Pangaea Logistics Solutions, Ltd.
Q3 2015 Earnings Call Transcript

Published: 13 Nov 2015

[Operator:]

Good morning. My name is Maria and I’ll be your conference facilitator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Third Quarter 2015 Earnings Teleconference. Our host for today’s call are Mr. Ed Coll, Chairman and Chief Executive Officer, Mr. Anthony Laura, Chief Financial Officer and Mr. Thomas Rozycki, Managing Director at Prosek Partners. Today’s call is being recorded and will be available for replay at 08

[Thomas Rozycki:]

Thank you, Maria and good morning and thanks to all of you for joining us for our third quarter 2015 earnings conference call. As we have stated on the line today we have Mr. Ed Coll, current CEO and Chairman and Tony Laura, CFO. Before I turn the call over to Ed, I’d like to read the Safe Harbor statements. This conference call 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 were not historical facts; such forward-looking statements are based upon the current beliefs and expectations with 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 the Pangaea Logistics Solutions filings with the Securities and Exchange Commission. The information set forth within this call should be understood in light of such risks. Pangaea Logistics Solutions does not assume any obligations to update the information contained in this conference call and the accompanying slide presentation. Thank you. Also, please remember that this quarter we had a supplemental slide presentation that will accompany the call and those slides can be found attached to the 8-K that was filed with last evenings press release and is available on the investors section of our website under company’s filings at pangaeals.com or on the SEC’s website at sec.gov. At this time, I’d like to turn the call over to Mr. Ed Coll, Chairman and the CEO. Ed?

[Ed Coll:]

Thanks Tom, and good morning to all of you and thank you for joining us on the call. This morning I’ll provide an update of operations and the market at large before turning the call over to Tony, our CFO, to provide a more detailed overview of the third quarter financials. And then we’ll open up the line for questions. Last evening, and as you can see on slide three and four of the accompanying presentation, we were very pleased to report our third consecutive quarter of profitability with net income attributable to Pangaea Logistics Solutions of $3 million for the quarter or $0.08 a share on a pro forma basis compared to a loss of $2.09 million or $0.08 per share on pro forma adjusted basis in the third quarter of 2014. Our ability to generate profits in an environment where many others are operating at a loss is due to our flexible access like strategy and disciplined approach to generating revenues. This strategy allows us to minimize our exposure to the low rate environment and instead focus on profitable voyage revenue tied to our portfolio of long term contracts of affreightment or COAs. We are also focused on controlling expenses and improving efficiencies while selecting adding to our book of business. The dramatic improvement in our performance compared to the prior year period was largely attributable to our improved operating margin. As you will see on slide 5, our operating margin increased to 6.8% for the third quarter of 2015 from the negative 2.1% in the third quarter of 2014. The uptick in our operating margin in turn was driven by lower cost for chartering vessels from weak dry bulk shipping markets. Optimization of vessels based to minimize positioning cost and list of losses in a weak market decreased bunker costs and performing under fixed price COAs at average rates that are higher than the present market. Our revenues of $71.2 million declined 22% from $91.2 million in the third quarter of 2014 as we decreased total shipping days by 16% to reduce our exposure to a weak grade environment. As you are all aware, our revenue primarily falls into two categories, quarter revenue which is tied to market rate time charter days and voyage revenue which has survived from longer term COAs and other acquired loss. As the charter rate environment has remained challenged, we took advantage of our flexible business model and decreased our charter out days by 34% while decreasing our voyage days which are tied to COAs and it generally averages above where the market has been this year and reflect our proprietary backhaul positioning business at only 11%. This combination of improved margins and strategic pull back from market based business resulted in time charter prevalent rates of $11,849 per day for the quarter ending September 30, compared to $10,882 per day for the third quarter of 2014. As in previous quarters, our earnings increased despite lower revenues which are a function of this being a margin driven business and our business model is allowing us to drive margin improvement in the face of continued industry challenges. Now, I’ll take a few minutes to offer a bit more detail on that business model and our strategy. How they differ from our competitors and how they have allowed us to operate profitably in the current turbulent market. I will be -- here as we have discussed this on previous calls but I do think that if there is highlighting these differentiators which are also summarized on slide 6 and our positioning in the market. What sets our business model apart is that the majority of our fleet discharged in that market rates to move specific cargoes that we have agreed to carry for our clients, often pursuant to long term COAs which are in turn often lasting that late hirers [ph] than where the market has been in 2015. Roughly speaking, we expect our COAs to represent approximately one third of our revenue. Similarly, our own fleet is matched against the agreements that we have to carry fiber for our clients or owned with specialised trades, which is the case with our ice-class fleet. With regards to any expansion to the own fleet, we are constantly monitoring the second hand market and accessing the needs of our COA portfolio. We would only add to our fleet if we believe there is quality comments that can be market to an existing piece of business. As a result, in a low rate environment charter expenses, which were some of our key costs are reduced, and so we should be less impacted by lower rates than companies with largely fixed costs. This is a stark contrast to the majority of public dry bulk companies who are large asset owners, burdened by heavy fixed cost and must focus on finding employment for their vessels, a model that has been under pressure in the current environment. Backhaul is a principal component of our strategy, meaning we seek to position our vessels in traditional loading areas by working with our customers to deliver cargoes to these areas as opposed to the typical approach in our industry which is to travel to these areas unladen [ph]. We believe that our approach to manage key shipping risk by reducing the impact of low rates by reducing positioning cost and by maximising utilization. The inherent agility of our strategy allows us to focus on those sectors and [Indiscernible] comfortably while conserving cash enabling us to pursue attractive opportunities as they presented themselves. In short, we are nimble, have lasting contracts that generate revenue, can contract and expand at the market and can insulate ourselves in a broader rate environment as a result. We are further encouraged by our success in the ice-class trade. We have carefully organized and executed strategy that is showing great future potential and will continue to develop. So far in 2015 the ice-class 1A fleet has generated an 80% premium over the average comparable Baltic index vessel. We look forward to receiving our fourth and final new best-of-fleet [ph] ice-class 1A vessel in January of 2016, which could not have been matched by anything available on the second hand market. Reflecting our confidence in our ice-class strategy, during the quarter the company purchased portion of Nordic Bulk carriers or NBC or ice-class focused affiliate that we treat this [Indiscernible] making it a wholly owned subsidiary of Pangaea. We believe that our unmatched fleet and unique expertise in less commoditized trades such as ice-class increases our likelihood of securing higher rates and margins than those available to other drybulk companies. Speaking of our unique experience, I must also commend our employees who have enabled us to remain profitable to a challenging 2015, something few if any other companies in our space have been able to achieve. Their tireless commitment to best-in-class execution and operations while delivering value for our global base and helping them solve their most difficult logistic challenges is a core component of the strong results we have announced today. Looking at the board of markets, we do not see any near term catalyst that we think will likely change the rate environment, as demand for the commodities we move to our clients and remain skewed and a global dry bulk fleet are slowing continues rate remain for some time. Our rates -- remain muted and our differentiated business model allows us to operate in this market at lower risk than others. This is thanks to our unique combination of relatively low fixed cost and higher exposure to variable market based cost in the form of chartered and tonnage, and our book of profitable long term COAs. These attributes of our business model are further enhanced by our expertise in specialised areas such as ice-class and backhaul which allow us to command higher rates and increased utilization. As we have continually emphasized, we are positioned for strong performance in a multitude of rate environments including the currently depressed one. Moving forward we believe we are well positioned to capitalize on our recovery in the freight market, thanks to our flexible strategy. And eventually -- eventual recovery should allow us to grow the number of voyage days and shipping days in turn supporting revenue growth and increased profits. Our track record of profitability demonstrates the merits of our business model and approach to providing dry bulk logistics solutions. While we can’t know where precisely dates will go, we are confident that we’ve built the company that can successfully navigate a variety of market conditions. Thank you for your time and attention. I now like to turn the call over to Tony Laura, our CFO to provide additional details on the financials. Tony?

[Tony Laura:]

Thank you, Ed. Turning now to our financials for the third quarter, which begins on slide 7 of the presentation. As you can see Pangaea’s revenue for the quarter ended September 30, 2015 were $71.2 million compared with $91.2 million for the third quarter of 2014. This decrease was primarily attributable to 16% decrease in the company’s total shipping days which were 4099 days in the third quarter of 2014, with only 3,443 days in the third quarter of 2015. Further breakdown shows that voyage revenue which is derived from our COA and other calls of business decreased 20% year-on-year to $64.6 million from $80.6 million in 2014. Charter revenue which is tied to market rate charters decreased 38% on year-on-year from $6.6 million from $10.6 million in 2014. As Ed touched on earlier, our expense declined more than our revenue leading to a dramatic improvement in margin, specifically voyage expense declined 35% year-on-year to $30.4 million from $46.6 million due predominantly to a decrease in bumper prizes and charter high expenses decreased 40% year-on-year to $20.6 million from $34.3 million due to the decline in market rates. Income from operations was $4.9 million for the three months ended September 30, 2015 as compared to a loss from operations of $1.9 million for the three months ended September 30, 2014. As Ed noted earlier, this increase is due to lower costs for chartered-in vessels decreased once [ph] before and performing under fixed price for COAs. Voyage expense as a percentage of voyage revenues decreased from 58% to 47% and charter hire expense as a percentage of total revenue decreased from 38% to 29%. Adjusted EBITDA from $8.1 million for the third quarter of 2015 compared to $1.2 million for the third quarter of 2014 a nearly six fold increase driven by the increased and income from operations. That income for the quarter was $3 million or $0.08 for common share which represents significant growth over the third quarter of 2014 when the company reported net loss of $2.9 million or a loss of $0.08 per share on a pro forma adjusted basis. The growth in net income was primarily attributable to improved operating margins which rose to 6.8% from a negative 2.1% in the third quarter of 2014. Moving onto the balance sheet and cash flows which you will find on slide 8, cash and cash equivalents were $34.2 million as of September 30, 2015 compared to $29.8 million on December 31, 2014. Bank debt rose to $133 million as of September 30, 2015 compared with the $105 million as of December 31, 2014. Financing for the two new vessels was obtained at attractive rates from both and existing vendor and a [Indiscernible] that we began work from this earlier in the year. We expect that as we continue throughout we will be able to leverage these relationships with top tier institutions and to continue to secure competitive financing. For the nine months ended September 30, 2015 the company’s net cash provided by operating activities was $18 million compared to $12.5 million at September 30, 2014. This increase was primarily driven by the growth in net income. For the nine months ended September 30, 2015 and 2014, net cash used in investing activities was $41 million and $26.2 million respectively and net cash provided by financing activities was $27.3 million compared with $14.9 million during the comparable period last year. These increases reflect the purchase of our two new ice-class ships, the Nordic Olympic and Nordic Odin. I will now turning the call back over to Ed for additional remarks before we get to the Q&A.

[Ed Coll:]

Thank you, Tony. As Ed previously said, we will continue to focus on the strategy that has propelled our strong profitable results in 2015. Operating the best-in-class of [Indiscernible] indicating the risk of a low rate environment controlling costs, expanding debt into our COA base, strategically servicing our specialized markets and most importantly maximizing utilization for backhaul. As you can see in our 2015 results to date, steadfast appearance for these simple principles should enable future growth for our company and by extension shareholder value. With that, we’ll open up the call to your questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Jacob Ma-Weaver with Cable Car Capital. Hi, good morning Ed, and Tony.

[Ed Coll:]

Good morning.

[Jacob Ma-Weaver:]

Yes, I was hoping. Yes, I was hoping let’s say a couple of questions on the ice-class fleet. In particular, can you remind us of the seasonality of that business and its impact on your financials, and then also give us a broader update on the competitive and the regulatory environment on the two and the various northern [Indiscernible] passage there?

[Ed Coll:]

Okay, basically how it works with those ships we -- the ice-season for them generally will start really in January where they are going to be trading mostly in the Baltic and sometimes eastern Canada, but basically in the Baltic. So that will run basically into April and then we have the summer season where we have added a big contract of affreightment this year with ArcelorMittal that can cover every ice-ship for that all summer season. But we have options of putting lesser ice-class vessels in that program. So this past summer, rather than send ships over the Northwest Passage or the northern sea route we plied all the ships into this Baffin Island project. In the future, I can see that in a better market condition we would likely charter ships for the Baffin Island and then use the Northwest Passage and northern sea route for voyages to the east and we are working on other projects there for that. The reason we haven’t done it this year is its pure economics, have lower rates per tonne and lower fuel prices, the economic don’t dictate having the ships go out there in those conditions. So we are able to earn good money in the Baffin Island contract.

[Jacob Ma-Weaver:]

Got it. And then is the ships there trading with a premium in the winter, is that correct?

[Ed Coll:]

Yes, I mean, I think year-to-date put in there we’ve actually outperformed the market quite a bit, but you know the problem is the general market is so terrible for regular access. So we are pleased that we can outperform them around good money but we sure wish that we could earn a lot more and I think in a different market condition that will naturally occur.

[Jacob Ma-Weaver:]

Perfect. Great, well thanks guys.

[Ed Coll:]

Thank you.

[Operator:]

[Operator Instructions] And at this time there are no questions in queue.

[Ed Coll:]

Okay, well thank you all for taking the time to join us this morning and have a good day.

[Operator:]

This concludes today’s conference call. You may now disconnect.

[Ed Coll:]

Thank you Maria.

[Operator:]

You’re welcome.