IQ Ultra Short Duration ETF
Q3 2015 Earnings Call Transcript
Published:
- Operator:
- Welcome and thank you for standing by. At this time all participants will be in a listen only mode until the question and answer session of today's conference. [Operator Instructions]. I would now like to turn the call over to Mr. Leonard Hoskinson. Sir, you may begin.
- Len Hoskinson:
- Thank you, Glenn. Good morning everyone and welcome to Ultrapetrol's conference call to discuss the company's third quarter 2015 earnings. I would like to remind you that this conference call is now being webcast at the company's website. There are also additional material is related to our earnings announcement on our website including the 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 the factors that could cause results to differ, please see the company's file 20 F and the press release and 6K that was filed yesterday, as well as the company's prior filings with the SEC on slide two 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 us an overview of the third 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 the closing remarks with Damian we will then be happy to take your questions. So, Damian over to you.
- Damian Scokin:
- Good morning everyone and I am pleased to join you for today's conference call and I look forward to taking your questions after briefly discussing our business, the broader market environment and our progress in implementing our strategic initiative to strengthen Ultrapetrol across a wide range of metrics. If we turn to slide three you can see a summary of our third quarter and first nine months results compared to a third quarter first nine months of 2014. These are broken up by segment. Overall, our results were very negatively impacted by difficult market conditions including the ongoing difficulties of Petrobras and historically low cost commodity prices in the river. On a year-over-year basis, however, this was more than offset by the entry into service of the RSV UP Coral and the tanker vessel Mentor, as well as our success in implementing our strategic initiatives to improve operational and financial performance. Adjusted EBITDA for third quarter results 2015 was $17.9 million up from $13.7 million in 2014. Total segment adjusted EBITDA which excludes the impact of foreign exchange effects, was $21.2 million for the third quarter of 2015 up $15.5 million from the 2014 quarter. Despite the persistence of difficult markets across our segment we continue to advance our strategic initiatives to certain Ultrapetrol's operation of efficiency, cost controls and organizational across the business. I will now provide you with a more in depth look at what are we doing in each of the business lines and how that is translated into improvement of segment key performance indicators. I would like to highlight that for the full year 2015, we now expect to generate an EBITDA in a range of $51 million if we estimate a breakeven Q4 but it could be close to $55 million. This will depend on revenues in the river business and also on the effect of further devaluation of local currencies that may affect our overall numbers. If we turn to slide five, you can see that the market headwinds we discussed last quarter have continued to put a downward pressure on the demand for river transportation of both iron ore and soybeans. Historically low commodity pricing has resulted in reduced industry volumes in the Hidrovia and that's a lot of barge capacity that we estimate at approximately 25% in the dry sector. This over capacity has put a significant pressure on freight rates which we estimate that at the industry level were down 16% from the 2014 period. To put this into context, if industry prices had been the same as in 2014, our third quarter 2015 river business adjusted EBITDA would have been approximately $6 million higher. The fact that our adjusted EBITDA in the segment was significantly improved from the prior year period, despite the weak market speaks of the extent of the cost savings and efficiency improvements that we have achieved. On slide four, slide six, excuse me, you can see the impact of the our strategic initiatives in our river business KPI's for 2015 third quarter versus the prior year. Most visibly among the changes we have introduced, our decision to implement the point-to-point operation model has resulted in faster transit times and cost efficiencies. Our specific cost-reduction initiatives have also shielded positive results with additional profit perspective as we continue to pursue an optimal headcount and fleet size eliminating redundancies and temporarily laying out pushboats and barges that would not be profitably employed in the current environment. Our improved material systems have enabled us to clearly see where such opportunities exist in real time and when we have identified an opportunity we have not hesitated to act on it. I will specifically draw your attention to the 38% increase in dry barge turns. In addition we have implemented other cost savings initiatives which resulted in a 59% decrease in pushable cost per ton, other than crude when compared to the same quarter of 2014. Our goal is to maximize our return on assets and we have made great progress in that despite the challenging river market. Other third quarter river developments include the sale of three barges to third parties supporting our quarters result and the continued take of employment of our [indiscernible] charter and [indiscernible] island transport facility, the latter of which moved 230,000 tons of iron ore during the quarter. Both of these take or pay contracts contribute to our ability to more predictably and consistently utilize our assets smoothing out our cash flows and reducing unpaid of hirer. Turning to slide eight, the persistence of oil prices half of what they were in 2014 has according to the International Energy Agency, brought about the 20% decrease in upstream oil and gas CapEx globally and surprisingly this reaction has placed significant pressures on offshore supply markets including those in Brazil. As a result of this situation, as well as continuing internal struggles, Petrobras continued to execute its previously announced divestment plan during the quarter while also reacting to the weak market at subsequent oversupply of unemployed PSVs by canceling the contract of a number of foreign flag PSVs including three international flag vessels that are part of the UP offshore fleet. Similarly our international flag PSV Ultrapetrol was blocked by Brazilian flagged fleet early September. While the offshore market in the north sea and Brazil remain depressed the majority of our PSVs continue to be profitably employed on long-term contracts and we believe that we're well-positioned to maintain those contracts moving forward by year two of our foreign flag vessels and our success in securing river rights over other vessels enabling them to trade on equal footing with resilient flag vessels. On slide nine, you can see the impact of drastic oil price decrease on rig utilization across different geographies as well as the impact on spot market rates and idle PSV tonnage. The pullback in energy CapEx can be seen across global offshore markets with the most heavily affected area being Asia, Australia which has seen rig utilization plans from 85% to under 60% over the last year. Looking at Petrobras in particular you can see that the southern decline in dark gray line in the upper left graph which corresponds to the reduced CapEx plans which included a recount target of approximately 35 by mid-2016. Approximately half of what they previously intended. As of October this year Petrobras is guiding to an 11% spending decrease in 2015 and a further 30% in 2016. All of these has resulted in a 57% decrease in North Sea spot rates bringing the prevailing rate to well below OpEx which we found necessary to lay out our two PSVs in that market. Our capital was far from unique in reaching that conclusion as you can see in the lower right the idle PSV fleet has increased by 62% since October 2014 putting further pressure on employment opportunities. On slide 10, we can dive into a more of the specifics of our offshore supply business development and operating performance. Throughout the quarter the UP Jasper and UP Agate remained laid up in the North Sea and they have been since April as a result of North Sea spot rates that have remained below OpEx. As we mentioned previously, we have presented these vessels on [indiscernible] as we have also done with the UP Esmeralda the and UP Amber. This tendering process has been considerably delayed but it remains underway. Despite the difficulty in the overall market, our high spec RCV Coral commenced operations on a long-term charter to Petrobras in August 2015 and have continued to perform as we had hoped. Even as Petrobras has reduced the scope of its EMPs aspirations the company relies on [indiscernible] charter PSVs and RSVs to not only expand its rig footprint but also to provide the ongoing support maintains and diagnostic necessary to maintain the existing offshore presence without significant degradation of the assets capability. Our vessels make up a crucial part of the offshore energy market and we're proud of UP offshore's hard won reputation as a top-quality operator. We continue to believe that there are additional opportunities to provide the more differentiated higher-margin services made possible with an RSV. Last Tuesday we presented five of our vessels and the [indiscernible] effectively asked Brazilian vessels into a Petrobras tender in which we're competing with other 22 vessels. We expect to have news on the outcome of this tender in early 2016. In looking at the KPIs for these segments I would like to point out that while the global offshore market environment has negatively impacted our overall performance in the quarter, if we were to look at the quality of the operations themselves by excluding the impact of the vessels that were removed from service either in the North Sea or in the Petrobras contracts we would see improvements of 8% to 10% in revenue of higher and running costs per calendar day. It would of course be inappropriate to dismiss the importance of these impacts on the bottom line but it remains if I did not highlight that real progress has been made in strengthening what was already a very well-run efficient offshore supply business. Looking into slide 12, we continue to make progress in improving our segment of operational performance, increasing revenue per calendar day and average number of turns per quarter by 27% and 24% respectively, while also decreasing on plant off higher days by 5%. As we look for opportunities to operate the business in a more asset like basis we sold our vessels Esmeralda and replaced it with a bareboat charter vessel Mentor which is servicing a three-year contract with Petrobras that commence in June 2015. We're also looking for new employment opportunities in foreign markets for the Alejandrina which is currently laid up. Finally in support of our organization I won't go into detail on all the general changes that were implemented to our HR and IT systems but I will reiterate that we're focused on improving management capabilities and skills at all levels of the organization, streamlining decision-making processes, improving our management system and installing a corporate culture of accountability, efficiency and customer service. With that I will hand the call over to Cecelia for her review of the financials.
- Maria Cecilia Yad:
- Thank you, Damian. On slide 13 you have a condensed version of the company's balance sheet as of September 30, 2015 versus December 31, 2014. As of September 26 we had a cash and cash equivalent on hand of $45.8 million plus $11.3 million of restrictive cash [indiscernible] total of cash of $57.1 million. The cash on hand includes $30 million from the drawdown we have made throughout the year from our revolving credit line available which will become due next year in quarter two. During the third quarter of 2015, we had CapEx of $5.2 million from which $2.5 million we're mainly related to the maintenance CapEx in the river segment and $2.7 million related to the drydocks in all segments. Throughout the third quarter, we remain in full compliance with all our covenants. And with that I would like to turn the call back to Damian.
- Damian Scokin:
- In summary I would like to again emphasize that despite the continued difficult market conditions we face our determination to implement our strategic initiatives and improve efficiency consistency and predictability of our business has resulted in significant improvements across our business line. We continue to be focused on putting [indiscernible] to fully benefit from any improvements in the market conditions. We believe that there is real value in Petrobras high quality assets, long term contracts and deep customer relationships and we're single minded in our pursuit of every opportunity to unlock that value and create long term value for our shareholders. I would also like to thank all of you for joining us on today's call and we would be happy to take your questions.
- Operator:
- [Operator Instructions]. Our first question comes from Mr. Douglas Karson. Sir, your line is now open.
- Douglas Karson:
- If you could possibly share with us a little more color. It may not be simple to do so but as you kind of read down your press release, you discuss that you've engaged an outside financial advisor to explore strategic alternatives. Can you elaborate on that at all if possible?
- Damian Scokin:
- We hired an outside advisor to look into all improvement opportunities from the operations of all our business lines and also strategic alternatives of acquisition merger and even from a balance sheet perspective. That's the range of this call.
- Douglas Karson:
- Okay. So one range.
- Damian Scokin:
- Yes.
- Douglas Karson:
- And then earlier in the prepared remarks, I'm not sure if I took this down correctly. Did you say that EBITDA for the full year was going to be in the range of $51 million to $55 million?
- Damian Scokin:
- That's correct.
- Douglas Karson:
- Okay. Am I interpreting that that the fourth quarter then is going to be kind of close to breakeven because I think you're running close to 50 LTM. What does that tell us about the fourth quarter given the year-to-date numbers are close to 50?
- Maria Cecilia Yad:
- Year-to-date numbers are close to $51 million. That's the reason why we are mentioning that we could be also on the positive side to $55 million. It will depend on the how the river business performs. So you know this is the [indiscernible] for the river November and December but if the river performs as we are expecting and [indiscernible] then we will be able to make money in Q4 and be able to be closer to the $55 million more than the $51 million. We would avoid being breakeven in Q4. But it will depend on the river and also if we have some sort of continued devaluations in mainly in Brazil markets.
- Douglas Karson:
- It looks like from last quarter there's some seasonality in Q4 making it a more difficult or difficult quarter. Is the seasonality a big part of why Q4 is going to be so weak or is it because you're having significant problems in the river business.
- Maria Cecilia Yad:
- No, no, it's not a problem in the river business. If you look at the figures from previous years mainly in Q4 last year we lost money in Q4 and in the river business historically the river has been losing money in Q4. It was mainly seasonality and also our inability to adapt the cost when the cargos goes down. Now that we are more on top of the cost and controlling the operations, we believe we would be able not to lose money in the river and if this is the case then we will be able to say that we will make money in Q4.
- Douglas Karson:
- Right. I guess I'll circle back to the first question and get a little more out of that. I don't know if you can give us any more color but with the outside financial advisor are you more focused on looking to streamline operations, improve costs, look at how to improve profitability or is it more along the lines of like balance sheet like reshaping.
- Damian Scokin:
- As I mentioned before the scope is very broad and we will be happy to share the outcome of that process while it's finished.
- Operator:
- The next question will come from Mr. Michael Schlembach. Sir, your line is now open.
- Michael Schlembach:
- I want to ask first about 3Q and the river. Year-over-year margins are up substantially and I think it's pre-SG&A the highest margin in the river business in many years at least better than 2010 through 2014 for the third quarter, which is a big quarter for you guys. So what contributed the most to that gross margin improvement? How much of that is just fuel or currency and how much of it is real operational improvements. I saw the running cost was down a thousand basis points as a percentage of revenue or 700 basis points or something. Can you talk a little bit about what's driving the margin improvements in River?
- Damian Scokin:
- Yes. I would say that -- remember that most of our contracts in the river are adjusted by fuel price so on a margin basis the reaction in oil prices does not help us with the EBITDA margin. So I would say 100% or 90% of the EBITDA improvement in the context of lower tonnage and lower prices comes from cost savings initiatives and the change of operational model.
- Michael Schlembach:
- I mean it's pretty significant. Do you think that this is repeatable going into next year?
- Damian Scokin:
- I'm very reluctant to promise anything but obviously this totality in net operating without any cost. So I expect a lower rate of reduction but we are optimistic on finding new opportunities.
- Michael Schlembach:
- Secondly, turning to the offshore supply business, this tender that you mentioned putting the vessels in, is that the next opportunity for redeployment or is there anything between now and then in terms of discussion with Petrobras.
- Damian Scokin:
- No. This is the only tender that was open with Petrobras other than for PSVs other than one additional that is still open within the next 10 days for RSV which we will be also participating.
- Michael Schlembach:
- So that RSV tender closes in 10 days and -- say again?
- Damian Scokin:
- Yes approximately in 10 days.
- Michael Schlembach:
- And you have submitted tender for a contract similar to the retrofitting of the current RSV that you started in August?
- Damian Scokin:
- We're in the process of familiar tender, you're right.
- Michael Schlembach:
- And what's the timeframe for hearing back on that tender as well.
- Damian Scokin:
- If I am ready to talk about next year cost, imagine about Petrobras timing these days.
- Michael Schlembach:
- Okay and then finally the same question I had in the river business for the ocean business where it looks like kind of the opposite happened just with regards to cost margins being down, costs being up. I realize that this, unlike the river business where gross profit before SG&A applied was 16. I realize it's half a million bucks so it's -- from a magnitude perspective on how it impacts the overall company less. But just wondering what -- what's going on there and if there are reasons for the decreased margin were one time in nature or going to be recurring?
- Damian Scokin:
- The ocean business we are affected by two major forces. One is the labor and locally denominated costs which in dollar terms when you translate the Argentine peso cost into dollars, the official rate I mean our cost increased significantly. That's one thing and there are onetime events of the sale of two vessels over the year that had affected us significantly.
- Michael Schlembach:
- And then finally turning to the company hiring financial advisors, is it fair to say that with the near-term maturities in a relatively more uncertain future on the offshore supply business side, that the balance sheet of that particular piece of the business is going to be one of the priority focuses? That's question one. And question two on that is talking about M&A, is one of the things that you're considering in Southern Cross is considering might be selling the river business to fund debt paydown's and basically splitting these two businesses given the potential interest in the river business from a few parties out there.
- Maria Cecilia Yad:
- When you mention about the hiring a financial advisor that we have been discussing in negotiations with the offshore lenders since say six months ago. And negotiations have been delayed after the special [indiscernible] counsel three-hour vessel but we continue with negotiations and we should expect to reach an agreement with them, the sooner the better, we are expecting to cover some outcome of the negotiations before year end. The financial advisors are assisting on that but also as Damian mentioned we are looking at all the strategic time as possible in order to strengthen our balance sheet. And that could mean improving the business segments, improving the operations and we can see some opportunities so for measuring or acquiring companies [indiscernible] but it is too early to comment on that.
- Michael Schlembach:
- Okay and to the second question anything you can say to that on business lines what might be -- what might be evaluated their?
- Maria Cecilia Yad:
- We haven't made any decisions so far so there's nothing to comment on that on this stage.
- Operator:
- The next question will come from Jacob Miller [ph]. Sir, your line is now open.
- Unidentified Analyst:
- The implication of the flat EBITDA for the fourth quarter would seem to imply zero EBITDA for the offshore side. Can you explain the dynamics of why that would be?
- Damian Scokin:
- You'll have to go again, Jacob. Tell us again the question.
- Unidentified Analyst:
- Yes. You have guided the fourth quarter to a flat top EBITDA depending on what happens in the river side, which would seem to imply that the offshore business will be running at a flat EBITDA. What's driving that number?
- Maria Cecilia Yad:
- No. We are not suggesting offshore being in a flat EBITDA. On the contrary what we're saying here is potentially the offshore EBITDA would be upset by the other segments EBITDA. If we are not performing as we are expecting the river and also we are having some additional costs in the ocean business.
- Unidentified Analyst:
- Or put another way, there's a lot of pieces that have moved around in the offshore business. You now have nine of your 14 vessels operating. If the whole thing is staying equal and nothing changes what are the run rate EBITDA for the oil business, currently?
- Maria Cecilia Yad:
- Well [indiscernible] we never mention this we cannot comment on this. Perhaps for Q4 we will be able to give you some guidance for the coming year.
- Damian Scokin:
- Jacob, just to correct that number. It is eight vessels operating not nine.
- Unidentified Analyst:
- You have two laid up and three got laid up, so isn't that five out of 14? What am I missing?
- Damian Scokin:
- Yes, the Turquoise is also still not employed.
- Unidentified Analyst:
- I don't know you guys want to talk about next year but fourth-quarter, what are we looking for in the ultra-side?
- Damian Scokin:
- We haven't itemized this -- you're asking us for the run rate for the fourth quarter, Jacob. We haven't disclosed that kind of information before. You've got the time charter rates. You know what the expenses are, you've got that --
- Unidentified Analyst:
- I'm not sure what the expenses are as far as the laid up vessels -- I guess would be the piece that's missing.
- Maria Cecilia Yad:
- You could assume a range of $2,000 per day per vessel.
- Operator:
- We show no further questions at this time.
- Damian Scokin:
- Thanks everybody I'm looking forward to our next conference call on the fourth and full year results. Thanks.
- Operator:
- That concludes today's conference. Thank you for your participation. You may disconnect at this time.
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