Executives: James Small - General Counsel Lois Zabrocky - President and CE Jeffrey Pribor - CFO Derek Solon - VP and

CCO
Analysts: Noah Parquette - JPMorgan Magnus Fyhr - Seaport Global Espen Landmark -

Fearnley
Operator: Good day, and welcome to the International Seaways Incorporated Second Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to James Small, General Counsel. Please go ahead, sir.

James Small: Thank you.

Good morning, everyone, and welcome to International Seaways earnings call for the second quarter of 2018. Before we begin, I would like to start off by advising everyone on the call today of

the following: During this conference call, Management may make forward-looking statements regarding the Company or the industry in which it operates, which could include, without limitation, 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; International Seaways' strategy; purchases and sales of vessels; anticipated financing transactions; expectations regarding revenues and expenses, including both vessel and G&A expenses; estimated bookings and TCE rates for the third quarter, second half, and other periods in 2018; estimated capital expenditures for 2018 or other periods; projected scheduled dry-dock and off-hire days; the Company's ability to achieve its financing and other objectives and it's consideration of strategic alternatives; and economic, political, and regulatory developments around the world. Any such forward-looking statements take into account various assumptions made by Management based on a variety of factors, including Management's experience and perception of historical trends, current market 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 may cause actual results to differ materially from those implied or expressed by those forward-looking 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 of 2017, and its quarterly report on Form 10-Q for the second quarter of 2018, and in other fillings that we have made, or in the future, may make with the U.S.

Securities and Exchange Commission. Now I would like to turn the call over to the Company's President and Chief Executive Officer, Ms. Lois Zabrocky. Lois?

Lois Zabrocky: Thank you very much, James, and good morning, everyone. Thank you for joining International Seaways earnings call to discuss our second quarter 2018 results.

Please turn to Slide 4. We will review our second quarter 2018 highlights and our recent accomplishments. During the quarter, we positioned International Seaways to further enhance industry leadership and our earnings power ahead of the market recovery as we achieved a major milestone in growing and renewing the fleet, and taking advantage of our balance sheet strength. Looking at the first bullet, I will begin by discussing our recent acquisition of the six VLCCs. After entering into an agreement in December of 2017, to acquire six modern VLCCs from Euronav, we finalized the transaction in June, highlighting our considerable success, enhancing the size and age profile of our fleet during a low point in the tanker cycle.

We're pleased to have added these high specification sister ships to our fleet, and have financed the acquisition with the assumption of $311 million of attractive Sinosure debt. With the balance of the purchase price funded with available liquidity as a result of actions that Jeff will highlight. Continuing to the second bullet, and based on our approach to financing the transaction, we have completed the VLCC acquisition without diluting shareholders and in a manner that simultaneously enabled us to maintain International Seaways balance sheet strength, and increase our liquidity position. As part of this approach, we received $110 million in proceeds from our FSO joint ventures, $220 million credit facility, representing our 50% ownership of the FSO Africa and FSO Asia floating storage and offloading service vessels. Importantly, year-to-date, we increased our cash position by $72 million to $143 million, giving us the total liquidity of $193 million, including $50 million of an undrawn revolver.

This represents an increase in total liquidity of $102 million since December 31st. We also continue to maintain one of the lowest net loan-to-value profiles in the sector, ending the second quarter with a net loan-to-value of 54%, measured conservatively using vessel value, while extending our debt maturities with the earliest maturity now in 2022. Moving to the third bullet, with the acquisition of the six VLCCs during the second quarter, and the two Suezmax vessels, as well as, one VLCC in 2017, we have cumulatively invested $600 million in nine vessels with an average age of 2.3 years since our spin-off in December of 2016, without issuing equity. Taking into account opportunistic sale of vessels with an average age of 16 years, we have also reduced our fleet's age by close to three years and increased our deadweight by 22%. Moving to the last bullet, we continued to operate against the backdrop of a challenging tanker market during the second quarter.

While our strategy of maintaining a lean and scalable model and predictable cash flows from our joint ventures, and contracted fixed-rate charters have remained intact. Our Q2 results were affected by the low rate environment. For the second quarter, we reported an adjusted EBITDA of $9.2 million, up from the first quarter on time charter equivalent revenues of $50 million. Our net loss was $18.8 million or $0.65 per share, which includes a $6.7 million gain from the sale of vessels, net of impairments, and $4.9 million of charges related to an amendment of the Company's existing credit facility. Please turn to Slide 5.

Specifically to the chart at the right, we illustrate the point that I made earlier regarding the success we've had in growing and renewing our fleet. We believe our success requiring modern vessels and disposing of older tonnage further solidifies our industry leadership, strengthening our fleet profile and our operating leverage, enhancing International Seaways upside potential for capitalizing on the market recovery in both the crude and product tanker spaces. Please turn to Slide 6. Here we provide an update on tanker demand. During the second quarter, oil demand remained strong.

In both 2018 and 2019, the IEA forecasts global oil demand growth of 1.4 million barrels per day, which continues to be driven by strong demand into emerging markets. In particular, while Chinese imports were lower in June at 8.4 million barrels, it is significant to note that through the first half of 2018, imports to China are up 5.8% compared to the prior year. Looking at the top right chart, which shows increases in oil demand growth year-over-year during the prior six quarters and projected growth during the next six quarters, the impact of Chinese demand is clear. While it has been recently reported that certain Chinese buyer's maybe suspending imports of U.S. crude as a result of the ongoing tariff dispute between the U.S.

and China, we fully expect there will be sustained demand for U.S. crude exports in other Asian markets. We intend to monitor these developments closely. Additionally, looking ahead, we expect the upcoming IMO 2020 regulations will boost demand for both crude and product tankers, as refinery margins increase and refineries produce more low sulfur fuel and middle distillates; therefore, increasing overall crude volume and likely the seaborne transportation of petroleum products. In addition to sustained oil demand, global crude and product stocks continue to trend downward during the second quarter, another positive indicator of tanker demand.

As you can see in the chart on the bottom right of the Slide, the IEA estimates that OECD inventories dipped below five year averages by 23 million barrels at the end of May, continuing the inventory declines that began in 2017. The decline in OECD stocks, excluding SPR barrels, to 60 days of forward cover compared with 66 days at the beginning of 2016, further highlights the reduction in inventory. Slide 7. I provide an update on tanker supply, and we'd like to highlight that based on a more favorable order book and increased scrapping, we have seen negative fleet growth for VLCCs during the first half of 2018. Beginning with an order book update, 9 VLCC newbuildings were ordered in the second quarter compared to 13 in the first quarter.

As shown in the chart at the top right of the page, newbuilding activity was down across vessel types, and total orders declined for the second consecutive quarter. Although we continue to expect substantial crude tanker deliveries in 2018, the total amount is expected to be down from 2017 level. In terms of the VLCC fleet deliveries, 45 total are expected in 2018, assuming no slippage into 2019, compared to 50 VLCC deliveries in 2017. An important point to note is that strength in dry bulk container and LNG ordering is putting limits on tanker newbuilding berths availability at shipyards. Turning to scrapping.

We continued to see considerable activity in the second quarter. This is shown in the chart on the bottom right. After two years of nearly no scrapping due to very weak rate environment and stronger steel prices, compared to a total of 13 VLCC's scrapped during all of 2017, 33 have already been sold for scrap thus far in 2018, while only 24 ships have been delivered year-to-date. Suezmaxes and an Aframaxes have also experienced increased scrapping with 13 and 28 ships respectively scrapped in the first half of 2018. Regarding VLCC fleet growth, we expect minimal net growth of just 1% in 2018, following growth of 5% in 2017, and 7% in 2016.

I will now turn the call over to Jeff Pribor, our CFO, to provide additional details on the first quarter results.

Jeffrey Pribor: Thank you, Lois, and good morning, everyone. Let's move directly to reviewing the second quarter results in more detail. Before turning to Slide 9, let me just quickly summarize our consolidated results. Net loss for the second quarter was $18.8 million or negative $0.65 a share, per diluted share, compared with $11.6 million or $0.40 per diluted share in the second quarter of 2017.

This net loss reflects a decline in TCE revenues compared with the second quarter of 2017, a reduction in equity and income of affiliated companies of $5.0 million, and a higher interest expense of $3.8 million. These negative factors were offset to a large degree by a net gain on vessel disposals during the period of $6.7 million, as well as decreases in expenses associated with changes to the Company's debt facilities which aggregated $10.1 million, and decreases in vessel expenses of $3.8 million, and depreciation and amortization of $2.3 million. Now, if I could ask you to turn to Slide 9. As reflected in the chart on the top left, consolidated TCE revenues for the second quarter 2018 were $50 million, compared to $69.3 million in the second quarter of 2017. This decrease was principally driven by lower average daily rates earned across the majority of International Seaways fleet sectors this quarter compared to Q2 of last year.

Let me now discuss the results of our business segments beginning with the Crude segment. TCEs for the Crude Tankers segment were $34.4 million for the quarter, compared to $45.7 million in the second quarter of last year. This decrease was primarily due to lower average blended rates in all sectors compared to the same period of last year, particularly the VLCC fleet sector, which accounted for $30.3 million of the overall decrease. An additional $6 million of the decrease represents the impact of our only ULCC being idle for the entirety of the quarter ahead of its sale at the end of June 2018, and a 2000 built VLCC being held for sale as of the end of January 2018, through its sale completion in April 2018. Also decreased revenues of $1 million from the Crude Tanker lightering business contributed to the decline, although I would note that lightering revenue and EBITDA increased sequentially from the first quarter.

This was partially offset by increased revenue days contributed by the two 2017 built Suezmax, and one 2000 built VLCC, which delivered to the Company in the second half of 2017, as well as by the 2015 built and five 2016 built VLCCs that delivered to the Company in June 2018. Also contributing to the increased revenue days was the 255 day reduction in the dry dock days in the Panamax fleet, as compared to the prior year period. Turning to Product Carriers, TCE revenues for the Product Carriers segment were $15.6 million for the quarter, compared to $23.5 million in the second quarter of last year. This decrease was primarily due to a decrease in MR revenue days arising as a result of sale of five MRs between August 2017 and April 2018, and the redelivery of three MRs to their owners between December 2017 and June 2018, at the time of the expiry of their respective bareboat charters. Decline in average daily blended rates earned in MR fleet also contributed to the decrease.

This was partially offset due to an increase in revenue resulting from increased daily rates earned in the LR1 and LR2 fleets. Looking now at the chart at the top right of the page, adjusted EBITDA was $9.2 million for the quarter, compared to $32 million in the same period of 2017. This decrease mainly reflects lower daily rates in the second quarter, compared to the second quarter of last year, as well as the other factors previously mentioned. In terms of the trailing 12 months, you can see at the bottom of the Slide, TCE revenue was $220 million for the latest 12 months ending second quarter 2018 period, compared to the $312 million for the comparable prior year period. Adjusted EBITDA for the latest 12 months ending June was $54 million, compared to $153 million in the same period of 2017.

Now turning to Slide 10. We provide Q3, 2018 earnings update. This quarter for the first time, we've broken out spot rates for the VLCCs that are over 15 years old, in addition to breaking out spot rates for the modern VLCCs in our fleet, and spot rates booked for our VLCCs overall. As I mentioned on the previous call regarding spot rates for VLCCs at low points of the tanker cycles such as the current period, modern VLCCs are in higher rates. As the market recovers, this gap should narrow significantly and rates for modern VLCCs should more closely reflect those of the overall VLCC group.

In the short-term, however, even if the gap persists, Seaways is well positioned to benefit from the improved rates for modern VLCCs based on the significant progress we've made as described by Lois, in implementing our fleet growth and renewal strategy, as a result of which we only have 4 out of our 14 VLCCs, which are oversold. Looking forward, we experienced generally or have experienced generally higher rates in Q3, compared to Q2. We booked, for example, 60% of available Q3 spot days for our modern Vs at an average of approximately $17,300 a day; 36% of available VLCC days for vessels which are over 15 years old, and approximately $8,700 a day; 53% of available overall VLCC spot days, therefore an average of approximately $15,600 per day. In Suezmax, 15% of Q3 spot days are at an average of approximately $17,700 per day; 49% of available Aframax or LR2 spot days are booked at approximately $11,700 per day; and 46% of available Panamax or LR1 spot days at an average of approximately $12,500 per day. On the MR side, we booked 42% of our third quarter spot days at an average of approximately $8,800 per day, a slight increase in the second quarter.

Once again, I'd like to point out, our fleet growth and modernization strategy has positioned International Seaways to increase our revenue days and enhance our upside potential for capitalizing on a market recovery in both the Product and Crude Tanker sectors. A $1,000 increase in rates in every vessel class, for example, will result in an increase of about $70 million in cash flow. A $5,000 and $10,000 increases would add $84 million and $169 million in cash flow respectively. Turning to Slide 11. The cash cost TCE breakevens for the 12 months ended June 30, 2018, were $16,400 per day for VLCCs, $13,700 per day for Suezmaxes, $15,300 per day for Aframaxes, $16, 400 for Panamaxes, and $15,000 per day for MRs.

International Seaways overall breakeven rate fleet wide was $15,800 per day for the 12 months ended June 30, 2018. These rates are the all-in daily rates for our owned vessels - that our owned vessels must earn to cover operating costs, dry dock, CapEx, 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 during the period, the overall breakeven rate for the Company dropped to $12,300 a day, highlighting our strong position for optimizing cash flows in a challenging market environment. Of note, the VLCC breakeven does not take into account the six recently acquired VLCCs, as they were only in the fleet for 17 days in the second quarter. Additionally, the breakevens do not reflect any effect of the FSO financing, which was completed in the quarter.

Providing a little more detail on this Slide and a view going forward, our last 12 months OpEx, which corresponds to the dark blue columns on the chart, per revenue day by vessel class were

as follows: for VLCCs, $9,400; Suezmax, $7,700; Aframax, $8,500; Panamax, $8,400; and MRs, $8,100 per day. The targeted amounts per operating day for 2018 for the various classes are as follows; VLCCs, $9,200 per day; Suezmax, $8,100; Aframax, $8,500; Panamax, $8,200; and MRs targeted at, $7,700 per day. Our cash G&A for the last 12 months which corresponds to the yellow bar on this page was $21.4 million or $1,800 per vessel per day. Our target for 2018 is $22.2 million or $1,500 per vessel per day. Debt service, which is in white, was - for the last 12 months, $50.5 million or $4,250 per vessel per day.

Now if I could ask you to turn to Slide 12, for our cash bridge. Moving from left to right, we began the second quarter with total cash of $91 million. During the quarter we generated $9 million of adjusted EBITDA, this amount includes $9 million in equity income from JVs and non-cash item, which is therefore deducted in order to reach a cash figure. The cash distributions from the JVs were $120 million, of which $110 million was proceeds from the FSO financing. In addition, we expended $6 million on dry docking and maintenance CapEx.

The sale of vessels contributed $69 million, while new debt issuance contributed $73 million. We expended $123 million in the purchase of the equity portion of six VLCCs, which we expect to drive future earning power while also spending $60 million on a term of the prepayment during the quarter. Debt service paid was $21 million in the quarter, of which $12 million was interest and $9 million was debt amortization. Finally, changes in working capital and other noncash items had a negative impact of $1 million. The net result of all this is that we ended the quarter with approximately $143 million of cash and a $50 million undrawn revolver, yielding total liquidity of $192 million, $52 million more than the end of the first quarter and $102 million more than the year-end of 2017.

There were significant transaction events affecting the cash bridge during the quarter as you can see, and we expect that there are still some further amounts that will occur in the third quarter, including a $21 million payable for the balance of the six VLCC purchase. Now if you could turn to Slide 13. I'm going to talk about the balance sheet. As of June 30, 2018, we had $1.4 billion of conventional assets against $790 million of long-term debt. In addition, we had a $50 million revolving credit facility that remains undrawn at this time.

As you can see in the right-hand column of the Slide, our total debt to capital stood at 44% while net loan to value ended Q2 at 54%. Overall, our strong balance sheet with moderate leverage protects us in the challenging environment, where our spot vessels provide significant upside opportunity as the market turns. On the right side of the Slide, we have noted book values for our two joint ventures, which we believe are relative representative of their fair values. As of the end of the second quarter, the FSO and LNGS JVs have book values of $144 million and $109 million respectively. In terms of financing the recent acquisition of VLCCs, as Lois mentioned, we assumed $311 million of attractive Sinosure-insured debt and funded the balance of the purchase price with available liquidity, which was generated in part by the sale of older vessels from our fleet renewal program.

At the bottom of the Slide, we outline our debt facilities we entered into during this second quarter as part of the fleet renewal and growth program. Importantly, all of these facilities have relatively low amortization and mature in 2022 or later. That concludes my comments. So, I'd now like to turn the call back to Lois, for her closing remarks.

Lois Zabrocky: Thank you, Jeff.

Please turn to the summary page on Slide 15. The second quarter was important for International Seaways, as we significantly increased our earnings power while maintaining our strong financial position. Notably, our liquidity position increased to $193 million, up from $91 million at the end of 2017. In addition, our net loan to value as of June 30th, remained a very reasonable 54% at this point in the cycle. And we extended our debt maturities with the earliest maturity now in 2022.

Our considerable success growing and modernizing our fleet has enabled International Seaways to decrease the average age of our fleet by close to three years, and increased our deadweight capacity by 22%. Based on our moderate level of predictable cash flows from our joint ventures and contracted fixed rate charters, we remain in a strong position to operate during the low points of the cycle. With the strength in fleet profile, significant spot exposure, and leaner scalable model, we have also enhanced our operating leverage and our upside to recovery in the Product and Crude Tanker market. Since becoming an independent publicly traded Company in December of 2016, our focus has been on implementing a disciplined capital allocation strategy. We invested over $600 million in our fleet at the low point in the cycle without issuing equity.

This success which has significantly enhanced our fleet size and our age profile, combined with our level of predictable cash flows, an intense focus on financial strength and liquidity, has further enhanced our upside potential and our ability to create value for all of our stakeholders in a market recovery. That concludes our formal comments, and we will now open the call up to questions. Operator?

Operator: [Operator Instructions] We have a question from Noah Parquette from JPMorgan. Please go ahead.

Noah Parquette: I just want to ask some of your competitors have announced decisions to install scrubbers on some of their ships.

I want to know where you guys are regarding that decision, if you've made up your mind, if you're still looking at the problem, and talk a little bit about your strategy for 2020.

Lois Zabrocky: This is Lois. We do continue to look at the market impact that we think will come with 2020, and we're deep in the process of looking at potentially fitting scrubbers on some of our vessels.

Noah Parquette: And I just also wanted to ask, have you seen - well of course you've seen right, but have you seen in terms of changes in trade as a result of U.S. and China, anything specific would be nice.

Derek Solon: This is Derek Solon. With the talk of tariffs and potential trade wars going on, it's something we watch very closely of course, in terms of U.S. and Chinese trade for crude oil, but what we’ve seen so far is any potential impact with imports of U.S. oil from China, that can be displaced by we've seen cargos going to Korea and other parts of the Far East, it also goes out to India. So, we're confident that U.S.

crude will find a home even if things get tense with trading with China.

Operator: Our next question is from Magnus Fyhr from Seaport Global. Please go ahead.

Magnus Fyhr: Just two questions. First on the developments that we've seen in the spot market during the third quarter.

You booked more than 50% of your operating dates, but this recent strength that we've seen, I'm sure some of its seasonal and some is also related to OPEC increase in production. But have this - have you seen the strength accelerating in the last week or so? I mean, should we expect the rates to book at a higher level for the remainder of the quarter?

Lois Zabrocky: I would say Magnus, that some of this shows that we had seen in like maybe the last four weeks was indeed OPEC coming on a little bit stronger, and it's been sort of sustained, but it has not increased. The rates have been - they went up to on a TD3 somewhere around 15 a day and they've been basically holding there for now.

Jeffrey Pribor: But also I would say not so much seasonal it's more little bit counter seasonal.

Lois Zabrocky: That's correct.

Jeffrey Pribor: So, we'd normally expect to see a rise in rates in Q3 versus Q2. So the fact that we have seen that still at levels we'd like to see ultimately improve but the fact that we've seen that in Q3 Magnus is encouraging.

Lois Zabrocky: That's for sure third quarter is generally the weakest quarter. So to Jeff's point, we've seen the strengthening which is very positive.

Magnus Fyhr: And just one more question on - I mean it's not big portion of your old EBITDA any more, but I noticed that the lightering business have gone to the appendix.

So should be read anything into that that you'd be emphasizing that business and how you think that'll be impacted with increasing U.S. export facilities coming on line?

Lois Zabrocky: So, you should not read anything into that Magus, in fact in the last few months, lightering has been doing steadily stronger, month-on-month, which is very positive for us. We are following all of the projects. They are planned down in the Gulf, I think even the dredging for Corpus Christi wouldn't be completed for at least another 12 to 18 months, and a lot of the projects you're looking at coming online in 2022, but if you take everything into context and you look at the tremendous amount of export growth coming out of the U.S. Gulf, it seems that there is room for every method to export that crude, including healthy portion of lightering.

Magnus Fyhr: What's the primary reason for the downtrend that we've seen on the lightering business here in the last year or so? I mean, you're saying it's picking up here on a month-to-month basis, but…

Lois Zabrocky: Yes, the more full-service lightering that our team does the stronger the results that they post, and they're continuing to increase that market share.

Jeffrey Pribor: It's a competitive market, Magnus, and we want - won't be chasing prices down but we're very pleased with the progress you're making sequentially at this point.

Operator: [Operator Instructions] And our next question is from Espen Landmark from Fearnley. Please go ahead. Espen Landmark : Just picking up on the last note on the lightering business, I mean, there isn’t lot of comps from this in terms of variations, so, I mean, given the earnings that you have now, and I'll be curious to hear what's your thinking on this fair value is for that business? Thank you.

Jeffrey Pribor: Well, we have a trailing 12 months EBITDA, now about $1.3 million. So, I don't think we would speculate to you or leave it to you, you and others who follow or are looking at to this side. But it's not an asset heavy business. So you kind of had to look at earnings, I'd look at that trailing earnings and start there and make.

Lois Zabrocky: And we'd like that to improve.

Jeffrey Pribor: Which we do expect to improve, but I'd start there and probably for the multiple of your choosing on those earnings.

Espen Landmark: And then maybe on the scrubber side, I mean, I appreciate you guys splitting up the earnings on the VLCCs, I think it's quite illustrative of what's going on. So, I'd be curious to hear your thoughts throughout the benefit from the various vintages and potentially what kind of financing alternatives you would have in mind for them?

Lois Zabrocky: Well from our analyzing it, clearly your moderns vessels that are not - the first choice would be vessels that are 2010, 2011, 2012 built, right, that you know have a long future, but are actually bigger consumers than highly efficient ships that we just purchased from Generate. So, from that perspective, you can kind of go in an order and then Jeff on financing side, I don't know if you want to take any comment there.

Jeffrey Pribor: Well, we also have had numerous proposals for debt financing and creative profit-sharing financing, and timesharing, time charter financing and others, but we also look at that internally generated funds as being a really good source for health insurance and profits are increasing our leverage of cost.

So that's all part of the consideration. So I think it's just - this conference call doesn’t come at a time where we can be more fulfilling our description of this, but stay tuned.

Operator: And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Lois Zabrocky. Please go ahead, ma'am.

Lois Zabrocky: Thank you very much. We just want to thank everyone for joining us in our conference call today. And we look forward to the next quarter. Thank you very much.

Operator: The conference has now concluded.

Thank you for attending today's presentation. You may now disconnect your lines.