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Ultrapetrol (Bahamas) Ltd (NASDAQ:ULTR)

Q2 2008 Earnings Call Transcript

August 13, 2008 10:00 am ET

Executives

Len Hoskinson - Director and CFO

Filipe Menendez - President and CEO

Analysts

Ben Nolan - Jefferies & Company

Rodrigo Guerosare - Analyst

Matthew Dundon - Miller Tabak Roberts

Michael Safransky - Onyx Capital

Operator

Welcome to the Ultrapetrol Limited second quarter 2008 earnings conference call. At this time, all lines are in a listen-only mode. During the question-and-answer session today (Operator Instructions) Today's call is being recorded.

At this time, I will turn the call over to the CFO, Mr. Len Hoskinson. Sir, you may begin.

Len Hoskinson

Good morning, everyone. Thank you for joining us. Welcome to the Ultrapetrol Bahamas Limited conference call to discuss the Company's 2008 second quarter results. I would like to remind everyone that this conference call is now being webcast at the Company's website, ultrapetrol.net. There are also additional materials related to our earnings announcements, including a slide presentation on our website.

You should be aware that in today's conference call, we will be making certain forward-looking statements to discuss future events and performance. These statements are subject to risks and uncertainties that could cause actual results to differ from the forward-looking statements.

For a discussion of factors that could cause results to differ, please see the Company's press release that was issued yesterday, and the Company's filings with the Securities and Exchange Commission, including, without limitation, the Company's annual reports on Form 20F for the year ending December 31, 2007 and its subsequent reports on Form 6-K.

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

Now, I hand it over to Filipe.

Filipe Menendez

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

As you will see on slide three, our revenues during the second quarter of 2008 have increased by 50% over the same period of 2007 that is to $83 million. Similarly, our recorded EBITDA for the second quarter was $29 million, which compares with an adjusted EBITDA of $19.4 million in the second quarter of 2007.

Our recorded net income for the same period in 2008 was $11.7 million. The Company's second quarter 2008 net income includes a deferred income tax charge of $2.2 million from unrealized foreign currency exchange rate gains on U.S. dollar denominated debt on one of our Brazilian subsidiaries in the Offshore Supply Business.

The adjusted net income for the second quarter 2008, excluding this effect, is $13.9 million or an EPS of $0.43 per share, which compares with a similarly adjusted net income and EPS of $5.6 million and $0.18 per share, respectively, during the same period of last year.

Len will discuss our financials in more detail later on in the call. However, I would like to mention at this point that our overall results for the second quarter of 2008 have been strong in all segments, but particularly in our Ocean Business.

We are very much in line with what we discussed during our last call, the expiring of the old charters that covered part of our fleet, as well as the addition of one Capesize vessel at the end of 2007 have significantly changed the contribution of this segment in our overall results.

During the quarter, we entered into a 12-year secured term loan of up to $93.6 million with DVB Bank AG and Natixis, in respect of a pre-delivery and post-delivery financing of the four PSVs we have under construction in India.

In addition, we assigned an MOA to sell our passenger vessel, the Blue Monarch. The net proceeds of this sale to the Company are expected to be $8.3 million. Under the terms of this agreement, the buyers must deposit the purchase price prior to August 25, 2008. If the price is not deposited, however, in accordance with the MOA by August 25, this transaction may not materialize as agreed.

A good look at slide four, just to mention that our adjusted EBITDA, adjusted net income, and corresponding EPS for the first six months of the year have been $51.5 million, $19.7 million, and $0.60 per share, respectively, exceeding by44% the adjusted EBITDA and more than doubling the adjusted net income and earnings per share that we obtained in the same period of last year.

Let's turn to slide five for an update on what has happened in our River Business in this quarter. While we continued our barge enlargement program with 48 units already processed, we have advanced according to plan with the construction of our new barge building facility in Rosario, Argentina. We expect the facility to be in full production in the first quarter of 2009. This shipyard will be the most modern of its kind in South America, and it is designed to be able to add to our fleet 1 million tons of cargo -- iron ore cargo carrying capacity per year.

Volumes loaded grew 6% from 1.1 million tons in the second quarter of 2007 to 1.2 million tons in the second quarter of 2008. We have received in the Hidrovia the 27 Mississippi barges and two pushboats previously acquired in the Mississippi River, which became operational only in June 2008. So effectively, they did not have a significant impact in our second quarter results.

On slide six, you will find a quarter-on-quarter comparison of our River segment revenues, expenses and EBITDA. The second quarter 2008 River segment EBITDA was $5.8 million as compared to $5.7 million in the second quarter of 2007. When analyzing the expense side of our River results, we note an increase in our voyage expenses of approximately $8.3 million. The majority of this increase, $6.6 million, is attributable to fuel expense.

As you can see in the analysis shown at the bottom, $5.3 million or 80% of this variance is due to fuel price increases, which is consistent with what we have recovered from our customers during the second quarter with our fuel pass-through clauses. And $1.3 million was caused by larger quantities consumed, which corresponds to growth in volumes loaded and the number of pushboats in operation.

Our other non-fuel related voyage costs, port expenses, cleaning of barges, and others, and our running costs have increased from a year ago on a per-invoice ton basis 46% and 39%, respectively, for a total of $3.40 per ton compared to the equivalent costs in the second quarter of 2007.

These cost increases are associated mainly with increases in crew costs, a higher cost of steel used in our barge repairs, and generally with the revaluation of the local currencies against the U.S. dollar.

We believe that the new pushboats that we have added in the second quarter will help us improve our fuel efficiency and at the same time, reduce our operational cost per ton, compensating partially for this cost increase in the third and fourth quarters.

In slide seven, we can see that our average invoice freight in the second quarter of 2008 grew by 33% compared with the second quarter of 2007, from $20.9 per ton to $27.7 per ton. Two-thirds of this variance or $4.66 per ton is the result of our fuel pass-through clauses that have reimbursed us for the equivalent increase in fuel prices that we experienced in the quarter, as we just saw in the previous slide.

The remaining one-third or $2.20 per ton of the variance in our average freights over a period of one year are what analysts would call real increases, with something from pricing of our freight at a higher level or due to differences in the cargo mix that we carried during the quarter.

These price increases have been insufficient to cover the total variance of our voyage and running costs, excluding fuel of $3.40 per ton, as we saw in slide number six, when comparing the second quarter of 2007 with its equivalent period in 2008. Again, the introduction of the new pushboats that we have added in the second quarter, we believe will help compensate this difference in the third and fourth.

Turning to slide eight, it is important to note that while we increase our revenues mainly as a result of our fuel pass-through formulas, the EBITDA margins seem to shrink on a nominal basis. This effect has been particularly noticeable in the first and second quarter of 2008, when we have experienced significant volatility of fuel prices.

As you can see, the EBITDA margin for the second quarter of 2006, simply by dividing segment EBITDA by revenues, is 16.5%; while if you deduct from the revenues for the period, the effect of fuel adjustment formula, the EBITDA margin becomes 19.5%, which compares to the 24.3% in the same period of last year or with 19.4% for the full year of 2008.

At the bottom of this page, you will see a graph that depicts the evolution of the price of diesel oil, which has increased significantly in 2008, and also the gap between the price of diesel and that of heavy fuel, which has great significance to dimension the savings that we expect to make with our new heavy fuel reengineering project.

As you can see, the gap between heavy fuel and diesel has widened to over $500 per ton, with an average for the first half of this year of $483 per ton or an average for the second quarter of 2008 of $499 per ton. Based on an average for the first half of the year of $483 per ton, the average difference between diesel and fuel will represent the saving of 48% for each ton of heavy fuel that we consume. Our total river fuel expense in 2008 is likely to exceed $45 million.

In slide nine, you will see a projection for the soybean production in Paraguay, which is, as you know, central to the river system. According to the latest USDA estimate, it has grown another 0.6 million tons this year, accumulating a 37% compounded annual growth for the past three years.

Similarly, the iron ore shipments from Corumba in the second quarter of 2008 already show part of the growth that the mines in the region had announced, which represents the growth of close to 621,000 tons or 126% above what they shipped in the second quarter of 2007.

The outlook for our River Business going forward is one of growing short and long-term demand, stemming from the increased production of soybeans and iron ore in the area of influence of the river system.

In the short-term, we will be able to increase our transported volumes only through this 57 barges or about 9.5% additional capacity that we have shipped from the United States, which commenced service in May and June.

It is only as from the second half of 2009, when we expect our new barge building shipyard will be in full production, and when we will start adding pushboats re-powered with heavy fuel consuming engines that we will see the effect of these investments that we have planned and that now are being executed.

Turning to slide 10, in our Offshore Supply Business during the second quarter, we continued to operate five vessels, the UP Agua Marinha and Diamante operated in Brazil under long-term charters with Petrobras; and UP Esmeralda, Safira, and Topazio have operated in the North Sea.

Two of these vessels, UP Topazio and UP Safira, are committed on long-term charters in the North Sea until September 2008 and April 2009, respectively, while UP Esmeralda is operating in the spot market.

Our building program is in full progress, with our sixth and last vessel of the initial program being built in Brazil, where we expect to take delivery in the first quarter of 2009. The construction of the four vessels that we are in the process of building in India is also progressing as expected. And the steel cutting process for the two vessels being built in China is expected to start by the middle of the third quarter of 2008.

In slide 11, let's take a look at the revenues in our Offshore business, which increased slightly during the second quarter of 2008 compared to the second quarter of 2007, as our UP Diamante operated for the full second quarter in 2008.

The revenues generated by the vessels are particularly, sorry -- are partially reflected under other operating income corresponding to the recovery of our loss of hire and delay insurance coverage, while our Brazilian vessels and those North Sea vessels that were under term charter, generated basically the same revenues as in the second quarter of 2007.

One of our vessels, as we have described, operated in the spot market during the second quarter of 2008, where comparatively, rates were lower than in the equivalent period of 2007.

We experienced an increase in running costs from $3.2 million to $4.4 million, principally due to the Brazilian currency appreciation and the additional operational days of our UP Diamante in the second quarter of 2008.

The allocation of G&A expenses in 2007 was done on an estimated basis in the first three quarters of the year, and adjusted in the fourth quarter to reflect the proportion of each segment's share in the total fixed assets of the Company.

Mainly for this reason, G&A is showing a negative variance of some $775,000 this quarter, and will probably show another negative variance next quarter, which we expect will be reversed with a positive variance in the fourth quarter G&A comparison, neutralizing this effect by the end of the year.

The resulting EBITDA for this segment in this quarter was $4.5 million. However, excluding the effect of the G&A allocation we have just explained, which we expect to neutralize by year-end, it would have been $5.2 million, which compares to $5.8 million in 2007.

The spot market in the North Sea is presently at the higher level than at the same time in 2007, where from, if this tendency continues, we can expect that the third quarter results of the Offshore segment will be slightly higher than the equivalent period of 2007.

In slide 12, you can find the brief description of our offshore fleet, both operating and under construction. As mentioned before, it's worth remembering that our fleet is one of the most homogeneous and modern fleets in the world, specialized in large deck vessels, including DP-1 and DP-2 in our present new buildings. We operate in Brazil and the North Sea, where the very deep water drilling, particularly the new exploration areas in Brazil, requires large, modern vessels.

In slide 13, you will find depicted the spot rates for offshore in the North Sea, which started the second quarter at lower levels than we had experienced in the same period in 2007. However, we have now seen the market recover above those levels, and if this tendency continues as we described before, these spot earnings of our vessels will exceed those obtained in the third quarter of 2007.

As you can see in the pie chart, we have maintained a balance between period and spot employment, and we have maintained our presence in both the North Sea and the Brazilian markets. The average rate obtained by our vessels operating in Brazil are $24,334 per day, as you can see on the far right, is slightly higher than was experienced in this market in 2007.

In the North Sea, however, as you can see in the bar chart to the left, the average rate of $26,069 obtained in the second quarter is lower than the $29,700 average daily earnings that we obtained in 2007. As we just explained, this has to do with the lower rates obtained by one of our vessels in the North Sea, but now, as you can see in the graph at the top, those rates are above what they were a year ago, where it is possible that our spot vessel will outperform what obtained in the third quarter.

In calculating these rates, we have included income related to delay and loss of hire insurance, which we have considered inclusive in the calendar day earnings.

In slide 14, we'd like to show you that our three OBOs operated for almost the whole of the second quarter of 2008, under time charters tied to the four-time charter Capesize Routes Index. In addition, our Capesize vessel, Princess Marisol, is now also under a time charter tied to the four-time charter Capesize Routes Index.

We added one more product tanker to our fleet, the Austral, which we chartered for a long-term contract to an oil major in South America. On this front, we also re-chartered our Alejandrina for a middle-term complete, which will take her basically to the end of this year.

In slide 15, a brief description of what we have done in terms of FFAs. On May 16 and 19, the Company entered into a series of FFAs to buy back 274 days and cleared FFAs, mainly offsetting the positions previously sold for the third and fourth quarter of this year.

We simultaneously sold 274 days in over-the-counter FFAs for these same periods. With both the economic and accounting effect of these two transactions being almost neutral, we significantly reduced our future working capital requirements, since OTC positions, while carrying a higher counter-party risk do not require margin deposits.

On May 19, 2008, the Company entered into two FFA contracts to buy back 60 days in cleared FFAs, offsetting the positions previously sold for June 2008. On May 20, we sold 30 days in over-the-counter FFAs for this same period. The repurchase of our cleared positions covering the third and fourth quarters of 2008 resulted in a $24.2 million loss, counterbalanced by the over-the-counter sale of an equivalent number of FFA positions covering the same period.

Contrary to prior expectations, this $24.2 million loss has not been allocated against our second quarter results, but instead will be pro-rated equally in the third and fourth quarters, will impact our results together with the vessel's earnings and the over-the-counter FFA transactions covering these periods.

In slide 16, you can see that we produced an EBITDA of almost $21.5 million in the quarter as opposed to an adjusted EBITDA of $7.1 million in the same period of last year, produced by the Ocean segment. Most of the increase in the running costs that you see in the table, when comparing with the second quarter of 2007, is mainly because during the second quarter of 2008, we had three additional vessels, Princess Marisol, Amadeo, and Austral, which account for $3.5 million out of a total difference of $5.2 million.

The balance of the difference, or $1.7 million, represents cost increase of the pre-existing fleet, mostly associated with crew cost increases.

You want to turn to slide 17, we thought it important to show you a projection of the effects of the new index related charters of our OBO vessels coupled with the effect of our FFA hedges, and how it compares to our 2007 performance.

In the bar chart at the left, you can see the average time charter rates of $29,221 per day obtained by each of the three OBO vessels during 2007, compared with the $61,084 per day obtained by the same vessels during the second quarter of 2008. And compared with a projection of $57,077 per day for the full 2008 year based on the assumed earnings of our Capesize fleet at the value of the full-time charter routes at market close on August 7, and the result of our 2008 FFA positions that we have sold.

In the bar chart at the right, you can see a comparison of the gross profit contribution obtained from these vessels in 2007 of $27 million compared with a projection of $49.2 million profit contributions that, under these assumptions, would be obtained from the same vessels in 2008.

The very large increase of $22 million is mainly the result of the renewal of the charter contracts and the effect of the FFA hedges to secure their higher income that we have described before. There are several assumptions and disclaimers at the bottom of the page, which we urge you to read and take into account when considering these numbers.

Similarly, in slide 18, we wanted to give you an idea of the effect of the Princess Marisol in the gross profit contribution of the Ocean segment for 2008. While the FFA hedges are not technically related to any particular vessel, we wish to point out to you that for the purpose of this presentation, we have considered that the FFAs that we have entered into for 2008 correspond to the OBO fleet, as we have shown you in the previous slide.

On the left side of this slide, 18, the average daily hire that Princess Marisol has obtained so far and a projection of what she would earn on an average day if she was fit for the balance of the year at the rates that prevailed on August 7, less the 25% discount.

On the right hand side, you can see the annual total gross profit contribution that could be obtained from this ship in 2008, as opposed to only $3.4 million in 2007, because she started service with us only on the 20th of November.

As you can see, under these assumptions, the additional gross profit contribution from this vessel in 2008 would be $24.5 million. It is important to note that since in this projection we have not considered if her rates covering Princess Marisol, the projection of $27.9 million gross profit contribution estimated for 2008 is subject to the volatility of the market. We suggest that you read and take into account the disclaimers and assumptions contained at the bottom of this page.

In slide 19, for 2009, we have followed the similar pattern as we have done for 2008, securing for our OBO fleet through FFA hedges what we consider to be an attractive level of income.

In summary, for the purpose of this presentation, we have covered approximately 97% of the available days of our three OBO vessels after giving consideration to estimated [op hire] fees due to scheduled repairs and service, as well as an estimated discount compared to the index by vessel.

As you can see at the bottom left hand of the page, all other things being equal and subject to the assumptions explained in the slide, we estimate that considering the hedges that we have already taken so far for 2009, the gross profit contribution of this three vessel OBO fleet would reach, in 2009, $49.8 million, which is slightly higher than the $49.2 million we have calculated for 2008.

In slide 20, our ocean fleet consists, as you can see, of nine vessels in total, with the first four on this page corresponding to the OBO and Capesize vessels dedicated to the carriage of iron ore and coal in bulk. They are now all chartered at BCI full-time charter routes related rates.

On Miranda, Alejandrina, Amadeo and Austral, which are handysize and product tankers, are all operating in fixed rate time charters at attractive levels to first class oil companies training in South America.

In slide 21, a brief look to complete the information of the segment and a look at the general market information and a better understanding of where we are now in respect to previous years. At the bottom of the page, a table contain the four-time chartered route assessments as of August 11 of 115,220. And as well, on August 11, what all forward positions we're quoting at for Capesize vessels covering 2008, '09 and '10.

Turning to slide 22, let's take a quick look at our passenger vessels, which as you know, consists now only of one ship, the Blue Monarch. The Blue Monarch is committed to operate in the Aegean for the full 2000 season that started at the end of April and is planned to continue till the end of September.

On June 30, 2008, we entered into a memorandum of agreement to which we have agreed to sell this passenger vessel, the Blue Monarch. And the net proceeds of this sale to the Company should be $8.3 million. Under the terms of the agreement, the buyers must deposit the purchase price prior to August 25, 2008 in a joint escrow account. The delivery of the vessel will take place at the end of the current cruising season in the Aegean. If the purchase price is not deposited in accordance with the MOA by August 25, this transaction may not materialize as agreed.

In slide 23, you will find the updated fleet list.

Turning to slide 24, we have provided a summary of the CapEx program updated for 2008, '09, and '10 in line with the initiatives that we have discussed for the various business segments. This CapEx program is provided as a general reference only and we encourage you to read the language provided in slide 24 for a better understanding of the conditions that may affect this plan.

As you can see, the total CapEx for the River segment in the three years is $187 million, which includes $18 million in 2008 to complete the construction of a new barge building yard, and then $28 million per year to construct the barges and other equipment necessary for the growth of our fleet.

Similarly, the re-engineering program is estimated to require an additional investment of about $46 million in 2008, '09 and '10 to buy, build, modify and install the 24 engines that we have acquired under this program.

In our Offshore business, we estimate the total investments to complete the building of the one vessel that we still have to complete in Brazil plus the four Indian ships and the two firm vessels that we have committed to build in China will come to approximately $133 million in the next three years.

It may be worth it at this time to clarify that we have not at this point declared the option under two additional Chinese vessels. We are negotiating with the yard still, but these options have expired, so now the placement of this order will largely depend upon the negotiation that we are conducting with the yard at the moment.

Finally, we expect to invest about $34 million over the next three years in new product carriers to employ in South America. The total CapEx plan amounts to approximately $354 million in the next three years, $139 million of which will be spent in 2008, $145 million in 2009, and the balance of $70 million in 2010. We expect to finance this plan from internally generated cash plus additional debt in line with what we have previously announced.

Turning to slide 25, and before I turn it over to Len, we thought you might find useful to go through a quick summary of what you can expect in 2008 from our various lines of businesses.

In our River Business, our new barge building yard and the re-engineering projects will only add capacity or change our consumption pattern in a significant way after the second half of 2009. The capacity that we have added as from May and June 2008 will add less than 10% to our fleet.

A normal level of the Paraguay River in the fourth quarter, as well as some reopening that we have had on prices should contribute somewhat to volumes and results this year, but rising costs will probably offset part of these gains. As previously discussed, we do not expect EBITDA this segment to differ substantially from what we saw last year.

Similarly, in our Offshore business, as we have discussed previously, we operated 4.6 vessels on average during 2007, while in 2008, we expect to be operating five ships the whole year or 0.4 vessels more.

Consequently, on an even rate environment, you should only expect to see a marginal increase in the results produced by this line of business compared with 2007. Again, the growth in volumes will occur after the new ships being built are delivered in the second half of 2009.

In our Ocean Business, however, as we have described, our three OBO vessels and our Princess Marisol, considering the FFAs we have entered into, could produce an additional $32.2 million and $24.5 million gross profit contribution or a total of $46.7 million above what they produced in 2007.

It is important, however, to note that the contribution that is being calculated for Princess Marisol is dependent upon the spot market earnings that the ship is able to obtain for the balance of the year, and as such, it is exposed to market volatility.

I will now hand it over to Len, who will run us through the financial highlights for 2007.

Len Hoskinson

Thanks, Filipe. Moving to slide 26, let's recap. Total revenues for the Company during the second three months of 2008 were 50% higher at $83 million compared to $55.4 million in the same period in 2007.

The half-year results also saw approximately the same percentage increase from $100.9 million in the first half of '07 to $150.5 million in the first half of 2008.

The net income for the second three months of 2008 was $11.7 million compared to $943,000 in 2007. The half-year results 2008 compared to 2007 saw a nine-fold increase in net income from $2.9 million to $29.1 million.

Earnings per share for the second three months of '08 period were $0.36 compared to $0.03 in 2007, but for the six month period earnings per share were $0.88 compared to $0.10 per share in the equivalent first six months of 2007.

Second quarter '08 net income, adjusted for the only applicable item, which is the unrealized foreign currency exchange rate gain is $13.9 million compared to $5.7 million in the same second-quarter period in 2007, and results from an adjusted earnings per share of $0.43 in the second quarter of '08, which compares to an adjusted EPS of $0.18 for the second quarter of 2007.

We are reporting consolidated EBITDA for the first six months of '08 of $63.2 million, which is 93% higher than the equivalent '07 figure of $32.8 million. Adjusting for the non-cash mark-to-market gains in FFAs and the cash losses on FFAs already accounted for in our December 31, 2007 results, the first six months of 2008 adjusted EBITDA is $51.5 million, which is $15.6 million, 43% higher than the comparable adjusted EBITDA for the first six months of 2007.

As we've discussed in our last call, the second quarter we no longer have in our P&L the effect of non-cash mark-to-market losses for our future FFA positions. So, the EBITDA for the second three months of 2008 was $29 million, has no adjustments, and it is 49% higher than the adjusted equivalent '07 figure of $19.4 million.

Turning to slide 27, we show the breakdown across the business segments of the revenues, voyage expenses and running costs. Filipe has already discussed the main highlights for this business, so I won't repeat them here.

On slide 28, financial expenses grew 12% from $9.7 million during the first six months of '07 to $10.9 million in the same period of '08, because our variable interest rate debt increased through our senior loan facilities with DVB Bank AG, Nordia Bank and Bank BICE.

Looking at the segment contribution for EBITDA, Ocean has provided between 75% and 76% in both the second quarter and the first half of '08, when compared to 26% and 35%, respectively, for the same periods in 2007.

There were three more ships in operation during the second quarter of '08 versus '07, and of course, we have moved on from the low charter rates that the OBOs had in 2007.

On slide 29, there is a condensed version of the Company's balance sheet. Total assets have increased $37.6 million from $622.2 million as of December 31, '07, to $649.8 million as of June 30, '08. Fifty-seven barges and three pushboats were repositioned in the Hidrovia from the US in the period, and our fixed assets after depreciation grew consequently by $58.4 million or 13%, partially offset by $33.8 million decrease in our cash position, which was used to fund our several CapEx programs in the river and the offshore segments.

On the liability side, $10 million of the increase of $27.6 million between December 31, '07 and June 30, '08 stems from the drawdown of the new Line of Credit from the Bank Bice. Additionally, in the second quarter of 2008, we drew an initial tranche of $6.9 million of a new long-term loan entered into jointly with DVB and Natixis, which is providing pre- and post-delivery financing of our Indian PSVs. This loan will provide finance for a very large piece of the CapEx associated with the construction of these vessels, and the confirmation of the post-delivery finance now on a long-term basis is very convenient for the Company.

There are amounts included in other current liabilities and other payables which are in reference to our over-the-counter FFA activities and for further detail, that can be found in the notes to our accounts.

And now I will turn back the proceedings to Filipe.

Filipe Menendez

Thank you very much for joining us on the call today and giving us the opportunity of sharing with you comments on our second quarter performance. We will be glad at this time to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Ben Nolan. You may ask your question and please state your company name.

Ben Nolan - Jefferies & Company

Yes. This is Ben from Jefferies & Company. Good morning, Len, Filipe. Thanks for taking my call. I have got a couple of questions and if I can, I will break them down, I guess, by segment. First, on the offshore segment, just a broader industry question. Petrobras has been in the market tendering for large groups of offshore vessels. Is that an area of business that you would consider, especially given your large number of vessels that are coming into the market, and -- or would you prefer to keep them in the spot market or opportunistically, charter them individually?

Filipe Menendez

Yes, well, Petrobras has made generally a public announcement that they will be needing 146 additional vessels, that is almost doubling the fleet presently in their service by the time they complete this offshore exploration program in Tupi and Carioca. They have been tendering for vessels -- well, they have opened one tender really, which has now been postponed -- to charter a number of vessels on a long-term basis.

We will participate in these tenders. We are interested in looking at them. We are more interested, however, in trying to develop, with Petrobras, medium-term business within this 146 vessel total requirement. And so while we will participate in these tenders for the very long-term business, I think our focus of interest is really in the three, four, five-year charters, which maximize the result of the vessels and at the same time provides very interesting term coverage, more than the very long-term contracts, which are more geared to a financial result, if you will.

We will then -- in short, we will participate in both sides of the business. We are very interested in this whole new development. We think it opens a number of doors of opportunity for us to service Petrobras with our existing fleet that has the Brazilian flag rights, and with new ships that we will construct with a purpose to sign for this far away and highly sophisticated drilling program that will require very, very sophisticated ships.

Ben Nolan - Jefferies & Company

Perfect. That's a great answer. Along with that on the offshore segment, just looking at the CapEx program that you guys had laid out, it looks like the CapEx program for the Offshore segment was up about -- I think about $20 million or so. Is that just higher steel prices or more conservatism on your part? Maybe give a little color on that?

Filipe Menendez

None of the two -- sorry, we should have pointed that out when we presented the table. It is really a displacement of certain payments, which in our previous version had been expected to be made later to earlier dates. And some of the payments that corresponded to 2007, which is the version that we presented at your conference in September last year, that moved into 2008. They are the same values, only the dates have been re-accommodated.

Ben Nolan - Jefferies & Company

Okay, perfect. And then on the -- one quick question on the passenger side. Obviously, this past quarter was a little bit rougher for the Passenger Business, but just looking into the third quarter before the sale of the Blue Monarch -- to date, how has that business been? I mean, have occupancy levels been picked up or are they pretty strong, and should we expect maybe some profitability out of that ship for the third quarter?

Filipe Menendez

They are, yes. Occupancy levels are today at 100%. They have been that way for the past month, and the projections are that they will remain at that level at least till the end of September. So we do expect results to change considerably in the third quarter over what we saw in the second. And yes, in fact, occupancy levels in the second quarter were lower than expected, particularly in the Turkey route. This vessel is now offering two cruises in alternate weeks. So, yes, we can expect to see some positive input EBITDA from that vessel into the third quarter, although, again I caution, nothing in respect to this vessel is very exuberant in terms of results because she is a small ship.

Ben Nolan - Jefferies & Company

Sure. Well, yes, but that's helpful. And then just a few questions really quickly on the River Business. You have certainly added some capacity through the Mississippi River system today. Is that an area where we could possibly see further growth, maybe some further acquisitions or do you feel like you have pretty much capitalized on the opportunities that were available there?

Filipe Menendez

No, it's a very good question. There are more opportunities at the moment than we can carry in terms of volumes in the immediate future. As you know, our plan called for our yard to be satisfying that additional demand. We are considering perhaps adding some more capacity from the United States to comply with the initial stages of the contracts that come into effect in 2009. We would, however, want to limit those imports of barges from the United States to a bare minimum. Just to give you a general idea, prices of barges, following the price of steel in the United States, have increased 50% in the past eight months. The price of steel has increased almost a 100% over the past 18 months, and the projections of the cost of steel next year in the United States indicates still further increases.

So importing a barge from the United States is quite an expensive exercise. We would like to limit it -- now at these new values, we would like to limit it to the minimum possible number of barges that we need to add to our fleet before we start producing our own, and we are expanding the yard with a view to try and work a double shift; perhaps not from the very, very beginning, but early in its stages so we can step up production and meet the incremental demand with a cost-efficient barge that we will be able to produce here, trying not to import too many barges from the states, which doesn't seem to be economical at this point.

Ben Nolan - Jefferies & Company

Wonderful. And then last question on the River Business, obviously a lot of your growth over the last few years and really even going forward is focused on the dry side. Are there any opportunities that you see, maybe for tank barges or growth in that business segment? Or is that more of a steady-state business for you guys?

Filipe Menendez

Well, the tanker sector doesn't grow as quickly as the dry cargo. The consumptions in the area, if you look five years past, have grown only at a pace of 2% to 3% a year. We are growing in the tanker sector basically as a result of demand from vegetable oil. And we are enlarging some of our tanker barges. But no, we don't see enormous growth in this sector and I don't think anybody is projecting a spurt up of activity in terms of petroleum product carriages in the region for the next couple of years.

Ben Nolan - Jefferies & Company

Okay, perfect. Well, that does it for my question. And thanks to you, you have done a fantastic job addressing each of those. So, I appreciate it.

Filipe Menendez

Thank you, Nolan.

Operator

Thank you. Your next question comes from Gustavo Mariyura. You may ask your question, please state your company name.

Rodrigo Guerosare - Analyst

Actually this is Rodrigo. Hi. Filipe. Just a couple of quick questions; the first one on your River Business. You've had a couple of developments materializing over the past several months. One is the potential project between LLX and ALL for the refurbishment of the rail track linking Corumba all the way to the Port of Brazil, which will be at some point built near Santos. And you have also had Rio Tinto announcing significant investment in their barge infrastructure. I was wondering if you expect that to have any material impact on your ability to attain iron ore volumes from the Corumba region? That's the first question. Go ahead.

Filipe Menendez

Well, good morning, Rodrigo. Yes, we have read with a lot of interest the LLX/ALL idea, and there are several considerations to make about that. Well, as you know, we have a contract with MMX up to the year 2014, which starts -- scheduled up to a million tons next year with an option to go to 2 million. That project seems to need a lot of -- to iron out a lot of difficulties. One is reconstruction of the line itself, which is a major expenditure ranging close to the $1 billion figure. Environmental issues are connected with it, but mostly I think it is supported by the idea that Rio Tinto's expansion would take the same route. In fact, the Rio Tinto's expansion, which you mentioned, which is an enormous expansion of their mine which has now been approved by the Board, has selected the route of the River. They have acquired a piece of land in Uruguay to stockpile and do the transhipment ashore where they will put the cargo into further transhipment vessels that will load Capesizes out of sea. They are increasing their own fleet and talking to other people like us to subcontract large volumes of freight over long periods of time.

So effectively, I think, that out of the three mines, MMX, Rio Tinto and CVRD, the ALL and LX project would have to be supported only by the MMX volume and then only after 2014. I wonder how effective that is going to be. I would also question the cost-effectiveness of hauling the cargo over that distance to an Eastern Seaboard Brazil port, versus using the River route. Again, at today's fuel prices, one would have to consider very seriously whether that is economical on a cost-per-ton basis.

It may or may not happen. I don't think it has a material impact on our plans. The Rio Tinto program is enormous. They will satisfy part of that initial requirement by their own fleet. Again, I think our new yard can play a very significant role in building the barges that they may need on a long-term basis. They intend to scale up to 10 million tons production per year, as you know. And from there, they could even double if they decide to go that way.

So yes, I think we will be able to participate carrying part of that cargo. We will be able to participate building some of that equipment. And we have a working relationship with Rio Tinto, as you know, we are their largest carriers today besides their own captive fleet. And it is a relationship which we value enormously and we intend to expand it further.

So, I don't know if that covers the angle of what you had in mind?

Rodrigo Guerosare - Analyst

Yes. Thank you, Filipe. The other question has to do with your Capesize fleet. Some of those -- actually, most of those will be basically out of commission within the next four to five years. I was wondering if you could comment on what your plans are currently in terms of potentially replacing those vessels or going just a totally different route?

Filipe Menendez

Yes, as we have, I think, discussed in the past and we have mentioned in the last call, we have planned the renewal of our Capesized fleet for 2011 and '12. Most of our Capesized vessels do have to dry dock and carry out their surveys in 2009. We will complete these surveys. Technically, that will make them good for another five years. We are working on the assumption that we will be replacing these vessels in years 2011/12 when they cross the 30-year age barrier.

So, at that time, we believe it will be a good time to order new ships and yards or buy second-hand. We believe that the maximum -- the peak of the market will be reached before then, and we will find ourselves in a very good position to replace them at around that time.

In the meantime, we are not going to replace Capesize tonnage either in 2008-09 or even 2010; not in our present plans.

Rodrigo Guerosare - Analyst

Okay, perfect. Thank you very much, Filipe.

Operator

Thank you. Our next question comes from Matthew Dundon. You may ask your question, and please state your company name?

Matthew Dundon - Miller Tabak Roberts

Hi. From Miller Tabak Roberts. A question -- could you walk me through the calculation of the segment EBITDA for the offshore fleet for Q2 '08? I am trying to -- maybe I am just not seeing something -- I was trying to reconcile it to the -- from the stated numbers you couldn't quite get there. And then secondly, if reading between the lines on the sale of the passenger vessel, if that falls through, what is your view as to new buyers? Is that $8.3 million reflective of what you think you would get if you had to go back out to the market? And then -- actually, those two for now. Thank you.

Filipe Menendez

Okay, taking the second question first. It is, of course, impossible to say at what level you might be able to find another buyer. It may be higher, it may be lower. It is a question of negotiation.

We believe that the sale is at a reasonable price and if concluded, if the buyers deposit the money by the 25th we will be happy to conclude it and sell the vessel. But it is impossible to say what the alternative will be; I can only say that the buyers have been negotiating, in this case, other ships. And we were negotiating other buyers simultaneously and this was the best price that both parties could agree on. So we must think that it's reflective of the market at that time it was concluded.

Sorry, Matthew, can I ask you in particular, with respect to the offshore question that you asked, what is it exactly that you would like us to explain? The segment EBITDA for the second quarter was $4.459 million, which compares to $5.831 million for the second quarter 2007. I think the one thing that we pointed out to, and if you look at slide 11, the one thing that we would like you to consider is that there appears to be a large difference in G&A between the second quarter of '07 and '08. There is no such difference. This difference will disappear in the fourth quarter. In the second and third quarters of 2007, we allocated G&A on an estimated basis. And then in the fourth quarter, G&A was elevated between the different business segments in accordance with the criteria with which we have always done it, which is on the basis of the total value of our asset mix.

So, each segment absorbs the G&A in proportion to the value of its assets. So that means that the proportion of G&A that we are absorbing in the second quarter of '08 is higher than we did in '07 only because we are doing it now with the same criteria throughout the year. So we will have a negative variance in the second quarter. We will have a negative variance in the third quarter, and then we will have an equivalently positive variance in the fourth quarter. So you don't really have to worry about that difference. And then, the $4.45 million, if you add that $775,000 back, it becomes $5.2 million. That is the number that you can really compare to the $5.8 million -- if that was your question?

Matthew Dundon - Miller Tabak Roberts

Okay, well, I think if we -- as long as we keep getting 50% year-over-year changes in revenue, we are happy not to worry about some of the other things that we might worry about. I am wondering -- do we have any update or sense on the fair value of the collateral for the 9% notes at this point? It's now four years and change since that deal came and I believe the collateral pool was appraised at 107% of face with all the requisite disclaimers and reservations that accompany those kind of appraisals? Where do you think it is now? Is your own impression and has there been any kind of trustee certifications or anything that might be more official in terms of that collateral cover, as we sit?

Filipe Menendez

Okay. Well, we have -- over the life of these notes, as with the previous notes, we have never discussed collateral values. So I can't give you a figure because we have never publicly posted that figure.

However, if it's of guidance here, it might be useful to note that since we place the bond, the value of ocean ships has gone up quite considerably. And if you follow just general criteria for evaluation of ships in the shipping market since 2004 -- sorry, 2006 -- 2004, when the bonds were placed, the market has gone up several times. And the value of ships is now a significant proportion of both that; I mean, to the tune of 200% to 300%.

In the case of barges, and part of that collateral of the bond is barges, I will just mention that the value of second-hand barges in the United States in the past eight months has gone up 50%; with the price of steel going up steeply, that price of those barges is also going up. So in a general sense, the value -- the commercial value of collateral has gone up considerably. And if you take -- I think notes three of our financial statements, there is a net book value of the assets pledged to the guarantee of the long-term financial debt. And that was estimated at $304 million, but that is only book value. As I just described, commercial value of ships have increased many times over that.

Matthew Dundon - Miller Tabak Roberts

You remind me, I think it does, in your annual report, your form 20-S, you give an updated identification of the collateral of the senior notes. Is that correct?

Filipe Menendez

No, we give an updated estimate of its book value. I don't think we provide a ship by ship description of the collateral, but we could consider doing that, if you thought it would –

Matthew Dundon - Miller Tabak Roberts

I think it is helpful, because I know that there -- you called there was a substantial escrow of cash that we was used to buy new vessels and some vessels have been sold in and out. And you could go back and do some re-construction through four years of filings. But I think certainly think, as I talk to investors in the bonds, that this is an important factor in their own mind and it might be helpful to see it in one place -- now with the additions and subtractions and the deployment of the collateral. So if you could do that, I think that would be certainly helpful.

Filipe Menendez

Okay. We will consider it, Matthew. We are not making any promises at this time, but Len, our CFO, is making a note and we will look into it, and see if there is a practical way for which we can do this without making disclosures that we wouldn't want to reveal to other third parties.

Matthew Dundon - Miller Tabak Roberts

Understood.

Operator

Thank you. Your next question comes from Michael Safransky. You may ask your question, and please state your company name.

Michael Safransky - Onyx Capital

Good morning. Michael Safransky from Onyx Capital. Just a couple of questions on the financing. You mentioned in your presentation that a 12-year secured financing. As I can tell from your filing, it looks like $60 million in the first tranche, you have to pay back $40 million in the first ten years. And in the second tranche, $33.6 million gets paid back in five years. So the balance of the $20 million, is that just due at the end of the 12 years?

Filipe Menendez

That's a balloon payment at the end of the term of the post-delivery financing.

Michael Safransky - Onyx Capital

All right. So that's basically you just have the interest costs for the last two years plus this balloon payments of $20 million? Right?

Filipe Menendez

Yes, that's correct. And the term and the structure are meant -- in situated, they will be covered by the ships' cash flow. So, the ships will be a positive cash flow and be able to repay their own debt. And I think that is an important feature of all the loans that we have entered into, and the one that we are discussing with IFC as we reviewed in our first quarter, long-term loans, which can be repaid by the additional assets with comfort.

Michael Safransky - Onyx Capital

Okay. And now this is at LIBOR plus 150 and 175, is that basically around 5% to 5.5%?

Filipe Menendez

Well, depending on what LIBOR is over the next 12 years?

Michael Safransky - Onyx Capital

Right. Well, is there a way to swap that out? The [inaudible] cost?

Filipe Menendez

We have the ability to do so; there is an approval in place to do so, which we will consider at the right time. Right now, the financing that is in place, of course, is the pre-delivery financing. The vessels deliver in 2009, 2010. So as the vessels deliver and there's large amounts of that outstanding number vessels that they deliver that's probably the right time to look at swapping the interest rates discount.

Michael Safransky - Onyx Capital

Right. I am asking -- sorry -- no, because the bonds that are outstanding currently are yielding the 10% rate. It seems that you could almost buy them back on the open market and re-issue them as secured lines of credit and lower your interest costs significantly, can't you?

Filipe Menendez

Well, of course, we won't be able to do it because there is a redemption penalty on the balance until the time of anniversary, next November.

Len Hoskinson

Maybe he is referring to buying them in the secondary market?

Filipe Menendez

It might happen as well.

Len Hoskinson

It might happen as well, there could be advantages of doing that.

Filipe Menendez

Michael, as to your earlier question, I think it is useful to point out that we do have, as you have seen in the presentation, a large CapEx program which amounts to $354 million over the three years. With this CapEx program, we are going to enlarge very significantly the River and the Offshore businesses. We think the Company's cash flow is significantly going to change once those assets start producing. We have emphasized that this year people should not be looking at significant additional contributions either from River or Offshore than what we saw last year. We are going to have $47 million more in EBITDA coming from Ocean which were not there last year. That's a very important figure. This year Ocean is going to be a very significant contributor.

We have secured the earnings of our three OBO vessels for 2009 with a view to secure the cash flow coming from those ships at basically the same or slightly higher levels than 2008. So Ocean will still have a very, very significant contribution in 2009. And 2010 forward, I think you will see that our Offshore and our River Businesses are going to be changing their EBITDA contributions quite significantly if we are successful in implementing the new building plans for barges, the re-engining of the pushboats, and we manage to take delivery of the seven new ships that we have ordered for our Offshore segments.

So come that end of 2010, you will see very, very strong contributions from those two sectors, and at that point even if for 2011 the Ocean contribution diminishes, we will have a very strong EBITDA coming from that quarter. So -- and we are financing all of this with long-term debt, as Len has said, internally generated cash. The DVB loan, which is the 12-year facility effectively because it's 10 years after the delivery of the second PSV. The IFC loan, which we previously announced, and we are negotiating, which is a $50 million to $75 million facility also covering 12 years with four years of grace. And with that money, we can basically pay for all the CapEx that we have planned for the next three years.

Michael Safransky - Onyx Capital

Okay, excellent. Just turning to your share repurchase program, it looks like you could have -- one of the best investments you could have made was buying your stock at the $10 level. Have you bought back stock during the third quarter so far?

Filipe Menendez

No, we haven't announced any purchases, but if we had, we would have bought them up as recent developments in our recent filing. No, we have not. Let me tell you this, we are a disciplined company in this respect. We have a CapEx program ahead of us and that is our most important task. We are committed to making some of these investments, and we have to focus on that. But we will consider any alternative that enhances shareholder value. We do have authorization from the Board to implement up to a $50 million buyback up to the end of September. I think the Board took the view that we should act opportunistically, and we continue to be authorized to do so.

We have just been focusing on the things that we had immediately ahead of us and performing quarter-by-quarter giving an opportunity for the market to recognize those values, but we will do whatever enhances shareholders value, in our view, the most. And considering our buyback program is by no means out of the question.

Michael Safransky - Onyx Capital

And then just one last question. With the recent decline in steel prices, have you seen ship build costs coming down?

Filipe Menendez

No, not at all. Very much by the contrary.

Michael Safransky - Onyx Capital

Okay, great. Thank you very much.

Filipe Menendez

All right, thank you very much. Well, thank you very much all for participating today. And we shall be talking then again when we announce our third quarter, and to those of you participating in the Jefferies Conference in September, we will be presenting there and taking one-on-one with you. Thank you very much.

Operator

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

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