IQ Ultra Short Duration ETF
Q3 2013 Earnings Call Transcript

Published: 14 Nov 2013

[Operator:]

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is now being recorded. If you have any objections, you may disconnect at this time. I would like to hand this meeting over to Cecilia Yad. You may now begin, ma'am.

[Cecilia Yad:]

Good morning, everyone. Thank you for joining us on the call today. Welcome to the Ultrapetrol (Bahamas) Limited conference call to discuss the company's third 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 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, 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 will 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 a summary of our third quarter results for 2013 compared to the equivalent period in 2012. The adjusted EBITDA for the period is $30.2 million, which compares with $9.1 million in the same period of 2012, while our adjusted net income and adjusted EPS are $8.4 million and $0.06 per share, which compares to a net loss of $11.5 million and $0.39 per share in the same period of 2012. As you will notice, this brings our adjusted EBITDA for the first 9 months of the year to $82.1 million, which compares with $25.9 million in the equivalent period of last year. As usual, we adjusted net income and EPS on the third quarter to reflect the increase in the provision for exchange variance in our Brazilian subsidiary, which is a noncash effect, produced solely by the re-evaluation of the Brazilian currency against the U.S. dollar. We have also adjusted our net income in the third quarter for the one-time charge of $1.7 million in connection with the extinguishment of debt mostly related to the repayment of our 2014 notes, which occurred early in the third quarter. During the quarter, we placed a $25 million add-on to our $200 million, 2021 notes issued earlier in the year. The placement was very well accepted by investors and was priced at 104.5% with proceeds of $26.1 million to the company, which will apply towards our growth program in the Offshore and River segments. On October 3, we entered into a contract to purchase two 5,145 deadweight new built vessels off the yard, and took an option to buy a third identical ship, which we declared on October 25. The total purchase price of these 3 vessels was around $96 million, and they are expected to commence service in the first quarter of 2014. Also on October 22, we canceled the shipbuilding contract for UP Onyx on account of the shipyard's delay in delivering the vessel. The appropriate repayment demands have been made under the refund guarantees. On October 24, we signed agreements for the sale of another set of 12 barges to be delivered to third parties in the first quarter of 2014 from our Punta Alvear barge building facility. Let's turn to Slide 4. In the table at the top of the slide, you will find the comparison between the third quarter 2013 EBITDA per segment and those obtained in each business segment in the equivalent period of last year. As we mentioned in the second quarter, the River business results in 2013 show a substantial difference with 2012, which as we have discussed in the past, were severely affected by the conjunction of a drought that cut the crops in half and very low river levels, which affected the navigation and overall efficiency of transportation throughout 2012. The third quarter 2013 also benefited from 10 barges delivered for third parties from our Punta Alvear facility. Our Offshore Supply business in the third quarter 2013 produced double the EBITDA obtained in the same period of 2012. As we will see in more detail, when we cover this segment later in the presentation, this staggering increase results mostly from additional vessels, as well as the increased time charter rate that we have obtained in 2013, as we renew the long-term contracts of the existing fleet. When we compare the third quarter results of our Ocean business with those of the third quarter last year, we will see a -- that a significant part of the difference corresponds to a change in 2013 of the apportionment of our G&A in a quarter-for-quarter basis, which should be neutralized by the end of the year. Finally, this quarter, we have had the positive impact from foreign exchange variations equivalent to $5.5 million in cash, as opposed to a negative variation of $0.7 million in the same period of last year. Let's turn to Slide 6, where you will find the comparison of our third quarter 2013 River business results against those obtained in the same period of 2012. As you can see, our River segment in the third quarter this year produced a segment adjusted EBITDA of $11.4 million compared to a segment adjusted EBITDA of $0.3 million negative in the same period of 2012. In the third quarter 2013, we carried a total of 1.2 million tons of cargo compared to 937,000 tons in the third quarter of 2012. That is 31% more cargo carried. The same figures for the first 9 months of 2013 show an increase of 26% over the volumes carried in the same period of 2012. As we have mentioned earlier, 2012 was affected by severe drought and also by very low river levels. But in addition, in 2013 we renewed a substantial portion of our 3-year transportation contracts, which resulted in overall stronger results. Our running costs during the first 9 months of 2013 had been 18% higher than in the same period of the previous year, mostly as a result of crew costs, as well as other operational expenses affected by inflation in costs, which have not been reflected in equivalent evaluation of the local currency. As you can see in the third quarter, this tendency has eased off considerably, reflecting only a 7% increase, which is partly consistent with the larger volumes carried. The devaluation rate of some of our local currencies has accelerated in recent months. This could be an indication that our operating costs will become more stable, but we will only have a more definite sense of direction if the local currencies maintain this tendency in the next few months. As we anticipated in our last call, the administrative and commercial expenses show variations between segments on a quarter-per-quarter basis because of a different allocation per segment in each quarter in 2013, than the criteria we followed in 2012. These differences, as you can see in third quarter, have begun a reversal, and will mostly be neutralized between segments at the end of the year. Turning to Slide 7. In the bar chart at the top, you will see that USDA statistics for the Paraguayan soybean production for the past 10 years, as well as their 2014 estimate. As you can see, the soybean crop was substantially better this year, but most importantly, USDA is predicting a growth of the seeded area in 2014. And if rainfall is again normal during the season, we can expect another substantial crop. In the graph on the bottom left, you will see the levels of the Paraguayan River for 2013 compared to the 10-year median and the equivalent levels in 2012. As you will note this year, the river returned to its normal levels permitting navigation into the early part of the fourth quarter, as we had anticipated. Finally, in the graph at the bottom right, as you can see, soybean prices have remained relatively high, which provides a very solid basis for continued growth of the seeded area in the future. Moving to Slide 8. We can see that our Punta Alvear shipyard has remained very active, working to its maximum capacity. We delivered 10 barges in the third quarter, in accordance with our program, and we have commitments which would take the total number of barges delivered to third parties to approximately 58 units by the end of this year. As we previously discussed, with this program at the same average contributions per barge obtained in the past, the yard will contribute over $20 million to our EBITDA in 2013. We have recently concluded a new contract for an additional 12 barges to be delivered in the first quarter 2014, with which the yard is expected to be fully committed into the second quarter of next year. In Slide 10, you will find the summary of the third quarter 2013 Offshore Supply results compared with the same period of 2012. As you can see, the Offshore Supply segment adjusted EBITDA for the third quarter 2013 was $12.7 million compared with $6.3 million in the third quarter of 2012. The substantial increase in revenues and results was mostly due to the participation of 1 more vessel, UP Amber, which entered service with Petrobras on the 1st of August this year. But more significantly, from the very substantial increase in the time charter rates obtained by part of our existing vessels, where, as we discussed, their 4-year contracts were renewed earlier in 2013. As we incorporate UP Pearl into our operation in the fourth quarter, the entire 11-vessel fleet will be contributing to our EBITDA for the first time. While running costs increased 5% in the third quarter 2013 compared with the same period of 2012, we had 1 more vessel in operation this year, UP Amber. And therefore, on a ship-by-ship straight comparison, we experienced, in fact, a slight reduction. Voyage expenses, as you know, are not significant in the Offshore segment because our vessels operate in a time charter basis. And they reflect mostly the one-time positioning cost that we have to incur as we move a ship from the building yard in Asia to Brazil or the North Sea. During 2014, 5 of our offshore vessels are scheduled for dry dock. And because of that, we are advancing the dry dock of UP Agua-Marinha to the fourth quarter of 2013. Let's turn to Slide 11. On the right-hand side, you will see the pictures of our newly acquired vessels at their construction yard in China. On the left-hand side, you will see a specification sheet of the MMC 887, which is the type to which these vessels belong. This acquisition has been the most important investment decision that we have made this year. We have purchased, for a total of about $96 million, 3 state-of-the-art very large PSVs with diesel electric propulsion, a deck capacity of over 1,000 square meters, and 5,200 dead weight tons capacity. We have bought 3 ships in a completely finished condition, delivered from the yard in China. In fact, we have already taken delivery of 2 of them, and will probably be taking delivery of the third next week. The vessels will require approximately 45 days of work within the yard, some minor modifications that we need to do in order to adapt them to our operation. We expect to put the ships in service in the first quarter of 2014. With these 3 new vessels, our Offshore Supply peak capacity has grown 30% going from 11 to 14 vessels that will be producing in 2014. Another recent development in our Offshore segment is that on October 22 we canceled the shipbuilding contract of UP Onyx on account of the shipyard's delay in delivering the vessel. As we have mentioned, the appropriate repayment demands have been made under the corresponding refund guarantees. In Slide 12, you will find the summary of the employment of our fleet as it stands today. As you can see in 2013, we contracted our new vessels, UP Pearl and UP Amber, as we equally renewed for 4 years the contracts for UPS Moraga, Topazio, Diamante and Agua-Marinha with substantial increases in their daily earning. With this, out of the 11 existing ships, we have 8 which are already contracted for long-term periods with Petrobras, while we are in the process of negotiating the renewal of our UP Rubi. At the bottom of this page, as a reference to calculate the impact of these new charters, you will find the summary of the annualized impact of the incremental rates and the new ships. As you can see, the total EBITDA for the offshore fleet, which was $27.7 million in 2012 would become $54 million on an annualized basis, with all 11 ships in operation as we expect them to be in 2014. In addition, as we discussed, we are taking delivery of 3 new vessels, which will contribute also substantially to our EBITDA. On Slide 14, you will find the third quarter 2013 versus 2012 comparison of the earnings of our ocean vessels. As you can see, the segment adjusted EBITDA in the third quarter was $659,000, which compares to $3.8 million in the same period of last year. As we have discussed earlier, the allocation of our general administrative and commercial expenses to each business segment quarter-by-quarter has not followed the same criteria in 2013 that we used in 2012. Over the entire year, these differences will be neutralized, but they do distort the comparison on a quarter-by-quarter basis. As you can see here, administrative and commercial expenses allocated to the Ocean business increased in the third quarter, approximately $1.8 million. However, over the 9 months period ended September 30, 2013, they are 8% lower than they were in 2012. If you exclude this difference created by G&A during the third quarter 2013, the Ocean segment contribution was $2.9 million compared to $4.3 million in the same quarter of 2012. The difference of $1.4 million was produced mainly by the schedule dry dock of our tanker vessel, Miranda 1, over almost 50 days in the third quarter of 2013, while in the same period of 2012, this vessel had been fully operative. At the beginning of the third quarter 2013, as previously announced, we experienced a slowdown in the volumes of cargo of our feeder container service. The volumes and results of this service returned to normal in the second half of the third quarter. Let's take a look at Page 15. We can clearly see how the second quarter revenues on the southbound leg were considerably lower than those of the same period of last year. As we described in the previous slide, that situation continued into the early part of the third quarter. Volumes and revenues did recover their pace in August and September. However, we do not expect the fourth quarter results would be able to compensate the shortfall of the second quarter, particularly since 1 of our 2 vessels will have to undergo its scheduled dry dock before the end of this year. With that, I'll turn the call over to Cecilia, who will guide you through the financials.

[Cecilia Yad:]

Turning to Slide 16, you will find a breakdown across the core business segment for total revenue, voyage expenses and running costs. Felipe has already discussed the main highlights for this business, so I will not repeat them here. Total revenue for the third quarter 2013 were $112.6 million, showing an increase of $29.8 million, or 36% compared to $82.8 million for the third quarter 2012. The increase was driven by the River and Offshore Supply business segments, which accounted for 83% of the total revenues in the third quarter. Operating profit for the company totaled $14 million for the quarter ending September 30, 2013, up from a loss of $1.7 million in the same period of last year, showing an increase of $15.7 million. The operating profit attributable to the River business improved from a loss of $6.2 million in the third quarter 2012, a positive result of $5.5 million in the third quarter 2013. In Offshore Supply business, our operating profit increased from $3.6 million to $9.7 million in comparison to the same period in 2012. In Ocean, the operating profit decreased from $0.9 million to a loss of $1.1 million when comparing with the same period in 2012. The company's adjusted EBITDA increased $21.1 million, or 3.3x, to $30.2 million in the third quarter of 2013, up from $9.1 million in the same period of 2012, mostly driven by the significant improvement in the River business segment, which accounted for 78% of the total segment EBITDA increase of $14.9 million. Pointing to the River business segment, adjusted EBITDA increased $11.7 million to $11.4 million in the third quarter of 2013, up from a loss of $0.3 million in the same period of 2012. Offshore Supply business increased from $6.4 million [audio gap] million when comparing with the same period in 2012. Ocean business adjusted EBITDA decreased from $3.8 million to $0.7 million in comparison to the same period in 2012. For a reconciliation of EBITDA to cash flows from operating activities, please refer to the table at the end of this presentation. Turning to Slide 17. The reported net income in third quarter 2013 amounting to $7 million, or $0.05 per share compared to a loss of $12.9 million, or $0.44 per share for the same period in 2012. In the third quarter 2013, we had an adjusted -- an adjustment of $0.3 million due to an unrealized gain for deferred taxes on exchange variance in gross sales. A negative adjustment of the yard's EBITDA, related to the Touax barge sale of $0.1 million, and a $1.7 million adjustment of a noncash loss from debt extinguishments attributable to extinguishment of our senior notes due 2014, on July 10, 2013, resulting in adjusted net income figure for the third quarter 2013 of $8.4 million, or $0.06 per share compared with an adjusted net loss for Q3 2012 of $11.5 million, or $0.39 per share. On Slide 18 we saw a condensed version of the company's balance sheet as of September 30, 2013, compared to December 31, 2012. At September 30, 2013, we had $123.1 million in cash and cash equivalents, and a further sum in restricted cash of $8.9 million, showing a substantial liquidity, which as Felipe already presented, it has been partially invested in the Offshore segment for about $96 million in 3 very large PSVs expected to be in service early in 2014. In connection with our level of CapEx, we have invested $16.6 million lower as of September 2013, while the $3.6 million corresponded to the third quarter of 2013. The majority of investment in the third quarter were related to river projects. More specifically, to the conversion wealth [ph] of the Paraná Petrol, modification to our existing petrol and enhancement for our Punta Alvear barge building facility. On Slide 19, you will find our year capital repayment as of September 30, 2013, where we have [indiscernible] pro forma, the $25 million outside as an add-on to our outstanding $200 million senior notes 2021. As a recycle [ph] the offering of the add-on notes, we have outstanding an aggregate principal amount of $225 million, or 8.875% first preferred ship mortgage note due 2021. The add-on notes were sold at 104.5% and the gross proceeds to us of the offering totaled $26.1 million. Included in our $17.6 million for the fourth quarter showing the chart below are $4.7 million in a scheduled principal repayment under a various IFC and [indiscernible] financials, $8.6 million to fully repay the outstanding amount, and the original DVB Natixis facility, as it is highlighted in the third bullet point of this slide. $4.1 million in a scheduled principal repayments of our various offshore financing, and $200,000 under our Natixis financing of our canceled Alejandrina. And now, I would like to turn the call back to Felipe.

[Felipe Menendez Ross:]

We have now completed our remarks. And we welcome any questions that you may have.

[Operator:]

[Operator Instructions] Our first question from the line of Ben Nolan.

[Benjamin J. Nolan:]

I have a question with respect to the river system. I've noticed that in -- sorry, I'm getting a lot of feedback, but in early in the quarter, there was a lot of rainfall and quite few major storms that came through, I was wondering if, as a result of that, water levels were a little higher than they normally would be? And if ultimately, you think that the fourth quarter might see a little bit stronger than what would be typical level of volume, just as you're able to extend the seasonal a little bit further?

[Felipe Menendez Ross:]

Not really, Ben. Yes, there was a very high level of the rivers earlier in the third quarter. Now as you see in the graph that we showed in the presentation, we are very much back to the normal 10-year median. So we were able to extend our loadings earlier into the fourth quarter, as we had anticipated. But we don't particularly think that the fourth quarter will be stronger than it was in other years. So, no. It went well, according to plan, but not superb. So we think that we will execute the program of iron ore. We executed the program of iron ore, very much as we planned. We carried the quantities that we had committed to carry from the high Paraguay River in terms of soybean and petroleum products. But basically, the river now is shut down, as far as we're concerned because river levels now are very low. So we're bringing the last barges out of there at this time. Now we think the fourth quarter is going to be normal. What we did see was that the Paraguayan corn crop was affected negatively by those very intense rains that you mentioned, and the volume was a bit shorter than people expected. Particularly important, the fourth quarter is the sunflower seed crop, which is really the only new crop that comes up in early December. So we are waiting to see what that comes out like. Basically, we think fourth quarter is going to be seasonally lower, as it regularly is.

[Benjamin J. Nolan:]

Okay, that's helpful. And then with respect to -- I know you announced that you have now sold 10 more barges in the first quarter of next year. Can you maybe give me an idea of what the strategy is with respect to sort of barge sales versus building for your own fleet over the course of the year? And maybe, what that's -- what you're targeting for CapEx versus barge sales.

[Felipe Menendez Ross:]

Well, I think we will maintain the strategy that we have had so far. As you know, we designed this yard so it could produce enough barges for our own use, working 1 shift. And in fact, we increased the production to 2.5 shifts. And all that excess capacity we are selling to third parties. So I think our strategy going forward will remain very much the same. We will build a combination of tank and dry cargo barges for our own use. And we will sell the extra capacity that the yard generates, by working 2.5 shifts, to third parties. So our growth, so far, in capacity in the river fleet has been 6% per annum. And that has been our patent for about 10 years, but, particularly, since we opened the yard in 2010. So I think you can expect that we will expand capacity going forward at that same rate.

[Benjamin J. Nolan:]

Okay, that's helpful. And then lastly, on the barge sales. Based on sort of what you've indicated was the case for this year, doing, call it, $350,000 per barge in EBITDA, is that still sort of the run rate? I mean, has pricing changed or efficiency changed or anything, such that the margins would be any different on individual barge sales going forward?

[Felipe Menendez Ross:]

No, we don't think that there's been any substantial changes. Price of steel has gone down a little bit, price of labor has gone up a little bit. But essentially, our production costs remain very much stable. And we -- and pricing has been a little bit better for, particularly, for the first quarter of 2014. But I would still think that we are within the averages.

[Operator:]

[Operator Instructions] At this time, we don't have any more questions on queue. I would like to hand the meeting over to CEO, Felipe, for closing remarks.

[Felipe Menendez Ross:]

Thank you very much. Thanks, everybody, for participating in this call. And we'll be talking to you again when we announce our fourth quarter results. Thank you.

[Operator:]

That concludes today's conference. Thank you, all, for joining. You may now disconnect at this time.