Pangaea Logistics Solutions, Ltd. (PANL) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Maria and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions First Quarter 2018 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 AM Eastern Time. The recording can be accessed by dialing 800-585-8367 or 404-537-3406 and referencing ID number 5796949. All lines are currently muted, and after the prepared remarks, there will be a live question-and-answer session. [Operator Instructions] It is now my pleasure to turn the floor over to Ms. Kathleen Bentley with Prosek Partners.

Thank you, Maria and thank you for joining us for this morning's first quarter 2018 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 about Pangaea Logistics Solutions. Forward-looking statements are statements that are not based on historical fact. Such forward-looking statements are based upon the current beliefs and expectations of Pangaea Logistics Solutions' 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 the Pangaea Logistics Solutions' Chairman and CEO, Mr. Ed Coll. Ed?

Thanks, Kathleen, and good morning to all of you and thank you for joining us on the call. 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'll then open the line for questions. We hope you had time to review our press release and accompanying presentation, which were issued last evening. This is an interesting time in our business, tariffs, sanctions, regulations, restrictions and financing and supplier ships, along with improving demand and world economic cycles for providing challenges and opportunities for smart companies to extend their reach. As a whole, the industry has seen steady improvement over the last year with rates and demand for drybulk tonnage increasing significantly since it faced historic lows in February of 2016. During the past quarter, the Baltic Dry Index, a measure of drybulk market performance increased about 15% over the comparable quarter. During the recent quarter, we continued to produce positive earnings and momentum. Gianni will go with the numbers in more detail, but I’d like to highlight just a few points. First, our business is strong; we had 12.1 million EBITDA for the quarter and net income of 4.3 million or $0.10 per share. Our average time charter equivalent for the quarter was $13,849 per day, outperforming wealth related indexes by an average of 25%. Our ice ships had a good winter in Northern Europe trading and were ready to start our new artic contract which will utilize at least 25% of our Panamax ice fleet for the next 10 years. The rest of our fleet enjoyed brilliant market conditions with improved margins making up for some loss of ship days activity compared to last year, because of completion of our Charleston contract. By this week, we are back up to over 50 ships in operations. A few weeks ago, we signed a memorandum of agreement to purchase a new ship to be named the Bulk Pods to be used in our Miranda business. She is a 2006 Panamax vessel built in Japan and she’ll be delivered in June. We’ve also signed an agreement to sell and charter back one of our existing vessels, the motor vessel, Bulk Trident and the Bulk [Cods] to be used in our Miranda business. She’s a 2006 Panamax vessel built in Japan and she’ll be delivered in June. We’ve also signed an agreement to sell and charter back one of our existing vessels, the motor vessel called Trident and the Bulk Cods after deliveries to us at very attractive terms. The proceeds will be approximately $28 million and will be used to retire some existing debt on the Bulk Trident of approximately 3 million to purchase the new ship for about 14 million and to add some cash to the balance sheet. As I said in yesterday’s release, we’re optimistic about the markets continued recovery and we’re using the changes to meaningful road to our business. We’ll do this by expanding our contracts, investing in to assets, enhancing our people and capabilities in key markets and reinforcing Pangaea’s presence in growth area like our Singapore operation, where we’ve had very good success in obtaining new business that’s complimentary to our operations elsewhere in the world. With that I’d now like to 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. I will now turn to our financials for the first quarter of 2018, which begin on slide 9 of the presentation. Total revenue for the quarter was $79 million compared to 84.5 million for the same period in 2017. The total number of shipping days decreased by 19% to 3,524 in the three months ended March 31, 2018 compared to 4,342 for the same period in 2017. Further breakdown of our revenue shows that voyage revenue which make up 89% of our total decreased by 9% to 70.3 million compared to 77.7 million in the same period in 2017. The decrease in voyage revenues was predominantly driven by the 20% decrease in the number of voyage days which were 2,945 in the first quarter of 2018 as compared to 3,668 in the first quarter of 2017. The decrease in voyage days was due in large part to the completion of the Charleston contract which Ed mentioned earlier that was completed prior to the start of 2018. Charter revenue which are generally opportunistic for us and are tied to market rates increased by 8.7 million from 6.8 million or 28% compared to the first quarter of 2017. This was due to the continued improvement in drybulk market rates. Returning to slide 7, you will see that our unique client focused operating strategy continues to earn a meaningful TCE premium against the market. The average TCE rate earned increased to $13,849 per day for the first quarter of 2018 compared to 9,945 per day for the same period in 2017. Our TCE premium for the first quarter of 2018 was 25% or $2,772 per day above the market compared to 12% or $1,033 per day for the same period in 2017. Turning to expenses on slide 9, voyage expenses for the quarter was 30.2 million, a decrease from 41.3 for the comparable period in 2017 driven by the 20% decrease in voyage days that was discussed prior. Charter hire expense for the quarter was 22.7 million compared to 23.2 million for the same period in 2017, and vessel operating expenses increased approximately 15% to 9.8 million from 8.6 million. The increase in vessel operating expenses is due to a continued investment in our own fleet, with the addition of the Bulk Freedom and Bulk Pride in the second half of 2017. For the three months ended March 31, 2018, we reported income from operations of 7.6 million compared to income from operations of 24 million for the three months ended March 31, 2017. This was largely driven by the improvement in our TCE earnings and a loss on sale of leased back and the NV Bulk Destiny in January of 2017. Moving on to the balance sheet and cash flows, which you will find on slide 10, cash and cash equivalents were 28.2 million as of March 31, 2018 compared to 34.5 million as of December 31, 2017. And for the three months ended March 31, 2018 the company’s net cash provided by operating activities was 2.8 million compared to 2.4 million at the end of the first quarter of 2017. For the same time period, net cash used in investing activities was 0.4 million, compared to 38.7 as of Q1 of 2017, and net cash used in financing activities totaled 8.7 million compared to 35.7 provided by financing activities during the same period in 2017. 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. As you can see, we’re pleased with how we were able to take advantage of rapid momentum in the market and showcase strong execution of our strategy. We look forward to providing you with updates of our business continued progress over the coming quarters and will now open the floor to questions.

[Operator Instructions] our first question comes from the line of Poe Fratt from NOBLE Capital Markets.

I apologize that there’s background noise because I’m travelling. Would you just highlight the impact of the Baffin Island contract, looks like a pretty attractive contract and sort of walk us through the impact of that on a forward looking basis that’d be really helpful.

For the company, it is a very interesting business and the trade is going to continue to grow during the next 10 years and we probably will end up doing some more business with the people there and that probably may involve other activities. So what you end up with there is for the Ice-Class ships, the 1A Ice-Class ships that we own, 25% of their capacity will be fixed for the next 10 years at quite attractive prices. So we think that that’s a really good anchor for the continuation of the development of that trade. In addition to that we have the ability to charter lesser Ice Class vessels to use to support that trade as other opportunities to come available perhaps for their 1A Ice Class ships.

And then as you still back up over - back to 50 on current rates, do you think you can potentially maintain a same cash margin for shipping day or should we see a little bit of a compression over the rest of the year just to access your chartering and more capacity or more tonnage?

Well that’s a very good question, thank you. But I think where we are is, we had a dip in the number of vessels in the first quarter, as we mentioned, part of that was just the unwinding of a contract. But it was also the fact that a lot of industrial people started to see that the market was going to start to run upward and they wanted to lock in freight at levels that we simply wouldn’t do. So what we are having now is pretty quickly now we’ll be up over 60 vessels, and our margins we’ll remain strong to largely because of the way we trade which is all backhaul trading, and we can take full advantage of a rising market, because of that strategy. So I think yes we can maintain our margins.

And Gianni on the two sale leased backs it sounds like the Madeline is pretty close to getting in all terms there signed as far as sale leased back. You talk about 28 million as far as total, is that after the $2 million fair buck deduction on the Trident or how does that relate to that number. Is it inclusive or exclusive of that $2 million fair buck deduction?

The number that we are expecting to generate from those two transactions is 28 and that’s taking in to consideration the $2 million. So the net proceeds total will be 28. Just to clarify on that, yes, the Trident is – we’re moving forward with that one and the Madeline we expect to complete as well. We have terms and [structural reforms] as well.

So the potential net impact on liquidity would be about $9 million as far as cash hitting the balance sheet after all the debt repayment, is that math right?

That’s right.

And then Ed in the press release you highlighted just the potential positives of whether the tariffs or other trade issues, could you just give us a little more color on sort of your expectations for if we do see a continued move towards tariff in those 15 cargos and just sort of give us an idea of where potentially the [absolute] might rise for Pangaea?

I think like everyone living in the world, every day it’s a new adventure with what’s happening in the world. And I’ll speak particularly to the aluminum business where we have a big exposure and a big involvement, but what had happened there was, first, the government came out with section 232 to either have tariffs or to block aluminum imports, but the best laid plans don’t work out that way, so at the same time, you had a situation in Alumar in Brazil that produces alumina which is part of the process. They had a spill and they lost 50% of their capacity which is still out and then you had the government, the US government put sanctions on Rusal which turned the entire aluminum market upside down. The price of aluminum went to through the roof in a way that suits us. One of our big contracts is based on the price of aluminum, so that works out okay for us. But there’s a lot of disruptions and when there’s lot of disruption and you’re having the same thing in the grain business for example, the Chinese put a big tariff on US sorghum, okay, and 20 ships running on their way to China and they said okay, you have to pay 25% penalty now and so some of those ships had to go away, some of the people had to actually pay the tariff. So when there is disruption, it creates opportunities for people like us. Even we have to be careful, we have to study it carefully, but it does create opportunities. So we’re not passive on that. We are aggressive on looking for those opportunities in various places. At the same time, old economies are really booming. So we see that in our day-to-day activities in all sorts of ways, and so the opportunities for the company will work on many different things. It’s pretty time, I would say.

[Operator Instructions] I’m showing no further questions at this time. I would now like to turn the floor back over to management for any additional or closing remarks.

Well, thank you all for joining us this morning, and we wish you a good day.

Thank you ladies and gentlemen. This does conclude today’s Pangaea Logistics first quarter 2018 earnings call. You may now disconnect your lines and have a wonderful day.