Pangaea Logistics Solutions, Ltd.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

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 Del Signore, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 11

[Tiya Gulanikar:]

Thank you, Stephanie, and thank you for joining us for this morning's third quarter 2020 earnings conference call for Pangaea Logistics Solutions. With us today from the company are Chairman and CEO, Mr. Ed Coll; and Chief Financial Officer, Mr. Gianni Del Signore. Before I turn the call over to Ed, I'd like to read the safe harbor statement. This conference could contain forward-looking statements within the meaning of the Private Securities Relation Reform Act of 1995 about Pangaea Logistics Solutions. Forward-looking statements are statements that are not based on historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Pangaea Logistics Solutions management and are subject to risks and uncertainties which could cause 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?

[Ed Coll:]

Thanks, Tiya, and good morning to all of you, and thank you for joining us on the call. This morning, I'll provide you an update on our operations and the overall market before turning the call over to Gianni, our CFO, to provide a more detailed overview of the third quarter financials. We'll then open the line for questions. I'd like to begin by expressing well wishes to you and your families. I hope that you're all healthy and safe. Our thoughts are with all of those who have been impacted by COVID-19. We're especially grateful for our dedicated crew members working aboard our vessels as they support the global supply chain. Pangaea remains committed to the health and wellbeing 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.

[Gianni Del Signore:]

Thank you, Ed, and thank you all for joining us on today's call. Again we hope everyone remains healthy and safe as we continue to adjust to new restrictions or, in some cases, return to new normal work environments. We thank our employees and crew for their extra efforts during these unprecedented times. Before walking through our financials, I'd like to expand on our recent acquisition. As discussed on prior calls, we have been focused on effectively allocating our cash resources into operating initiatives and expansion opportunities. We are selectively deploying our capital in ways that complement our current business and secure our position for the future. As I’ve mentioned, we were excited to complete the acquisition of an additional one-third interest in our partially owned consolidated subsidiary, Nordic Bulk Holding Company, which owns six ice-class 1A panamax vessels, bringing our ownership interest from 33% to 67%. As you will see in our cash flow statement, $15 million of the total $22.5 million acquisition price was paid at closing and the balance will be paid in three annual installments of $2.5 million. Further, on November 3, we signed a nonbinding term sheet to refinance the Nordic Odyssey in Nordic Orion for up to $18 million with a seven year term at a fixed interest rate of 2.95%. We expect to close within December and use part of the proceeds to pay down the existing balloon installments, which come due on December 31, 2020. We have also taken additional steps to renew our fleet, reduce our average fleet age and strengthen our financial position. In January, we accelerated our purchase option on the Bulk Beothuk finance lease facility to pay off our most expensive debt facility. During the third quarter, we completed the sale, which generated $4.6 million of cash. With that, I'll now turn to our third quarter financials. Voyage revenue, which are revenues generated from carrying cargo for our clients, was $98.1 million, a decrease of approximately 5% compared to $103.8 million for the same period in 2019. This was predominantly due to lower average TCE rates. Our TCE rates decreased 16% to $13,316 per day from $15,915 in the third quarter of 2019, tracking the market declines from year-to-year. However, the company's achieved TCE rate continued to outperform against the published market rates by approximately 29%. Charter revenues, which are opportunistic and tied to market rates decreased to $5.6 million compared to $15.1 million in Q3 of 2019. The decrease in charter revenues was due to a decrease in 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.

[Ed Coll:]

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:]

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

[Poe Fratt:]

Good morning, Ed; good morning, Gianni.

[Ed Coll:]

Good morning, Poe.

[Poe Fratt:]

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.

[Ed Coll:]

Okay. I think where we end up, and it's perhaps a bit lucky for us. But the third quarter is traditionally a good quarter for us. 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 ships, our fleet will naturally go down. But we 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 two big problems, and one is COVID, which is really out of control.

[Poe Fratt:]

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?

[Ed Coll:]

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 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 is – 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 two 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 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.

[Poe Fratt:]

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

[Ed Coll:]

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 – 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.

[Poe Fratt:]

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

[Ed Coll:]

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 and 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, I think it's not stuff that really kind of protects the – contributes significantly to the bottom line. And that's really is helpful for us. And the more we do in that space, the more demand we have for our own ships or charter ships that we can place in those programs.

[Poe Fratt:]

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

[Ed Coll:]

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

[Poe Fratt:]

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

[Gianni Del Signore:]

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 pre-delivery 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 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.

[Poe Fratt:]

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?

[Gianni Del Signore:]

So the SP 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, 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.

[Poe Fratt:]

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

[Gianni Del Signore:]

Yes. No problem. What I Ed 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 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, and 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 remain slightly lower than it was for Q3, but I still expect around 50 for the quarter. And dry docking, we do have some dry docking in 2021, actually, two of our – two of our ice class vessels will complete towards the end of this year. But nothing that unusual, I would say, it's just normal dry docking. The two ice class vessels, actually the treatment installations. But I think we're assuming around $5 million to $6 million next year to allocate to dry docking.

[Poe Fratt:]

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 problem with due diligence. But – and then if you can just sort of describe that. And then maybe look at the potential to acquire the rest of the JV, is that something that is possible?

[Ed Coll:]

Are you talking about the logistics? Okay. That's basically came out the way it was structured was on , one of the partners wanted to get out. We spent the time setting the right pricing. And we were able to increase our stake substantially, right. And that because of the way the structure is we capture more of the upside because the Nordic guys captured as a matter, of course, 25% of it to begin with. So now we capture more. We have better control. And the people that last – they're getting out of drybulk business. So it suits 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 it. 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 one partner. If you get more than that, it's pretty difficult. I mean, in my early days in shipping, we ran a shipping pool, and that was like a nightmare, right. And you have to satisfy if you have 20 people and you have 20 opinions, you spend all your time managing the partners in it. So it's the same thing with the other projects we're doing that are logistics based. We've partnered with people that we know. We've done business with before, and we have a mutual trust. So that's – I think that's the way to go. You share your expertise.

[Poe Fratt:]

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

[Gianni Del Signore:]

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

[Poe Fratt:]

Great, thank you so much.

[Operator:]

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

[Ed Coll:]

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

[Operator:]

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