Q4 2022 Pangaea Logistics Solutions Ltd Earnings Call

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Speaker 2: Good morning. My name is Shelby and I will be your conference operator today. At this time, I would like to welcome everyone to the PAM Geologistics Solutions 4th Quarter and Full Year 2022 Earnings Teleconference. Today's call is being recorded and will be available for replay beginning at 8 pm.

Speaker 2: 11 o'clock a.m. Eastern Standard Time.

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Speaker 2: We do ask that you please pick up your handset for optimal sound quality. It is now my pleasure to turn the floor over to Noel Ryan with Valem Advisors.

Speaker 3: Thank you operator and welcome to the Pangea Logistics Solutions fourth quarter and full year 22 results conference call. Leaving the call with me today is CEO Mark Fonowski, Chief Financial Officer Gianni Del Signore and COO Mads Peterson. Today's discussion contains four looking statements about future business.

Speaker 3: At the conclusion of our prepared remarks, we will open the line for questions.

Speaker 3: And with that, I would like to turn the call over to Mark.

Speaker 4: Thank you, Noel, and welcome to those joining us on the call and webcast today. After the market closed yesterday, we issued results for the 3 and 12 months ended December 31, 2023. Last year, we continued to develop a leading dry bulk logistics and transportation services company of scale.

Speaker 4: while providing our customers with specialized shipping, supply chain, and logistics offerings in commodity and niche markets.

Speaker 4: Our record full year profitability and operating cash flow put on display the durability of our vertically integrated premium rate shipping logistics model during a period of pronounced market volatility.

Speaker 4: TCE rates were strong in the first half of 2022, with the first six months being some of the best we've seen in years.

Speaker 4: During this period, we capitalized on the strong demand and rate environment by fully utilizing our fleet, including our four new-build ICE-class vessels, together with five secondhand vessels purchased in the prior 24 months, and the purchase of one-third interest in our NBHC joint venture.

Speaker 4: from one of our partners in late 2020, which effectively added two more vessels to our fleet.

Speaker 4: During the fourth quarter, our chartering strategy drove positive arbitrage in a falling rate market.

Speaker 4: While market conditions deteriorated during beginning in the latter half of 2022, our long-term transportation contracts and flexible, chartered-in fleet positioned us to perform well in excess of the market indices.

Speaker 4: TCE earned declined 38.5% on year-over-year basis in the fourth quarter, but our average TCE rate exceeded the average benchmark by 41% in that period.

Speaker 4: First quarter 2023 to date, our TCE booked for 3,970 ship days is $15,065 per day.

Speaker 4: Our premium rate model, which leverages the integrated benefits of specialty cargo carriage and onshore supply chain solutions, contributed to the 480 basis points adjusted EBITDA margin expansion realized in the fourth quarter when compared to the prior year-end year period.

Speaker 4: In 2022, we generated nearly $100 million in free cash flow, positioning us to pursue a balanced, self-funded approach toward organic and inorganic growth investments.

Speaker 4: together with a robust and consistent dividend program.

Speaker 4: In 2023, our capital allocation priorities will include fleet renewal and measured expansion, expanding our logistics platform, particularly as it relates to complementary, immediately accretive onshore opportunities.

Speaker 4: further debt reduction, and continued support of our quarterly cash dividend, which on an annualized basis represents more than 18 million in dividends to shareholders.

Speaker 4: Looking ahead to the remainder of 2023, we anticipate that a post-pandemic reopening in China and stable economic activity in the West should provide incremental support for global dry bulk demand.

Speaker 4: On the supply side,

Speaker 4: Global dry bulk shipping capacity is constrained for the foreseeable future, given the combined impact of low new build activity and recent introduction of new IMO mandated emissions reduction regulations that will impact older, less efficient pleats and will further restrict new building orders.

Speaker 4: In January 2023, we entered into an agreement to sell our bulk Newport, a 2003 Supermax vessel for $9.2 million. This sale is consistent with our strategy of maintaining a modern and efficient fleet amid tightening global emissions regulations.

Speaker 4: Looking ahead, we intend to opportunistically manage our fleet and commercial operations, with the purpose of maximizing TCE rates while continuing to support client requirements.

Speaker 4: In closing, I want to personally thank all of our employees, partners, and shareholders for their continued support. We see many opportunities for profitable growth on the horizon, and we look forward to providing you regular updates on our progress.

Speaker 4: With that, I'll hand it over to Johnny.

Speaker 4: I'll hand it over to Johnny.

Speaker 3: Thank you, Mark, and welcome to all of those joining us today.

Speaker 3: Our fourth quarter financial results continue to emphasize the flexibility of our business model, as we were able to maximize our operating coverage through our chartering strategy and deliver solid returns amid a weakening dry bulk market. Fourth quarter rates were approximately 20,000 dollars per day.

Speaker 3: a premium of more than 40% to the average published market rates for Supermax and Panamax vessels in the period, which is supported by our long-term COAs and our ability to opportunistically lock in short-term cargo business. Adjusted EBITDA for the quarter was $26.8 million capping off 2022 with full year adjusted EBITDA.

Speaker 3: to a 45% year-over-year decrease in total revenue attributable to lower market rates and a 29% decline in total shipping days.

Speaker 3: This revenue decline was partially offset by lower charter in higher expenses.

Speaker 3: which declined by 86.8 million year-over-year to 28.2 million in the fourth quarter.

Speaker 3: Chartered end days declined by 55% as the company favored trip charters over period charters in the fourth quarter of 2022 versus 2021.

Speaker 5: Vessel operating expenses increased approximately 21%.

Speaker 5: However, for the full year vessel operating expenses on a per day basis, excluding management fees was approximately $5,800 a day, an increase of about 10%, mainly due to increased crew travel expenses and crew management expenses. As we've discussed in the past, we utilize

Speaker 5: 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.

Speaker 5: As such, during the fourth quarter, our reported net income reflects unrealized gains of approximately $1.1 million and $465,000 relating to mark-to-market adjustments on bunker swaps and forward freight agreements, respectively.

Speaker 5: and an unrealized loss on interest rate derivatives of $371,000.

Speaker 5: In total, our reported GAAP net income attributable to Pangaea for the fourth quarter was $15.5 million or $0.34 per diluted share in line with the fourth quarter of 2021.

Speaker 5: Moving on to the cash flow statement, total cash from operations increased 73% year over year to 32.9 million in the fourth quarter of 2022. As a result, the company had 128.4 million dollars in cash and cash equivalents. In total debt, including finance, lease obligations of 200,000 dollars.

Speaker 5: at an all-in rate of 4.04%.

Speaker 5: 40% is capped at LIBOR rate of 3.25%.

Speaker 5: and 8% is floating at LIBOR plus 2.1. At the end of the fourth quarter of 2022, the ratio of net debt to trailing 12-month adjusted EBITDA was 1.25 times.

Speaker 5: In conclusion, our vertically integrated shipping and logistics model delivered above market growth during the fourth quarter.

Speaker 5: supported by strong execution of our chartering strategy, continued fleet expansion, and disciplined capital allocation.

Speaker 5: Entering 2023, our liquidity position has never been stronger, positioning us to drive strategic investments in new vessels and logistics operations, while continuing to reduce debt and pay a stable quarterly cash dividend.

Speaker 5: As we seek to deploy capital toward new growth opportunities, we will aim to further optimize our return on capital invested, consistent with our commitment to long-term value creation for our shareholders.

Speaker 2: Thank you. At this time if you would like to ask a question please press the star and 1 on your touch tone phone.

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Speaker 2: Once again, that is star and one to ask a question. We will pause for a moment to allow questions to queue.

Speaker 2: And we'll take our first question from Liam Burke with B. Riley.

Speaker 6: Thank you. Good morning, Mark. Good morning, Johnny.

Speaker 6: Thank you, honey. Good morning, William.

Speaker 6: Nice to hear from you. Oh, thank you. Mark, you mentioned the IMO mandate in terms of carbon emissions and slow steaming. I know it's early in the year, but are you seeing any further capacity tightening on the global fleet related to slow steaming? We don't see it yet, Liam.

Speaker 4: I think people are still trying to figure out exactly how the CII regulations are going to affect everyone. You've got to be careful on how you plan your voyages and try to...

Speaker 4: operate your ships as efficiently as possible to make sure that you don't end up with a problem at the end of the year by doing something that's going to affect you early in the year. So people are trying to work their way through these these regulations. We're looking at the CII impact of voyages.

Speaker 4: already on our ships and trying to make

Speaker 4: make sense of exactly what we're going to have to do toward the end of the year to make sure that we get the best ratings on our ships. Mads Peterson is here with me. He's really leading the charge here on the Pangea side in terms of these regulations. Maybe he has a comment directly. No, but...

Speaker 7: Thanks, Marg and hi Liam. It is essentially a question of at the moment of sort of where we're sort of shadow complying with it, where we're monitoring and tracking how we are, you know, how we're stacking up against the new regulations, but it's not something that has an operational impact yet.

Speaker 6: for us and I doubt for many others. Okay, got it. Your, CapEx is relatively low, except if you go out and buy more assets, but cash flow should be strong, your balance sheets in the best shape ever.

Speaker 6: How are you looking at capital allocation in 2023?

Speaker 5: Hey, William, it's Gianni. I think.

I think we're pretty consistent. Our strategy remains the same it's been for many years. I think we've, like you said, we've never been in a better position. We can be opportunistic and we can look at different things that in the past perhaps we wouldn't be in a position to look at.

That being said, I think if we look at our priorities, our chartered fleet and our own fleet are always priorities to us. We're selling the bulk Newport. We may look at one or two additional assets this year to sort of supplement the fleet.

and continue to look for some opportunities to renew.

debt service, we continue to pay down debt, we're paying $8 to $10 million a quarter for 2023, and then we have our first meaningful balloon in Q2 of 24. So we want to be in a position to have a flexibility.

to do what we want as we approach that balloon. It's about 20 million dollar balloon in 2024. And then we said it before, our message to everyone is we try to be consistent and that goes for our dividend as well. So we want to continue.

To be in a position where we can we can pay that dividend through the cycle for as long as possible.

But it's good to be in a position we're in and it's good to have that flexibility so we can be opportunistic.

Great. Thank you, Johnny. Thank you, Mark. Thank you, Matt. And once again, if you would like to ask a question, please press star 1. We'll take our next question from Poe Fratt with AGP. Good morning.

Johnny, for you first, can you just talk, I mean you sort of alluded to it, but can you just talk about.

You know cash on the balance sheet is you know almost doubled over the last year or more than doubled It's you know you're carrying about two dollars and eighty five cents of Cash on the balance sheet granted your you know you still you have a reasonable amount of debt Can you just talk about you know?

you're a little more deeper into your cash management strategy. And then on top of that, you're selling the Newport, you know, so that you get another roughly 8.5 million net coming in. So, you know, does it make sense to carry that much cash?

So I think, thanks, Pone, it's a great question and we are certainly looking at that internally and at the board level as well. The first thing I guess I would point you to and others is Note 4 in our 10K, which is a reconciliation or a breakdown of our cash.

And I think it's worth noting that some of that cash of the 128 million is held in joint ventures that are consolidated. So we have our partners that also have a say in the utilization of that cash. So if you look at note four, there's.

the amount of cash attributable just to Pangea and we have full access to, let's say, versus consolidated is about 85 million.

But in whole, I agree with you. We're looking for opportunities to deploy it. There's actual yield now at different banks.

But back to my comment to Liam, I think being able to

to have the, you know, to be as opportunistic as possible, to be in a position where we have flexibility to look at different projects I think is important for us. And we're trying to, we are returning cash to shareholders. We are paying a dividend. We've incrementally increased it over 2022. And if we see opportunities, we will be able to do that.

to do other things or return in other forms, then we certainly are looking at that as well.

And then, you know, you control the joint venture though, you have a two-thirds, you know, ownership interest. You know, you refinanced a lot of the joint venture debt. So why not move that cash over to corporate and…

Yeah, we did. We are. We're doing that. We paid a $15 million dividend out of one of our joint ventures.

And we will continue to do that, absolutely. So I think we revisit that periodically at the Pangaea board level, and we revisit it with our partners frequently as well.

We don't want to sit on cash if we don't expect to use it. We want to be able to deploy it in ways that are meaningful to the business and are generating value. That's how we view our cash and that's how we'll view it going forward.

And then, you know, who would have thought over the last 10 days, you know, some of the things that were happening in the banking industry. Can you just comment on how, you know, whether you've run a risk analysis on where your cash is and, you know, where...

where you potentially might see some concerns? Yeah, you're absolutely right. It certainly sends some panic through the market on where you have your cash and we're very mindful of that.

We've always reviewed our banks. We're not just a US-focused.

banking system, but we're global, right? We're making payments, we're receiving payments all across the world. We've generally been in the big banks and we have a lot of our cash, almost all of it, in what we would deem the larger...

banks and larger Western banks in the US and in Europe . So yeah, we're looking very closely. We feel we are in a good position where our cash currently is.

So, but who knows? I know who knows what's ahead, but we'll try to we'll try to keep it in a place that we feel as comfortable as possible.

Great, and then Mads, if we could talk about one, how's the ice class market looking for the rest of the year? And then two, you know, you really scaled back the chartered in fleet over the course of the fourth quarter. Can you give us an idea of where you are on the chartered in fleet right now and how you are doing it?

how the charting and fleet looks for the rest of the year and then just on you know layer on top of that just you know where you might see the you know the one to two assets is It ice class or non ice class sort of what you're what you're looking at to you know continue the fleet renewal program I hope they are happy to do that and I think after it's starting with your with your life

to the to the ice-class fleet at the moment.

In any size really, in terms of the charted in fleet, I mean that number will fluctuate in accordance with the duration of the degradation of those.

the market, our customers, how busy they are and ultimately of course our view on where we think the market will be. So you're absolutely right, that number did go down throughout the latter half of the year.

last year that is that's the way that this part of the business is designed to operate it you know when the market is dropping like it is the last couple course last year we can reprice the fleet we can re-deliver the charalim fleet as we go and then we fix and ship Chiba right so so that means

that rather than having maybe some short period shifts in the fleet, we will just execute on time travel trips to extract the most value out of whatever market is at the current time, right? We have done that before, you know, we didn't want to load up on period times going into Q1.

That proved to be the right decision as the market kept trending lower. But as things are improving now, I imagine that this part of the fleet will actually sort of grow a bit over the next.

three to six months depending on what happens in the market. We're already seeing signs of better value in the short period market and we are trying to extract that. We don't have a fixed number of shifts that we need to employ in this part of the business. It is designed to be dynamic and contract and expand in line with the markets. And then on the ice class front.

from Russia or with cargo of Russian origin. So that did impact the earnings of that fleet compared to where it normally would be this time of year. But it is an efficient fleet. It's a modern fleet. It can do conventional drive for business. I make sure that Stormtrooper Leather is here, because that's there. It's an excellent fleet. I lovepeople. I like what old people do around the again.

And it did that for the quarter, right? And of course we still have our Bethlehem contract that's coming up over the summer, where all 10 ships will be engaged in that business. So yeah, does that answer your questions? Absolutely, great color, thank you. And Mark, not to leave you out.

Thank you.

When you look at, you've been talking about expanding the logistics business for a couple quarters if not longer.

look at you've been talking about expanding the logistics business for, you know, a couple quarters, if not longer. Can you just talk about

strategically what you want to accomplish on the logistics side, you know, it hasn't hit the

radar screen as far as materiality yet, but can you just talk about, you know, strategically what you want to do there? And then also give us an idea of sort of how much capital you might be able to deploy and then

if you could just talk about what kind of return on capital your targets might include. Okay. First of all, the strategy really, Paul, is to get more cargo to put on our ships, expand the opportunities for shipping. So we can get closer to cargo by...

developing a relationship with a miner or producer and get more cargo on our ships to deliver to customers on the other end of the voyage, then that helps our shipping business. But it also gives us a little return on the activity we're doing, even during activity we might be doing in the load.

So overall, our margins increase, our throughput increases, our revenue increases, and it gives us other opportunities for other movements that Minor might be making.

On the other side, where we arrive with cargo, say in our Sabine terminal, we take the... we arrive with our ship or another person's ship, another company's ship, and comes in, and we discharge that cargo. We get closer to the end user on that point. So maybe if they've got cargo to ship into...

the US Gulf, they can ship it into Sabine, we can do the same thing, get more cargo on our ship coming to our managed terminal where we get additional margin for doing the extra work. So, that's really the strategy to expand the shipping business by doing these other things on each end.iquetetetetetetet loops Here we're automating the shipping service command and we're doing all the same equipment

Now, that gives us, having the opportunity, having the operation going in Sabine gives us other opportunities to do business for other ships. I was back last summer when Houston was very...

It was very crowded and congested. We did some business with third party companies, either suppliers or buyers of commodities that were trying to get into Texas, into Houston, but they came to Sabine instead.

We help them in that area. And we develop relationships with those customers that are ongoing. So it's just expansion of the whole touch of cargo from...

beginning point to end point is what we're really at with Poe. In terms of capital, you know, we could spend a lot of money going on buying real estate up and down the Mississippi River or in the US Gulf Coast.

It's not in our in our target right now to do that. We're trying to do it Where our customers are our current customers are active Maybe try to get hold of another terminal that we can operate with existing customers to expand our business with them and expand

like I said, in different ways with suppliers, producers, shippers to get more cargo on the ships. In terms of ROE, we're looking at projects today that would be in the mid-teens, I guess, in terms of if we just took that.

took that opportunity by itself. But really again what we're trying to do is expand returns on the whole business.

took that opportunity by itself. But really, again, what we're trying to do is expand returns on the whole business by getting additionalcr enabling about backd

freight on carriage of cargo and extra services, debadoring services packaged all together gives us an overall higher return. Again, that's the strategy looking at individual.

on carriage of cargo and extra services, evadoring services, packaged all together, gives us an overall higher return. So again, that's the strategy, looking at individual projects.

probably mid-teens is our target right now. Okay, and then Mark, would you, you know, I think I heard it, but would you characterize the logistics business as lower risk and a little more consistent than on the fleet side? You know, that there's, you know,

risk adjusted, the volatility is going to be a lot lower. Maybe the returns are lower in peak cycles, but there's more consistency, so it creates a little more consistency in the overall business. Yeah, for instance, Paul, we're looking at a project right now to.

adjusted, the volatility is going to be a lot lower. Maybe the returns are lower in peak cycles, but there's more consistency, so it creates a little more consistency in the overall business. For instance, we're looking at a project right now to...

to take cargo into a new port that we're trying to develop a relationship with in the Gulf Coast. So... Last week on huh, I had a lot of contact with myon that during his first visit torief,

the project comes with, it's really based on a contract for carriage of commodity into that port. So if we can get a contract for one year or two years or three years for this commodity business because we're doing this deep adoring on the...

on the discharge port or the stevadoring on the load port, then that adds consistency to the whole business. We put together the contract to carry the goods along with the stevadoring.

So we're not dependent on market fluctuations so much. That's why we think it's more consistent.

actually depend on each other for the maximum output, right? Steeped oiling alone without any activity on our own ships, sort of derived from that, that is not something that will generate a comparable return to buying a board carrier for instance, right? But the combination is really powerful and drives higher modular and...

and much more meaningful relationships that you find traditionally in the shipping market. It's a way to operate and create a niche for yourself. It's not different. Our approach to it and our view on it is not different from our ice-cast business, for instance. It's the same idea, just a different way of getting to the same end result of a more sort of...

of offering a more comprehensive service that is of higher value to the customer than just moving stuff from A to B and not really thinking about what happens before or after.

Those comments are really helpful. Thank you. Thank you. It appears that we have no further questions at this time. I will turn the program back over to Mark Zielinowski for any additional or closing remarks.

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

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

That concludes today's teleconference. Thank you for your participation. You may now disconnect.