IQ Ultra Short Duration ETF
Q3 2014 Earnings Call Transcript

Published: 13 Nov 2014

[Operator:]

Welcome to the Ultrapetrol (Bahamas) Limited Third Quarter Earnings Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Len Hoskinson, Vice President of the company. Sir, you may begin.

[Leonard J. Hoskinson:]

Thank you, and good morning, everyone. Thank you for joining us on the call today. Welcome to Ultrapetrol (Bahamas) Limited conference call to discuss the company's third quarter 2004 (sic) [ 2014 ] 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 announcements on our website, including a 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 statement. For a discussion of factors that could cause results to differ, please see the company's 6-K and press release that were filed yesterday and the company's filings with the Securities and Exchange Commission, including, without limitation, the company's annual report on Form 20-F for the year ending December 31, 2013, filed March 12, 2014, as well as Page 2 of the slide presentation, that shortly follows. With me today is Horacio Reyser, the Chairman of Ultrapetrol's Board of Directors, a partner at Southern Cross and who's had the post of interim Chief Executive Officer over the last 2.5 months; Cecilia Yad, our CFO; and Ramiro Molina, our deputy CFO. You will note that we have changed formats of our investor presentation today. We will base the conference call on a few summary slides. Our usual full quarter presentation is filed as an annex thereto. Horacio will give an overview of Ultrapetrol's third quarter results of its business segments and offer some guidance on how the company is looking into the future, how EBITDA may look at the end of 2014 and how, following the successful implementation of a 2-year plan we embarked on, EBITDA could look in the future. Horacio will also take the opportunity to introduce you to our new Chief Executive Officer, Mr. Damián Scokin, who took up his new position this last Monday, November 10. Damián will also add a few words by way of his own introduction. Cecilia will take you through the financials, and after our remarks, we will be happy to take your questions. And now I hand the proceedings over to Horacio.

[Horacio Reyser:]

Thank you, Len. Good morning, everyone, and thank you for joining us on the call today. As we go through the materials that we have filed today, we will reference the slide number that corresponds to the information we are discussing. As Len mentioned, this is a particular call since we are finishing a transition period in which I have acted as interim CEO. Our new CEO, Damián Scokin, has just joined the company this week, and I take the opportunity to thank the whole management team and to welcome Damián. As I mentioned in our last investor presentation, when Southern Cross made its initial investment in December 2012, 3 ways to create value in the company were identified. The first one was to strengthen the balance sheet of the company to be able to resume growth in its core businesses, which was executed through a $220 million capital increase in the company, which allowed to pay over 100% of an $80 million convertible bond and to refinance $180 million of long-term notes; second, to expand the offshore fleet, which increased from 8 to 14 vessels in operation; and finally, an opportunity to take the return on assets of the River Business to what are considered reasonable industry benchmarks commensurate the with strategic position we have in the Parana Paraguay waterway. In the River Business, significant progress has been made, but many of the initiatives, which also include improvement in processes will require some time to mature. In this end, the incorporation of Damián Scokin, our new CEO, with substantial experience in transportation and logistic, is a key step towards achieving these targets. As you will see when we go through the presentation, the River Business is a segment, which has faced challenges during this year, which reflected on the present quarter, which is totally consistent with what we expected to encounter, as I just mentioned. Now going to the presentation. In Slide 3, you will find a summary of our 9-month and third quarter results for 2014 compared to the equivalent periods of 2013. The previously announced purchase by Sparrow Capital Investments Limited, a subsidiary of Southern Cross Latin America Private Equity Funds III and IV, from Hazels (Bahamas) and Inversiones Los Avellanos S.A. of all their astounding equity interest in the company has been completed. Southern Cross interest in the company has thus increased from 67% to 85%, and all of the shares in the company now carry one vote per share. As mentioned, Damián Scokin has joined Ultrapetrol as CEO the past November 10. Revenues in the third quarter of 2014 decreased $13.2 million or 12% compared to the same period of 2013, impacted mainly by less tons transported in the river, no third-party sales in the shipyard partially compensated by higher offshore revenues. For the 9 months ended September 30, 2014, the recorded adjusted EBITDA is $58.7 million, which compares to $82.1 million obtained in the same period of 2013. The adjusted EBITDA for the quarter decreased by $16.5 million, of which $2.3 million corresponds to extraordinary foreign exchange rate, net effects benefiting 2013 and $3.8 million corresponding to third-party barge sales to the same -- during the same year. Let us turn to Slide 4. In the table at the top of the slide, you will find our third quarter 2014 segment adjusted EBITDA compared with those obtained in each business segment in the equivalent periods of last year. The total segment adjusted EBITDA for the third quarter of 2014 was $15.5 million compared to $24.7 million obtained in the same period of last year. As with revenues, the main difference versus previous year corresponds to the River Business, which is partially compensated by offshore and ocean. We have a negative $11.5 million or a decrease in our River Business segment adjusted EBITDA, which results mainly from the difference between a total of 10 barges sold to third parties from our shipyard in the third quarter of 2013 against no barges sold to third parties in the same period of this year. We have also suffered a decrease in revenues from River operations mainly related to lower availability of some of our larger pushboats during the whole of 2014, which has affected our operating plan, resulting in lower volumes being transported in the third quarter of 2014 compared to previous year. During the third quarter of 2014, we operated an average of 20% less pushboats than required as compared to only 6% average pushboats shortfall during the same period of 2013. Our Offshore business performed strongly during this quarter with 14 vessels in operation versus 10 last year. The company has benefited from increase in revenues of our 3 new PSVs

[María Cecilia Yad:]

Thank you, Horacio. In Slide 10, on September 30, 2014, our cash and cash equivalent were $50.1 million, the asset [ph] service restricted cash of $12.7 million showing an acceptable liquidity at the end of the quarter. The year-to-date level of our CapEx was $46.5 million plus $10.2 million in dry docking expenses. We have invested $25 million in our shipyards, as Horacio mentioned before, to produce barges for our own fleet. In addition, $14.5 million were invested in the underway construction of 2 port pushboats to be in operation by early Q1 2015. The completion of the re-engining program by the end of August and the construction of the agricultural transshipment station, which we expect to be in place next year by Q1 2015 as well. As for offshore, we have invested $4.5 million in the conversion of the UP Coral into an RSV as part of the pre-awarded contract with Petrobras, plus additional spares for the offshore fleet in whole. In Slide 11, we are showing our current debt repayment schedule having a balanced yearly principal repayments in the medium term with $10.4 million payment to be done through the year end. At the end of the quarter, the company was in full compliance with the covenants. And with that, I would like to turn the call back to Horacio.

[Horacio Reyser:]

Thank you, Cecilia. Now I would like to take the opportunity to introduce our new Chief Executive Officer who joined the company on Monday of this week. Damián is an experienced leader in the business of South American transportation and logistic, and we have full confidence in him and his ability to maximize the value of Ultrapetrol's core businesses for the benefit of all of its present and future shareholders. Damián, welcome to Ultrapetrol.

[Damian Scokin:]

Thank you, Horacio. First of all, I would like to thank Horacio and the rest of the board for entrusting me with the development of the next stage of Ultrapetrol's progress and continuing to unlock the full value of the company's leadership position in the core River and Offshore Supply business. While I have no direct involvement in the shipholding and operating business as far as in my career, I am looking forward to taking on the challenges that it will bring. I agreed to join the company for many reasons, not least of which is its history of success in the field study but also for the future and our exciting growth prospects in core businesses that have strong industry fundamentals. In my previous positions, I have promoted a commitment to engaging in a transparent and open dialogue with the investment community, and I look forward to continuing it here. I'm excited for the opportunity of accepting this chief executive officer role and to be working with Horacio, the board, Cecilia and the rest of the team. I truly believe in the company's potential and prospect for creating a long-term shareholder value. So again, thanks for this opportunity. And now, I hand the call back to Horacio, who will open the lines for Q&A.

[Horacio Reyser:]

Thank you, Damian. We are ready to answer your questions now.

[Operator:]

[Operator Instructions] Our first question from Ben Nolan, Stifel.

[Steven Tittsworth:]

This is actually Steven Tittsworth in for Ben Nolan. I was wondering if you could provide a little more information in terms of the River business. I know you operate at 20% on the pushboats in the third quarter of 2013. Just provide a little more detail behind that 20%?

[Horacio Reyser:]

Ben, I couldn't hear the last part of your question. Could you repeat it?

[Steven Tittsworth:]

Yes. Just I guess overall really looking for a little more color behind the River Business and the availability of the pushboat.

[Horacio Reyser:]

Okay. Yes, as I was mentioning before in the third quarter of this year, we -- and in terms of EBITDA difference versus our previous year, one of the very important aspects was that we produced in the shipyard for our own needs as compared to certain third-party sales during last year. That was an important part of the difference. Another one compared to last year was the unavailability of a certain number of pushboats, which is not -- it's something that is not only concentrated in this quarter but has been a situation that we had during the year, where a certain percentage of the fleet was unavailable due mainly to some technical reasons that we have and are in the process of improving but that did affect the operations, and therefore, certain volumes that were available to the company to be transported were not transported due to this fact.

[Steven Tittsworth:]

Okay. Okay. And I guess my final question would have to do with the barge building business. Like you said, you've been -- you were building some for your fleet for the quarter. What is the appetite you're seeing for -- among your customer base in terms of demand for new barges?

[Horacio Reyser:]

Yes. Regarding that, the first point I think we mentioned it in the presentation, I would see is the more fundamental trend behind what is happening and the attrition that the river system as a whole will suffer during the next year. We're in a situation where the volumes in the River Business have consistently grown during the last decade, and we don't foresee any change or any significant change in that tendency would create a very strong demand for barges. That's more the structural view that we have. We're convinced of that view. It is a medium- to long-term tendency, I would say. In the short term, we do have a pipeline of certain initiatives and of different customers that are looking at the regulations to see if they are effectively made, for example, the double hull's legislation. There is certain expectation that this will certainly come in place as it was announced. That's one element, and then there are other elements that have to do with the regulation and the international legislation also about double hull, and then the -- also the needs for dry barges, given the demands going forward. All of that is reflected in a certain time line that we currently have. In terms of confirmation of certain orders, we cannot say anything concrete at this time. Some of these discussions are in the pipeline. Some of them are large requests. Some of them are smaller requests, may become effective at some point and may generate a significant activity for the shipyard. However, they are still, I would consider, pipeline and not concrete in terms of large orders at the moment.

[Operator:]

Next question from Michael Schlembach of JPMorgan.

[Michael Schlembach:]

I have a few, if I may, on some on each of the business lines. What's the estimated start date of the new contract on the UP Coral? Awaiting formal board approval, assuming you get to that, it's sort of shaded into your graph there at early '15. Can you -- is it sometime in Q1 that you think it would start?

[Leonard J. Hoskinson:]

Michael, this is Len. Your questions come up to us at least in bits. It keeps coming in and out, and the volume.

[Michael Schlembach:]

Can you hear me better now?

[Leonard J. Hoskinson:]

Better now. Could you repeat the question, please?

[Michael Schlembach:]

Sure. What is the estimated start date of the UP Coral?

[Horacio Reyser:]

Our current estimation is the second quarter of 2015. It is -- the contract has been pre-awarded and required a final approval and formal approval by the Board of Directors of our customer, which is expected in the short term, but -- and therefore, with that approval in the time that we are expecting it, it should come in operation by 2000 -- in the second quarter of 2015. The crane that was being built is on track in that sense, and therefore, we don't envision any further delays more than getting the final authorization that is required.

[Michael Schlembach:]

Next question. Should the Ocean Business be sold? What would the use of sale proceeds be directed towards? Does debt on that particular business have to be paid down? Or can it travel as part of the sale? If there are incremental sale proceeds, what is the expected use of proceeds?

[Horacio Reyser:]

As you know, the ocean -- sale of the Ocean Business is an option that has to follow certain guidelines, as was agreed in the purchase agreement and the transaction. We are still, I would say, in the process of getting the independent valuations. After that, it would require the approval of a majority of interested directors of the company, including the independent director and agreements with terms and conditions. That -- we're a little bit early in that process, but -- and therefore, we don't have any clarity if this is going to happen or not. We have not, therefore, planned any use of receipts for that business because we, as I mentioned it, it was early times. However, in terms of a general view of the company going forward, offshore is a place where we think there still exist opportunities for growth. Our participation in the RSV opportunity that was pre-awarded is an interesting one for the company and opens the opportunity for other investments in the company, and that could be an alternative also. Debt reduction, as you know, we target to reach conservative levels of leverage in the long term, a first step of which was achieved with a capital increase that was made in the company. So it could have any of those 2 destinies if it were to happen, which, as I was saying, is still a bit early for us to say.

[Michael Schlembach:]

Turning to the River Business. I have 2 questions. The first is that one of your competitors said on their second quarter call that river conditions were too high, and it looks like that the levels remained elevated throughout the second and third into the -- well, into the third quarter. How much of the quarter was affected by extremely high water levels? And what does that mean for the fourth quarter of this year?

[Horacio Reyser:]

I would say that for this particular quarter, we did not have any significant impact of the water levels. This did affect our previous quarters, as was explained in our previous presentation, and affected the yearly results. Mainly concentrated in July, I would say. Going forward, what you say is important because the river levels are good, and it could generate opportunities to transport additional cargoes that we're currently not forecasting in the -- or included in the general guidelines that we just shared with you, but it is a little bit too early to say. And these cargoes generally appear more on a spot basis and could be a source of additional cargo, but we're not assuming that those cargoes are going to be there for the meantime.

[Michael Schlembach:]

And my second question on the River Business is this technical issue on the pushboats, has this been fixed? Or is this something ongoing? I mean, why weren't they available?

[Horacio Reyser:]

I would say with the process to you pursue a maintenance program as we think it has to be done is there, and therefore, for the campaign of next year, we believe that we are going to be in a much better qualitative position than in previous year. And the reason why they were out of service in general has to do with that sometimes the maintenance is a bit -- is delayed because of cargo opportunities, et cetera, that in general appear as opportunities for the company. We're working in a more disciplined way going forward and pursuing all the maintenance that has to be done to the pushboats in order to be available at the peak moments of the year, which is starting in March and goes in general to the mid of the year and a little bit more. So what I can tell you is that for this year, the maintenance of the pushboats will be done in a disciplined way. That is one thing. The other thing is that there was a lack of certain port pushboats and that is being sold with the construction of pushboats -- port pushboats that will come in operation during 2015, which generate delays at the ports. It's not -- it did not affect the tranches, but it did affect the transport or the tranches but on the ports that finally do affect the cargoes finally transported. So I would enmark [ph] this in what we could consider are the initiatives that will take the company to a more predictable profitability during the next years. Also, another important factor is the programming and training of the crew, especially in Paraguay, which is something that we are working on, which also we believe will improve operations. We also have one new heavy fuel pushboat, the Espiritu Paraguayo, which will be in operations during 2015, which was not in operation during most of 2014, and that is also a qualitative change versus the operation of this year.

[Michael Schlembach:]

I was surprised to see that you didn't mention in the presentation, although it was set in the financials, the onetime expense for severance was $5.7 million for the previous management team. That is onetime, right? So I mean, when you guys are talking about doing $66 million to $72 million of EBITDA for the full year, that includes that charge. Without that, you'd be $72 million to $79 million. Is there any reason why that wasn't more explicitly a onetime item? Is there something ongoing there? Or what am I...

[Horacio Reyser:]

Yes, no. That is definitely a onetime item and because of this, when we set the guidance, we already excluded that item. And therefore, it is not as you were suggesting that it would be higher, but it already contemplates that issue.

[Michael Schlembach:]

Okay. So the $58 million year-to-date EBITDA, you're saying would be $60-something million without -- with that charge removed? Or it would be $53 million or whatever?

[María Cecilia Yad:]

Yes, let me clarify. The $59 million that you are talking about, we need to discount the onetime effect. So in reality, including such effect, it will be the EBITDA for the quarter, $53 million, and then the guidance is $66 million and $74 million.

[Michael Schlembach:]

I appreciate that. And then lastly, 2015 CapEx. Can you guys give us some type of guidance on what you think you're going to spend maybe in the first half of the year, if not the full year? And that's my final question.

[Horacio Reyser:]

At this time, we cannot give information about that. We're working on the budget for next year. We're in the final stages of preparing the budget for next year. And since we have not finalized those figures, we prefer not to share them with you still.

[Operator:]

We are showing no further questions. I would like to turn it back to Mr. Reyser for closing remarks.

[Horacio Reyser:]

Okay. Thank you for participating in our call. Thank you for all questions, and now I will call the presentation to an end. Thank you very much.

[Operator:]

Thank you. This does conclude today's presentation. You may disconnect at this time.