Pangaea Logistics Solutions Ltd. (NASDAQ:PANL)
Q4 2015 Earnings Conference Call
March 24, 2016 08:00 ET
Edward Coll - Chairman & CEO
Anthony Laura - CFO
Josh Clarkson - Prosek Partners
Good morning. My name is Crystal and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Fourth Quarter and Full Year 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. Josh Clarkson of Prosek Partners.
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 800-585-8367 domestic or 404-537-3406 international and referencing ID number 72750653. 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 Mr. Josh Clarkson.
Thank you, Crystal and thank you all for joining us for this morning's fourth quarter and full year 2015 earnings teleconference for Pangaea Logistics Solutions. With it today from the company, our Chairman and CEO, Mr. Ed Coll and Chief Financial Officer, Mr. Tony Laura.
Before I turn the call over to Ed, I'd like to read the Safe Harbor statements. This conference could contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 about Pangaea Logistics Solutions. Forward-looking statements are statements that are not 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 obligations to update the information contained in this conference call. Thank you. Also, please recall that this quarter a supplemental slide presentation that will accompany this call, those slides can be found attached to the 8-K that was filed with last evenings 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 Logistic Solutions, Chairman and CEO, Mr. Ed Coll. Ed?
Thanks, Josh, and good morning to all of you and thank you for joining us on the call. This morning I will 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 fourth quarter and full year financials. And then we’ll open up the line for questions.
Last evening, and as you can see on slides three and four of the accompanying presentation, we were very pleased to report a net income of $11.3 million for 2015, or $0.48 per share on a pro forma adjusted basis compared to a loss of $12.1 million, or $0.03 per share on a pro forma adjusted basis in 2014.
Our unique asset right strategy focused on servicing profitable voyage revenue tied to contracts of affreightment or COAs with a mix of owned, owned and chartered in vessels allows us to minimize the impact of low rates and focus on our core competency of providing logistic solutions to our valued clients. We were served very well by the strategy in 2015 as evidence by our profitable results that made us historically difficult operating environment and so many of our competitors are fretting at a loss.
The dramatic improvement in our performance compared to last year was largely attributable to our improved operating margin. As you will see on slide six, our operating margin increased to 7.1% for 2015 from negative 0.63% in 2015, the uptick in our operating margin in terms is driven by lower cost of chartered in vessels from a weak drive off shipping market, optimization of vessel days to minimize cost and risk of losses in a weak market. Decreased bunker cost and performing under fixed price COAs at average rates that are higher than the present market.
While Tony will offer a more detailed discussion about our full year and fourth quarter financials, I would like to touch on our fourth quarter performance which is discussed in slide four of the presentation.
First of all, our core business remain profitable throughout the fourth quarter with revenues of $56 million and direct operating expenses meaning combined voyage, charter hire, vessel operating and G&A expense of $48.6 million, resulting in an adjusted EBITDA of $7.4 million. However, we recorded a loss from operations of $1.3 million and a net loss attributable to Pangaea of $4.8 million, resulting in pro forma adjusted earnings per share percent. This was driven primarily by a $5.4 million impairment we recorded on two of our older vessels due to declining market rates and the preference for newer vessels, and to a lesser extent an unrealized loss on some of our bunker spots.
This result from market improvement of the comparable period in 2014, and we saw a net loss of $17 million or a pro forma adjusted loss per share of $0.11 and adjusted EBITDA of $0.8 million. But we cannot predict with certainty the impact of impairments on our operations when we move forward as they are driven by more conditions that are beyond our control. We are encouraged to steer our core business improve significantly year-on-year remain profitable throughout the current market down term.
Returning now to our full year 2015 performance, our revenue for the year was $287.3 million compared to $398.3 for 2014. This decrease in overall revenue is due primarily to a 17% decrease in shipping days from 16,952 days in 2014 to 14,094 days in 2015. This reduction in total shipping days was in keeping with our strategy which I referenced earlier, fixed to minimize our exposure to the current weak rate environment.
To explain that decrease in shipping days in a little bit more detail in a weak market such as the current one, we hired vessels only if necessary. Necessary often for less than 90 days, if your perform wages under contract, and therefore we do not have excess ship days on which to earn revenue. While this element of our strategy naturally results in lower revenue, it more importantly allows us to support our operating margin, remain profitable, conserve our cash and optimally position ourselves for when the cycle eventually turns.
Accordingly, charter revenue which is tied to market rate, time charter days declined 61% while in voyage revenue which is derived from longer term COAs and other cargos where our revenues only declined by 23% or roughly a third as much as our charter revenues. While our revenues in both categories decline, our earnings improve remarkably. This is due to our business being a margin driven business and our business model allowing us to drive margin improvement and earnings growth despite the difficult operating environment, something others have not been able to match.
I would like to take a moment now to discuss our revenue in expense mix in a greater detail which is a topic that has come up in several of our calls with investors recently. It's important to understand that charter expense is not a one to one with charter revenue. Charter expense is the process for chartering in vessels that perform both high-end charters and voyage charters. So we charter vessels to supplement our own fleet. These vessels are used mostly to perform COA and cargo business which is recognized as voyage revenue, and opportunistically on high-end charters which represent a very small piece of our total business.
One topic that I would like to address is the bankruptcy of a customer of ours, Nuvanda [ph] which many of you may be aware of. We're closely monitoring the situation to all we can to protect our interest. At this time, we do not expect any disruption to the services we provide under this contract. Also we continue provide logistics services to the customer post-petition and have been compensated for those services provided.
Now I'll discus very briefly the unique aspects of our business model and strategy and how they've allowed us to operate profitably during our first full years of public company, a year that saw the BDI reach all-time lows. These were also summarized on slide six. Importantly, the majority of our fleet is chartered in at market rates to move specific cargos that we've agreed to carry for our clients. Often pursuant to long term COAs and our own fleet to some we matched against profitable pieces of business.
Accordingly in a low rate environment, chartered expenses which are one of our principle cost declined along with the market. This is in stark contrast to traditional dry bulk shipping companies who maintained large owned fleets with high fix cost that they're obligated to find employment for any available rate even grossly unprofitable ones. This model has not fared well recently.
Conversely, our model with its synthesis on variable cost allows us to focus on profitable business and expand and contract as warranted by the operating environment and the opportunity for profitable work. This strategy enabled us to achieve an average time charter equivalent rate for 2015 of $11,473. While this was a decrease of 7% compared to $12,317 we achieved in 2014, our time charter equivalent rate held up drastically better in the broader market than most of many of our peers.
Additionally, back hauls are important component of our strategy, meaning that depending on the market environment, we often seek to position our vessels in traditional loading areas by delivering cargos to those ports. This approach is designed to maximize utilization while reducing positioning cost and the impact of lower rates. In short, we were nimble, we've locked in contracts to generate revenue and adjust with the market and we can insulate ourselves from the broader rate environment as a result.
Additionally, we believe that our unmatched fleet and expertise and less commoditized trades such as ice class increases our likelihood of securing higher rates and margins than those available to others. Regarding ice class that is carefully organized and executed strategy that shows great future potential and will continue developing.
In 2015, our ice class 1A fleet generated a premium over 75% of the average comparable Baltic index vessel. In order to further capitalize on this comparative advantage, we have received our fourth and final best-of-fleet ice-class 1A vessel in January 2016 and have two ice-class 1C ultra max new buildings scheduled for delivery on January of 2017. These vessels are all extremely unique vessels whose capabilities in servicing our client could not have been matched by anything else available on the market. Her ice class capabilities comprising both our fleet and our unrivaled expertise in this complex roots are truly without peer and will allow us to capture significant share of the opportunities that will be presented by this new and dynamic area of dry bulk shipping.
No discussion of that unique expertise would be complete without highlighting the invaluable contributions of our employees whose hard work and abilities have enabled us to deliver a profitable 2015. Something few if any teams in our sector have been able to do.
Looking ahead to 2016 at what the markets may hold, we presently do not see any imminent catalyst for remarkably improved environment, although there are some encouraging signs, namely the supply side is moving towards balance as deliveries are cancelled and pushed out while there are essentially no new building orders. Long discussed lay ups are finally happening and vessels that were once have been considered new are now being sat.
On the demand side, while the overall appetite for the commodities we move for our clients remain subdued compared to a few years past, recent developments in the market may indicate an uptick in demand. On this type of market our flexible, unique business model and measured strategy enables us to operate at lower risk than other firms. This is thanks to our unique combination of relatively low fix cost and higher exposure to variable market based cost in the form of chartered tonnage and our book of profitable long term COAs.
These attributes of our business model are further enhanced by our expertise in specialized areas such as ice-class and back haul which allow us to commit higher rates and increased utilization. All these elements of our company our underpinned by a prudent approach using our balance sheet and world-class corporate governance and best management practices. In turn these attributes allow us to conserve our resources and position ourselves with the eventual turn of the cycle.
While we've been clearly demonstrated our ability to operate profitably in the most difficult drive off shipping market in history, we're confident that we'll be vastly more impressive is how we're able to capitalize on inevitable improvement in our core markets. This recovery should allow us to grow a number of voyage days and shipping days in terms of revenue growth and increased profits.
Our track record in profitability demonstrates the merits of our business model and approach to providing drive off logistic solutions. While we can't progress the name in the future great environment, we were confident that we have built a company that can successfully navigate a variety of market conditions.
Thank you for your time and attention. I'd now like to turn the call over to Tony Laura to provide additional details on the financials. Tony?
Thank you, Ed. Turning now to our financials for the fourth quarter and full year which began on slide eight of the presentation. As you can see, revenue for the full year was $287.3 million compared to $398.3 million in 2014. This decline was a result of the number of total shipping days decreasing 17% from 16,952 in 2014 to 14,094 in 2015.
Pangaea's revenue for the fourth quarter of 2015 was $55.9 million compared with $103.1 million for the fourth quarter of 2014. This was also driven by a decrease in total shipping days from 4,497 in the fourth quarter of 2014 to 2,475 in the fourth quarter of 2015, a decline of 45%.
Further breakdown of our full year revenue shows that voyage revenue which is derived from our COA and other cost of business decreased 23% to $266.7 million in 2014 from $345.2 million in 2014. Meanwhile, charter revenue which is tied to market rate charters decreased 61% in 2015 to $20.7 million from $53 million in 2014.
Our full year expenses decline meaningfully more than our revenue leading to a dramatic improvement in margins, specifically voyage expenses declined 34% year-on-year to $125.6 million from $189.5 due predominantly to decreases in voyage days and bunker prices and charter hire expenses decreased 49% year-on-year to $75.9 million from $149.7 million due to the decline in market rates.
During the fourth quarter of 2015, both our voyage and charter revenues declined 46% from the fourth quarter of 2014, while voyage expense and charter hire expenses both declined 59% year-on-year. Income from operations was $20.5 million for the full year as compared to a loss from operations of $2.5 million in 2014. As Ed noted earlier this increase is due to lower cost for chartered in vessels, decreased bunker cost and performing under fixed price COAs. Voyage expenses as a percentage of voyage revenue decreased from 55% to 47% and charter hire expenses as a percentage of total revenue decreased from 38% to 26%.
During the fourth quarter of 2015, our operations produced a net loss of $1.3 million which is the most improvement over the $14 million loss from operations in the fourth quarter of 2014. Adjusted EBITDA for 2015 was $38.6 million compared to $20.7 million in 2014. For the fourth quarter of 2015 adjusted EBITDA was $7.4 million compared with an $800,000 loss for the fourth quarter of 2014. The dramatic increase in both periods is primarily attributable to the improvements and income from operations.
Net income attributable to Pangaea Logistics Solutions for the full year 2015 was $11.3 million with $0.32 per common share which represents an extremely impressive improvement from 2014 when we incurred a loss of $12.1 million or $1.61 per share. For the fourth quarter the company incurred a net loss of $4.8 million or $0.14 per common share which represents significant improvement over the fourth quarter of 2014 when the company recorded a net loss of $17 million or $0.86 per share. The improvement in net income for both periods is primarily attributable to enhanced operating margins which increased to 7.1% from negative 0.6% for the full year, and to 13.6% from negative 2.3% year-over-year on the fourth quarter.
Moving on to the balance sheet and cash flows which you will find on slide nine, cash and cash equivalents were $37.5 million as of December 31, 2015, compared with $29.8 million on December 31, 2014.
Bank debt rose to $149 million as of December 31, 2015, compared with $104 million as of December 31, 2014. Financing for the three new ice-class ships, the Nordic Olympic, the Nordic Odin and the Nordic Oasis was obtained at attractive rates from both an existing lender and a lender we've began working with earlier in the year. We expect that as we continue to grow, our relationships with these top-tier institutions will continue to grow as well enabling us to secure competitive financing going forward.
For the twelve months ended December 31, 2015, the company's net cash provided by operating activities was $26 million compared to $19.7 million at the end of 2014. This increase is primarily driven by the growth in net income. The twelve months ended December 31, 2015 and 2014 net cash used in investing activities was $64 million and $34.3 million, respectively. And net cash provided by financing activities was $25.5 million during the prior year. This increases reflect the purchase of the Nordic Olympic, the Nordic Odin and the Nordic Oasis.
I will now turn the call over to Ed for any additional remarks before we get to the Q&A portion of the call. Ed?
Thank you, Tony. In 2016 and beyond, we'll continue to focus on the strategy that propelled our strong profitable results in 2015; operating the best-in-class efficiency, mitigating the risk of a low rate environment, controlling cost, selective expanding and adding to our COAs, strategically servicing our specialized market and most importantly utilization for back haul.
As you can see in our 2015 results, steadfast adherence to these simple principles should enable future sustainable growth for our company and by extension shareholder value.
With that I'll open the call up to your questions.
Thank you all for taking the time to join us this morning, and have a great day.
Thank you. That does conclude the Pangaea Logistics Solutions fourth quarter and full year 2015 earnings teleconference. You may now disconnect.
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