Ultrapetrol (Bahamas) Limited (NASDAQ:ULTR)
Q3 2008 Earnings Call
November 13, 2008 10:00 am ET
Filipe Menendez - President and CEO
Len Hoskinson - CFO
Mike Lanier - AIG
Francisco Schumacher - Raymond James
Leenk Warden - HD Willington
Ira Socket - Socket and Company
Rodrigo Goes - UBS
Welcome to the Ultrapetrol conference call third quarter 2008 financial results. At this time, all participants are on a listen-only mode. (Operator Instructions). Today's conference is being recorded.
And at this time, I'll turn the call over to Mr. Len Hoskinson, Chief Financial Officer.
Good morning, everyone. Thank you for joining us and welcome to the Ultrapetrol conference call to discuss the company's 2008 third quarter results. I would like to remind everyone that this conference call is now being webcast at the company's website and there are also additional materials there related to our earnings announcement, including the slide presentation which forms part of this conference call.
You should be aware that in today's conference call, we'll be making certain forward-looking statements to discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements.
For a discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday and the company's filings with the SEC including, without limitation, the company's annual report on Form 20-F for the year ending December 31, 2007 and its subsequent reports on Form 6-K.
With me today is Filipe Menendez, Ultrapetrol's President and Chief Executive Officer. Filipe 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 with that, I will now hand it to Felipe.
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 along we will reference the slide number that corresponds to the information that we are discussing.
As you will see in slide 3, our revenues during the third quarter of 2008 have increased by 45% over the same period of 2007 to $91.3 million. Similarly, our recorded EBIDTA for the third quarter was $30.6 million, which compares with an adjusted EBIDTA of $21.7 million in the third quarter of 2007.
Our recorded net income for the third quarter of 2008 was $15.1 million, which includes an income tax on exchange variance provision of $3.9 million from unrealized foreign currency exchange rate gains on US dollar-denominated debt of one our Brazilian subsidiaries in the Offshore Supply Business.
The adjusted net income for the third quarter of 2008, excluding this effect, is $11.1 million, or $0.34 per share, which compares with a similarly adjusted net income and EPS of $7.7 million and $0.33 per share respectively during the same period of last year.
Len will discuss our financials in more detail later on the call. However, I would like to mention at this point that our overall results for the third quarter of 2008 have been strong in full course, particularly in our Ocean Business. We are very much in line with what we discussed during our last call. The expiry of our old charters that covered part of our fleet coupled with the FAA forward coverage that we secured have significantly changed the contribution of this segment to our results.
During the quarter, we drew down senior credit loan facility with IFC for $60 million, to which we expect to add another $15 million loan before the end of 2008. With the total of $75 million under these two facilities, both of which had a 12-year term with four years of grace, we have all the external financing that we think we need to fund our River Business growth programs.
Let's turn to slide 4, just to mention that our adjusted EBITDA, adjusted net income and corresponding earnings per share for the first nine months of the year have been $82.1 million, $30.8 million and $0.94 per share, exceeding by 43% the adjusted EBITDA and almost doubling the adjusted net income and EPS that we obtained during the same period of last year.
Our share repurchase program, which was authorized up to $50 million, has been extended up to the end of December 2008. During October 2008, the company acquired 2,531,108 of its shares at an average cost of $0.439 for a total cost of $11.1 million, making the total acquisition in 2008 about 3.2 million shares or about 9.6% of the shares outstanding at the beginning of the year at an average price of $5.49.
Let's turn to slide 5 for an update on what has happened in our River Business in this quarter. We have advanced with the construction of our new barge building facility in Rosario, in Argentina. The progress of construction is approximately two months behind schedule, mainly due to delays of one of our contractors.
We are receiving and started to install the equipment for the yard as planned, so we should not experience any significant delays from now on. We expect to have the yard in full production for the second quarter of 2009. As we have previously discussed, this ship yard will be the most modern of its kind in South America and will give also a great competitive advantage in creating new capacity at a low unit cost.
We have temporarily slowed down our barge enlargement program until the second quarter of 2009 to prioritize the re-bottoming and repairs required by our existing fleet. During the next six months, we will be using only 30% of our Ramallo yard capacity for enlargements, and 70% for repairs.
However, our original target of a 130 enlarged barges by the end of 2010 remains very much in place. Volumes loaded grew 14% in the third quarter of 2008, when compared to the same period of last year and 11% for the first nine months of 2008, when compared to the equivalent period of 2007.
The volumes of iron ore to be carried in the fourth quarter of 2008 are likely to be lower than we had anticipated, as a result of reduced production on some of the mines in the region as well as low levels of water in the High Paraguay River. These low water levels should remain with us till January; however, may I remind you this only effects the loadings of iron ore and not that of soybean in this period.
Our loadings of soybeans and other agriculture products in October and the first half of November have been lower than in the same period of last year. Statistics indicate that there are still significant volumes of agricultural products in silos at origin with transactions have been slow in taking place during this month and a half. We are seeing the volumes starting to pick up now in the second half of November, so that we expect a busy month of December ahead of us.
We believe that the net effect of these variations in volumes carried in the fourth quarter versus what we had expected for 2008, which was an EBITDA 10% higher than what he had last year. If grain volumes are normalized as we expect, we should see a River for 2008 slightly below the $18.5 million obtained in 2007. So these variations in volumes will not have a dramatic effect overall.
Looking into 2009, the USDA has produced an estimate for the Paraguayan production, which, as you know, is central to the river system of 7.2 million tones, compared to 6.8 in 2008. That is 400,000 tonnes more or a 6% increase, which is in line with our previous expectations. The expansion of iron ore production in the region however, may be less than had been previously announced by the producers. But this would not have a significant effect over our plan for 2009 in the River.
On slide 6, you will find a quarter-on-quarter comparison of our River segment, revenues, expenses and EBITDA. The third quarter 2008 River segment EBITDA was $4.8 million, as compared to $4.6 million in the third quarter of 2007. When analyzing the expense side of our River business results, we noted an increase in our voyage expenses of approximately $9.9 million. The majority of this increase $8.1 million is attributable to our fuel expense.
As you can see $6.6 million of this variance is due to fuel price increases. This is fairly consistent with what we have recovered from our customers during the first and the third quarter without fuel, in past two quarters. While $1.5 million is attributable to larger quantities of fuel consumed, due to larger volumes loaded and the number of push boats in operation.
Our other voyage costs, excluding fuel price adjustments and our running costs, have increased from a year ago on per voyage ton as 21% and 27% respectively or a total of $4 per ton, compared to the equivalent costs in the third quarter of 2007. These cost increases are associated mainly with increases in crew costs, higher cost of fuel used in our barge repairs, but generally, with the reevaluation of the local currencies against the US dollar in the period.
We have at the beginning of the fourth quarter seen a reversal of this tendency, with the local currencies devaluating against the US dollar and the steel prices generally declining. If these tendencies are maintained overtime, we may see part of our costs reduce in dollar terms in the future.
In slide 7, we can see that the average invoice freights for the third quarter of 2008 grew by 38%, compared with the third quarter of 2007, from $21.9 per ton to $30.4 per ton. Around two thirds of this variance or $5.22 per ton is the result of our fuel pass-through clauses that have reimbursed us for the equivalent increase in fuel price that we experienced in the quarter, as we saw in our previous slide.
The remaining one third of the variance in our average freights or $3.19 per ton is what analysts would call real increase, resulting from pricing of freights at higher levels or due to the differences in the cargo mix that we carried during the quarter. These price increases have been insufficient however, to cover the total variance of our voyage and running costs in the third quarter. But as we have mentioned, the devaluation of the local currencies and other cost reductions may revert part of this tendency in the future.
Turning to slide 8, you may notice that as revenues had been inflationed by our fuel pass-through formula, EBITDA margins on a percentage basis seem to become normally smaller. As you can see the EBITDA margin for the third quarter simply by dividing segment EBITDA by revenues is 12.3%. If however, you deduct from the revenues for the period, the effect of fuel adjustment formulas, the EBITDA margin becomes 14.9%, which compares to the 18.7% of the same period of last year.
The GAAP between the adjusted segment EBITDA margins for the first nine months of 2008 compared with the same period of 2007 was 6.3%, while the same GAAP comparison in this third quarter is 3.8%. This indicates that if costs are reduced in dollar terms in the fourth quarter and beyond, we may return in the future towards the 2007 margins.
At the bottom of this page, you will see a graph that depicts the evolution of the price of diesel oil and the gap between the price of diesel oil and that of heavy fuel. This is of great significance to dimension the savings that we expect to make with our heavy fuel reengineering projects.
As you can see, the gap between heavy fuel and diesel stands today based on November 10, prices at $368 per ton, somewhat lower than the $414 average for 2008, but well in excess of the price gap of a $180 per ton with which the project was approved. Another positive development in respect of this project is that the engines purchased were priced in euros. So, as the US dollar strengthened our project cost has reduced by approximately $3.3 million.
In slide 9, you will see a projection of the soybean production in Paraguayan, which is central to the river system. According to the USDA estimate, the production has grown 600,000 tons this year and they predict an increase of another 400,000 tons for 2009 as we've recently discussed, accumulating then a 26% compounded annual growth for the three years 2006-2009.
Similarly, the shipments of iron ore from Corumbá in the third quarter of 2008 represent a growth of about 744,000 tons or 90% above what was shipped in the third quarter of 2007. As we have discussed a bit earlier, while we can probably expect incremental volumes of soybean and agricultural products in 2009 and beyond, the volumes of iron ore may not grow as rapidly as producers had announced.
In terms of the outlook for 2009, it is only as from the second half of 2009, when we expect our new barge building shipyard will be adding new capacity to our fleet and when we will start adding push boats re-powered with heavy fuel consuming engines, then we expected to see the effect of the investments that we have planned for and which are now being executed in our River Business.
Turning to slide 10. In our Offshore Supply Business, during the third quarter we continued to operate 5 vessels, UP Aqua-Marinha and Diamante in Brazil, under a long-term charter with Petrobras, while UP Esmeralda, Safira and Topazio operated in the North Sea.
Our UB Safira is committed until the second quarter of 2009. Topazio has been recently rechartered and committed until the end of the third quarter of 2009. While UP Esmeralda operated during the third quarter of 2008 [under stock market] and has just now being committed until the end of the second quarter of 2009 at the prevailing attractive rates.
We currently have seven vessels under construction. We expect delivery of our UP Rubi which is under construction in Brazil at the end of first quarter 2009. This vessel has now been committed under a four-year charter at an attractive level.
The steel cutting of the first two, out of the four vessels that we are building in India is progressing and the steel cutting process for the two vessels being built in China has already began. One other vessels being built in India and one other Chinese vessels are schedule to be delivered in the fourth quarter of 2009, while the rest are schedule for 2010.
In slide 11, you can see that the revenues of our Offshore Supply Business increased by 15% during the third quarter of 2008, compared with the same period of 2007. These higher revenues result mainly from higher rates obtained by UP Esmeralda in North Sea and to the fact that we've repositioned UP Topazio in the North Sea in the fourth quarter of 2007, where she has obtained higher rates, than she had obtained in Brazil in the previous year.
We experienced an increase in running costs from $3.8 million to $4.4 million, principally due to the Brazilian currency appreciation and to higher manning supplies and maintenance expenses in our PSVs operating in Brazil.
The allocation of G&A expenses in 2007 was done on an estimated basis in the first three quarters of the year and adjusted in the fourth quarter to reflect the proportion of the segment share in the total fixed assets of the company.
As explained in our previous call, the third quarter of 2008 shows a negative variation, while we expect that the fourth quarter of 2008 will show a positive variation.
The resulting EBITDA from this segment in this quarter was $5.9 million, which is almost identical to the EBITDA obtained in the same period of last year.
However, if we exclude the effect of G&A allocation that we've just explained, it would have been $7.6 million compared to $7 million in 2007, which shows that operationally the third quarter was, in fact, approximately 10% stronger than its equivalent period in 2007.
In slide 12, you can find a brief description of our offshore fleet, both that are operating and those that are under construction. When we take delivery of all our new vessels, the total fleet will more than double the current size and will be one of the most ingenious in modern fleets of its kind in the world.
The state-of-the-art features including DP-1 or DP-2 old recovery and other capabilities, which are particularly important to operate in the new deep water discoveries like those of Brazil.
In slide 13, you can see on top left side the graph that shows us spot rate for offshore in the North Sea, which as you can see is being quite strong. And, in fact, it recently exceeded the very high levels experienced last year.
In the pie chart to the right, you can see we have maintained the balance of our presence in both the North Sea and the Brazilian markets, while leaving one vessel open to the spot market, in the North Sea up to the end of the third quarter at high rates.
The average rate obtained by our vessels in Brazil for the third quarter of 2008 of $24,185 is similar to what we experienced in this market during the first half of 2008, and higher than the average rate obtained during the first quarter of 2007 for the same vessels.
In the North Sea, as you can see at the bar chart to the left and in coincidence with our previous announcements, the average rate of $31,414 obtained in the third quarter is higher than the rate obtained during the first half of 2008. We consequently expect that the year end average for this fleet will be similar to the average obtained in 2007.
The market in the North Sea presently continues to show very high rates and PSV's are in strong demand.
In slide 14, a brief of recapitalization of what has happened with our ocean fleets. Our three OBO vessels operated for the whole for the third quarter of 2008 under the time charters tied to the four time charter Capesize Routes Index, which expire during the first half of 2009.
Similarly, our Capesize vessel Princess Marisol operated for almost all of the third quarter under the time charter also tied to the four time charter Capesize Routes Index. And for the last six days of the third quarter, she was employed under a COA, which lasted until the end of October.
On the tanker front, we re-charted during the third quarter of 2008 are Alejandrina and Miranda.
Turning to slide 15. During the third quarter of 2008, we showed 500 days in over-the-counter FFAs to further cover our exposure to the spot market.
We sold 30 days per month for the fourth quarter of 2008 at an average of $153,500 per day to Nobel and Bunge. 15 days per month in the first quarter of 2009 at 53,500 to Navlos and 12 months in 2010 at $83,000 per day again to Bunge.
On November 7th, we received payments of a total of $10.4 million corresponding to the settlement of our October FFA positions. All our outstanding FFA positions as of November 10, have a mark-to-market value of $87.2 million, of which $22.7 million correspond to 2008, $44 million correspond to 2009 and $20.5 million to 2010.
Our counterpart exposure is with subsidiaries of Bunge, 57.4%; Nobel all in 2008, 21.3%; and Dreyfus, 13.6%; while with Navlos in the first quarter of 2009, we have only 1.9%. The remaining 5.8% is to a clearing house of the London.
Let's turn now to slide 16, to have a quick view of our Ocean segment results. Our revenues during the third quarter of 2008 have increased by 146% over the same period of 2007 to almost $33 million.
A large proportion of the increase in the running costs that you see in the table shown in the slide, when comparing with the third quarter of 2007, is because during the third quarter of '08, we had two additional vessels Princess Marisol and Austral accounting for $2.4 million out of the total difference of $5.5 million. The Amadeo, which started operations during the third quarter of '07, explains a further $1.6 million of the increase.
In slide 17, as we have done in previous calls, we show the combined effect of the earnings of our OBO vessels and the FFA contracts with covenant. In the bar chart at the left, if you'll see the average time charter rates of $29,221 per day obtained by each of the three OBO vessels during 2007, compared with the $61,463 per day obtained by the same vessels during the third quarter of 2008, and compared with the projection of $56,507 for the full 2008 year.
Based on the assumed earnings of our overall Capesize fleet for the remaining of the year at the values of the four time charter routes on market close of October 28th, and the mark-to-market as of that same date of the 2008 FFA positions that we have sold for the same period.
In the bar chart at the right, you can see a comparison of the $27 million gross profit contribution obtained from these vessels in 2007, with a projection of $49 million gross profit contribution that we expect to obtain for the same vessels this year by combining the time charter earnings and their FFA coverage in the manner that we have just explained.
As you can see, we are expecting that the year end gross profit contribution to these vessels will be $49 million or $22 million more than in 2007. These expected contributions are almost identical to what we announced at the time we discussed our second quarter results. There are several assumptions and disclaimers as at the bottom of this page which we encourage you to take into account when considering these figures.
Similarly, in slide 18, you will find an update of the results what we expect to obtain in 2008 from the earnings of the Capesize vessel Princess Marisol and the FFA coverage allocated to her.
On the left side of the slide, the average daily high that Princess Marisol actually earned in the third quarter and a projection of what she is expected to earn at year-end by combing the earnings of the vessel itself and the net effect of the FFA positions not allocated to the overall vessel as per the previous slide.
On the right hand side, you can see the annual total gross profit contribution of $31.6 million that this ship is expected to obtain for the full year of 2008, as opposed to only $3.4 million in 2007 because she started her service with us only on the 20th of November.
As you can see under the assumptions, the additional gross profit contribution for this vessel in 2008 would be $28.2 million. This expected gross profit contribution for Princess Marisol for the whole of 2008, actually exceeds the projections that we have discussed during our second quarter release. We gain suggest that you read and take into account the assumptions used for this calculation contained at the bottom of the page.
In slide 19, for 2009 and 2010, as you can see we have followed a very similar pattern as we have done for 2008, securing the earnings of our OBO fleet through FFA hedges at an attractive level of income.
In summary for 2009, we have covered approximately 99.5% of the available days of our three OBO vessels after giving consideration to estimated of higher periods due to scheduled repairs and service, as well as allowing for an estimated 25% discount compared with the typical index vessel.
As you can see, although all of the things being equal and subject to the assumptions explained in the slide, we estimate that considering the hedges that we have taken so far for 2009, the gross profit contribution for these three OBO vessel fleet should reach in 2009 $48.1 million, which is slightly lower than the $49 million that we have calculated for 2008.
For 2010, we have covered approximately 45% of the available days of these three vessels. In 2010, we estimate a gross profit contribution of the OBO fleet of $28.1 million based on the FFA coverage that we have secured and assuming that the non-covered days will earn 75% of a full time charter routes for 2007 at the values prevailing on November 10.
In slide 20, we wanted to depict the entire Ocean fleet, which as you know consists of nine vessels in total. The first four in this page corresponding to the overall capesize fleet that we have just discussed, while Miranda, Alejandrina, Amadeo, Austral are all operating in fixed rate time charters at attractive levels to first class oil companies trading in South America.
In slide 21, just to complete the information of this segment, we have included some general market information that helps understand the level of the market today in comparison to previous years. At the bottom of the slide, you will find the FFA values corresponding to the close of the market on November 11th.
Turning to slide 22, let's take a quick look at our Passenger Business, which as, you know consists of only one ship, the Blue Monarch, about half the size of our New Flamenco that we sold in 2007. The Blue Monarch operated for most of the third quarter of 2008 at high-occupancy levels but did not reach breakeven. As you can see the segment EBITDA in the quarter represented a negative $0.5 million.
As previously announced, unfortunately the sale of this vessel did not materialize, after the perspective buyer failed to make his deposit in time. The vessel ended her season employment in October and is not laid out.
In slide 23, you will find the updated fleet list.
In slide 24, we have provided a summary of the CapEx program for 2008, '09, '010 and '011 in line with the initiatives that we have discussed for the various business segments.
This CapEx program is provided as a general reference only and we encourage you to read the language provided in slide 24 for a better understanding of the conditions that may affect this plan.
As you can see, the total CapEx for the River segment in the four years that we have analyzed is $215 million, which includes $18 million for the whole year 2008 to complete the construction of the new barrage building yard and then $28 million per year to construct the barrages and other equipments necessary for the growth of our fleet.
We can adopt the size of this yearly investment in new barrages and equipment to actual demand growth as we see it in each period.
Similarly, the re-engining program is estimated to require an additional investment of about $46 million in 2008, '09 and '010 to buy, build, modify and install the 24 engines that we have acquired under this program.
In our offshore business, we estimate that certain investments from building of the one vessel that we still have to complete in Brazil plus the four Indian ships and the two vessels that we have committed to build in China will come to approximately a $134 million in total from the beginning of 2008 till the end of 2010. Of which, only about a $107 million remain to be invested at the end of the third quarter.
As you can see of the total of $128.5 million total CapEx for 2008, at the end of September, we had already invested $91.1 million. So the CapEx remaining for the fourth quarter is $37.4.
Our total remaining CapEx for the next three years, therefore, is almost $257.9 million as opposed to the grand total of $349 million that you can see in the slide.
The company has decided not to execute the option for the acquisition of further two PSVs with the same Chinese shipyard that is currently building our first two vessels.
We will finance part of the real business CapEx with the $60 million IFC loan already drawn down plus a $15 million additional facility, which we expect to finalize by year end.
The pre-delivery portion of the DVB/Natixis facility will cover about 75% of the construction cost of the four Indian PSVs with the balance being financed with internally generated cash.
The balance of this loan facility will be available upon delivery provided certain valuations, stipulations are met.
As a summary, then for 2008, we can expect River and offshore to be at or slightly below last year’s EBITDA, while for ocean, we are looking at approximately $50 million more in EBITDA [standing] from the additional earnings secured through FFAs for the Capesize OBOs and our Princess Marisol.
With that, I will turn the call to Len, who will guide you through our financial results.
Thanks, Felipe. On slide 25, we can see the total revenue for the company joined in third quarter of 2008 with 45% higher, up $91.3 million compared to $63.1 million in the same period in 2007. First nine months results also showed approximately the same percentage of increase from $163.9 million in '07 to $241.7 million in 2008.
The reported net income for the third quarter of 2008 was $15.1 million compared to a loss of $4.7 million in 2007. Reported net income for the first nine months of 2008 was $44.1 million, when compared to a loss of $1.8 million in 2007.
Earnings per share for the third quarter 2008 period were $0.46, compared to a minus $0.14 in 2007, while for the nine month period in 2008 earnings per share was $1.35 compared to a negative $0.06 per share for the equivalence first nine months of 2007.
In 3Q 2008 net income adjusted is the only a special item which is the income tax on a exchange variance provision is $11.1 million compared to $7.7 million for the same 3Q in 2007 and results in an adjusted EPS per share of $0.34 in Q3 2008, which compares with adjusted EPS of $0.23 in third quarter of 2007.
We are reporting consolidated EBITDA for the first nine months of 2008 of $93.8 million, which is a 117% higher than the equivalent 2007 figure of $43.3 million. Adjusting, for the non-cash mark-to-market gains and FFAs and the cash losses in FFAs already accounted for in our December 31, 2007 results. The first nine months of 2008 adjusted EBITDA is $82.1 million, which is $24.5 million or 43% higher than the comparable adjusted EBITDA for the first nine months of 2007.
As we discussed in our last call we no longer have in our P&L the effective non-cash mark-to-market losses for our future FFA position. So the EBIDTA for the Q3 2008 of $30.6 million has no adjustments and is 41% higher than the adjusted equivalent 2007 figure of $21.8 million.
Turning to slide 26 we show the breakdown across the business segments or revenues void expenses and running costs. Filipe has already discussed the main highlights for these business, I will not repeat them here. On slide 27 we can see the financial expenses grew 30% from $14.6 million during the first nine months of ’07 to $19 million in the same period of ’08 because of variable interest that's increased basically through volume in your longer term DVB Bank, Nordea Bank and Banco BICE.
Looking at the segment contribution for EBITDA as anticipated Ocean has provided the strongest growth in both Q3 and the first nine months of 2008, when compared to the same period in 2007. This increase is mainly explained by the fact that we have moved from the low charter rates that the OBOs had in 2007 and benefited from the FFA coverage for which we have secured higher level of earnings.
Moving to slide 28 here we have a condensed version of the company’s balance sheet. Total assets have increased to $193 million from $62.2 million as of December 31st, 2007 to $815.2 million as of September 30, 2008. 57 barges and three push boats are repositioned to the Hidrovia from the USA. In period and our fixed assets before depreciation grew by about $100 million in the period.
About 60% of the growth is expected, comes from the additions to the River business, which includes barges completed in the widening and re-bottoming programs as well as the yard which is under construction and other 25% of the increase in fixed assets referred to the increasing value of the PSVs which are under construction.
At the end of Q3, our cash position was a $106.7 million and $42.5 million higher than the 31st December 2007, except the IFC loan growth outage took place at quarter end. On the liability side, $63.9 million increase in financial debt between December '07 and 30th September 2008 comes from the drawdown of new loan and Banco BICE as well as the IFC loan increment.
However, the main difference in our balance sheet over the period is the inclusion of our FFA position, which is now recorded in our accounts on the other receivable and it's the main reason why this balance sheet item is increased from $34.4 million as of December 31, 2007 up to $98.3 million as of 30th of September 2008.
I'd like to refer you to note 2D of our financial statement. There you will find reference to our adoption of SFAS 157 which has been effective since January 1, 2008 with no material impact on a company's consolidated financial position or its results of operations.
You will also find their reference to fair value assessments of our FFA position which is $73.4 million at the end of September. The treasury stock line has not yet taken into account our recent activity in a stock repurchase program as that only started up again in October 2008.
And now, I'd like to turn the proceedings back to Filipe.
Thank you very much for joining us on the call today and giving us the opportunity of sharing with you some comments about our third quarter performance. We would be glad at this time to take any questions that you may have.
(Operator Instructions) Our first question comes from [Mike Lanier]. You may ask question, please state your company name.
Mike Lanier - AIG
AIG. Can you guys talk about how reliant the model you've laid out in a very nice detailed manner, how much you are reliant upon the capital markets functioning reasonably, I mean, how much new financing you are hoping to be able to line up to do your CapEx plan?
Well, Mike, fortunately as you may see from our CapEx plan, we don't really need the capital markets. It's all from now on to execute on this CapEx plan. Let me run you through the figures in a broad way so you get a better understanding of this. If you go back to slide 24, you will see that the total CapEx plan up to year 2011 is $349 million. But of that, we have already incurred up to the end of the third quarter in 2008, $91.1 million. So the remaining CapEx as from the 30th of September up to the end of the 2011 is only $257.9, call it $258 million.
Now as of the end of September, we had $106 million in cash and to that, we may add $15 million of a new facility that has been finalized. Now we expect to drill down before the end of the year and we have learned from DVB/Natixis to fund our Offshore construction program for another $88 million. So, the cash in hand plus these two facilities which have already been agreed would provide us with $209 million of the $257 million that we need.
Now, as you've seen in broad terms, we are looking at an EBITDA this year, which should be in the region of $50 million more than what we had last year. Because of our Ocean additional contribution, everything else being equal, so we're looking at an EBITDA in the region of $110 million.
As you've seen, there is not enormous variance for 2009 in the earnings of the OBO vessels and in fact, River and Offshore should be contributing more. So, again, out of the $257 million, we already have the resources for 209 and in the next four years, we are looking at EBITDAs that that should easily cover that difference.
There is also one more element that you might want to consider is that, in that CapEx we have for 2009, '10 and '11 allocated for each year construction of new barges to the tune of $84 million. So, if something went wrong and we've thought that the additional demand was not coming on stream, we could always reduce that expenditure and then our CapEx plan would be below our present cash resources and committed credits. The credits that we have committed are not short-term credits that we have to rollover. Both the IFC facility and the DVB/Natixis facility are 12-year facilities.
In the case of IFC, it has four years of grace, for repayment of principal. In the case of DVB/Natixis, it starts with the delivery of the last ship. So, that is effectively two years from now, before we start paying any principal. So they are very long-term facilities, with an initial period of easement in terms of payment to principal. So we have really no concerns about financing our CapEx going forward.
Mike Lanier - AIG
One point where you mentioned the barge building, now that's not on page 24 is it, that the actual, I mean I see enlargement and bottom and building yard and re-engineering. But, I mean, in addition to this there's going to be just actually building more barges on top of these numbers we're looking out on 24?
No, sorry, I should I have clarified that. The underlying barge building yard, the $18 million is the remaining expenditure for the building the yard itself.
Mike Lanier - AIG
$28 million is per year for building barges and associated equipment.
Mike Lanier - AIG
Okay. For yourself and others, right or is it all for yourself?
That's for ourselves.
Mike Lanier - AIG
Okay. Again just had a curiosity these new facilities that you're getting, you've agreed in principal and are about sign, has the terms changed much given the economic environment?
The terms are exactly the same as the IFC you're referring to the additional $15 million facility. They are identical to IFC, in fact it is parallel loan with the IFC that we have agreed to all the terms identical to those that we signed IFC. So its 12-years, four years of grace, exactly the same terms.
Mike Lanier - AIG
Okay. If you mentioned this during the call I apologize, because I don't know how everybody else, having seen everybody else that people just walk in and start talking to you when you are on a conference call. The Paraguay River, did you mention or was it discussed in any way about how its got low levels and that usually dentures you a little bit, is that what's the situation there?
Yes, we did mention it, but let me clarify it. The Paraguay River as from November as the river levels have fallen. So, we do not expect to be carrying iron ore in November or December in this section of the river. Now, that in itself doesn't create much of a problem because we have a backlog of soybean still to carry. So we can switch the barrages to load soybean and that in fact is what we believe is going to happen second half November and December.
But in October and first half November, the flow of soybeans down the river, despite the fact that the grain is physically in the time of was rather slow because transactions were slow in taking place. So we're now seeing that volume pickup. It certainly has to come out of the sizes before the new crop comes in. We think that we're going to have a relatively busy December in terms of soybeans.
But either way Mike, it doesn't make a tremendous difference, as we just explained. We had expected for the year that we will able to produce 10% more EBIDTA than we did last year. Last year's EBITDA was $18.5 million. We had a hope to produce 10% more, so $1.8 million.
Now, we're saying we were slightly below, so the total difference is going to be, I think, about $2 million for yearly EBITDA. It is not a significant number.
Mike Lanier - AIG
And a lot of the iron ore and even the soybeans that you get out to the coast to your barge network, I mean the big demand was China, right? And obviously, we've seen some huge changes in the Baltic rates for shipping because of a slowdown in demand, you're not really feeling that?
No. I suppose what you're seeing in the international ocean freight scene is in equation of supply and demand that is not there in the River. The price of soybeans maybe affected by supply and demand, but the volumes carried down the River are mainly regulated by the size of a crop.
The fleet in the river is rather stable. The freight rate environment is very stable. Most of our contracts are long-term. We have a very large portion, about 90% of our capacity under long-term contracts with grain houses such as Bunge or Dreyfus or Cargill. And these are minimum, maximum volumes, but within those parameters are take-a-pay contract.
So, really the River environment is a lot stable than the Ocean and is not generally subject to the fluctuations, up or down in that sense.
Mike Lanier - AIG
I guess, we got to take it to market whatever the price is.
Mike Lanier - AIG
And then lastly, on the supply chip side, I mean I think on the last call, [cruise] prices were twice as higher as they are today. Is there ramifications to your arrangements or expectations towards [five] handle on cruise prices?
I am sorry Mike you refer to the offshore supply vessels?
Mike Lanier - AIG
Well, actually rates are now a lot stronger than they were in our last call. If you want to take a like at the graph on slide 13, of the top left that shows what the market is being doing and the stock market in the North Sea which we generally caution people that this is a very short-term market and they are quite volatile and has not good index of what actually vessels can obtain as an average during the year.
But as you can see the spot rate for PSV's in the North Sea is 34,600 pounds per day. That is above what it was this time last year and last year, it was the highest ever. So, we are looking at possibly the highest rate environment that the offshore market has ever seen in terms of daily for that vessels in the North Sea.
Now, that is the spot earnings. The periods fixtures during the third quarter and what we've seen in the fourth quarter have remained quite a strong, of course, not as high as these spot numbers because the spot numbers referred to 1,2,3 days of employment, but this market is quite strong at the moment. And there are no indications of weakness or suspension of drilling programs from any of the main contractors in the world right now.
There are a number of rigs to be delivered in 2009. And as you know, these rigs are very, very large investments. They are by and large committed to drilling programs and our vessels are fixed throughout 2008 and into the third quarter of 2009 monthly at sort of average rates that have prevailed in 2008.
We also mentioned during the call that the first ship that we take delivery of in Brazil next year has been committed under a four-year charter at the prevailing very attractive rates. So actually come next year, we will have that ship committed for a very long time over a period, where she has basically a full pay back up at that rate.
So, great environment for offshore at the moment has remained quite strong, and we have taken forward coverage at attractive rates during the third quarter.
Mike Lanier - AIG
Do you suppose if (inaudible) stays at 50 that’s not going to have an impact on you in 2009 because everything that’s happening in 2009 has already been lined up.
Well, two things just to that. Firstly, the drilling platforms cannot function without platform supply vessel. So the demand for vessel -- supply vessels tends from the delivery of rigs. We believe that the rigs that are going to be delivered in 2009 are already basically paid for or mostly for and these are very, very large investments ranging up to $500 million, $600 million a piece.
They are mostly contracted by the time they go into the water for long periods of time. So assuming that those rigs will be delivered, we don’t see any slackening of demand in 2009, because it is not the operational cost of the rig itself that is going to determine whether it's going to work or not, but the cost of building and then once the cost of building is incurred even in a $50 or $60 price scenario, they will continue to work.
As for the price scenario, the only thing that I could add to that is the President of Petrobras in talking a couple of weeks ago about their developments in Tupi and Carioca said that they had designed their investment program from those field based on the price of $35 a barrel of oil. So he stated that those programs would be unaffected in a price scenarios the one we [seek back].
Thank you. Our next question comes from Francisco Schumacher. You may ask your question and please state your company name.
Francisco Schumacher - Raymond James
Yes, from Raymond James. Well, congratulations on the results. Basically my question comes regarding your expansion in capacity in this for '09 and '010 in the River business. Why do you think that the expected decrease of maintenance of iron ore production in the following years will not change your expansion programs?
Francisco well, two things as to that. We were not counting in 2009, really with the large input from our new production of barges, as you'll see it only starts rolling in, in a serious way from the second half of the year. We think with the contracted cargo the way we have it, even if there is no incremental demand coming in from iron ore, we do have enough cargo to cover a 100% of our fleet during the year. So it doesn’t change our 2009 plan.
As to the future increments, 2010 and beyond, it does seems like the soybean incremental production is going to continue, we should remember that the soybean production expanded at the rate of approximately 9% a year for 12 years continuously at a price level, which was about half of what it is today.
So we believe and the farming technics that have been introduced to the region, really made the expansions the available land for soybean easier and cheaper. So there’s no reason for us to think that that expansion is not going to continue particularly in Paraguay and in Mato Grosso do Sul in Brazil.
We see also more of the Brazilian cargo flowing into the River. We saw a significant increment in 2008 as a result of the river logistics being more accessible and cheaper than the alternative logistics to take the cargo to the ocean. So, as the Brazilian crop grows and the logistics for railing it or trucking it to [Paraguay] become more and more congested, the river will become more of an alternative. We will see more of that cargo flowing towards the river that's another reason why soybeans will grow.
Finally, in the long-term, we believe that the average age of the local fleet is pretty old, it is approaching 30 year's in average. So, in the next four or five years, there will be a natural depletion of the old barges, which will come out of service and we believe that we will be able, even in the no growth scenario for the iron ore, to maintain the growth in cargo carrying that we had expected by replacing barges that will go out of service.
(Operator Instruction) Our next question comes from [Leenk Warden]. You may ask your question and please state your company name.
Leenk Warden - HD Willington
Okay. This is [Leenk Warden, HD Willington]. I was wondering whether you have given any consideration to a reverse split and as much as under various covenants a lot of stock buyers regardless of values apart from buying stocks under $5 a share?
I'm sorry. Could you clarify the question [Leenk], because as a company we have announced a plan to buyback shares up to the total of $50 million. As we explained, we did execute on that time during October within the maximum parameters that the company is allowed to. That is 25% of its average volumes for the last 30 days and the Board has authorized us to continue with that program up to the end of December but there is no price parameters set for it.
Leenk Warden - HD Willington
Well except through a number of investors there are price parameters they can't buy stocks under $5 a share and for that reason you might want to consider a reverse split not buying more shares, but cutting the size of your share base by two or three times to affect a higher per share price.
I see. No we have not considered that, but it's an idea that we might study.
Leenk Warden - HD Willington
Because you are missing the market out there of investors who can't invest in an under $5 stock.
Okay. We thank you for the advice we had not taken that into consideration so far, so we will definitely look into it.
Leenk Warden - HD Willington
Thank you. Our next question comes from [Ira Socket]. You may ask your question. Please state your company name.
Ira Socket - Socket and Company
[Socket and Company]. Are you at liberty to discuss how many shares you are picking up through November, so far?
Well the reply is we have revealed. We have made public all the share purchases that we have made so far. As you know there is a blind period 15 days before the release, so as soon as we announced the release we did not purchase anymore share.
Ira Socket - Socket and Company
I understand, okay. Second I am an investment advisor and I run a small hedge fund. And I have been buying even as a we speak on this phone call your 9% secured bonds at prices of today at $74.25 and lower. Could you discuss what you believe to be the residual value or the comparable values of those ships that secure those bonds or does that work on freight rates, or does it work on actual age, or does it work on just the wear and tear. Secondly, I live in my Miami and I also live in Hope Town in the Abacos and is there an opportunity to visit with you and Mr. Hoskinson?
As to the latter, there is definitely an opportunity and Mr. Hoskinson here will be very glad to see you in Miami. So, well you have our address and you can call up on him anytime.
Ira Socket - Socket and Company
I have called, but I haven’t got the return phone call other than from the New York Investor Relations.
I see. Well, we'll make sure that you do get a call back. So, you can please do give us, when you call make reference to this conference call here. We'll make sure you get a call back.
As for the underlying value of the assets that support the bond or the collateralized bond, it is not information that we have made public, and therefore we could not discuss it here. But let me say this, a proportion of the assets that secure the bonds are barrages, which have sort of reasonably stable value and which declines over a very long life time.
So, and they have been replaced in numerous occasions during the life of the bond. So while there is no value that I can give you as to the collateral of the bonds, it is split between ships, barges and there's a variety of ships there, so it's not subject fully to the fluctuations of the value of bulk carrier or of tractor.
Ira Socket - Socket and Company
Okay. One last question. I know it's your policy to isolate each loan on a tone and not to buy back bonds but considering you are buying back stock, why would the board not reconsider that policy when in light of the current market conditions, when the purchase would say, somewhere close to 13% in current interest plus the large gains on retiring both bonds of almost 25%, over 25% of the debt.
Well, as to that, it is true that we have not made any purchases of this bond that is now in place, but we did purchase the previous bond in the secondary market. It's the one that we repay completely in 2004. So because of the buying back of bond is not unknown to us.
At the moment, I can only say the board is preferred to concentrate our efforts in repurchasing the shares because they think it is very important to sustain shareholder value. They believe it is in that sense a larger contribution to shareholder value than repurchasing the bonds. But it's there is nothing to preclude us from buying bonds in the future.
Our last question comes from Rodrigo Goes. You may ask your question and please state your company name.
Rodrigo Goes - UBS
It's UBS. How you doing Filipe? Just a quick on your passenger vessel, I was wondering if you have any plans for that asset, now that the sale has fallen through. What's your expectation is it, if you don’t have a fair buyer lined up, what do you expect to do within 2009?
Hi, Rodrigo. Well, it was most unfortunate that the sale did not come through and I suppose it was just at a point in time where the financing for this buyer became difficult and that he couldn't execute on the purchase. The vessel came to the end of the season and we have laid her up.
The situation for selling cruise ships Rodrigo, or for chartering the cruise vessels at the moment is very uncertain. At the moment there are simply no transactions taking place in the sale and purchase market of cruise ships. So we're sort of forced into taking a wait and see attitude. The vessel is out there both in the sale and in the charter market.
One thing I can say is that, we do intend to continue operating the vessel, under the MCC banner as we did last during this year. And we are looking for a guaranteed income charter or a sale of the vessel now.
It is very unlikely we think that we will be able to materialize either of these two opportunities before year end, because the whole context of this cruise industry seems a bit uncertain at the moment. So its better we wait and see. We think that if market returns to normal we can execute on a sale of the vessel at the sort of same price that we had sold before, or otherwise we’re just are going to have see what the new year brings.
Rodrigo Goes - UBS
Okay, very good, thank you very much for that, Len.
One thing that you might want to know, (inaudible) is that she is laid up at minimum, minimum cost. We are not, as we have done in previous years, refurbishing or preparing the ship for a different trade or improving her in any way for next season. We're just playing up her as she is at minimum cost.
Rodrigo Goes - UBS
Just out of curiosity, if it does not [change] next year what was the negative EBITDA we should assume?
Very, very small. We don't have a number. But at the moment, we are assuming what is called be [play up] with a complete minimum attendance of cruise. So it will be very small. I can give you a figure for that a bit later if you want.
Thank you. And at this time, I’ll turn the call over to the speakers for closing comments.
Well, thank you everybody for participating on the call and we will be talking to you as we discuss our fourth quarter and year end results in the course of early 2009. Thank you very much.
Thank you. And this does conclude today's conference. We thank you for your participation.
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