Rand Logistics Management Discusses Q3 2013 Results - Earnings Call Transcript

Feb. 7.13 | About: Rand Logistics, (RLOG)

Rand Logistics (NASDAQ:RLOG)

Q3 2013 Earnings Call

February 07, 2013 8:30 am ET

Executives

Lesley Snyder

Laurence S. Levy - Chairman of the Board, Chief Executive Officer, Director of Grand River and Director of Lower Lakes & Lower Lakes Transportation

Scott Bravener - Director, President of Lower Lakes & Lower Lakes Transportation and Director of Lower Lakes

Joseph W. McHugh - Chief Financial Officer, Principal Accounting Officer and Vice President

Edward Levy - President

Analysts

Andrew E. Gadlin - CJS Securities, Inc.

William W. Horner - BB&T Capital Markets, Research Division

Matthew Dodson

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rand Logistics Third Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Lesley Snyder, Investor Relations. You may begin your conference.

Lesley Snyder

Thank you, operator. Good morning, ladies and gentlemen, and welcome to Rand Logistics Fiscal 2013 Third Quarter Conference Call.

On the call today from the company are Laurence Levy, Chairman and Chief Executive Officer; Ed Levy, Rand's President; Scott Bravener, President of Lower Lakes; and Joe McHugh, Rand's Chief Financial Officer. A live audio webcast and accompanying slide presentation would be available on the Rand website at www.randlogisticsinc.com/presentations.html.

Before we begin, we would like to remind everyone that this conference call contains forward-looking statements. For all forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control, and some of which may not even be anticipated.

Future events and actual results affecting our strategic plan, as well as our financial position, results of operation and cash flows could differ materially from those described in or contemplated by the forward-looking statements.

Important factors that contribute to such risks include, but are not limited to, the effect of the economic downturn in our market, the weather conditions on the Great Lakes and our ability to maintain and replace our vessels as they age.

For a more detailed description of these uncertainties and other factors, please see the Risk Factors section in Rand's annual report on Form 10-K as filed with the Securities and Exchange Commission on June 8, 2012.

And with that, I would like to turn the call over to Mr. Laurence Levy.

Laurence S. Levy

Thank you, Lesley, and good morning, everyone. Thank you for joining us on today's call.

After my opening remarks, Scott Bravener, President of Lower Lakes, will discuss our operating results; Joe McHugh, Rand's CFO, will review the financial results; and Ed Levy, Rand's President, will provide further insight into the quarter. We will then open the call up for questions.

As we have previously described, we experienced significant incidents on 2 of our vessels during the 2012 sailing season: One in the first fiscal quarter, and one at the end of the second fiscal quarter. Combined, these incidents resulted in 123 lost sailing days. In total, these 2 incidents resulted in a decline in our reported results for the 9 months ended December 31, 2012, of $4 million, as compared to the 9-month period ended December 31, 2011.

Additionally, 1 of the 2 vessels that we acquired in September 2011 was delayed in being introduced into service and the second acquired vessel encountered a series of startup issues and lost sailing days during the season due to weakness in the grain market and an early layout for further modifications.

Aside from the aforementioned 2 vessels that encountered operating incidents, and the startup issues on the 2 vessels that we acquired in the September 2011, the combined results from our remaining 12 vessels exceeded our 2012 sailing season earnings guidance.

We are continuing to evaluate our customers' capacity needs for the 2013 sailing season. We are targeting key business opportunities that are well-suited to our fleet, allow for future growth and will be accretive to our profitability. At the present time, the demand environment in our markets looks very similar to the 2012 sailing season. We do not anticipate integrating any new vessels into our fleet, or managing any major vessel modification projects during the 2013 sailing season, and therefore, our sole focus will be to execute our business plan.

Notwithstanding the challenges that we've faced over the last 9 months, the fundamentals of our business remain intact including our low-cost operating structure, our non-duplicatable asset portfolio and our extensive customer network. We believe that these attributes will allow us to continue to create long-term shareholder value.

At the present time, we do not plan on investing capital in the McKee Sons barge for its 5-year survey and drydocking and we do not plan to operate the barge in the 2013 sailing season. We are continuing to finalize our operating plans for the upcoming sailing season, including completing certain customer contracts, quantifying the level of salt and grain demand and the impact of expected lower water levels.

While we have yet to finalize our fiscal 2014 budget, we do not expect that our vessel margin per day after winter work would deviate materially from recent historic levels.

G&A expenses for the year are projected to be approximately $13 million, and interest expense is predicted to equal about $10 million.

Now, I'd like to turn the call over to Scott. Scott?

Scott Bravener

Thank you, Laurence. Overall, we would characterize demand in the 2012 sailing season as adequate but not optimal. While we operated all of our vessels in the 2012 sailing season, we were not able to optimize our trade patterns for a number of reasons including: weather conditions, low water levels, a reduction in salt tonnage, weaker grain shipment than expected, erratic order patterns by our customers, softness in the aggregate markets particularly in the July through December period and unexpected event experienced by our customers including a work stoppage and an extended plant maintenance shutdown.

As a result of these factors, we were not able to maximize the percentage of time that our vessels operated in the revenue-loaded condition. Additionally, as Laurence mentioned, 1 of the 2 vessels that we acquired in September 2011 was delayed in being introduced into service until October 23, 2012, instead of our projected introduction date of August 1, 2012. This project, which we began in May 2012, was required to make the modifications necessary for the vessel to meet Great Lakes standards and took longer than anticipated. While the vessel's performance in November and December were inconsistent due to its trade patterns and startup issues, we were pleased that it operated faster than our acquisition and assumptions. We expect to realize the benefit of this in greater speed in the upcoming sailing season.

In addition, the second acquired vessel encountered a series of startup issues and lost approximately 77 sailing days during the season due to weakness in the grain market and an early layout for further modifications. We remain enthusiastic about the prospects for both of these vessels and expect them to both -- to be fully operational for the 2013 sailing season.

As Laurence mentioned, while operating and startup factors impacted 4 of our vessels, the collective operating performance of the remaining 12 vessels in our fleet exceeded our expectations.

As we have discussed on previous calls, vessel margin per day is a key performance metric that we monitor to evaluate fleet performance. On a year-to-date basis, company-wide vessel margin per day before winter work were $13,031 per day compared to $13,518 per day in the same year-ago period, despite a higher number of bulker days, which regenerate less margin per day, and inefficiencies resulting from the 2 recently acquired vessels. We estimate the vessel margin per day was reduced by approximately $600 per day on account of the 2 aforementioned incidents.

To help us meet our 2013 sailing season operating objectives, we have augmented the personnel in our engineering department, particularly the U.S., upgraded our shipboard personnel and enhanced our safety operations, continued to implement best practices across the entire fleet and are introducing a new incentive structure, which is directly tied to reducing vessel downtime.

Tonnage hauled by our operated vessels for the 3-month period ended December 31, 2012, increased by 1.9% for the same year-ago period. Aggregate comprised approximately 41.4% of our total third quarter tonnage. Aggregate shipments decreased 3.6% lakes-wide, year-to-date versus the same period 1 year ago.

As I have mentioned previously, the majority of our aggregates are used in construction end markets. Our shipments were down 1.8% during the third quarter as compared to the same year-ago period. However, on a year-to-date basis, our shipments increased 18.2%. This increase was primarily driven by a significant piece of new business that we are awarded.

Iron ore comprised approximately 19.2% of our total third quarter tonnage. Shipments increased 4% lakes-wide, year-to-date versus the same period 1 year ago. Our shipments increased by 40% during the third quarter as compared to the same year-ago period. This increase was entirely related to a shift in the timing of shipments for our main steel customer from the preceding quarter. This is an example of the uneven demand we experienced throughout the sailing season.

Coal comprised approximately 11.6% of our total third quarter tonnage. Shipments decreased 8.2% lakes-wide, year-to-date versus the same period 1 year ago. Our coal shipment decreased by 31.5% during the third quarter as compared to the same quarter last year. On a year-to-date basis, our coal shipment increased 5.6% and demand was strong across our entire coal customer base including coal for export.

Salt comprise approximately 10.3% of our total third quarter tonnage. Our salt tonnage decreased by 23.6% during the third quarter as compared to the same quarter last year due to an abnormally dry winter in the Great Lakes region. These events impacted the efficiency of our trade patterns. We expect our salt tonnage will increase in the 2013 sailing season on the basis of market share gain. We experienced uneven demand from our salt customers throughout the sailing season because of the strike at one of our customer's facilities and an extended plant shutdown for maintenance at another customer's location.

Grain comprised 13.5% of our total third quarter tonnage. During the 2012 sailing season, we faced a challenging overall grain crop. This resulted in laying up certain of our bulkers for a total of 77 days. As I mentioned in the past, much of our bulker capacity is on a long-term time chart. While we are paid for not operating the time-chartered vessels, our margins are lower as compared to when we are sailing.

We operated 16 vessels during the 3-month period ended December 31, 2012, including the vessels acquired in the 3-month period ended December 31, 2011, compared to 14 vessels during the 3-month period ended December 31, 2011. Management believes that each of our vessels should achieve approximately 92 sailing days in an average third fiscal quarter, assuming no major repairs, incidents or vessel lay-ups.

The company's vessels sailed an average of approximately 85 sailing days during the 3-month period ended December 31, 2012, compared to an average of 86 sailing days during the same year-ago period. The average number of sailing days per vessel during the 3 months ended December 31, 2012, was adversely impacted by the loss of 38 sailing days due to mechanical repairs required on one of our vessels following an incident that occurred at the end of the 3-month period ended September 30, 2012; a vessel that was taken out of service on December 6, 2012 for further modifications; and the aforementioned vessel, which was introduced into service on October 23, 2012, and only sailed 69 days in the 3-month period.

With that, I'd like to turn the call over to Joe McHugh for a review of the financial results. Joe?

Joseph W. McHugh

Thanks, Scott. I would now like to give you a more detailed explanation of our financials. Total revenue during the 3-month period ended December 31, 2012, was $49.5 million, an increase of $200,000 or 0.4% compared to $49.3 million during the same year-ago period. This increase was primarily attributable to a stronger Canadian dollar and higher freight revenue offset by reduced fuel surcharges.

Marine, freight and other related revenue generated from company-operated vessels increased by $1.4 million or 4.0% to $37.3 million during the 3-month period ended December 31, 2012, compared to $35.9 million during the same year-ago period. Excluding the impact of currency exchanges, freight revenue increased $500,000 or 1.5% during the 3-month period ended December 31, 2012 compared to the same year-ago period. This increase was primarily attributable to contractual price increases. Marine freight revenue per sailing day decreased by $2,203 or 7.4% to $27,480 per sailing day, compared to $29,683 per sailing day during the same year-ago period. This decrease was attributable to unfavorable weather conditions including: Hurricane Sandy, which resulted in an accumulative loss of 30 sailing days; low water levels; uneven customer demand and a reduction in salt tonnage due to abnormally dry winter in the Great Lakes region. These events impacted the efficiency of our trade patterns.

Fuel and other surcharges the decreased by $800,000 or 6.3% to $12.0 million during the 3-month period ended December 31, 2012, compared to $12.8 million during the same year-ago period. This decrease was attributable to lower fuel costs upon which the surcharge is based offset by a stronger Canadian dollar.

Vessel operating expenses increased by $2.6 million or 8.2% to $34.7 million during the 3-month period ended December 31, 2012, compared to $32.1 million during the same year-ago period. This increase was primarily attributable to increased sailing days attributable to 2 additional vessels sailed in the quarter, but not sailed in the comparable quarter last year, and to operating inefficiencies associated with the startup of a vessel introduced into service during the quarter. Vessel operating expenses per sailing day decreased by $979 or 3.7% to $25,530 per sailing day during the 3-month period ended December 31, 2012, from $26,509 per sailing day during the same year-ago period largely due to lower fuel prices.

Our general and administrative expenses increased to $3.1 million during the 3-month period ended December 31, 2012, compared to $2.6 million in the same year-ago period. These cost increase primarily due to compensation costs primarily related to higher engineering and IT headcount and consulting cost for a new systems implementation, regulatory changes and other engineering costs. Our general and administrative expenses represented 8.4% of freight revenues during the 3-month period ended December 31, 2012, an increase from 7.1% of freight revenues during the same year-ago period. During the 3-month period ended December 31, 2012, $900,000 of our general and administrative expenses was attributable to our parent company and $2.2 million was attributable to our operating companies. Operating income plus depreciation, amortization of drydock costs and amortization of intangibles decreased by 19.2% or $2.7 million to $11.3 million during the 3-month period ended December 31, 2012, from $14.0 million during the same year-ago period.

With that, I'd like to turn the call over to Ed. Ed?

Edward Levy

Thanks, Joe. Over the last several months, we have secured several new contracts illustrating the continued confidence that our customers have in the services that we provide. Certain of these new contract wins will allow us to increase the efficiency and utilization of our fleet in the 2013 sailing season. In addition, we believe that certain of our new business wins may have positive long-term strategic implications.

Our lost of sailing days due to incidents in the 2012 sailing season increased by 61 days to 145 days compared to the prior year. The lost sailing days during the 2012 sailing season due to incidents, equaled 3.9% of our total sailing days versus our 3- and 5-year average of 2.8% and 2%, respectively. Said differently, on average, we lost 36 days per incident this year versus 12 days in the 2011 sailing season, and 12 days on average per incident over the last 5 years.

As a result of these 2 incidents, our vessel margin for the 9 months ended December 31, 2012, was approximately $4 million less than the prior year and $5.5 million below our expectations for the 2012 sailing season.

Our decision at the present time to not sail the barge McKee Sons is in part related to an insufficient return on the capital which is required to be invested in this vessel for its upcoming 5-year special survey and drydocking. We do not own the McKee Sons barge but instead, operate it under a long-term lease.

Assuming that we do not operate this vessel in 2013, our total capital expenditures will equal approximately $12.5 million this winter. This amount is comprised of $2.4 million for drydocking 2 vessels, 1 dry docking of which has a ready been completed; $5.1 million of life extension projects; and approximately $5 million of routine and regulatory capital spending.

As many of you aware -- as many of you are aware, since the beginning of the 2011 sailing season, we have increased the carrying capacity of our fleet by nearly 65%. The 2013 sailing season is the first in 2 years in which we have not added new capacity to our fleet. As such, we do not believe that we will incur startup expenses or personnel learning curve issues inherent with the type of growth that we have experienced over the last 24 months.

With that, I would like to open the lines up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Andrew Gadlin of CJS Securities.

Andrew E. Gadlin - CJS Securities, Inc.

I was wondering if you could give a little more detail on McKee Sons? What the issues are that you're having with the vessel? And what impact do you think it will have on your vessel margin per day next year?

Edward Levy

Andrew, we're not having any issues with the vessel. We've done a capital allocation review in terms of what the cost of the 5-year survey is. And based on that capital allocation review, we have concluded that at this point, at the present time, it doesn't warrant the capital required necessary for the 5-year survey. There's -- it has nothing to do with issues related to the vessel. It has to do with its 5-year survey and the capital -- and the return we're going to get on invested capital. And is it relates to the McKee Sons, as you know, we don't ever break out margins on a particular vessel. However, in general, that vessel tends to have vessel profitability which is in the lower quartile of the fleet.

Scott Bravener

This is to add to that Andrew, we did lay the McKee Sons up in the 2009 sailing season and we have a positive impact on our margins to our other vessels and that's -- we're seeing similar type of demand patterns right now. And that's part of our analysis that we believe we can drive higher margins on the remainder of the fleet by withdrawing one of the vessels from service at this time.

Andrew E. Gadlin - CJS Securities, Inc.

Got it. I believe in your commentary you said that you'd expect vessel margin per day in line with this year. Are you talking about for the full year or are you talking about the first half of the sailing season?

Laurence S. Levy

Andrew, we're contemplating that for the full year. We still don't have clear visibility for the year as there are several uncertainties that we did mentioned including grain and salt demand, the water levels are an issue as you probably are aware. So we tried to quantify all of that. But based on our current views we believe for the full year, we will have a comparable year demand-wise to 2012 sailing season.

Andrew E. Gadlin - CJS Securities, Inc.

And for the salt demand, I'd assume that the rain, the snow that we've had this winter, will be good for next year. Is that correct?

Scott Bravener

At this point, Andrew, we have seen some marginal improvement over the last year's precipitation levels. Still not at what we call average levels but we still got some winter to go here. We've got storm coming through the region here tonight. So it's a little early to predict on a total impact on our salt right now but we expect it to be closer to normal than the previous year at this point, and hopefully at the end of the winter it has normalized.

Andrew E. Gadlin - CJS Securities, Inc.

And then finally, on the water levels, I know in the past you said that it's kind of a marginal impact but it sounds like water levels are now at record lows. Can you talk about what kind of impact that could have next year and maybe to put it in terms of what it's going to do to the vessel margin per day?

Scott Bravener

The total impact to the fleet for the last 4 months of the year was about $600,000, Andrew. And at that -- at the levels that we reached at the end of the season, we start -- we are now into where we start to collect low-water surcharges under the majority of our contracts. So we will have some additional impact if water -- if we don't have some rebound in runoffs -- spring runoffs here. We'll see some impact in the spring that we didn't see that -- before we get to the levels that trigger our surcharge amounts. But for the second half of the year, we don't see further degradation because we are covered at the levels we're reached then.

Andrew E. Gadlin - CJS Securities, Inc.

I mean, if your surcharges get you back up to a point where it's doesn't affect your margins? Into the surcharges cover, the margin impact from having that sales slower and all those other issues?

Scott Bravener

Obviously, there is a level being absorbed before the surcharges kick in and that's what I explained, the water levels that we got to at the end of the season are now in levels where we're in surcharge territory. Conversely, when water levels go up, there's a significant spread before the customers would get any rebate on that. So there has to -- there is a band that -- before the water levels kick in either way and we're now in the band where -- so we don't -- as I said, we don't expect any further degradation in our margins due to water levels.

Operator

[Operator Instructions] You have a question from the line of Kevin Sterling of BB&T.

William W. Horner - BB&T Capital Markets, Research Division

This is actually William Horner on for Kevin. Sticking with the low-water levels for just a second here, I know it's still too early to tell and you're seeing some recent storms, but in terms of snowpack or other impacts that may bring the water levels up next year, what are the experts saying and right now we're in seasonally low but are we -- are you hoping for more normalized levels next year?

Scott Bravener

I guess, the simpler answer to that, William, at this point, no. We haven't had ice cover on the Great Lakes. It's late and delayed this year. And we haven't had a lot of snowpack. So we expect -- we don't expect any significant improvement in -- as you know, water levels are seasonal and cyclical on the Great Lakes, so they -- we do get a rebound in the spring from the runoff but we will not reach -- we will remain significantly below the water levels that we started last season with.

William W. Horner - BB&T Capital Markets, Research Division

Right, okay. So this will take more and more in the later spring, summer, hopefully to get them back up to par?

Scott Bravener

Yes. It will take a couple of years of normal to above normal precipitation to start a nice cover to start water levels rebounding.

William W. Horner - BB&T Capital Markets, Research Division

Okay, great. And going back to your demand patterns, I know you all have some challenges with the erratic orders in combination of low-water levels, facility maintenance, is there any way to break it out? How much of your, I guess, demand was driven by one reason or another? I mean, and were the facility maintenance and other issues due because of the low-water levels?

Scott Bravener

I'd answer the first question. No, we haven't broke that out, William. The facility issues were in no way related to water levels.

Edward Levy

I think, William, that the component we have broken out is the water level number and that's [indiscernible] EBITDA, which primarily hit us in our third fiscal quarter.

Laurence S. Levy

And William, we did break out the impact of the -- of 2 operating incidents there that had an impact on our financial statement. We quantified the loss sailing days and the actual dollar impact, as well.

William W. Horner - BB&T Capital Markets, Research Division

Great. Okay. A couple of housekeeping issues, what are you budgeting for drydocking next year? I apologize if I missed it already?

Scott Bravener

We'll have 2 -- the 2 vessels due for drydocking next year.

William W. Horner - BB&T Capital Markets, Research Division

And how many days does that typically incur?

Scott Bravener

[indiscernible]

William W. Horner - BB&T Capital Markets, Research Division

In terms of the all season, okay. Okay. And then going back, I think you gave some numbers for 2013 or fiscal '14 on guidance. Did I hear correctly G&A about $13 million and interest expense of $10 million?

Laurence S. Levy

Correct, William.

William W. Horner - BB&T Capital Markets, Research Division

And did -- was there anything else that I missed?

Laurence S. Levy

No. I mean, we indicated that we expect vessel margin to be comparable to what we've had more recently. But we will be able to get a better visibility of that as we clarify some of the issues we described earlier, William.

Operator

Your next question comes from the line of Matthew Dodson of JWest, LLC.

Matthew Dodson

Can you guys talk a little bit about your price increases? You guys are getting in contracts and how that's going to play out this year than next year?

Laurence S. Levy

Scott?

Scott Bravener

[indiscernible] Matthew, pricing in this environment and anything you knew that we're doing right now is in the mid- to low-single digits. We are getting price increasing -- increases in everything that we're doing under our existing contracts and renewals.

Matthew Dodson

Got you. And then on your aggregate business with the housing construction and just regular construction kind of coming back, can you talk about demand that coming into next year? And then any price increases there? And then how will that play out if we start really seeing the construction market play out more?

Scott Bravener

As you see in the aggregates declined by just about 4% on an overall, on the Great Lakes last year. Our major customers predict flat to modest increases over the next year. It's really latter part of 2014, 2015 before they see a significant rebound in this market. And as you can see from the tonnages shipped on the Great Lakes since 2009 where there hasn't been a real recovery in aggregate market, they're significantly under their 5-year average. So there is significant amount of recovery that has to be done.

Edward Levy

Matt, it's Ed. We're about 20% below the 5-year average in aggregate tonnage. To the extent that demand improves, I think where we will see it in the 2013 sailing season is far better efficiencies and far better fuel -- fleet utilization. And so I think that you'll see it more in terms of driving margins versus on the pricing side because, as you are aware of our business has done by far the long-term contracts.

Scott Bravener

And in fact that it provides more opportunity for scheduling efficiencies.

Matthew Dodson

Got you. And then my last question is can you kind of help us understand a little bit about things you can control next year? I mean, I know you can't control the water being low, but you had so many execution issues last year. Kind of what do you have in place to fix that going into next year?

Laurence S. Levy

Scott?

Scott Bravener

Well, as we outlined, we've implemented a number of improvements throughout the operation. It's -- and we've also brought in a new incentive program to our key vessel managers on board the vessels to really align their interest with those of the shareholders and owners of the company, and that we're all driving to reduce the significant impact that incidents we've had on the fleet over the past 2 years, but primarily this year. And a lot of -- the majority of the incidents that we've experienced this year were due to human error and we need to, hopefully, eliminate them, but certainly cut their impact dramatically. And we think we've put in place a number of processes and rewards for doing that. Now we've got to go out and execute.

Matthew Dodson

Got you. But if you still have these execution issues, who is responsible even if that, that does not work?

Scott Bravener

Ultimately, I am responsible. But the vessel managers themselves right down through the organization and that's one thing we've been driving over the past year is increased accountability throughout the organization for the results, not only for the company as a whole but each individual asset, which we -- each one of our vessels is essentially a floating plant. So the plant managers have to be accountable at the end of the day.

Operator

At this time, there are no further questions.

Laurence S. Levy

Thank you, operator. And so, we'd like to thank you, on behalf of Rand Logistics for your interest in the company. We look forward to keeping you apprised of the company's progress. And we thank you for spending time with us this morning.

Operator

Thank you. This concludes your conference. You may now disconnect.

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Rand Logistics (RLOG): FQ3 EPS of $0.15 misses by $0.03. Revenue of $49.5M (+0.4% Y/Y) beats by $3M. (PR)