Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ultrapetrol (Bahamas) Limited (NASDAQ:ULTR)

Q4 2013 Results Earnings Conference Call

March 13, 2014 10:00 a.m. ET

Executives

Felipe Menendez Ross - Chief Executive Officer, President and Director

Cecilia Yad - Chief Financial Officer

Analysts

Benjamin Nolan - Stifel, Nicolaus

Arieh Coll - Coll Capital

Katja Jancic - Sidoti & Company

Operator

Welcome and thank you for standing by. (Operator Instructions) Today's conference is being recorded. And at this time I will turn the call over to Mr. Felipe Menendez, CEO of Ultrapetrol and Ms. Cecilia Yad, CFO of Ultrapetrol.

Cecilia Yad

Good morning, everyone. Thank you for joining us and welcome to the Ultrapetrol (Bahamas) Limited conference call to discuss the company's 2013 full year and fourth quarter earnings. I would like to remind everyone that this conference call is now being webcast at the company's Web site, www.ultrapetrol.net.

There are also additional materials related to our earnings announcement on our Web site, including a slide presentation which forms a part of this conference call. You should be aware that in today's conference call, we will be making certain forward-looking statements to discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements. For the discussion of factors that could cause results to differ, please see the company's press release that was issued yesterday and the company's filings with the Securities and Exchange Commission, including, without limitation, the company's Annual Report on Form 20-F for the year ending December 31, 2013, filed yesterday, as well as Page 2 of the slide presentation that shortly follows.

With me today is Felipe Menendez, Ultrapetrol's President and Chief Executive Officer. Felipe will review Ultrapetrol's business segments as well as discuss our industry and future growth opportunities. I will take you through the financials and after our remarks we will be happy to take your questions.

And now I will hand the proceedings to Felipe.

Felipe Menendez Ross

Thank you, Cecilia. Good morning, everyone, and thank you for joining us on the call today. In order to make the best use of the material that we have filed together with our press release, as we go along, we will reference the slide number that corresponds to the information that we are discussing.

Let's turn to Slide 3. In Slide 3 you will find a summary of our fourth quarter and full year results for 2013 compared to the equivalent periods of 2012. The adjusted EBITDA for 2013 is $97 million which is over three times the $32 million we obtained in the same period of 2012. Our adjusted net income and adjusted EPS are $13.2 million and $0.09 per share, which compares to an adjusted net loss of $46 million and $1.30 per share in the same period of 2012. As you will notice, our fourth quarter of 2013 adjusted EBITDA was $14.9 million, which compares with $6.1 million in the equivalent of last year or an increase of 143%.

As usual, we adjusted net income and EPS on the fourth quarter and full year 2013 to reflect the increase in the provision for exchange variance in our Brazilian subsidiary, which is a non-cash effect produced solely by the reevaluation of the Brazilian currency against the U.S. dollar. We have also adjusted our net income in the full year for the one-time charge of $5.5 million in connection with the extinguishment of debt mostly related to the repayment of our convertible bonds and our 2014 notes which occurred during 2013.

Finally, we have adjusted our net income for the gain related to the sale of dry barges which were subsequently leased back to the company and that for accounting purposes such gain will be deferred over the term of the lease. During the quarter we closed as previously announced, $25 million add-on to our $200 million, 2021 notes issued earlier in the year. The placement was very well accepted by investors and was priced at 104.5% which gave proceeds of $26.1 million to the company. Also in the fourth quarter as we had previously announced, we confirmed the acquisition of three 5,100 deadweight newly built vessels off the yard.

The total purchase price for these vessels was about $96 million. We took delivery of these vessels at the building yard in China and following a short period of upgrades where we have added some equipment to adequate them to our operation, they are now sailing towards the Atlantic Ocean where we expect they will be in service in April 2014.

On October 22, we canceled the shipbuilding contract for UP Onyx on account of the shipyard's delay in delivering the vessel. The appropriate repayment demands were made under the refund guarantees and we obtained a complete refund from the banks of $17.7 million in January 2014. As already announced, on October 24 we signed the agreements for the sale of another set of 12 barges to be delivered in the first quarter of 2014 from our Punta Alvear barge building facility.

Let's turn to Slide 4. In the table at the top of the slide, you will find our fourth quarter and full year 2013 EBITDA per segment, respectively, compared with those obtained in each business segment in the equivalent periods of last year. As we already mentioned, the River business results in 2013 showed a total adjusted EBITDA of $38.8 million for the year, a substantial difference with 2012, which as we have discussed in the past, was severely affected by the conjunction of a severe drought that cut the crops in half, and very low river levels which affected the navigation and overall efficiency of transportation in 2012. Our 2013 results also benefited from a large number of barges delivered for third parties from our Punta Alvear facility.

Our Offshore Supply business in 2013 produced $40 million of EBITDA which is 45% more than what we obtained in the same period of 2012. As we will see in more detail when we cover this segment later in the presentation, this impressive increase results mostly from the additional vessels that were delivered from the construction yard in India, but just as significantly from the increased time charter rate that we obtained in 2013 as we renewed the long term contracts of the existing fleet which expired during the year.

Our fourth quarter results in the Ocean business were $3.2 million better than the fourth quarter of last year. While the full year results are virtually unchanged in terms of EBITDA in respect of last year, you will note when we discuss the segment, how it provides a very substantial gross profit contribution before distribution of G&A to our various segments.

Finally, in the fourth quarter we have had a positive impact from foreign exchange variations equivalent to $1.9 million in cash, as opposed to a variation of $770,000 in the same period of last year.

Turning to Slide 6. You will find the comparison of our fourth quarter and full year 2013 River business results against those obtained in the same period of 2012. As we have already discussed, our River segment in 2013 produced a segment adjusted EBITDA of $38.8 million compared to a segment adjusted EBITDA of negative $3.7 million in the same period of 2012. As we have already discussed, the main differences between both years were, firstly, the extreme drought that affected 2012 that had a severe impact in the volumes of cargo carried and also in the river depths, which impaired navigation and it impacted our costs.

Secondly, in 2013 we also renewed at higher rates a number of our long-term contracts that expired at the end of the previous year. And we sold a substantially larger number of barges for third parties than we did in 2012.

In 2013, we carried a total of 4.1 million tons of cargo compared to 3.45 million tons in 2012. That is 20% more cargo carried in the year. Our running costs of 2013 were 7% higher than in the same period of the previous year, persistent with larger volumes carried but mostly also as a result of crew costs as well as other operational expenses affected by inflation in our costs which were not reflected in equivalent devaluation of the local currency during the year. This tendency has eased considerably in 2014 with most local currencies having suffered considerable devaluation which may help reverse this increase in the future.

As we anticipated in our last call, the administrative and commercial expenses show variations between segments on a quarter-per-quarter basis because of a different allocation per segment in each quarter in 2013 than the criteria we followed in 2012. And that is the main reason why we see a discrepancy of 51% in the fourth quarter when we compare the quarterly expense of both years. We have experienced, however, a 38% increase in our administrative and commercial expenses when comparing the full year 2013 against 2012. This results partially from the same exchange effects that we discussed when referring to the running cost but also because of distribution of our corporate G&A in our different segments.

Let's turn to Slide 7. In the bar chart at the top, you will see the USDA statistics for the Paraguayan soybean production for the past ten years as well as their 2014 estimate. As you can see, the soybean crop was substantially better this year than in 2012 which was deeply affected by the drought. But most importantly, USDA is predicting a similarly normal crop for 2014. It is important to mention that the 2014 crop has already been mostly harvested by now.

In the graph on the bottom, you will see the production of iron ore in region, which for the third consecutive year has exceeded 7 million tons. Over three times what it produced a decade ago. This production is led by Vale who has in place expansion projects for their mines in the future. Let's turn to Slide 8. For 2014, we have had throughout December, January and February, regular rains in Paraguay and therefore the crop is expected to be in line with 2013 volume of around 8 million tons as we just discussed. Over 70% of the crop is already in silos, so we do not expect to have any volume problems this year in the agricultural sector. Whereas the same time Vale has a robust shipment program, so we expect to use in the season, all our available capacity.

In conjunction with our already fully contracted iron ore transshipment operation, we intend to develop additional capacity and to provide transshipment services for other cargoes which will help integrated the services that we provide and obtain a better margin by adding value in the logistical service chain. We will continue to transform our pushing capacity in order to become more efficient. As you know, we have invested in building and converting our existing pushboats, increasing significantly the horsepower of our engines which also consumer heavy fuel which is considerably cheaper than diesel. Seven of these units will be in service in 2014.

And now we have decided to design and build four state of the art shallow drafter new pushboats of 6,000 and 7,250 horsepower, respectively. The first of these pushboats will be in service by the middle of 2015 and we expect that they will significantly improve the efficiency of our operations in the long up stretches of the river system, reducing our transportation cost per ton in terms of fuel expense and running costs. We will continue to manufacture barges for our own fleet and for third parties for which our production line automated shipyard is a very cost efficient tool as we have seen last year.

Turning to Slide 9. I would like to briefly describe two new operations that start in 2014. As we previously announced, we have entered into a five-year contract with Vale to time charter four convoys of one pushboat and 16 barges, all of which have been delivered to the customers in January this year. We expect that this contract by itself will generate in excess of $8 million of EBITDA per year. We have also placed in an operating position our new iron ore transfer station, Parana Iron, which is depicted in the lower part of this page. And we expect it to be in operation before the end of this month.

She has been fully contracted by Vale on a take or pay basis and therefore together with the time charter of the four convoys discussed just now, we now have long-term contracts that segregate a significant portion of our results from the agricultural cycle and reduce our exposure to climate effects enhancing our margin.

Moving to Slide 10. As anticipated in our previous calls, our Punta Alvear shipyard remained very active, working to its maximum capacity. We delivered 13 barges in the fourth quarter in accordance with our program, taking the total number of barges delivered to third parties to 58 units by year-end. As we previously discussed, these third party sales contributed $21.4 million to our EBITDA 2013. We also concluded in the fourth quarter a new contract for 12 barges, part of which are to be delivered in the first quarter of 2014 with which the yard is expected to be fully committed into the second quarter of this year.

Let's turn to Slide 12. Here you will find a summary of the fourth quarter and full year 2013 Offshore Supply results compared with the same periods in 2012. As you can see, the Offshore Supply segment adjusted EBITDA for the fourth quarter was $11.1 million compared to $8 million in the fourth quarter 2012. Similarly the full year EBITDA for this segment reached $40 million, which is a significant increase over 2012 where our segment adjusted EBITDA was $27.6 million.

The substantial increase in revenues and results was mostly due to the participation of two more vessels, UP Amber and UP Pearl, which entered service with Petrobras on the August 1 and November 25, respectively, coming of from the yard in India. But more significantly, from the very substantial increase in the time charter rates obtained by part of our existing vessels for which as we discussed earlier, we renewed their four-year contracts in 2013. While running costs increased 5% in the fourth quarter versus the same period in 2012, we had two more vessels in operation this year, UP Amber and UP Pearl. And on a full year basis you can see that running costs increased 6% but given the larger number of vessels in operation on a ship-by-ship straight comparison, we experienced a slight reduction.

Voyage expenses, as you know, are not significant in the Offshore segment because our vessels operate on a time charter basis. And they reflect mostly the onetime positioning cost that we have to incur when we move a ship from the building yard in Asia to Brazil or the North Sea.

In Slide 13, you will find the evolution of Petrobras' five-year business plan as they proceeded to invest over the past four years. As you can see, the portion destinated to expiration and production has grown from 48% to 70%. Of the $220 billion in the new five-year 2014-2018 investment plan that Petrobras only a couple of weeks ago. This significant increase in their commitment to the offshore and exploration -- the offshore exploration and production, is a very robust sign of the demand that we expect will occur in our main offshore market in the next few years.

Let's turn to Slide 14. On the right-hand side, you will see pictures of our newly acquired vessels at their construction yard in China. This acquisition has been the most important investment decision that we have made in 2013. We purchased, for a total of $96 million, three state-of-the-art, very large PSVs with diesel-electric propulsion and a deck capacity of over 1,000 square meters with 5,200 deadweight tons. We have bought these ships in a completely finished condition delivered from the yard in China. We have taken delivery of them within 2013 and following a very brief period of work at the yard to adapt them for our service, they are now on their way into the Atlantic ocean where we expect to put them in service as we mentioned in early April.

A very interesting development has taken place in the past few days, where we participated with one of these new ships, UP Coral, jointly with a leading international subsea service company in a tender held by Petrobras in order to provide services as an RSV. RSV ships are vessels that can operate remote controlled vehicles up to 3000 meters depth. The contract will have a duration of six years. The RSVs will be provided and operated by our joint venture. Our bid was the winning bid and we expect that the contract will be awarded within the next 90 days. This contract opens the door for us to participate in the future in an array of different subsea service contracts, which have significantly higher margins.

As Petrobras puts into service a growing number of deep sea drilling rigs, the requirement for vessels of this same type will also grow. In fact, this could represent a very interesting opportunity for our two sister ships, UP Agata and UP Opal, within the next two years. The plan with UP Coral is to operate the vessel in the North Sea until the additional equipment and the remotely operated vehicles are ready for installation in Europe before we move the vessel to Brazil to commence service under this contract in the first half of 2015.

The total additional investment that UP Coral would require to service this contract is expected to be below $10 million, excluding the cost of the ROV which is provided by our partner. With these three new vessels, our offshore supply fleet capacity has grown 30% going from 11 to 14 vessels that will all be producing as from the second quarter of 2014. Another fourth quarter development in our Offshore segment was that on October 22 we canceled the shipbuilding contract for UP Onyx on account of the shipyard's delay in delivering the vessel from India. The appropriate repayment demands have been made under the refund guarantees issued by two major Indian banks and we obtained full payment of the $17.7 million due under such guarantees in January 2014.

In Slide 15, you will find a summary of the employment of our fleet as it stands today. As you can see, in 2013, we contracted our new vessels, UP Pearl and UP Amber, and we equally renewed for further four years, the contracts of UPS Moraga, Topazio, Diamante and Agua-Marinha, with substantial increases in their earnings. Similarly, only a week ago, we received confirmation of the renewal for four years of the contract of our UP Rubi to Petrobras at $35,280 per day, which leaves the ship in employed until 2018 at an improved rate. With this, out of the now 14 existing ships, we have 9 which are already contracted for long-term periods with Petrobras at attractive rats.

At the bottom of this page, as a reference to calculate the impact of these new charters, you will find a summary of the annualized impact of the incremental rates on the new ships. As you can see, the pro forma segment of the EBITDA for the offshore fleet which was previously calculated on adjusted basis for the annualized impact of an 11 vessel PSV fleet, an improved charter rate would now increase to $68.7 million if we added the pro forma effect of employing the three new vessels, UP Agate, UP Coral and UP Opal at the same average rate as the existing fleet.

On Slide 17, you will find a fourth quarter and full year 2013 versus 2012 comparison of the earnings of our ocean vessels. As you can see, the segment adjusted EBITDA in the fourth quarter 2013 was $1.45 million which compares to a negative $1.8 million in the same period of last year. This difference results mostly from the adjustment of tariffs in our container service and a significant increase in the time charter rate of our tanker Amadeo, which took place in September 2013. The other variances in revenues and voyage expenses from one year to the next should be ignored since they refer to the inclusion in 2012 in our ocean revenue of the freight of the barges to Colombia received from a third party which has a neutral effect in our results since we paid an equal amount of expense.

The fourth quarter 2013 reflects the new time charter rates and the expenses that we currently experience. You will also note that the EBITDA of the Ocean segment for 2013 was $2.4 million as opposed to $2.6 million last year. We expect with the increase in the time charter rate in the Amadeo, the yearly performance of the tanker fleet will improve in the future. It is important, however, to note that the gross profit contribution of the Ocean segment in 2013 was $11.1 million while this segment absorbed $8.9 million of our general, administrative and commercial expenses. In other words, the contribution of the Ocean business in our overall results is larger than the segment adjusted EBITDA would suggest.

Turning to Page 18, just a general reminder of the two types of vessels that we operate in this segment, including a description of the cabotage feeder service that we operate. With that we can turn to Slide 19, where you will find in the bar chart at the bottom the evolution of revenues of our feeder container service by leg over the past two years. As discussed in our last conference, following a second quarter low in 2013, the revenues for the balance of the year recovered as expected resulting from strong volumes and increased tariff. For future reference it is also important to note that during December 2013 and following into the first quarter of '14, our Asturiano was in dry dock for a considerable length of time despite which revenues remained quite strong.

With that, I will turn the call over to Cecilia, who will guide you through the financials.

Cecilia Yad

Thank you, Felipe. Moving to Slide 20. This shows the breakdown across the core business segment for total revenues, voyage expenses and running costs. As Felipe has already discussed the main highlights of each business, I am not going to repeat them here.

Total revenue for the company within 2013 were 31% or $98 million higher at $411.2 million compared with $313.1 million for the same period in 2012. 85% of that increase was produced by the River business reflecting the upward trend which occurred in transportation within the year as well as a continuous expansion of our shipyard and barges manufacture for sale purpose.

Our Operating profit in 2013 was $35.1 million, significantly improving from an operating loss in 2012 of $25.1 million,, which results in an increase in operating profit of $60.3 million during 2013. Our operating profit in the River business which includes both, the transportation and the barge manufacturing results, was up $29.6 million when comparing 2013 with 2012, from a loss of $18.9 million in 2012 to a gain of $10.6 million in 2013.

In Offshore, our operating profit was 65% when comparing 2013 with 2012, from $17.6 million to $29 million. In Ocean, our operating profit increased by $19.3 million. But considering that we have the (indiscernible) expense of the elimination in 2013 or impairment charge, both in 2012 related to the Amadeo.

The company's adjusted EBITDA for the full year and Q4 2013 was $97 million and $14.9 million respectively. As a comparable figure in 2012, we had $32 million and $6.1 million respectively, 3 times the EBITDA configuration when compared to previous 12-months figure. Looking to the River business, full year figures of adjusted EBITDA increased 10 times in 2013 to $38.8 million and $3.7 million in 2012. In Offshore, our adjusted EBITDA was 45% or $12.4 million in 2013 to $40 million as compared to $27.6 million in 2012. For a reconciliation of EBITDA to cash flows from operating activities, please refer to the table we have included at the end of this presentation.

In the Slide 21, our reported net income in 2013 amounting to $7.3 million, or $0.05 per share compared to a loss of $63.7 million, or negative $1.80 per share for the same period in 2012. In 2013, there was a positive adjustment in non-cash charge of $1.2 million related to an unrealized gain for deferred taxes on exchange variance in gross sales. And two negative adjustments. One of $1.4 million from the yard's EBITDA, related to the Touax barge sale and these (indiscernible), and $5.5 million of a non-cash charge mainly related to the early extinguishment of our senior notes due 2014 on July 10, 2013. After making these relevant adjustments for the full year, the adjusted net income for the company in 2013 amounted to $13.1 million or adjusted earnings per share of $0.09 compared to an adjusted net loss of $46 million or negative $1.30 per share.

In Slide 22, we have a condensed version of the company's balance sheet as of 31st December, 2013, compared to 31st December, 2012. At 31st December 2013, we had in cash $62.6 million and a further sum in restricted cash of $13.6 million, making a total of $86.2 million in cash, cash equivalents and restricted cash. Additionally, we have booked $17.7 million under other current assets to reflect our change in connection with the UP unit refund guarantee which we exercised before the year-end and got the refund in January 2014 for the sold amount.

In 2013, we had CapEx of $130.1 million, which included an $96 million from the acquisition of three new very large PSVs, as Felipe has mentioned earlier, with our offshore supply fleet. The majority of the other investments were applied to the River projects. More specifically, to the conversion deck of the Parana Iron and specific improvement to our pushboats to reduce fuel consumption and expenses and increase their navigation skills.

2013, we reduced the year-end total financial debt by $19.2 million to $498.3 million from $517.6 million at 2012 year-end. During 2013, as main financing transactions, we repaid our $80 million 2017 convertible bonds, placed a new $200 million notes due 2021 on [June] (ph), amount of the proceeds of which we used to prepay the then existing $180 million notes due 2014. We subsequently increased the 2021 note of funding with a $25 million add-on in October 2013, which we placed at a 4.5% premium. In addition, we have entered into a loan agreement with DVB and NIBC as the co-lenders to provide us with $38.4 million of post-delivery financing for two of our three new build PSVs acquired in the period.

As of December 31, 2013, we have wrote down the tranche A of both (indiscernible), amounting to $32 million. We expect to be able to draw down the remaining $6.4 million available under this financing during the course of 2014. In Slide 23, we are showing our current debt repayment schedule having the balanced yearly prepayments in the medium term. We are in compliance with our covenants at year-end. We consider given our liquidity and the adequate exposure to debt with the current financing structure in place, we are well positioned for the continued execution of our growth plans in 2014 and beyond.

And with that I would like to turn the call back to Felipe.

Felipe Menendez Ross

Thank you, very much, Cecilia. We welcome your questions at this point.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ben Nolan with Stifel. You may ask your question.

Benjamin Nolan - Stifel, Nicolaus

I actually had several questions if that’s okay. The first one relates to the barge sales, obviously that’s been a pretty important component of the river business over the really past few years but especially last year. And I know that you guys have already sold the capacity really through the first quarter. Just curious what the target is for 2014. What you feel like you might build for your own fleet versus sell to third parties? If you have any inkling of consumer demand or what customers would like to buy? Whether you are getting a strong bid from third parties to buy those or just generally the mix of third party assets versus things that -- barges which you would use for your own fleet, any color there?

Felipe Menendez Ross

Yes, good morning, Ben. Firstly, one word caution when you compare the figures that we provide for the third party sales. Because, of course those are contribution to EBITDA but the G&A of course is not charged exclusively to those sales. So it is a very significant contribution but the weight of the G&A is not completely included there. Now having clarified that, yes, in 2013 we had a very heavy third party order book. We ended the year delivering 58 barges. We don’t think this year we will deliver as many as essentially because we will be devoting more of the yard's capacity for building our own barges. We have disclosed the contracts as they have been closed.

In the first quarter we are not expecting departure from the same pattern you saw last year because as we have announced, we have already a full commitment for the third quarter on the third party sales. Now we would expect to receive quite a number of orders from third parties. We have received very strong enquires. The volumes in the River are quite healthy and there is a lot of interest from third parties to build. But we can't expect the year to be as plentiful as last year because we had to devote a larger portion of the yard's capacity to build for our own fleet. That’s all what I can comment on at the moment.

Benjamin Nolan - Stifel, Nicolaus

Okay. So no split like 50:50, third party versus -- no target of that sort, I suppose, is what you are saying?

Felipe Menendez Ross

Not at this time. We wouldn’t like to set a different target now.

Benjamin Nolan - Stifel, Nicolaus

Okay. That’s fine. And then as it relates to the UP Coral, I think that’s a pretty interesting development. And you either have said that it would certainly enhance the returns as being used as a remotely operated vehicle support vessel. But could you maybe frame that out little bit more in terms of what -- if you can, what sort of charter rate a vehicle that or a vessel like that would garner versus using it as a traditional PSV?

Felipe Menendez Ross

Yes, well, it’s public knowledge that we have won the tender at the present time charter rate of $87,000 per day. That we have to share with our co-participant that provides the submarines. So the net time charter to us will be in the region of $50,000 per day and we will have some incremental cost because we have to add some crew and some other minor expenses. And of course we are investing an additional -- in additional equipment on the ship including a crane. So the margins, as you can see, are very large. And this is a more sophisticated type of service. It will require us to have a lot of dedication on this ship and the performance requirements are quite stringent under this contract.

What we think is extremely interesting, Ben, is, not only that it -- in an obvious way it permits the UP Agate and the UP Opal which are sister ships, also to participate in similar tenders that we believe will occur in the course of the year as Petrobras puts in service more of these deep sea drilling rigs that are capable of drilling in more than 2,000 meters of water. and the escalation of a number of units in operation in Brazil has been quite staggering. Remember that in 2010 they had 15 of these ships, by the end of 2013, three years later, they had 39. Here we are talking about each one of these drilling ships being extremely large investment, ranging from $350 million up to three quarters of $1 billion.

So as these ships drill and discover oil, somebody has to go down there and do the subsea construction. Then the production platforms are put in place and then somebody has to go and do the regular maintenance of all that subsea construction, which includes operating with submarines, to videotape the condition of the installations, to repair it with mechanical arms. There is a whole array of services that had to be provided below the surface of the ocean. So while up to today we have operated on the surface services, this opens a whole new world where margins are bigger, operations are more sophisticated and we are a step removed from competition. So the fact that we have these ships that were capable of providing this service allowed us to participate in this. It was one of the things that we had our eyes on when we purchased them and now we have won the tender for providing the services in conjunction with a leader, international submarine operator, remotely operated vehicle operator. And we think this is really a breakthrough that puts us into a whole new world of things that we can do.

Benjamin Nolan - Stifel, Nicolaus

Okay. Great. I was just -- based on your numbers I was running some math that does seem to be quite a solid rate or return on the investment on the asset. And if I am doing it right, the net balances, call it $3.5 million to $4 million after expenses, or the incremental expenses above what you could have earned on an annual basis which is traditional PSV. Is that fair?

Felipe Menendez Ross

I think you are being very conservative in that calculation but that’s so far your calculation. But we will be providing more information as we go along and we get an award on the contact. We think the introduction of (indiscernible).

Benjamin Nolan - Stifel, Nicolaus

Sure.

Felipe Menendez Ross

For us to announce of differential results.

Benjamin Nolan - Stifel, Nicolaus

Of course. No, that’s helpful. But with respect to the process, you have won the contracts. Now is it simply a matter of logistics and semantics or is there any risk of it not potentially happening?

Felipe Menendez Ross

Well, we have not received an award. Petrobras has published the list of participants and we have been the winning bid. Normally the award -- it's a process of 90 days. There is normally no negotiation involved. But Petrobras has to evaluate the offers. This offer that we put in has been consistent with what they had expected to pay for these services. So while we are very optimistic about the award being received, you cannot consider it firm until it's actually delivered.

Benjamin Nolan - Stifel, Nicolaus

Okay, perfect. And then just two quick last questions and I appreciate your time. Number one, could you maybe give some color as to, at least roughly what you would anticipate your CapEx schedule to be for 2014 and, if possible, for 2015 as well.

Felipe Menendez Ross

Well, 2015, we may be a bit too far off.

Benjamin Nolan - Stifel, Nicolaus

Okay.

Felipe Menendez Ross

In 2014, as you may pickup from our 20-F filing, we have schedule so far $50 million. But that is what we know at the balance. So that figure could change as opportunities develop, of course. And 2015, we haven't announced anything and I think it's a bit too far away.

Benjamin Nolan - Stifel, Nicolaus

Okay. That’s fine. And then lastly on the G&A, obviously, you had mentioned it in your prepared remarks. There has been pretty substantial escalation in some of those costs. How much of that, or could you maybe quantify how much of that you may think would come down or be offset by the currency devaluation?

Felipe Menendez Ross

Well, we would like to see how currency performs further into the year before we can actually anticipate that. But as you know, the Brazilian real, the Argentine currency as well the Paraguayan currency have -- but mostly the first two, have experienced quite considerable devaluation. And that helps our running cost on the one hand and our G&A on the other. So if that tendency continues throughout the year and basically there is a larger devaluation than the local inflation, we will see these administrative and commercial expenses seriously reduce.

The devaluation has been in the order of magnitude of 20% in the two of these three currencies at least. So that is a very very significant impact and of the total amount of G&A that we experienced today would mean a $6 million reduction. So let's wait and see until these tendencies are confirmed throughout the year. Certainly, the reverse tendency which have been, what we experienced over the past five years, has definitely reversed itself so far.

Benjamin Nolan - Stifel, Nicolaus

Okay. Well that’s perfect and thank you for taking the time. Again, congratulations on winning that tender that seems to be a very good use of capital.

Operator

Thank you. Our next question comes from Doug Carson with Bank of America. You may ask your question.

Unidentified Analyst

It's actually (indiscernible). I work with Doug Carson. So congratulations on a great year in 2013. A lot of my questions have been answered by I was hoping you guys can provide us with some clarity on your river business. The EBITDA for the year was up significantly and has been higher in past quarters. And I was wondering if you can give us more clarity on why the River EBITDA was breakeven for the quarter.

Felipe Menendez Ross

Well, as you know, the fourth quarter together with the first quarter are the lowest part of the year for the River seasonally. We saw the movement basically concentrate between March and September of every year. In this particular year, what we did see was a more concentrated seasonality than we had previously experienced. In fact, some of the crushing plants that we service that we would normally have expected to be active in the months of October, November and December, were storing beans so they could see what results of the 2014 crop was going to be. So we had somewhat anticipated cut in the export of pellets. But the soybeans are generally quite low in the fourth quarter. And the iron ore this year, we would not particularly interested in carrying so we stopped our carriages of iron ore early in the month of October. We were in a contract that was coming to an end. We had to service the entire quantity that we had committee to service. And that contract was at a low rate. So volume-wise, we did not really, or to the renter (ph) wouldn’t probably had allowed us to carry a lot more anyway, we were not particularly interested in taking risks in carrying more iron ore on an old contract at low rate.

Now the one thing that is important to note in connection with the fourth quarter when you compare it with last year, is that the allocation of administrative and commercial expenses does vary by about $2.5 million. So if you look at it on the gross margin line, the fourth quarter of this year did about $1.7 million better than last year. Traditionally, you will always see that the fourth quarter and first quarter of each year are the lowest, and the fourth one in particular.

Unidentified Analyst

Okay. Great. Thank you. And as I am looking at Slide 10, I see that you -- that the third party barge delivery contributed about $21.4 million in EBITDA to the river business. So do you expect the river operations going forward to remain about 45% of your river business EBITDA? Or because you mentioned you may move away from third party sales in 2014, will that mix shift and do you still expect EBITDA to be up year-over-year in the river business because the kind of shift away from third party barge sales.

Felipe Menendez Ross

Okay. As I just clarified before answering the specific question, I think it is an important consideration to make when you look at Slide number 10. Slide number 10 is third party barge sales EBITDA contribution. So we are not looking there at the full weight of the G&A in those third party sales. And therefore the balance of the operation is carrying the most significant part of the weight in terms of G&A. So they are not strictly comparable figures. This is how much those third party barge sales contributed to our EBITDA but without weighing them completely with the G&A.

Now having said that, as we were just discussing with Ben, in the first quarter, as we had previously announced, you shouldn’t expect to see any departure from the pattern that you saw in 2013. The yard is fully committed to third party barge sales as we had previously said and you will probably see that the first quarter is going to come in line with the third party barge sales that we had in 2013. In the balance the year, what we can say at this time is that we have scheduled to build more barges for our own fleet. We need to grow our own fleet more this year and add more barges in order to be able to service the cargo contracts that we have. And therefore perhaps or probably, the third party barge sales will be lower than they were last year.

Now how much lower, we can't really tell at this time. There are a substantial number enquires and we are looking at how many of those can we actually satisfy and trying to make a definite plan which, when we have a definite plan, we will of course announce it. In the first quarter there would be no departure.

Operator

Thank you. Our next question comes from Arieh Coll with Coll Capital. You may ask your question.

Arieh Coll - Coll Capital

Thank you again for your thorough presentation. You had about $15 million of foreign currency gains in the one line item in 2013. If the current exchange rates that you have today were fixed for the rest of the year, can you just give and update us on where all your various derivative contracts would end up in terms of the net gain or loss for the year?

Felipe Menendez Ross

Yes, let me clarify it. At the moment we don’t have any derivative contracts for foreign exchange. So we are not exposed in that sense to it. It’s difficult to anticipate what the variations of the local currencies might do. They have been very negative for years, last year they were positive. This year, I would expect that probably the foreign currency variations will be more reflected in our operational lines than in this separate line. And in fact, when we look at most of these foreign currency variations, if the rate of exchange applicable to operations had been by way of straight devaluations as we see it right now, we would probably have seen a similar impact in our operational line.

So there may, with larger devaluation, I guess the best reply I can give you Arieh at this time is that, you will see that effect translated into less expenses.

Arieh Coll - Coll Capital

Okay. And then just as a follow up on the RSV opportunity you mentioned earlier with the Coral. Can you give us a sense for over the next three years, how many of these types of vessels Petrobras may need as their drilling efforts move on to the next stage in the development of all the various fields.

Felipe Menendez Ross

Very interesting. That number is increasing as they develop the fields. Petrobras has expressed that by the end of this year they would like to have an operation of 15 vessels. At the moment they have taken, including this tender, they will have taken 8 vessels on longer term and they have taken 4 vessels or 3 vessels on short term. So they will need to take an additional 4 ships and the short term vessels will need to be replaced probably by longer-term. So in this year alone, there should be a need of another four ships by itself and probably in the future they would need to replace the short-term vessels that they contracted last year.

Now that is only where things stand today and we should remember that as these vessels drill and are successful in finding oil and the production platforms are put in place, these numbers are going to increase. And the interesting thing is that it is not a onetime thing that goes together with the drilling and the subsea building of structures but also then for years and years after it, its maintenance, regular maintenance that has to be done on all these subsea structures. So it is a growing market and a place where there is going to be need for services for a very long period.

Operator

Thank you. Your next question comes from Katja Jancic with Sidoti & Company. You may ask your question.

Katja Jancic - Sidoti & Company

Are you looking at potentially increasing the barge building capacity concerning that there is such a demand for that?

Felipe Menendez Ross

We have looked into it, Katja, and we have evaluated the possibility of building a second line. As you are probably aware, we did build a second line in our ramp so we could build simultaneously tank and dry barges which was not in the original configuration of the yard. We have considered a second production line. Now that is a major step forward and will require significant investment and taking a long-term view on the need of barges. At the moment we are satisfied with the layout that we have and we wouldn’t like to take a step of building a second line unless we confirm the very large number of barges in addition to our own for a long period of time. But it has been evaluated. It is possible. We don’t think that we are going to be doing it in the near future.

Katja Jancic - Sidoti & Company

Just for reference, how much would it cost to actually do that?

Felipe Menendez Ross

Well, we haven't discussed that publicly. But it is a significant investment. There are small improvements that we could do to enhance our current production capacity. And those we are considering doing. But a full second production line is a major investment, let me say.

Katja Jancic - Sidoti & Company

Okay. Just one more question. With the Panama Canal expansion, is that going to impact you in any way or is that maybe an opportunity?

Felipe Menendez Ross

No, not really. It certainly doesn’t impact our offshore supply service sector. Our ocean sector is purely regional and cabotage directed and the barge and river operations are of course completely independent from that.

Operator

Thank you. And our final question comes from [Jacob Muller] (ph) with [AYN Capital] (ph). You may ask your question.

Unidentified Analyst

Just following up on a couple of the questions we had before. With the shifting more of the capacity towards internal capacity in the barge yard as opposed to selling, do you expect an increase of tenders to offset the loss of EBITDA from not selling the barges.

Felipe Menendez Ross

[Jacob] (ph) I think we have mentioned in the presentation, the new businesses that have been incorporated in 2014 which will be considerable add-ons. One is of course the charter to Vale of these four convoys which somehow replaces a very low paying iron ore contract which we painfully ran to its end in 2013 as we were just discussing. So you will see a significant increase in EBITDA coming from there, from employing that equipment or part of that equipment in servicing a very low paying iron ore contract versus now employing on a time charter basis, take or pay, 365 days a year at a good return rate. The second thing that of course we will be incorporating on iron, this transfer station for iron ore that is, again, fully contracted by Vale which was not there in 2013. That will also mean a very significant block of new additional EBITDA.

The yard in the first quarter, as we have just said, will be producing barges for third parties in line with what happened in 2013. So really any differences will come from second, third and fourth quarter. And we are going to have a mix of third party and own barge sales here and you can make your own calculations with these blocks. But in a general sense, as you can see, there is quite an additional input of EBITDA that will help defer any differential that may occur in the third party barge sales.

Unidentified Analyst

Right. So a little more. You have quantified the Vale business as an $8 million block of business and I don’t know exactly what that replaces on the iron ore side where you said it's not very profitable. But the other piece is, I mean what is the total incremental EBITDA you see from these new blocks of business that you referenced?

Felipe Menendez Ross

We have discussed that publicly, [Jacob] (ph). So as they enter into operation, we will be revealing results and I think you will be pleasantly surprised. We have said, however, that the investment in Parana Iron we expect will provide more than a 35% return. So the [dollars] (ph) from there is going to be significant for us.

Unidentified Analyst

And what is the total investment in Pan Iron?

Felipe Menendez Ross

Well, that is another figure that we have not disclosed completely at the moment. So I think at the moment, we would like to say that it has been, will be a significant contribution. We want to see it up and running and performing so that people can get a good feeling of what it is going to contribute. But we expect it to be a very good business.

Unidentified Analyst

And in light of the single skin phase out, next year I believe. Do you see that as a potential opportunity to increase your tons transported over the next several years at a higher curve than in the past few?

Felipe Menendez Ross

Indeed. Very much so. The cliff coming off the double-hull phase out -- or single-hull phase out, will affect the river barges very substantially. A large proportion of the existing tank fleet is single skin and we believe that will open new opportunities for our barges, yes.

Unidentified Analyst

And then moving on to the PSV business. First of all congratulations on this new tender, it sounds like a very exciting opportunity. What is the incremental cost for the vessels, for the crane and the other equipment?

Felipe Menendez Ross

Well, as we said in this presentation, we think it's going to be below $10 million.

Unidentified Analyst

And as far as the next year, obviously these tenders, the first one that you have won is only for 2015 and you referenced that vessel will be serving in the North Sea. Shall we assume that the other two vessels will be serving in the North Sea as well?

Felipe Menendez Ross

Yes. I think initially they will. There is chances for some contracts in West Africa. But we will move them to the North Sea and probably try to wait for the best opportunity in Brazil. If there were other opportunities to use them as RSVs of course we would very much like to do that. Not only because it's higher margin, it is also because it's an area of operation where we want to expand. So initially, you can think of them as, one to the North Sea and moving down to Brazil as and when they are employed.

Unidentified Analyst

And on the incremental operating expenses in RSV. I mean compared to the $13,000 per vessel you model now, what we should think about for the RSV vessels?

Felipe Menendez Ross

Well, as I just mentioned to Ben, we haven't disclosed that figure. The incremental expenses are not enormous in the sense that you do not have to maintain a lot of other equipment. The additional investment in the ship doesn’t need to be extensively insured. It is basically a matter of crew and other expenses. So let's put it this way, it is definitely less than a 50% increase over that figure that you mentioned.

Unidentified Analyst

And one final question on the PSV business. Year-over-year obviously this is big growth, quarter-over-quarter, however, it was actually lower. And I am wondering, in light of the fact that there were by the way two additional vessels and all the contracts have been changed to higher rates, what explains that? I would have thought it would have been a higher number than $11 million EBITDA in quarter four.

Felipe Menendez Ross

I missed the initial part of your question. You referred to offshore fourth quarter, it did increase the EBITDA as you can see from $8 million to $11 million...

Unidentified Analyst

I am referring to quarter-over-quarter. From third quarter to fourth quarter the number went actually went down. And one would think with the extra, with the additional vessels, the number actually would have been higher.

Felipe Menendez Ross

Okay. Wait a minute. Yeah, that is an important question. In the fourth quarter we did dry dock the Agua-Marinha for quite some time and we did other maintenance work with the ships unemployed for a period. So you will see -- and the Pearl only came into operation on 25th of November. So in fact her impact was only a month within that quarter, a month and five days. So the differences in between quarters are mainly associated with dry docks and scheduled maintenance on the vessels.

Unidentified Analyst

So just to think about it the right way, you have mentioned the annualized EBITDA of the 11 PSV fleet at being at $54 million. So on an average quarterly basis, the number actually would be some $5 million higher than the number we experienced this quarter.

Felipe Menendez Ross

I am not sure how you got that mark.

Unidentified Analyst

I am sorry, that’s incorrect. That would be around $3 million higher. In other words, to take the 54 and dividing it quarterly.

Felipe Menendez Ross

Oh, I see. Okay. Yes, $3 million, that’s about right.

Operator

Thank you. And at this time I will turn the call back over to Felipe Menendez for closing remarks.

Felipe Menendez Ross

Thank you very much for joining us on the call today and we will be talking to you when we announce our first quarter results. Thank you.

Operator

Thank you. And this does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ultrapetrol (Bahamas) CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts