Ultrapetrol (Bahamas) (ULTR) CEO Felipe Ross on Q1 2014 Results - Earnings Call Transcript

| About: Ultrapetrol (Bahamas) (ULTR)

Ultrapetrol (Bahamas) Limited (NASDAQ:ULTR)

Q1 2014 Results Earnings Conference Call

May 15, 2014, 10:00 AM ET


Felipe Menendez Ross - President and CEO

Cecilia Yad - CFO


Benjamin Nolan - Stifel, Nicolaus


Thank you for standing by and welcome to the Ultrapetrol (Bahamas) Limited First Quarter Earnings Call. Your lines have been placed on a listen-only until the question-and-answer session. [Operator instructions] I would now like to turn the call over to CFO, Cecilia Yad.

Cecilia Yad

Thank you. Good morning, everyone. Thank you for joining us. Welcome to the Ultrapetrol Limited conference call to discuss the company's 2014 first quarter earnings. I would like to remind everyone that this conference call is now being webcast at the company's website, www.ultrapetrol.net.

There are also additional materials related to our earnings announcement on our website, including a slide presentation, which forms a part of this conference call. You should be aware that in today's conference call, we will be making certain forward-looking statements to discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements.

For the discussion of factors that could cause results to differ, please see the company's 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 on March 12, 2014, 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 first quarter 2014 results compared to the equivalent period of 2013. The adjusted EBITDA for 2014 first quarter is $19.6 million, which is almost identical to $19.3 million obtained in the same period of 2013. Our adjusted net loss and adjusted EPS are $4.6 million and $0.03 per share, which corresponds to an adjusted net loss of $0.24 million and $0.00 per share in the same period of 2013.

As previously announced on October 22, 2013, we cancelled the Shipbuilding Contract with UP Onyx on account of the shipyards delay in delivering the vessel. The appropriate repayment demands were made under the refund guarantees and we obtained a complete refund of all monies advanced to the yard plus interest from the banks of $17.7 million during January 2014.

We continue to reserve our rights for a multi-million dollar claim for delays on the previous three vessels [Agata].

Let's turn to Slide 4. In the table at the top of the slide, you will find our first quarter 2014 EBITDA per segment, compared to those obtained in each business segment in the equivalent periods of last year. As we already mentioned, our total EBITDA for the first quarter 2014 was almost identical to what we obtained in the equivalent period of 2013, with positive variances in our Offshore and Ocean Business segment and a negative variance of approximately the same amount in our River Business.

Our River Business adjusted EBITDA for the first quarter 2014 is $7.2 million lower than what we reported in the first quarter of 2013. There are two significant differences that we should take into account when comparing these periods. The first is in the first quarter 2013, we obtained a onetime $3.2 million exchange variance affecting our OpEx and the second is at the end of the first quarter 2014, we have the impact of a $7.8 million positioning charge, whereas in the same period of 2013, this impact was already $3.7 million; therefore, representing a difference of $4.1 million between both results.

As we will explain in more detail when we cover the segment, the effect of positioning, which may be positive or negative in any particular quarter has historically been mostly neutral in comparing one year with the next and therefore we believe that this larger positioning charge in the first quarter of 2014 will not affect our yearend results.

Our offshore supply business in the first quarter produced $13.2 million of EBITDA, which is 40% more than what we obtained in the same period of 2013. As you will see in more detail when we cover the segment later in the presentation, this impressive increase results mostly from the additional vessels that were delivered from the construction yard UP Amber and UP Pearl, both of which were delivered to Petrobras in the third quarter of 2013.

But also just as significantly from the increased time charter rates that we obtained from the second and third quarters of 2013 as we renewed the long term contract of the existing fleet, which expires that year and were therefore fully applied in the first quarter of 2014, while in the same period of last year, these vessels were still operating under their own contracts.

Our first quarter 2014 results in the Ocean business show an adjusted EBITDA of $4.1 million, which is significantly higher than the $0.50 million obtained in the first quarter of 2013. This reference was solved partially from higher rates in some of our current tankers, but also to a very satisfactory result of our container feeder service during the traditionally low season of the first quarter.

Finally in the first quarter of 2014, we had the positive impact from foreign exchange variations equivalent to $2.9 million in cash, which is almost identical to the $3 million gain experienced in the same period of last year.

Turning to Slide 6, you will find the comparison of our first quarter 2014 River results against those obtained in the same period of last year. Our River segment in the first period of 2014 produced a segment adjusted EBITDA of negative $0.7 million, compared to a segment adjusted EBITDA of $6.5 million in the same period of 2013.

As we have just discussed, the main differences between both years were firstly a one-time $3.2 million positive reduction of OpEx in the first quarter of 2013 as a result of an exchange variation affecting our operating costs and the very large negative positioning charge of $7.8 million in the first quarter of 2014, compared to the equivalent charge of only $3.7 million in the first quarter of 2013.

Let's analyze in a bit more detail these differences. The positioning charge at the end of each period represents a revenue recognition correction to the total freight invoiced in the period. In other words, invoice revenue is corrected in relation to the position that each barge is in within the river system at the end of each quarter.

Positioning charges, which are negative in one period, are immediately reversed at the beginning of the next quarter. On a full year basis, these positioning charges have historically been mostly neutral, meaning that the positioning correction to freight's invoiced at the beginning of one calendar year, is almost equivalent to the inverse correction done at the end of the year and therefore may have no influence in the yearly results.

On a quarter by quarter basis however, the positioning may vary substantially determining the number of factors and particularly in the first quarter. For example a [late clock] (ph) will mean that barges at the end of the first quarter has [loaded their invoice to] (ph) the freight, did not cover the full length of their first voyage and therefore we will experience a larger negative positioning adjustment by March 31 of that year.

The revenue will be recognized later in the year as the voyages are completed and since we have seasonally excess capacity in the fourth quarter, it will simply delay the revenue recognition, but not falter the total result on a daily basis.

With reference to the effect of the devaluation of the local currencies in our OpEx, fortunately we have seen some relief with significant devaluations in respect of the U.S. dollar having taking place in the first quarter of 2014. If this tendency is maintained throughout this year, it is possible that we will have a progressive reduction of our OpEx in the year.

If you look at the top of the table in Slide 6, you will see that the total tons loaded in the first three months of 2014 were 782,000 tons, which compares with almost 927,000 tons last year. That is a 145,000 tons or a 16% difference.

When you compare these two figures, you should consider the forward pushboats and 100 of our barges are on time charter to Vale in the first quarter of 2014, earning a daily hire, whereas in 2013, they were employed carrying cargo on a freight per ton basis. The difference of 145,000 metric tons is equivalent to the carrying capacity of these barges in the first quarter of 2013.

As these 100 barges are now in time charter, we will see the daily hire in our revenues, but we do not see the tons that they carried in 2014.

Let's turn to Slide 7. In the bar chart at the top as usual, you will see the U.S. statistics for the Paraguayan soybean production for the last ten years as well as their 2014 estimate. As you can see, the 2014 soybean production is estimated to be very similar to the 2013 crop and therefore having loaded an equivalent quantity of cargo in the first quarter of 2014, than we did in the first quarter of the previous year, we expect the total quantity of soybeans that we will move this year will also be similar to what we carried in 2013.

It is important to mention that the 2014 Paraguayan crop has been completely harvested by now. Also of note is the fact that the soybean crop had no fees to Argentina, is estimated to be substantially larger than what it was last year, which will help increase our volumes in the fourth quarter, which is a time of the year when seasonally we have excess capacity.

In the graph on the bottom, you will see the production of iron ore in the region for a decade in the first quarter production, which has been in line with that of the previous year. As most of our iron ore dedicated equipment is now on time charter to Vale, it is then we will organize for the shipments of these volumes down the river and we are paid on the basis of the guaranteed daily charter hire.

Let's turn to Slide 8. We have already discussed the time charter to Vale of four [full close] (ph) which include four pushboat and 64 barges for five years and the additional 36 barges time chartered to Vale as well.

This portion of our business will not only contribute the significant portion of our EBITDA, estimated at $8.2 million per year, but we also provide stability of earnings on a take or pay basis.

Our Parana Iron has commenced her transhipment operations in May 2014. And you can see a picture of our first cargo being loaded. This unit will also be a significant contributor to our EBITDA. We estimate 6.5 million per year on an annualized basis and will also provide stability of earning by opening a new line of logistical services within our River business segment that reduces our exposure to the agricultural cycle.

Turning to slide nine, at the top of the slide you will see the outlines of our new generation of pushboats, which is now in the final design phase and what we have -- that we have contracted with the European fare.

We intent to build four of these new pushboats, which has a state-of-the-art shallow draft ultra-fuel efficient design. The first of these four pushboats will be in operation in 2015, and with an average power of 6,930 bhp, they will be capable of pushing more barges at higher speed spending less in fuel. We expect that these new boats will make a very significant change to our operation and consequently to our margin.

On the lower part of the slide, you will see a picture of our Punta Alvear Yard, which has successfully delivered eight barges included three tank barges to third party customers in the first quarter of 2014.

With that, we’ll also be capable of producing pushboats cost efficiently and avoiding high import duties for pushboats produced in other areas of the world.

In Slide 11, you will find a summary of the first quarter 2014 offshore supply results compared with the same period of 2013. As you can see the offshore supply segment's adjusted EBITDA for the first quarter 2014 was $13.2 million compared with $9.5 million in the first quarter of 2013.

The substantial increase in revenues in the south was mostly due to the participation of two more vessels, UP Amber and UP Pearl, which entered service with Petrobras on August 1st and November 23rd, 2013, respectively.

But also significantly from the very substantial increase in the time charter rates obtained by part of our existing vessels for which we renewed their existing contracts in the second and third quarters of 2013.

In the case of our UP Diamante, Topazio and Agua-Marinha, rates increased from $28,000 to $35,380 per day and in the case of UP Esmeralda from $36,200 to $31,950 per day, a new four-year contract.

Running costs increased by $2.3 million in the first quarter as compared to the same quarter in 2013, not only because we incorporated UP Amber and UP Pearl as mentioned above, but also related to the delivery of the three new ships UP Agate, UP Coral and UP Opal, which started their positioning voyage from the yard in China towards the Atlantic in the first quarter 2014.

In Slide 12, a quick review of the evolution of Petrobras’s five-year business plan as they have proceeded to invest over the past four years. As we have mentioned in the past, the portion vest into exploration and production has grown from 48% to 70% of the $220 billion proposed for the next five years 2014 to 2018 investment plan that Petrobras published sometime ago.

This significant increase in their commitment to 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.

At the bottom of the slide, we show the earlier projection of growth of their fleet that they will need to operate the projected productions. Of particular interest is to note, the very significant growth in the number of deep sea drilling ships that we'll be operating in Brazil in the next few years.

And how this number has grown from 15 in 2010 to 39 in 2013, and finally to 65 in 2020. All of these units have already been contracted and as they enter into service and find oil, they will need a similar growing number of service vessels not only for surface supplies, but most interestingly for subsea support activities as well.

These subsea support activities cover a wide variety of vessels from extremely sophisticated pipe layers and construction ships to vessels that can support submarine remote operated vehicles for the most routine type of construction and maintenance work.

We believe that the subsea service activities is a market that will grow particularly in Brazil as a large number of dual ships and production platforms are planned to be put into service.

Let’s turn to Slide 13, on the right hand side you will see pictures of our newly acquired vessels at their construction yard in China. River position has been the most important investment decision that we took last year.

We purchased for a total of $96 million three state-of-the-art very large PSVs with diesel-electric propulsion, a deck capacity of over 100,000 square meters and 5200 deadweight. We have both these ships in completely finished condition delivered from the yard in China.

We took delivery of them at the end of 2013 and following a period of work at the yard to adapt them for our service they were positioned in the North Sea where they have commenced service in April and May this year.

Meantime, we participated successfully with one of these new ships, UP Coral, jointly was a leader -- 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 3,000 meter in deck and the contract will be for a period of six years. The remote operated vehicles will be provided and operated by our joint venture partner.

Our bid at $87,000 per day was the winning bid and we are awaiting for Petrobras to confirm the award once their Board approval has been impact. The plan with UP Coral is to operate the vessel in the North Sea until the additional equipment and the ROVs are ready for installation in Europe before we move the vessels to Brazil to commence service under this contract in the first half of 2013.

The total of this investment at UP Coral would require to service this contract is expected to be between $8.5 and $10 million, excluding the cost of the ROVs, which are provided by our joint venture partner.

We expect that under this employment as an RSV, this ship should be able to generate an EBITDA margin of approximately $10 million per year, which is double the average pro forma EBITDA that we had calculated for our regular PSV vessels.

We believe that these new acquisitions are particularly suitable for subsea activities and that Petrobras should have growing requirements for this type of vessel in the future. Our strategy that implies to position the company in the future to capitalize on its existing relationship with Petrobras and its new position as a subsea service provider to capture a portion of this growing market.

Another three interesting developments that have taken place in the first quarter of 2014, we also successfully participated in two tenders with Petrobras to employ our UP Safira for four years at $30,000 per day starting in September at the expiry of her current charter.

Similarly, UP Opal with selected at a successful bid at $31,000 per day also for four years and we expected to deliver into this charter in the fourth quarter of 2014. Both vessels are awaiting confirmation of the award and Board approval by Petrobras.

Finally, we delivered our UP Rubi in May 2014 into her four-year contract with Petrobras at $35,380 per day as previously announced.

Let’s turn to Slide 14, where you will find a summary of the employment of our fleet as it stands today. As you can see, it would receive confirmation of the employment for UP Safira, Opal and Coral as we just discussed.

Out of our 14 existing vessels, 12 will be committed on long-term contract at attractive rates. In particular UP Coral operating as an RSV has the potential to earn double the EBITDA of her sister ships, generating on an average pro forma annualized basis as PSVs.

This will mean that as you can see at the bottom of the slide that a total fleet of 13 vessels operating as PSVs and one operating as an RSVs on an annualized basis could produce a total of $75 million EBITDA with the potential to employ other vessels as RSVs as well.

On Slide 16, you will find the first quarter 2014 versus first quarter 2013 comparison of the earnings of our Ocean vessels. As you can see, this segment's adjusted EBITDA in the first quarter 2014 was $4.1 million, which compares to $0.15 million in the same period of last year.

This difference results mostly from a rate increase of our product carriers and a very good low season performance of our Container Feeder Service.

The performance of our product tank vessels was above average in the first quarter and given the rates that we had agreed for one of our vessels as from the end of May, we expect that margins will also be satisfactory in the second and third quarter. Running costs in generally have been favorably impacted by the devaluation, as has been the case in our River business as well.

Our container feeder service had a strong performance in the first quarter particularly in the critical southbound leg coupled with lower operating cost, which helps us enhance our ocean segment results this quarter.

If the current circumstances continue as planned for the rest of the year, we estimate that the Ocean segment will generate a segment adjusted EBITDA of approximately $6.5 million to $7.5 million.

Turning to Page 17, just a general reminder of the two types of vessels that we operate in this segment including a description of the cabotage feeder container service that we operate.

But perhaps more interestingly on Slide 18, we can confirm what we were discussing in Slide 16 a minute ago and you can see that the southbound leg revenues for 2014 were 33% and 26% higher in the first quarter than in the equivalent periods of the previous two years.

Also importantly, these results were obtained partially with only one ship in operation during the quarter, since our M.V. Asturiano was in drydock during part of that period.

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 19, 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 for the third quarter of 2014 increased $8.4 million or 11% to $86.3 million as compared with $77.9 million for the first quarter of last year. This increase was mostly driven by the River and Offshore segment, which accounted for 80% of the total revenue in the first quarter of 2014.

Our operating profit for the first quarter of 2014 was $5 million as compared to $1.9 million for the first quarter of 2013. The operating loss of our River business in the first quarter of 2014, which includes both, transportation and barge manufacturing results, was negative $6.5 million as compared to a negative number of $3.9 million for the same period of last year.

In Offshore, our operating profit increased 26% in the first quarter of 2014, when comparing with the first quarter of 2013, from 7.4 million to $9.3 million. In Ocean, our operating profit increased $3.7 million, from a loss of $1.5 million in the first quarter of 2013 to a profit of $2.2 million for the same period of 2014.

The company adjusted EBITDA for the first quarter was $19.6 million, 2% higher than the first quarter of last year. However, if we exclude the one time positive effect from the first quarter 2014 of $3.2 million, then the adjusted EBITDA increased 22% in the first quarter of 2014.

Looking to the River business, our adjusted EBITDA for the first quarter of 2014 was a loss of $0.7 million from a profit of $6.5 million in the first quarter of 2013. In Offshore, our adjusted EBITDA was up 40% or $3.7 million in the first quarter 2014 to $30.2 million as compared to $9.4 million in the same period of last year. For a reconciliation of EBITDA to cash flows from operating activities, please refer to the tables we have included at the end of this presentation.

In Slide 20, our reported net loss for the company in the first quarter of 2014, amounted to a negative amount of $4.7 million or negative $0.03 per share, compared to a loss of $5.8 million, or negative $0.04 per share for the same period in 2013.

In the first quarter of 2014, there was an adjustment of $0.3 million related to a non-cash loss for deferred taxes on unrealized foreign exchange rates in Brazil and $0.1 million adjustment from the yard's EBITDA, related to the Touax barge sale. After making these adjustments for the first quarter of 2014, the adjusted net loss for the company in the period amounted to $4.5 million or adjusted losses per share of $0.03 compared to an adjusted net loss of $0.2 million or nil per share.

In Slide 21, we have a condensed version of the company's balance sheet as of March 31st, 2014, and as of December 31st, 2013. At March 31st, 2014, our cash and cash equivalents were $81.7 million with a further $12.7 million in restricted cash showing a substantial liquidity in our company.

During January 2014, we have received a $17.7 million in connection with a refund guarantees of UP Onyx with less excise at yearend 2013, as we anticipated.

During the first quarter of 2014, we have CapEx of $17.6 million, which included about $15 million applied to River projects. More specifically, we have invested $9.9 million in the conversion of new barges of our shipyard, $2.4 million in the new midstream planned shipment station and $2 million in the construction of new line and pushboats. In addition, we have invested $1.3 million in the reconfiguration of our recently acquired PSVs and our offshore business segment.

In Slide 22, we show our current debt repayment schedule having a balanced yearly principle prepayments in the medium term. We are in compliance with all our covenants at end of the quarter and we don't see any refinancing needs at the moment. We are well positioned for the continued execution of our growth plans during 2014 and beyond.

And now, I would like to turn the call back to Felipe.

Felipe Menendez Ross

Thank you, Cecilia. If you want to ask questions at this time, we turn the call back to the operator.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question today comes from Ben Nolan. Your line is open and please state your company name.

Benjamin Nolan - Stifel, Nicolaus

Great. Yes, Stifel. Good morning. Actually I have a few questions, so hope that's okay. Number one, it relates to the difference that you guys had in terms of when you were able to recognize revenues as opposed to last year and hopefully you went into quite a bit of detail on that was very helpful, but I was wondering if there is -- is that entirely a function of your traditional soybean trade or is there an element of the new Vale contract in there that may just also be a function of pushing back the revenues recognition a bit?

Felipe Menendez Ross

Good morning, Ben. It's entirely due to soybeans. The revenues for Vale are paid on a monthly basis and recognized as the charter hire with daily earn. So we don't have a problem with those.

I know this is a confusing issue and it's difficult to explain in a short time, but essentially what we want to tell people is don't worry about this. Positioning charges vary from quarter and quarter and we see them go up and down. Generally we don't refer to them because it was not a significant different quarter on quarter comparison, just watch itself out as the year goes along.

In this case, the substantial difference basically we started later in the year loading the grains. There were some hold-ups at the Diamante, Jasper and the barges were held further up river than what we would have expected them to be at that time of the year. In fact, further out than they were last year.

And these positioning corrections on a year-to-year basis, are completely neutral, meaning that whatever beneficial effect you receive at the beginning of the year coming from the reversal of the provision in the previous year, then becomes a negative charge at the end of the year and so it is really a zero some gain.

But on a quarter to quarter basis, particularly in the first quarter then, it can be very confusing because first as you know, the seasonal starts for soybean generally on the 20th of February, we receive our first loading. So when you look at the first quarter, you are in fact looking at 40 days of activity.

So if that activity is pushed back 10 days, you will see that the positioning charge at the end of the quarter where we would have invoiced all the freights is higher in one year than it did in the next and that doesn’t really mean anything in terms of the year.

So I hope we've been clear in saying the positioning charge is correct. It's grown in recognition rule and it's the one we follow every year, but when you look at the first quarter, do not put a lot of weight into it, because it doesn’t really mean much. It gets corrected later.

Benjamin Nolan - Stifel, Nicolaus

Okay. No, that's helpful. And then sticking with the -- with the River business, for a moment, well, number one, on the barges committed to Vale, originally there were the 64 barges and four pushboats and then I saw there was another 36 that were in there as well. Was that always part of the original operation or were the additional barges there added subsequently?

Felipe Menendez Ross

It were -- it was part of a separate transaction. The 64 barges and the four pushboats are charted on a five-year basis as we have disclosed the 36 barges are charted in a shorter period, which is basically until February next year.

Benjamin Nolan - Stifel, Nicolaus

I see. Okay. So does that change the EBITDA at all of the project I guess or do you think of it separately?

Felipe Menendez Ross

Well, it doesn’t change tremendously because we had budgeted to use those additional 36 barges in other activities while making them available to Vale. They are generating a bit higher EBITDA, but not substantial difference. So we don't want people to add the same thing twice.

These additional barges will be generating revenues and EBITDA from Vale, but they will not be used for carrying soybean and other cargo. So essentially they would not be completely accretive, but it is a type of pay deal and we think that as much as we can stabilize the earnings by putting barges and time charter we'll earn 365 days a year and have a high winter so much and particularly because we are growing our fleet by adding barges on the other end. So we secure employment on a pay basis and we add barges to the fleet.

Benjamin Nolan - Stifel, Nicolaus

Okay. And you say that, that contract is through February of next year, is that correct?

Felipe Menendez Ross

That is correct, yes.

Benjamin Nolan - Stifel, Nicolaus

Okay. And then still on the Riverside, as it relates to your new pushboats, I had a few questions there, number one, if you could refresh me on what you would expect the total CapEx of that to be, but also more importantly can you may be if it's possible, quantify for me what you would expect the benefit of building these barges, is it simply a function of needing to replace older assets or needing to add capacity because you are adding barges or is it really an incremental economic benefit over and above just what you might would need otherwise?

Felipe Menendez Ross

As to the total CapEx, we haven’t discussed that publicly yet, so I would love to hold back a bit on it. Now let me tell you this. We had originally planned as you remember to re-engine a larger number of our existing pushboats. Now the reengineering process has two effects.

Firstly you have to detract the pushboat from your operation for quite some time and the end result of the pushboat that you receive is the same pushboat, more highly powered and in some cases like a [speed wire] (ph), which is the one we are going to put in service now.

We corrected how to make it more shallow draft because we realized that that is the way we need to go in the future to service the upper portion of the rivers where the draft is up, critical issue.

So rather than doing that, we said all right, let's leave the existing fleet in service and let's design something from a clean piece of paper; something that will be as close as perfect as we can in terms of drop making them ultra-shallow with a full load of fuel on board.

We will make them consumer heavy fuel with these new engines, but we will also make them super efficient tools in the sense that we can transmit that power into the water and achieve the pushing of -- the forward pushing effect of every dollar that we spend in fuel.

So, we contracted a European firm to do this for us. It has been a long process. There was initial preliminary design. It was time tested to determine that in fact we were going to get from the real boats the pushing capacity that we’re looking for with this horsepower and we have been very satisfied with the results.

The outcome is that we put almost 7,000 of horse -- we put almost 7,000 horsepower pushing capacity in the engine and we get the optimal result in terms of that same force transmitted into the water. So, in other words, every dollar that we spend in fuel is actually going into effectively pushing tons.

That design is now very advanced. We are in the process of completing it and we think we will start building these pushboats early in the third quarter. So, the first of them will be delivered in 2015. They will really change the efficiencies of our operation.

We've already purchased these engines. We have been an inventory. So the CapEx now will be related basically to building the hulls, which we can do in our own shipyard and outfitting them which is a job that we already have done on the previous seven boats.

And a very important feature is that we will give the yard the ability to build this pushboat, which we can also sell to third-parties. This design or some other design and we believe our yard can be very efficient in doing it, but we also save very significantly input duties in four pushboats, the import duties and taxes associated from buying it from anywhere else will be equivalent to almost one entire pushboat. So, we build four of the price that it would cost us build five abroad. So we think it’s a game changing design in the sense that it will change the efficiencies completely.

Benjamin Nolan - Stifel, Nicolaus

Okay. Well, that’s helpful. And then lastly, sticking with the River and then I'll be done, any update on barge sales. How far into the 2014 program are you with respect to third-party sales? Are you continuing to have negotiations with other third parties about potentially adding sales in the back half for the year? Any color that you might be able to give there?

Felipe Menendez Ross

We can’t disclose it at this time the negotiations or the possibility that we are engaging. I can’t say that we do want to build a larger number of barges this year for our own use than we have done in the past. We need to grow our fleet. We need to gain an efficiency and barge capacity as we increase our pushboat fleet.

So, we will be building more in the second, third and fourth quarter this year than we -- for us, for our own use than we did in the past. Nevertheless, we are actively engaged in a couple of discussions that could lead to sales in the balance of the year.

Benjamin Nolan - Stifel, Nicolaus

Okay. All right. Well that does it for me. I can keep going, but I’ll let somebody else have a crack.

Felipe Menendez Ross

Thank you very much, Ben.


Our next question comes from [Claudia Deshuk]. Your line is open. And please state your company name.

Unidentified Analyst

Good morning. This is [Claudia Deshuk] from Bank of America and in place for Doug Carson. I just had a few more questions regarding the River business. A lot of them have been answered already, but just so I am clear especially in my model going forward, so regarding the negative positioning charge that you guys have in the river business in the first quarter.

Felipe Menendez Ross

Claudia, sorry, we missed you there for second. Could you repeat regarding and then we couldn’t hear you very well?

Unidentified Analyst

Yeah, sorry, can you hear me better now?

Felipe Menendez Ross

Yeah, better.

Unidentified Analyst

Okay, great. So, regarding the river business and the negative position charge you took in the first quarter, I just want to be clear from my model kind of going forward. So I just wanted to confirm that I should maybe look at more of a normalized EBITDA for this quarter to be closer to $7 million and should we expect to see the second quarter about $7 million higher because of the reversal or will that come later in the year?

Felipe Menendez Ross

It may come later in the year. We can’t tell sales in the second quarter have been strong operations. We had a few hiccups because of navigation issues. But generally, we are experiencing so far a very good second quarter in terms of volumes and demand. And we think somehow that will evolve into the third and fourth quarter quarters as well.

As we mentioned, I think earlier when we were going over the slides there’s been a very good prop in Northeast Argentina. That is a good thing for us because it puts volumes into our fourth quarter, which is the period of the year when we have slack capacity seasonally.

So I think of the positioning charge, will -- this positioning charge will be erased in second and third quarters and you’ll see it disappear by the end of the year as it has every year this positioning correction is neutral year-on-year.

So, yes you can say on a normalized basis that was -- that $7 million was the first quarter EBITDA and as we go along I think you will see that positioning charge progressively disappear.

It is a true revenue recognition correction and we do it, but it can be very distorted in the first quarter because of the phenomenal that I was describing to them. You already have effectively 40 days of operations in first quarter. So anything holds your barges further up the River and you have a positioning correction.

Unidentified Analyst

Okay, great. Thank you. And then regarding the total Punta Alvear Yard in your third-party barge sales, I know you can't disclose exactly who you’re working with and how many you’re planning on building. But it looks like you delivered eight barges in the first quarter to third parties.

Can you reveal if you built any for your own use this quarter and is A; barge sales a kind of good run rate for me to kind of use for the full year? I know you mentioned that you plan to build more for your own fleet in the second, and third and fourth quarters than previous years?

Felipe Menendez Ross

Yes, we have taken delivery of a small number of barges for our own use in the first quarter tank barges particular. And we’re also building up the yard a couple of four pushboats mostly for our own use at the same time. So yard has also been providing us with some barges.

Last year as you know we delivered 58 barges to third-parties. All I can say, I know what you guys want to put a finger in your wardrobe is that this year that number will be lower. We will not be selling as many barges to third parties and we will be building more for ourselves that the exact number, we still can’t tell you.

Unidentified Analyst

Okay. Great. Thank you. And then I guess my final question is regarding you chartered contracts that you established with Vale. That seems like you're really kind of good business to enter and they it kind of gives you a steady EBITDA for the year. Are there other companies that you can partner with and establish these charter contracts and is it kind of a strategy that you hope to further expand in the future?

Felipe Menendez Ross

Yes. It is something that we look into doing and we are looking at a couple of possibilities also in the liquid front to make our revenues more stable and predictable and we think that we have a great space in logistical services.

We just started services with our Parana Iron. And as Cecilia mentioned, we are in the process of building a new transhipment midstream unit in May. She listed it amongst the CapEx for second part of the year and we think this will also add significant revenue and steady take or pay business to our river business.

So we are in the process either by committing part of our fleet on part of the contract that we have with Vale or by opening the logistical services side of the business more where we have these shipment installations that are paid for a job that doesn’t depend solely on the agricultural cycle.

Unidentified Analyst

Okay. Great. Thank you, Felipe. And that does it for me. I'll get back into queue.

Felipe Menendez Ross

Thank you. [indiscernible].


That was our final question. So I'll turn the call back over to Mr. Menendez for closing statement.

Felipe Menendez Ross

Thank you very much for participating in the call today and we will be talking to you when we report our second quarter. Thank you.


That does conclude today's conference. We thank you all for joining. You may now disconnect.

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