Pangaea Logistics Solutions Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Britney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Third Quarter 2023 Earnings Teleconference. Today's call is being recorded and will be available for replay beginning at 11 am Eastern Standard Time. The recording can be accessed by dialing 800-839-7414 for domestic in 402-220-6068 for international.

Operator

If your questions have been answered, you may remove yourself from the queue at any time by pressing star 2. We do ask that you pick up your handset for optimal sound quality. It is now my pleasure to turn the floor over to Noel Ryan with Valem Advisors.

Speaker 1

Thank you, operator, and welcome to the Pangio Logistics Third Quarter 2023 Results Conference Call. Leading the call with me today is CEO, Mark Filanowski Chief Financial Officer, Gianni DelSignore and COO, Mats Petersen. Today's discussion contains forward looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update are forward looking statements.

Speaker 1

At the conclusion of our prepared remarks, we will open the line for questions. And with that, I would like to turn the call over to Mark.

Speaker 2

Thank you, Noel, and welcome to those joining us on the call and webcast today. After the market closed yesterday, We issued a release detailing our Q3 results. The Q3 represents a seasonal peak in demand levels across our Arctic trades. Our global fleet of ice class vessels were fully utilized in the period. Fleet utilization in our deep portfolio of COAs Contributed to an earned TCE rate that exceeded the bottom market index by nearly 50%.

Speaker 2

Our TCE earned was $15,748 per day for the 3 months ended September 30, 2023, Compared to an average of $24,107 per day for the same period in 2022, as the dry bulk markets absorb the release of capacity from prolonged port congestion. Volatility continues in the markets as market index fluctuations are being caused by ongoing geopolitical uncertainty. On the plus side, the markets in which we directly participate, including construction aggregates and cementitious materials, We're strong across major customers and regions we served in the period. To that end, as of November 7, We booked over 2,700 days for the Q4 at an average rate of $19,000 per day, a testament to the value and durability of our cargo focused business model. Entering 2024, The bulk shipping market continues its volatile path.

Speaker 2

However, growth in the global dry bulk fleet remains low as new build activity is limited. For our part, we believe our premium rate model and long term COAs position us to execute on our strategy. Given our continued confidence in the performance outlook for our business, our capital allocation priorities remain unchanged. Over the last year, our operating cash flow conversion has been in excess of 70% of adjusted EBITDA and we've utilized this cash generation to pay down more than $20,000,000 in debt. We've also Reinvested approximately $50,000,000 in our business through acquisition and fleet renewals, while returning more than 18,000,000 dollars to shareholders to our quarterly cash dividend.

Speaker 2

We remain committed to a consistent return of capital program and continue to view our quarterly cash dividend as an integral part of our investment thesis, one that emphasizes total shareholder returns. In October, we entered into an agreement to sell the 2006 built Supermax Bulk Trident for $9,800,000 This sale is aligned with our strategic focus on owning and operating a newer, more efficient fleet consistent with our approach to regular fleet Refreshment. In 2024, we will evaluate additional vessel acquisitions and divestitures while supporting the unique requirements of our customers on an on demand basis. Before I turn the call over to Johnny, I want to note that our Q3 was our 1st full quarter of ownership of the port and logistics business that we acquired in June. The business is performing well and we continue to work diligently on expanding that business with our current customer base, while seeking out opportunities to leverage the growing economies of scale between our onshore and offshore assets.

Speaker 2

With that, I'll hand it over to Johnny for a discussion of our Q3 financial results.

Speaker 3

Thank you, Mark, and welcome to all those joining us today. Our Q3 financial results continue to emphasize the flexibility of our business model as we were able to maximize returns through the utilization of our specialized fleet of ice class vessels, which were employed on long term contract business during the summer ice season. 3rd quarter TCE rates were approximately $15,748 per day, a premium of 49% over the average published market rates for Supramax and Panamax vessels in the period, which is supported by our ice class fleet, our long term COAs and forward bookings, which lock in rates for future cargo performance. Our adjusted EBITDA declined year over year to $27,900,000 However, we held our adjusted EBITDA margin approximately flat year over year due to our flexible chartered in strategy and active cost management efforts amid inflationary pressures. During this period of softer market rates, our ability to opportunistically adjust our chartered in fleet, coupled with lower market rates, served to reduce our charter hire expense by nearly 50% year over year from an average of $21,226 per day in the Q3 of last year to $10,800 per day in the Q3 of 2023.

Speaker 3

Furthermore, vessel operating expenses net of technical management fee decreased by 12% year over year From an average of $6,471 per

Speaker 4

day last

Speaker 3

year to $5,706 per day in the Q3 of 2023. As I mentioned, the decrease was driven by prudent operating cost management as well as costs incurred in the prior year related to the change in technical managers, which were not incurred in the current year. In total, our reported GAAP net income attributable to Pangaea for the 3rd quarter was 20 $200,000 or $0.42 per diluted share compared to $19,800,000 or $0.42 per diluted share in the 3rd quarter of last year. Excluding the impact of derivative instruments as well as other non GAAP adjustments, Our reported adjusted net income attributable to Pangaea during the quarter was $14,400,000 or $0.32 per diluted share, a decrease of $8,900,000 or $0.20 per diluted share versus the Q3 of last year. Moving on to the cash flows.

Speaker 3

Total cash from operations decreased by $16,000,000 year over year to 16,300,000 due to the decrease in TCE rates. At quarter end, the company had $87,400,000 in cash and total debt including finance lease obligations of approximately 276,000,000 Of the $276,000,000 in debt, approximately $20,000,000 became current at the end of the second quarter, representing balloon payments that are due in May of 2024. This credit facility is currently locked in at a fixed rate of 3.96 percent and we expect to refinance this as we approach maturity in May of 2024. During the quarter, the impact of higher interest rates was relatively muted in our results due to our fixed rate and capitalized debt, as well as benefits from interest yielding deposits, which generated nearly $1,000,000 in interest income. At the end of the Q3 of 2023, the ratio of net debt to trailing 12 month adjusted EBITDA was 2.2 times.

Speaker 3

In conclusion, our vertically integrated shipping and logistics model continued to deliver above market performance, Supported by strong execution of our specialized ice class fleet, our chartering strategy, continued fleet expansion and a disciplined capital allocation. During periods of market volatility, we believe that our business model We'll continue to deliver above market returns and consistent cash flow generation. With that, we will now open the line for questions.

Operator

Star 2. Once again, that is star and 1 if you would like to ask a question. And we do ask that you please pick up your handset to allow optimal sound quality. We'll take our first question from Liam Burke with B. Riley.

Operator

Your line is now open.

Speaker 5

Thank you. Good morning, Mark. Good morning, Johnny.

Speaker 2

Hello, Liam. Nice to hear from you.

Speaker 5

Thank you. You too. You did sell 1 vessel this quarter. You said 2024, you'd be looking to possibly add. Considering pricing, Scarce Resources.

Speaker 5

How does the pipeline look for potential vessel acquisitions?

Speaker 2

We're hoping the S and P Mark, it takes a little pause here and we'll be opportunistic when it comes to adding back to the fleet. We've got a pretty strong business here. We see upside in the long term for us, and we're I'm trying to shrink the fleet. We're going to try to grow it a little bit.

Speaker 5

Okay. And I mean, would you consider I mean, do you see opportunity to grow the fleet more than 1 vessel next year? Or I mean, is it just going to you're just going to work the S and P market as it comes to you?

Speaker 2

I think the latter. We've always been opportunistic in our purchases. We try to build a cargo base before we go to market to purchase ships. And when we purchase ships, we try to do it In times when it starts a little lower than it is higher.

Speaker 5

Great. And on the ports operations, it seems to be contributing nice stable EBITDA. You mentioned in your comments That you were looking to grow organically from new and existing customers. But do you see any opportunities to add General ports to your, for lack of better servicing portfolio?

Speaker 2

We do. We do. We're actively looking at properties that become available in places where our ships go and working with our customers in important areas where they take in cargo. So yes, we are looking to expand that business Where it makes sense for us, where we can add services to our basic service, which is ocean transportation. But sometimes it goes the other way.

Speaker 2

We've got a Customers taking in cargo in a specific tour, they might ask us to look at the ocean transportation also. So it's great to go both ways for us and it has.

Speaker 5

Thank you, Mark.

Operator

Thank you. We'll take our next question from Ho Fratt with Alliance Global Partners. Your line is now open.

Speaker 4

Good morning, Mark. Good morning, Gianni and I assume good morning, Matt. Can you just talk about the Stebadorings operation? Were there any start up costs in that operation that put the gross margin at 11%? And what sort of a good run rate to use going forward on that business line?

Speaker 2

The stevedoring business doesn't come in a steady stream. Over time, of course, it's a pretty steady business, but ship schedules, cargo schedules, whether a cargo owner engages us to do seabedoring And say Fort Lauderdale is or not, they might pick another available It depends on the timing of the ships coming in and going out. So in terms of steady, it's steady over time. We've got contracts to service certain customers in the various But it is a little bit lumpy. In terms of start up, I don't think there were any Significant.

Speaker 3

Sorry, I got it. So, yes, there were some start up costs, but probably they hit our G and A. So, part of the reason our G and A was A bit higher in Q2 is a lot of the legal fees and start up costs that we would have we incurred closing The acquisition were not capitalized and rather they were expensed through G and A. So you saw a little bit of a spike in our G and A that quarter. And then there's we now have intangibles, right?

Speaker 3

We have our goodwill that hits our balance sheet, and we have intangibles we acquired through the acquisition, including customer contracts, licenses, etcetera, which are being depreciated and amortized. So there is more That's hitting the P and L, besides just the terminal revenue and we have terminal and fee for expenses. But some of those were one time and obviously other ones are flowing through depreciation, not affecting EBITDA.

Speaker 4

Okay. And so relative to the Q3, how does the Q4 look right now? We're Close to halfway through it. Can you just give me sort of a color on how that steep Doran terminal Operation looks right now relative to the Q3?

Speaker 2

Towards the terminals operations specifically, you said?

Speaker 4

Yes. I'm just trying to figure out where I know it's a very small part of the business right now, but it's Fairly new and I'm trying to appreciate sort of how to model it.

Speaker 2

We get a schedule of upcoming Shifts, it only goes out about a month, but I think we'll be pretty active over the next month or 2. Okay.

Speaker 4

That's all right, Lars. Why don't we move on to your forward cover. Relative to The second or at the time of the Q2, Paul, the days that you spoke for the Q4 are down A little bit modestly like 20%, but the rate is a lot higher. Can you just talk about that dynamics of Your forward cover right now and that 2,715 days that you booked, Where do you think how many shipping dates do you think you'll have total in the Q4? And just Matt, could you give us sort of dynamic of how the were you able to capture the run up in rates in September, October and The rest of the quarter is going to be a little weaker or sort of just if you can give us an idea of the dynamics of your forward cover at this point.

Speaker 3

So Paul, I'll start with the as far as what we published and sort of guided to for the Q4, which was the 19,000 a day rate in about 2,700 days. That What we're estimating for the quarter, I think it's similar. We're about 45 vessels in that ballpark for the Q4. So The 2,700 days obviously is just a snapshot for what has been performed and booked through November 7 or November 6 rather. So there are definitely there are certainly days that will still come into the quarter based on we can continue to operate around that 45.

Speaker 3

It's probably coming down from a high of 51 shifts down to about 45 to 48. So that's what the quarter will look like. As far as rates, we're happy to see it. We had a great start going into the 4th quarter. We have We've got a lot of forward cargo.

Speaker 3

So we think we're pretty well positioned for the Q4, but I'll let Mads give a bit more color on that.

Speaker 6

Yes. I think, Paul, it's driven primarily by our Arctic business, which sort of extends from the Q3 into the 4th. That, for Sure. It's a positive contributor to that. But in addition, we do have quite a bit of non It's the business on the books that we are performing at the moment.

Speaker 6

We will have that in Q4 as well. But yes, the market is obviously softer in those numbers. That one potentially impacted us well, sure.

Speaker 4

Okay, great. That's helpful. And then Johnny, you highlighted Charter hire expenses were a lot lower year over year,

Speaker 3

a lot lower than what I expected.

Speaker 4

Can you talk about the 4th quarter run rate So far for charter hire expenses, you're going to charter in less vessels. It looks like you're going to have about 500 less days in the 4th quarter This is the Q3, but can you just talk about charter hire days as far as just maybe gross number or even on a per day basis?

Speaker 3

Yes, I know this is sort of a lagging effect that impacts us. And Certainly, it's a positive it can be a positive and sometimes it's certainly in rising markets, we're able to Chartering at lower rates and then utilizing ships in those higher markets and it has that sort of inverse effect. Yes, Q3, it was 10.8, I think, was our total cost for charter in, which was Compared to that $15,700,000 that we earned, so we'll probably see a little bit of an uptick in our charter hire expense, but I don't expect it to increase significantly. We're still chartering for period and have some shifts coming into the Q4 that we had already fixed. But Of course, as the market fluctuates, our charter hire expense fluctuates.

Speaker 3

But it's again, It's largely dependent on timing and where the market is.

Speaker 2

Yes. And I'm

Speaker 6

sorry if I could just add, everything we do in this space It's short term at the moment. We still see best value in the shorter executions on any time chartering business we do. So it's not something that will lap into several more quarters.

Speaker 4

Okay. And then, you talked about financing, Gianni. Can you just am I correct in looking at The Trident has about $4,600,000 of obligation to purchase options. So You're going to have sort of what's the so what's the net proceeds going to be on that?

Speaker 3

We're expecting 5, About $5,000,000 of cash derived out of that transaction. And you're right, We have the purchase option on it's called the purchase option, but we view it as a financing. So it's really we'll call it the balloon payment impact due on the lease. And we're in the process of closing that out actually now, and We'll be ready to sell her within the end of November, early December, she'll be sold and they'll generate about 5,000,000

Speaker 4

Okay. And then you have what little over $20,000,000 due in the Q2 in the May timeframe. You also have The friendship lease that looks like we incurred in the Q3 September ish. Would that also be a refinancing or is that potentially a sale candidate?

Speaker 3

We have the prudence That's also we bought remember, we bought her with no debt attached. So we have her debt free. And then in that May facility, we have the bulk Endurance that's going to be coming due. So I think the way we look at it now is It probably likely the Endurance and the Prudence would be our candidates and do some sort of package for those two vessels and keep the others debt free. Just so we can be a bit to your point in what Mark said earlier, we want to be opportunistic with our vessels and If it's a sale candidate in the market, it's there, then we want to be in that position.

Speaker 3

So yes, so I think you're absolutely right, Colin, in How you're thinking about that and how we're thinking that as that approaches maturity.

Speaker 4

Okay, great. Thanks a lot.

Speaker 2

Thank you, folks.

Operator

Thank you. That does concludes today's question and answer session. I will turn the call back over to Mark Zylinowski for any additional or closing remarks.

Speaker 2

Thank you for joining us today. Have a great day and happy holiday for Thanksgiving.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Pangaea Logistics Solutions Q3 2023
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