Ultrapetrol (Bahamas) Q3 2007 Earnings Call Transcript

Nov.14.07 | About: Ultrapetrol (Bahamas) (ULTR)

Ultrapetrol (Bahamas) Ltd. (NASDAQ:ULTR)

Q3 2007 Earnings Call

November 14, 2007 10:00 am ET

Executives

Len Hoskinson - Chief Financial Officer

Felipe Menendez - Chief Executive Officer

Analysts

Scott Burk - Bear Stearns

Justine Fisher - Goldman Sachs

Dominic Neary - Insight Investment

Ian Crooke - Raymond James

Mike Leniare - Analyst

Erol Grinifini - Deutsche Bank

Scott Burk - Bear Stearns

Operator

Good morning and welcome to the Ultrapetrol's 2007 ThirdQuarter Earnings Conference Call. All participants will be in listen-only modeuntil the question-and-answer session (Operator Instructions). This conferenceis being recorded. If there are any objections, you may disconnect at thistime.

Now, I would like to turn the meeting over to Mr. FelipeMenendez, Chief Executive Officer. Sir you may begin.

Len Hoskinson

Actually it is Len. I am going to do the introduction. Goodmorning, everybody. This is Len Hoskinson, Ultrapetrol's Chief FinancialOfficer. Yesterday we issued a press release announcing financial results forthe third quarter 2007. A replay of this call will be available for one weekvia telephone starting approximately one hour after this call ends.

The call can be accessed at 1-800-879-7630, toll-free in theUnited States, or area code 203-369-4000 outside of the United States. The passcode is ULTR. The webcast is archived on Ultrapetrol's web site and will beavailable for 30 days after this call.

With me today is Felipe Menendez, Ultrapetrol's Presidentand Chief Executive Officer. Felipe will review Ultrapetrol's business segmentsas well as discuss our industry and future growth opportunities. I will takeyou through the financials.

After our remarks, we will be happy to take your questions.However, before we begin, we would like to draw your attention to the languagecontained in our previously filed reports and prospectuses concerningforward-looking statements.

This conference call may include assumptions, expectations,projections, intentions and beliefs about future events. These statements mayconstitute forward-looking statements. We caution that assumptions,expectations, projections, intentions and beliefs about future events may andoften vary from actual results and the differences can be material.

Forward-looking statements include such matters as futureoperating or financial results; statements of our planned, pending or recentacquisitions; business strategy; and expected capital spending or operatingexpenses, including drydocks.

Please read the company's registration statement on formF-1, our annual reports on form 20-F and our reports on form 8-K, which arefiled with the United States Securities and Exchange Commission, for importantfactors that could affect our results and for our full forward-lookingstatements legend.

And now I'll hand it to Felipe.

Felipe Menendez

Thank you, Len. Good morning, and thank you all for joiningus today on the call. During the first nine months of the year, andparticularly in our third quarter, we have successfully implemented asignificant number of the initiatives we had planned for 2007.

And we believe we have laid the foundations of our futuregrowth in each of our main lines of business. We have not only enlarged ourgrowth fleet through readily available tonnage by adding in August 33 bargesand one push boat that we purchased in United States, but we have alsocontracted for the equipment and acquired the land to locate our new shipyard.

We expect this yard commenced production of barges in alarge-scale by the end of 2008. We have confirmed the construction of 4 PSVs toadd to our offshore fleet in India and in this third quarter, we have orderedtwo larger units in China with an option to build two more. At the end of August,we placed in service art double-hulled tanker Amadeo, which has enteredservice, as you know, under a three-year charter.

In the third quarter, as previously announced, we havecontracted to sell our Princess Marina for a gross price of $18.5 million andwe delivered this vessel to her new owners on October 11, 2007. As you may haveseen in our third quarter 6-K filing, we also recently sold our largestpassenger vessel, New Flamenco, for a gross price of $24.3 million,significantly reducing our investment in the passenger sector.

We have also recently purchased a capesize vessel of 166,000tons deadweight built in 1984 for price of $57 million. This vessel wasdelivered to us yesterday and we intend to use her in the spot market. Theaddition of this vessel, at a time when the dry cargo markets for this size ofship are particularly strong, will contribute significantly to the performanceof our Ocean Business.

Len will discuss in detail the arrangements that we have putin place to finance this acquisition. Our River Business experiencedapproximately an 18% growth in volume in the first nine months of 2007 whencompared to the same period of 2006.

Particularly noticeable is the effect of soybeans and soyderivatives, where in the first nine months of 2007 we carried almost 2.3million metric tons, or 29% more than the 1.8 million metric tons that weshipped in the first nine months of 2006.

As mentioned in our last call, industry estimates for thesoybean crops in the region indicate that the 2007 production has exceeded byover 1.5 million metric tons the crop obtained in either of the previous twoyears. The seeded area for 2008 is expected to grow still further. Given thevolumes carried so far in October and November 2007, we expect the loadings forthe fourth quarter to be, again, 10% above the first quarter of 2006.

And therefore, we expect that the total volume carried inthe whole year of 2007 would be in the region of 4.2 million and to 4.3 millionmetric tons, or approximately 18% to 20% above the volume carried in 2006. Theresults of the larger volume carried may not be completely visible in the thirdquarter because we experienced a more-than-proportional increase in costs andalso the September 30 results still carry an adjustment for barge positioningof approximately $0.9 million, which should reduce towards the end of the year.

Given the expected loadings for November and December andtaking into account the cost increase already mentioned, for 2007 we expect thetotal EBITDA from our River Business at year-end to be approximately 10% abovethat we experienced in 2006.

In our Offshore Supply Business, during the third quarter of2007 we have operated five vessels the UPS morale to UP's morale to UPEsmeralda and Safira in the North Sea; UP Agua Marinha, Topazio and Diamante inBrazil. Three of our five vessels have entered into charter commitmentsextending from March to May 2009.

Two will be open for employment within the next nine months.In fact, we have recently repositioned our UP Topazio to operate in the NorthSea, where rates remain very strong. We believe that while this move willsignificantly increase the ship's earnings in the next twelve months, it willhave a negative impact in our fourth quarter because the time and cost ofpositioning the UP Topazio in the North Sea will be approximately 22 idle daysplus the fuel consumed.

As you know, we will have one more sister vessel deliveredto us in Brazil by the end of 2008. In addition, four Indian PSVs will commenceservice beginning mid 2009 and we have ordered two more PSVs in China, which,with over 1000 square meters of deck, are approximately 20% larger in capacitythan our existing vessels.

The general market outlook for this type of vessel atpresent remains extremely strong, with average 2007 rates exceeding those thatwe experienced in 2006. For the third quarter in our Ocean Business, we havewitnessed a stronger international freight market for capesize dry bulk vesselsthan during 2006.

As you know, our capesize Suezmax OBO vessels are trading ontimecharter as dry bulk carriers and they have remained committed ontimecharter throughout 2007 and partially into the first quarter of 2008. Inthe second quarter, we entered into Forward Freight Agreements, or FFAs, to hedgethe earnings of these vessels during 2008 and partially in 2009 at a levelsubstantially above their average timecharter in 2007.

We believe that by hedging forward at levels, which lock inapproximately $20 million more in operating profits than what these shipsearned in 2007, not only do we provide visibility to the cash flow of our oceanfleet, but we can also optimize our market exposure throughout our variousbusiness segments.

The non-cash mark-to-market loss effect of these hedges willaffect our results during the coming quarters. Until the FFAs reach theirsettlement in 2008 and the ships produce in the market, the equivalent resultneutralizing the profits or losses created by the FFA in each month.

This is equivalent to having fixed our three OBO capesizevessels at an average of between 55,000 and $60,000 per day during the entire2008 year.

In addition, our recent capesize acquisition, mulitvesselPrincess Marisol, will also contribute further to the overall profitability ofthe capesize fleet. The coastal tankers in South America are all now beyond thescheduled major conversions and we expect, except for technical off-hire, toexperience uninterrupted service to these vessels during the next twelvemonths.

In our passenger vessels, as mentioned, our New Flamenco hasbeen sold following the end of the 2007 season in Spain and our only remainingpassenger ship, the 500-passenger Blue Monarch, has finished its 2007 programand is committed to recommence her cruises in the Aegean for one more season inApril 2008.

I will now hand it over to Len to discuss the financialhighlights.

Len Hoskinson

Thanks, Felipe day. Total revenues for the Company for thenine months of 2007 are 28% higher at $163.9 million compared to $127.7 millionfor the same period in 2006. The net loss for the period was $1.8 millioncompared to net income of $13.3 million in 2006.

Net loss per share for the 2007 period was $0.06 compared toa net gain of $0.86 in 2006. However, in analyzing these figures, you shouldconsider that we have recognized an unrealized non-cash mark-to-market loss inFFA hedges $14.3 million, or $0.46 per share.

Also there is a deferred income tax charge of $3.6 million,or $0.12 per share, from unrealized foreign currency exchange rate gains onU.S. dollar denominated debt of our Brazilian subsidiary in the offshorebusiness.

Net income for the first nine months of 2007, excluding theeffects of both of these items, is $16.1 million, or $0.52 per share, comparedto $13.3 million, or $0.86 per share, in the same period of 2006.

Earnings for the third quarter 2007 were a loss of $4.7million, or $0.15 per share, compared with income of $8 million, or $0.51 pershare, during the same period in 2006. The third quarter 2007, that resultincludes a non-cash mark-to-market loss on FFA hedges of $11.2 million, or$0.34, and a deferred income tax charge of $1.2 million, or $0.04 per share,from unrealized foreign currency exchange rate gains on the U.S.dollar-denominated debt of our Brazilian subsidiary in the Offshore SupplyBusiness.

Net income for the third quarter 2007, excluding the effectof both of these items, is a gain of $7.7 million, or $0.23 per share.

We are reporting consolidated EBITDA for the first ninemonths of $43.3 million, which is 12% lower than the equivalent 2006 figure of$49.3 million. Again, adjusting for the non-cash mark-to-market losses on FFAsof $14.3 million, the first nine months of 2007 EBITDA is $57.6 million, $8.3million, or 17%, higher than the comparable EBITDA for the first nine months of2006.

EBITDA for the third quarter of 2007 was $10.5 million,compared to $21.3 million in the same period of 2006. The third quarter 2007EBITDA includes a non-cash loss of $11.2 million for the third quarter and EBITDAfor the third quarter 2007 excluding the effect of these above items, is $21.7million.

Our River Business EBITDA for the first nine months 2007 is$15.9 million. That is compared to $15.2 million for the same period of 2006.That is a positive variance of $700,000, or a 5% increase.

However, as you have heard from the outlook that Felipereferred to referred to for year-end, we expect to be 10% above the 2006 figurefor this segment.

Voyage and operating expenses for the River Business haveincreased by $8.7 million in the first nine months 2007 from $39.7 million in'06 to $48.4 million. This 22% increase is consistent with larger cargo volumesand is also affected by higher boat prices, which include third-party hiredpush boats and higher expense in our own push boats mainly associated with crewexpense.

Our Offshore Supply Business EBITDA in the first nine monthsof 2007 has been $15.7 million. This is a positive variance of $6.5 millionwhen compared to the same period in 2006.

As you will recall, we only consolidated EBITDA from thesegment from the second quarter of 2006 following the acquisition of themajority of the shares of UP Offshore. Consequently, the first nine months of2006 does not present a fair basis for comparison.

Third quarter revenues were 52% higher, $11.4 million, whencompared to $7.5 million for the equivalent period in 2006. Our Offshore Supplysegment operating profit for the third quarter 2007 is 21% higher, $4.8million, than the equivalent figure of $4 million in 2006.

Most of these differences result from the fact that in thethird quarter 2006 we only had three vessels in operation for the full quarter,with the fourth being delivered in September '06, while in the third quarter of2007, we have five ships in operation.

Our Ocean Business EBITDA in the first nine months of 2007has been $6.3 million, including non-cash losses on mark-to-market of the FFAsin the third quarter. Excluding this effect, our third-quarter Ocean BusinessEBITDA is $20.6 million, which is 16% higher than the 2000 equivalently EBITDAfigure of $17.8 million.

From a vessel trading perspective, perspective, we haveadded the MT Amadeo on August 31, 2007 and the Alejandrina in our coastalcabotage trade during 2007, but we have suffered a technical off-hire on ourPrincess Susana due to contact with a port buoy that resulted in a loss ofrevenue of approximately $400,000 in the third quarter.

Our Passenger segment business EBITDA for the first ninemonths and the third quarter of 2007 has been $3 million and $4.2 million,respectively. That's compared to $6.8 million and $4.6 million for the sameperiod in 2006. First nine months management fees and administrative andcommercial expenses, these rose by $5.6 million to $14.4 million for the firstnine months 2007 when comparing against the 2006 equivalent figure of $8.9million.

The Company made its IPO in October 2006, so this increaseis mainly due to events either connected the IPO or arising afterwards, whichis an increase in admin expenses associated with the absorption of UP Offshore,which took effect from the second quarter of '06; the takeover of the adminfunctions formerly carried out for the Company by Ocean Marine; the cost ofcompensation granted to the Board in the form of share allotments and grants;and the costs of the D&L insurance.

There were no major financings that took place in the thirdquarter 2007. As I explained in the recent development section of the MD&A,we entered into a new loan with DVB Bank in the amount of $25 million and drewdown $25 million under a credit line with our Chilean bank, Banco Bice, as partof the steps taken in October and November to secure funding for the purchaseof our new capesize Princess Marisol, which Felipe referred to.

Finally, you may wish to note that our total tax costs forthe nine months of 2007 were $4.6 million higher than the same period in 2006.As mentioned earlier, this is mainly due to the effect of the deferred chargefrom unrealized foreign currency exchange rate gains in our Brazilian side ofthe offshore business.

I will now turn it back to Felipe.

Felipe Menendez

Thank you very much for joining us on the call today andgiving us the opportunity of sharing with you some comments on our thirdquarter 2007 performance. We will be glad at this time to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from ScottBurk with Bear Stearns. You may ask your question.

Scott Burk - Bear Stearns

Hi, guys.

Leonard Hoskinson

Good morning Scott.

Scott Burk - Bear Stearns

First of all, let me just verify the clean numbers for thequarter, then. So, Len, it was $0.23 after I make FFAs and then $21.7 millionof EBITDA?

Leonard Hoskinson

That sounds right, yes.

Scott Burk - Bear Stearns

We got something slightly different just in our model, butit would be helpful if you put out the third, the quarterly numbers like that.

Leonard Hoskinson

Okay.

Scott Burk - Bear Stearns

Then I had a couple questions. First of all about thecapesize or the gain from the sale of the Marina when is that going to be? Willthat be realized in the fourth quarter then? And that's about $10.6 million?

Leonard Hoskinson

That is about $10 million and it's in the fourth quarter.

Scott Burk - Bear Stearns

All right, and the what about…

Leonard Hoskinson

I'm sorry to interrupt, but the $0.23 is actually about$0.235. The number of shares billion '09. I think we say 23 shares. It is 23.5.

Scott Burk - Bear Stearns

Okay, then I wanted to ask about the gain, also the gainfrom the sale of the New Flamenco. What is the gain from the sale on thatvessel?

Leonard Hoskinson

It is very minimal. It is very close to our book value.

Scott Burk - Bear Stearns

Sounds good. Then I want to see, you covered that already.Could you talk about why the voyage expenses were up so much in the river bargebusiness and if that is going to be a continuing issue or is that just due tothe low river levels that you've seen in some parts of the river?

Leonard Hoskinson

The voyage expenses were up, mainly due to volumes carried.We also had in effect this year, and particularly in the third quarter, wherethe third-party harbor tugs that we hire from third parties, as you know, thesmall port tugs that bring the barges to the berth one by one, and not in allcases belong to us.

It is more efficient for us to hire them from smallercompanies, and they suffered crew adjustments, particularly in Argentina inJuly and August. So we had to renegotiate our agreements with them, and I thinkthe total differential the nine months that we have in connection with thesethird-party harbor tugs is nearing now $1 million to September, and most ofthat effect occurred in the third quarter.

We had to recognize some retroactive crew benefits that weregranted by the bargaining agreements. So that is part of the effect, but ofcourse we carried a lot more volume. So voyage expenses, you would expect tosee them grow.

I think in September we also incurred some pretty heavyrunning costs in connection with the fleet that did not correspond to theperiod. So, and we see the benefits of that come somehow in the fourth quarter.

In connection with that, there's also a correction forpositioning of barges, which was $1.3 million in June and has diminished to$900,000 or $875,000 in September. It will reduce further towards the end ofthe year.

So, put it all in the melting pot, what we know alreadyabout the carryings of October and the first half of November, we think theyear-end EBITDA for our river sector will be some 10% above last year's.

Scott Burk - Bear Stearns

Okay. Then I wanted to ask you the one final question aboutthe new capesize vessel. $57 million, is that going to preclude you from, youhad previously talked about purchasing a couple of product tankers over thenext few years. Did you do this instead of that, or is this going to be inaddition to them?

Felipe Menendez

It's going to be an addition. As Len explained, we havetaken additional finance to cover most of the acquisition of this vessel.Perhaps what we will do is delay a bit the purchase of the additional producttanker, which we are expected to do very early in 2008, may scale back alittle.

But that is also coincident with the fact that we are stillinspecting vessels, and we expect to negotiate for this vessel for the purchaseby the end of the year or early 2008. So, actual delivery may not take placeuntil March start.

Scott Burk - Bear Stearns

Okay, then could you just run through your CapEx, the totalcapital you expect to spend including the stuff through year-end, I guess justfor the fourth quarter? And then maybe is your outlook for next year the sameas we talked about last quarter?

Felipe Menendez

Well, it is difficult to recap everything that we have donein the third and fourth quarter right here, Scott. I think for the balance ofthe year now, we still have to pay the 20% down payments on the PSVs that wehave ordered in China.

And we still have to pay for the engines that we're takingdelivery of in connection with the fuel conversion. And, of course, we arepurchasing barges in the United States, and we are still purchasing and payingfor the construction of the yard in Argentina.

So, if you take it as a whole including the PrincessMarisol, which was a $57 million acquisition, you could say that end of thethird quarter and the fourth quarter, we are expecting about $105 million ofCapEx. Again, that includes the $57 million acquisition of the PrincessMarisol.

Scott Burk - Bear Stearns

All right, thank you.

Operator

Thank you. Our next question comes from Justine Fisher withGoldman Sachs.

Justine Fisher - Goldman Sachs

Good morning.

Felipe Menendez

Good morning, Justine.

Justine Fisher - Goldman Sachs

I just wanted to know if you guys are planning on exitingthe cruise business entirely by selling your other ship too.

Felipe Menendez

Well, we cannot say that at this time, Justine. We havepreviously indicated that the Passenger Business is not our core business, thatwe are prepared to sell that business and the assets in particular of theships, if we see attractive prices going forward.

We have implemented on that strategy with New Flamenco. NewFlamenco has been an excellent investment with us. If you take it from the timewe bought the ship in 2005, in March 2005, up to the day we sold her anddelivered her November 6 this year, the IRR we obtained with that ship was 25%.

So, again, if we see the right prices and we are satisfiedwith the results, yes, we will exit, but otherwise, we're in no hurry.

Justine Fisher - Goldman Sachs

Okay, then can we anticipate entering into additionalsectors like the cruise business? I agree, it seems to be a great investment,especially given the price that you're selling the vessel for, but would youconsider sort of trading around in other sectors that are not core to yourbusiness aside from cruise?

Felipe Menendez

We have no plans to do that at this time, no.

Justine Fisher - Goldman Sachs

Okay, then I saw in the release the size, obviously, of thenew dry bulk vessels, it's a capesize, and forgive me if I missed it, how oldis it?

Felipe Menendez

She is 1984. She just underwent her survey, so this ship isgood for continuous trading for the next 2.5 years. We believe that with therepairs that were done at this intermediate survey, which the vessel terminatednow in September just before we took delivery of her, she should be able topass without much expense her April 2009 surveys and roll for another fiveyears.

So we bought the ship just after a very extensive overalland also she is of age, she is, in our opinion, in very good condition. So theimportant thing was buying a ship that we could take delivery of very promptly,so that we can enjoy the very high rates that prevail in the market today. Onthese rates, the payback for the ship, we believe, is going to be veryattractive.

Justine Fisher - Goldman Sachs

I guess you are planning on operating that ship in the spotmarket?

Felipe Menendez

That is correct, yes.

Justine Fisher - Goldman Sachs

Are you seeing charterers willing to charter in such an oldship? It seems, I know the recent accidents have been with a tanker in theBlack Sea and with a container ship in the San Francisco Bay, but there havebeen in previous accidents where some pretty old dry bulk ships have run intosome problems. Are you not seeing charterers discriminate based on age?

Felipe Menendez

No, in fact Rightship, which is the main vetting entity nowon a worldwide basis, has come up with a program to extend dry bulk carriervessels which are in good condition, extend their full classification after the30 years of age. There are large number of bulk carriers of this age and olderthat are trading.

I think it is a question of what condition the ship is in.She is two years older than our Princess Susana and we are very satisfied withthe condition of the ship. In fact, we have already fixed her in the spotmarket and we do not think she'll have any problems with trading.

Justine Fisher - Goldman Sachs

Okay, then you're not going to hedge that with FFAs like youdid for the other vessels, right?

Felipe Menendez

Not at this time, no.

Justine Fisher - Goldman Sachs

Okay, the last question I had was about who you're buyingthe barges from in the U.S.

Felipe Menendez

We can’t discuss who we buy from, but it is various sources,not just one source.

Justine Fisher - Goldman Sachs

Okay, thank you very much.

Operator

Our next question comes from Dominic Neary, with InsightInvestment. You may ask your question.

Dominic Neary - Insight Investment

Hi, how are you there. It was just really, I know you havetalked about, particularly in the River Business, the increased voyage costs,but could you talk about it in the context of your EBITDA margin, which,obviously versus second-quarter and the year-to-date, took a bit of a hit.

Is that somewhat related to bringing the barges on halfwaythrough the quarter, the new barges? Or can we see that, then, dissipating andthen returning to sort of more-normalized EBITDA margin in that segment, or arewe looking at a depressed one and sort of increased costs generally?

Felipe Menendez

No, we do not see in short, we do not see our marginsdeteriorating. By the contrary, we believe that in 2008, despite an increase incosts and we are experiencing a cost increase not only in connection with thethird-party harbor tugs, as we mentioned before.

But also in connection with our own crews, the scarcity ofcrews, the increase that we have motivated somehow in the entire River sectoris leading us short of good crews and we have to pay them more. We also seeincreases in costs in other sectors.

But despite these increases in costs, which perhaps put thethird quarter results of the River under an unfavorable light, as we mentioned,we expect to see the EBITDA end this year 10% higher than it was last year. Wethink that margins are going to remain where they are and as we implement someof the initiatives that we have underway, those margins should increase.

I think we filed at the end of September a presentation,which I think is interesting to look at, and it depicts how as we change, forinstance, our diesel oil consumption biofuel consumption. With an 80%substitution, which we should reach in three years time.

We will see those margins increase from 24 to 33%. So as wejumboize the barges and we increase the fleet size, those margins willstrengthen. At the moment, we are sort of an unfortunate situation, Dominic, becausewe've expanded the fleet by buying these barges in the United States, which, asyou rightly point out, has brought some additional expense in 2007.

And particularly, it added depreciation, which startedrunning in July at the end of June actually, but the barges did not effectivelycome into service but till the middle of August. So, we’ve added some expenseand we are still not seeing the EBITDA come through.

In the fourth quarter, there may be an event that affectedthe October results as well. There was low water in the high Paraguay River. Itis not going to affect us, overall, because we've redeployed the fleet to loadsoybeans in other parts of the river, which are not affected by drought.

But in the first 20 days of October, sorry, the last 20 daysof October, this redeployment took some idle time of the fleet, so we will seea slight diminution of earnings in the fourth quarter because of that. Still,as mentioned, we expect EBITDA to be 10% higher.

Dominic Neary - Insight Investment

Sure. On a margin basis, would you expect to sustain theyear-to-date EBITDA margin on the River Business? You're at 22.8 I think, orthereabout.

Felipe Menendez

I think we're going to be improving it a little bit.

Dominic Neary - Insight Investment

Okay.

Felipe Menendez

Towards year-end.

Dominic Neary - Insight Investment

And I am sorry, just on a similar vein and ignoring the FFAmark-to-market, on the Ocean Business, and again, this is quite a significanthit to EBITDA margin if we're looking at it from that viewpoint. Is thatpredominantly related to the lost days in the port accident or is there more toit than that?

Felipe Menendez

No, there is the more to it than that. As I think wediscussed, in 2007 these ships, the main Capesize ships, were basically spokenfor in terms of employment. So, now we incorporated the new capesize. Thiscapesize, at today's market levels, will improve the EBITDA margins coming fromthe Ocean considerably.

I mean the capesize sector today the four roots stand closeto $170,000 per day earnings on the modern ship, which would translate to about$150,000 per day earnings on these ships. Now, you compare that with $30,000per day, which is the average time charter that these that our existingcapesizes were earning, you can easily see that there is going to besignificant additional margin.

The FFAs that we have taken secure for the three existingcapesizes a time charter level which is almost double what they had in 2007.So, you're going to see those EBITDA margins in the Ocean Business on thecapesize sector grow significantly. On the coastal tankers, I think what youwill see is that sector remains very profitable and very steady, because thoseships are employed on time charters, most of them.

Dominic Neary - Insight Investment

That was great. Thanks very much for that.

Felipe Menendez

Thank you.

Operator

Our next question comes from Ian Crooke, with Raymond James.

Ian Crooke - Raymond James

Hi, good morning Felipe. Hi. Leon.

Leonard Hoskinson

Good morning.

Felipe Menendez

Good morning, Ian.

Ian Crooke - Raymond James

Look most of questions have already been asked and answered,but perhaps you could just give me a quick update on what is happening with thebarge construction project. Is that still on schedule? And you mentioned thatyou're not thinking of any Forward Freight Agreements for the new capesizevessel, but could you just tell me in general how you would approach anyForward Freight Agreement in the future.

Felipe Menendez

Okay, on the barge construction issue, yes, very much onplan. We have purchased a good portion of the equipment. We've purchased theland and should start erecting our building within the next 15, 20 days. And weare full steam ahead on that. We believe that we will be in production byyear-end.

On the question on FFAs, Ian, let me just clarify this,because I think a lot of people do not visualize really how this works. Let's assumewe had fixed our three capesize vessels to a charterer in 2008, throughout 2008at, say, $60,000 a day.

We would not be showing any cash, non-cash losses in ourbooks. The ships would just be committed at that rate in 2008. And that is avery, very profitable rate at $60,000 a day; these ships make double the moneythat they made in 2007. That is over $20 million more than they made in 2007.Okay, so instead of fixing the ships physically for $60,000 a day, we soldfutures at that level.

Now, since the market has gone above that level, the spotmarket has gone above that level and the futures are recognizing that higherlevel throughout 2008, this time charter income that we have capped, that wehave locked in for 2008, the difference with the futures market as it's seentoday becomes a non-cash loss.

But effectively it is not, because come the time the FFAlosses will be offset by gains in the vessels, which will be earning more than$60,000 a day and the end result is that it will be the same, as though theships had been fixed on time charter at $60,000.

So we do not plan to sell FFAs, more FFAs at this time tocover Princess Marisol and the non-cash losses that we are incurring in factlocked in a pretty attractive earning for that portion of the capesize fleet in2008.

Ian Crooke - Raymond James

Okay. Thanks.

Operator

Our next question comes from Mike Leniare. You may ask yourquestion.

Mike Leniare - Analyst

Hello you kind of caught my question. I was a little confusedby the way those FFAs really work. Do you have to put out cash collateral?

Felipe Menendez

Yes, very good question Mike. We do, and at the moment, wehave a big margin deposit in the account. Of course as the positions settle,that margin deposit comes back to us.

Mike Leniare - Analyst

Okay, so this is it does not even it's not incorporated inany way into your EBITDA number.

Felipe Menendez

No, because the margin deposit is not really lost. It isjust a guarantee.

Mike Leniare - Analyst

Not the margin, I mean the FFA impact. The earnings impactis ignored when calculating EBITDA.

Felipe Menendez

Well, no. This is the thing. The U.S. GAAP rules force us oftaking these differentials, these non-cash losses, into partially into ourincome statement and therefore, into our EBITDA. So if you take the nine monthsended September and you look at the EBITDA produced by the Ocean fleet,normally it looks like $6.3 million.

However, there are loss FFA losses for $14.3 million in thenine months. So the EBITDA truly generated by the Ocean fleet is $20.6 million,$14.3 million are the non cash losses accumulated for the nine months in 2000and …

Mike Leniare - Analyst

So what do you think is the right way to look at it?

Felipe Menendez

I think you have got to add back these non cash losses,because let me take it from the beginning, because I think this is veryconfusing. If we had time chartered to the ships for the full of 2008 at$60,000 a day, we would not be showing any non cash losses.

Effectively, this is exactly the same as leaving the shipsopen in the market and selling futures at $60,000 a day. It works out exactlythe same. Only in this case, we are forced to show these non cash losses, whichin fact, when the time comes, will be settled against the earnings of thevessels. Therefore, it will be no different than if the ship had been charteredat $60,000.

Therefore, we believe that in order to have a true readingof what the earnings of these vessels are, you have to add them back becausethey are not losses that we are incurring at this time.

Mike Leniare - Analyst

Makes sense. And then my other question was on your CapExplans. When approximately, when do you think in the next couple years you thinkyou will hit your peak debt level? And what kind of level are we talking about?

Felipe Menendez

If you look at the Jefferies presentation that we filed inSeptember, you will see that we laid out a CapEx plan for the next three yearsthere, which might be useful. As we mentioned, it’s not written in stone and itmay change, but if you follow that, in 2008 our total CapEx plan is $126million.

We are looking at $59 million of that going into River, $51million going into Offshore and $17 million going into Ocean. In 2009 we'relooking at $136 million with $71 million into River, $48 million into Offshore,and again, $17 million into Ocean.

That is how we see it at the moment. It may change. We mayacquire further ships that we are not looking out here and we may be able toexercise the option of the additional Chinese vessels, which are notcontemplated in the figures I just gave you. That gives us another $50 million.

We estimate that this CapEx plan can be executed with ourown cash flow and the loans that we have in place, plus borrowings that weintend to put in place in 2008 and nine, particularly in 2009. I think we wouldbe able to repay those loans pretty quickly, because in 2010 and 11 theaccumulation of cash is quite significant.

Mike Leniare - Analyst

So excluding the 50 additional Chinese vessels, we arelooking at 260 and change in the next two years, plus whatever you're going todo here in the fourth quarter? So maybe let's call it just round it to $300million.

Leonard Hoskinson

No more than that in 2009, including the notes.

Mike Leniare - Analyst

I'm sorry, what?

Leonard Hoskinson

No more than that, maximum $300 million during 2009including the notes $180 million in notes that we have outstanding in CapEx.

Mike Leniare - Analyst

On the CapEx side, so let's say over the next between end ofthird quarter '07 and end of '09 you get CapEx of roughly let's call it 300 forarguments sake, how much of that 300 is going to be financed externally versusjust handled with internal cash flow?

Felipe Menendez

Not a very significant number. We are looking as we said, inorder to finance this CapEx plan, and again, it may change, but in 2008 and in2008 we do not need any additional borrowings. In 2009 we may, until the newPSVs are delivered, we may need to borrow for one year or 18 months until thosePSVs are delivered an amount of close to $50 million, $40 million to $50million.

The reason here is that we are putting the money into newconstruction vessels and that assumes that you're not going to get any EBITDAfrom those ships for two years until they are delivered, so by the end of 2009,we're in the worst situation of that construction program if we don’t financeat all, but just conduct it with our own cash because we have already paid theyard for most of the price of the ship, but we still have not gotten any shipsdelivered.

So deliveries will start by middle 2009 and by middle 2010our cash flow starts to recover very, very quickly. So effectively, we wouldneed to borrow some $40 million to $50 million with this plan in 2009 and onlyfor a short period.

Mike Leniare - Analyst

Just as an aside, is that Jefferies presentation, is that onyour website or can we get a hold of that?

Leonard Hoskinson

It was filed with the SEC. It is on the website.

Felipe Menendez

Sure, it was presented at the Jefferies conference and it’sfiled in our website as well.

Mike Leniare - Analyst

Under 8-K or a 6-K or something it’s there? It is on yourwebsite, all right. Then is it fair to say, that even with the fact that yourmoney is tied up while the ship is getting built that your forecast for yourbusiness really don’t lead you to any kind of material higher leverage becausethe cash flow, the business is improving and actually your leverage is the sameor lower than it is today.

Felipe Menendez

That is correct. Of course you must add the financings thatLen discussed at the end of the call, where we have borrowed for acquisitionsnow $25 million from DVB. We’ve borrowed $25 million from BC and we have onemore financing that is going to come in at the end of this year in the regionof $20 million and with that, we do not need to do anything else until the endof or middle of middle to the end of 2009.

Mike Leniare - Analyst

I guess that sounds good and the last question is thesePSVs, the offshore supply ships, as these get delivered, how is your costcompared to where you think the fair market value is? Have you created muchequity in these ships?

Felipe Menendez

Very substantial equity today with the average cost ofbuilding our ships was sort of below $20 million so far. The average marketvalue of these ships will it is difficult to say, but its 50% above thatnumber, 50% to 80% above that number. We have made very substantial differencesbetween the cost of building and the current prices.

What the situation is going to be in 2009 and 2010, well,anybody's guess, but the cost of building these vessels is very reasonable.It’s in line with what we built the existing fleet for plus the standardincrements that the entire industry has been experiencing in the last fewyears. So, we think we're building for a very attractive cost.

Mike Leniare - Analyst

And when you launched that division, it was based kind of apretty strong relationship with Petrobras is that, has that played out as wellas you were hoping it would?

Felipe Menendez

It has and you may have read in the papers last week,Petrobras has just made an enormous discovery off the coast of Brazil. It isbelieved that it may develop into the largest oil field in the world. Most ofthis field lies between 2500 meters deep in the ocean to 6000 meters deep, soits very deep waters. That speaks for a very large number of PSVs for everyhole that you drill and it can be a massive utilization of PSVs that was not inthe cards a week ago.

So, we are very happy with our presence in Brazil. We havebuilt a very strong relationship with Petrobras. We have Brazilian flag rightsfor four of our ships, which allows us to import another two into Brazil. So,we can operate with full Brazilian flag rights a total of six very modern,large vessels. We are very happy with our presence there.

Mike Leniare - Analyst

All right, thank you very much.

Felipe Menendez

Thank you.

Operator

Our next question comes from Erol Grinifini (ph) withDeutsche Bank. You may ask your question.

Erol Grinifini - Deutsche Bank

Hi, thank you very much. Just a very quick question on theFFA again. I think you said the capacity that you have hedged is three of yourfive vessels. Could you please clarify that?

Leonard Hoskinson

That is an approximate number. If you look at our filings,you will see each one of the positions that we have hedged for 2008 and 2009.Notionally, if you take every ship being available for 365 days a year less thenumber of days she is employed into the first quarter in her physical charters,you will find that roughly the number of FFAs equates to the availability ofthe three ships and something, and change, basically because at this time wecan't know when the three vessels that we have on charter will be redeliveredby her present users. Basically, all these charters have a plus or minus 30days close and it very much depends when their physical employment ends whenthey actually are going to be redelivered.

So, the number of available days of our fleet in 2008 is notan exact number, but you could say that the FFAs that we have sold for '08 areequivalent to the available days of these ships and there might be some overlapbecause of late deliveries of the ships, which would put us, would have theFFAs exceed the available days or be under the available days by a margin.

We also have some positions sold in 2009, but that is very,very minimal. It's only half of one ship for the year, so whereas opposed tothat, we have four ships available so, you can read the exact number of FFAdays sold in our previous filings.

Erol Grinifini - Deutsche Bank

Okay. And then, one additional question regarding that allthese contracts are cash-settled, right? You don't have to actually deliver theship and offer the service?

Leonard Hoskinson

Correct, they are cash-settled.

Erol Grinifini - Deutsche Bank

Okay, thank you.

Operator

Thank you. Our final question today will come from ScottBurk with Bear Stearns. You may ask your question sit.

Scott Burk - Bear Stearns

Hi, I’m also have a follow-up question has been answered. Ijust wanted one more question on the FFAs. If you look at the market for 2009right now, you have rates at $90,000 a day. So, you could lock in somethingsignificantly higher than what you locked in for 2008. Has your experience inlocking in perhaps too early, does that prevent you from wanting to do that for2009 or perhaps lock in only part of the fleet or how do you think about that?

Felipe Menendez

No, our experience with FFAs has been good, Scott. I thinkas we have had the chance to discuss in the past, we do not regret having fixedthose FFAs. They allowed us to ensure very healthy cash flow in 2008 for thoseships. That allowed us to make investment positions, which have proven soundand very profitable. So, we're not unhappy with what we did.

In answering your question, yes, we would use them for 2009,if we see the right rates there. The question is $90,000 is an attractive rate,but it's a big discount over today's margin.

Scott Burk - Bear Stearns

Yeah.

Felipe Menendez

So, we would expect to log in our 2009 earnings when thatdiscount is not so deep.

Scott Burk - Bear Stearns

Okay, thanks.

Felipe Menendez

Thank you very much all for joining us today and hope to seeyou, talk to then in our next quarter release.

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