couple of the 09 built MRs. What are your thoughts on increasing your coverage further? It appears there are still opportunities to deploy more ships if desired. Is that something you are considering? Also, are there specific segments where you would like to increase your coverage? Any insights would be appreciated.

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 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?

Thank you, Lois. I’d like to add that we have successfully secured the value of some of the 15-plus MRs for two years and, more recently, three years. We are pleased to have locked in that value for the 15-plus ships, and I appreciate you mentioning the LR2 as well. As you noted, she is our only LR2, so committing her for three years felt like the right choice. However, when it comes to specific sectors, we will continue to seek opportunities that offer outsized returns over extended periods.

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

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?

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...

This is Derek. In response to your question, we are examining several older ships in our fleet that operate on the spot market, which are 15 years old or more. However, we achieved an average rate of $38 per day for the quarter and are continuing to see strong rates into the second quarter. Therefore, considering the current state of the freight market, we aren’t observing significant differences based on the age of the vessels.

Jeff, regarding the dividend policy, it appears that investors are quite satisfied with the variable quarterly dividends. However, since your cash costs are decreasing and your cash flow is improving, do you have any thoughts on raising the $0.12 dividend? Or are you currently comfortable with just the base dividend plus the variable component?

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.

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

I apologize for my voice in advance. I've not been feeling well. But Jeff, now that you have a 14% net loan to value, the cash breakeven has decreased, especially with the consolidation of the senior secured facilities. It seems the company is well-positioned to calm down and focus on harvesting and returning capital. Would you describe it that way? Is there anything more to be done to further reduce the cash breakeven, such as adjustments with financing or capital structure or targeting operating expenses? Where do we currently stand with the cash breakeven level and plans to lower it further? Or are we just maintaining our current course from this point on?

Chris, we are pleased with our progress in reducing cash breakeven levels. While we are not aiming for zero debt, maintaining debt below recycle value in the mid-teens allows us flexibility, such as transitioning term debt to revolvers without fixed amortization requirements. We may opt to amortize, but lower breakevens lead to increased cash flow and position us better against market fluctuations, especially considering the tough conditions we faced just a couple of years ago. It's essential for us to operate effectively even in a downturn, and we've achieved that. We remain committed to making improvements, but we don’t anticipate significant shifts in our debt situation over the next year. We consider our current debt to be high-quality, with some portions below earning and interest rates, which are unlikely to change soon. In short, we are actively seeking opportunities to utilize our cash flow beyond just returning capital to shareholders; we are also focused on renewing and growing our fleet. So while we are harvesting, we are also selectively pursuing growth.

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?

So, Chris, the second-hand market is very strong, at $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.

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?

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.

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.

Thank you. Our next question comes from the line of Sherif Elmaghrabi with BTIG.

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?

I'm going to try a little bit of that, and I'll pass it to Derek, our commercial person. We have been aware that this has been a strong sector for us for quite a while, and we wanted to take advantage of the available slots as we discovered them. Currently, most slots are filled until 2027 across the tanker space, with some MRs possibly available in 2026. Derek, could you provide more details on that?

Sure, Lois. The only additional point I could make is that, as Lois mentioned, most of the available slots will be in 2027. Specifically for our LR1s, what we want to emphasize is that, while other yards are constructing LR1s, our LR1s are still designed for the old Panamax Canal with a 32.2-meter beam. This has contributed to our strong earnings because we can navigate the Canal and operate on both sides of the Pacific and Atlantic. The new LR1s we are building will also have this capability, whereas most of the newly constructed LR1s have around a 38-meter beam. This design truly facilitates clean trade and places us in a unique position as we cannot be easily competed with in the crude trade across the Americas.

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

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.

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