Pangaea Logistics Solutions Ltd. (PANL) Q4 2020 Earnings Call Transcript

Good morning. My name is Maria and I will be your conference operator today. I would like to welcome everyone to the Pangaea Logistics Solutions Fourth Quarter and Full Year 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. This call is currently being recorded and will be available for replay starting at 11:00 A.M. Eastern Time. You can access the recording by dialing 800-585-8367 or 404-537-3406 and referencing ID number 5197869. All lines are muted right now, and after the prepared remarks, we will have a live question-and-answer session. It is now my pleasure to turn the floor over to Ms. Tiya Gulanikar with Prosek Partners.

Thank you, Maria and thank you for joining us for this morning's fourth quarter and full year 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 Litigation 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 the 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. Thank you for joining us on the call. This morning I'll provide an update of our operations on the overall market before turning the call over to Gianni, our CFO, to provide a more detailed overview of the fourth quarter and fiscal year 2020 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 healthy and safe, and our thoughts are with all of those who have been impacted by COVID-19. I'm especially proud of our entire team this year, both on shore and on our vessels. The performance to keep the company moving forward against the challenges of the global pandemic is remarkable, and the efforts to work as a team and to adjust to rigorous safety standards while still performing at best-in-class results is truly appreciated. We are also pleased to see attention from the entire industry to seafarer wellbeing in the recent Neptune declaration, which we were proud signatories of. Pangaea remains committed to the health and wellbeing of our employees and as a company, we will 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 fourth quarter results capped off another profitable year with full year net income of $11.4 million and earnings per share of $0.26. As we have said in the past, our client-focused business model that prioritizes cargo helps us to remain profitable in volatile markets, and we think 2020 exemplifies this. Our nimble strategy allowed us to limit our exposure to the poor markets we experienced in the first quarter by redelivering vessels to their owners early in the year and replacing them when needed at lower costs in sync with cargo demand that returned in the second and third quarters. Our average fleet contracted to 40 vessels in the second quarter and expanded back to 53 vessels by year-end. As of today, we're operating close to our average high of 60 vessels. Our achieved TCE rate, while lower year-over-year, continued to outperform against the average of the Baltic Panamax and Supramax indexes. We exceeded the average market rates by $4,413 a day, a 55% premium to market indexes. In addition to keeping the company's base business moving successfully, we worked hard on strategic opportunities by expanding our terminal services, renewing our fleet, and solidifying our position in our ice class niche. In late September, we increased our ownership in our six ice class 1A Panamaxes from 33% to 67%, solidifying our position in this strategically important ice class sector and leading to additional refinancings which Gianni will cover later. We continued to see progress in our ice class new building project in which we expect to take delivery of the first two of four vessels in the next few months. We sold four of our older vessels entering 2020 prior to the market decline and we're also pleased to recently announce the acquisition of a 2013 built Ultramax to be renamed Bulk Courageous, and a 2013 built Panamax to be renamed Bulk Promise. Both are expected to be delivered in the second quarter. These sale and purchase transactions are additional steps in our effort to improve our fleet age and efficiency. Collectively, we are encouraged by the steps we've taken to expand our platform in ways that add value for our customers and enhance shareholder value. As we look ahead, the coming year appears to be bright for dry bulk shipping and for us. We hope that as COVID-19 is mitigated, the world economy will recover, increasing demand for dry bulk capacity. Simultaneously, we continue to see restraint in new building orders, which should have a long-term positive effect on the dry bulk industry. The first quarter of 2021 rates have been a welcome surprise to many and perhaps an indication for the year ahead. However, we're always prepared for uncertainty in our markets and we'll continue to react quickly. We'll 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'd like to turn the call over to Gianni to provide additional details on the financials.

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 some 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 a few recent transactions. As I 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%. This led to refinancing opportunities on the six vessels. As you will see in our year-end financials, in December we completed the first financing transaction for $18 million on the Nordic Odyssey and Nordic Orion vessels. The debt will be paid back over a seven year term to a $4.4 million balloon, and interest is fixed at 2.95%. Separately, on March 8, 2021, we obtained a commitment letter from two new lenders for a six-year $53 million senior secured loan facility to be used to refinance the remaining four ice class vessels, which is expected to close in the next couple of weeks. We've also taken additional steps to renew our fleet, reduce our average fleet age, and strengthen our financial position. As Ed mentioned, our upcoming acquisition of the Bulk Courageous also led to additional financing opportunities. In February, we signed a term sheet for up to $12 million payable over seven years with an interest rate of LIBOR plus 2.75%. We expect to close simultaneously with the delivery of the vessel in April. With that, I'll now turn to our full year financials starting on Page 6 of our presentation. Voyage revenue, which are revenues generated from carrying cargo for our clients was $349.7 million, a decrease of approximately 4% compared to $365.7 million for the same period in 2019. This is predominantly due to lower average TCE rates. Although our TCE rates decreased 12% to $12,433 per day from $14,199 per day in 2019 tracking the market declines from year to year. However, the company’s achieved TCE rates continue to outperform against the published market rates by approximately 55%. Charter revenues, which are opportunistic and tied to market rates decreased to $33.2 million compared to $46.5 million in 2019. The decrease in charter revenue was due to a decrease in market charter rates and a decline in time charter days, which were down 5% as we limited our exposure to the market. Charter expenses paid to third-party ship owners decreased to $127.8 million from $133 million. Our nimble chartering strategy allows us to charter in vessels typically on a short-term basis to supplement our own fleet when needed to meet clients’ cargo commitments. Due to the sale of vessels in early 2020, we increased our chartering days by 14%, which was offset by a 16% decrease in charter in rates. The sale of owned vessels also led to a decrease in vessel operating expenses, which decreased 16% to $38 million. Excluding technical management fees, vessel operating expenses on a per-day basis was $5,432 per day. Net income for the year was $11.4 million or $0.26 per share compared to $11.7 million or $0.27 per share for the same period in 2019. Moving on to the balance sheet and cash flows on Page 7 of our presentation. We ended the year with $48.3 million of total cash and cash equivalents, including restricted cash following an active year of operating, investing, and financing activities. In early 2020, we temporarily suspended our quarterly dividend to maintain a strong liquidity position; however, in December we announced the reinstatement of a $0.02 per share dividend. Moving down the balance sheet, the current portion of long-term debt reflects approximately $51 million of debt, which is due on our four ice class vessels, which, as mentioned earlier, is expected to be refinanced with a new $53 million loan facility. As you can see, we continue to expand our platform and focus on a strategy that puts our clients' cargo needs first, optimizes our assets, and adds value. We are excited about our new projects in 2021 as we drive growth and expansion opportunities and 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.

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

Thank you. Our first question comes from the line of Poe Fratt of Noble Capital Market.

Good morning Ed, good morning Gianni. Ed, you mentioned that the market has been somewhat stronger than expected in the early part of the first quarter. I have a couple of questions from two perspectives. First, regarding your own fleet, are you doing anything to secure current rates? Where do you see those rates right now? Secondly, could you share any changes in customer behavior or cargo that might have resulted from the higher rate environment? Are you noticing any decrease in volume or shifts in customer behavior due to the changes in rates?

Okay, well thank you. The reality is we keep our approach the same. So we benefit from the increased rates because we do have exposure to what's going on. But in this environment, we try to support our customer base and avoid doing business at discounted levels. That's worked out pretty well, and because our general business is backlog related, that's been quite helpful. We continue on with things, but the rates are higher; the projects are continuing to evolve and go forward. I believe we’re going to come out of this situation with a lot of pent-up demand across the board, across the world. So it's probably that, in line with the issue of new builds being muted, gives us a good window for at least a couple of years. So we're in the process of redoing some of the longer-term contracts. We’ve done some things obviously regarding the new builds that are coming, and that has been fortuitous that those ships are going to perform well. I think what we’re seeing is that the world is waking up, and it's taken a little bit of time. All the people that we deal with around the world are starting to understand that this is a new environment, and they have to adjust. If the price of a commodity is 40% more, then they realize that's what they need to pay. People are coming out of the weeds, and we see a lot of demand appearing across the board, and for us, we will capture that benefit, and we're well-positioned to take advantage of the increase in the rates while also protecting the downside, which we've always done.

Okay, have you seen any changes in customer behavior? It sounds like the shippers are adjusting to the current rate environment. You're currently running a total fleet of about 60. As we look into the second quarter and the remainder of the first quarter – and even take a leap into the second half – where do you think the current fleet will be? Is 60 a good number to use for the full year?

Sure. I think the answer to that is opportunistic in nature. In an environment like we're dealing with now, doing non-contract business, things will come up and you do them. It makes the operating environment a bit easier because people need to move their cargo and commodities. So, is it going to be 60 ships? I don't know. Is it 55? I don't know. If it's 65, I also don’t know. But I think we'll probably be around this level for the rest of the year, and if things change in the market, our chartered fleet will change accordingly to get the best mix of earnings going forward. Some of the rates we're seeing are extremely high, and the market has people hanging in there with their teeth. Is this a super cycle? We get asked that a lot, but we’ve been around long enough to know that we don’t know, but we’ll take advantage of it while we can. We will continue to work on our projects to build long-term stability into our shipping model, including many things we’re doing with terminals, which provide a base for good earnings moving forward and lead to other cargo opportunities. So I can’t accurately say yet how many ships we’ll have; it is very opportunistic in nature.

Okay, great. Ed, would you expand on the strengthened market, which was a surprise? Can you highlight what surprised you the most so far this year and are there any temporary factors that we should consider that might have moved the market one way or another?

Well, I think there are several different pieces to this. The 'world' decided that Q1 was going to be terrible for dry bulk shipping, right? Meaning that the big grain companies and mining operators kept themselves short of tonnage and took third-party business often at a discount to the market. Many operators took positions in the same way and now they struggle to reverse their positions. A lot of it was historic; people looked at previous years. But for us, we’ve kept an even keel. We continue to make good returns because we didn’t buy into making giant bets on the market. So now, emerging from this situation, trade was very restricted due to government policies and now that's changing. We’re starting to see stability returning in our trade worldwide, and people are beginning to feel comfortable taking on projects. The pandemic has had a huge effect on everyone, including us. The most challenging part is that crew members are in a terrible situation, and we had to work our way through how to replace them. Everyone has the same problem in their offices, adjusting to getting people back and working from home. This has been a big adjustment for every company, not just in shipping and trading. The world will come out differently, but we have successfully navigated the situation and we're pretty excited about what lies ahead, especially regarding projects that require engagement we couldn’t drive to a conclusion due to the pandemic.

Great. Another shipping company mentioned that it seems like shippers or cargo movers had the luxury over the last several years of plentiful tonnage availability, resulting in no urgency to lock in and managing their business on a just-in-time basis. Has the environment shifted more towards just-in-case?

I think that statement has credibility. Companies can become comfortable with the status quo, and many have kept themselves short because they thought they could always find a ship. Now with the current environment, it’s much less straightforward. If a commodity trader finds themselves short on freight, it's challenging. One example is a large aluminum company that managed its trades based on prior years and has discovered it will cost them an additional $25 to $30 million this year for ocean freight. This situation impacts not only them, but also grain companies who are inherently short on tonnage and require adjustment. It's like trying to turn around a supertanker while you're on the wrong side; that's a difficult position to be in. Our structure allows for greater nimbleness, enabling us to seize opportunities effectively. However, many who are short have to adjust their positions, which is beneficial for the shipping industry as commodity prices have risen significantly, especially with certain global markets like iron ore. We will also see how inflation interacts with the shipping market. The money can be repaid in cheaper dollars, making this a great time for shipping. Additionally, if someone wishes to build a new bulk carrier, they should be looking at 2024 as the container ship segment has ordered far more vessels, forcing shipyards to focus on more complex ships for higher margins.

Great. It seems your timing has worked out well with the new builds committed to a couple of years ago and the recent acquisitions. Can you discuss how you approached those acquisitions and if they came about quickly? Also, what is the tone of the M&A or resale market right now?

Our view towards ships in general is fairly straightforward when it comes to vessels that are not ice-class or specialty buildings. We don't pursue projects without a reasonable expectation of asset employment concerning contracts, etc. We believed in our business model enough to make those commitments. I recall one colleague mentioning that ship values are like a bird on a wire. As for the overall market, we perceive current vessel values as higher than what we had contracted for. Our fleet age will transition from around 13 years to approximately 8 years once the new builds are delivered, which was always part of our strategy. Once this process finishes, our ice fleet could evolve to about a dozen modern ships, while the rest of our trading vessels also become younger. The ships we recently acquired were primarily replacements for older vessels we sold.

Great. Gianni, if I could ask a couple of financial questions. Many companies utilize a forward earnings metric that helps indicate the upcoming quarter's performance based on booked shipping days at certain rates. Can you provide insight into how the first quarter has evolved from that perspective?

Historically, we've never given specific forward guidance. What we typically point out is the premium we've earned throughout the market's ups and downs. As the market improves, there's certainly... I’d rather secure a smaller premium in a much healthier market instead of a large premium in a poor market. For Q1, with Ed's commentary, I can say the market is healthy, and we are earning rates that are at all-time highs for several deals. We're excited about Q1 and prospects for 2021. Moreover, as Ed mentioned about new build orders, tonnage supply, and pent-up demand seems to be aligning for a healthy run over the next year or two.

Yes. It sounds like your financing plans are falling into place too. Gianni, could you share details about the balloon payments on the refinancing for Nordic Holding Company, including the maturity date?

As I mentioned earlier, our balance sheet reflects upcoming balloon payments on the existing facility tied to our four ice-class vessels. We're in the process of refinancing them, and I expect completion in the next few weeks, so this current debt will transition into a longer-term obligation. The new $53 million loan facility is a six-year commitment with a balloon payment of $25 million in year six. The interest is priced at LIBOR plus 2.35%. We aim to finalize this soon.

Great! You mentioned another term loan of $12 million. Can you provide details on that and will the acquisition of Bulk Promise be funded in a similar manner?

The loan planned for the Bulk Courageous is with an existing lender. It's structured as a seven-year investment with a balloon payment of $3.3 million in year seven and carries LIBOR plus 2.75%. For Bulk Promise, we’re looking for the best financing solution. I expect terms will be comparable to what we're implementing for Bulk Courageous. We have sufficient capital on our balance sheet and are positioned to execute these fleet renewals efficiently.

Lastly, Ed, could you address the recent changes in Board composition?

Certainly. As you know, we had two representatives from Cartesian on our board, and they have stepped down. However, Cartesian remains a significant shareholder and has been involved in our business for at least 12 years. While they are adjusting their position, they trust us to run the business effectively. Regarding board composition, we don't see an urgent need to add new directors immediately. We previously had a relatively large board for the size of our company, and reducing the number of directors will help save costs. Nonetheless, they will still be engaged as a significant shareholder and contribute where necessary.

Thank you for your time. I look forward to seeing how the rest of 2021 unfolds. Thanks Ed and thanks Gianni.

Thank you, Poe.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.