Pangaea Logistics Solutions Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 11, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Reza, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics First 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-seven twenty three-five twenty eight or 402 2202,654.

Operator

All lines are currently muted and after the prepared remarks, there will be a live question and answer If you would like to ask a question during the Q and A segment, please press star 1 on your phone. By pressing star 2. It is now my pleasure to turn the floor over to Noel Ryan with Balm Advisors.

Speaker 1

Thank you, operator, and welcome to the Pangaea Logistics Solutions First Quarter 2023 Results Conference Call. Leading the call with me today is CEO, Mark Filanowski Chief Financial Officer, Gianni DelSignore and COO, Mads 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 our 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 Q1 results. During a seasonally slower period for the global dry bulk shipping market where benchmark industry rates declined nearly 60% on a year over year basis. Pangaea delivered an average TCE rate that was approximately 50% higher than our broader market indices, resulting in another consecutive quarter of profitability. Our TCE earned was $14,372 per day for the 3 months ended March 31, 2023, compared to an average of $26,472 per day for the same period in 2022.

Speaker 2

Our long term COAs, specialized fleet and cargo focused strategy helped us to perform better than index rates in a slow market environment. Just yesterday, Vessel Index published its report on outperformance, and we again are at the top of the 5 year historical performance list of dry bulk public companies. Seasonal demand softness combined with extended holiday schedules in the East contributed to challenging market conditions in January February. Since bottoming in February, market rates recovered materially as the market became more balanced, giving a combination of improved seasonal demand, increasing activity in Asia and Tightness in Global Shipping Capacity. We've seen some easing of congestion with the lifting of COVID restrictions in China.

Speaker 2

The result was a reset of market rate during the Q1 as vessel capacity expanded in a seasonably weak period. Despite global recessionary concerns, we are not seeing any material deceleration in cargo demand. We are strategically focused on positioning our business to capitalize on the expected growth in global dry bulk volume and favorable rate dynamics over the coming years. During April, market rates averaged more than $13,000 per day, up from $6,200 per day in February. Meanwhile, vessel supply remains highly constrained with lead times ranging from 2 to 3 years, which we expect will keep float fleet growth low for the foreseeable future.

Speaker 2

Notably, asset values remain strong in this market as the demand for echo tonnage in the Ultramax segment has remained high. During the last 12 months, we've generated nearly $100,000,000 in free cash flow, positioning us to reduce net leverage and return capital to shareholders, while investing in high return organic and inorganic growth opportunities that align with our integrated shipping and logistics strategy. In April, we completed negotiations for the acquisition of a 61,000 deadweight ton dry bulk vessel in the second hand market for $26,600,000 cash. Built in 2014, this vessel to be renamed Bulk Prudence is expected to be delivered to Pangaea in June 2023, representing the 25th owned vessel in our fleet. The Bulk Prudence is our 9th vessel acquisition since 2021, highlighting our continued strategic focus on owning and operating a newer, more efficient fleet, well equipped to support client requirements on an on demand basis.

Speaker 2

In May, we entered into definitive agreement to acquire Marine Port Terminal operations in Port Everglades, Fort Lauderdale and Port of Palm Beach in Florida and in the Port of Baltimore, Maryland from host terminals in all cash transaction. With this acquisition, we will expand our North American terminal network to include the Mid Atlantic and Southeastern United States, while adding dry bulk Distribution Capabilities Within Growing Commerce Centers. Our Cargo Central strategy leverages our established competency within dry bulk shipping together with logistics requirements of our customers, allowing us to extend our service relationship beyond the ocean going vessel. As before, Pangaea remains committed to a consistent return of capital strategy. During the last two years, we've increased our quarterly cash dividend by more than 100% to $0.10 per share per quarter, representing a total payout of $18,000,000 annually, which further positions us as a compelling yield centric opportunity.

Speaker 2

Looking ahead, we continue to anticipate Pangea will generate strong cash flow this year, positioning us to further reward our shareholders, reduce debt outstanding and invest in our commercial expansion. On a strategic level, we continue to focus on moving closer to our customer, while managing an end to end supply chain solution that drives long term margin expansion and profitable growth. As before, we remain an opportunistic acquirer of tuck in assets that complement our integrated solutions offering. With that, I'll hand it over to Johnny.

Speaker 3

Thank you, Mark, and welcome to all of those joining us today. Our Q1 financial results continue to emphasize The durability of our business model, as we were able to maximize our operating leverage through our chartering strategy and deliver solid returns amid a seasonal weak TriBulk Market. 1st quarter TCE rates were approximately $14,300 per day, a premium of 48% over the average published market rates for Supramax and Panamax vessels in the period, which is supported by our long term COAs and our ability to opportunistically lock in short term cargo business at rates above the prevailing markets. Our adjusted EBITDA declined by approximately 48% year over year in the first quarter amid a 41% year over year decrease in total revenue attributable to lower market rates and a 17% decline in total shipping days versus the Q1 of 2022. Nonetheless, our adjusted EBITDA margins of 14.3% Our above levels achieved in similar market environments due to the successful execution of our business strategy.

Speaker 3

During a seasonal week period, we were able to flex down our chartered in days, which coupled with lower market rates served to reduce our charter hire expense by over 70% year over year. Vessel operating expenses increased by 3.2% year over year, driven by an increase in owned days and increases seen in crew travel costs, which have now begun to stabilize in 2023. Excluding technical management fees, vessel operating expenses on a per day basis were $5,006.32 down from an average of $5,805 for the full year of 2022. In total, our reported GAAP net income attributable to Pangaea for the Q1 was $3,500,000 or $0.08 per diluted share compared to $20,200,000 or $0.45 per diluted share in the Q1 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 $5,100,000 or $0.11 per diluted share, A decrease of $10,600,000 or $0.24 per diluted share versus the Q1 of last year.

Speaker 3

Moving on to the cash flows. Total cash from operations decreased by $21,000,000 year over year to $11,600,000 but maintain strong conversion as a percentage of our adjusted EBITDA. As a result, the company had $129,200,000 in cash and equivalents and total debt, including lease finance obligations of approximately $294,000,000 Of our total long term debt and financial leases, 53% is fixed at an all in rate of 4%. 40% is capped at LIBOR rate of 3.25% and 7% is floating at LIBOR plus 1.7%. During the quarter, The impact of higher interest rates was relatively muted in our results due to our fixed rate and capped rate debt as well as benefits from interest yielding deposits, which generated over $1,000,000 in interest income.

Speaker 3

To the degree that interest rates remain at current levels or higher, we would expect our blended interest rate to remain largely in line with what was realized during the Q1. At the end of the Q1 of 2023, the ratio of net debt to trailing 12 month adjusted EBITDA was 1.3 times. In conclusion, Our vertically integrated shipping and logistics model delivered above market performance during the softest market since the pandemic, supported by strong execution of our chartering strategy, continued fleet expansion and refreshment and disciplined capital allocation. As evidenced by our recent acquisitions, we are continuing to strategically utilize our strong liquidity position to opportunistically invest in our unique business model, while continuing to reduce debt and pay a stable quarterly cash dividend. As we seek to deploy capital toward new growth opportunities.

Speaker 3

We will seek to further optimize our return on capital investment consistent with our long term commitment and long term value creation for our shareholders. With that, we will now open the line for questions.

Operator

And we'll take our first question from Liam Burke with B. Riley. Your line is open.

Speaker 4

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

Speaker 2

Hello, Liam.

Speaker 4

Mark, China steel production is up pretty nicely year over year for the first at least through the Q1. How does that set you up If we're continuing to see inventories work down for your iron ore trade for the balance of the year.

Speaker 2

Thanks, Liam. I think China activity is sort of an indicator for us for the market. We're not really directly involved in a lot of trade in and out of China. But like we always say, all ships rise and fall with the tide in China. Our iron ore trade is mostly in the summer months, in the next few months concentrated from Baffin Island where we've got a 10 year contract to move iron ore from Baffin Island in the Arctic to Europe.

Speaker 2

So they those ships are fully spoken for during that period from August through October. And so any real iron ore activity Going to China will mostly affect our other ships on the water. It will Soak up more capacity in the Panamax trades that we generally see and that flows down eventually into the Supramax trades. So more activity on steel in China will be good for everybody out there.

Speaker 4

Great. And I know you have a sort of a flex strategy on how you handle your fleet, but do you see other Assets out there that you may want to purchase, similar to what you just announced on the recent vessel?

Speaker 2

We're always looking at ships, Liam. We've probably got 3 that we're looking at records for right now. But we're with value so high, we're trying to be opportunistic here, find exactly the ship we want, One that will we think will perform well in all the emissions trades, all the emissions regulations and within our existing Trades. So we do see ourselves continuing to renew and gradually expand the fleet. Yes.

Speaker 3

Great.

Speaker 4

Thank you,

Speaker 2

Mark.

Operator

Our next question comes from Poe Fratt with Alliance Global Partners. Your line is open.

Speaker 5

Hey, good morning. Just a couple of quick ones. Has the visibility in the business changed at all? You look at Q1 coverage of 2,635 days at 15,700 call it. If I look at the Q1 of last year of 'twenty two, I think you had over 3,000 like 3,100 days booked at this point in the year.

Speaker 5

Is it just a function of the rate environment that you're less willing to go forward at low rates and waiting for the inflection point that a lot of us think will happen over the next couple of weeks or Has the business changed?

Speaker 6

Hi, Poma, it's here. Thanks for the question. It is definitely What you're mentioning there is a play, right? We are not sort of willing to take on sort of that shorter term cover When the markets were trading like they were back in April. At that point, we sort of, of course, have our contract book, That's fine.

Speaker 6

But sort of the shorter term employment of our own ships then is exactly that, right? We don't fix more than 1 voyage at a time. Never really do any sort of sub charter to not log in at levels where we feel that these will come up as they did. So that is definitely part of it, yes.

Speaker 5

Okay, great. Thanks, Matt. And then if you could talk about your financing plans for the bulk prudence, traditionally, Pay cash and then finance either before the acquisition is completed or shortly thereafter. Can you just Talk about sort of how you're approaching the financing for the bulk prudence?

Speaker 3

Yes. Gianni here. Paul, thanks for the question.

Speaker 1

I think The way we're

Speaker 3

looking at her is, it's good to have a debt free vessel in the fleet to add to our current fleet and it gives us A little bit more optionality, and we're looking at her in 2 different ways. 1, if we target our next vessel, We have this vessel available to us to potentially finance. And then we have some balloons coming up later or early next year. So as those balloons approach us, we may use this vessel to help refinance those or extend those balloons. But for now, I think we're content.

Speaker 3

We're in a good position where we can buy the vessel. We can add her to our fleet. We can do it with the cash on hand and deploy it to take on this asset. And I think We'll have some optionality as we go ahead, but there's no pressing issue for us to add debt On that vessel.

Speaker 5

Yes. I mean, even after paying cash, you're still going to have a pretty healthy, If not, overcapital cash balance. Mark, I think you You said that you're assessing 3 opportunities right now or looking at the books on 3 different opportunities From a fleet expansion standpoint, should we expect the fleet, the owned fleet to expand? Or Would you end up selling one of your older assets and keep the owned fleet sort of in that 25 range?

Speaker 2

Thanks. When we talk about fleet renewal, I guess we're saying that trading in some older ships for some newer ships is probably the way we'll move forward and gradually and small steps expand the fleet. So it's we do need to find the best ships that trade Best under the new emissions rules and that's generally ships that are built say 2014 and later. So we've got some ships that are older, that are approaching their next special surveys and we'll make decisions as those surveys Come up as to what to do with those ships, but we're constantly looking at ships that are available in the market. And if we think there's a good ship that comes up and a good chance for us to get That ship in a good position, in a good delivery time, one that fits our trades, We can move on

Speaker 5

it. If you wouldn't mind highlighting when the next special survey is on one of your older assets. Is it a 2023 event or 2024 event?

Speaker 2

I think there may be it depends on Timing where the ship is trading and where the opportunity is, but I think it's generally after the first of this year, There we got 2, I think coming up.

Speaker 6

Yes. So early next year, the sort of the likely candidates are coming up for service.

Speaker 5

Okay. So more of a sort of early 'twenty four event, maybe late 'twenty three. And then you Did the acquisition on the 4 different ports, can you and it turned out to be a lot less Lot less than $10,000,000 more like $7,200,000 Can you talk about the multiple cash flow that you paid? And then also what potential growth opportunities you see within not only those 4 locations that you acquired, But other opportunities you might be looking at in the past, you've talked about deploying capital up to I think it was $25,000,000 in that business. And can you just Sort of talk about the acquisition in the context of growth profile, but then also other opportunities we'd be looking at.

Speaker 3

Yes. Paul, I think this is one we're really excited about. Some of the other ports that we operate, We do it under joint ventures. We have partners that are bringing expertise to the table. This one we're acquiring an operating entity.

Speaker 3

It It comes with people, equipment. It's ready to go and it's going to really supplement what we currently can offer our customers. So we'll have a full solution. We'll have real assets on the ground that are ours, 100% ours. We'll have a labor force that we can use.

Speaker 3

We have customers we're bringing on, some of which are already customers on our freight side. So The complementary nature of this and the sort of full ownership of these assets and These people we're bringing on, I think is what we're really excited about. It gives us flexibility we've never had. The purchase price, we're happy to do it at a small scale to start. We don't want to deploy 100 of 1,000,000 of dollars, but if we can buy these types of operations and expand our expertise.

Speaker 3

I think it's exactly what we're looking for. From an earnings perspective, We expect it to contribute $1,000,000 $1,500,000 of EBITDA and that's to start. And as we look to grow it and expanded and what the freight components that we can add to this. I think we expect that to grow. But at least to start, we have and operating business that's going to add to the company and really expand the offering that we're able to deliver.

Speaker 5

Got you. So less than a 5 times EBITDA multiple.

Speaker 3

We hope so. That's what we're working hard to make sure.

Speaker 5

Okay. And then if I instead of Getting out of the queue and coming back, can I just ask a couple of modeling questions? One is that, Gian, if you look at the OpEx and G and A, a total of 19.3% for the quarter, that was Flat with the Q4 of last year and up, as you mentioned, from the Q1 last year. But the mix changed, your OpEx versus G and A change. Is that can you just help me understand what's going on there and sort of how to model out G and A versus OpEx going forward?

Speaker 3

So operating expenses, the comments I made in our prepared remarks, I think We see a little bit more stabilization in those costs. I think our Q1 average, we expect that to remain consistent for this year. Crew costs was the really the big driver in travel and moving people around. That's still an inflated sort of cost in the market, but we're seeing it sort of start to stabilize some of these other costs. And we're happy to see the average for Q1 drop below sort of our full year 2022 average and certainly below well below our Q4 of 2022.

Speaker 3

So I think the cost for Q1, I think are pretty reflective of what we expect for the rest of the year. And G and A, it's I think same thing. I think we'll see maybe a slight reduction, but not much. I think we're pretty I think that'll probably be a run rate for the rest of the year. And it's just a function of there are some increasing costs.

Speaker 3

We do have more travel. People are out going to see customers and clients and It's exactly what we should be doing. So, but as far as expectations for increasing that, I don't think so. I think We'll be around that range, maybe a slight decrease in Q2 and then balance of the year.

Speaker 5

Great. Just one last Quick one is that your non controlling interest would you back out of net income to get net income to common shareholders. It's been trending down since the Q2 of 2022, when it was actually Helpful this quarter. Can you just talk about how we should model that for not only the Q2, but also the rest of the year?

Speaker 3

So there's 2 sort of minority interests, right? There's a non controlling interest that's recorded as long term liability, and there's a portion of those earnings that are kind of recorded above the line or above net income. And then below that is the non controlling interest from our JV on the 6 ICE Class 1.8 Panamaxes. Largely that the earnings for that joint venture are largely driven by profit share. The charter hire that we're paying to that joint venture, which is a consolidated entity, This largely puts us at a cash breakeven to cover the debt, cover the operating expenses.

Speaker 3

And most of the earnings out of those companies are coming from profit share. So as we see increases in market, we'll see an increase in The allocation of profit to that joint venture. So that average earnings of Q1 'fourteen It was just a tick below where that company will start generating significant profit. So As the market improves, the profit share, it's obviously beneficial for all of us, And we'll see probably that increase, but it is a variable number and it's that joint venture is structured that way to be variable. We all take We're all taking ownership of the profits and losses of that company.

Speaker 3

So It's I hope that answers your question, but it is a variable number.

Speaker 5

Yes. So we did The trend hopefully will reverse because it means that there's more profits coming through the JV.

Speaker 2

Right.

Speaker 5

Okay, great. Thank you.

Operator

It appears we have no further questions at this time. I'll turn the call back to Mark Silinowski, CEO, for any additional or closing remarks.

Speaker 2

And a member of our team will follow-up with you. This concludes our call today. You may now disconnect.

Operator

And this does conclude today's program. Thank you for your participation and you may disconnect at any time.

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Earnings Conference Call
Pangaea Logistics Solutions Q1 2023
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