Ultrapetrol (Bahamas) Limited (ULTR)
Q4 2008 Earnings Call
March 18, 2009; 10:00 am ET
Felipe Menendez - President and Chief Executive Officer
Len Hoskinson - Chief Financial Officer
Francisco Schumacher - Raymond James
Mike Lanier - AIG
Ira Socket - Socket and Company
Good morning, and welcome to the Ultrapetrol’s fourth quarter and financial 2008 earnings presentation. All participants will be in a listen-only mode. Today’s conference call is being recorded. If you have any objections please disconnect at this time.
I’ll now turn the call over to the company’s Chief Financial Officer Mr. Len Hoskinson and Mr. Felipe Menendez, CEO. Gentlemen you may begin.
Thank you [Kathy]. Good morning, everyone. Thank you for joining us and welcome to the Ultrapetrol (Bahamas) Limited conference call to discuss the company’s fourth quarter and fiscal 2008 earnings presentation. 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 the slide presentation which forms a part of this conference call. You should be aware that in today’s conference call, we will be making certain forward-looking statements to discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements.
For a discussion of 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, 2008 as well as page two 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 happy to take your questions and now, I hand over to Felipe.
Thank you, Len. Good morning everyone, and thank you for joining us on the call today. In order to make the best use of the material what we have filed together with our press release, in particular the slide show, as we go along we will reference the slide number that corresponds to the information that we are discussing.
In slide three, you will find the summary of our year-end results for 2008, compared to the equivalent results for 2007. Let me start by pointing out our reported 2008 EBITDA of $116.8 million, and net income of $47.5 million with a resulting EPS of $1.48 per share that you can see on the left-hand column. These are the strongest results that company has reported so far in its history.
As you know, we generally apply several adjustments for a better understanding of these results. In this case, we deducted the $11.7 million non-cash gains on FFAs that we recorded in the first quarter. The $4.9 million positive effect that the driven ratio of the Brazil Real at the end of the year had on our income tax provision, and the $16.4 million impact that the mal discontinued Passenger operation had in our 2008 results.
As you can see, in the second last right-hand column, after all these adjustments the resulting EBITDA of $111.8 million, net income of $47.2 million, an EPS of $1.47 are very close to the reported figure prior to adjustments that we just referred to. These results compared very favorably in 2007. In fact, 48% more in EBITDA and 100% higher net income and EPS than in the previous year.
The adjusted EBITDA, adjusted net income and adjusted EPS without taking into consideration the discontinued operations are $105.1 million, $30.8 million and $0.96 per share respectively.
Turning to slide four, you will find the equivalent results from the fourth quarter. As you can see on the left-hand side of the table, the reported EBITDA, net income and EPS for the fourth quarter were $3.4 million and $0.11 per share respectively. While the adjusted EBITDA, adjusted net income and resulting EPS excluding the discontinued passenger operation were $25.1 million, $9 million and $0.30 per share respectively. This compares favorably with $21 million, $6.3 million and $0.20 per share on the same basis for the fourth quarter of 2007.
As we anticipated in our last call, we completed in December the additional financing of $15 million without feet, which together with the $60 million that we have previously received from IFC, provide this with the total of $75 million over 12 years, with four years of grace to finance our River Business expansion.
We purchased a total of $3.2 million shares in the fourth quarter at an average price of $4.1. With these shares that we repurchase, we completed the acquisition of a total of $3.9 million share in 2008; at an average price of $4.97 for a total of $19.5 million spend. As we announced earlier this year, the board decided to extent this program until March 31, 2009.
On the slide six, you will find a year-on-year, as well as a quarter-on-quarter comparison on our River segment revenues, expenses and EBITDA. These 2008 River segments EBITDA was $14.4 million, as compared with $17.68 million in 2007. With analyzing the expense side of our River Business results, we note an increase in our voyage expenses of approximately $24.1 million.
The majority of this increase however, $18.5 million is attributable to increase in our fuel expense. As you can see $15.6 million of this variance is due to fuel price increases, which is fairly consistent with what we have recovered from our customers during the year through our fuel pass-through clauses, and $2.8 million is attributable to larger quantities consumed, due to larger volumes loaded and the number of pushboats in operation. The increase however, in other voyage expenses excluding fuel from the year was $5.6 million. In slide seven, we analyze the increase in cost both fixed and variable in the context of our pricing scenario for the year. As you can see our other voyage costs, excluding fuel price adjustments and our running costs increased on per ton basis, 21% and 34% respectively for a total of $5.45 per ton compared to the same costs in 2007.
As you can see in the second part of this table, during 2008 we also increased our rate of freights by $6 per ton, but $3.79 of that where fuel pass-through freight adjustments, was $2.21 per ton where what the analyst would call real increases resulting either from higher freights or an improved cargo mix. This $2.21 per ton freight increase was sufficient to offset the $5.45 per ton cost increase, resulting in a net cost increase of $3.24.
This cost increases are associated mainly with increases in crew costs, higher maintenance in operational cost, but generally with the reevaluation of the local currencies against the U.S. dollar in the first three quarters of the year.
As you can see in the graph at the bottom on the left side, you will note the Paraguayan currency in which we paid most of our River accruals, River rated on average about 16% for the first three quarters of 2008, compared to the average exchange rate for full 2007. At its worst point in September 2008 the exchange rate was about 24% lower than what it had been a year earlier.
A similar situation occurred in Argentina, where a stagnant rate of exchange coupled with local inflation increased substantially our cost in dollar. We have in the fourth quarter of 2008 and first quarter of 2009, as you can appreciate in this graph seen a reversal of this stagnancy, with local currencies devaluating against the U.S. dollar. If this stagnancy has maintained over 2009, we may see part of our cost reduce in dollar terms back close to what they were in 2007.
On the top left hand side of slide eight, you will see a pie chart that shows the distribution per product of the 4.3 million tons that we have carried in 2008. As you can see 63% of what we loaded was soybeans and by-products, 17% was iron ore, 11% petroleum products and 9% all other cargos combined.
Given our last call in 2008, we anticipated that no further loads of iron ore will take place during the year, on accounts of a general reduction in iron ore production affected by the International crisis and very low water levels in the High Paraguay River during the fourth quarter.
The volumes of soybeans shipped in December did not increase as we had expected and following the trend experienced in October and November, the volume of soybeans exports remain low when account to the financial crisis, which froze the opening of letters of credit and slowdown grain trading in general reduction in volumes affected the earnings of the fourth quarter, which coupled with the increase in costs we experienced in the first three quarters, resulted in a Rive segment EBITDA for the full year of 2008 of $14.4 million compared with $17.7 million in 2007.
The central area of Brazil, Paraguay and Argentina has suffered in late 2008 and early 2009 one of the worst droughts in the past 70 years. To illustrate the effect that this drought had on the soybean production in the area, the U.S. Department of Agriculture had estimated that the soybean production in Paraguay for in stance for 2009 was to be 7.2 million tons that estimate was produced in November 2008.
Their estimate now is only 4 million tons; that is a reduction of 44%. There will be some compensating volumes of soybean produced in 2008 being shift in 2009, but overall we are anticipating a reduction of 1.8 million to 2 million tons of cargo in delivers a whole for 2009 which could have a negative impact of about $4 million in our EBITDA.
As we mentioned earlier the devaluation of the local currencies with respect to the U.S. dollar if continued through 2009 should help reduce our costs. The long term outlook however, for volumes in the River is unaffected, so the seeded area continues to grow as we had expected. As you can see in the bar chart at bottom left of slide eight; the seeded area in Paraguay has grown 10% a year for a decade.
For 2010, over a theoretical seeded area of 3 million hectares, given the normal rainfall the production should be 7.7 million tons or 900,000 tons more than it was in 2008. Since our future demand projection is based on soybean expansion, which is 63% of our cargo we believe that given normal climatic condition, we will experience strong demand for transportation in the years to come.
In slide nine, we can take a look at the supply side of the equation in relation to the River system. The bar chart at the top shows the approximate age profile of the River fleet five years from now. As you can see a total of some 607 barges or about 40% of the capacity is going to be the young 35 years of age, which is generally considered to be the end of usual life of a barge. 96 of these are our own barges most of which will be then put through our re-bottoming or enlargement programs.
The remaining 511 of these older barges however, belong to competitors and that replacement by new equipment will require an investment of some $300 million to $400 million. We believe that in the current financial environment, where credit and liquidity will be scarce we will be ideally positioned to supply this needed capacity.
Our new shipyard in the River, which will be in operation in the second half of 2009, will be able to produce jumbo barges of 2,500 tones for 40% less than any other alternative. We continue full steam ahead with our reengineering program, which wine fully implemented, counting in its fourth quarter average prices should cut $6.9 million from our annual fuel bill increasing our EBITDA accordingly.
We also expect to achieve significant productivity gains from these large heavy fuel products, which should improve significantly our margins. The first two heavy fuel bunks will be operational in the second half of 2009.
Turning to slide 11, in our Offshore Supply Business, during the fourth quarter we continued to operate five vessels. UP Agua-Marinha and UP Diamante operated in Brazil under a long term charter with Petrobras’, which will be coming up for renewal between the second and the fourth quarter of 2009. While UP Esmeralda, Safira and Topazio, operates into the North Sea during the fourth quarter of 2008.
Our UP Safira is committed on a long term charter until the second quarter of 2009. UP Topazio and Esmeralda however, were charted at attractive rates until the third quarter of 2009 thus avoiding the seasonal low winter months. We currently have seven vessels under construction. We expect delivery of our UP Rubi, which is currently being built in Brazil, early in the second quarter of 2009. This vessel has been now charted to Petrobras’ for a four year period at a rate in excess of $30,000 a day.
Regarding our Indian and Chinese new buildings, the queue is in process of being late for the first two vessels being built at either location, while fuel cutting is progressing for the third and four Indian vessels as well.
Turning to slide 12, revenues in our Offshore Business increased 6% during 2008 compared to 2007. These higher revenues result mainly from higher rates obtained by our UP Esmeralda in the North Sea and the repositioning of UP Topazio in North Sea in the fourth quarter of 2007, whereas you obtained higher rates than she had obtained in Brazil a year earlier.
We experienced an increase in running cost to $16.7 million in 2008 from $13.9 million in 2007. Principally due to the currency appreciation of the Brazilian Real during the first three quarters of 2008, and due to higher manning supplies and maintenance expenses in our PSVs operating in Brazil. The Brazilian Real has since devalued considerably.
As previously informed during 2008, we sold U.K. pounds forward in order to protect our U.S. dollar revenues during the third quarter of 2008 and partially in 2009. The mark-to-market of these future pound sales as from the 31, of December 2008 show a profit of $2.4 million which when added to the profits made in 2008 on the settle positions of about $0.55 million totaled $2.95 million.
The resulting EBITDA for the segment in 2008 is $21.5 million compared with $18.6 million in 2007, and $6.3 million in the fourth quarter of 2008 compared to $2.9 million in the fourth quarter of 2007. As mentioned, the year and fourth quarter 2008 EBITDA include the $2.4 million gain produced by the mark-to-market of the pounds sell forward.
Turning now to slide 13, you will see that during the three quarters of 2009 we expect to have one additional PSV in operation. UP Rubi will contribute approximately $4.9 million gross profit contribution this year. The big increase of our PSV fleet really has its impact during 2010, then the flee will grow from the six vessels that we expect to have in operation during 2009 to 12 vessels that we expect to have in operation by the end of 2010.
In the bar chart on this page you can appreciate how the gross profit contribution per year increases as the new vessels are delivered. We want to point out as mentioned in the note, that the assumptions that had been made to build this bar chart basically have used the U.S. dollar revenues obtained by the fleet in average in 2008 and assumed the same revenues in operating days going forward.
In slide 14, you can see that the spot rates for the offshore in the North Sea during 2008 are being quite strong. As you can see in the graph at the top left, the year started at relatively low rates during the winter months, that gradually improved at the spring and summer came about.
We have maintained the balance in our fleet, both in the North Sea and Brazilian markets. The average rate obtained by our vessels in Brazil during 2008 was $23,650. In the North Sea, as you can see in the bar chart of the bottom left, we obtained an average rate during 2008 of $27,818.
The market in the North Sea presently still suffers from the typical lower winter activity and is also affected somewhat by the financial crisis and the low oil prices prevailing. As I’ve told you earlier, we fixed our North Sea vessels in anticipation of the winter slow season and therefore we have not been effected by the existing lower rates.
For very modern deep sea vessels such as ours, we expect that the shortfall of PSVs will continue until 2011. As you can see in the upper right hand of the page, new deliveries of rigs and the requirement for PSVs will out number of new deliveries of PSV. Generally, 1.7 PSVs are required to service every rig and as drilling operations move further away from the coast and into deeper and more difficult waters, the number of required PSVs per rig will increase.
In Brazil, where we announced Petrobras CapEx for the coming years, it is estimated that Brazil will double its present requirement for PSVs by 2012 and we will triple them by 2020. Our vessels have special cabotage rights to operate in Brazilian waters, since four of them were actually build in Brazil.
In slide 15, you can find a brief description of our offshore fleets, both operating and under construction. When we take delivery of our new vessels, our fleet will have more than double its present size and will be one of the most ingenious and modern fleets of its kind in the world, including DP-1 or DP-2 and other capabilities, which are particularly important to operate in the new deep sea water discoveries in Brazil.
In the table at the top of slide 17, we show the segment EBITDA for our Ocean Business during the full year and fourth quarter of 2008, compared with the equivalent periods of 2007. As you can see, the segment EBITDA for 2008 grew to $91.8 million or $67 million more than in 2007.
The Ocean Fleet fourth quarter EBITDA is equivalent to $23.5 million, which is over $5 million more than in the fourth quarter of 2007 and $3 million above the results obtained by the very same fleet in the third quarter of 2008. This result is inline with our previous announcements and it comes as a result of both the stable earnings of our Product Tanker Fleet, which is employed in South America and the long term charters and our Capesize fleet with its FFA coverage.
In slide 18, you will find in the graph to the right, a depiction of the time charter values at which our forward FAA coverage is taken, compared to where the future values of the market where at March 16, 2009 for the same periods. As you can see, our forward coverage is well above today’s market and has a positive total mark-to-market value of $58.4 million.
As of March 16, 2009, we have covered approximately 71% of the remaining available days in 2009 and 69% of the available days of 2010, considering that we have plans to reduce this fleet to three ships in that year. In the pie chart of the bottom left, you will see an analysis of our counterparts under the FFA contracts, which shows that 77% of our contract days are with Bunge, 14% with Cetragpa, a subsidiary of Louis Dreyfus, 8% through a clearing house and a very small portion of 1% with Navios.
Turning to slide 19 now, in the bar chart to the left, you will find the average daily time charter earnings of our Capesize vessels for the past three years and based on our FFA coverage and the future market values of March 16, 2009, both we estimate that 2009 and 2010 average time charter just to be. On the bar chart to the right, you will find the equivalent gross profit contributions expected from the same fleet, using similar assumptions.
As you can see the result in gross profit contribution for 2009 basis four ships is $51.4 million and for 2010 basis three ships is $28.4 million, which for comparison purposes is $4 million and $11.8 million more than what we obtain with an equivalent fleet of three vessels in 2007 and 2006 respectively.
The graph at the bottom right shows the evolution of the spot market for the past five months. Our FFA coverage has proven to be a successful tool to reduce our exposure to market volatility and secure our cash growths going forward.
Our Ocean Fleet, as depicted in slide 20; consists of 10 vessels in total, with the first four in this stage corresponding to the overall Capesize vessels that we had just discussed, while Amadeo, Miranda, Alejandrina and Austral are all operating at fixed rate time charters at attractive levels to first class oil companies trading in South America.
In slide 21, we have provided a summary of the CapEx programs for 2009 and 2010, in line with the initiatives that we have discussed with 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 21 for a better understanding of the conditions that may affect this plan.
As you can see, the total CapEx for the River segment in these two years is a $105 million, which includes $8 million for the whole year 2009 to complete the construction of the new barge building yard, and then $14 million in 2009 and $28.8 million in 2010 to construct the barges and other equipment necessary for the growth of our fleet.
We can of course adapt the size of this yearly investment in new barrages as we see fit in each period. Similarly, the reengining program is estimated to require a total investment of about $38 million in 2009 and 2010 to buy, build, modify and install the 24 engines that we have acquired under this program.
In our offshore business, we estimate that the total remaining investments for building 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 $86.6 million. As you can see, we have a total of $121 million CapEx for 2009 and $71.7 million for 2010. The total CapEx therefore for both years is almost $193 million.
As we have previously indicated, we started 2009 with over $105 million in cash and cash equivalents, which added to the $79.8 million undrawn portion of the DVB/Natixis long term loan that was agreed in 2008, provides a total of approximately $185 million or merely enough to satisfy our CapEx for the next two years, not counting on any of the net cash that the company can generate.
We believe that we are financially well position to take the growth opportunities that may arise in months and years ahead. In slide 22 you will find the reference list for the fleet list for the company.
With that I will turn the call over to Len, who will guide you over the financials.
Thanks Felipe. Turning to slide 23, we can see that total revenue for the company during 2008, were a record 57% higher of $303.6 million compared to $193.8 million for 2007. The fourth quarter 2008 revenues also saw a 30% increase from $54.8 million in ’07 to $71.4 million in 2008.
The reported net income for the full year and the fourth quarter 2008 was $47.5 million or $1.48 per share and $3.4 million or $0.11 per share respectively, as compared with income of $4.4 million or $0.14 per share, and income of $6.3 million of $0.20 per share respectively during the same periods in 2007.
The full year 2008 results include the non-cash mark-to-market net gain on FFA hedges of $11.7 million or $0.36 per share and a deferred income tax gain of $5 million from unrealized foreign currency exchange rate losses on our U.S. dollar denominated debt in our Brazilian subsidiary in the offshore supply business, which is about $0.16 per share; while fourth quarter 2008 results include only a deferred income tax gain of $3.4 million or $0.11 per share from unrealized foreign currency exchange rate losses, on our U.S. dollar denominated debt of our Brazilian subsidiary in the offshore supply business.
Net income for the full year and fourth quarter ’08, excluding the effect of both above items, is a gain of $30.8 million or $0.96 per share compared with 2007, a minimal loss with zero dollars per share.
The reported EBITDA for the full year and fourth quarter ’08 was $116.9 and $23 million respectively, as compared with $65 million and $21.7 million in the same periods of 2007. The 2008 EBITDA for the full year and for the fourth quarter of ’08 includes a non-cash gain of $11.7 million on non-cash results from FFA hedges.
Excluding the effect of the non-cash mark-to-market net gain in FFA hedges, the adjusted EBITDA for the full year and for the fourth quarter of ’08 is a $105.1 million and $23 million respectively, compared to adjusted EBITDA for the full year and fourth quarter ’07 of $76.7 million and $19.1 million, after excluding a non-cash loss of $11.7 million and a gain of $2.6 million on FFA hedges respectively. For a reconciliation of EBITDA to cash flows for operation activities, please refer to the tables at the end of the presentation.
Excluding the effect of the discontinued operations of our Passenger Business, we generated EBITDA from continuing operations, income from continuing operations and earnings per share from continuing operations of $123.5 million, $64 million and $1.99 per share respectively for the full year ’08, as compared with EBITDA from continuing operations, net income from continuing operations and EPS from continuing operations of $63.9 million, $8.4 million and $0.26 per share respectively for the equivalent period of 2007.
Finally, excluding the effect of the discontinued operations of our Passenger Business as well as the effect of certain non-cash effects included in our results, we generated adjusted EBITDA from continuing operations, adjusted income from continuing operations and adjusted EPS from continuing operations of $111.8 million, $47.3 million and $1.47 per share respectively for the full year ’08, as compared with adjusted EBITDA from continuing operations, adjusted income from continuing operations and adjusted EPS from continuing operations of $75.6 million, $23.4 million and $0.74 per share respectively, for the equivalent period of 2007.
Looking into fourth quarter numbers and excluding the effect of the discontinued operations of our Passenger Business, we generated EBITDA from continuing operations, income from continuing operations and EPS from continuing operations of $25.2 million, $12.4 million and $0.41 per share respectively for the fourth quarter of ’08, as compared with EBITDA from continuing operations, income from continuing operations and EPS of $23.6 million, $9.3 million and $0.29 per share respectively for the equivalent period of 2007.
Excluding the effect of the discontinued operations of our Passenger Business, as well as the effect of certain non-cash effects included in our results, we generated adjusted EBITDA from continuing operations, adjusted income from continuing operations and adjusted EPS from continuing operations of $25.2 million, $9 million and $0.30 per share respectively for the fourth quarter of 2008, as compared with adjusted EBITDA from continuing operations, adjusted income from continuing operations and adjusted earnings per share from continuing operations of $21 million, $6.4 million and $0.20 per share respectively for the equivalent period of 2007.
Moving to slide 24, we show the breakdown across the business segments for revenues, voyage expenses and running costs. Felipe has already discussed the main highlights for each business, so I won’t repeat them here.
On slide 25, here is the condensed version of our company’s balance sheet. Total assets have increased 33% from $62.2 million as of December 31 ’07, to $825.1 million as of December 31 ‘08.
During 2008, our fixed assets before depreciation grew by about a $100 million in the period. About 60% of the growth in fixed assets stands from the additions to the River Business, including 57 barges and three pushboats reposition of the Hidrovia from the United States and barges completed in the widening and re-bottoming programs, as well as the yard which is under construction.
Another 25% of the increase in fixed assets refers to the increasing value of the PSVs, which are under construction. As of December 31, 2008, our unrestricted cash position was $105.8 million, 65% higher than at December 31, 2007, when we had $64.3 million in unrestricted cash.
On the liability side, the 18% increase in financial debt between December 31, ‘07 and December 31, ‘08 stems primarily from the drawdown of the new loan from IFC and OFID, which has reported earlier of very long term credits, including substantial grace price periods, as well as the initial drawdown under our long term facility with DVB and Natixis, for the funding of some of the stage payments on the Indian PSVs.
The significant difference in our balance sheet over the period is the value of our FFA position, which is recorded in our accounts under other receivables. This is the main reason why our current assets have increased from $25.4 million as of December 31, 2007, up to $84.3 million as of 31 December 2008, and non-current receivables have increased from $10 million as of December ’07 to $36.6 million as of 31 December 2008, which in total is an increase from $35.4 million to $120.8 million.
As you will see, our current liabilities of $208 million compare favorably with the current liabilities of $72 million, which is a very strong working capital ratio. Including discontinued operations, our key ratios as of 31, December ’08, our net debt-to-capital 45%, net debt-to-EBITDA 2.95 times and debt-to-EBITDA of 3.95 times.
On slide 26; as you can see in the slide our financing is very well balanced with total repayments in the range of $11 million to $41 million until 2014, when $180 million note is due for repayments. In 2009, we will prepay the Princess Marisol loan and even though in the $41 million we also included the repayments of a $10 million revolving credit we have with Banco Bice, that credit is available for drawdown for the next 18 months.
We have financed our current projects in the Offshore and River segments with long term loans that will allow for the construction period to be completed, and the assets to be in full production before the commencement of the principal repayment. We believe this structure is one of the cornerstones of our financial strength going forward.
Now I’d like to turn the call to Felipe.
With that we have finished our presentation of our 31 December results, and we will be opened for questions.
(Operator Instructions) Your first question comes from Francisco Schumacher - Raymond James.
Francisco Schumacher - Raymond James
Basically, I have one question related to why did you decide to prepay the Banco Bice debt and availing that over repurchasing the 2014 debt which is much lower in terms of yields maturity, well, that’s my first question.
Good morning Francisco. The Banco Bice debt was one of our most expensive pieces of debt. It is relatively short; it only had three years to go and it would have been substantially repaid including the cash collateral required a year from now anyway. So, we decided that it was a good opportunity to take it up with Banco Bice.
We are looking at other financings with them, and so we thought it was a good thing to take this from out of the way, so we can look at new financings with them. We have several of our PSVs that are being constructed, which are not committed to any financing at the moment, and we would rather concentrate on long term financing in these units than in short term credits as we had with the Marisol.
Francisco Schumacher - Raymond James
My second question is related to the River Business. It was somewhat below what I was expecting in terms of operating results. Should we expect a similar fourth quarter in the first quarter of this year and the running costs didn’t decrease at all in the fourth quarter, even though the transported volumes were much lower. This is because you probably don’t have the flexibility to adjust those costs related to this strong unexpected decrease?
Yes. Well, let me answer the last question first. Running costs are semi-fixed costs as we see it and in particular in the fourth quarter, we were expecting a re-ramping of the exports of soybean in December. So, we were keeping a large active fleet in expectation that the soybean exports would unfreeze and we would see volumes come back in December, which did not occur.
So, generally our running costs are semi-fixed. We can alter them very quickly to changing market conditions, and in particular in the fourth quarter we were hopping that volumes would rebound in December, which they did not. So, effectively you will see that with radical changes happening over what had been anticipated in our plan for the fourth quarter, we will not be able to adapt running costs as quickly.
As to the outlook for 2009, as we have said, 2009 is going to be affected by the drought. Now paradoxically, the first quarter is not. In the first quarter we have seen some other soybeans that were not shipped in 2008, come into the market as the letters of credit and the financial situation ease and the trade returned to more normal conditions.
Typically, what you will see in the year with a drought like this is that it will be a very short season. The early part of the season will have the same abundance of grain as a normal year; then as the second and third quarter progresses, the soybean would probably dry out. So, we’ll not see the impact of this drought in the first quarter and in fact you may see a quite strong first quarter, but then we will see the effect of that later in the year.
Your next question comes from Mike Lanier - AIG.
Mike Lanier - AIG
When we look at the Ocean Business, it’s been the big contributor right now. How does that play out over the next couple of years? I mean your FFA’s protective you for how long?
The FFAs as we described here, cover about 70% of what we have in capacity for the OBOs for the Capesize fleet in 2009 and 2010. So, we are pretty well protected for the earnings of those vessels, but tankers as we said, and that’s the other side of the equation of our ocean fleet, are all in the long term charters.
So, their earnings are protected going forward and still beyond 2010. So, we don’t expect to see any significant value in some of the tanker earnings and on the Capesize front, the FFAs will protect us about 70% of our available capacity, ’09 and 2010.
Mike Lanier - AIG
Okay and you expect the fleet size to be pretty static over the next couple of years?
Good point. We did mention that we are planning to reduce the Capesize fleet by one vessel in 2010. So from a fleet to four Capesizes, we’ll be reducing to three and as you can see in the slide, we projected with the future growth profit contributions that we expect from the Ocean vessels, we are projecting a year 2009, with a gross profit contribution which is $4 million above what an equivalent fleet produced in 2007.
You can see that, I think it is slide 19 in fact; we are projecting for 2009 a gross profit contribution of $51.4 million and for 2010, on a three ship fleet, a gross profit contribution of $28.4 million.
Now in 2007, we were operating a three vessel fleet in this class and we produced $24.3 million and that was an excellent result in 2007. So, we are expecting with the coverage that we have and with current market conditions to be producing $4 million more than that and then in 2006 we produced with three ships $16.6 million. So, the $28.4 million that the three ships will produced in 2010 is quite a considerable result.
Now, on the other hand, one thing that perhaps we didn’t mention Mike and what is interesting to addresses is that this is not static. We have always said that we would not replace the Capesize vessels while the values remain very high. There are going to be, we believe, very interesting opportunities in the next two years, in the dry cargo sector, to buy modern ships at reduced prices and we expect to be able to take these opportunities and buildup a strong and very modern fleet of Capesize as these vessels come off service in 2011 and going forward.
So, this is not a disappearing fleet that we expect to be able to strengthen; the fleet that in fact with the opportunities that we believe will come to the market. We will probably have a larger Capesize fleet in 2011 and 2012 where we operate today.
Mike Lanier - AIG
Also, your stock buyback program, did you stress that at all?
We did, yes. We booked a totaled of 3.9 million shares approximately in 2008, for a average price of $4.97. This includes about 3.2 million shares, with an average price of $4.01 that we booked in the fourth quarter of 2008. With this we have spent about $19.5 million of the $15 million authorized by the Board under this program.
The program has been extended till March 31, 2009 and as in previous quarters we will submit to the Board, the extension of this program beyond that date and we shall see, but it’s a program that continues; of course it continues with the limitations that the law imposes. Basically, we cannot buy more than 25% of the average volume of the previous 30 days and we can only do it when we’re not in a blackout period or in possession of information that the market does not have. So, our repurchasing capacity is limited.
Mike Lanier - AIG
What kind of cash balance do you like to maintain here or you think as you consider stock buybacks and extra CapEx, where do you just kind of draw the line on minimum cash?
Well, we have never drawn a line of minimum cash. Now, if you look into our past, we never needed more than $10 million to $15 million to manage the activities of the company. So, I suppose you can do the additions and subtractions yourself, but the idea is to keep the company very liquid, to be able to take the opportunities that the market we believe will bring.
Your next question comes from Ira Socket - Socket and Company
Ira Socket - Socket and Company
The last time I met with you, you had mentioned that the company was contemplating an Investor Day. The price of your stock and the price of your bonds is very depressed, mainly because Ultra is a Bahamian-based company and doesn’t have to file more, more SEC and so there is not a high level of belief; I’ll use that term. Giving investors the opportunities to smell, feel, tough, the company, I think would be very helpful. Is there any thought to scheduling an Investor Day?
Well, it’s something we give continuous thought to and in fact we tried to put it together last year, but given the market situation and all of our listed attendees excuse themselves quite understandably, because in October, November last year the markets were in quite a turmoil.
We are waiting for the opportunity where we can get the attendance of investors; it’s something that we welcome. We have tried to promote, unfortunately circumstances have been a bit adverse, but we definitely do it and we’ll let you know when it’s scheduled.
Ira Socket - Socket and Company
What about the opportunity for someone to come down on their own and get a tour at their own expense?
We are always available for people that want to come down. Now, these are very long distances. I mean our River operation covers about 4000 kilometers of river. So, it’s always better to put together a group to make better use of the resources, but no, we always welcome people that want to come.
Ira Socket - Socket and Company
Okay, then I will bring back the old subject; you’ve paid-off some of your debt early, you said that was relatively high price, your secured bonds, and continue re-buying them in the 63, 64 area; that would represent an incredibly high yield not only, and plus a 36 point discount. Can you again comment why you will not start to buy some of old bonds on the open market?
No, there is no particular reason why we haven’t. The Board in this case has preferred repurchase stock, but we have repurchased bonds in the past and we cannot rule out the possibility that we may do so in the future.
I will now turn the call back to Mr. Felipe Menendez for closing remarks.
Well, thank you very much for participating in the call and with that, we end of our presentation today and hope to host through a new conference when we announce our first quarter 2009 results. Thank you very much.
This will conclude today’s conference. All parties may disconnect at this time.
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