Good morning, and welcome to the International Seaways Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. James Small, General Counsel. Please go ahead..

statements about the outlooks for the crude tanker and product carrier markets; changing oil trading patterns; forecasts of world and regional economic activity; forecasts of demand for and production of oil and petroleum products; the company's strategy; purchases and sales of vessels and other investments; anticipated financing transactions; expectations regarding revenues and expenses, including vessel expenses, charter hire expenses and G&A expenses; estimated bookings and TCE rates for the second half and other periods in 2019; estimated capital expenditures for 2019 or other periods; projected scheduled dry-dock and off-hire days; the company's consideration of strategic alternatives; its ability to achieve its financing and other objectives; and economic, political and regulatory developments around the world.

Any such forward-looking statements take into account various assumptions made by management based on various factors, including its experience and perception of historical trends, current conditions, expected and future developments and other factors 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 those statements.

Factors, risks and uncertainties that could cause International Seaways' actual results to differ from expectations include those described in its annual report on Form 10-K and its quarterly reports on Form 10-Q and in other filings that we have made or in the future may make with the U.S. Securities and Exchange Commission.

With that out of the way, I would like to turn the call over to our President and Chief Executive Officer, Ms. Lois Zabrocky.

Lois?.

the slowing pace of newbuilding deliveries, current Mideast tensions and dislocations as well as incremental demand resulting from IMO 2020. In terms of asset values, gains achieved in the first quarter have been largely reversed, but year-over-year values are still higher than they were in the fourth quarter of 2018. Tanker supply, on Slide 6.

Let's look both at the order book and the potential for ship scrapping. In terms of an order book update, there have been 5 VLCC newbuilding orders placed since January. Importantly, the earliest delivery for new orders is now into 2021.

While the total VLCC order book has decreased to just over 10%, we continue to expect it to be tempered, as highlighted in the top-right chart, by off-hire for scrubber installations. The biggest takeaway in terms of the overall tanker order book is that the order book is at its lowest levels in the last 22 years.

Turning to the potential for increased scrapping, as I have pointed out in the past, the global VLCC fleet is aging. This is evidenced by the bottom-right chart which shows you nearly 25% of the existing VLCC fleet will reach 15 years old by 2020.

Once this occurs, these vessels will be more expensive to operate, with significant investments required to continue trading beyond 15 and then every 2.5 years thereafter. In addition, even greater capital expenditure is required to keep trading, as ships reach their ballast water treatment deadlines.

Now I'll turn the call over to Jeff, and he's going to provide additional details on our second quarter results..

Thanks, Lois, and good morning, everyone. Before reviewing the second quarter results in greater detail, let me quickly summarize our results. As Lois mentioned earlier, net loss for the quarter was $16.5 million, or $0.57 per diluted share, compared with $18.8 million, or $0.65 per diluted share, in the second quarter of 2018.

Excluding the impact of $1.6 million loss related to vessels sold in the quarter, our net loss was $15 million, or $0.51 per share. Now if you could turn to Slide 8. I'd first like to discuss the results of our business segments, beginning with the Crude Tankers segment.

TCEs for the Crude Tankers segment were $46 million for the quarter, compared to $34 million in the second quarter of last year.

This increase reflects our success improving the age profile and also increasing the capacity of the fleet as well as it primarily resulting from the impact of higher average blended rates in the VLCC, Suezmax, Panamax and Aframax sectors.

The increase was also attributable to increased revenue days in the VLCC sector and higher activity in the company's lightering business in the second quarter this year compared to last year. Turning to the Product Carriers segment, TCE revenues were $17 million for the quarter, compared to $16 million in the second quarter of last year.

This increase primarily resulted from the impact of higher average daily blended rates earned by our LR1s, LR2 and MR fleets, with spot rates rising to approximately $17,300, $17,700 and $11,600 per day, respectively.

Serving to partially offset these increases was a decrease in MR revenue days, which resulted primarily from the sales of 3 MRs between the second and fourth quarters of 2018 and 1 MR during the second quarter of 2019, all of which are part of our fleet renewal program.

And also it reflects deliveries of 2 charted MRs to their owners during the second quarter of 2018 at the expiry of their respective bareboat charters. Over all, as reflected in the chart top-left, consolidated TCE revenues for the second quarter of 2019 were $62 million, compared to $50 million in the second quarter of 2018.

This overall increase was principally driven by higher average daily rates earned across the crude and product carrier fleets this quarter compared to last year as well as increased revenue days in VLCCs and incremental activity in lightering.

Looking at the chart on the top-right of the page, adjusted EBITDA was $21 million for the quarter, compared to $9 million in the same period of last year. Again, this increase was principally driven by higher daily rates. On the bottom half of the page we look at the results sequentially i.e., quarter-to-quarter.

Consolidated TCE revenues and adjusted EBITDA for the second quarter were down from the first quarter, decreasing $32 million and $26 million, respectively. As Lois mentioned, these rates were affected by expected seasonal factors and refinery maintenance in advance of IMO 2020. Now turning to Slide 9, we provide a Q2 review and Q3 rate update.

Spot rates are broken out for our modern VLCCs and the VLCCs in our fleet which are over 15 years old. As I have mentioned on previous calls regarding spot rates for VLCCs at relatively lower points in the tanker cycle, modern VLCCs earn higher rates than older vessels.

As the market recovers, this gap will narrow significantly and rates for modern VLCCs will more closely reflect those for the overall VLCC group. I will now discuss our bookings for Q3 thus far, which are generally flat relative to Q2 but still significantly higher than Q3 2018 levels.

We booked 65% of available Q3 spot days for modern VLCCs at an average of just under $20,000 a day; 68% of available VLCC days for our vessels over 15 years old at an average of approximately $11,800 a day; 47% of available Suezmax spot days at an average of approximately $19,000 a day; 56% of available Aframax spot days at an average of $14,600 per day; and 42% of available Panamax/LR1 spot days at an average of approximately $20,000 a day.

On the MR side, we've booked 40% of our third quarter spot days at an average of approximately $10,100 per day. Now turning to Slide 10, we talk about our breakevens.

The cash cost TCE breakevens for the 12 months ended June 30, 2019, are illustrated on this slide, for the first time reflecting 12 full months of our fleet after completing the 6 VLCC acquisitions last year. International Seaways' overall breakeven rate was $22,500 per day for the 12 months ended June 30, 2019.

These rates are the all-in daily rates our owned vessels must earn to cover operating costs, dry docking, G&A expense and debt service costs, which means scheduled principal amortization as well as interest expense.

Of note, taking into consideration distributions from our JVs, the overall breakeven rate for the company drops to $20,300 a day, which highlights -- this competitive rate highlights our strong position for optimizing cash flows. At this time, I'd also like to reaffirm cost guidance for the year for modeling purposes.

First, with respect to regular daily OpEx, which includes all running costs, insurance, management fees and other similar and related expenses for our various classes, they will continue to be at levels at which we have previously provided.

For details and an update on projected dry dock and CapEx costs as well as off-hire days, you can refer to Slide 18 in the Appendix. Of note, the sale of the MR, as mentioned previously, will save us $6.7 million in dry dock CapEx.

Continuing with cost guidance for your modeling, we expect third quarter total interest expense i.e., cash and noncash to be $17 million. Additionally, our debt calls for $31.6 million in principal payments scheduled in the second half of the year, two quarters.

For G&A in the third quarter, we expect it to be approximately $6.2 million all-in, which includes noncash charges of just under $1 million. Finally, we expect $8.7 million in equity income and $19.3 million for depreciation and amortization in the third quarter. I'd also like to take this time to provide an update on lightering.

As we've often pointed out in these calls, it's a relatively small but very important part of our business, especially given the growth of reverse lightering for exports from the U.S. Gulf.

As with conventional tankers, lightering's results in the second quarter were affected by heavy refinery maintenance as well as fewer VLCCs loading for export due to the U.S.-China trade dispute and other factors.

Despite this volatility, we continue to see bright prospects for this business, with the previously announced charter-in of 2 Aframax tankers, including one of our own 2002-built ships, marking a significant commitment to lightering. Full details can be found in the Appendix, on Page 22. Now if I could ask you to turn to Slide 11, for our cash bridge.

As Lois mentioned before, we ended the quarter with the highest cash liquidity we've had since our inception. So how did we get there? Moving from left to right, we began the second quarter with a total cash of $137 million.

During the quarter we generated $21 million of adjusted EBITDA, which includes $8 million in equity income from JVs, with a noncash item. So we, therefore, deduct it to reach a cash figure, but then add back the actual cash distributions from JVs, which were $4 million. And then go to proceeds from vessel sales, which were $9 million.

And then against that we expended $9 million on dry docking and CapEx. Cash interest and principal paid on our debt totaled $28 million.

And finally, changes in working capital and other noncash items had a positive $23 million impact, which is principally related to reduction in trade receivables and a deposit on the Ariadmar sale which will close in the third quarter.

The net result of all this is that we ended the quarter with approximately $150 million of cash and $50 million of an undrawn revolver, yielding total liquidity of $200 million. Now turning to Slide 12 to talk a little bit about our balance sheet.

As Lois mentioned, we made a prepayment of $10 million on our 2017 term loan facility that will result in a $400,000 reduction of interest expense for the remainder of 2019 as well as a $100,000 proportional reduction in future quarterly principal amortization payments, which will go from $6.1 million a quarter to $6 million.

In terms of balance sheet specifics, as of June 30 we had $1.9 billion of assets, compared to $737 million of long-term debt. In addition, we have, as I mentioned, a $50 million revolving credit facility that remains undrawn.

As you can see on the right-hand column of the slide our total debt to capital stood at 44%, while our net loan to value, using vessel values for conventional tankers and booked value for our FSO joint venture, stands at just 50%, right at 50%. On the right side of the slide we note book values for our two joint ventures.

As of the end of the second quarter, the FSO and LNG joint ventures had net book values of $133 million and $116 million, respectively, which combined represents almost $9 per International Seaways share. At the bottom of the slide we outline our debt facilities, all of which, importantly, mature in 2022 or later.

Turning to Slide 13, we illustrate the strong earnings power of our company -- our fleet heading into the market recovery. On the far left we show 2018 spot rates earned by International Seaways vessels, which we view as a trough of the tanker market.

To demonstrate the impact of a rising-rate environment relative to those 2018 lows, as we did last quarter, we've presented 3 specific scenarios, to the right. The first is Mid-Cycle, by which we mean the 15-year average rate. The next is Recent Peak, which is represented by 2015 average rates.

And the last, on the right-hand side, are historical peak rates achieved in 2008. You can see that based on Mid-Cycle average rates we would generate an annualized EBITDA of about $278 million and $4.46 per share in EPS. If rates return to 2015 levels, that would represent $476 million of adjusted EBITDA and $11.22 earnings per share.

And of course should we ever experience the super cycle levels again we'd generate nearly $700 million of adjusted EBITDA.

Regardless of how the rates environment develops, our past success implementing our fleet growth and modernization strategy has significantly enhanced our upside potential for capitalizing on a market recovery in both the product and crude tanker sectors.

As a reminder, every $1,000 increase in spot rates fleet-wide results in an increase of $14 million in cash flow, which corresponds to $0.48 earnings per share per annum. Before I conclude my comments and turn it back over to Lois, I wanted to provide an update on our shareholder base.

After several years of ownership, 2 of our largest pre-spinoff fund holders have reduced their International Seaways positions. At the time of the spinoff, they held over 24% of the company and now have each reduced their positions to below the 5% regulatory filing requirement.

One of these holders, BlueMountain, has been kind enough confirm their position is now 0; and the other, Paulson, has reported to be below 5%. So over all, we've had a major reduction of about 20% in these positions in the last several quarters.

We appreciate the support that these shareholders and others have provided and continue to provide the company, and we view this development as very positive from a share liquidity perspective. Of note, our daily stock trading liquidity averaged $3.6 million per day in the second quarter, up from $2.4 million in the first quarter.

I'd now like to turn the call back to Lois for her closing remarks..

Thank you very much, Jeff. During the second quarter and year-to-date 2019, we've taken steps to further strengthen our financial position. We ended the quarter with a total liquidity of $200 million. This was up $33 million year-to-date and nearly $60 million higher than we were at our spinoff.

We have maintained a low loan to value ratio, which stands at 50%. Our earliest debt maturity is not until 2022. International Seaways remains poised to continue to capitalize on our core differentiators.

Specifically, we are in a strong position to further our leading reputation as a disciplined allocator of capital, prepaying $10 million of debt in July, as we focus on enhancing long-term shareholder value.

We also maintain a commitment to providing safe, reliable service to leading energy companies as well as a commitment to transparency and corporate governance. We are the number one rated tanker company for corporate governance.

As we progress through the second half of 2019, we are optimistic about the outlook for the tanker market, based on the order book being at the lowest level since 1997, robust oil demand forecasts for the second half of 2019 and for the year 2020. In addition, tanker demand game-changers, such as increasing U.S.

exports and the upcoming IMO 2020 regulation, will provide incremental benefits to our sizable fleet of crude and product tankers. Importantly, we continue to maintain significant operating leverage to a rising-rate environment. Every $1,000 per-day increase in rates corresponds to $14 million in EBITDA and $0.48 per share in earnings per share.

In conclusion, our financial position is robust. Seaways remains a disciplined, transparent company with strong corporate governance, and we are excited about the favorable outlook, with our strong operating leverage poised to take advantage of a recovering tanker market. We will now open up the call to questions.

Operator?.

[Operator Instructions]. Our first question comes from Randy Giveans, of Jefferies..

All right. So first, kind of on a market question. We're hearing one-year time charter rates of $35,000, maybe $37,000 a day for Eco VLCCs, without scrubbers. Have you gotten any bids for some of your vessels at or near those rates? And also, obviously, 10 of your vessels, your Vs, will have scrubbers installed, ideally by the end of the year.

What is the charter premium for a scrubber-equipped VLCC for a one-year time charter?.

Well, Randy, I would say that for a one-year time charter it's a little trickier to identify that scrubber premium. If you're going to look at, like, three years or five years, you're somewhere $4,000 per day, $5,000 per day there..

That's right. And we haven't really received too much interest on a one-year time charter because we're not too keen on doing one-year, given 2020 scrubber retrofits..

Right. Similar to most owners, Randy, if you're going to do a one-year time charter really starting in the fourth quarter for a scrubber-fitted V, we really expect a lot of upside, especially when you have a lot of inefficiency and disruption to the oil markets in early 2020..

Okay.

And then before I get to my next question, the 10 scrubbers, are they going to be completed by this year? Or how many are slipping into 2020?.

Nothing is slipping. We have scheduled from the beginning for seven of our scrubbers to be installed in 2019 and 3 of them to be in the first quarter of 2020..

Okay. So no delays to that..

No..

All right. Okay. Last question for me. As you mentioned, cash balance, highest level since the spinoff. You have very low debt due until 2022. Outlook is very strong for the back half of this year, obviously 2020. That said, your shares, trading near the lowest level since 2016, early 2017, 30-plus percent discount to NAV.

You recently sold those two vessels at NAV.

So should we expect INSW to repurchase shares here in the near term since you already have the authorization in place?.

Randy, it's Jeff. I think what Lois said, and I'll repeat, is that we're really super pleased at having first allocated capital in our existence to the $600 million we spent renewing our fleet, putting ourselves in really good position for this upturn that is at hand.

But still, we generate a lot of liquidity from operations and from selling older vessels, which brings in cash and saves dry dock, right? So we've put ourselves in a position to have the highest liquidity since we've been spun off. And we look at it and say, all right, we've already bought enough ships to be really well positioned.

So now we can turn to other types of capital allocation that are accretive. And it isn't like you make a choice of any one thing. They're really all tools that you have in the tool kit; so, deleveraging, share repurchase, dividends. That's where capital is going to go now, and that's what you should be looking for. We started it with deleveraging.

We love that because, first of all, it's just good, deleveraging. Secondly, it's flexible. You can always relever if you want to. And really, also keep in mind that a lot of the proceeds that we have in terms of this cash are from selling older vessels and they're really earmarked for deleveraging because of the way that the credit facilities work.

So that's where it started. But yes, we're looking at share repurchase, dividends, all of the above for capital allocation in the future..

Our next question comes from Liam Burke, of B. Riley FBR..

Lois, on the sale of the 2004 MR, are you seeing better pricing or liquidity in those markets? And does that affect your decision on what to do with some of your older MR vessels?.

Well, the sale of these final two MRs were the completion of a program that we had of 6 2004-built MRs, specifically. And the prices that we were able to realize for those had indeed strengthened, and there was more inquiry in the last quarter. So we were able to realize some of that benefit..

Okay. And Jeff, you're talking about deleveraging. You prepaid $10 million in debt. You've got a slug of high-cost debt.

I know it's due in 2023, but is there any thought on prepaying that? Or how do you look at that?.

Well, thanks, Liam. First of all, the $10 million was applied to that.

So yes, we're definitely -- that's a start, right? So I would say this, that that debt which you called high-cost, if you mean the Term Loan B, that was really put into place or amended for the acquisition last year, as was some of the other debt, some of the unsecured debt we have, as well.

And they have the ability, especially the unsecured, the ability to call it next year, and the Term Loan B can be called at any time, although there's a slight premium until December 31 of this year.

So really the best way to say it is that as we enter this period of time where we're generating a little bit of additional cash, as we discussed, we'll be looking at the entire balance sheet and seeing what's the right thing for us to do as we head into this recovery. So it will -- we're evaluating it sort of top to bottom..

[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Lois Zabrocky, CEO, for any closing remarks..

We just want to thank everyone for joining us for our second quarter earnings call. And enjoy the rest of your summer. We're looking forward to that tanker market recovering. Thank you very much..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..