Pangaea Logistics Solutions - Q1 2024

Transcript

Operator (participant)

Good morning. My name is Brittany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions First Quarter 2024 Earnings Teleconference. Today's call is being recorded and will be available for replay beginning at 11:00 A.M. EST. The recording can be accessed by dialing 877-856-8964 for domestic and 402-220-1608 for international. All lines are currently muted, and after the prepared remarks, there will be a live question-and-answer session. If you would like to ask a question during that Q&A segment, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two.

We do ask that you pick up your handset for optimal sound quality. It is now my pleasure to turn the floor over to Stefan Neely with Vallum Advisors.

Stefan Neely (Partner)

Thank you, operator, and welcome to the Pangaea Logistics Solutions First Quarter 2024 Results Conference Call. Leading the call with me today is CEO Mark Filanowski, Chief Financial Officer Gianni Del Signore, 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. At the conclusion of our prepared remarks, we will open the line for questions. With that, I would like to turn the call over to Mark.

Mark Filanowski (CEO)

Thank you, Stefan, and welcome to those joining us on the call today. After the market closed yesterday, we issued a release detailing our first quarter 2024 results. Our flexible, cargo-focused business model continued to deliver premium TCE rates over the prevailing market. During the first quarter, it also allowed us to drive improved operating leverage compared to the prior year, which resulted in higher adjusted EBITDA and improved margins year-over-year. While the first quarter is normally a seasonally soft period for global dry bulk demand, we benefited from elevated long-haul voyage demand across our ice-class fleet, together with a solid base of premium long-term COAs. As market rates began to rise later in the quarter, we added to our cargo commitments to increase utilization of our own fleet and chartered in more vessels, which positioned us to optimize our TCE returns.

When combined, these factors resulted in our TCE rates for the quarter exceeding the benchmark index by nearly 30%. We reported adjusted net income of $6.6 million for the first quarter and adjusted EBITDA of $19.9 million. Adjusted EBITDA improved by 23% year-over-year, as our adjusted EBITDA margins strengthened by 400 basis points compared to the first quarter of 2023. Our improved profitability was supported by a 41% year-over-year increase in published market rates for Supramax and Panamax vessels, which also supported the 23% increase in our own earned TCE rates year-over-year in the first quarter. At a macro level, the global demand for dry bulk remains strong and the supply of vessels remains constrained. These dynamics give us confidence in both the near-term and long-term outlook for our business.

Specifically, in the near term, geopolitical disruptions have resulted in an increase in ton mile demand with certain shipping channels. We are also seeing regionally strong demand in key bulk trades associated with the current level of infrastructure investment in North America. On the supply front, the number of new builds coming into service remains limited relative to historical levels, which will continue to put pressure on dry bulk capacity. In combination, we see the supply and demand factors for dry bulk being structurally supportive for higher market rates for the remainder of 2024 and beyond. With that said, volatility will continue to be a prevailing theme, but one that our cargo-focused business model uniquely positions us to successfully navigate. While certain aspects of the dry bulk markets have seen pricing moderate since late in the first quarter, others have continued to progressively improve.

Through today, we've booked over 2,890 shipping days at an average TCE rate of $16,200 per day, versus a market rate of approximately $15,000 per day so far in the second quarter, 2024. Strategically, we continue 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.

Regarding our current fleet of owned vessels, we have been re-focused on refreshing our fleet to keep an average vessel age of approximately 10 years, while continuing to ensure that we are able to meet unique cargo needs of our customers.... We continue to strategically evaluate additional vessel acquisitions and divestitures through this lens. And last night, we announced we had entered into an agreement to purchase two 58,000 deadweight ton sister ships built in 2016. We are purchasing these ships for a combined price of $56.6 million, and we expect to take delivery during the third quarter of this year. Within our port and logistics business, we have made strides to organically expand that business in the U.S. Gulf Coast region through strategic joint operations, partnerships, and site leases.

During the first quarter, we executed a long-term lease agreement in The Port of Tampa to handle dry bulk commodities that are complementary to those carried on our fleet vessels. In conjunction with signing this lease, we also committed investment capital in some port operations infrastructure part, in partnership with JV partners at the port. This investment will allow us to expand our ability to offer a wider scope of cargo-focused services across the strategically important Gulf Coast region to both new and existing customers. The investment will provide a meaningful growth avenue for our terminal and stevedore business, which we expanded into Florida in June of last year. In summary, our cargo-focused business model continues to deliver strong premium returns, which we are strategically investing in key growth opportunities, both in our logistics business and in our owned vessel fleet.

Coupled with the supportive macro environment for dry bulk rates, we believe that we are well positioned to continue to deliver attractive shareholder returns through opportunistic capital deployment. I'll now hand it over to Gianni for a discussion of our first quarter financial results.

Gianni Del Signore (CFO)

Thank you, Mark, and welcome to all of those joining us today. Our first quarter financial results continue to emphasize the flexibility of our business model as we were able to deliver premium returns despite a year-over-year reduction in total shipping days. Our results highlight the value that our chartered-in strategy and cargo-focused model creates within the context of our overall operating leverage. First quarter TCE rates were approximately $17,697 per day, a premium of approximately 29% over the average published market rates for Supramax and Panamax vessels in the period, which is supported by long-haul ice-class performance early in the quarter and forward bookings, which locked in rates for cargo performance. Our adjusted EBITDA increased by nearly 23% year-over-year to $19.9 million.

Our adjusted EBITDA margin also improved year-over-year to 19% as we managed our vessel utilization in accordance to the prevailing market rates to maximize our TCE rate returns and operating leverage. While our chartered-in days decreased by 14% year-over-year, our total charter hire expense increased by 20% compared to the first quarter of 2023, due to the 41% increase in the prevailing market rates. Our charter-in cost on a per-day basis was $17,580 in the first quarter of 2024. Through today, we've booked approximately 1,400 days at approximately $16,700 per day.

As I mentioned, we pushed some of our cargo commitments forward toward charter hire vessels intra-quarter in the face of higher market rates, which allowed us to maximize our returns on our total fleet in accordance with our short-term charter and strategy. Furthermore, our improved profitability for the first quarter was bolstered by lower vessel operating expenses, net of technical management fee, which decreased by 6% year-over-year from an average of $5,632 per day last year to $5,300 per day in the first quarter of 2024. The decrease continues to highlight the success of our efforts to manage vessel operating costs. As we have mentioned in the past, we utilize forward freight 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 basis. Given the market volatility during the first quarter, our reported net income reflects an unrealized gain of approximately $5.1 million relating to 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 first quarter was $11.7 million, or $0.25 per diluted share, compared to $3.5 million, or $0.08 per diluted share in the first quarter 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 $6.6 million or $0.14 per diluted share, an increase of $1.5 million or $0.03 per diluted share versus the first quarter of last year. Moving on to cash flows. Total cash from operations decreased by $2.6 million year-over-year to $9 million, as the improvement in profitability was offset by the timing of customer receipts and supplier payments reflected in net working capital.... At quarter end, the company had $95.9 million in cash and total debt, including finance lease obligations of approximately $258 million.

Of the $258 million in debt, approximately $20 million represents a balloon payment that is due this month at maturity of the loan. This credit facility is currently locked in at a fixed rate of 3.96%. Once paid, the Bulk Pride, Bulk Independence and Bulk Endurance will be debt-free vessels in our fleet, and we are actively working with a new lender to refinance the Bulk Endurance only, which will generate approximately $15 million of cash and is expected to be finalized in the coming weeks. During the quarter, we continued to see a 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 million in interest income.

At the end of the first quarter, the ratio of net debt to trailing 12 month adjusted EBITDA was 2x. 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 liquidity profile allows us the flexibility to deploy capital in ways that maximize overall returns on investment. Importantly, I would reiterate that we continue to prioritize a consistent return of capital strategy. We believe that our current dividend is one that can be sustained through the market cycle. With that, we will now open the line for questions.

Operator (participant)

At this time, if you would like to ask a question, please press star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one if you would like to ask a question. We'll take our first question from Liam Burke with B. Riley. Your line is now open.

Liam Burke (Managing Director and Analyst)

Yes, good morning, Mark. Good morning, Gianni. Good morning, Mads.

Mark Filanowski (CEO)

Hi, Liam. Thanks for joining us.

Liam Burke (Managing Director and Analyst)

Mark, in the first quarter, you chartered in about 17 vessels, which is way, way on the low end of typically when you flex your fleet. Typically, I think of vessels in the 20-ish range. But then Gianni gave us a sort of partial chartered-in number for the second quarter. Do you anticipate chartering in more than 17 vessels in the quarter, and is that reflective of the end user demand?

Mark Filanowski (CEO)

Thanks for the question, Liam. But yes, you have, you have it right. In the first quarter, you know, we early in the quarter, the market didn't look so great to us, and we slimmed down the fleet. But toward the end of the quarter, the market started to come back, and we started to expand the chartered-in fleet. So looking forward, yes, the chartered-in base should go up as the market moves up.

Liam Burke (Managing Director and Analyst)

I mean, Gianni quoted a price quarter to date on your chartered in day rates, and they were lower than the first quarter. So, is that trend continuing where we could see a little margin lift there?

Mads Petersen (COO)

Yeah. Hi, Liam, Mads here. You know, we hope so, of course. It is all reflection of where we take the ship. You know, if you take the ship out in the Far East and you move it into the Atlantic, you know, it has a different cost than when we pick them up in the Atlantic. So I don't know if there's a real trend there that you can project, unfortunately.

Liam Burke (Managing Director and Analyst)

Okay.

Mads Petersen (COO)

It's all very specific to the individual opportunity.

Liam Burke (Managing Director and Analyst)

Great. Thanks, Mads. And then just real quickly, you bought the two new vessels that'll be delivered in the second half. You have a balloon payment, you have a large cash balance that can address, you know, your refinancing. You refinance only one vessel. I presume that refinancing will go to the acquisition of the two new vessels?

Gianni Del Signore (CFO)

Yeah, so I think the balloon comes due next week, actually. So we are, like you said, we are in a position, we will pay off the balloon and then we are refinancing just the Bulk Endurance. So we'll add the Bulk Independence and the Bulk Pride as debt-free vessels in the fleet. And yeah, we'll use a portion of that to offset some of the equity on the two new vessels. But we do intend to refinance the new vessels as well. But delivery is looking like sometime in Q3, so we have a little bit of time to plan how we want to handle that.

But I expect we'll also finance a certain level on those vessels as well.

Liam Burke (Managing Director and Analyst)

Great. Thank you.

Operator (participant)

Thank you. We'll take our next question from Poe Fratt with AGP. Your line is now open.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Hey, good morning. Can you give us a little more detail on the acquisitions? You know, what's the vintage on the two sister ships?

Mads Petersen (COO)

Sure. They are built in 2016. So that is typically, you know, that 7-10-year range, that is where we have historically done most of our secondhand acquisitions. So we, we feel that these ships are a great fit for our business model. It's not often that two sister ships come up like that, that, that, that fits the bill. So we are, we are pretty excited about that transaction, and we can't wait to put them to work in our business.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Mads, will these be, you know, essentially substituted for chartered in tonnage, or do you think it'll, it's more expansionary?

Mads Petersen (COO)

Well, I think it... You know, we did sell a ship in, I think it was December of last year, right? So there's a bit of a, sort of a... fleet renewal maintenance part of it. But I don't think we don't anticipate, you know, a one-to-one reduction of the chartered-in fleet. It's that the two things shouldn't be that closely linked.

Mark Filanowski (CEO)

It's a continual cycle, Poe. You know, a larger fleet gives us a little bit more, a little ability to find more cargo commitments, which allows us to leverage our own fleet with more chartered-in ships. So it is, there is a little bit of growth element to this and a little bit of fleet replacement element, so.

Mads Petersen (COO)

If anything, I think also, Poe, it's a reflection in the belief we have in our model and the demand that we're experiencing from across the business, that we wanna make sure that we have good ships that we can serve our customers with as their volumes grow.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Understood. And then, you know, that sort of ties into Mark earlier in the call said that, you know, you, you've flexed down your fleet early in the quarter just because you didn't like what you saw or you thought the market was soft. And just to clarify, was that on the cargo side, you just didn't see the cargo volume to support chartered-in vessels? Or it certainly wasn't from a rate perspective, right? You're looking more from the end cargo, you know, volume.

Mark Filanowski (CEO)

Really, it's the opportunities we see when we're out looking at cargo, Poe. We didn't see a bunch of opportunity for us to expand the fleet and make money and to position the ships that we're chartering in the right places to make a profit on them. So it's a constant daily study of what the market, where the market is and what we can do with it.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Understood. And then, you know, if you could talk about your forward cover. You know, your forward cover, you know, 2,890 days and 16,300, you know, that's a pretty meaningful drop from the first quarter TCE average, TCE rate, TCE rate average. Can you just talk about sort of the context of how we should look at the rest of the quarter and sort of where your, your average TCE for the quarter might end up?

Mads Petersen (COO)

Yeah, I, I think, that's a good question, Poe, and, and just going back to what, what Mark said earlier about, with the, with the previous question, about, about growing the chartered-in fleet. So the way that we historically do this is by, by when we grow the, the. That part of the business is through backhauls. So we will have some ships that are doing, backhaul voyages, and of course, that, that is not as high a number as, when they do sort of our traditional lending business or, or front haul, right? So there's an element to that, and the quarter is not finished. So, we, we, we, we, we, we like to think that, you know, over the year, for sure, these, backhaul investments we're making now will, will contribute positively.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Okay. Yeah, I mean, should I be concerned that you're chartering in at $16,700 and you're booking at $16,300?

Mads Petersen (COO)

We do it every quarter. Yeah, you should, but, but, that's not what we anticipate going forward for sure, right? You know, this is a result mostly of April. You know, we have some cargo on the books that were fixed at different levels, but also a pretty meaningful investment in positioning voyages in the quarter.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Okay. And then, and so Gianni, working capital was pretty negative for the quarter. Could you just talk about, you know, will that balance out over the second quarter or just the rest of the year? Sort of how we should look at working capital in the second quarter. And then if you could just give us a snapshot on where your mark-to-market, you know, on all your derivatives look right now, that'd be helpful.

Gianni Del Signore (CFO)

Yeah, so working capital, the largest impact there has been the recognition of the balloon payment on the debt that comes due next week. And that's sort of been there since, you know, we were anticipating that for a while. But cash balance is remaining strongly, you know, even as it continues to maintain and grow. So we're allocating it, you know, towards chartering ships, towards building up towards acquisitions, et cetera. So once we handle the balloon payments, we refinance, I think we'll see, you know, as far as that working capital ratio, and we'll see that improve.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Okay, and then how do your derivatives look so far in the quarter, you know, relative to the, you know, the unrealized gains that you had in the first quarter? Flat, should we expect some unrealized losses? Or, you know, how does, how does the derivative book look right now?

Gianni Del Signore (CFO)

Yeah. Well, there's three components to that mark-to-market gain, right. There's the interest rate cap, there's the bunker derivatives, and then there's FFAs. Interest rate cap, you know, what happened at the end of last year, we knew there was some maybe negative pressure on the cap because of what expectations were on interest rates. That didn't materialize, so we did see a pickup in value, you know, from year-end to the first quarter there. And then bunker derivatives and FFAs, I think they've remained relatively flat. So, and even looking ahead with the interest rate cap, I think that also has remained relatively flat. So I don't expect significant volatility when it comes to our derivative book for Q2.

Poe Fratt (Managing Director of Equity Research and Senior Transportation Analyst)

Great. That's really helpful. Thank you.

Operator (participant)

Thank you. We have no further questions on the line at this time. I'll turn the program back over to Mark Filanowski for any additional or closing remarks.

Mark Filanowski (CEO)

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

Operator (participant)

Once again, this does conclude today's program. Thank you for your participation. You may disconnect at any time.