Pangaea Logistics Solutions Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 10, 2023

There are 7 speakers on the call.

Operator

Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Second Quarter 2023 Earnings Teleconference. Today's call is being recorded and will be available for replay the 5,153 Domestic OR 402-220-1182 International. Call.

Operator

All lines are currently muted and after the prepared remarks, there will be a live question and answer session. Call. It is now my pleasure to turn the floor over to Noelle Ryan with Balam Advisors.

Speaker 1

Operator. Sir?

Speaker 2

Thank you, operator, and welcome to the Pangaea Logistics Solutions Second 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 our forward looking statements.

Speaker 2

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 3

Thank you, Noel, and welcome to those joining us today on the call. After the market closed yesterday, we issued a release detailing our 2nd quarter results. During a period of continued softness in global dry bulk shipping markets, where benchmark industry rates declined nearly 60% on a year over year basis, Pangaea delivered an average TCE rate that was approximately 50% higher in our broader market indices, resulting in another Our TCE earned was $15,558 per day for the 3 months ended June 30, 20 23, compared to an average of $27,139 per day for the same period in 2022. Our long term COAs, specialized fleet and cargo focused strategy helped us to significantly outperform index rate the In the second quarter, excess dry bulk capacity created by easing port congestion Global trade and ton mile demand remain buoyant and markets in which we directly participate, including construction aggregates Semanticious Materials are especially active, where we participate in ocean freight, stevedoring and terminal operations. Though we are experiencing a softer near term market, the long term supply and demand dynamics remain very favorable.

Speaker 3

Newbuilding vessel supply remains highly constrained with lead time stretching into 2026, which we expect will keep fleet growth low for the foreseeable secondhand asset values have recently softened a bit, but remain strong in this market as the demand for echo tonnage in the Ultramax segment has remained high. As such, we remain strategically focused on positioning our business to capitalize on the expected growth in global dry bulk volumes and favorable rate dynamics over the coming years. Through August 8, market rates have continued to fall, averaging approximately $8,500 per day compared to $10,431 per day in the Q2. For Pangaea, the 3rd quarter represents the peak of our Arctic trade season With all 10 of our ICE Class 1A vessels fully committed through October at ICE Class premium rates. The These ships remain a key value differentiator for us.

Speaker 3

We have made both financial and operating commitments to this important trade. During the quarter, our post Panamax ice class ships built by us in 2021 received the DNV class Silent Environmental Notation, the 1st dry bulk ships ever to receive this designation, helping ensure our ships make a minimal footprint In pristine environments like the Arctic Ocean. Along with our overall cargo focused strategy in key commodity trades, Our efforts have allowed us to outperform the market by an average of 30% annually over the last 5 years, And we remain the top performer on the vessel index list of publicly listed dry bulk companies over that period. We project that our Q3 TCEs will significantly exceed the quarter to date indices. Through August 8, we have booked 3,500 shipping days, returning $16,700 per day Q3.

Speaker 3

While we remain focused on delivering above market returns for our shareholders, capital allocations have also been a key priority for us. Over the last 12 months, our operating cash flow conversion Has been over 80% of our adjusted EBITDA, providing for ample cash to de risk our balance sheet, invest in growth and return capital to shareholders through a consistent dividend. We've grown our quarterly cash dividend to $0.10 per share, Representing a total payout of $18,000,000 annually, which we believe represents a sustainable commitment regardless of current market conditions. In June, we took delivery of the 61,000 deadweight bulk prudence, which we purchased for cash. The The acquisition expands our own fleet to 25 vessels and is congruent with our continued strategic on owning and operating a newer, more efficient fleet as well equipped to support client requirements on an on demand basis.

Speaker 3

Also in June, we closed on the acquisition of Marine Port Terminal Operations in Florida and Maryland, an all cash transaction. This acquisition represents critical expansion of our North American terminal network to include the Mid Atlantic and Southeastern United States, adding dry bulk distribution capabilities within growing commerce centers. In alignment with our cargo centric strategy, We are already actively pursuing opportunities to leverage this footprint for growth with new and existing customers. We're now beginning to break out our port terminal operations business within our financials to increase transparency as we focus on growing this business in coming years. Looking ahead, we continue to anticipate Pangaea will generate strong cash flow this year, positioning us to continue to reward our shareholders, de risk our balance sheet and invest in our commercial expansion.

Speaker 3

Strategically, our focus is the same as ever. We are confident in the long term tailwinds that are setting to support drybulk economics. And we believe the most compelling value opportunity for our shareholders will come from sticking to our differentiated business plan, deepening our relationships with our customers and optimally positioning our fleet to maximize asset values in a higher market rate environment. With that, I'll hand it over to Johnny for a discussion of our Q2 financial results.

Speaker 4

Thank you, Mark, and welcome to all of those joining us today. Our Q2 financial results continue to emphasize the durability of our business model, as we were able to maximized returns through our charter in strategy, I mean, a soft dry bulk market and against the backdrop of record profitability in the Q2 of last year. 2nd quarter TCE rates were approximately $15,558 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 long term COAs, Our ability to opportunistically adjust our utilization of chartered in vessels in periods of softer market rates in forward bookings, which lock in rates for future cargo performance. Our adjusted EBITDA declined record quarterly adjusted EBITDA of $44,200,000 and an adjusted EBITDA margin of 22.6% in the Q2 of last year. The decline was primarily driven by a nearly 40% year over year decline in revenues as market rates decreased by 60% year over year.

Speaker 4

During this period of softer market rates, we minimized our charter in dates, which coupled with lower market rates served to reduce our charter hire expense by over 55% year over year the Q2 of 2023. Vessel operating expenses increased by 2.2% year over year. However, excluding technical management fees, vessel operating expenses on a per day basis were $5,517 per day, 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 Q2 was $2,800,000 or $0.06 per diluted share, Excluding the impact of derivative instruments as well as other non GAAP adjustments, our reported adjusted net income attributable Tangia during the quarter was $4,600,000 or $0.10 per diluted share, a decrease of $24,300,000 or $0.54 Per diluted share versus the Q2 of last year. Moving on to cash flows.

Speaker 4

Total cash from operations decreased by $35,000,000 year over year to $2,000,000 due to the decrease in TCE rates. The company also deployed $34,000,000 in capital during the quarter on vessel and business acquisitions as Mark discussed a moment ago. As a result, the company had $84,300,000 in cash and equivalents in total debt, including lease finance obligations of approximately $287,000,000 Of the $287,000,000 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 approximately 3.96%. We are discussing with multiple lenders We are willing to provide the necessary financing, but we are tactically managing our cost of capital in the current interest rate environment Of our total debt and financial leases, 53% is fixed at an all in rate of 4%, 41% is capped at sulfur rate of 3.25% and 6% is floating at sulfur+1.96 During the quarter, the impact of higher interest rates was relatively muted in our results Due to our fixed rate and cap rate debt, as well as benefits from interest yielding deposits, which generated over $1,000,000 in interest income.

Speaker 4

To the degree that interest rates remain at current levels or higher, we would expect our blended interest rate to remain largely in line What was realized so far this year? At the end of the Q2 of 2023, the ratio of net debt to the trailing 12 month adjusted EBITDA was 2.1 times. In conclusion, our vertically integrated shipping and logistics model continued to deliver above market performance during a soft market, supported by strong execution of our chartering strategy, continued fleet expansion and disciplined capital allocation. Strategically, our focus is call on consistently generating and returning value to shareholders, while leveraging our current balance sheet to optimally position call on our business to capitalize on long term opportunities in the dry bulk market. During periods of market softness, we believe that our business model We'll continue to deliver above market returns and consistent cash flow generation.

Speaker 4

With that, we will now open the line for questions.

Operator

And our first question will come from Liam Burke with B. Riley. Your line is open.

Speaker 5

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

Speaker 3

Good morning, Liam. Thanks for joining us.

Speaker 5

Mark, can we talk about your fixtures for the Q3 at twice the current market? You mentioned obviously it's the peak Arctic season and you're getting the ice class premium, but can you talk about the rest of the fleet? Is it the COAs that are above market or are you getting a premium to spot with other vessels.

Speaker 3

Liam, thanks for the question. The The ice class ships, 10 ships in our own fleet, they are earning the ice class premium in this period of time During the Q3, it's the biggest part of our ice season. But the rest of the business, we Did take some cargo earlier in the year with what appeared to be then low rates with everybody's expectation. But we it's our business plan to give up a little bit of the market Spikes, those infrequent market spikes in order to protect ourselves from downside periods in times like this. So we were a little bit opportunistic earlier in the year and we are working off some of those annual COAs that were booked earlier this year.

Speaker 5

Great. Thank you. And you closed on the Marine Port acquisition. You incurred some terminal and seaborne expense in the Q2. Is that a fixed cost or was there any revenue associated with that?

Speaker 3

There's some revenue identified in the income statement. It's only 1 month. So it's hard to draw any real conclusions over it. The The expenses that we incur, Johnny, were they in cost of sales or were they in G and A down below, cost to close the transaction costs, legal expenses, environmental reviews, etcetera. Johnny?

Speaker 4

Yes. Liam, it's absolutely worth noting that we closed in June. We have 1 month of And we're now starting to show this financial information, discreetly for that entity. So again, it's 1 month of activity. It is there are 2 new line items in our P and L being terminal and stevedore revenue and then Terminal and Steve Door Expenses.

Speaker 4

In addition to that, there was G and A incurred during the quarter related to the closing that was Part of our part of the increase that we saw in G and A. But going forward, That will be part of our P and L. That's an operating segment for us. But the other components Of that business that are in joint ventures will continue to be recorded unfortunately in other income below the line. But This entity now will be above the line.

Speaker 5

Great. Thank you, Johnny. Thank you, Mark.

Operator

Thank you. And our next question will come from Cofratt with Alliance Global Partners. Your line is open.

Speaker 1

Yes. Tiani, can you just Talk about the decision to break out the terminal in Schievedore, I mean, you look at it, it's less 1% of revenue. Can you just talk about that? Does this indicate that it might become a more meaningful business down the road? And sort of if you can Highlight any plans to deploy capital into that business.

Speaker 1

And then if I do the math on it, it's roughly 28% gross margin. If you just net look at revenues and then net out the costs and can you just talk about sort of the margin profile on that business?

Speaker 4

Yes. So sure, on the first question, I know there's levels of how we can break this out From an accounting perspective, right? It's definitely a new operating segment for us. It's a different type of revenue. It's a different type of business.

Speaker 4

It's complementary obviously and strategically important to us, but the nature of its revenues are different than voyage revenue or charter revenue, which are our 2 other Mainstreams of Revenue. So from that perspective, it is warranted to break out and we have, But there's other levels. We don't this won't be a separate reporting segment just yet. It will be a new operating segment, but it's not a reportable segment. We hope to grow it and to continue.

Speaker 4

We have we made an effort and you've heard it on conference call after conference call and presentation after presentation that this is part of our strategy to diversify and have a larger offering to customers than What a traditional shipping company would necessarily provide. So it's definitely strategically important and showing the information As we have on our P and L, which essentially is our 2 new revenue and expense lines, I think it's important. Again, what I said to Liam, it is 1 month of activity. The business can be lumpy. There could be periods of multiple ships at port and it could be periods where there's fewer ships.

Speaker 4

So 1 month of activity, I Don't think it's the best indicator on a go forward basis, but it is certainly helpful. On a longer term, We project slightly lower margin than what we saw in the 1st month of activity, but it still will be it will be shown separately and It's important to us to continue growing it.

Speaker 1

Great. And then Could you quantify the ice class premium that you booked in your Ford cover 200 I think if I did the math correctly, it's about 26% a year forward days booked. Can you just quantify What those 9 20 days were booked at as far as a rate?

Speaker 6

Yes. Hi, Paul. Matt here. I mean, in this current rate environment, So the average return on that ICE business in the occupied is about twice the current index.

Speaker 1

Okay. And even if it's twice the foreign index. It implies that the rest of the fleet is, was well above what current rates are. And can you just talk about potentially whether you forward booked into Q4 2 and so that we potentially are going to see above average Bookings for the Q4 as we look at the Q3 conference call.

Speaker 6

I mean, We do have a pretty similar book, I would say, to Q3 outside the ice season, right? So for Q4 outside the ICE business, as Mark alluded to earlier, the numbers that we reported so far Q3 and not even solidifying the ice. So it's also our sort of our other business and also a healthy degree of cover going into that quarter.

Speaker 1

Okay. And then when you look at the overall business, I think a competitor You always mentioned that the COA business is backed off. Companies are making shippers are making less firm commitments as we look out, call it, 6 months or so. Are you seeing the same thing? And then What does that imply as far as your chartered in fleet for the 3rd and 4th quarters?

Speaker 6

In terms of the channel in fleet, that is in our business always a pretty dynamic number depending on the market conditions at any current time, right? So In terms of the outlook, I would say that this is not typically the season where those sort of contracts for 1, 2 years are made. It typically happens towards the end of the year. And we are still having discussions with several of our customers about longer term commitments into both 2024 and 2025. So I think it depends on where you are in the market and what sort of service you're offering to your customers, whether there's We have those discussions on that.

Speaker 3

And a little bit of where you think the market is going to be a year from now. If you think the market is going to be twice what it is today, a year from now, you don't want to put your ship out that far. But a shipper might want to contract for today's rate out for another year. So there is a gap there between what's acceptable buyer and seller.

Speaker 1

Okay. I guess to get a little more specific, you only had a chartered in or you chartered in 20 vessels during the Q2. Is that a good number to use for the rest of the year?

Speaker 6

Yes, I think so. I mean, it's obviously a bit of guess work into that statement. But if the market continues the way It has been for Q2. I don't see why we should change that number dramatically. It's all about how we get the best sort of short term value out of those arbitrage Opportunities poll, right?

Speaker 6

Whether you want to take a ship for a couple of legs or you just take it for a trip. And in a soft market, as we've had for the last 6 months maybe even. We don't want to take those risks and go out long on Chartered Intelligence. We get more value out of just executing on the trips.

Speaker 1

Okay. That's helpful. Thanks, Mads. And then Gianni, could I just ask you a couple of questions about the cash flow statement.

Speaker 3

Just

Speaker 1

2 items jump out at me. 1 is that There's a pretty meaningful increase in the accounts for doubtful accounts provision for doubtful accounts. It was negative in the Q1 and was over $1,000,000 in the second quarter for a 6 month run rate. Can you just talk about that? And then secondly, you had a working capital deficit or use in the second quarter.

Speaker 1

Do you expect that to reverse over the course of the rest of the year?

Speaker 4

Yes, sure. So the part of the working capital, the draw on working capital, We had the cash acquisitions of the Bulk Prudence and the acquisition of the port terminal. In addition, we had A reclass of debt coming due in May of 2024. So that is now In our current liabilities, so it is affecting our working capital. Our expectation there, as I said in my prepared remarks is, We're pretty comfortable in the interest rate that we have.

Speaker 4

It was fortunate we'd locked in a significant amount of our debt When we did at interest rates that were far more favorable. So as we approach that maturity, we are currently working Talking to some lenders and we have no worries about the potential refinancing as it approaches. It's just a matter of tactically looking at how much we will refinance and how we can be as efficient as possible In that respect. So yes, I don't think we'll see a similar draw on working capital that we did in Q2. The On the reserve front, we did make a slight adjustment in our general reserve policy.

Speaker 4

So these are just overall macro type reserves, nothing that would necessarily be on a specific way, but Just overall general reserve, we made a slight adjustment to our general reserve policy, which resulted in a slight increase in our reserve. So I don't expect I expect that modification to not have any further impact for the balance of the year.

Speaker 1

Sounds good. And then just, 2 other things came up. One is that you mentioned that Some of your terminal and stevedoring activities are run through the JV. How If you on a gross revenue basis, how much is that generating? How meaningful is that relative to the current reported terminal and stevedore in revenue.

Speaker 1

And then secondly, just if you wouldn't mind quantifying the G and A or transaction costs that you incurred in the Q2 associated with the acquisition.

Speaker 4

Sure. So I'll start with the JV. So We've had these joint ventures for years. So the impacts of them should be the same Going forward, right. And it was always recorded our pro rata share of the net income of those entities was recorded in other income.

Speaker 4

We've been in these joint ventures, some since, I don't know, 2016, 2017 And some are a little bit more recent, but since they're held in joint ventures, the accounting for them and the recognition of the income will continue to be reflected in that manner. So we'll continue to just recognize our pro rata share of the income and other income. The gross revenue Of the entities, we're just we're not we wouldn't be showing it, we're not consolidating it in, but it would be $5,000,000 $10,000,000 is probably the range we're seeing for that activity.

Speaker 1

Understood. Yes, it's all captured through the JV, but I was just sort of trying to figure out on a gross basis or Yes, how meaningful it is to overall business. And then

Speaker 4

And then your second question there on the G and A related to the acquisition. In the MD and A, we do have some discussion about it in the 10 Q, but it was closing cost, one time closing cost just over $300,000,000 sorry, dollars 300,000 of closing costs That were incurred in the quarter that we don't expect to obviously to occur again throughout the year.

Speaker 1

Yes, I was going to guess around 3% or so of the overall $7,200,000 acquisition. Great. Thanks for your help. Congratulations on a good quarter.

Speaker 3

Thanks, Beau. Thanks, Beau. Thanks, Gary. Call.

Operator

Thank you. And at this time, there are no further questions in the queue. So I would like to turn the call back over to Mark Zylinowski for any additional or closing remarks.

Speaker 3

Once again, thank you for joining our call. Should you have any questions, please feel free to contact us at investors atpangayals.com and a member of our team will follow-up with you. This concludes our call today. You may now disconnect.

Operator

Thank you, ladies and gentlemen. This concludes today's presentation and we appreciate your participation. You may disconnect at any time.

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Earnings Conference Call
Pangaea Logistics Solutions Q2 2023
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