Pangaea Logistics Solutions Q4 2023 Earnings Call Transcript

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March 14, 2024

There are 7 speakers on the call.

Operator

Good morning. My name is Todd and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions 4th Quarter and Full Year 2023 Earnings Teleconference. Today's call is being recorded and will be available for replay beginning at 11 am Eastern Time. The recording can be accessed by dialing 800-839-5630 for domestic users or 402-two twenty-two thousand five hundred and fifty seven for international.

Operator

All lines are currently muted and after the prepared remarks, there will be a live question and answer session. It is now my pleasure to turn the floor over to Stephan Neely with Valem Advisors. Please go ahead.

Speaker 1

Thank you, operator, and welcome to the Pangaea Logistics Solutions 4th quarter and full year 2023 results conference call. Leading the call with me today is CEO, Mark Filanowski Chief Financial Officer, Johnny 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 1

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

Speaker 2

Thank you, Stefan, and welcome to those joining us on the call today. After the market closed yesterday, we issued a release detailing our Q4 and full year 2023 results. Our results were a good finish to the year as we continue to achieve a consistent TCE rate premium above our benchmark indices. While the 4th quarter is generally a slower period for Pangaea as we exit the peak of our Arctic trade season, ongoing geopolitical trade disruptions have led to increased demand within our traditional trade routes contributing to increased shipping days in the period together with a corresponding increase in freight rates. We reported adjusted net income of $7,400,000 for the 4th quarter and $31,400,000 for the year.

Speaker 2

For the Q4 of 2023, our adjusted EBITDA of $19,700,000 dollars though strong declined on a year to year basis, even as our TCE rate exceeded our benchmark BSI index by 20 7%. Market rate volatility can be impactful over quarterly periods, but our business model smooths to meet the effects over longer periods. Our markets in the current quarter are showing surprising strength on a seasonal basis as global trade disruptions have led to persistent market inefficiencies, a dynamic supportive of a structurally higher freight rate environment. With supply growth limited by worldwide shipbuilding capacity to produce new ships in our segment, we think there is a long runway for continued strong performance. Beyond the favorable dynamics being created by geopolitical disruption, we continue to see strong demand growth in the core trades that we serve, specifically construction aggregates, cement and iron ore and iron products.

Speaker 2

Through today, we've booked over 3,500 shipping days at an average TCE rate of $17,430 per day versus a market rate of approximately $13,000 per day in the Q1 2024. Given these favorable underlying demand conditions and our expanding cargo book, we intend to prioritize capital investment in fleet expansion and renewal, while continuing to scale our onshore logistics capabilities. In addition to these organic and inorganic investments, we'll seek to further fortify our balance sheet, all while continuing to support a consistent return of capital program as demonstrated by our consistent quarterly cash dividend. At a strategic level, we remain focused on providing a growing base of integrated shipping and logistics solutions that address the unique demands of our customers. To that end, following the acquisition of 3 marine port terminal operations in Florida and Maryland in mid-twenty 23, we've been actively working to expand our onshore relationships with new and existing customers.

Speaker 2

During 2024, we will expand our footprint across the U. S. Gulf Coast and in Florida through strategic joint operations, partnerships and site leases. We believe this approach is a lower cost, less capital intensive method of entering a market, albeit one that allows us to build stronger relationships with current and potential customers and is centered on building around our ocean transport offerings. This accelerating dry bulk demand growth, limited volume of newbuild dry bulk vessels scheduled to enter service over the coming years and a focus on expansion of our fleet and turn it over to Johnny for a deeper discussion of our Q4 financial results.

Speaker 3

Thank you, Mark, and welcome to all of those joining us today. Our 4th quarter financial results continue to emphasize the flexibility of our business model as we were able to deliver premium returns amid market volatility, strong year over year growth in shipping days, all while reducing our vessel operating expenses per day. 4th quarter TCE rates were approximately $17,684 per day, a premium of 27% over the average published market rates for Supramax and Panamax vessels in the period, which is supported by ice class performance early in the quarter as well as our long term COAs and forward bookings, which lock in rates for future cargo performance. Our adjusted EBITDA declined year over year to $19,700,000 Our adjusted EBITDA margin also declined year over year to 14.9 percent given volatility in rates which negatively impacted our charter and expenses. We also recognized an unusually high canal transit fee during the quarter resulting from environmental disruptions at the Panama Canal.

Speaker 3

This fee resulted in a $1,000,000 negative impact to our adjusted EBITDA during the Q4 and a reduction in our overall PCE earned. During the Q4, we saw year over year increase in charter in days, which increased 33% due to increased demand from our customers and our ability to supplement our fleet with chartered in vessels. However, in accordance with our short term charter in strategy, we recognized higher spot charter in rates in comparison to our overall TCE resulting in margin compression, which may happen during times of rising rate environment. Through today, we booked approximately 1400 charter in days at an average cost of 17,100 per day in the Q1 of 2024. Furthermore, this dynamic was offset by lower vessel operating expenses net of technical management fee which decreased by 4% year over year from an average of $6,200 per day last year to $5,900 per day in the Q4 of 2023.

Speaker 3

The decrease continues to highlight the success of our efforts to manage vessel operating expenses. As we have mentioned in the past, we utilize forward agreements and bunker swaps to selectively hedge our exposure to the market on our long term cargo contracts and forward bookings. This approach helps us lock in future cash flows and minimize the impact of market volatility, but can lead to fluctuations in our reported results on a period to period Given the market volatility during the Q4, our reported net income reflects an unrealized loss of approximately 5,700,000 dollars relating to the mark to market adjustments of bunker swaps, forward freight agreements and our interest rate cap. In total, our reported GAAP net income attributable to Pangaea for the 4th quarter was $1,100,000 or $0.02 per diluted share compared to $15,500,000 or $0.34 per diluted share in the Q4 of last year. When excluding the impact of the unrealized losses from derivative instruments that I mentioned as well as other non GAAP adjustments, our reported adjusted net income attributable to Pangaea during the quarter was $7,400,000 or $0.16 per diluted share, a decrease of $6,900,000 or $0.16 per diluted share versus the Q4 of last year.

Speaker 3

Moving on to cash flows, total cash from operations decreased by $9,000,000 year over year to $23,900,000 due to decrease in TCE rates. At quarter end, the company had $99,000,000 in cash and total debt including finance lease obligations of approximately $268,000,000 Of the $268,000,000 in debt, approximately $20,000,000 represents a balloon payment that is due in May of this year. This credit facility is currently locked at a fixed rate of 3.96 and we are currently evaluating numerous refinancing partners as well as the potential of paying off the debt and owning the underlying vessels outright. During the quarter, we continued to see relatively muted impact from higher interest rates due to our fixed rate and cap rate debt as well as benefits from interest yielding deposits which generated nearly $1,000,000 in interest income. At the end of the Q4 of 2023, the ratio of net debt to trailing 12 month adjusted EBITDA was 2.1 times.

Speaker 3

As Mark mentioned, our capital allocation focus in 2024 is investing in growth by expanding our onshore footprint and owned vessel capacity. Our current balance sheet and the strong cash flow profile of our business gives us the flexibility to be thoughtful about the most advantageous ways to finance our growth plans. Importantly, I would reiterate that we continue to prioritize a consistent return of capital strategy. We believe that our current dividend is one that we can sustain through the market cycle. With that, we will now open the line for questions.

Operator

Our first question comes from Liam Burke with B. Riley. Please go ahead.

Speaker 1

Yes. Good morning, Mark. Good morning, Gianni.

Speaker 2

Hi, Liam.

Speaker 1

Mark, can we discuss the charter hire charter and expenses that sort of squeezed your margin during this quarter? Flexing your fleet using leased vessels, chartered in vessels as part of your overall strategy, was this a short term anomaly in terms of the margin squeeze? And does that make you think about your longer term strategy about chartering vessels?

Speaker 2

No, the strategy is still solid, Liam. This isn't unusual for us in times of where we book cargo forward today and we don't perform until a month from now. Things can happen in the market that cause chartered in fleet to be a bit more costly as market rates rise. When they go the other way, it becomes cheaper for us to bring in ships. So we're careful on the cargo we book and the timing we take to charter in ships.

Speaker 2

But when we have a big spike like we did in December, unexpected, it can temporarily cause a little disruption. We're also it depends a little bit on where if you're comparing to the charter in cost to the market, it depends a little bit on where that increase in market rates occurred. If it occurred in the places where we are active, say, the North Atlantic, that North Atlantic did spike a bit more than the rest of the world. So if you're comparing the charter our charter in cost to the worldwide rates, then we're a little bit higher than if you compare to just the North Atlantic market.

Speaker 4

And Liam, if I could add, it's Johnny. Just to add, it's not necessarily when we look at it on a quarterly a quarter by quarter basis, we'll see these potentially these reductions in margin or expansion in margin. And for example, Q1 of 'twenty two, we were in a similar situation. The chartered in fleet did have a negative margin for the Q1 of 'twenty two. So we look at it quarter by quarter and then these spikes in market rates result in that margin squeeze.

Speaker 4

But for the full year, just to say it, for the full year of 2023, the margin on our chartered in fleet was around 1800 a day. So it was a positive and it continues to be. So I don't think there's any it is unfortunate for the quarter, but when we look at a long term basis, it's consistent

Speaker 3

with what we want to accomplish.

Speaker 2

We do look at the pieces, what it costs us to charter in ships versus and what those charter in ships produce against our charter our cargo book or spot cargoes. But the concept here is that we free up tonnage on our own ships that can then participate in a higher market. So, although we do look at the pieces, we have to we're really trying to make the whole work better.

Speaker 1

Great. Thank you, Mark. On the Q1 partial fixtures, sequentially, it's almost flat where typically you'd expect it be down with Q1 being a seasonally slow quarter. Is that primarily the Panama Canal or there are other things in there that's giving you really looks like a seasonally strong I mean a strong seasonally slow Q1?

Speaker 5

Yes. Hi, Gabe, it's Matt here. Hi, Matt. The Panama Canal of course has an effect, but I think the main driver is also the fact that we were able to book cargo in Q4 that we are now executing on in Q1 at what are historical pretty attractive levels. So, of course, it's a result of the sort of general strengthening, but also the fact that we were able to secure some pretty decent payment

Speaker 3

for our cover. Great.

Speaker 1

Thank you, Mads. Thank you, Mark. Thank you, John.

Speaker 4

Yes. Thanks, Sam.

Operator

Our next question comes from Poe Fratt with Alliance Global Partners.

Speaker 6

Good morning, Mark. Good morning, Gianni. Good morning, Mats. Good to see you on Monday. Can we just dig a little deeper on the charter hire expense?

Speaker 6

It was roughly $34,000,000 for the quarter. Do you have I'm calculating that your charter in days were about 1700 dollars. And so I'm calculating a chartered in expense in the Q4 of just over $19,000 Is that are those numbers close or can you give us

Speaker 4

an idea of Yes, I can give you the numbers, Poe.

Speaker 6

That'd be great.

Speaker 4

So yes, and actually in my prepared in our remarks earlier in the call, I did also mention what the chartering cost is for the Q1, what we've sort of booked and incurred so far. So you have that as well. But for the Q4, the chartering cost was $17,986 per day. The chartering days were approximately 1800 chartering days.

Speaker 6

Okay, great. And then looking at that Ford chartered in cost of 1300 days at 17,100, how many can you give me an appreciation for sort of how the whole quarter might look like? Will the chartered in days be close to what they were in the 4th quarter and the cost should be a little bit lower just because maybe you can avoid that spike that you saw in December?

Speaker 4

Well, we're pretty close to the end of the quarter here. So, I don't expect significant changes to what we said. But you're right, the fleet remains around we're still around 45 to 50 vessels. Q4, we had about 44 total fleet. So yes, I think as far as volume of activity, it's relatively similar.

Speaker 4

And then since we are pretty close to the end, I think the numbers that we gave there are a very good indication of what it will be for the full quarter.

Speaker 6

Okay, great. And then Mads, I guess another thing I'd just support cover, Gianni. Do you have for the rest of the year, are you can you give me an idea of sort of how your forward covered looks for the rest of the year and then your chartered in costs? Are you willing to sort of look beyond just this quarter or this exact date and time?

Speaker 4

So, Paul, we don't give out beyond

Speaker 3

the Q1.

Speaker 4

But as far as our core business, the sort of core contract that we're operating in our typical long term cover, we discussed our long term cover on our own fleet remains the same. But in the near term, we're always booking forward into subsequent quarters and the market is always changing. But we haven't really we haven't given out those longer term other than our long term numbers on our long term contracts.

Speaker 5

And in terms of the chartered in fleet, Paul, that's our approach and strategy around that hasn't really changed. The vast majority of that is short term in acre, so that will always reprice relatively quickly. We're not looking to add up a significant amount of child in tonnage over a longer period, for instance. That's not part of the strategy really.

Speaker 6

Yes. You sort of want to avoid taking market bets other than what your owned fleet, right, Mads? You don't want to charter in long term and get exposed to negative moves in the market?

Speaker 5

Yes. 100% correct, right. I mean, the charter in fleet for us is essentially an arbitrage around the own fleet and a way to employ the entire fleet of the company in a more sort of sensible way rather than ending up balancing too far to pick up a cargo just because you don't want to fix in the ship. So it goes back to what Mark said earlier that you sort of have to look at the whole, not just pick out the arbiters, the chart in because it serves purpose in the greater picture of things where you will in a quarter like this, you can have a quarter that just in that particular part of the business looks a little disruptive as Mark said.

Speaker 6

Yes. And I know that you're hesitant to sort of talk about your forward cover book, but has anything changed where you typically have 10 to 12 working 10 to 12 ice class vessels working during the ice season over the course of, call it, the summer and early fall?

Speaker 5

Yes, that part of the fleet is owned primarily. So we don't expect any huge changes in that part of the fleet, no.

Speaker 2

But if we have booked other business that those ships now have to leave to go north into the Arctic, we've made it is a more active part of the season for us, that Q3, not just because the ships go north, but because then we have to replace take some ships from the market to participate in moving cargoes that we've booked. We probably have a little higher chartered in fleet during that period.

Speaker 6

Okay. And then, Mats, are you seeing anything on the demand side, changes either positive, negative that you can highlight for the rest of the year?

Speaker 5

I think I want to point to what was in the in Mark's comments that we are seeing increased demands in the businesses and in the trades where we are pretty busy such as construction material. That is not just across the ships we own and operate, but also in our terminals business. So we feel pretty confident about the demand going forward in those commodities. I mean, you know, Trevor, but we're not a big sort of long haul iron ore owner operator. So there I think I read the same thing that you do and I think demand wise things look pretty good, not fantastic, but okay.

Speaker 5

And that combined with attractive supply side, we feel pretty confident about where the market is and where it's heading.

Speaker 6

Okay. And then you talked about the Tourmaline business. There was a season, you know, sequential drop in revenues there. Margins were still healthy, but there's a seasonal drop in or a sequential drop in revenue in the stevedoring terminally. Is that seasonal and we should expect a pickup in this quarter and the rest of the year into the Q4?

Speaker 6

Or Can you just give me an idea sort of how the cadence of that business?

Speaker 2

It depends on demand ships coming into our terminals. So I don't think the decrease was that high that much could be affected by the number of ships that come into port during that quarter. Our most active port is Port Everglades and there we have we do container ships, we do we load ferries, we discharge dry bulk goods, commodities that come in. So it really depends on the schedule of those ships that are visiting the ports. We do have some more active things happening in some of the other ports.

Speaker 2

So things should move up this year, Paul. The Port Everglades business is new to us from last June. And so I think in the beginning you'll see a little bit of ups and downs, but not significant. They've been fairly steady.

Speaker 6

Okay. And then Gianni, if you could just highlight where that $1,000,000 transit fee, what part of the expense line did it come in? Was it in voyage expense or charter hire? Just I know it's nitpicking, but I just wanted to sort of understand where that was recognized.

Speaker 4

Yes, it was recognized through voyage expenses, which obviously impacted our overall TCE. And I think we spoke about this

Speaker 3

in our last call regarding the situation of

Speaker 4

the Panama Canal. And unfortunately, we were there and we had to bid on a slot to get through. And it was $1,000,000 impact to voyage expenses and reduction, equivalent reduction in TCE and adjusted EBITDA. So yes, that's where it's recognized.

Speaker 6

Great. Thanks a lot. Very helpful.

Speaker 2

Have a

Speaker 6

great day.

Speaker 4

Thanks, Paul.

Operator

Thanks. And at this time, I show no further questions in queue. I'll go ahead and turn the call back to Mark Filanowski for any additional or closing remarks.

Speaker 2

Thank you for joining us today for our call and see you next quarter.

Speaker 5

This

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Pangaea Logistics Solutions Q4 2023
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