Pangaea Logistics Solutions Ltd. Q3 FY2020 Earnings Call

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Third Quarter 2020 Earnings Teleconference. Our hosts for today's call are Mr. Ed Coll, Chairman and Chief Executive Officer; and Mr. Gianni Del Signore, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 11:00 a.m. Eastern Time. The recording can be accessed by dialing (855) 859-2056 domestically or (404) 537-3406 internationally and referencing ID number 5847439. All lines are currently muted and after the prepared remarks, there will be a live question-and-answer session. Please follow the operator's instructions. It is now my pleasure to turn the floor over to Ms. Tiya Gulanikar with Prosek Partners. Please go ahead.

Thank you, Stephanie, and thank you for joining us for this morning's third quarter 2020 earnings conference call for Pangaea Logistics Solutions. With us today from the company are Chairman and CEO, Mr. Ed Coll; and Chief Financial Officer, Mr. Gianni Del Signore. Before I turn the call over to Ed, I'd like to read the safe harbor statement. This conference could contain forward-looking statements within the meaning of the Private Securities Relation Reform Act of 1995 about Pangaea Logistics Solutions. Forward-looking statements are statements that are not based on historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Pangaea Logistics Solutions management and are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in Pangaea Logistics Solutions' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Pangaea Logistics Solutions does not assume any obligation to update the information contained in this conference call. Also, please recall that a supplemental slide presentation will accompany this call. Those slides can be found attached to the 8-K that was filed with last evening's release, which is available on the Investors section of www.pangaeals.com under Company Filings or on the SEC's website at sec.gov. Now I would like to turn the call over to Pangaea Logistics Solutions' Chairman and CEO, Mr. Ed Coll. Ed?

Thanks, Tiya, and good morning to all of you, and thank you for joining us on the call. This morning, I'll provide you an update on our operations and the overall market before turning the call over to Gianni, our CFO, to provide a more detailed overview of the third quarter financials. We'll then open the line for questions. I'd like to begin by expressing well wishes to you and your families. I hope that you're all healthy and safe. Our thoughts are with all of those who have been impacted by COVID-19. We're especially grateful for our dedicated crew members working aboard our vessels as they support the global supply chain. Pangaea remains committed to the health and well-being of our employees. And as a company, we'll continue to follow all local and international regulatory guidance and best practices when it comes to operating our business safely. We hope you’ve had time to review our press release and the accompanying presentation, which were issued last evening. Our strong third quarter results reflected a continued turnaround from the first quarter of 2020 and validates our business model as our long-term contracts of affreightment, specialized fleet, and cargo-focused strategy allowed us to maintain strong margins. During the quarter, which is seasonally one of our strongest, we benefited from both improved market conditions and the arrival of the summer ice season for our specialized fleet. Once again, we've deployed the full strength of our industry-leading ice class capabilities to provide our clients with specialized services required in demanding conditions. Our achieved TCE rate for the full fleet for the quarter, while lower year-over-year, continued to outperform the average of the Baltic panamax and supramax indexes. We exceeded the average market rates by $3,030 per day, a 29% premium to market indexes. We also continue to execute our strategy by prudently allocating our capital across various initiatives. During the quarter, as part of our fleet renewal program, we completed the sale of the Bulk Beothuk in advance of dry docking, bringing our total fleet to 17 owned vessels. We continue to see progress in our ice class newbuilding project, in which we expect to take delivery of the first two of four vessels in the spring of 2021. Further, in late September, we increased our ownership in our six ice class 1A panamax vessels from 33% to 67%, solidifying our position in the strategically important ice class sector and leading to additional refinancing, which Gianni will cover later. Collectively, we are encouraged by the steps we've taken as we focus on niches where we add value and enhance shareholder value. Furthermore, as we look ahead, we continue to watch the rapidly changing conditions caused by COVID-19, from changes to our working environment to rotating crews aboard our vessels. Our results year-over-year remain strong. In the longer term, we are encouraged by the decline in newbuilding orders and its impact on the supply side of the dry bulk industry; however, we expect and have prepared for caution – continued uncertainty in our markets over the next few quarters. We will continue to be opportunistic, as we have been, in delivering best-in-class services for our clients, looking to acquire new vessels when opportunities arise, and developing new business that complements our platform. We look forward to updating you on developments in the coming quarters. With that, I'll now turn the call over to Gianni to provide additional details of the financials. Gianni?

Thank you, Ed, and thank you all for joining us on today's call. Again, we hope everyone remains healthy and safe as we continue to adjust to new restrictions or, in some cases, return to new normal work environments. We thank our employees and crew for their extra efforts during these unprecedented times. Before walking through our financials, I'd like to expand on our recent acquisition. As discussed on prior calls, we have been focused on effectively allocating our cash resources into operating initiatives and expansion opportunities. We are selectively deploying our capital in ways that complement our current business and secure our position for the future. As I’ve mentioned, we were excited to complete the acquisition of an additional one-third interest in our partially owned consolidated subsidiary, Nordic Bulk Holding Company, which owns six ice-class 1A panamax vessels, bringing our ownership interest from 33% to 67%. As you will see in our cash flow statement, $15 million of the total $22.5 million acquisition price was paid at closing and the balance will be paid in three annual installments of $2.5 million. Further, on November 3, we signed a nonbinding term sheet to refinance the Nordic Odyssey and Nordic Orion for up to $18 million with a seven-year term at a fixed interest rate of 2.95%. We expect to close within December and use part of the proceeds to pay down the existing balloon installments, which come due on December 31, 2020. We have also taken additional steps to renew our fleet, reduce our average fleet age, and strengthen our financial position. In January, we accelerated our purchase option on the Bulk Beothuk finance lease facility to pay off our most expensive debt facility. During the third quarter, we completed the sale, which generated $4.6 million of cash. With that, I'll now turn to our third quarter financials. Voyage revenue, which are revenues generated from carrying cargo for our clients, was $98.1 million, a decrease of approximately 5% compared to $103.8 million for the same period in 2019. This was predominantly due to lower average TCE rates. Our TCE rates decreased 16% to $13,316 per day from $15,915 in the third quarter of 2019, tracking the market declines from year-to-year. However, the company's achieved TCE rate continued to outperform against the published market rates by approximately 29%. Charter revenues, which are opportunistic and tied to market rates, decreased to $5.6 million compared to $15.1 million in Q3 of 2019. The decrease in charter revenues was due to a decrease in market charter rates and a decline in charter days, which were down 35% as we limited our exposure to the market. Voyage expenses were $40.7 million compared to $45.1 million for the same period in 2019, a decrease of approximately 10%. The decrease was primarily due to a reduction in bunker expense as a result of the COVID-19 triggered decline in market prices for bunkers in the third quarter of 2020, compared to the third quarter of 2019. Vessel operating expenses on a per day basis, excluding technical management fee, were up by 4% from $5,313 to $5,548 in Q3 of 2020. Net income for the quarter was $7.5 million or $0.17 per share, compared to $8.3 million or $0.19 per share for the same period in 2019. Moving on to the balance sheet and cash flows. Total cash and cash equivalents, including restricted cash, were $48 million compared to $36.6 million at September 30, 2019. For the nine-month period, net cash provided by operating activities was $22.4 million compared to $23.4 million in 2019. Net cash used in investing activities was $6 million as a result of the acquisition of noncontrolling interest, offset by the sale of vessels, compared to $48.2 million used in Q3 of 2019, due to the acquisition of vessels as well as deposits on newbuildings during the first nine months of 2019. As you can see, we continue to make progress in our platform expansion initiatives and implementing a strategy that optimizes our assets. Our ability to continually strengthen our financial position while also driving growth and expansion opportunities will, by extension, continue to generate shareholder value. With that, I will now turn the call back over to Ed for any additional remarks before we get to the Q&A portion of the call. Ed?

Thank you, Gianni. We thank our customers, our business partners, and shareholders for their continued commitment and partnership, and we look forward to updating you further in the coming quarters. I'll now open the floor for questions.

Your first question comes from the line of Poe Fratt with Noble Capital Market.

Good morning, Ed; good morning, Gianni.

Good morning, Poe.

Ed, if you wouldn't mind, I would like to ask you about how you're seeing the market and if there are any changes in your customer activity and anything you'd like to highlight. And then also, if you could just expand a little bit on your comment that you're preparing for added volatility or potential volatility over the next quarter or so. If you could just maybe talk about what kind of measures you're taking to handle that potential volatility.

Okay. I think where we end up, and it's perhaps a bit lucky for us, but the third quarter is traditionally a good quarter for us. The fourth quarter is okay, but as you get into the first quarter, it's generally a slow quarter for the market. Naturally, as we come out of the ice season and deliver, especially the chartered ships, our fleet will naturally go down. But we're very careful not to take on heavy commitments on the tonnage side for that period. So I suppose that's what we're preparing for. I think we have two big problems: one is COVID, which is really out of control; we're very lucky here. We set policies and thankfully, no one has gotten sick. The crew on board has been lucky, and we haven't had real problems repatriating seamen, but other people have. That's fortuitous for us. But now, we're going to go through this period, and no one knows where it ends. The second problem is the political situation, and this has been the case for a while. The instability in our political situation means that people can't make decisions and can't go forward, and that's not helpful—not just for our business, but for any business—until things stabilize. My view is that if it stabilizes, there will be a lot more business that comes because people will feel that now they can invest and that they can do things. Even regardless of COVID, I think you’re going to see a push in demand in the market for that once that’s resolved. But at the same time, it's a seasonally poor situation. So, if it can be balanced by some stability, we’ve been working on a lot of projects for quite some time, but they’ve stalled. Some of it is COVID and some of it is really the instability of our government, and hopefully, we can get through— I mean we can't control COVID, but we can work on getting some stability in the government. On balance, what you end up with is the supply-demand looks pretty decent. We just need to have stability.

And Ed, if I could just expand on that. When you talk about potentially just the question should be under Biden administration, would you say that less adversarial trade discussions would be helpful? Is that the kind of change that you're talking about?

Yes. I think the confrontational—it's not just the confrontational style. It's just the fact that you wake up every morning and you don't know what the next thing is. And I think that's a basic problem without getting political. If you don’t have that stability, then you wake up every day to some other crazy things going on, and people just look at it and wonder how can we make capital decisions, let's say, in the coal industry. People in the coal industry understand that field is not going to last forever, regardless of what the government has done. You don’t see any of those guys making investments in new coal-fired plants, that’s for sure. The alternative energy market, which is a giant growth market if they let it happen, is helpful for us in a lot of ways. Those are just two examples. But I think if you can take out all of this trade stuff, then things will really start to flow smoothly. So I think we’re hopeful that that's going to be the case. So then, at least for the first quarter, maybe that gets us over-the-top to being generally a bit more bullish, moving forward. But beyond the first quarter, I think the supply and demand is pretty good. People aren't building ships for different reasons, but also the same—in a way, the same thing, no stability, and no one knows what's going on with trade, so that's a real issue. Our economy here, we haven't seen the worst of what's going to happen, that’s for sure. I think we're cautiously optimistic that things in Washington will get settled, which is optimistic in terms of COVID; no one knows how that will affect the economy. Beyond that, I think it’s okay for us. I mean, we're pretty well balanced with our fleet and what we're doing. I think we're going to be in a situation where we've sold five ships over probably the last year or so. We will continue to look to renew the fleet, pick up a couple of modern ships along the way. With the new buildings starting to come next year, I think our average fleet age will fall from something around 13 down to something like 8, and I think that's a long-term goal for us. Regarding the ice ships, it’s a different way of looking at it; those ships are necessary to run the ice business. It’s that simple. The other ships tend to be more commodity-based, but we need them to expand our business.

Great. And I think you read my mind on sort of what you're doing on the asset side, Ed, because I was going to ask you that question about just how your overall fleet is contracted, but it has shifted a little more towards the—because of the Nordic Bulk acquisition and also just the selling of the older assets and the arrival of newbuilds, you will have a better fleet. Then potentially it does expand next year if you do find the right opportunities?

I think so. And again, we're quite hopeful that some of the projects will come to fruition now. We're doing other things in the logistics space that will come out pretty soon, and they've added valuable things to our services. I think we’re spending a lot of time on those endeavors.

And when you talk about the logistics space, is that associated with the Fall River terminal? Or is there another element to that, Ed?

Well, we're already doing certain things. I don't know if I probably shouldn't talk about it yet, but we are already doing things in the Gulf, and that will come out. We just have some paperwork there to finalize, but it's actually in place; it's already operating. We're seeing a lot of opportunities around LNG terminals to move things from Canada into there and working with partners. We’re not experts in everything, so we know where we aren’t, and we like to have partners that are complementary to what we do. That’s worked out well. We've been doing some good things, and yes, I think it’s not stuff that really contributes significantly to the bottom line, but that's really very helpful for us. The more we do in that space, the more demand we have for our own ships or charter ships that we can place in those programs.

Yes. And I mean, on the risk spectrum—very low risk, right?

Very low risk. There is some capital involved, but it's not a lot.

Great. And then, Gianni, if you could talk about the newbuilds and you're going to have two that arrive sometime around the spring. I'm calling it April and then the other two later in the year. Can you talk about the capital—if my math is correct, that you had $15 million at the end of the quarter of the $76 million paid. Can you talk about the timing of the $60 million that's left and then how the financing works, when will it be upon delivery where you can close on the financing? Or will there be a little bit of a lag there?

Yes, no problem at all, Poe. So concerning that, we've actually—because we were doing it in a joint venture with a partner, Pangaea has already completed its capital contributions to that project. Going forward, our partners will come in with capital upon the launch of the vessels. We’re also getting pre-delivery financing. So the actual financing will kick in at launch as well. From our perspective, I think we’re in a good position. We get to take strategically important assets for the company. As of today, we're in a comfortable position. We'll have some delivery costs that will be borne by Pangaea, but we're talking $2 million to $3 million of delivery cost. Then obviously, we'll be operating them, so it will be the commercial management and positioning of the vessels. But from a capital perspective, to complete the project, we’re basically fully committed.

Okay. And then when you look at how you're going to treat that from an accounting standpoint, it sounds like it may be consolidated? Or will that be reported as an equity income?

So the SP is already consolidated. So it will be fully consolidated. We'll capture 100% of the assets and liabilities. This will be back in, I think, in Q2 for that, actually. When we entered into the agreement with our partners, there's a new line item on our balance sheet, which is other long-term liabilities, which represents, in our view, the equity contribution of our partners. But for accounting purposes, it’s recorded as liability due to purchase obligations in the outer years with that joint venture. So yes, we will consolidate it. It will be fully consolidated, and the entity currently is, obviously, doesn’t have many assets yet, but it will toward the middle of next year.

Okay, great. And then can you give us an idea of sort of where you stand for current activity this quarter? Where we sit look at sort of your overall fleet or your shifting days? And then if you could comment on any changes on the cost structure, whether it's charter higher OpEx or drydocking activity in the quarter?

Yes. No problem. What Ed said earlier, the ice season is a very busy season. We're fully deploying our assets, plus chartering in additional vessels. We will redeliver some; but I still expect we will average somewhere in the 50s for the quarter from a vessel fleet size. That composition is obviously going to include a few more chartered-in vessels due to the sales of owned vessels. Still, we're expecting about the same level of activity from a fleet perspective. The market is what it is and what Ed has said earlier, and we’re preparing; I think we basically do what we do in any other market cycle. We have the flexibility to redeliver vessels and reduce our exposure to the market, and we can adjust our cost basis. I still think our chartering fleet will remain slightly lower than it was for Q3, but I still expect around 50 for the quarter. Regarding dry docking, we do have some dry docking in 2021; actually, two of our ice-class vessels will complete towards the end of this year. However, there's nothing unusual, I would say; it's just normal dry docking. The two ice-class vessels, actually, will include the treatment installations. But I think we're assuming around $5 million to $6 million next year to allocate to dry docking.

Okay, great. And then maybe, Ed, if you could talk about the joint venture acquisitions and how that presented itself, and it’s obviously you know the operating history; there’s no problem with due diligence. But—and then if you can just sort of describe that. And then maybe look at the potential to acquire the rest of the JV, is that something that is possible?

Are you talking about the logistics? Okay. That basically came out the way it was structured; one of the partners wanted to get out. We spent the time setting the right pricing, and we were able to increase our stake substantially, right? Because of the way the structure is we capture more of the upside because the Nordic guys captured, as a matter of course, 25% of it to begin with. So now we capture more. We have better control, and the people that last—they're getting out of the drybulk business. So it suits us to do it. The other partner still—we asked them also if they wanted to go, and they said no; this is the only shipping investment we make money with. So we want to stay. I think it gives us more control, and I think it’s always difficult when you—it’s hard enough if you have one partner. If you get more than that, it’s pretty difficult. I mean, in my early days in shipping, we ran a shipping pool, and that was like a nightmare. You have to satisfy if you have 20 people and you have 20 opinions; you spend all your time managing the partners in it. So it’s the same thing with the other projects we're doing that are logistics-based. We've partnered with people that we know and have done business with before, and we have a mutual trust. So that's, I think, the way to go. You share your expertise.

Okay, perfect. And Gianni, I'm not sure if you're hearing the same feedback as I am, but I apologize. Gianni, on the refinancing, can you talk about the potential for refinancing the facilities on the four other ones that are due in late 2021 and then early 2022?

Sure. Actually, what we did on that facility with the existing lenders is what you've seen, I think, in our Q. We amended the repayment date of the Odyssey and Orion. So originally, the balloon payments were due in September; we moved them after negotiating with the lenders to the end of December. Odyssey and Orion have done; we're happy to move forward with what we think is a very attractive package for the company on those two vessels. We've developed a good relationship with the lenders, and we're happy we have access to capital or financing in that range. The remaining four, we're actively working on. I expect we'll complete that financing in late 2020 or early 2021. We have not signed a term sheet, but we are very, very close, and we expect that we'll refinance those four ships as well well before their balloon payments come due. As far as the leverage profile on the other four ships, it will probably be close to existing levels of debt. There's no intention to leverage those ships up any further than they currently are. We want to have a longer runway to reduce our quarterly amortization. They will benefit the company in paying lower cash breakeven on our vessels. We'll have a longer runway and a little more stability in our financing for six and seven years.

Great, thank you so much.

At this time, there are no further questions in the queue. I would like to hand it back to management for their closing remarks.

Thank you very much for joining us this morning, and stay safe you and your family.

Thank you. This concludes today's conference call. You may now disconnect.