Pangaea Logistics Solutions Ltd (PANL) 2020 Q3 法說會逐字稿

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 host for today's call are Mr. Ed Coll, Chairman and Chief Executive Officer; and Mr. Gianni DelSignore, 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 domestic or 404-537-3406 international and referencing ID #5847439. (Operator 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 DelSignore.

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 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 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 it 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 1 of our strongest, we benefited from both improved market conditions and the arrival of the summer ice season for a specialized fleet. Once again, we deployed the full strength of our industry-leading ice class capabilities to provide our clients with specialized services required for demanding conditions.

Our achieved TCE rate for the full fleet for the quarter, 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 $3,030 per day, a 29% premium to market indexes.

We also continue to execute on 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 drydocking, bringing our total fleet to 17 owned vessels.

We continue to see progress on our ice class new building project, in which we expect to take delivery of the first 2 of 4 vessels in the spring of 2021. Further, in late September, we increased our ownership in our 6 ice class 1A Panamax vessels from 33% to 67% solidifying our position in the strategically important ice class sector and leading to additional refinancings, which Gianni will cover later.

Collectively, we're 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 and border vessels.

Our results year-over-year remains strong. In the longer term, we're encouraged by the decline in new building orders and its impact on the supply side of the drybulk 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 of 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 Ed mentioned, we were excited to complete the acquisition of an additional 1/3 interest in our partially owned consolidated subsidiary, Nordic Bulk Holding Company which owns 6 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 3 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 7-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 the 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 decrease 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 9-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 new buildings during the first 9 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.

(Operator Instructions) Our first question comes from the line of Poe Fratt with NOBLE Capital Markets.

Ed, if you wouldn't mind, I would like to ask you sort of how you're seeing the market and how -- 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 will we end up, and it's perhaps a bit lucky for us. But the third quarter is traditionally a good quarter for us. Fourth quarter is okay. But as you get into the first quarter, it's generally -- for the market, it's a slow quarter. And naturally, as we come out of the ice season and we deliver, especially the chartered ice 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 like what we're preparing for. I think that we have 2 big problems, right, and one is COVID, which is really out of control. We're very lucky here. We set policies. And thank goodness, no one has got sick. Guys on board. We've been lucky there. We haven't had real problems repatriating seamen. The people have that. 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 problem. And this has been this way for a while. And the instability in our political situation means that people can't make decisions, and they 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 and this carries through, there will be a lot more business that comes because people will feel that now they can invest and now they can do things and -- even regardless of the COVID. And you're going to -- 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 -- but if it can be balanced by the -- by some stability, and we've been working on a lot of projects for quite some time, but they've been stalled. And part of it's COVID and part of it is really the instability of our government. And hopefully, we can get through -- I mean, we can't control the COVID, but we can control getting some stability in the government.

So I think on balance, what you end up with is the supply demand book looks pretty decent. We just need to have stability.

And Ed, if I could just expand on that. When you talk about -- potentially maybe just the question should be under Biden administration, would you -- do you think 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 the basic problem without getting political, if you don't have that stability. So you wake up every day and there's some other crazy things going on, and people just look at it and they -- how can we make capital decisions, let's say, the coal industry. I think people in the coal industry understand that, that field is not going to last forever regardless of what the government has done to start on.

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, that's helpful for us in a lot of ways. Those are just 2 examples. And -- but I think if you take out all of this trade stuff, then things will really start to flow smoothly.

And so I think that's -- 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, but going forward. But beyond the first quarter, I think that the supply and demand is pretty good. And people aren't building ships, different reasons.

But also the same -- in a way, the same thing, no stability. No one knows what's going on with trade and so that's a real issue. And our economy here, we haven't seen the worst of what's going to happen. That's for sure. But I think we're cautiously optimistic, the thing in Washington will get settled. We are optimistic. The COVID, no one knows how that affects the economy. And -so beyond that, I think it's okay for us. I mean we're pretty well balanced with our fleet and with what we're doing. And I think we're going to be in a situation where we've sold 5 ships probably throughout the last year or so. And we'll continue -- we will end up looking to renew the fleet, pick up a couple of modern ships along the way.

And I think with the new buildings coming -- starting to come next year, I think our average age of the fleet will fall from something like 13 down to something like 8. And I think that's a long-term goal for us. And you're in -- the ice ships are -- it's a different way of looking at it. Those ships -- you need the ice ships to run the ice business. It's that simple.

And the other ships tend to be more commodity-based but we need them to expand our business. And -- yes, that's it.

Great. 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 selling the older assets and the arrival of newbuilds, you will have a better fleet and 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. And we're doing other things in the logistics space. That will come out pretty soon, and they've added value things to our services. And I think we're spending a lot of time on doing that sort of stuff.

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. And we're seeing a lot of opportunities around LNG terminals in an effort to move things from Canada into there and working with partners.

We're not experts at everything. So we know where we're not, and we like to have partners that are complementary to what we do. And that's worked out. We've done some good things. And yes, it's not stuff that really kind of protects the -- contributes significantly to the bottom line. And that's really -- it's helpful for us. And the more we do in that space, the more demand we have for our own ships, our 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, but it's not a lot.

Great. And then, Gianni, if you could talk about the newbuilds. And you're going to have 2 that arrive sometime around the spring, I'm calling it April, and then the other 2 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 that one -- 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 launching of the vessels.

And then we're also getting predelivery financing. So the actual financing will kick in at launch as well. So from our perspective, I think we're in a good position. We get to take on strategically important assets for the company. And 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.

And 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 committed our capital fully.

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 and income.

So the equity is already consolidated. So it will be fully consolidated. We'll capture 100% of the assets and liabilities. And this will be back in -- I think in Q2 or -- 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 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 much assets yet, but it will, towards 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 and 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 had said earlier, the ice season is a very busy season. We're fully deploying our assets plus chartering in additional vessels. So 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, there's going to be a few more chartered-in vessels due to the sales of owned vessels.

But we're still expecting about the same level of activity from a fleet perspective and the market is what it is and what Ed has said earlier, we're preparing. I think we basically do what we do in any other market cycle. We'll -- we have the flexibility to redeliver vessels and reduce our exposure to the market, and we can adjust our cost basis. So I still think our chartering fleet will mean slightly lower than it was for Q3, but I still expect around 50 for the quarter. And drydocking, we do have some dry docking in 2021. Actually, 2 of our -- 2 of our ice class vessels will complete towards the end of this year. But nothing that's unusual, I would say. It's just normal dry docking. The 2 ice class vessels, actually the ODYSSEY and ONION (inaudible) treatment installations.

But I think we're assuming around $5 million to $6 million next year to allocate to drydocking.

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, no problems 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? (inaudible) Okay. The -- that -- basically it came out the way we structured, was on yielding. 1 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? And that, because of the way the structure is, we captured 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 (inaudible) they're getting out of the drybulk business. So it suits us and (inaudible) us to do it. The other partner still -- we ask them also, do you want to go and they said, "no, it's only shipping investment we make money with. So we want to stay." And so I think it gives us more control. And I think it's always difficult when you -- it's hard enough if you have 1 partner.

If you have 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, right? And you have to satisfy -- if you have 10 people, you have 20 opinions, and 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, we've done business with before, and we have a mutual trust.

So that's -- I think that's the way to go. I mean, 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 4 other ones that are due in late 2021 and then early 2022?

Sure. Actually, what we did on that facility with the existing lenders, what you've seen, I think, in our Q, we actually 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 end of December. ODYSSEY AND ORION have done. We're happy to move forward what we think is a very attractive package for the company on those 2 vessels.

We've developed a good relationship with the lenders, and we're happy we have access to the capital or financing in that range. The remaining 4 we're actively working on, I expect we'll complete -- we'll complete that financing as well 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 4 ships as well early, well before their balloon payments come due. As far as the leverage profile on the other 4 ships, it will probably be close to existing levels of debt. There's no intention to lever those ships up any further than they currently are. So we want to have one of the longer runway, reduce our quarterly amortization. They'll 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 6 and 7 years.

(Operator Instructions) At this time, there are no further questions in the queue. I'd like to turn it back over to management for their closing remarks.

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

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