Pangaea Logistics Solutions Ltd (PANL) 2019 Q4 法說會逐字稿

Good morning. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Fourth Quarter 2019 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 a.m. Eastern Time. The recording can be accessed by dialing (800) 585-8367 for domestic or (404) 537-3406 international, and referencing ID number 9578734. (Operator Instructions)

It is now my pleasure to turn the floor over to Tiya Gulanikar with Prosek Partners.

Thank you, Lori, and thank you for joining us for this morning's fourth quarter 2019 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 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 an update of our operations and the overall market before turning the call over to Gianni, our CFO, to provide a more detailed overview of the fourth quarter financials. We'll then open the line for questions.

Before I address our results and talk about our fiscal year 2019, please allow me to talk about the impact coronavirus has had on our market and the way we're approaching that. I think it will be a very difficult time for all of us. I hope you and your families are safely waiting out the storm. Across all of our offices, we're taking every precaution and are mostly working from home, which is familiar territory for most of our people, as this is a 24/7 business in the best of times.

Overall, our position in the shipping market for now is attempting to be resilient to the impact of its global pandemic. After a weak start to the year, minor bulks are now moving and perhaps delays in certain points -- in certain ports due to virus response have tightened supply just a little.

However, we are prepared for a downturn if it comes, which may be inevitable, which much of the world economy closing down at the same time. You can only hope for a quick recovery. Our Board has wisely deferred a decision on our next dividend payment, and we have resisted buying more ships to replace those we have sold over the past few months. We will use our flexible business model to quickly adjust our chartered-in risk, as we feel the market moving. We'll continue to work closely with our customers to support their businesses, and we will try to conserve cash, but we'll always be resourceful and opportunistic.

We hope you had time to review our press release and accompanying presentation, which were issued last evening. As you've heard us say before, the seaborne dry bulk industry is cyclical and can be very volatile. Although the average BDI for 2019 remained flat year-over-year at 1,329, seasonal volatility led to a low of 595 in February and a multiyear high of 2,518 in September. Despite these conditions, our fleet remained resilient. Whereas the average published market rates for Supramax and Panamax vessels decreased by approximately 8% to 10,093 in 2019, Pangaea's average TCE rates increased by 1% in 2019. We also exceeded the public market rates -- published market rates by an average of 39% for 2019, continuing our industry-leading performance.

2019 was an extremely active year for us. We continue to operate profitably despite book losses on sale and impairments. Those sales advanced our strategic priority, improving our fleet age. Gianni will provide more detail shortly. Moreover, our vessel activity increased substantially in the third and fourth quarters, which is typically our busiest time of the year.

Along with our strong operational results, we were able to push forward core strategic initiatives such as our fleet renewal efforts and port logistics. In May, we announced the expansion of our high ice class fleet niche with a new 10-year contract with our customer, Baffinland Iron Mines Corporation, continuing to demonstrate our leadership in high arctic shipping. We also signed a contract to build 4 new post-Panamax 95,000 deadweight ton dry bulk vessels at Guangzhou Shipyard in China to support this business.

Additionally, we built a temporary port and performed a test shipment of valuable ore from Greenland, from a beach less than 1,000 miles from the North Pole. To enhance our fleet renewal during the year, we purchased some young secondhand vessels. Our joint venture with Hudson Structured Capital Management continues to help us expand our ice class capabilities, with the construction of these vessels.

Further, the ships have been committed -- have committed financing through a competitive 15-year sale charterback transaction. Towards the end of the year, we took further steps with our fleet renewal plan by selling 4 older ships, putting us in a position to renew when opportunities arise. Despite aggressive debt amortization, the purchase of new vessels, substantial newbuilding deposits and payment of dividends to our shareholders, our strong cash operating income allowed cash to stay above $50 million at year-end. Additionally, we expanded our reach onshore with our Brayton Point Terminal, which is now in operation and received our first cargo shipment there. We were also awarded the contract to perform stevedoring operations for a major customer in the Mississippi River at year-end. We continue to demonstrate our expertise in handling difficult challenges related to cargo movements, which make us always ready to expand.

2020 began with much uncertainty about the implementation of new fuel regulations under IMO 2020. Our decision on compliance with the new regulation was made in early 2019, and our advanced planning put us in a position to transition to compliant fuel without significant operational problems. The concerns over nonavailability of fuels seem to have been overstated. And the gap between compliant fuels burned by our ships and noncompliant fuel burned by ships with scrubbers has narrowed considerably. A very competitive market has adjusted well as it has time and time again.

With that, I'd like to turn the call over to Gianni to provide additional details.

Thank you, Ed, and thank you all for joining us on today's call. Again, we hope everyone remains healthy and safe in this unprecedented time and truly appreciate everyone taking the time to join us. Before walking through our financials, I'd like to expand upon Ed's earlier comments about our business strategy. Of course, this is not the market we'd like to be in. However, as we've said in the past, our business model is built to protect the downside, as it did in 2016 and as we navigated the decline during the fourth quarter and into 2020.

While we recorded a book loss during the fourth quarter related to vessel sales and impairments, we were able to sell 4 of our older vessels at very good prices right before the market collapsed. Our goal, as Ed noted, is to renew our fleet and lower our average age, which we have reduced from 13 years down to 9 years. As the market collapsed and interest rates fell steeply in March, we capitalized on a low rate environment to improve our cost of capital by fixing interest rates on the Bulk Endurance, Bulk Pride and Bulk Independence debt facilities.

In addition, in January, we accelerated our purchase option on the Bulk Beothuk finance lease facility to pay off one of our most expensive facilities. We were very active in 2019 with vessel acquisitions, opportunistically identifying ways to strengthening our balance sheet and extending contracts with key customers.

In 2020, our capital allocation strategy will remain tied to our fleet renewal and opportunistically acquiring new vessels when we feel the time is right. And from a revenue standpoint, we'll continue sourcing value-added projects to preserve and enhance our customer relationships. And as I've noted, to maintain our strong footing in these extremely uncertain times, we have deferred a decision on our next dividend payment, which we will continue to revisit quarterly as we monitor the COVID-19 global pandemic.

With that, I'll now turn to our full year financials. Starting with voyage revenue, which are revenues generated from carrying cargo for our clients, was $365.7 million, an increase of approximately 14% from 2018. This was predominantly driven by a 12% increase in voyage days.

Our TCE rates increased 1% to $14,199 per day in 2019 from $14,019 in 2018, while the market average for the year was approximately $10,093. We continue to outperform the market and maintained an overall average premium over market rates for 2019 of approximately 39%, driven by our long-term COAs, cargo focus and specialized fleet.

Charter revenue, which are opportunistic and tied to market rates, decreased by 13% to $46.5 million. This decrease was driven by the decrease in market rates and to a decrease in charter-in days, which decreased 3,177 in 2019 from 3,543. The decrease in time charter days is primarily due to the utilization of our fleet on voyage charters and the execution of our charter-in strategy to reduce exposure to declining markets by redelivering vessels.

Voyage expenses increased by 14% during 2019 to $165.5 million compared to $145.1 million in 2018. This was driven by a 12% increase in voyage days. Charter expenses paid to third-party shipowners increased to $133 million from $117 million. The 14% increase in charter expenses was due to a 5% increase in charter-in days. Further, although the market was relatively flat on average in 2019 as compared to 2018, the performance of certain voyage charters requiring the company to charter in additional vessels coincided with the BDI reaching a multiyear high in September, resulting in an increase in charter expenses paid.

Vessel operating expenses increased by 14% from $39.8 million in 2018 to $45.3 million in 2019. The increase is due to the acquisition of 3 vessels during 2019. Net income attributable to Pangaea for the year ended December 31, 2019, was $11.6 million or $0.27 per share compared to $17.7 million or $0.42 per share. The decrease is due to the recognition of book losses in sale -- book losses on sale and impairment of vessels.

Moving on to the balance sheet and cash flows. Restricted cash and cash equivalents were $53.1 million as of December 31, 2019, compared to $56.1 million as of December 31, 2018. Net cash provided by operating activities grew slightly to $44.5 million compared to $40.1 million in 2018. Net cash used in investing activities was $46.6 million versus $17.5 million during 2018. And net cash used in financing activities totaled $916,000 compared to $5 million during the same period in 2018. These changes reflect the company's investment in newbuilding vessels and the purchase of secondhand vessels, including the Bulk Spirit and Bulk Friendship, which were financed under finance lease arrangements; and the Bulk Independence, which was financed under a commercial loan facility.

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. Ed?

Thank you, Gianni. As you can see from our results and the various initiatives we took this year, we're well positioned to address the uncertainty presenting personally facing us. The longer-term path forward for Pangaea is clear, and we're well positioned. We thank our customers, business partners and shareholders for their continued commitment and partnership, and we look forward to updating you further in coming quarters.

I'll now open the floor for questions.

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

Ed, I was hoping you would expand on your comments about the current market conditions. I thought I heard you say that the year started off pretty on a weak note, maybe seasonally too, and then it's picked up. Could you help us -- or could you help me understand sort of where we stand right now? And sort of are we running at like 70% of last year? Or sort of -- is there any sort of benchmark that you could point me to, to sort of understand where the market stands right now? And then also if you could talk about your cargo book and whether you're seeing any change in either volume or pricing in the cargo book?

Okay. So I think you have to look at it 2 ways. Number one, if you put the corona thing out of it, right, that's one way you're looking at it. And if you add it in, it's another way. I mean fundamentally, there's not that many ships. The supply-demand situation was pretty healthy, okay? And -- but now we have this disruption, and we are not quite seeing it reflected except because we're not cape operators, right? If you're in the Capesize business and the raw material business, steel mills, et cetera, you are in a world of hurt. That's not our business.

So beyond that, it's been fairly resilient. We do see a lot of interesting things on the ground happening, but this whirlwinds of the corona has just stopped the economies. And so I think, unfortunately, we're going to see some fallout from that in the general marketplace. And it's okay because in the end, it's going to create all sorts of opportunities for us because we're solid and we have good relationships and contracts, and a lot of the things we're doing on a project basis that we hope will come to fruition in the next few months. But fundamentally, our contracts support our ships that we have on the water. We're fortuitously able to sell 4 ships before this mess happened, and we have reduced the age of our fleet. And we ordered those ships in 2019 against contracts. And I think in this stage, what you have to end up looking at is not just your client, but their clients. So you have to understand how everything all fits together. For example, our Baffin clients, I think their cost of production with our new project will get down toward $20 a ton for iron ore, and they're selling it at $90 a ton in China, and they get a premium of 20% for the quality on top of that. So I think that's a safe bet in that example.

The aluminum business, which we do with Noranda, we took over their stevedoring operation. We invested in 2 cranes there. Small capital for us. A very good business. And the aluminum business is actually pretty resilient. So I think that when we get through this situation, which we will get through, right, whether it's 2 weeks or 6 months, it will happen, we're going to get an explosion of demand. That's my opinion. And so where are we now? We would like to sell 1 more ship, an older ship, and we would like to pick up a couple of ships, taking advantage of people who need to sell. So I think fundamentally, we have our cash. We have a good operating business, continue to make money. So we're in the best situation that I can imagine across -- certainly across some of our competitors.

And can you sort of update us on the progress on the newbuilds? And any concern about what's going on in China as far as just maybe some -- have the ship -- have your projects been impacted at all by some of the slowdowns? It seems like you're coming out of the shipyards in China.

Well, I think this is very interesting for a lot of reasons, okay? So I spend my mornings talking to all our guys around the world and what's going on. And in China, we -- they did have a problem, okay, but now pretty much everyone's back to work, and they're doing what they need to do. We were asked early on with the Chinese, with the shipyard, they say, can you help us? Can you get us masks? Can you do all of these things for us, and we did. We sent them out of Greece about $15,000 worth of equipment to help them. And now they turn around and they say, we don't need it. Do you want it back, right? So that tells you a story about what's going on in Asia. And of course, certainly in China, they can be a lot more rigid than we can in the United States about -- and Europe about how you treat your people. But it kind of gives you hope that we can get through this. But everything seems to be coming back there, in China, and they also are stimulating their economy. And here, we're obviously going to do that, stimulate the economy and throw everything but the kitchen sink into the mix. And so we will get through it. So there's no problem out there for the newbuildings. You can see that there will be pent-up demand in the minor bulks. What we see is every day, there's more and more things that people want to do. They're being restrained by the current situation. But things are still moving. And so -- but I think it will get worse in our market before it gets better. That's just our sense of it. But people have to move things by ocean. And it's okay. We see no change really, except for short term in the project business. That's not going to -- it's not going to change. And people need to do things, and we're well positioned to take advantage of that.

And would you -- your model allows you to flex with your charter-in activity. Can you -- and as you mentioned, it was higher -- above average over the second half of the year. Can you give us some color on how your charter-in activity has evolved over the course of the year and looking into maybe the second quarter?

Well, I think -- as you know, what we try to do is everything with our charter-in business is based around backhaul cargoes, right, so to eliminate our risk in backhaul and short period in this optionality idea. So I think our program now, probably in the near-term, will be not to take the money out of those charters and go down a little bit further in the number of ships. I think that's probably the right thing to do, and then come back. At the same time, we're looking at longer-term opportunities on the charter side. It doesn't take a lot. I think it's finding people tonnage providers that, say, that are stressed in order to find -- and they're not really commercial people. It's the two guys and a dog kind of scenario, that are asset players. I think that we will look carefully to find the opportunities there. But in the near term, we won't take the risk, I think, of keeping ships on if we don't believe in the short term that the market is going to support it. We'll probably just take the cash and hunker down.

And can you give me an idea of how many vessels you charter-in right now or just sort of a ballpark number?

Yes. I think we're -- it's about 40, give or take, and as you know, it changes every day because they're coming and going. And we don't have long-term commitments on chartered ships. And those that we have long -- let's say, longer-term payments on or index based, and -- that's okay with us because, as you know, we can continually outperform the index by quite a bit. So that -- but we're not -- we own ships, as you know, but it's not -- the ice ships are very specific to trade, and we have a lot of focus on that. Half the ships that we actually own are ice ships, and the other ships are commodities. We need to own a fleet of ships to be able to service our clients, and we do some difficult cargoes and work in some difficult places. So it requires us to own a certain percentage of our ships. We don't believe in the model, the total asset-light model. We don't believe in it, not really because we think you can only be so smart so long before you get whacked. And that historically, I've been in this business for 40 years. I've seen it happen over and over. So having a balance where we can have 20%, 25% of our ships that are -- got owned and controlled in the balance charter, I think that's a -- it's a good rule of thumb.

Great. And Gianni, if you wouldn't mind a couple just follow-up questions. It looks -- did the Patriot -- when did the Patriot sale close? Was it in the fourth quarter or the first quarter of 2020? Or has it closed yet?

Yes. So she was held for sale as of December 31 on our balance sheet. The sale closed in February.

Okay. And then also, you sold the Barents?

Yes. And the [Bothnia], correct, that was also sold within the first quarter.

Yes. In February 2, I think...

It was a little bit earlier, but it was early in the mid -- in the first quarter, I think it was around January.

Okay. And then you said you fixed some of the rates on, I think, the Bulk Beothuk and the Pride and the Independence. Can you give us -- give me a flavor on where you fixed?

Sure. So the 2 things. We fixed interest rates on 1 of our facilities, and we exercised a purchase option early on the Bulk Beothuk. So the Bulk Beothuk was financed under a finance lease arrangement. As you recall, I think about 2 years ago, we sold her sale leaseback. The first purchase option was available to us in May of this year, but we accelerated that and exercised our option to -- or essentially pay off the lease in January. So we did that. And she was unfortunately one of our highest interest-bearing facilities that we had. So we thought we could get out of that facility and then reduce our interest cost on that one. And then the other one that we did was with the facility we have with NIBC Bank. It's broken up across 3 vessels: the Bulk Independence, the Bulk Pride and the Bulk Endurance. So there's 3 different tranches that we fixed over the course of March -- early March. We locked in the interest rates across those 3 tranches.

Because I think they were at LIBOR plus 2.40%, I think, or maybe...

So right now, they were floating at LIBOR plus 1.7% for the first 8 quarters of the loan. It increases to LIBOR plus 2.4% after the eighth quarter through the duration of the facility. So we fixed the LIBOR portion in the low 1s for the duration of the facility now.

For the duration, okay?

Yes.

And then how much was the finance lease buyout?

It was $5.5 million.

Okay. Great. And then when you look at -- Ed, when you look at the shift from, I guess, the -- not declaring the dividend this quarter and reviewing it per quarter or each quarter, and then the implementation of the stock buyback, what would get you to declare the dividend again? Can you just sort of walk us through sort of what you're thinking on that is? Is it a perma hold? Or is it something that if you do see the pent-up demand materialize over the second half of the year that you'd be more inclined to declare the dividend?

No, I think it's a defensive move, right? And to me, what it means is there's so much uncertainty out there. We're better off hoarding our cash, right? I think that's -- because we will have a better use for it. I mean, as Gianni said, with -- when you're going out to borrow money, it's almost free, and that's probably going to stay that way for a little bit. But we want to hoard our cash and look for opportunities. That's number one. And it's very cloudy out there at the moment. And we want to make sure that we're not in a situation that there's problems that we have to deal with. At the same time, we will buy back shares if that's the right thing to do, but we really don't have any immediate plans to do that because we would rather keep the cash for the time being. We know we have to replace a couple of the ships that we sold that probably buyback at cheaper prices. So our timing was fortuitous there with what we did. But coming back to the dividend, yes, sure, if there's some stabilization, we'll consider reinstating it, but that will be quarter-by-quarter.

Great. And that's interesting for us. How much lower do you think you could reacquire the vessels at this point in time? Is it order of magnitude 10%, 20%, Ed? Can you sort of give me an idea of how much asset values might have dropped?

Okay. Well, just thinking about what the right group percentage is, I would say, just intuitively, it's probably something like 15% so far. But when we go buy a ship, we look at it completely differently. And we don't want to buy -- we want to buy a good ship, which generally means for us buying Japanese-built ship, and we want to buy a more modern ship. As I mentioned, we're going down from 13 years down to 9 years. And I think we would like to focus in that range, probably something from, I don't know, 2011, 2015 and take advantage of that piece of it. And we just want to buy a good ship, right? So it's like buying a used car from the old lady who goes to church on Sunday. That's where you end up. So it's not like we're going out and buying the fleet. We just need a couple of ships. So -- and it'll -- one -- something will fall into our lap. We expect regularly, but we're not going to buy junk. We're not going to buy Chinese-built ships, which a lot of people got in trouble doing.

At this time, there are no further questions. I will now return the call to management for any additional or concluding remarks.

Okay. Well, thank you, everyone, for joining us this morning and stay safe for you and your family.

Thank you. That does conclude today's conference call. You may now disconnect your lines, and have a wonderful day.