Pangaea Logistics Solutions Ltd. Q3 FY2022 Earnings Call

Ladies and gentlemen, greetings, and welcome to the Pangaea Logistics Solutions Third Quarter 2022 Results Conference Call. It is now my pleasure to introduce your host, Noel Ryan from Vallum Advisors. Please go ahead.

Thank you, operator, and welcome to Pangaea Logistics Solutions Third Quarter 2022 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. And with that, I'd like to turn the call over to Mark.

Thank you, Noel, and welcome to those joining us on the call today. After the market closed yesterday, we issued results for the 3 months and 9 months ended September 30, 2022. During a period of broader market volatility, our diverse portfolio of stable, long-term transportation contracts, leading positions in higher-margin ice-class trade routes, and larger owned fleet culminated in a strong third quarter performance, one highlighted by significant year-over-year growth in operating cash flow and adjusted EBITDA, together with another consecutive quarter of profitability, as our realized TCE rates outperformed the market index by 41%. As the largest owner and operator of vessels globally, we have the scale, technical capabilities, and contractual relationships to support consistent above-market returns that regularly exceed those of less demanding trades. During the third quarter, all 10 of our modern Ice Class 1A vessels were active within premium rate Arctic ice trades. While most dry bulk trades experienced typical levels of seasonal softness during the summer months, demand within our core Ice Class contract routes was solid, resulting in a strong third quarter performance. While the current geopolitical environment remains volatile, it has created new opportunities for our businesses. Our usual ice Baltic ice trade is export from Baltic areas. This year, we may import commodities to non-Russian ports in this area. Coal imports to European ports and other commodities worldwide are shipped from longer distances. We anticipate that the continued disruption of many dry bulk trades may result in more ton-mile demand, especially in the sub-capesize markets where we operate. We are seeing increased demand for shipping and cargo handling of commodities such as cement and aggregates moving into U.S. ports to support infrastructure spending. With our customer-focused, agile approach and efficient fleet, we are in a great position to take advantage of new opportunities in the market. Looking ahead, we remain committed to further developing a leading dry bulk logistics and transportation services company of scale, providing our customers with specialized shipping, supply chain, and logistics offerings in commodity and niche markets, all of which positions us to deliver premium returns. During the third quarter, we continued to expand our logistics offering to new and existing customers, collaborated with multiple third-party freight and logistic providers, transported 140,000 tons of coal to a power plant operator in the Northeastern United States. We provided stevedoring and terminal services to an offshore cable installation vessel, discharged 13,000 tons of cement in super-sack bags in Texas. We provided labor and support services for a wind farm commissioning service operations vessel at our berth at Brayton Point in Somerset, Massachusetts. And we were awarded a stevedoring license to begin operating in the port of Freeport, Texas. In October, we took delivery of the newest addition to our own fleet, the motor vessel, Bulk Sachuest, a 58,000 deadweight supramax. With this acquisition, we now own 25 ships while continuing to operate a total fleet of approximately 50 to 55 vessels in worldwide trades. Bulk Sachuest is currently in service and is currently contributing positively to both operating cash flow and net income. Before I turn the call over to Gianni for his remarks, allow me to share a few words on our balance sheet and capital allocation. With more than 90% of our long-term debt sitting at a blended fixed rate of less than 5.1%, we are well insulated from the rising interest rate environment. We ended the third quarter with cash and equivalents of $118 million, an increase of nearly $70 million versus the year-ago period, while our ratio of net debt to trailing 12-month adjusted EBITDA was 1.2x at third quarter end, down from 2.9x in the prior year period. Our Board of Directors constantly considers the best use of capital our business generates. As such, our Board has approved a 33% increase in our quarterly dividend, our second increase in the past year from $0.075 per share to $0.10 per common share. We remain committed to a balanced capital allocation strategy, one that includes investments in organic and inorganic growth initiatives, targeted debt reduction, stable quarterly cash dividend, and reserves for opportunistic expansion and protection from volatile market swings. With that, I'll hand it over to Gianni.

Thank you, Mark, and welcome to all of those joining us today. Our third quarter financial results continue to emphasize the durability of our business model as we were able to recognize sizable margin expansion from our expanded fleet of owned ships during the peak Arctic ice season. Third-quarter TCE rates were $24,107 per day, a premium of more than 40% to the average published market rates for supramax and panamax vessels, which is supported by our long-term COAs and the seasonal Ice Class demand during the quarter. Despite TCE rates declining on a year-over-year basis, adjusted EBITDA grew $4.9 million to $38.5 million during the third quarter. The growth was driven by an increase in adjusted EBITDA margins even as total revenue declined by $28.6 million or 13% versus the prior year. The decline in revenue was more than offset by lower charter hire expenses, which declined by $53 million year-over-year to $50.6 million during the quarter driven by a decrease in charter-in days due to the expansion of our owned fleet and our flexible charter-in strategy, allowing us to supplement our own fleet with short-term chartered-in tonnage at prevailing market rates when needed to meet cargo demand. The decline in charter hire expenses was partially offset by a 30.7% increase in vessel operating expenses mainly due to an increase in owned days from the acquisition of our 4 Ice Class 1A post-panamax new building vessels during 2021; and the Bulk Concord, which delivered in Q1 of 2022. On a per day basis, net of technical management fees, vessel operating expenses for the 9-month period were up 8.75% to $5,667 per day. 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 approach locks in future cash flows, the mark-to-market unrealized gains or losses can lead to fluctuations in our reported results on a period-to-period basis, while settlement of the position and execution of the physical will occur at a future date. As such, during the quarter, our reported net income reflects an unrealized loss of approximately $3.2 million relating to the mark-to-market on bunker fuel swaps, an unrealized loss on forward freight agreements of approximately $3.8 million, and an unrealized gain of approximately $2.5 million associated with our interest rate derivatives. In total, our reported GAAP net income attributable to Pangaea for the third quarter was $18.8 million or $0.42 per diluted share, a decrease of $8.2 million or $0.18 per diluted share relative to the third quarter of last year. Excluding the impacts of the derivative instruments as well as other non-GAAP adjustments, our reported adjusted net income attributable to Pangaea during the quarter was $23.3 million or $0.52 per diluted share, an increase of $1.6 million or $0.04 per share compared to the third quarter of last year. Moving on to the cash flows. Total cash from operations increased 41% year-over-year to $32.6 million in the third quarter of 2022. As a result, the company had $118 million in cash and cash equivalents and total debt, including finance lease obligations, of $298.1 million. Of our total long-term debt and finance leases, 52% is fixed at an all-in rate of 3.7%, 40% is capped at an all-in rate of 6.8%, and 8% is floating at LIBOR plus 2.1%. At the end of the third quarter 2022, the ratio of net debt to trailing 12-month adjusted EBITDA was 1.2x. In conclusion, our dynamic business model generated strong performance during the third quarter as we continued to focus our efforts in capital investment on expanding our fleet, strengthening our balance sheet, and generating returns for shareholders through our quarterly dividend. Looking ahead, our liquidity position has never been stronger as we look to expand our platform through asset-right vessel acquisitions and renewals, growing our stevedoring and logistics businesses, and continue to pay down debt, all while continuing to deliver consistent returns to our shareholders. With that, we will now open the floor for any questions.

Our first question comes from the line of Poe Fratt from Alliance Global.

Another solid quarter in reasonably good market conditions in the third quarter, but the forward cover for the fourth quarter looks reasonably good at about 8,800, which I calculate to be about 63% of the days if you are currently operating 55 vessels. Can you comment on that, please?

Yes, that's about right, Poe. As we book voyages earlier in the quarter, they perform later in the quarter, and that's how we take this measurement. So you're about right in those estimates.

You mentioned that charter-in costs decreased in the third quarter. Currently, you are chartering about 30 vessels as your own fleet has returned to 25. Can you provide some insight into your current charter-in costs? Are they closer to the market rate of around $15,000? Additionally, could you explain how the higher costs of chartering over the past few quarters have decreased and what your current chartering rates are?

Hi, Poe. It's Mads here. You're absolutely right. I mean the business model is sort of flexible in that sense; as the markets drop, we can redeliver the chartered-in part of the fleet and replace that with cheaper tonnage. So that trend, for sure, is what we are seeing as we have progressed through the quarters, and of course, our chartered-in cost now is probably a little bit hard to say what it is on average. It's very sort of positional and depending on the route you need to ship for, but in the 15,000 to 20,000 range depending on the trade. Yes. That's probably right.

Mads, is there any impact from the ice season in the fourth quarter, or is that only relevant to the third quarter? I believe it usually extends into October.

The winter season is beginning, and we are starting to see some premium from that business already from mid-November to early December, particularly for our operations in the St. Lawrence region in eastern Canada. Additionally, the voyages that conclude in late October and November also include a premium component. Therefore, we are experiencing some premium in the fourth quarter.

Okay. Great. Mark, you mentioned the strength of the balance sheet, the increase in cash, and the rising dividend. Can you discuss a couple of points? First, your investment opportunities; you have previously emphasized areas like stevedoring and port logistics to provide more stability compared to the dry bulk market. Secondly, how should we view your dividend policy moving forward? I know you've indicated in the past that it’s evaluated quarter-to-quarter, but could you share your thoughts on the dividend and if there's a target payout ratio? Any insights into the dividend policy would be appreciated.

Why don't I address the dividend. It's always been our approach with the dividend to put out a sustainable dividend number through good markets and bad markets. Throughout the years, we've been pretty consistent in terms of performance of the company in good markets and not so good markets. We've consistently outperformed market indexes and continually reported profit. So when it comes to dividend, I think we have the same approach, cautious, but we want to share some of the cash we're generating with shareholders. So we do it carefully through the dividend. We haven't, to date, wanted to do a formulaic dividend. Maybe we consider that a little bit too volatile against our plan to be a little bit more consistent. And so we've consistently increased the dividend over the past, what, 18 months or so when we restarted it after COVID. And we started out at $0.035, I think, and it's now up to $0.10. We're pretty comfortable with that number right now. But looking forward, if we keep generating the cash we're generating, I'm sure the Board will consider other adjustments. In terms of investments we see going forward, I think we see a little bit of market weakness in the forecast. At least FFA rates are pretty low for 2023. I think we'll sit and wait and look at the market, see which way the S&P values go. And if we see an opportunity, we've got some cash on hand, we'll maybe pick up a ship or two, depending on where the market is. In terms of logistics, so far, we've done what we've accomplished on the logistics side with relatively little capital investment. We are, today though, focusing on a couple of different projects that would be a little bigger step than us maybe doing something on that side in the next 12 months or so.

Our next question comes from Poe Fratt from Alliance Global.

I would have continued asking, but I thought that maybe Liam had moved over from the Genco call. Mark, you mentioned that depending on the S&P market, you might acquire an asset or two. With the Newport coming up in the first quarter of 2023 for a survey, is that a potential sales candidate? Can you share what you plan to do with the Newport at this time?

It is a potential sale candidate, Poe, assuming the ship is considering cash flow now. When it comes to reinvesting in a ship of that age, we always ask ourselves twice whether that's something we want to do and whether it makes sense going forward, especially looking at some new propulsion technologies that may become available. Instead of investing in an older ship, it might be better to hold onto our cash and wait to see what kind of ships will define the future or perhaps look for a more efficient, eco-friendly ship that we could trade for a longer period.

Okay. Gianni, you mentioned that the operating expenses for the first nine months are around $5,700, slightly below that. It seems like the third quarter might have been a bit higher. Can you discuss what the fourth quarter or the outlook for 2023 might look like regarding operating expenses?

Yes, of course. I sometimes hesitate to share our operating expenses on a quarterly basis because I believe it's more indicative of our cost trends when viewed over the year. However, the third quarter was affected by some one-time expenses. As you're aware, we transitioned our technical management from Sovcomflot to Bernhard Schulte, which resulted in additional costs during the third quarter that raised our operating expenses. I think the year-to-date figures provide a better perspective. We are definitely experiencing some inflationary pressures, with a year-to-date increase of about 8% compared to the previous year. There are also rising costs associated with travel and crew changes. I believe the year-to-date number is a better guide for what we can expect for the remainder of this year and into next year, whereas the Q3 figure was significantly impacted by those one-time events.

Since there are no further questions, I would now like to hand the conference over to your CEO, Mark Filanowski, for closing comments.

Thank you all for attending, and have a great rest of the day.

Thank you. The conference has now concluded. Thank you for your participation. You may now disconnect your lines.