Pangaea Logistics Solutions Ltd. Q1 FY2022 Earnings Call

Good morning. My name is Ashley and I will be your conference operator today. At this time I would like to welcome everyone to the Pangaea Logistics Solutions First-Quarter 2022 Earnings Teleconference. Our hosts for today's call are Mr. Mark Filanowski, Chief Executive Officer, Gianni Del Signore, Chief Financial Officer, and Mr. Mads Petersen, Chief Operating Officer. Today's call is being recorded and will be made available for replay beginning at 11 AM Eastern Standard Time. The recording can be accessed by dialing 8938154 domestic, or 402 20 1542 international. 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 Ms. Emily Blum with Prosek Partners.

Thank you, operator. And thank you for joining us for this morning's First Quarter 2022 earnings conference call for Pangaea Logistics Solutions. With us today from the company are CEO, Mr. Mark Filanowski, CFO, Mr. Gianni Del Signore, and COO Mads Boy Petersen. Before I turn the call over to Mark, I'd like to read the safe harbor statement. This conference could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Pangaea Logistics Solutions. Forward-looking statements are statements that are not based on historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Pangaea Logistics Solutions management, and our expected risks and uncertainties which could cause the actual results to differ from the forward-looking statements. Such risks are more fully discussed in Pangaea Logistics Solutions filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of Pangaea Logistics Solutions does not assume any obligation to update the information contained in this conference call. Also, please recall that a supplemental slide presentation will accompany this call. Those slides can be found attached to the 8-K that was filed with last evening's release, which is available on the Investors section of www.pangaeals.com under Company Filings or on SEC website at sec.gov. Now, I would like to turn the call over to Mr. Mark Filanowski. Mark?

Thank you, Emily. And thanks to all who have joined us today for Pangaea's First Quarter 2022 Earnings Call. This morning, I will provide an update on our operations and the overall market before turning the call over to Gianni, our CFO, to provide a more detailed overview of the first quarter of 2022 financials. We'll then open the line for questions. We hope you've had time to review our press release and accompanying presentation, which were issued last evening. It was a volatile market within the quarter. But overall, improving dry bulk market fundamentals, timely expansion of our fleet, and an early winter resulted in another strong quarter to start 2022, led by market strength pushed by our business plan and our people, navigating sanctions, operating challenges, and trade lane disruptions caused by the war in Ukraine. We reported quarterly net income of $20.1 million or $0.45 per share. Market strength continues to build in most geographic areas where we operate. At the end of the first week of May, our second-quarter time charter equivalent booked indicates a rate of $29,400 per day, an increase from our actual Q1 time charter equivalent rate. As we move towards the third quarter, seasonally our strongest, we don't see a reason for a weakening market. Supply of new ships is constrained for years, and the existing global fleet in use is stretched by high fuel prices, congestion, and increases in tonne-mile demand. We reiterate our tempered enthusiasm, this is shipping after all, by announcing our Board has decided to increase our quarterly dividend by 50% for the June payment date, our second increase this year, and our sixth consecutive dividend payment. We want our shareholders to participate in the results of a good market and the hard work our people put in every day from decks and desks. We have also tried to differentiate our business model and our performance from our peers. One way is to examine results that matter. How productive is a company at making the best use of the assets at its disposal? We think time charter equivalent through cycles is an excellent measure of how effective a shipping company is in its market. I am pleased to tell you that we learned last week that Pangaea outperformed 20 other publicly listed dry bulk shipping owners and operators in the annual measurement performed by vessel index, finishing in second place this year after placing first for the previous three years. It really is hard to be number one every year, especially in a moving market we had last year. Over the last four years since these statistics have been published by vessel index, Pangaea has outperformed all other companies included in the survey. We have more than doubled the performance of the second-place entrants. Over four years, Pangaea has averaged an outperformance of 36.6% or $3,372 per day, per owned vessel over the industry index and $1,397 per day per vessel over the second-place finisher. This independent measurement of Pangaea's outperformance demonstrates the power of our business strategy and trading platform over long-term business cycles. As we look ahead, we remain encouraged by our strategic position and our ability to capitalize on improving market fundamentals. We continue to supplement our successful business model by ramping up our efforts and logistics at ports we operate in the U.S. We are participating in infrastructure cargoes and projects, meaning we are stevedoring break-bulk solar components and cement and bauxite, and we're bidding on projects to support wind farm installations. There is no doubt this service is complementary to our base shipping business. We have attracted a veteran of this space, Brent Mohana, to work with us to expand our efforts. We hope to make this part of our business a real contributor over the next few years. I'd now like to turn the call over to Gianni to go over the numbers in more detail. Gianni.

Thank you, Mark. And thank you all for joining us on today's call. 2021 was a record year for Pangaea, and our momentum continued into 2022, despite a volatile rate environment during the first quarter with the average of the public Panamax and Supermax indexes ranging from $16,000 to a high of over $30,000. We generated adjusted EBITDA of $31.3 million and adjusted net income of $15.7 million. Our average net TCE earned of $26,472 per day increased over 60% compared to the first quarter of 2021 and exceeded the market by approximately 17%. We believe we are well-positioned to extract the most out of any market that may be ahead. We continue to deploy our assets to serve our clients' cargo needs, and within the quarter, took delivery of the Bulk Concord, a 2009-built Panamax, giving us the flexibility to sell the Bulk Pangaea, a 1999-built Panamax vessel. Although we recognized a $3 million book loss on impairment during the quarter, the sale of the Bulk Pangaea, once completed in June, will result in approximately $8.5 million in positive cash from investing activities. Turning to our full-year financials starting on Page 6 of our presentation, you will see a year-over-year increase in our total revenues, driven by an improving market and an increase in our achieved TCE rate. Voyage revenues increased approximately 62% to $176 million, and charter revenues decreased approximately 5% to $15.4 million, as our fleet was deployed on more voyage charters compared to time charters during this quarter as compared to Q1 of 2021. Charter expenses paid to third-party ship owners increased to $77.7 million from $53.6 million, a 45% increase due to increases in market rates for chartering vessels. However, total chartering days decreased by 19% as the expansion of our owned fleet during 2021 reduced the number of vessels needed to supplement the owned fleet at prevailing market rates. Further, the expansion of our own fleet throughout 2021 led to an increase in vessel operating expenses, which increased by 55% to $13.2 million compared to $8.5 million. Vessel operating expenses on a per-day basis, excluding management fees, increased 7% from $5,014 per day to $5,345 per day. Unrealized gains on derivative instruments were $7.5 million, representing the change in market value of open derivative positions from December 31 to March 31. Within other current assets, we recorded FFA assets of $4.9 million, fuel swaps of $4 million, and interest rate cap of $2.4 million. As we've discussed 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 cargo bookings. While this locks in future cash flows, the mark-to-market unrealized gains or losses can lead to fluctuations in the company's reported results on a period-to-period basis, while settlement of the position and execution of the fiscal will occur at a future date. Net income for the quarter was $20.2 million or $0.45 per share compared to net income of $5.8 million or $0.13 per share for the same period in 2021. Moving onto the balance sheet and cash flows on page seven of our presentation. We ended the quarter with $69.9 million of total cash and cash equivalents, an increase of $13.7 million from year-end, driven by $32 million in positive operating cash flow offset by the acquisition of the Bulk Concord and related financing activities. Collectively, we are encouraged by the steps we've taken to strengthen our financial position and return value to shareholders as we have increased our quarterly dividend by 50% to $7.5 for the June payment date, our second increase this year, and our sixth consecutive dividend payments. With that, I will now turn the call back over to Mark for any additional remarks before we get to the Q&A portion of the call. Mark?

Thank you, Gianni. We thank our customers, business partners, and shareholders for their continued commitment and partnership, and we look forward to updating you further in coming quarters. I'll now open the floor for questions.

At this time if you would like to ask your question, . And we will take our first question from Liam Burke with B. Riley. Please go ahead. Your line is open.

Thank you. Good morning Mark, good morning Gianni, good morning Mads.

Hey, Liam, thanks for joining us.

Thank you. Mark, you mentioned in your prepared statements that there's a fair amount of scarcity of assets in your asset class. If I'm looking at volumes of traffic in the north of sea routes, they're growing pretty rapidly. What does that mean for future rates and asset values going forward?

Liam, we're seeing a lot of tightness in the markets. Almost everywhere we look, market rates are really good. I mentioned that for the second quarter year-to-date, we're over $29,000 a day booked. And the market was favorable from there for the rest of this quarter, which is about halfway done. For the rest of the year, we move into our summer ice season, and that's always good for us. It keeps us busy at ice premium rates for 10 of our ships at least. And the rest of the market seems still pretty firm for the rest of the year. The forward numbers look good for the rest of this year. In terms of ship values, ship values have increased substantially over the past two years or so, ratcheting up very nicely. The ships that we ordered in 2019, delivered in 2021. They were ordered for $38 million each. We think they've increased, they're probably at least 20% higher in value today. But there aren't a lot of these ships trading because they are valuable to the current owners. In terms of the values of the rest of the fleets around the world, I think anything that floats is up substantially from where it was two years ago. Older ships are multiple maybe of what they were back two years ago. Newer ships are way above where the values were some time ago. New building costs are rising, but some people are brave enough to order new buildings at the current prices, but you've got to wait a while for your ships. So that's pushed up the prices of secondhand ships. Looking at our net asset value, we don't think it's a good way to measure where your stock trades compared to net asset value, but our net asset value has increased substantially over the past couple of years. If you look at it today, it's a little bit hard to decipher on our balance sheet because of the consolidated joint venture assets, you've got to do a little adding and subtracting. And then you've got to consider maybe adding a little bit more because our trading platform does add, as I mentioned in my prepared remarks, substantial extra value when we trade our assets in the market. So we think we're trading today at the value of our shares as substantially under our net asset value. And that's a good indicator for the future of our company and where we stand.

Great. Thank you. And you did sell obviously the Bulk Pangaea. What motivated you to sell if your current asset group is so valuable?

That ship was purchased maybe about 10 years ago for a specific trade for our bauxite business, Jamaica to Gramercy, Louisiana. In that trade for well over 100 voyages and as you'll do for docking in early this year and the installation of the ballast water treatment system. Again, that's a 10-year contract we have, we have 10 more years left to go. We thought it was better to trade that ship for a newer vessel that we committed to purchase back in November and put it into the trade just very recently. So it's really a trade-up.

Okay. So I just want to clarify that the contract still exists and you're still going to move that cargo. You're just trading up on the vessel?

Correct.

Okay. Great. Thank you. Mark.

I will take our next question from Climent Molins with Value Investor's Edge. Please go ahead, your line is open.

Good morning. Thank you for taking my questions. You provided some interesting commentary regarding Europe exposure to both ports and terminals. And I was wondering if you could expand on the new projects you mentioned, especially on the site. Should we expect incremental CapEx or are the port facilities ready for this additional business?

The port and terminal business aligns well with our objectives. We aim to identify opportunities, such as stevedoring services, that enhance our ocean freight operations. Currently, we are working on a project in Brayton Point, Massachusetts, recognized as a valuable site for supporting offshore wind farm installations. Although we do not have a fixed contract for this space yet, we are actively pursuing it. Some capital expenditure will be required to upgrade the area, but this has already been incorporated into our funding plans for the project. Additionally, at our terminal in Sabine, Texas, we are receiving break-bulk solar component parts, unloading them from incoming ships, and distributing them locally. We anticipate significant growth in this segment over the coming years. While it is not a major element of our operations right now, it remains a priority to supplement our core shipping business.

All right. That's very helpful. And the board approves the significant increase to the dividend, which comes on top of other recent increases. How should we think about your capital allocation priorities going forward? And I was wondering regarding shareholder returns, is there any appetite for potentially formalizing a dividend policy that is to be free cash flow or net income, or that the board prepared to retain more optionality?

To date, the board has preferred to retain optionality. Always looking forward to capital expenses, capital expenditures including fleet renewal. And considering that this is a pretty volatile business, but also on the other side, we have a business plan that does protect us from the downside through contracts we have in place that go long-term. So to date, the board has always considered that it should be a quarter-to-quarter decision rather than a long-term decision to commit to any formula that could change in the future, but right now the board considers flexibility to be the key.

Make sense that's all for me. Congratulations for this quarter and thank you for taking my questions.

Thank you.

Again, as a reminder, to ask the question today we'll go next to Poe Fratt with the Lion's Global Partners. Please go ahead.

Good morning, Mark. Good morning, Gianni. Good morning, Mads. I just had a couple of quick questions. One is, when you look at the Bulk Pangaea, what would have been the scrap value on that vessel right now?

Probably $6 million plus minus.

Can you explain why, given the scrap value and the potential cash that could have been generated annually, which is likely over $4 million, you didn't keep it in the fleet and run it until it was eventually scrapped instead of selling it in the market?

I guess a couple of things. One is the time and costs to put the ship through a docking, and then looking at the trading value of that ship. As a ship gets older, it becomes a little more difficult to trade. It becomes a little more difficult to get the premiums we talk about when we study our income statement. So the best use of that asset would be in the bauxite trade that I talked about. But that contract has another 10 years of life, and we didn't think that the Bulk Pangaea has another 10 years of life, even after we did the dry dock and maintenance and improvements on the ship. So it was really just a trade-up to make a long-term fulfillment of our contract obligations under that contract.

When considering the ancillary business, such as stevedoring and other services, did that significantly affect the quarter? Additionally, could you provide insight into how this might evolve in 2023 and 2024, where we could see a more substantial impact?

It's not a significant impact on the quarter yet. It is a focus of our efforts, as we aim to increase our participation in the cargo throughput. The ultimate goal is to approach a customer and offer to manage their entire supply chain. We will take their product from the mine, integrate it into their production process onshore, and handle the cargo transport. This arrangement will benefit them by simplifying their operations, potentially reducing costs, and minimizing inefficiencies in the supply chain. We are willing to take on a bit more risk in exchange for a better return. This is the concept we have implemented in certain areas, and we want it to become a fundamental aspect of our business—seeking joint ventures or operating agreements with barge lines and stevedores. We have made some progress, but we aim to do more. While I can't provide a timeline, we are focused on this initiative. We have seen success in Sabine, Gramercy, and the Mississippi River, as well as in Brayton Point, Massachusetts. We are currently working in Florida and other areas in Texas, as well as the Northeast. This is a significant area of focus for us, and we have brought in Brent, an expert in attracting cargo and optimizing these supply lines for customers. We are optimistic about our progress.

Great. You mentioned earlier about the ice class in the marketable business. Can you provide the premium that was realized in the first quarter for ice clients and what is potentially factored into the second quarter, forward cover? You also mentioned that the third quarter could be the strongest, so does that suggest that the TCE rate premium might increase into the third quarter as well?

What I said is that the premium we saw in the first quarter in terms of ice-class. These ships, when they trade in ice in the winter season, they're not put on time charter. When they are in the ice, we get an additional premium for those days that the ships trade in the ice. What that averages. I'm going to let Mads talk about that. Going into the third quarter under our Bettenland contract rate. So why don't I let Mads address that - the premium that we see on those ice-class ships.

Sure. Thanks, Mark. Opposed, the overall premium fall for the Jeff fleet was 17% for the quarter, right? We don't usually break out the individualized premium, but it is higher than 17%. It was a bit of an unusual season in the sense that we started quite early; we started earning premiums earlier than we usually did, and then of course there was a bit of, to say the least, disruption with the follow-up from the Ukrainian situation. But still overall, we actually managed to get a pretty good season within them. And across for Q2, we never really had much of a nice premium there historically, and of course now we're gearing up for the Bettenland summer season, which we have high hopes for, of course.

Okay, great. Mark, you mentioned the dividend increase of $0.025 per quarter, which is a significant percentage. Looking ahead, how should we view the dividend? Given your strong financial position and the market outlook, it seems likely that further increases could occur. Can you share your thoughts on whether you are considering a set increase per quarter per share, aside from the percentage? Additionally, could you discuss share buybacks in light of how your public market float has changed over the past year, especially regarding board member holdings? It seems that the public float may have increased; could you elaborate on share buybacks considering a public market float that is not as limited as it used to be?

Sure, Poe. Thoughts on all these things are evolving as cash starts to accumulate on the balance sheet. And we think this $0.075 dividend that we declared the other day that will be paid in June is a pretty nice reward. We certainly hope you were right that the cash keeps building, that the market stays strong, and we can increase the dividend more. We've always thought of buybacks as a way that we would further restrict this trading element of our shares. We've always been reluctant to do that. It's been only about nine months since the large shareholder, Cartesian, who held a third of the shares in their fund started to get out of the stock. It got pretty easily absorbed into the market over the following months, and by summer last year, they were totally out. As we look forward to get a little more comfortable with the trading volume of this stock, maybe we'll think of stock buybacks a little differently, but it hasn't been on the top of our priority list than the way to get funds and rewards back to shareholders at this point.

Poe, if I could add just one thing on the dividend, I think one of the most important factors for us and our board as we assess is the level of each quarter to make sure it's sustainable as possible. I think what we want to do is have a dividend that is not going to fluctuate significantly quarter to quarter. We wanted to be as sustainable as possible for a longer term. And I think that's one factor that we continue to pay close attention to as we make that decision.

Great. Just to check the box on the macro. Mads, are you seeing anything that concerns you in the marketplace from standpoint of rates are high, bunker prices are high, there's been disruption from Ukraine, anything that concerns you from the standpoint of what's going on in the market or even in other places around the world?

I believe the market is currently very dynamic. Disruptions like COVID or the situation in Ukraine cause the market to adjust quickly. We have been busy assisting our customers who were previously sourcing their raw materials, helping them find alternative sources for iron ore or anthracite, which increases ton-miles. The overall uncertainties in the world seem to be balanced by the increased ton-mile demand we are observing. I think other dry bulk companies will share a similar perspective. We are witnessing trades that made sense four months ago suddenly becoming relevant again, indicating a shift. Overall, I believe travel is in a good situation. As Mark mentioned, higher new building costs help keep the supply of ships in check. However, since it is shipping, demand can be unpredictable. From what we're seeing and hearing from our customers, the general sentiment is quite positive.

Gentlemen, thank you for your time.

Thank you for joining us today to talk about our earnings and our prospects. I wish you all a great day. Hope to see you, hear you again next quarter.

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