Pangaea Logistics Solutions, Ltd. (PANL) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Fourth Quarter and Full Year 2018 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 800-85-8367 or 404-537-3406, and referencing ID number 7499725. [Operator Instructions]. It is now my pleasure to turn the floor over to Mr. Sean Silva with Prosek Partners.

Thank you, Maria, and thank you for joining us for this morning's fourth quarter and fiscal year 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 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 at pangaeals.com under Company Filings or on the SEC's website at sec.gov. Now I would turn the call over to Pangaea Logistics Solutions' Chairman and CEO, Mr. Ed Coll. Ed?

Thanks, Sean, 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 fourth 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. As you've heard us say before, the seaborne drybulk industry is cyclical and can be very volatile. However, despite the volatility, we have seen continued steady improvements across the entire industry, with demand continuing to outpace fleet growth and ordering at a manageable level. During 2018, we saw higher rates due to steady demand from China, increase in the U.S. production as well as increased demand from iron ore bulks. Over the past year, the average published Supramax and Panamax market rates increased 18% and the Drybulk Baltic Index, a measure of drybulk market performance, averaged 1,345, up from an average of 1,137 for 2017. Company's average TCE rates increased by 23% in 2018 over the average of -- for 2017 and exceeded the published market rates by an average of 25% over the 2-year period. We're proud of the results our unique strategy delivered during 2018. Our strong results during 2018 were driven by an improved market strength for both the summer and winter ice season as well as our backhaul cargo strategy. As a result, our average TCE meaningfully increased, and our financing strategy helped us secure favorable terms on our vessels, which strengthened our balance sheet and resulted in record cash levels. I'll now summarize our financial results for the year. 2018 net income increased to $17.8 million compared to $7.8 million for the year ending December 31, 2017. Income from operations increased to $36.1 million, up from $16 million at the end of 2017. Cash flow from operations increased to $40.1 million compared to $29.2 million in 2017. Total cash, restricted cash and cash equivalents were $56.1 million, a company record. In addition to our strong 2018 results, we recorded the following fourth quarter results. Net revenue increased by 14%, adjusted EBITDA was $12.2 million, income from operations was $7.7 million. We recorded a net loss during the quarter of $600,000, which includes the impact of an unrealized loss on derivative instruments of $4.3 million. As hedge strategy, we closely monitor the impact associated with volatile bunker prices and the operating income of our long-term contracts and we'll enter into bunker swaps to hedge such risks. However, the precipitous drop in bunker prices towards the end of 2018 resulted in the unrealized loss, marketing our forward position to the market. In 2019, we're already seeing a recovery in the oil market, which will result in mark-to-market gains until our position settles and will be offset by the impact of physical supply. This will largely reverse the Q4 numbers. Turning now to 2019. Activity at the start of the year was lower than usual. Demand was down, which meaningfully impacted our chartered-in fleet. However, our disciplined approach to managing our balance sheet and the flexibility provided by short-term charter-in strategy have partially insulated us from these headwinds and has positioned us well as the market begins to improve. We remain committed to expanding our ice-class offerings this year as we believe this as a true differentiator. More broadly, we will continue to identify and pursue logistics-based products -- projects that include more than just simple moving transportation. This might include cargo handling or cargo ownership in order to provide better service and provide better margins for our business. With that, I'd 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. Before walking through our financials, I wanted to expand on Ed's earlier comments about our business strategy. First, as Ed noted, 2018 was a strong year, and we saw improvements across many financial measures. We remained active with vessel acquisitions. We opportunistically identified ways to strengthen our balance sheet, and we extended contracts with key customers. Further, we remain nimble in our charter-in strategy by redelivering ships in early 2018 after completing 2 long-term contracts and more recently as the market declined entering 2019. Adherence to this strategy, we believe, provides downside protection as evidenced by our results in 2016 and positions us well for recovery in the market. With that, I will now turn to our financials, which begin on Slide 8 of our presentation. Total revenue for the year was $373 million compared to $386 million in 2017. The total number of shipping days decreased by 16% to 16,251 compared to 19,346 in 2017. Voyage revenue, which are revenues generated from carrying cargo for our clients and represents 80% -- 86% of our total revenue, was $320 million, a decrease of approximately 6% from 2017 levels. This was predominantly driven by an 18% decrease in voyage days, which, as mentioned earlier, resulted from 2 contracts that began in 2017 and were completed prior to the start of 2018. Charter revenue, which is opportunistic and tied to market rates, increased by 12% to $53.2 million. This increase was due to a continued improvement in market rates throughout 2018 as measured by published Panamax and Supramax rates and the BDI, which both increased by approximately 18% year-over-year. Although charter days decreased to 3,543 from 3,924 in 2017, our period charter-in strategy resulted in optionality to capitalize on the improving market -- improving rate environment throughout 2018. Voyage expenses decreased by 10% during 2018 to $145 million. This was driven by an 18% decrease in voyage days, which was offset by an increase in oil prices during the first 3 quarters of 2018. The total cost of bunkers consumed in 2018 increased approximately 6% from the same period in 2017. Moving on to charter expenses that are paid to third-party ship owners decreased to $117 million from $133 million at the end of 2017. The 12% decrease in charter expense was due to the 29% decrease in charter days, which were 9,650 as compared to 13,505 in 2017. Vessel operating expenses increased by 9% to $39.8 million due to the acquisition of 1 vessel in June of 2017, an additional vessel in December of 2017, which were owned the full year in 2018. In addition to those 2 vessels, we also purchased a vessel in August of 2018. However, vessel operating expenses, as expressed on a daily basis, including technical management fees, increased only 3% to $5,520 per day compared to $5,384 per day in 2017. Income from operations increased by 125% for the year ended December 31, 2018, predominantly due to improvement in our TCE rates and to the reduction in losses associated with sale-leaseback transactions of approximately $8.4 million. Net income for the year was $17.8 million or $0.42 per share compared to $7.8 million or $0.20 per share in 2017. Moving on to the balance sheet and cash flows, which you will find on Slide 9. Unrestricted cash and cash equivalents hit an all-time high and were $53.6 million as of December 31, 2018, compared to $34.5 million on December 31, 2017. For the year ended December 31, 2018, the company's net cash provided by operating activities was $40.1 million compared to $29.2 million at the end of '17. For the same time period, net cash used in investing activities was $17.5 million and $64.5 million during 2017. And finally, net cash used in financing activities totaled $5 million compared to $45.4 million provided by financing activities during the same period in 2017. Looking ahead into 2019, in March, we successfully took delivery of the Bulk Spirit and subsequently completed a sale/charterback, which provided the equivalent to the purchase price of the vessel of approximately $13 million. This addition brings our own vessel fleet to 20, and we will continue to look for ways to effectively deploy our capital for accretive projects and to maximize 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 our call. Ed?

Thank you, Gianni. As you can see from our record results, the path forward for Pangaea is clear. We're well positioned for the long term. We look forward to providing you with further updates. And we'll now open the floor to questions.

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

The question I had is -- and you may have said this, and I apologize if it's multitasking. But how does the first quarter look from a standpoint of, one, how your contract cover for the quarter is on your own fleet? And if you can give us an average TCE rate so far? And then also how your chartered-in activity looks over the first quarter too?

Okay. Thank you for asking the question as usual. I mean, it -- I think where we went and it's basically a testament to the model, the number of ships we had going into what people expected to be a good market but turned out not to be a great market, so what we ended up doing was shrinking our fleet in Q1. I think I can't probably talk too much about it, but I think we're very satisfied with what the results of that will be going forward, and we're continuing to grow the business in pretty interesting ways. I probably can't say more than that, except that we are keeping to the model, it protects us, and I think we'll continue to do well.

Okay. And Ed, do you -- have you seen any signs that, well, it's hard to quantify. It appears to be some progress on the U.S. and China trade negotiations. I think that you talked over the last quarter so that, that had kept people looking at very focusing very near term and not looking out -- not acting with a lot of confidence in the market. Have you sensed that, that has changed at all? I know that you shrunk -- it sounded like you shrunk your chartered-in fleet over the first part of the first quarter, but are you seeing signs that your customers are a little more optimistic looking into the second quarter or the second half of the year? Or are we still sort of hamstrung by the trade tensions that we've been dealing with for the last six months or so?

Well, I think that continues to hover over every business activity and not just to shipping, okay? And at the same time, in my opinion, because of that, you have -- it contributes to a slowdown in China, a disruption of trade. At the same time, in China, you've had this problem with soybeans with disease and the hogs there that are going to shorten the demand for -- maybe for quite some time. So we can't control those things because we're in a situation where the Chinese have to basically slaughter a lot of the livestock that consumes the soybeans that's going to result in a decline in demand for the soybeans. So you have a lot of different things that are going on. A lot of people have gone out there and basically slashed their expectations. The Kate [ph] market is a disaster, and that has to do with what's happened to people like Vale with their tailing ponds which has been very well noted in the press. But fundamentally, the supply/demand is pretty good. You don't have a lot of ships being built. These disruptions in demand will change over time. And I think with our business what we see is continued inquiry and things that we can actually do and a lot of it is related to infrastructure around the world. If we can ever get out of our own way here and get the infrastructure going, I think that will be really a good thing for shipping.

[Operator Instructions].

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

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.