IQ Ultra Short Duration ETF
Q2 2013 Earnings Call Transcript

Published: 14 Aug 2013

[Operator:]

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn over the meeting to Ms. Cecilia Yad, Chief Financial Officer. You may begin.

[Cecilia Yad:]

Good morning, everyone. Thank you for joining us on the call today. Welcome to the Ultrapetrol (Bahamas) Ltd. conference call to discuss the company's second quarter 2013 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 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 statements. For the discussion of factors that could cause results to differ, please see the company's 6-K and press release that we have 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, 2012, filed March 14, 2013, as well as Page 2 of the slide presentation that shortly follows. With me today is Felipe Menendez, Ultrapetrol's President and Chief Executive Officer. Felipe will review Ultrapetrol's business segments, as well as discuss our industry and future growth opportunities. I'll take you through the financials. And after our remarks, we will be happy to take your questions. And now I will hand the proceedings to Felipe.

[Felipe Menendez Ross:]

Thank you, Cecilia. Good morning, everyone, and thank you for joining us on the call today. In order to make the best use of the material that we have filed together with our press release, as we go along, we will reference the slide number that corresponds to the information that we are discussing. Let's turn to Slide 3. In Slide 3, you will find the summary of our second quarter results for 2013 compared to the equivalent period of 2012. The adjusted EBITDA for the period is $32.6 million, which compares with $9.6 million in the same period of 2012, while our adjusted net income and adjusted earnings per share are $12.5 million and $0.09, which compares to a net loss of $7.9 million and $0.27 in the same period of 2012. As you will notice, this brings our adjusted EBITDA for the first 6 months of the year to $51.9 million, which compares with $16.8 million in the equivalent period of last year. As usual, we adjust the net income and earnings per share of the second quarter to reflect the increase in the provision for exchange variance in our Brazilian subsidiary, which is a noncash effect, produced solely by the devaluation of the Brazilian currency against the U.S. dollar. The most significant event this quarter was the placement of a new $200 million bond, due 2021, at an interest rate of 8.875%. The proceeds from this bond have been used primarily to repay the $180 million facility that we had outstanding due in 2014. This is a significant change in the profile of our outstanding debt that will now allow us to use the company's substantial cash flow to invest in growing our core businesses. Another piece of good news was confirmed early in the third quarter as we signed the agreements for the sale of another set of 7 tank barges from our Punta Alvear barge building facility. As previously announced, we expect to deliver these units by the end of this year. Finally, we have acquired the minority interest of 5.5% from Firmapar in our now 100% subsidiary UP Offshore. We believe this is an accretive transaction that completes our ownership in this very important subsidiary. As you know, we have focused on the growth of our River and Offshore segments as the key drivers of our future and where we are going to be making significant investments in the future. In this context, acquiring this minority interest is particularly attractive. Let's turn to Slide 4. In the table at the top of the slide, you will find the comparison between the second quarter 2013 EBITDA per segment and those obtained in each business segment in the equivalent period of last year. It is clearly noticeable from this table that our River business results were substantially better than those obtained in 2012, which, as we have discussed in the past, were severely affected by the conjunction of a severe drought that cut the crops in half and very low river levels which affected the navigation and overall efficiency of our transportation. The second quarter 2013 also benefited from a larger number of barges delivered to third parties from our Punta Alvear facility. We will be discussing these changes, as well as the most important factors to consider in our River business going forward, in a second. As you can see, neither our Offshore nor our Ocean Business reflect significant changes when comparing the second quarter 2013 results with the same period of last year. As you will notice when we discuss our Offshore business in more detail, there have been very positive changes in this segment. We have added 2 new vessels, which are fully contracted at attractive rates, and we have renewed the charters of our 4 existing ships at significantly higher daily charters. The impact of these changes however, will only be noticeable in a significant way in the third and fourth quarters, as these new rates not only become applicable at the end of the second quarter, and the new vessels will only start operating in July and October, respectively. Finally this quarter, we have had a positive impact from foreign exchange variations equivalent to $5.2 million in cash, as opposed to a negative variation of $3.4 million in the same period of last year. Turning to Slide 6. You will find a comparison of second quarter 2013 River business results against those obtained in the same period of 2012. As you can see, our River segment in the second quarter of this year produced a segment adjusted EBITDA of $20.5 million compared to a segment adjusted EBITDA of $5.4 million in the same period of 2012. In the second quarter 2013, we carried the total of 1.35 million tons of cargo compared to 1.2 million tons in the second quarter of 2012. That is 13% more cargo carried. The same figure for the first 6 months of 2013 show an increase of 23% over the volumes carried in the first half of 2012. The first obvious difference between both periods is that this year, with a normal rainfall, we have experienced a substantial vessel craft [ph], which coupled with continued demand from iron ore, and normal river levels, have allowed us to use our fleet more effectively. It is important to note that the revenues have increased more than proportionately in relation to volume when comparing 2012 with 2013. These revenues, as well as voyage and manufacturing expenses, include the sale of barges to third parties. The comparison requires segregating the revenues associated purely with transportation activity. Within the second quarter, the revenues related to transportation increased by 38% when compared to the equivalent period of 2012. This increase reflects of course, the 13% increase in volumes, but also the effect of stronger freight rates that have stemmed from the renewal of our 3-year transportation contract, a significant portion of which expired at the end of 2012. Our running costs during the period were higher by 29% than those experienced in the same period of 2012. As you can see, the same tendency is reflected when comparing the first 6 months of 2013 with the equivalent period last year. These increases partly relate to the higher volumes transported, 23% in the first half of 2013, but they are also reflective of higher costs, in particularly, those related to crude. When comparing administrative and commercial expenses to those incurred in previous periods, you must be aware that due to a different allocation per quarter in 2013 than we followed in 2012, we generally showed a negative variation of these expenses in quarters 1 and 2, which will be followed by proportional positive variations in quarters 3 and 4. And therefore, the change of 78% that you see in administrative and commercial expenses should be mostly neutralized by year end. Let's turn to Slide 7. In the bar chart at the top left, you will see the USDA statistics for the Paraguayan soybean production for the past 10 years, as well as their 2013 estimate. As you can see, the soybean crop is expected to grow from 4.4 million last year to 9.4 million in 2013. The compounded annual growth of the soybean production has thus been 7.6% for the past decade. And the seeded area in 2013, despite a very bad year for farmers in 2012, grew almost 7.5% over the seeded area of 2011. In the graph at the bottom left, you will see the levels of the Paraguay River for 2013 compared to the 10-year median and the equivalent levels in 2012. As you will see, this year, this river has returned to its normal level, far above the very abnormal lows that we experienced last year. Finally, in the graph at the bottom right, as you can see, soybean prices have remained relatively high, creating further incentives for farmers to grow the seeded area again next year. Let's move to Slide 8, where you will see a similar graph depicting the evolution of the production of iron ore for the past 10 years in the mines that affect the region. The graph shows that despite MMX reduced production this year, the other 2 mines operated by Vale will bring the total production to 6.8 million tons. Iron ore prices have remained lower than the average 2010, 2013, but above early projections from where we expect the total volume shipped down the river will probably remain unchanged. In Slide 9, you will see a graph that depicts the growth of the capacity of our own fleet over the same 10-year period, which shows a 6.4% compounded annual growth. If you project the same growth over the next 5 years, our capacity would grow approximately 30%, reaching 1.64 million metric tons. Our added efficiency can, of course, increase the carrying capacity of the fleet well beyond this percentage. Let's turn to Slide 10, where you will see a picture of our automated barge building facility at Punta Alvear, which is now working 2.5 shifts and producing simultaneously dry and tank barges, both for our own fleet and for third parties. As you will recall, we started working in this yard in January 2010, and our first year in full production mode was 2011. As we obtained higher productivity rates and we secured orders to produce barges for third parties, as well as for our own fleet, the yard has made a significant contribution to our total EBITDA. As you can see in 2011, we sold a total of 12 -- 20 barges to third parties with a total contribution of $6.4 million to our EBITDA. In 2012, the figures were 37 units to third parties and a contribution of $13.7 million. For delivery in 2013, we have already committed, as we have progressively announced, the sale to third parties of a total of 58 barges. At the same average contribution obtained in the previous 2 years, these 58 barges would contribute $20.5 million of EBITDA, still leaving additional capacity to expand our own fleet. In Slide 11, we show a brief summary of the 3 key initiatives that we have undertaken in our River business and that we have discussed with you in the past. We seek to replace pushboats that have old diesel-consuming engines by pushboats that have much larger heavy-fuel-consuming engines. The result of this program, which will be 68% executed next year, is that we are increasing year by year our fuel efficiency, operating fewer, more powerful, efficient boats and essentially reducing the cost per transported ton. We have operated successfully our own terminals, which have added cargo to our barges. And in the second half of 2013, we will inaugurate our new midstream transshipment facility, which will enter into a 3-year contract to tranship iron ore from barges to ocean export vessels and will add substantial EBITDA to future year results. As we have discussed already, our fully automated shipyard can produce barges at a substantial lower cost than sourcing them anywhere else, and this gives us a powerful growth instrument going forward, as we can obtain a better return on the investment in new capacity than our smaller competitors. Let's now turn to Slide 13 and talk about our Offshore business results. You will find here a summary of the second quarter 2013 Offshore Supply results compared with the same period of 2012. As you can see, the Offshore Supply segment adjusted EBITDA for the second quarter 2013 was $6.8 million, which remained basically unchanged from the same period in 2012. When comparing both periods, we must take into account that we had one more ship in the fleet, UP Jade, which entered into operation on August 10, 2012. Nevertheless, we also had, in the second quarter of 2013, 47 days of scheduled drydocks and repairs in the fleet, which neutralized the additional vessel and part of the higher charter rates that started to apply to our 3 renewed contracts, UP Agua-Marinha, Topazio and Diamante, at the end of the quarter. Without this of-hire time and with full effect of the new rates for the entire period as well as the renewed charter rate of UP Esmeralda from early July and the commencement to service of UP Amber, the third quarter will reflect the differential earnings of these vessels. Similarly to what we pointed out when analyzing the River business, you will note that the comparison of administrative and commercial expenses between the second quarter in both years generates a difference of $0.8 million, which will become mostly eliminated by year end as the third and fourth quarters will cause the inverse effect. In Slide 14, as we have previously discussed, the long-term projection for supply vessel requirements of Petrobras together with their latest announcements of another pre-salt discovery. We just wanted to bring this up as a context to our fleet's current employment and the prospect of future growth that we will be discussing in a minute. Let's turn to Page 15, where you will find a description of the 4,500 class PSVs that are currently contracted in Brazil. It is important to note that most of the pre-salt discoveries are in very deep waters and very far off the coast. As you can see, this newly reported discovery that we discussed in the last slide is 303 kilometers off the coast of the state of São Paulo. And consequently, will require the very large 4,500 class vessels to service the rigs working in these areas. As you can see, our fleet represents 21% of the available vessels in this class in Brazil, and approximately 40% of our capacity was built in Brazil and flies the Brazilian flag, which gives us certain advantages in terms of employment opportunities for these vessels. In Slide 16 now, you will find a summary of the employment of our vessels. As you can see, the new contracts for the first 4 vessels have been fully confirmed for the next 4 years, and they have all been delivered under these new agreements, which, as you can note in the summary reference A and B at the bottom of the Slide, will produce $7.8 million and $2 million, respectively, in additional EBITDA on an annualized basis over what these same vessels were producing in the past. Similarly, UP Jade, which entered into its 4-year contract with Petrobras on August 2012, is expected to produce an additional $4 million per year over her 2012 results. Finally listed in D, you will find UP Amber and UP Pearl, both of which have been delivered by the yard in India and which have also obtained a 4-year contract with Petrobras. UP Amber has already been delivered to Petrobras and UP Pearl will commence her service in October. On an annualized business, these vessels should produce an additional contribution of $12.5 million. The additional total segment EBITDA that these new contracts and new vessels are expected to produce on an annualized basis is $26.3 million, which almost doubles the $27.7 million EBITDA obtained by our Offshore Supply business segment in 2012. On Slide 18, you will find a second quarter 2013 versus 2012 comparison of the earnings of our Ocean vessels. As you can see, this segment's adjusted EBITDA in the second quarter was $152,000, which compared to $648,000 in the same period of last year. In administrative and commercial expenses, when comparing the second quarter 2013 with the second quarter 2012, you'll see here the reverse effect of the allocation of corporate overhead by quarter than we saw in our River business. These differences will tend to neutralize in all segments by year end, as we have explained before. While our tanker vessels remained under the same charters and produced a stable contribution in the second quarter, our container vessels experienced a reduction in cargo volumes, which extended into the first half of July 2013. The volumes for the balance of the third quarter are expected, however, to normalize. In Slide 19, you have a more detailed analysis of the situation we were just describing. Particularly, as you can see, the southbound revenues were reduced in the second quarter to $4.7 million from $6.4 million in the equivalent period of last year. While we believe that the period August to December will perform as expected in line with 2012, we do not believe that the shortfall of the second quarter will be recovered this year in the container trade. The long-term prospects of this service, however, remain very strong, and rates have increased significantly over the past 12 months, while northbound cargo has been growing consistently in the first and second quarter of 2013. With that, I will turn the call over to Cecilia, who will guide you through the financials.

[Cecilia Yad:]

On Slide 20, we show the breakdown across the core business segments for total revenues, voyage expenses and running costs. Felipe has already discussed the main highlights for each business, so we'll not repeat them here. Ultrapetrol total revenues for the Q2 2013 were $121.8 million, showing an increase of $42.3 million or 53% compared to $79.5 million for the Q2 2012. The increase was driven by the River and Offshore Supply businesses segments, which accounted for, of the total -- accounted for 85% of the total revenue in the second quarter. Operating profit for the company totalized $17.3 million for the quarter ending June 30, 2013, up from $3.5 million in the same period of last year, showing an increase of $13.9 million or 5.1x. The operating profit attributable to the River business, which includes both the transportation and the barge manufacturing result, improved from $0.4 million in Q2 2012 to $14.6 million in Q2 2013. In Offshore Supply, our operating profit remained virtually unchanged from $4.5 million to $4.2 million when comparing same period of 2012. In Ocean, the attributable operating loss remains virtually unchanged as well at $1.5 million in Q2 2012 and $1.6 million in Q2 2013. The company's adjusted EBITDA increased $23.1 million or 3.4x to $13.6 million in the second quarter of 2013, up from $9.6 million in the same period of 2012, mostly driven by the significant improvement in the River business segment. Pointing to the River business segment, EBITDA increased $18.3 million or 4.4x to $23.7 million in the second quarter of 2013, up from $5.4 million in the same period of 2012. Offshore Supply business slightly decreased from $6.9 million to $6.8 million, slightly minus 1% when comparing with the same period of 2012. For a reconciliation of EBITDA to cash flows from operation activities, please refer to the tables at the end of this presentation. Turning to Slide 21, we reported net income in Q2 2013 amounted to $13.5 million or $0.10 per share compared to a loss of $5.4 million or $0.18 per share for the same period in 2012. In Q2 2013, we had an adjustment of $1.1 million due to an unrealized gain for deferred taxes on exchange variance in Brazil, a negative adjustment of the year's EBITDA related to the Touax barge sales of $131,000 and a $181,000 adjustment of a noncash loss from debt extinguishment, resulting in an adjusted net income figure for Q2 2013 of $12.5 million or 0.09% compared with an adjusted net loss for Q2 2012 of minus $7.9 million or $0.27 per share. On Slide 22, we have a condensed version of the company's balance sheet as of 30 June 2013, compared to 31st December 2012. At June 30, 2013, we had $131.3 million in cash and cash equivalents and a further sum in restricted cash of $10.4 million, showing a substantial liquidity. In addition, we have disclosed as current assets and under the caption, restricted cash to redeem 2014 senior notes, $182.1 million, which corresponds to the amount which was filed in an account with the trustees for the revocable redemption of $180 million of our outstanding 9% senior note due in 2014, plus accrued interest to the redemption date on July 10, 2014, amounting $2.1 million. Similarly, at June 30, 2013, the 2014 senior notes and accrued interest of $181.6 million, we have disclosed as current liabilities under the caption 2014 senior notes and accrued interest. The difference between $182.1 million in asset and $182.6 million in liabilities correspond to the interest to be accrued by July 1 -- between July 1 and July 10, 2013. At December 31, 2012, and March 31, 2013, the 2014 senior notes we have disclosed as a long-term financial debt. However, due to the redemption notice, they shall now be shown as current. Furthermore, at June 30, 2013, our balance sheet reflected the offering completion on June 10, 2013, of the new $200 million note due in 2021. It's important to emphasize that due to the redemption dates June 10, 2013, for this 2014 notes, our balance sheet as of June 30, 2013, shows both the new and old notes as a standing -- as outstanding, while the 2014 date have, in fact, now been completely repaid on July 10, 2013. In connection with our level of CapEx, we have invested $13 million for the first half of the year, while $4.8 million corresponding to the second quarter of 2013. A majority of the investment were related to River project, more specifically to the conversion work of Paraná Petrol for its new iron ore transshipment employment with a large iron ore mining company and modifications to our pushboats and to our offshore PSV construction, installment for the UP Amber and UP Pearl. On Slide 23, with the successful redemption of the senior notes due 2014, by utilizing the last portion of the proceeds of our $200 million 2021 senior notes, as previously mentioned, we have addressed our most relevant short-term maturity, and that adds further flexibility to our capital structure. Included in our $13.5 million in the next 6-month maturities are $4.7 million in scheduled principal repayments and in our various ISP and no-fit [ph] Financing, $8.3 million in scheduled principal repayments of our various offshore financing and $500,000 under our Natixis financing of our tanker Alejandrina. Our repayment schedule is balanced over the next year, and we have no refinancing needs at that moment. And now I would like to turn the call back to Felipe.

[Felipe Menendez Ross:]

Thank you very much, Cecilia. And now we are ready for your questions.

[Operator:]

[Operator Instructions] The first question is from Michael Schlembach.

[Michael Schlembach:]

It's Mike Schlembach with JPMorgan. I just had a couple of small modeling items, if I can. On a run-rate basis with the refinancing now and some of the debt in place and extended, what do you think your sort of run rate interest expense is?

[Felipe Menendez Ross:]

Interest expense this quarter has been -- for the 6 months has been $16.2 million. I think we only had one major piece of debt that was repaid in the period, which was the $18 million convertible, which really only had effect for approximately a month. So you are looking at somewhere around double this figure, call it $30 million to $35 million, Michael.

[Michael Schlembach:]

Okay. And then I had one other question, and it's very minor. I'm just wondering, one of the -- just noticed a slight tickup in some of the -- slight tickup in bad debt expense. Just wondering if that has to do with some of the new barging business where certain people are paying you in the process or something like this. And again, it was very minor, it's less than $1 million in the quarter. But I just -- as you guys manage this business as it continues to grow, I'm just wondering if that's a trend or something you guys are watching or...

[Felipe Menendez Ross:]

No, not at all. It doesn't stem from the sale of barges. It is basically an aging problem. We decided to write off part of older outstandings, not to mean that we don't continue to press to collect them. So it was part of that process. It's just a routine exercise.

[Michael Schlembach:]

I appreciate it. I'm nitpicking with what I thought was an outstanding quarter. So...

[Felipe Menendez Ross:]

Quite all right. Quite all right.

[Operator:]

The next question is from Katja.

[Katja Jancic:]

Just I need a little bit of more information, if you could provide, about what do you expect volumes transported in the River business to be in the second half? Do you see them picking up, do you see at this level? If you could just provide information on that, please?

[Felipe Menendez Ross:]

Sure. Well, generally, from a historical perspective, second and third quarter are very similar in terms of volumes carried, so we would expect that the third quarter to mirror the second. We're experiencing very strong volumes right up to now, and we're already in the middle of August. I think what might give us a bit of a surprise this year is the fourth quarter. We're a bit early still to give you a determination. But generally, the fourth quarter has a significant slowdown. We generally do not carry large volumes of iron ore in the fourth quarter past October, and we see a slackening in the grain season. As you may have seen from our slide on the USDA estimate for the production, the total production in Paraguay and throughout the River system this year, the agricultural production has been quite successful. So we would expect the fourth volume to carry a bit the volumes that were not carried in the first 3 and perhaps have a stronger fourth than we would normally have, but it's a bit early to say. What we can say in terms of volume is, historically, third quarter is almost identical to second in terms of volumes, and that remains to be true this year. And fourth, we would expect to be a bit stronger than the first, but let's see as we progress.

[Katja Jancic:]

With the addition of the Offshore vessels, you, to some extent, expect that the third quarter will be quite stronger than the second one. Am I...

[Felipe Menendez Ross:]

Definitely. That is a correct assertion. The new rates on Agua-Marinha, Topazio and Diamante only kicked in at the very end of May. So in the second quarter, we only had them there for a month or less. And in Esmeralda, those new rates kicked in, in fact, in July. So they had no effect. And there, you have 4 ships, which are going to be producing an average $5,000 more per day than they were producing before. So the impact of that will obviously be felt in the second half. Then you have 2 more ships, UP Amber, which started its service with Petrobras at the end of July, call it August; and UP Pearl, which will start its service in October, mid-October, call it. So you have the effect of these 2 new vessels that were not there in the second or first quarter. And as you know, they have been chartered for close to $33,000 a day, so they should be generating considerable additional EBITDA. As you will have noticed from the slide that we put forward with our presentation today, the annualized effect of those 2 new vessels will be $12.5 million additional EBITDA. But of course, this year, they're only coming in, in August and October, respectively. So you can proportionally take that into consideration in running your model. But essentially, the second half of the year will definitely be stronger. And of course, in the third quarter, we do not have a significant number of scheduled drydocks, as we did in the second quarter, that took away 47 operating days. In the fourth quarter, we had 2 drydocks, UP Agua-Marinha and Turquoise, which will probably use around 30 days in total, so. And we may have one more drydock that we are going to anticipate this year for next year. But other than that, we don't have any substantial or higher schedules. Particularly, the third quarter has none. So you will definitely see a stronger result from Offshore.

[Operator:]

The next question is from Doug Carson.

[Unknown Analyst:]

This is actually Claudia Short[ph], backing up for Doug Carson. I guess my first question would be in regards to your Punta Alvear yard. So the year-over-year growth rate in barge sales was high. Can we expect this similar growth rate to continue into third quarter and fourth quarter? And do you expect any additional barges to become contracted for delivery this year?

[Felipe Menendez Ross:]

Well, on the count, yes, we've announced 58 for the year, and that is almost doubling what we did in the first quarter. The composition is slightly different. We'll be delivering more tanks in the second half than in the first. As for the pipeline for next year, we are working on that at this moment. We haven't announced anything. And as you know, we announce major sales as they occur. But we have not announced anything so far.

[Unknown Analyst:]

Okay. And then with the more tanks, is there any additional EBITDA that comes from the tanks versus the barges or are they roughly similar?

[Felipe Menendez Ross:]

The EBITDA per unit on the tank is larger, but of course, it is more laborious. It also takes about 3x the number of man hours, so we can produce less. So the end result is not terribly different.

[Unknown Analyst:]

Okay, great. And I guess, finally, would you be able to give us any guidance for EBITDA for the third quarter or kind of the fiscal year? Can we expect the similar growth rate that we saw in either the first quarter or the second quarter for the third quarter?

[Felipe Menendez Ross:]

We haven't given guidance this time for the rest of the year. We will probably do that later in the year. All we can say is, you have the EBITDA of the first quarter in front of you -- I'm sorry, of the first and the second quarter, the first half, and it's close to $52 million. If you look at the last 3 years' history, second half comes in close to first half within an 80%, 90% range. This year, you have the effects that we were just discussing with Katja of the additional revenue resulting from better rates and the larger fleet in the PSVs. So and that's -- I can only give you those building blocks at this time and we will probably be giving guidance later in the year.

[Operator:]

There are no further questions at this time.

[Felipe Menendez Ross:]

Okay, thanks. Thanks very much, and thank you, all, for participating in the call, and we'll be talking to you again when we open our third quarter results.

[Operator:]

Thank you for participating in today's conference call. You may now disconnect.