Ultrapetrol (Bahamas) (ULTR) CEO Felipe Ross on Q2 2014 Results - Earnings Call Transcript

Aug.15.14 | About: Ultrapetrol (Bahamas) (ULTR)

Ultrapetrol (Bahamas) Limited (NASDAQ:ULTR)

Q2 2014 Results Earnings Conference Call

August 15, 2014, 10:00 AM ET


Horacio Reyser - Chairman

Felipe Menendez Ross - President and CEO

Cecilia Yad – CFO


Benjamin Nolan - Stifel, Nicolaus

Ira Sochet - Sochet & Co.

Michael Schlembach - JPMorgan


Thank you for standing by and welcome to the Ultrapetrol (Bahamas) Limited Second Quarter Earnings Call. Your lines have been placed on a listen-only mode until the question-and-answer session. [Operator instructions] I would now like to turn the call over to Horacio Reyser, Chairman of the Board. Sir you may begin.

Horacio Reyser

Good morning. My name is Horacio Reyser. I am Chairman of Ultrapetrol’s Board of Directors and a partner at Southern Cross. Before Felipe and Cecilia provide an overview of the quarter’s results, I would like to take the moment to discuss Ultrapetrol’s recently announced transaction whereby Southern Cross would substantially increase its investment in the company. Since the transaction is still pending and is expected to close within the next several weeks, my comments will concentrate primarily in providing background on the transaction and insight into how Southern Cross views Ultrapetrol’s value proposition.

I will start by providing some background on Southern Cross existing investment and on the pending transaction. Southern Cross initially invested $220 million in Ultrapetrol at the end of 2012 consistent with its focus on Latin American companies with high quality assets, a competitive market position and the potential to generate sustainable value for shareholders. Specifically Southern Cross was attracted by the compelling fundamentals and growth potential of Ultrapetrol’s core businesses, and since taking a stake in the company has worked closely with Ultrapetrol’s founders to achieve notable accomplishments.

First, Ultrapetrol has strengthened its balance sheet by successfully repaying its $80 million convertible bond and refinancing its $180 million on of long term notes to $225 million, significantly improving the company’s financial position and ability to growth through accretive acquisition.

Second, Ultrapetrol expanded its offshore fleet from 11 to 14 vessels while diversifying its service offerings to include more complex higher margin capabilities. Finally Ultrapetrol has made initial progress in improving the outlook for its River Business favouring a change in the service mix to include certain time charter contracts and infrastructure which are less sensitive to climate conditions or cargo availability.

As a result of these and other achievements, we believe that the value of Ultrapetrol has meaningfully increased in recent years and the investment proposition has become even more compelling. As such Southern Cross is pleased to have entered into an agreement to increase its post-closing ownership to approximately 85%.

Looking forward, we believe that there exists further improvement opportunities to generate additional sustainable value in Ultrapetrol’s core River and Offshore businesses. The River business, Ultrapetrol is well-positioned to capitalize on its market leadership position in the Hidrovia river system which remains strategically important to many of the region’s growing commodity export.

In an effort to further increase the company's competitive advantage and leadership position in the river business, we intend to focus our attention on customer service, operating processes, IT systems and management practices to extract a level of profitability commensurate with the strategic position and capital deployed and to utilize the Punta Alvear shipyard to build additional state-of-the-art barges and new high performance pushboats in a cost efficient manner while continuing to pursue other operational efficiencies aimed to increasing returns for Ultrapetrol’s strong growing asset base.

In the offshore business, Ultrapetrol is well established with its large 4500 deadweight ton PSVs serving the growing offshore oil market in Brazil and the North Sea. This scale has also enabled Ultrapetrol to pursue a wider range of higher margin opportunities in the space such as the very complex sub-sea services that our RSV UP Coral have been preselected to provide to Petrobras. With the rapid expansion of deepwater operation at Petrobras and elsewhere, the already large market for highly specialized subsea services continues to expand and Ultrapetrol’s ability to provide a diverse range of offshore services positions it well to benefit from this growth in a profitable sustainable manner.

With that, I will hand the proceeding to Cecilia.

Cecilia Yad

Thank you, Horacio. Good morning everyone. Thank you for joining us. Welcome to the Ultrapetrol Bahamas Limited conference call to discuss the company's 2014 second 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, 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 will be discussing.

Let’s turn to Slide 3. You will find a summary of our second quarter 2014 compared with the equivalent period of 2013. The adjusted EBITDA for 2014 is $25.3 million which compares with $32.6 million obtained in the same period of 2013. Our adjusted net income and adjusted EPS for the second quarter are 2.9 and $0.02 per share which compares to an adjusted net profit of 12.4 million and $0.09 per share in the same period of 2013.

As previously announced in July 13, 2014 the company was informed that Sparrow Capital Investments, a subsidiary of Southern Cross Latin America Private Equity Funds III and IV and our major shareholder entered into a share purchase agreement with Hazels (Bahamas) Investments Limited and Inversiones Los Avellanos to purchase all of Hazels' and Los Avellanos' outstanding equity interests in the company, increasing Southern Cross' interest from 67% to 85%. The transaction is subject to certain conditions. For further details, please refer to our press release issued on July 13, 2014. As you may understand, until this transaction closes, we cannot provide further details than those already discussed in our press release.

Let’s turn to Slide 4. In the table at the top of the slide, you will find our second quarter 2014 EBITDA per segment compared with those obtained in each business segment in the equivalent periods of last year. As we already mentioned, our total EBITDA for the second quarter was $25.4 million which compares with $32.6 million obtained in the same period last year.

In fact, if we compare the adjusted EBITDA provided by our three business segments, excluding the foreign currency exchange gains experienced in each respective period, as you can see our total segment adjusted EBITDA for the second quarter was $22.7 million which compares with $27.4 million in the same period of last year; that is a reduction of $4.6 million or 17%.

We have a $12.4 million decrease in our river business which results mainly from the difference between the total of 22 barges sold to third parties from our shipyard in the second quarter of 2013 against only 4 barges sold to third parties in the same period of this year. This effect, as we will review in more detail in a few minutes, coupled with a decrease in revenues from river operations mainly related to a delay in loading of soybeans in the second quarter 2014.

As you can see, the offshore and ocean segments provided a positive variance in the second quarter, partly compensating the reduction experienced in our river activities during the period. Our offshore supply business, as anticipate, was positively impacted by a significant adjustment in rates experienced by our UP Agua-Marinha, UP Esmeralda, UP Diamante and UP Topazio, all of which as you know extended their contracts with Petrobras for another four years at significantly higher rates when comparing both periods and we should also consider UP Amber and UP Pearl which commenced their activities late in 2013 and have also been placed on profitable long-term contracts with Petrobras.

Finally, our new vessels UP Agate, UP Coral and UP Opal had only a very limited impact in the second quarter results as they commenced their operation in the North Sea in April and May respectively, but in fact, had to undergo initial inspections and other requirements necessary for new ships that start their activities which consumed a significant portion of their available time in this past quarter.

Our ocean business continued to perform satisfactorily with better volumes of our container feeder service in the second quarter this year than those experienced in the same period of 2013. In addition, one of our product tankers finished a long-term employment in April and was engaged in a new short-term employment at improved rates.

Let’s turn to Slide 6 where you will find a comparison of our second quarter 2014 river business results against those obtained in the same period of 2013. Our river segment in the second quarter of 2014 produced a segment adjusted EBITDA of $8 million compared to a segment adjusted EBITDA of $20.4 million in the same period of 2013.

As we just discussed, the main difference between the second quarter in both years results from a reduction in revenue of $21.1 million corresponding to the difference in the number of barges constructed whereas last year we built and delivered to third parties 22 barges, in the second quarter of this year we have only constructed and delivered four. As anticipated, the yard will focus in 2014 on producing barges as well as pushboats for our own fleet. However there may still be some additional third-party sales in the second half of the year.

You will notice that we have transported a smaller total number of tons in cargo in the second quarter 2014 than we did in the same period of last year. The most significant difference, as we announced at the beginning of this year, is the fact that in 2014 we had time chartered 4 pushboats and 100 of our barges to Vale on a long-term basis. This significant portion of our fleet is therefore hired on a daily basis rather than earning on the basis of freight per ton.

As we’ve previously discussed, this take or pay time charter made a significant difference in our exposure to the agricultural cycle on a long-term basis. In the same direction, our new Parana Iron transfer station, which had very little influence in our results in the second quarter, as it only started its activities at the end of May, will also contribute significantly to isolate a significant portion of our earnings from climate changes and other factors affecting the agricultural demand. We did experience in the second quarter of this year a significant operational problems, not the least of which was an abnormal and very sudden increase in the water levels of the high Parana river which in mobilized [ph] the loading at all ports over this portion of the river for over 10 days at a critical point in the season. Gradually the river levels returned to normal and one by one we could start loading soybeans at these ports again. The accumulation of barges ready to load which then were laden over a very short period of time plus accumulating loaded barges at the load ports caused a disruption in our system which took some kind to unwind.

These river levels, coupled with navigational problems of the fleet in this period resulted in a delay in loading about 22% of the cargo that we have planned to load in the second quarter. And more loaded barges were located closer to the port of origin at the end of the quarter than we would regularly have had. This results in a negative accumulated positioning charge for the first half of the year of $7.4 million which is $3.6 million above what we had by the June 30, 2013.

As we explained in our earlier call, that repositioning charges reflect the revenue recognition of freight invoiced in the period and are reversed going into the following quarter. Positioning charges have been historically neutral to our results on a yearly basis and therefore we should not expect to suffer a material negative effect in our yearly results.

As we will discuss in the next slide, there are some factors which may contribute positively in our results for the balance of the year and in particularly for the fourth quarter which could show stronger results than we had in 2013.

As you can see, the positive effect that we experienced in running costs in the first quarter has continued into the second, with a reduction of almost $2 million over the running costs experienced in the same period of last year where we basically were operating a similar sized river fleet. This is an important tendency favoured by the effect of the devaluation of the local currencies in our OpEx. If this tendency is maintained through the rest of 2014, it is possible that we will have a significant favorable difference in the second half of the year coming from the cost side as well.

Let's turn to Slide 7. And let's refresh our views for the remainder of 2014. As anticipated, the total soybean crop in the region has been satisfactory with substantially the same volumes as we experienced last year. There are, however, areas of the Ladario where according to analysts exports have been substantially delayed, not only by operational problems as we have discussed but also due to a significant drop in the international soybean prices. Coupled with this, the maize crop in Paraguay is not going to be over record level as originally expected, with 3.5 million tons as currently expected could add at least 1 million tons to the total river demand in the second half of the year over what we experienced in 2013.

The exports of iron ore continue unabated despite variation in international prices and therefore we expect that the iron ore barges will remain fully employed until the end of the year. Very important positive factor in 2014 on river levels, in the high Paraguay river. As you can see in the graph to the right, these river levels are far above both the 2013 levels but also the 10-year median levels. This means that our barges in the third quarter will continue to load to the normal operating drafts with better efficiency for transportation results. But this also bodes well for our fourth quarter. If the high Paraguay river remains navigable well into the fourth quarter, we will be able to extend our service to the Bolivian soybean producers and crushers load more vegetable oil and petroleum products through that portion of the river and eventually add volumes of iron ore all of which means larger volumes in the fourth quarter than we have been historically able to carry.

As we have already mentioned, our transshipment station Parana Iron started her operations at the end of May. You can see a picture of her first transshipment into an ocean vessel at the bottom left of the slide. In her first month of operation, she loaded over 100,000 tons. If we are ready to maintain this volume throughout the full-year, we would exceed by 20% our original projections in terms of volume for this unit. .

Let’s take a quick look at Slide number 8. We have continued this quarter with the design of our new generation of pushboats which is now in its final stages. As anticipated, we intend to build four of these new pushboats which have a state-of-the-art shallow draft ultra-fuel efficient design. The first of these four pushboats will probably be in operation in 2015 and with an average power of above 6900 HP, they will be able to pushing more barges at higher speeds, spending less in fuel and therefore will make a 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 as we’ve discussed earlier is now mainly building dry and tank barges for our own fleet and selling a lesser number of barges to third parties than we did in 2013. We are open to third party inquiries and we believe that the anticipated requirement with double hull barges that we discussed in the previous slide will bring demand from various customers to upgrade their tank fleet before the new regulation is in force. The yard will also be capable of producing pushboats cost efficiently and avoiding import duties for pushboats produced in our other areas of the world.

In Slide 10, you will find a summary of our second quarter 2014 offshore supply results, compared with the same period of 2013. As you can see, the offshore supply segment adjusted EBITDA for this quarter was $12.4 million compared to $6.8 million in the second quarter 2013. The substantial increase in revenues and results was mostly due to the participation of 2 more vessels, UP Amber and UP Pearl, which entered service with Petrobras as you know in August and November 2013 respectively. But also from the very substantial increase in the time charter rates obtained by part of our existing vessels, for which we renewed at prevailing contracts in the second and third quarter of last year.

In the case of UP Diamante, Topazio and Agua-Marinha, rates increased from $28,000 to $35,380 per day. In the case of UP Esmeralda from $26,200 to $31,950 per day on new four-year contract. Our three new vessels, UP Agate, Opal and Coral, as we mentioned before had little influence in our second quarter 2014 results. They arrived in the North Sea in April and May respectively but as we had to undergo inspections and approvals as well as attentive technical matters related to their commencement of service, they saw less than 20% active duty in the second quarter. They have since been successfully employed in the spot markets in the North Sea, having been employed by most major charters.

As we will discuss in a moment, we expect that two of these ships will be positioned under long-term charters with Petrobras and therefore they will leave the North Sea in one case by the end of this year and in the other in the first half of 2015.

Running costs increased by almost $3 million in the second quarter 2014 as compared to the same period last year, 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 Opal which were fully crewed during the entire quarter, also they did not produce substantial EBITDA as we have just discussed.

Let’s turn to Slide 11 for a quick review of the evolution of Petrobras’ 2014-2018 business plan. As you can see the portion invested in to exploration and production has grown to 69.8% of the $220 billion to be spent over this five year investment plan. This significant increase in their commitment to the offshore exploration and production is a very robust sign for 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 their projection of growth of the fleet that they will need to operate these projected productions. Of particular interest is to note the very significant growth in the number of ultra-deep sea drilling rigs that we will be operating in Brazil in the next few years and how this number will grow from the current 40 units and we should consider that the only operated 15 units of this type in 2010, to 68 units by 2020, most of these units have been contracted and as they enter into service and find oil, they will need a similar growing number of service vessels, not only the surface supplies but most interestingly for subsea support activity. 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 war 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 drilling ships and production platforms are put into service.

In Slide 12, we will review the employment of the fleet and as you will recall we acquired the 3 new ships ex-yard in China at the end of 2013 which you can see in the pictures on the right hand side of the slide. As discussed, these three ships, the UP Opal, UP Coral and UP Agate we’re positioned in the North Sea to work in the spot market during 2014 while we find long-term employment for them preferably in Brazil.

As we announced in our last call, we won the tenders for four year contracts for both our existing UP Safira and our new UP Opal at $30,000 per day and $31,000 per day respectively for four years. These contracts have now been formally approved by the board of Petrobras and correspondingly officially awarded. Our UP Safira will enter into a new four-year contract in direct continuation from her present charter at $26,200 and into her new rate of $30,000 per day. UP Opal will position herself from the North Sea to Brazil at some time during the fourth quarter and enter into her new contract as well.

As you will recall, we participated successfully with another of these new ships UP Coral jointly with a leading international subsea service company in a tender held by Petrobras in order to provide service as an RSV. RSV ships as you may know are vessels that can operate remoted -- remote-controlled vehicles up to 3000 meters depth 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 the board approval has been obtained as has been the case for UP Safira and Opal.

The plan with UP Coral is to provide the vessel -- to operate in the North Sea until the additional equipment and the remotely operated vehicles are ready for installation in Europe. Then we will move the vessel to Brazil to commence service under her new contract in the first half of 2015. The total additional investment that UP Coral will require to service this contract is expected to be between $8.5 million and $10 million, excluding the cost of the remotely operated vehicles provided by our partners. We expect that under this employment as an RSV, this ship would be able to generate an EBITDA margin of approximately $10 million per year, which is double the average pro forma EBITDA that we have 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 is to try to position the company 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.

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

In Slide 13, you will find the graphic summary of the employment of our fleet as it stands today. As you can see, now that UP Opal and Safira have been confirmed. If we receive a confirmation of the employment of UP Coral as explained in our previous slide, our other 14 existing vessels 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 her sister ships generate on average on the pro forma annualized basis. This would mean as you can see at the bottom of the slide, that the total fleet of 13 vessels operating as PSVs and one operating as an RSV on an annualized basis could produce a total of $75 million of EBITDA with the potential to employ another of our vessels as an RSV as well.

Let’s take a look in Slide 15 at the second quarter of our ocean vessels compared to the equivalent period of last year. As you can see, the segment adjusted EBITDA in the second quarter 2014 was $2.1 million which compares to $150,000 in the same period of last year. This positive difference results mostly from a rate increase in some of our product carriers that we had experienced and announced in the first quarter and a comparatively better second quarter performance of our container feeder service which had, as you may recall, suffered very low volumes in the second quarter of 2013.

While the performance of our product tanker vessels was above last year during this quarter giving the improved rates that we have fixed in 2013 for one of our vessels and the short-term charter that we agreed for another ship as from the end of May. Unfortunately due to slackening of the local demand we do not expect to be able to renew the short-term employment which will expire in September 2014.

Running costs in general have been favorably impacted by the devaluation as has been the case in our river business as well. Our container feeder service had record volumes in the second quarter which compares favorably with the low volumes experienced in the same period of last year. However again demand appears to be slackening towards the year-end. So we do not expect to exceed our earlier announced expectations for 2014 in the ocean segment.

Turning to Page 16, 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. Perhaps more interestingly, in Slide 17 confirming what we just discussed, you can see the second quarter southbound volumes were the highest ever experienced in the service influenced partly by the demand of TV sets sold in connection with the World Cup.

With that, I will turn the call over to Cecilia who will guide us through our financials and we will take your questions at the end.

Cecilia Yad

Thank you, Felipe. Moving to Slide 18, 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 second quarter were $99.4 million compared with $121.8 million for the second quarter of last year, reflecting a $22 million decrease, mostly driven, as was explained before by Felipe, by the river segment, which was impacted by the decrease in the shipyard activities in connection with the third party barges sold, as 4 barges were sold this quarter compared to the 22 barges sold to third parties in Q2 2013.

Our operating profit for the second quarter of 2014 was $10 million as compared to $17.3 million for the second quarter of 2013. The operating profit for the second quarter of 2014 attributable to the river business, which includes both the transportation and the barge manufacturing result, was $1.5 million as compared to $14.6 million for the same period of last year.

In offshore, our operating profit was up 92% in the second quarter of 2014 when comparing with the second quarter of last year, from $4.2 million to $8.2 million. In ocean, our operating profit increased $1.9 million from a loss of $1.6 million in the second quarter of 2013 to a profit of $0.4 million for the same period of 2014.

The company’s adjusted EBITDA for the second quarter was $25.4 million, 22% lower than the second quarter of 2013.

Looking to the river business. Our adjusted EBITDA for the second quarter of 2014 was $8.1 million, down from $20.5 million in the second quarter of last year. In offshore, our adjusted EBITDA was up 83% in the second quarter of 2014, $5.5 million as compared to $6.8 million in the same period of last year. In ocean, our adjusted EBITDA increased $2.2 million in the second quarter of 2014, as compared to $0.2 million in the same period of 2013. 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 19, our reported net income for the company in the second quarter of 2014 amounted to $2.8 million or $0.02 per share, compared to $13.5 million or $0.10 per share for the same period in 2013. In the second quarter of 2014, there was an adjustment of $0.3 million related to a non-cash loss for deferred taxes on unrealized foreign exchange gain in Brazil and $0.1 million from the yard's EBITDA, related to the Touax barge sale. After making these adjustments for the second quarter of 2014, the adjusted net income for the company in the period amounted to $2.9 million or adjusted net income [ph] per share of $0.02 compared to an adjusted net income of $12.5 million or $0.09 per share in the second quarter of 2013.

In Slide 20, we have a condensed version of the company's balance sheet as of June 30t, 2014, compared to December 31st, 2013. At June 30, 2014, our cash and cash equivalents were $59.7 million with a further sum in restricted cash of 13 million showing a substantial liquidity.

In connection with our level of CapEx, we have invested $31.5 million for the first half of the year while almost $14 million belonged to the second quarter of 2014. The majority of the investments were related to the river projects. More specifically we have invested $17 million in the construction of new barges at our shipyard, $3.5 million in a new midstream transshipment station and $5.1 million in [indiscernible] the construction of new line and pushboats. In addition, we have invested $2.7 million in the reconfiguration of our acquired PSVs from China and additional awards in progress to convert the UP Coral into an RSV, which will require the installation of especially designed crane and other equipment.

In Slide 21, we show our current debt repayment schedule having a balanced yearly principal repayment in the medium term. We are in compliance in this quarter with our covenants and we feel we are very well positioned for the continued execution of our growth plans for the second half of the year and beyond.

Now I would like to turn the call back to Felipe.

Felipe Menendez Ross

Thank you, Cecilia. We are now available for your questions.

Question-and-Answer Session


(Operator Instructions) our first question is from Ben Nolan, Stifel.

Benjamin Nolan - Stifel, Nicolaus

So my first question relates to the water levels in the river and – Felipe, did you say that the impact, maybe help me understand, was $7.4 million is sort of how you are allocating the impact of the higher than normal water levels that disrupted the system, is that how to think of it?

Felipe Menendez Ross

That’s one way to look at it. Ben, I think we mentioned another figure which is we loaded 22% less cargo than we had anticipated. We are talking about a figure of approximately a million tons within the quarter. So we postponed the loading, or delayed the loading of 220,000 tons. So if you would look at that way, it is almost equivalent to the 7.5 million positioning charge. It is not to say that this cargo has been lost, but we did not load it in the quarter and as capacity slackens in the fourth quarter, we will be able to carry cargo if it’s still available then. As things are looking right now, the demand for the fourth quarter will remain quite strong. So we hope to be able to pick this volume at the end of the year.

The other factor which postpones the loadings and somehow the availability of cargo, in the early part of the third quarter as we mentioned in the slide, is the fact that soybean prices have been falling. So this causes farmers to retain the crops and hope for better prices. I think this has particularly been the case in Argentina, and it is also the case in large areas of Paraguay as well. So with the maize crop at 3.5 million tons demand remains strong throughout the third and fourth quarter as we expect, the loss of volume of the second could be made up in the fourth quarter and that’s what we are looking at.

Benjamin Nolan - Stifel, Nicolaus

Okay, so not split between the third and fourth quarter but more back end weighted is how to think of it, I guess?

Felipe Menendez Ross

That is correct because essentially July and August we are fully booked anyway. So basically we only have available capacity to pick up additional volumes come the middle of September onwards. It does look like river levels, cargo quantities, the fundamentals are there so that we could improve substantially on the quantities that we carried in the fourth quarter last year.

Benjamin Nolan - Stifel, Nicolaus

And then I have a few questions related to sort of the barge building strategy and really what’s going on there? And I would lump them all together I guess, so you guys are building primarily for your own account, first of all, is it – what’s the mix between dry versus wet? And then along with that, could you maybe refresh me on what exactly is the regulation that is taking effect as it relates to the double hull phase-out and what impact that should have on the broader fleet and then on your fleet specifically as it relates to the tank barges?

Felipe Menendez Ross

Let me start with the second part of the question, as you will recall generally 2015 is the final deadline for all single hull vessels, and that is true for the river as well as ocean. It’s an international regulation. And that cut-off date is the 31 December 2015. A new regulation in Paraguay has brought forward that date to the first of January 2015. Now that will have, we believe, a significant influence in the renewal plans that most companies in the river have about their tank fleet. And in our particular case, it doesn’t really affect us at all. As you will recall, when we started the yard in 2010, we devoted the first year or a year and half of the yard only to producing tank barges. And we replaced all of our single hull fleet, I think, we only operate today one fully operational single hull barge and which is employed only in the carriage of vegetable oil. So essentially our entire operating tank fleet is fully double hull. Now that is not true for the industry. The vast majority of the existing tank fleet in the river and when I say vast majority, I am talking about something like 85% is single hull. Double hull of very old age that will need replacement.

So we think that the single hull units will have to go faster than they had anticipated, this will bring people to anticipate their CapEx which they thought they still had full year to cover. Anyway we are really looking at the variation of these 12 months, these single hull barges had to leave the system anyway. So that bodes really very well for the yard, it bodes well for Ultrapetrol who anticipated this change and built its fleet double hull three years ago.

So I want to go back to the first part of your question, we are building barges primarily for ourselves that is how we plan this year. We are producing a mix of dry and tank barges. We haven’t revealed publicly exactly what that mix is but now we’re more inclined to building a large number of tank barges and with this anticipated regulation, it may open new transportation opportunities and it may open the opportunities of selling equipment to third parties. The investment in CapEx in new barges in the first half of the year as Cecilia mentioned has been quite considerable. We have invested $17 million in new barges and we continue to do that basically because we believe that the replacement of older units is something that the industry will have to go through. Sorry, does that address the both questions for you?

Benjamin Nolan - Stifel, Nicolaus

That’s very thorough; I do sure have a few questions. So the 85% you said is single hull, very old double hull, what’s the basis for that, how many tank barges are in the market just to sort of put a number on it?

Felipe Menendez Ross

I can put that figure in front of me in a second and give you the exact figures. But it’s the oldest part of the fleet afloat – if you be just patient till the end of the call we will bring the exact figure for you.

Benjamin Nolan - Stifel, Nicolaus

And then also associated with that, have your costs – I know obviously your costs across the board have come off a bit because of currency revaluation, has that also been the case on a barge building site and at this point what is your approximate cost to build tank versus a dry barge?

Felipe Menendez Ross

The costs have not changed much for what we previously revealed. The devaluation has had some positive effect but as you know a large portion of our costs is steel which is in dollars. So we have been positively impacted, our total cost is not different than what we had previously discussed.

Benjamin Nolan - Stifel, Nicolaus

And then last question relates to what’s going on with respect to change in the ownership structure, I know that you’re probably somewhat limited in what you can say prior to the closing of the transaction, I understand. But I am curious as to what changes may be in place or the thinking may be with respect to the go forward strategy of the firm? I mean does it make sense to remain a public company with only 15% free floats, is it still a dual or potentially three-tiered strategy in terms of the segments of the market, has that thinking changed at all I guess with respect to how the company should be viewed on a go forward basis?

Felipe Menendez Ross

These are all very good and valid questions Ben, as you quite rightly pointed out I can’t answer them, basically from the company's perspective there is no change. There is going to be a change at the top management level but there is a group of very talented people who will be managing the company for years and it’s the same group -- some of our investors and you as analysts have seen and interacted with, and nothing is going to change in that respect. We believe that the company is in very good footing to growth and really there isn't much that we can say from company's perspective about any changes in view. There are no changes in views as far as we are concerned up to this time. So I am afraid we’re going to have – from my perspective I could leave that unanswered at that mode.

Benjamin Nolan - Stifel, Nicolaus

I sort of suspected that would be the answer and – but nonetheless Felipe, it’s been a pleasure and best of luck going forward and I hope whoever does the call subsequent to this is half as thorough as you are.

Felipe Menendez Ross

That will definitely be the case but let’s not good byes so quickly. I will remain as a director in the company. I am completely committed to seeing this transition being smooth and successful. I am going to stay here as long as Southern Cross and team need my help. So there is no goodbyes to be said at this time and really I think that this is a great company that can grow forward from where it is on multiple avenues and has really incredible tools for growth. So we intend to continue to do that and I will be sitting at the board and trying to contribute.


The next question is from Ira Sochet with Sochet & Co.

Ira Sochet - Sochet & Co.

The first questions are really for Cecilia. At the end of the slide presentation you have your consolidated EBITDA, your adjusted net income, your operating profit to adjusted – EBITDA, which number can we use for your actual cash EBITDA number?

Felipe Menendez Ross

A very good questions, Cecilia is getting into numbers in front of her but the FX gain and I think this is something we stressed in our last call, our cash gain. So you should include that in your EBITDA. These are not exchange differences purely resulting from accounting, they are in fact cash gains. It is another way of saying that they should be impacting our OpEx line but we show them as exchange differences because in fact, that allows us to pay our expenses at a higher exchange rate, is that correct.

Cecilia Yad

That’s correct.

Ira Sochet - Sochet & Co.

Again what's the number we’re going to – are we going to use -- the 25 million, 394 which includes our foreign currency exchange gain at your cash EBITDA?

Cecilia Yad

Right, the 25.4 million includes the cash gain and we are calling here foreign currency exchange gains, you need to take that into account, so the 25.4 million EBITDA is a cash, it’s fine, it’s okay.

Ira Sochet - Sochet & Co.

In your 6-K you show a higher comprehensive income number. Can you elaborate a little bit on that?

Cecilia Yad

Let me check.

Felipe Menendez Ross

Which part, which page of the 6-K are you referring to?

Ira Sochet - Sochet & Co.

I can’t because I have got the slide in front of me – in that financial section, where you do your cash flow – after the cash flow it’s the comprehensive income which looked very good. Meanwhile while Cecilia is looking that up, can you – what are the future plans for adding more semisubmersibles?

Felipe Menendez Ross

Well at the moment we’ve focused on employing the three that we acquired. The market is very strong in Brazil right now and the demand is growing. Let me give you an idea -- in the last round of negotiations where we fixed UP Opal and UP Safira as we described, together with our two ships, Petrobras in our class of vessels in the 4500 class, admittedly that is the largest class of vessels that they employ. But together with our two ships they took a total of 12 ships in a single tender. So this is indicative of how strong the demand is. I don't want to anticipate what the future might bring, Ira, as you can imagine but I would not be surprised if Petrobras did come up with a new tender for an RSV before the year-end, in which case we could employee our only remaining new acquisition UP Agate and send it to Brazil as well. If we do that, given our cash position, given that we made these acquisitions substantially using our own capital and with very low levels of leverage, the company would be in a position to acquire three more ships in the course of the next year. I am not saying that we will, I'm saying that we would be in a position to do that and it would make a lot of sense as the demand is growing.

So if we see things as we see them today it would be quite possible that we could acquire more vessels. We have today and -- this is something we did not mention in the call but running across our long-term coverage Ultrapetrol today with 12 ships out of 14 is the best long-term covered offshore fleet in the world in PSV. So we have I think terrific coverage and long-term rates. Now we could take further exposure, because if we employ the last vessels, all three ships bought for $100 million last year would be fully contracted. And let me take a step back so that we all visualize what this means. We bought the UP Coral as we announced for 32 million. We are investing in her another 8.5 million, so let’s call it $40 million to $42 million investment. This ship is going into a Petrobras contract for six years generating $10 million per year. So when she exits this contract she will have paid herself out 1.5 times. That is a fantastic return on the investments and I think a very good position to consolidate Ultrapetrol cash flow. So if we are able to secure one remaining new acquisition at this level it would make every sense in the world to grow with an equivalent exposure of three ships but I am not saying that we will, I'm saying that potentially we have the capability for doing it and the market is there.

On the question of the 6-K, as I think we need to run with you through the correct page, would it make sense if we address your questions separately in order to look for the correct page of 6-K that you're looking at –

Ira Sochet - Sochet & Co.

No problem at all. Two last questions. One, in the past you projected your EBITDA for the balance of the year and for the following year. Can you do that again?

Felipe Menendez Ross

Yes we do that but we don’t do it disparately. With the third quarter we generally have given guidance to the fourth. So I think that would be the case again and we have given sort of long term views, if you recall, we've given a three and five year view. We have not prepared that at this time but it’s something that we could easily do again. So we will make a note of it and include our long-term projection if that is of interest. But I think you can expect as we have done in the past together with our third quarter we give guidance to the year.

Ira Sochet - Sochet & Co.

Last question, a short one. Are there any plans for another investor conference like the last one in New York where we can meet the new management as well as get those EBITDA numbers?

Felipe Menendez Ross

Yes, definitely, this is something we have discussed with Horacio and it’s something that Southern Cross would very much like to do, we would do – and probably organize an investor conference in New York by the end of the year and introduce the new CEO. I will probably be there as well and then explain the future strategy of the company and give our revenue opportunity to discuss our operations and results.

Ira Sochet - Sochet & Co.

A possible investor conference in South America, giving us a nice river tour?

Felipe Menendez Ross

That is also open and it's something we have been thinking about doing for several years, for one reason or another it's been postponed. But that is definitely something that we would like to do, organize it. It’s a long way to come but for a group of investors that can take the time and have a sizable investments in the company would make every sense. So most definitely we will try to do that next year.


The next question is from Michael Schlembach with JPMorgan.

Michael Schlembach - JPMorgan

I did want to ask a few questions on a go forward basis here. What are the plans for financing the incremental CapEx that you guys talked about, with some of these larger single vessels, do you think this is something that’s covered by operational cash flow or do you intend to finance a piece of it? Just trying to get a sense of that overall debt picture going forward?

Felipe Menendez Ross

Very good point, Michael. Perhaps we didn't specifically address it with enough intensity. Let me go through what we have done in the past. And that's a good indication of perhaps how we intend to do it in the future. We bought three vessels for over $100 million last year. What we did is we took a total of $42 million in debt from two ships, leaving the third ship completely unleveraged. So we've taken -- more overall leverage in the acquisition and we have used a large portion of equity. The banking – the ship banking industry is making a comeback from the situation it faced in 2009, ’10, ’11, ‘12 where there was very little capacity, very little lending capacity in the large additional ship banking institutions. Now we see that the successful large banks that have survived are trying to increase their shipping portfolios and that is very low cost debt. We're talking about LIBOR plus 2, LIBOR plus 3, and with this LIBOR rate it is a very interesting tool for financing. So the company would finance new acquisitions essentially with bank debt and equity but keeping the debt to a low proportion. I think that is the avenue that we followed with the last acquisition and it’s the avenue the company would like to follow going forward.

As a guideline, what we said that the level of debt that we plan on a long-term basis should be around 3 to 3.5 times and I think that will continue to be the policy going forward. Of course there are times when you buy an asset and it hasn't produced EBITDA and then your ratio for a short time bumps up. But I think that the initial tool will be ship financed debt, typical ship finance debt, which is attractive and available today and low costs and we can take piecemeal without adding a big chunk of that by itself. As we grow and we grow into more expensive and sophisticated assets, well we will look at many other opportunities I am sure. The company has used traditional ship finance and that is an avenue which is open to use at an attractive interest rate.

Michael Schlembach - JPMorgan

Couple more. When do you think that RSV contract will be finalized, just out of curiosity?

Felipe Menendez Ross

Well, it’s difficult to comment – because Petrobras board takes a long time. What I can say is if you use as a yardstick the confirmation of Opal and Safira those tenders took about 90 days to award. Petrobras has just asked for extension on the award of 45 days. So now the timing is similar to what happened with Opal and Safira I think we would expect an award within the next month -- month to 45 days, it shouldn't take much longer than that.

Michael Schlembach - JPMorgan

And then two more, one short one and then one on the river business. I have seen one of your principal competitors in the region is a little bigger in the overall feeder business. That is a nice dovetail to some of the things that you already do, given the manufacturing capacity that you have in the region. Do you guys or have you looked at manufacturing feeder boats and doing anything in that sense as a incremental line of business, just given some of the overall demand and success we've seen with -- whether it is an Absol [ph] or somebody else in the region?

Felipe Menendez Ross

The yard is built to construct a wide variety of ships. We are focused on barges because that is what it is most efficient at doing .We have incorporated pushboats. And actually we have built a couple of small pushboats for our own use and the result has been very good. The efficiency obtained in the second vessel and the second small pushboats has been excellent. So building pushboats as we have discussed is definitely something that we would want to do. There are a number of other opportunities but I think the yard has to stay focused on fewer products because if you extend the range of products our experience is that you lose efficiency, as you could use solely tank barges or solely dry barges, you can obtain a hundred percent efficiency. If you produce, you lose a little bit. As you add more and more different types of products the operation loses efficiency in terms of productivity.

So I think at the moment we’re going to keep it focused on tank, dry barges and pushboats. Those are the three products that the yard will focus on producing.

Michael Schlembach - JPMorgan

I appreciate that and I have one more question. On the river business, as you guys have gone to this -- it is a real business transformation in terms of how the revenue flows through your statement and how the associated expenses flow through. Do you guys have a sense as to overall margins that you are targeting in that business? It really has shown the potential of this business being a little more stable and a little less volatile, just obviously given the nature of the take-or-pay contract, but are you guys underwriting some of these deals when you're building these contracts to a specific margin, or is it more in terms of what the market will take? I am just trying to get a sense of how the next three, four quarters look like in terms of that modeling –

Felipe Menendez Ross

Good point, Michael. I wouldn’t like to give you a concrete guidance as to next 3 or 4 quarters because we have announced it more on a longer-term basis. But as you quite rightly pointed out just now we have over the past three years changed the scope of services that we provide. So we now have a good portion of the fleet which is providing transportation, all transhipment services to Vale on a take or pay basis with less volatility and very good margins. And Parana Iron, I stress, can be an incredible contributor if we can maintain the efficiency that she has shown in the first month of operation, but of course one month is only a tiny sample. Now that changes our EBITDA margin.

The other driver to change in the EBITDA margin is the change of pushboats. We decided to go into the heavy fuel consumption engines five years ago, it has had innumerable problems but we are now through them and it’s proven to be an incredibly successful exercise. Let me give you this one figures, so that one can dimension it. When we look at this project, we were looking – we made this figure public – we were looking at a price differential between fuel and diesel of between $140 to $180 per ton. And that was a 20% differential. Last month this differential in our overall consumption was $500 per ton and that was hundred percent, a hundred percent, so the price of fuel is 50% of the price of diesel in average for us in the month of June. So this is an enormous driver, Michael, and it's been slow in executing but we are there, seven pushboats are in operation including the spirit [ph] of Paraguay which will start service now in September. We are going to build four more and these new pushboats are incredibly efficient. We have tank tested them, if they are anything like the tank test of strata models [ph] they are going to be by far more efficient than anything we've done so far.

So when you look at margins and we have announced this figure before, so I reiterated here. Once we are through with this plan – and this plan now as we built before new pushboats will take at least a year and a half to two years to have all those pushboats in operation. Our EBITDA margin in the transportation side of the river could range between 32% and 35%. And we have published that figure before but it's important to remind ourselves of that because these new technologies have really changed fuel consumption and efficiency and those are tremendous drivers for margin.

Michael Schlembach - JPMorgan

And that would be 32% to 35% before attribution of when you guys lay across the SG&A expense?

Felipe Menendez Ross

Yes, that will be.

Michael Schlembach - JPMorgan

So that compares to about 25% in the most recent quarter in the river business –

Felipe Menendez Ross

That’s correct.


We are showing no further questions. Now I would like to turn it back to Felipe for closing remarks.

Felipe Menendez Ross

Thank you very much everyone for joining us in the call today and of course we will be available when we release our third quarter. Thank you very much.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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