Rand Logistics, Inc. (RLOG) Q4 2017 Earnings Conference Call July 6, 2017 8:30 AM ET
Annemarie Dobler - Director, Corporate Communications
Ed Levy - President & CEO
Mark Hiltwein - CFO
Jon Tanwanteng - CJS Securities
Good day, ladies and gentlemen. And welcome to the Rand Logistics Fourth Quarter Fiscal Year 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to our host, Annemarie Dobler, Corporate Communications Director. Please go ahead, ma'am.
Thank you, Alan. Good morning, ladies and gentlemen and welcome to Rand Logistics fiscal 2017 yearend conference call. On the call today from the Company are Ed Levy, Rand’s President and CEO; and Mark Hiltwein, Rand’s Chief Financial Officer. A live audio webcast and accompanying slide presentation is 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 which reflects management’s current views with respect to certain future events and Rand’s operations, performance and financial conditions, only as of the date hereof. For all forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements reclaim the protection of the Safe Harbor for forward looking statement contained in the Private Securities Litigation Reform Act of 1995. All 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 might not even be anticipated. Participants are directed to our SEC filings and press releases for a more detailed description of certain business issues and risks including our most recent Annual Report filed on Form 10-K on July 6, 2017.
We may refer to certain non-GAAP measures, such as EBITDA which is defined as operating income plus interest, taxes, depreciation, and amortization. Please see our press release dated July 6, 2017, filed on Form 8-K for a reconciliation of certain non-GAAP measures.
With that, I’d like to turn the call over to Mr. Ed Levy. Go ahead, Ed.
Thank you, Annemarie, and good morning, everyone. Thank you for joining today's call to discuss our fiscal year 2017 performance. For our fiscal year ended March 31, 2017 we reported adjusted EBITDA of $29.7 million versus $32.5 million which includes a one time gain of $1.7 million for a contract that was bought out by one of our customers during the prior year period. These results were achieved while sailing 310 or 7.9% fewer days and carrying 5.4% less tons versus fiscal 2016. We are generally pleased with our operating performance for the fiscal year ended March 31, 2017. Vessel margin per day, our key financial metric, equaled $11,756 for the year ended March 31, 2017, compared to $11,743 for the prior year and a prior three year average of $11,643.
On a local currency basis, vessel margin increased by 2.1% or $279 per day. The growth in our vessel margin per day in local currency did not meet our expectations. Our inability to achieve our growth target was indicative of the difficult demand environment that we faced in the first half of the 2016 sailing season. Our goal is to continue to increase vessel margin per day by 4% to 6% per year on a local currency basis which is in line with our historic average. We mitigated the impact of inconsistent demand by achieving our $5 million cost savings objective that we established at the beginning of the fiscal year. We also succeeded in reducing our controllable vessel delays and aggressively managing our vessel capacity.
We've set a further goal or/and in the process of identifying an additional $1 million to $2 million of annual cost savings in the current fiscal year. Based on April and May financial results, we are tracking to the middle of this annual cost savings number. We also believe that we continue to strengthen our market position as illustrated by successfully renewing 9 of 10 expiring contracts. In all but one renewal we were able to maintain or increase our market share.
We define sailing days as a day a vessel is crewed and available for sailing. As discussed in our prior calls, our expectation was to sail 3,500 sailing days in fiscal 2017. Total sailing days in the year were 3,601 sailing days compared to 3,911 days in the prior year period. The 310 days decrease was result of our previously disclosed decision not to operate certain of our lower margin bulk carriers that primarily carry grain. The decision not to operate one of the bulk carriers was the result of the loss of the time charter contract that the counter party bought out in the last quarter of fiscal year 2016. This vessel reentered service in September 2016 and operated for the remainder of the 2016 sailing season.
In addition, the company elected not to operate one of its US flagged self-unloaders in the 2016 sailing season because the return on capital expected to be generated from the vessel did not merit the capital required to maintain the vessel. These factors were partially offset by the performance of the company's newest vessel which was introduced in November 2015, contractual price increases, new business from our existing customers realized during the sailing season and higher water levels.
Given our belief that each of our operated vessels should achieve a theoretical maximum of 275 sailing days in the sailing season, operated vessels achieved 93.5% of the theoretical maximum compared to 93.4% of the theoretical maximum sailing days for the previous fiscal year. We sailed an average of 257 sailing days per vessel during the year ended March 31, 2017 versus the possible 275 days available. This compares to an average of 244 sailing days in the prior year period.
Vessel reliability remains a top priority for our company. Process improvements that we have implemented are continuing to yield results. For the year ended March 31, 2017, we had a total of 41 days out of service or 1.1% of total sailing days, this compares to our five-year average of 1.2% of total sailing days and close to 150 days out of service as recently as the 2012 sailing season.
We also monitor vessel reliability by measuring delayed days which we define as the loss time incurred by our vessels while in operations and includes delays caused by inclement weather, dock delays, traffic congestion, vessel mechanical issues and other varied events. Delayed days for the year ended March 31, 2017 equaled 285 or 7.9% of sailing days compared to 343 delays or 8.8% of sailing days during the prior year. Because of delays in completing certain of our winter maintenance projects, we expect to sail approximately 50 days less or 3,550 days in the 2017 sailing season versus our previous guidance of 3,600 days and 3,601 days for the 2016 sailing season. The delays also resulted and is not being able maximize our trade pattern efficiencies in April and May 2017.
We are making a number of changes that are intended to eliminate delays in completing our future winter work and maintenance projects. From a customer demand perspective, the start of 2017 sailing season has been consistent with our expectations. Customer demand is improved versus the same time last year which is allowing us to increase the percentage of time that our vessels are in revenue loaded condition. Since April 1st, we've been awarded over $3.5 million of new business that will be called in the 2017 sailing season. These new business wins will allow us to continue to improve our percentage of time and revenue loaded condition.
In addition, we have a robust pipeline of new business opportunities totaling more than $10 million representing a diverse number of customers and commodities. Our expected conversion rate for new business is running between 15% and 20%. As we evaluate new business, we are aggressively pursuing opportunities in which we can leverage of scheduling efficiency. This is consistent with our primary focus of creating efficient trade patterns to maximize the percentage of time that our vessels are in revenue generating condition.
For the quarter ended June 30, 2017, we sailed for 1,005 days compared to 969 days in the same period in 2016. We are continuing to effectively analyze and react to operating data on a real time basis to ensure that we are achieving our operational performance objectives. In the current market environment in order to drive vessel margin per day, we must continue to drive efficiencies by managing our operating metrics and expenses.
With that I'd like to turn the call over to Mark Hiltwein for review of the fiscal 2017 financial results. Mark?
Thanks Ed. I would like to provide a more detailed explanation of our financial results for the year ended March 31, 2017 compared to the prior year. For fiscal 2017, our net loss increased to $19.9 million this year from $5.6 million last year, a decline of $14.3 million. Net loss per share on a diluted basis was $1.08 compared to a net loss per share of $0.31 in fiscal 2016. The main item that caused the increase in net loss was $4.9 million due to restructuring and impairment charges, $4.8 million related to accelerated deferred financing cost, financing fees and peak interest PIC associated with our second lien debt, $2 million of additional depreciation and amortization and lower sales volume.
Total revenue for the year was $115.5 million, a decrease of 22.2% compared to $148.4 million in the prior year. The major factor impacting the decline in revenue was a $13.3 million decrease due to the elimination of outside charter revenue. The decrease was also due to reduction in fuel surcharges and 310 day decrease in sailing days. These were partially offset by the introduction of the company's new vessel for its first full year, contractual price increases, new business from our existing customers and higher water levels.
Freight and related revenue generated from company operated vessels decreased $13.1 million or 10.6% to $110.5 million during fiscal year 2017, compared to $123.6 million during the prior year. The decline was primarily result of the 310 days decrease in sailing days due to the company's decision to sail two fewer vessels and weaker demand throughout the season for the commodities that we transport.
Marine freight and related revenue per sailing day decreased $911, or 2.9% to $30,690 for fiscal year 2017 compared to $31,601 in the prior year period. This revenue decrease was primarily due to a change in the mix of cargos. Vessel operating expense decreased $16.2 million, or 19.4%, to $67.2 million during the fiscal year ended March 31, 2017 compared to $83.4 million during the prior year. The decrease was primarily due to the reduced sailing days, operating efficiencies and the result of cost efficiency initiatives. Vessel operating expense per sailing day decreased $2,657 or 12.5% to $18,658 during 2017 from $21,315 in 2016.
Our general and administrative expenses were $15.5 million during fiscal year 2017 compared to $13.9 million in 2016. Approximately $0.7 million of the increase relates to fees and expenses associated with obtaining waivers from our lenders under our credit facility. The remainder of the increase is attributable to duplicative headcount cost with the streamlining of certain function and locations.
For the fiscal year, we have initiated $1 million to $2 million cost savings target to reduce general and administrative expenses. During the year, we determined that our smallest Canadian flagged bulk carrier was unlikely to generate a sufficient long-term return on capital given the operating and capitalize expenses necessary to continue operating the vessel. As a result, we retired this vessel and reported an impairment charge of $1.9 million. In connection with cost reduction and operating efficiency initiative which primarily included the streamlining of certain functions and locations, we've recorded restructuring expenses of $2.4 million.
Our interest expense which is net of capitalized interest and includes $5.1 million of amortization of deferred financing cost was $19.5 million in fiscal 2017. The $7 million increased from $12.5 million in the prior year was primarily attributable to accelerated amortization of deferred financing cost of $3.8 million related to our second lien debt, additional PIC interest of a $1 million related to the first quarter covenant breach and a higher average debt balance related to the borrowing for the new vessel.
Cash interest expense during the year ended March 31, 2017 equal $13.4 million compared to $12.3 million for the year ended March 31, 2016. Depreciation expense was $20.9 million during the year ended March 31, 2017 versus $18.9 million for the prior year period. This increase of $2 million was primarily attributable to capital expenditures and depreciation due to the newest vessel introduction.
The Canadian dollar weakened by 0.3% compared to the US dollar during the fiscal year ended March 31, 2017 averaging approximately $0.762 per Canadian dollar during the fiscal year 2017 compared to approximately $0.764 in the prior year.
Our effective tax rate for the fiscal year ended March 31, 2017 was 7.6% on pretax loss of $19.7 million resulting in income tax benefit of $1.5 million. Our effective income tax rate for the fiscal year ended March 31, 2017 was 5.8% on a pretax loss of $4 million resulting in an income tax expense of $0.2 million.
None of the US federal income tax expense is payable in cash due to our net operating loss carry forward, our US net operating loss carry forward was $70.8 million and our Canadian net operating loss was $21.6 million as of March 31, 2017. Net cash flow from operations was $5.2 million in fiscal year 2017. The decrease in cash provided by operating activities was primarily attributable to reduced cash earnings for the year ended March 31, 2017, a higher accounts receivable balance due to the timing of customer deliveries and cash collections, a higher cash outflow on dry dock cost paid and a lower accounts receivable balance compared to the prior year.
Adjusted EBITDA decreased $2.8 million, or 8.6% to $29.7 million from $32.5 million in the prior year. The $32.5 million from the prior year includes a one time gain of $1.7 million for the contract that was bought out by one of our customers during the prior year period. We had total debt outstanding of $200.3 million at March 31, 2017, up from $187.7 million in the prior year period.
The increase in our debt balance related to lender fees associated with the waiver process, as well as the use of working capital related to accelerated payments to vendors.
Our debt balance outstanding under our credit facilities has been reclassified as short-term obligations within the company's consolidated balance sheet due to the company's expectations of not being able to satisfy certain financial covenant under such credit facilities during the ensuing 12 months period. Management is currently in active and collaborative discussions with its second lien lender with respect to recapitalization transaction. There is no certainty that a transaction will be consummated and we will provide an update as the plan develops.
I'd now like to provide an update on our cost savings initiative. As Ed mentioned, we have set a goal and are in the process of identifying additional $1 million to $2 million of annual cost savings in our upcoming fiscal year. We've reviewed our general and administrative cost throughout the year and although there is in excess of $0.7 million of one time item relating to our waiver in Q1, we believe that we have some opportunities to drive additional cost out of the G&A line. Travel, technology, consulting, real estate, insurance and legal fees are all our focus areas we execute on our plan.
We remain committed to continuous improvement in all aspects of the business with the goal of generating cash flow, recapitalizing our balance sheet and paying down debt.
With that I'd like to open up the lines for any questions. Operator?
And we will take our first question from Jon Tanwanteng with CJS Securities.
Good morning, guys. Thank you for taking my questions. To the extent that you are able to -- can you give us a little bit more color on the ongoing negotiations with your lenders? And how you expect the recapitalization to play out? What are the rules or options being considered and could that involve the issuance of equity?
Hey, good morning, Jon. We are in active discussion with our second lien provider. We like to keep the detail at a minimum as we progress through the process. So as mentioned in the script, we will provide additional description and progress as we receive it.
Jon, I think to add to what Mark is saying the discussion that we mentioned this is very much collaborative, our lenders are very supportive, got in excess of $30 million of liquidity right now and so we got to address the balance sheet issue, we are aware of that. We discussed that on prior phone calls and that's a major focus for us right now.
Okay, got it. If you are able to -- is there any idea of the cost and fees that are going to be involved in this recapitalization and what that would look like over the next quarter or two?
Yes, Jon, if I give you a number it would -- we don't have a great idea on the cost at this point. I think again as we move forward in the process we will provide additional guidance as we find out some additional information there.
Safe to say Jon, management is trying to get those numbers as low as possible and we are appreciative of managing those costs as best as we can.
Okay. Can you talk a little bit about the year-over-year increase in the operating expense in Q4? Was it just increase sailing days that shows at? It just seemed a little bit surprising given the scale of other cost savings that you mentioned before.
Majority of that Jon was increase in sailing days or delayed days were up as well so those are the two main factors impacting that.
Okay, got it .And looking forward how should we think about your pricing ability in the current environment? Is the competition getting stronger out there at all? Are all the vessels on like -- how are they utilized? Just any color on the competitive environment.
Customer demand is pretty good right now, Jon. There is not a lot of excess capacity on the Canadian side. On the US side there is a bit of excess capacity. Pricing continuous to be difficult in terms of trying to increase pricing. But certainly demand positions are better today than what they were at this time last year. But again it's difficult negotiations when it comes to try to increase price. In one of our customer contracts, the one customer contract that we did not renew the company made the unilateral decision to walk away because we felt the pricing was not appropriately --return on capital that we want to achieve. So we are trying to show real discipline around price as well.
Okay, got it. And remind me how many vessels are sailing in these 3,550 sailing days guidance? Also does that include sailing in January as well?
It includes a small number of days in the January through March period, Jon. And meaningfully less than what we achieved in the January through March 2017 period. All of our vessels are sailing presently with the exception of the vessel that we have rode off last year and US flagged self- unloaders that we continue to market to customers but have yet to make a decision as to whether to put it back into service.
Okay, got it. And then just the final question on cash flow. And I know this depends highly on in the outcome of negotiations but last year you had expected to pay down debt call to the tune of $10 million or so. What is the expectation this year and kind of how do we couch that ex what's going on right now under the hood?
Yes. Jon, I think it's difficult to say with the ongoing negotiations. I think that once we nail down the numbers from a fee perspective and ongoing interest expense I think we will be able to provide a better number. But at this point with the negotiations still underway, it's a tough number to provide.
And sir this time I am showing no additional questions in queue. I'd like to turn the call back over to Mr. Ed Levy for any additional or closing remarks.
Thank you, operator. Thank you all for your continued interest in Rand. To the extent you have questions, please don't hesitate to contact us. We are certainly available to answer any additional questions. We will try to do it this timely as fast as possible. Thanks again and have a great rest of the day.
And ladies and gentlemen, that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.