Pangaea Logistics Solutions Ltd. Q1 FY2021 Earnings Call

Good morning. My name is Chrystelle and I will be your conference operator today. I would like to welcome everyone to the Pangaea Logistics Solutions First Quarter 2021 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 being recorded and will be available for replay starting at 11:00 A.M. Eastern Standard Time. The recording can be accessed by dialing 800-585-8367 domestically or 404-537-3406 internationally and referencing ID number 7074367. All lines are currently muted, and there will be a live question-and-answer session after the prepared remarks. It is now my pleasure to turn the floor over to Ms. Sean Silva from Prosek Partners.

Thank you and thank you for joining us for this morning's first quarter 2021 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. 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 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, Sean. And thanks to all who have joined us today. I hope that you and your families are healthy and safe. This morning, I'll provide 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 first quarter financials. We will then open the line for questions. We hope that you've had time to review our press release and accompanying presentation which were issued last evening. Our first quarter results benefited from an unexpected increase in the drybulk market for the first quarter of 2021. As we've seen freight rates rise to multiyear highs in a quarter that is usually weak for drybulk. Our quarterly results improved considerably year-over-year as our average net TCE earned $16,524 per day increased approximately 57% compared to the first quarter of 2020. And we generated net income of $5.8 million compared to a net loss of $6.8 million in the first quarter of 2020. As we said in the past, our client-focused business model that prioritizes cargo helps us maintain profitability even in volatile markets by reacting quickly to such changes. While our earned TCE for the first quarter is the highest earned in many years, we continue to outperform the market. The rapidly rising market resulted in a smaller TCE premium over the market averages. This is a normal consequence of a rapidly rising market as spot fixtures become old quickly and our contracted cargo tends to lag instead of lead the average of this kind of market, as you can see, both are still profitable even in this market. As the market started to show signs of improvement in the first quarter, we continued to position the company to capitalize on a recovery while adhering to our cargo-focused strategy. We operated a total fleet of 51 vessels during the quarter, and as of today, we're operating approximately 57 vessels in our combined owned and chartered fleet. We also timely deployed our capital in the first quarter for the acquisition of the 2013 built Bulk Courageous, which was delivered to us in April, and the 2013 built Bulk Promise, which is expected to be delivered to us in July. Gianni will discuss the financing arrangements on these acquisitions. Further, we're happy to announce last night, the acquisition of another 2013 built Supermax vessel, which is also expected to be delivered to us in July. These three secondhand purchases, coupled with our new building program, which will soon deliver four new post-Panamax ships to Pangaea, will add almost 600,000 dead-weight tonnes and over 2,500 annual shipping days to our own fleet this year. These are timely steps in our effort to improve our average fleet age, increase our efficiency, and expand our operating leverage at an opportune time in the dry bulk market. Our first new building vessel will deliver in May, and the second will be delivered by July, both expected to enter our Arctic cargo business this summer. The third and fourth ships will follow in late summer or fall, and will be ready for the winter race season. Collectively, we're encouraged by the steps we've taken to expand our platform in ways that add value for customers, and in turn, enhance shareholder value. As we look ahead, we're encouraged by the outlook of the dry bulk market. New building orders remain low, demand is improving following the COVID-19 lockdowns globally. And market disruptions from the container and commodity trades all favor the ship owner for now. The positive momentum of the first quarter has so far continued into the second quarter. And as of today, we have fixed 3,200 shipping days in the second quarter, and an average TCE rate of approximately $21,500 per day. We feel confident in the market and our strategy to keep performing. We reinstated our dividend in December, and today announced an increase in our quarterly dividend to $0.035 per share. 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 on developments in the coming quarters. With that I'd like to now 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. Before walking through our financials, I'd like to expand on a few recent transactions and highlight our results for the quarter. As Ed mentioned, we are excited about our recent acquisitions, which resulted in one of the more active periods for Pangaea in recent years. We've deployed our capital opportunistically to renew our fleet and expand our operating leverage as efficiently as possible. In April, we completed the financing on the Bulk Courageous with an existing lender for $12 million over seven years with an interest rate of LIBOR plus 2.75%. We also finalized the refinancing of our four ice-class Panamax vessels to new lenders. This new $53 million senior secured loan facility is payable over six years and interest was fixed at 3.375%. Further in April, we signed a term sheet with an existing lender to finance the Bulk Promise for up to $12.8 million, payable over six years at LIBOR plus 2.3%, which we expect to close in line with the delivery of the vessel. Turning to our first quarter financials, starting on page six of our presentation, the welcomed improvement in the market during the first quarter resulted in increases in both voyage revenues and time charter revenues. Voyage revenues increased approximately 25% and charter revenues, which are opportunistic and more closely tied to market rates, increased approximately 79%. Our TCE rates earned increased 57% to $16,524 for the first quarter of 2021 compared to $10,508 for the same period in 2020. Charter expenses paid to third-party ship owners increased to $53.6 million from $32.3 million due to increases in market rates to chartering vessels and an increase in chartering days due to the sale of vessels in 2020. The sale of owned vessels also led to a decrease in vessel operating expenses, which decreased 14% to $8.5 million. Excluding technical management fees, vessel operating expenses on a per-day basis was $5,014. Net income for the quarter was $5.8 million, or $0.13 per share compared to a loss of $6.8 million, or $0.16 per share for the same period in 2020. Moving on to the balance sheet and cash flows on page seven of our presentation, we ended the quarter with over $42 million of total cash and cash equivalents following an active quarter of operating, investing, and financing activities. The decrease in cash from year-end was primarily due to cash used in investing activities for vessel acquisitions. Further, as Ed mentioned, after temporarily suspending our quarterly dividend in 2020 to maintain a strong liquidity position, we have since reinstated and this quarter increased our dividend to $0.035 per share. Moving down the balance sheet, the improvement in working capital in the first quarter was due to the refinancing of our four ice-class vessels, which moved $50 million of current debt to long-term. As you can see, we are encouraged by results so far this year, and we will continue to position the company to capitalize on market improvements while adhering to our cargo focus strategy as we drive growth 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 our call.

Thank you, Gianni. We thank our customers, 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. Ed, I was wondering if you could highlight any changes that you're seeing either in trade flows or any potential impact from the higher cargo or higher shipping rates that we're seeing?

I think you're in a situation where I wouldn't describe it as a perfect storm, but a lot of factors are converging at the same time. For instance, just-in-time deliveries on container ships have been disrupted, leading to cargo that typically moved in containers now entering the multipurpose ship market and even bulk carriers. Additionally, there's ongoing congestion in the market, which is removing capacity, and we're seeing significant disruptions in the logistics chain alongside a major increase in commodity prices. Looking ahead to the next year or two, this business seems to be on a promising trajectory. However, it's difficult to predict what will happen beyond that. Currently, no one can build ships, as deliveries from shipyards are not expected until 2024 due to the high number of container ships ordered. We have successfully reduced the average age of our own ships, which is beneficial, and our timing has been favorable. We will acquire seven ships this year on the owned side, and the outlook remains very encouraging.

Okay. Great. And then, when you look at how active you've been on the M&A side, Ed, do you see additional opportunities out there, or when you previously talked about acquisitions, you've also talked about trying to identify a certain trade or a specific need? Have you identified that with the supermax that you just acquired?

I believe we have enough business coming from our regular customers that we are comfortable adding another ship. The main issue is that there's very little available for purchase, except for subpar options, and we are not interested in buying poor-quality ships. While it may be tempting to take advantage of a rising market, that does not align with our approach. However, we can support increased capacity. Our owned fleet has a very low breakeven price of around $10,000 a day, which is quite favorable in this market. If we can find the right ship at a reasonable breakeven cost from a reputable broker with a good survey position, we would consider making a move. However, it is becoming increasingly difficult as prices continue to rise and the available options, as I mentioned, are not particularly appealing. It feels like searching for a classic car that hasn't been driven much, which is challenging in this market. Nevertheless, we are continuously looking.

Ed, is the market strong enough for you to consider selling some of your older assets, or are you satisfied with the current age profile of your fleet?

I think we're in a good position because most of our ships, even the older ones, are in excellent condition. They have low breakeven costs, which we need for our operations. The challenge with the older ships is that you won't get a dollar-for-dollar return on them. For instance, if an old rebuilt ship costs $10 million and can generate $20 million, that's significant. However, if you try to sell it in the second-hand market, you won't receive a premium that reflects those earnings. You might get about $0.5 million more than its previous value, but it's not a complete return. Therefore, we aim to find the best value by considering both age and condition. On the other hand, if you look at newer ships, they come with a hefty premium. So, we focus on finding the best overall value. I wouldn't recommend selling these older ships now, as you wouldn’t get enough money to justify holding onto them.

Absolutely. Gianni, regarding the supermax you mentioned, have you, although it's still early, possibly secured financing for that vessel?

Yes. So we're currently working on it, Poe, but my expectation is it'll look very similar to what we did on the Bulk Courageous and the Bulk Promise. So I think we're in a good position, we're working with our relationships that we have with existing lenders. And I think that that's the expectation on her.

Great. And then if you could talk about, you poured coverage, you have 3,200 days at 21,500, that's pretty healthy delta versus your average first-quarter TCE. If you flow that through to all your owned fleet, the delta is about 8 million quarter-over-quarter. Will there be cash, because your operating expenses shouldn't change that much. Are there going to be offsets to that delta that you're seeing on the owned TCE rates? Can you just help me understand sort of how we should be looking at the second quarter? And then especially because you're running 57, so there isn't much of a drop-off at all in your chartered fleet. And then maybe you could comment on what you're seeing as far as chartered rates and sort of an outlook for how that within the next quarter or two looks?

One thing to mention is that we've consistently had strong premium margins, although this year might differ slightly. Nonetheless, I believe our earnings will be very solid. The chartered fleet is responsive to market changes, and our approach remains unchanged; we secure business first, then charter based on that decision, allowing us to maintain a healthy margin on the chartered fleet. This isn't a concern for us. Interestingly, the Far East market is exceptionally strong right now, which is unusual as it typically operates at a discount. With increased business heading to the US, the outbound market appears softer. This shift means that backhaul is now becoming more lucrative than front haul. You can even secure business on Supramaxes from the east to the states in the high 20s. This situation has turned things around somewhat due to these disruptions, but it's beneficial for us. Regarding earnings, as we expand to eight ships, our existing fleet has a low breakeven point. We also have contract coverage for the summer that exceeds today's rates. Typically, our backend business picks up in the third quarter, so we're looking forward to a strong period. Overall, we are quite optimistic about how things are developing at this moment.

Okay, and then maybe, Ed, if we could look at it from the standpoint of – are there any existing contracts or any time charters that you have on your own fleet that would hold you back or not make you – not enable us to realize the full benefits of the stronger market?

No, we tend to not put our ships on plain charter. When we do, it's normally to, you know, to position them or keep a – to a second leg or something of that nature. So we don't have any long-term contracts where we put ships on the edge, own ships at all. We don't, we generally don't do that. We trade them ourselves. And, you know, as you know, we're not a tonnage provider. That's not our business.

Yes. And then, if you wouldn't mind commenting on the charter expenses, what you're seeing and whether we should expect or expect an increase in charter expenses in the second quarter over the first quarter, just because of the stronger market in general?

Yes, Poe, I think you certainly will see a slight increase. I mean, our strategy has always been to react to the market in a weaker market. We tend to charter for single trip charters; as the market improves, we do period charters, but they are generally shorter term, three to six months max. So as a charter fleet renews, it stayed relatively stable to your point, as far as our fleet size, but vessels are being renewed. So we will be seeing slight increases as the market improves. But I think we'll stay – we will stay on par or better, because a lot of – the other things to consider with our chartering strategy is going back to do we think our cargo book or our contracts are holding us back. And the way we look at it is twofold. One, if it's dedicated to COA, that’s a fixed price, we usually have a ship assigned to it. And in some of the other contracts, they usually backhaul in nature, and we're able to charter the vessel that's positioned well for us, but maybe not necessarily in the market, and we'll slot it into one of these backhaul COAs or forward bookings. And that'll put us in a pretty healthy market. So on the run, we’ll still make a good premiums, we’ll still make a good margin, we’ll still make profit – will be profitable. And that's sort of how we look at it. So yes, they may be priced a month or a quarter or a year in advance. But the nature of that voyage, generally we're pretty comfortable because we will be able to capture on the second and third legs with our additional capacity.

Great. Ed, I was trying to understand your comments regarding the stronger market. In the last call, you mentioned how shippers are moving away from just-in-time practices and that vessel availability is looking favorable, leading to potential longer-term commitments. Compared to last quarter, do you believe the visibility in the market has improved?

I believe there is a strong sense of optimism among everyone. This optimism is reflected in the overall outlook. Occasionally, you might see some companies opt for longer ship leases, but that’s not our approach, even though we monitor the situation. It’s more common for larger companies to engage in that, but it hasn’t become a widespread trend yet. Many were short on cargo as they anticipated a weak first quarter, which led to some scrambling. However, I think there's a growing understanding that these costs will be passed on to customers if ship prices increase. While people may start adjusting to that, they aren't really making long-term purchases on a significant scale. If someone commits to a long-term deal and the market corrects itself, they face risks with counterparties. That's why we prefer to have more control over our own circumstances when it comes to these matters.

Great. And then lastly, if you could talk about the dividend increase and sort of whether we should be doing it as sort of quarter-to-quarter review, and then or is there a goal that tries to increase it every year. And then maybe also talk about the dividend increase in the context of considering buying shares back, especially since there's been a major seller out there as far as it's been unwinding for the last six weeks or so?

I believe the share price has increased, but it is still not where it should be in our view. This has been our experience. The sellers seemed to expect a longer timeline to sell their shares, but they have already unwound a significant amount. As a result, more shares are being held by a greater number of holders, which is boosting volume and liquidity. I think that aspect is positive. Regarding the dividends, we are being cautious. We believe we can manage this, and we will continuously assess whether it makes sense to make any changes.

And Poe, just to just to add on the share buyback, I think our views on share buybacks has always been to not take more shares out of the market and further reduce the liquidity and the sort of public float out there. So it's really never been a consideration for us historically. So yeah, I think as we look forward to I think that still remains true, but that may change depending on how we see the stock trade.

I was considering that generally people haven’t included those shares in the public float because they are closely held with a long-standing position. I was just curious if you had thought about potentially buying some shares back as they unwind. That's helpful. Thank you very much.

Thank you.

Thanks, Poe.

There are no further questions at this time. I will now turn the call back to management for closing remarks.

Well, thank you all for taking the time to join us this morning. And everyone have a very good day.

Thank you. This concludes today's Pangaea Logistics Solutions first quarter 2021 earnings call. You may now disconnect.