IQ Ultra Short Duration ETF
Q1 2015 Earnings Call Transcript

Published: 15 May 2015

[Operator:]

Welcome and thank you for standing by. At this time, all participants are in listen-only mode. [Operator Instructions] Today’s call is being recorded. If you have any objections, you may disconnect at this point. I will now turn the meeting over to Mr. Len Hoskinson. Sir, you may now begin.

[Len Hoskinson:]

Thank you. Good morning, everyone and thank you for joining us on the call today. Welcome to the Ultrapetrol (Bahamas) Ltd. conference call to discuss the company’s first quarter 2015 earnings. I would like to remind everyone that this conference call is now being webcast at the company’s website, www.ultrapetrol.net. There are also additional materials related to our earnings announcement on our website, including slide presentation, which forms a part of this conference call. You should be aware that in today’s conference call, we will be making certain forward-looking statements to discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For a discussion of factors that could cause results to differ, please see the company’s filed 20-F and the press release and 6-K that was filed yesterday as well as the company’s prior filings with the SEC on Page 2 of the slide presentation that shortly follows. With me today is Mr. Damian Scokin, our Chief Executive Officer and Ms. Cecilia Yad, our Chief Financial Officer. Damian will give an overview of the first quarter results and take you through the key areas of focus as we move forward. Cecilia will then take you through the financials. And after closing remarks from Damian, we will then be happy to take your questions. And now I hand it over to Damian.

[Damian Scokin:]

Good morning, everyone. I am pleased to join you on today’s call and I look forward to taking your questions following a brief overview of this quarter. We are going to talk about the current market environment for each of our businesses our progress in achieving our strategic priorities to unlock what we believe is Ultrapetrol’s high, full potential. If we start with Page 3, you will find a summary of our first quarter results compared to the same period of 2014. Here, you have them broken out by segment. You can see there that the adjusted EBITDA for 2015’s first quarter was $15.2 million against a $19.6 million in the same period of last year. Before adjusting for negative impact of our foreign exchange exposure related to almost a 21% devaluation of the Brazilian real, then our total segment adjusted EBITDA was $17.1 million, which represents a $0.5 million above first quarter of 2014. If we get into each business lines, our river business segment enjoyed a significantly better performance in the first quarter of 2015 when compared with the year earlier. The river business adjusted EBITDA for the quarter was $3.2 million against a negative adjusted EBITDA of just $0.7 million in the same period of 2014. This generated an additional adjusted EBITDA of $3.9 million. This trend was partially offset by the $3.3 million year-over-year decrease in third party barge sales from the eight barges we sold in first quarter 2014 to zero barges sold in the first quarter of 2015. In our river transportation business segment, we have had a very good performance in terms of revenues and operations even in a seasonally low quarter. The total tons loaded in the first three months of 2015 were 10% higher than those loaded a year earlier. We also had some success in reducing our operational costs as part of our initiative to move from a hub-and-spoke system to a point-to-point system. In addition, we successfully continued the operation of the Vale time charter, and our Parana iron transshipment unit will had a full quarter impact in 2015 as she commenced her transshipment operations in May 20, 2014. Both of these take-or-pay contracts are a significant contributor to our EBITDA in this segment. Additionally, they provide stability to our revenues by reducing our exposure to the agricultural cycle. Our offshore supply segment adjusted EBITDA for the first quarter of 2015 was $12.6 million compared with $13.2 million in the first quarter of 2014. Although we had a larger fleet of PSVs in operations in 2015, we have suffered from the depressed rate environment in the North Sea as well and – as we still maintain two PSVs in that market. At the same time, our UP Opal started her operation in Brazil on January 25 and our UP Coral is on her way to Brazil after the successful recombination into an RSV support vessel. Our ocean adjusted EBITDA for the first quarter of 2015 was $1.4 million, which compared to $4.1 million in the same period last year. The difference results mainly from our Product Tanker, Alejandrina, which ended her employment in September 2014. As the development taking place in this quarter, we have employed her in a four month contract with Gamesa, extendable for an additional two months. We are beginning to see early signs of progress during the first quarter from the implementation of the selected strategic initiatives. Let us remind you that while still in the early stages of a full change process, but we look forward to detailing for you the steps that we are taking in each segment and the key performance indicators that we are focused on. If we now turn to Slide 5, on the river you can see that the low commodity price environment has persisted. That has put downward pressure on the demand for transportation as producers look to stockpile soybeans in anticipation of future prices. Similarly, low demand for iron ore transportation has resulted in additional river tonnage seeking employment elsewhere, which has resulted in price pressure. On Slide 6, you can see an update on the recent developments in our river business as well as the areas of focus for our strategic initiatives for that segment. During the first quarter of 2015, we implemented a point-to-point operational model rather than a complex and more costly hub-and-spoke system. Our Parana Iron transshipment station also continues to operate with Vale transhipping 205,000 tons during this first quarter. Additionally, we reached an agreement in February to renew and expand our contract to move oil products for Petropar, the Paraguayan national oil company. We are not committing to moving 60% of the total volume, a substantial increase for the 30% share we have previously serviced. As we look to strengthen the operational and financial results of this business, we are particularly focused on four initiatives

[Cecilia Yad:]

Thank you, Damian. On Slide 15, you have condensed version of the company’s balance sheet as of 31, March, 2015 versus 31, December, 2014. As of March 2015, we held $20.3 million in cash and cash equivalents. During the first quarter of 2015, we also reduced our total financial debt by $5.7 million from $466 million in debt to $460.3 million at the end of the quarter of 2015. We also have $32.1 million – $32.2 million available under our revolving line of credit, which provides us with substantial liquidity. During the first three months of 2015, we have CapEx of $9.3 million, mainly applied to the tank barges construction for our own fleet for $3.7 million, additional maintenance to certain pushboats for $2.5 million and $1.8 million in the conversion of our UP Coral. In addition, we have spent $1.3 million in drydock. Regarding our financial covenants and our bank loans, we are in compliance, and we expect to remain so going forward. With that, I would like to turn the call back to Damian.

[Damian Scokin:]

Thank you for joining us on the call today for an update on our business and the progress of our strategic initiatives. With that, we will be glad at this time to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Mr. Ben Nolan. Sir, your line is now open.

[Ben Nolan:]

Thank you. I have several questions and first of all nice work this quarter. I know it’s a tough environment, but it’s meaningfully better than it was in the fourth quarter. The – my first question relates to the – I have a few questions on the river business, but you mentioned in the results there that you have this new contract with Petropar to move 60% of the river volumes, which previously you have been doing 30%. Could you maybe – I don’t know how to necessarily quantify that in terms of overall volume though. I mean, how meaningful is that contract with respect to your overall capacity on the river business?

[Damian Scokin:]

Okay. Yes, that in relative terms Ben means roughly doubling. There is a range of potential volumes, but in the case we will be doubling what we currently – what we have been transporting over the last two years in the lower end segment that will be increasing it by 30%. In total, out of our total transport volumes, I would say this represents I would say 5%, 10% increase in total volumes roughly.

[Ben Nolan:]

Okay. No, that’s helpful. And obviously, that’s all on the tank barge side, correct?

[Damian Scokin:]

Yes.

[Ben Nolan:]

So, and just to clarify there, so is that a 5% to 10% increase in your tank barge volume or your collective river business volume?

[Damian Scokin:]

Collective river business.

[Ben Nolan:]

Good. Okay. So, the next question goes to the barge sales and I know that obviously you have yet to get any firm contracts, but it sounded like activity levels have increased with respect to being able to sell barges to third-parties. I am curious about the dynamics of pricing is – are you – do you think that the market in terms of the price that you can sell those barges at is reasonably the same as what it had been prior or maybe are margins a bit tighter maybe than they have used to be?

[Damian Scokin:]

Yes. Ben, two questions here. Prices are definitely tighter, because we compete with China alternative as prices of steel and prices of manufacturing in general has come down. The good news there though is that we increased productivity in the shipyard also significantly where we are seeing good results in terms of the cost reduction efforts in the shipyard, which impacted the price erosion that we are transferring to the clients, increased demand that doesn’t necessarily impact directly or totally on the margins.

[Ben Nolan:]

Okay, that’s helpful. And then just in terms of maybe what you are looking to achieve, when would – if you are able to sell barges to third-parties, would that be a second half of the year event? What sort of timeframe would – should we think about that potentially happening?

[Damian Scokin:]

It had to commit to a day that we are making all the efforts possible and as I say we are becoming more competitive even our ability to keep margins at lower prices, but since this is not such a deep and transpire market had to commit to a date.

[Ben Nolan:]

Yes, I can appreciate that. Okay. So then shifting gears quickly to the offshore side. You have the two vessels obviously you are tendering I guess just twice to Petrobras. They are currently laid up. I am curious sort of two directions there. Number one, when would you expect to hear a result with respect to those tenders? And then also I know that at least one of those two was the larger PSVs that one of which has now been converted into RSV work. And if I remember correctly, those assets were maybe ideally suited to do that type of business. Have you done – has there been any discussion or any consideration about potentially being able to convert another of those? And do you think that – if do you think that there would be an ability to get a contract for that? I realize there is two questions there, but...

[Damian Scokin:]

Yes. In terms of the tender, your initial questions, these decisions are taking longer than usually in Petrobras. So it’s – I could only translate to you our current assumption, which is at least three more weeks to have a clarity on who will be awarded those tenders. And as per your second question in terms of the conversion of an additional vessel, certainly we are exploring all options and that’s one of them.

[Ben Nolan:]

Okay. Are there tenders for other RSVs by Petrobras as well or is that something that you would not undertake without having a contract in place?

[Damian Scokin:]

Yes. No, our current position is to get a contract first before committing to a CapEx of that source, of that amount.

[Ben Nolan:]

Sure. But there is potential contracts available possibly in a market, is that a fair assumption?

[Damian Scokin:]

Yes. As you say, there is a possibility. Today, we are not saying it’s a certainty.

[Ben Nolan:]

Okay, good. Well, that actually does it for my questions, but again solid progress, so good work on that.

[Damian Scokin:]

Thanks Ben.

[Operator:]

Thank you. And our next question comes from the line of Mr. Michael Schlembach. Sir, your line is now open. You may now proceed.

[Michael Schlembach:]

Congrats on good momentum [Technical Difficulty], Cecilia, could you...

[Damian Scokin:]

Michael, you are coming across an extremely low volume, can you please speak closer to the mic?

[Michael Schlembach:]

Is it better there?

[Damian Scokin:]

Yes. Now, it’s much better.

[Michael Schlembach:]

Okay. I was just saying congrats on continued momentum or showing momentum, particularly in the river business. Cecilia, can you repeat, you said what the revolver availability was. And another question for you or two more questions for you, can you give a sense of where you guys expect full year CapEx to be having spent the $9.3 million, in the first quarter not counting any opportunistic barge sales. And then my last question for you is working capital was a use of cash in the first quarter, particularly in receivables, how much of that you expect to reverse in the next couple of quarters? And then I have a few bigger-picture questions once those three are answered.

[Cecilia Yad:]

Okay. Mike, good morning and regarding your first question, the revolving credit that we have available is around $31 million that we haven’t used yet. What I want to comment there was about even though we have $20 million in cash, we also have available the $31 million in case we should need for uses to fund some growth or some additional capital investments. And then regarding your question about the working capital, we suffer an increase in the working capital in the first quarter for around $7 million, which is related to our accounts receivable, but this is mainly because we have a high quarter coming from the river and also keeping the same trend in offshore. I will say that I am seeing that this will be reverted in Q2 2015.

[Michael Schlembach:]

And then on CapEx?

[Cecilia Yad:]

And in terms of CapEx, so for the remaining of the year, what we are saying here is that we will continue investing in our shipyard around in total $13 million we already invested for. But this then it will depend up there some of negotiations that we are having in terms of selling some barges to third parties. In the case we sell them then these will not count as a CapEx...

[Michael Schlembach:]

Right. So you will spend about $13 million more on CapEx for construction of barges with or without barge sales, correct?

[Cecilia Yad:]

I would say $10 million more because we already spend between $3 million and $4 million this quarter.

[Michael Schlembach:]

Okay. And then I don’t know if this is a question for you or for Len, but the – there was some discussion last quarter about small maturities for some of these vessels in the offshore business, were any refinancings completed during the quarter or is that something that’s being contemplated now into the current quarter?

[Len Hoskinson:]

So, Mike, this is Len. We mentioned on the last call about a month ago, we were attempting or refinancing the entire UP Offshore fleet bring on the common borrowing group, common collateral. As you know, the bank market is a bit slow. It’s one baby step at a time. So, I don’t have much progress to add to what we said on the last call whether that will move in the right direction.

[Michael Schlembach:]

Okay. So, there is incremental progress being made. That’s not – it’s not something that’s been abandoned or anything like that?

[Len Hoskinson:]

Well, no, quite the opposite. I mean, we are discussing tiered sheets. We are discussing bank syndicate that kind of stuff, but we are still quite away from anything committed.

[Michael Schlembach:]

Okay. And then if the two vessels that are for sale in the ocean business are in fact sold what is the...

[Len Hoskinson:]

I think in general is sold. I think as I mentioned of it in 6-K, it sold earlier this week, $3.2 million and where the one is for sale, but as far as I know there is nothing active going with the purchase of it.

[Michael Schlembach:]

And is that just cash to the balance sheet once that’s done just for incremental liquidity there is nothing specific proceeds earmarked for that or anything right?

[Cecilia Yad:]

Right.

[Michael Schlembach:]

I think that’s it for me. Thank you very much.

[Cecilia Yad:]

Thank you, Mike.

[Operator:]

Thank you. And our next question comes from the line of Mr. Douglas Karson. Sir, your line is now open. You may proceed.

[Douglas Karson:]

Great, thank you. I just had one question on the river business and I am not sure if it was asked and answered already, but do you have a sense of the cadence of barge completions over the next one or two quarters? It’s been kind of lumpy trying to predict when those sales are going to take place to third-parties.

[Damian Scokin:]

Well, as I said before in this context in which as you know, we face a combination of decreasing demand for iron ore and an overcapacity of barges in the river. It’s a tough challenge to really keep up with sales. So, we are making all our efforts, but in this context, I really feel comfortable to commit the date with certainty.

[Douglas Karson:]

So, it would be safe to say that throughout the year, earnings are going to be negatively impacted by the absence of sales because the core business outside of the sales…

[Damian Scokin:]

Sorry. Go ahead, sorry.

[Douglas Karson:]

The core business outside of the sales seems to be lower than what has been with the barge sales. So, I am just trying to get a sense of that.

[Damian Scokin:]

Yes, but we face a combination of two things here. One, the transportation business of the river is doing better as we show on the KPIs even on a tougher market that is doing better. So, this wasn’t easy going to be able to compensate for a complete year of no barge sales to third-parties. That’s your question.

[Douglas Karson:]

Yes.

[Damian Scokin:]

Well, we expect not to have full year results with third-party sales, but on the other hand we won the tender for Petrobras as we mentioned, so more tank barges are going to be needed for transporting those additional cubic meters. So, it’s something that either through selling the barges or using them for transporting larger amounts of our tank crude will help us. But we will remain optimistic, we will be able to sell not as much to third-parties not as much as previous years, but we will be able to sell.

[Douglas Karson:]

Great. Thank you. Thank you very much. That’s it for me.

[Operator:]

Thank you. And our last question comes from the line of Mr. Mike [indiscernible]. Sir, your line is now open. You may proceed.

[Unidentified Analyst:]

Yes, hi. Just a quick question I guess when you are sitting or talking to the banks, have you performed any detailed workups on asset value replacement market values that you can share with us or help us out there?

[Damian Scokin:]

Of course, we have done the work. Are we going to share it with you? I don’t think so. And roughly, obviously, valuations are affected with the current status of the market, but we have got first valuations, well either be actually not the valuations. They went to two sources in Norway. They are independent of what our own personal thoughts are. As I have mentioned in the past, we are currently about a third leverage meaning bank debt to current market value. And I hope that when we do the refi, it will be somewhere between 50% to 55% of the valuation of the fleet. Does that answer your question?

[Unidentified Analyst:]

It does. So, you are roughly saying or was it $1 billion to $1.2 billion on the asset side, is that correct roughly?

[Damian Scokin:]

Say it again, value of the assets?

[Unidentified Analyst:]

Yes.

[Damian Scokin:]

I am just talking about the offshore fleet?

[Unidentified Analyst:]

Right.

[Damian Scokin:]

It’s a shade under $0.5 billion.

[Unidentified Analyst:]

Okay. And then the reverse, okay, got it.

[Damian Scokin:]

But the refi is not only offshore it’s nothing to do with anything else.

[Unidentified Analyst:]

Great. So, when you look at that asset, obviously, we are trading significant discount to asset value. Anything we look to do to unlock that value or is it just operators as usual when you are sitting at this kind of a discount, you would think that there is a way to unlock the value?

[Damian Scokin:]

Well, I suppose we are looking – management is looking at it a little differently than what you are. We have got some serious balloon payments following June 2016, 2017. So, the first step sort of renewed that from consideration that’s even out there. And the second consideration I suppose you have the UP Offshore is that we think UP Offshore is well-balanced and in this discouraging market, perhaps UP Offshore could be in the market to expand and accordingly, any debt refinancing that we do for UP Offshore is going to be flexible enough to take advantage of any opportunity that come across and because this kind of financing takes a while to put in place and when I say a while start to finish it probably three to four months. And when you start talking to when we get a closing date at all long documentation filed. The idea is to have UP Offshore poised in a good way and to be ready to take advantage of things that come in place, because well, they are likely that the margin is conscious to say, I don’t know, that’s a good idea, let’s go and do it. It takes a while. So, I am expecting that the future forward-looking statement is that UP Offshore will be able to leverage the assets that we might buy together with its own under leverage situation and there will be moderately eight vessels.

[Unidentified Analyst:]

Great, okay. Great progress this quarter. It sounds good guys.

[Damian Scokin:]

Okay.

[Operator:]

Thank you, speakers. You may now proceed.

[Damian Scokin:]

Well, thank you very much for taking part on the call and we look forward to our next call in three months’ time. Thank you very much.

[Operator:]

Thank you, speakers and that concludes today’s conference. Thank you all for participating. You may now disconnect.