Q2 2023 Pangaea Logistics Solutions Ltd Earnings Call
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Good morning, My name is Chelsea and I will be your conference operator today.
At this time I would like to welcome everyone should eat Pangaea logistics solutions second quarter 2023 earnings teleconference.
Today's call is being recorded and will be available for replay beginning at 11 a M. Eastern.
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5153, domestic or foresee rescue Q2, 0118 Q international.
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It is now my pleasure to turn the floor over to Noel Ryan with Vallum advisors Sir.
Thank you operator, and welcome to the Pangaea Logistics solutions second quarter 2023 results conference call, leading the call with me today are CEO Mark for now ski Chief Financial Officer, Gianni del Signore and C O O that's 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 would like to turn the call over to Mark.
Yeah.
Thank you all and welcome to those joining us today on the call.
After the market closed yesterday, we issued a press release detailing our second quarter results.
During a period of continued softness in global dry bulk shipping markets, where benchmark industry rates declined nearly 60% on a year over year basis.
Pangaea delivered an average TCE rate was approximately 50% higher than our broader market indices, resulting in another consecutive quarter of profitability. Once again proving the strength of our business plan.
Our TCE earned was $15558 per day for the three months ended June 32023.
Compared to an average of $27139 per day for the same period in 2022.
Our long term C O as specialized fleet and cargo focused strategy helped us to significantly outperform index rates and a declining market environment.
In the second quarter excess dry bulk capacity created by easing port congestion and high voyage operating speeds muted the normal seasonal hungry Capri that occurs in this period.
Global trade in ton mile demand remain buoyant.
And markets in which we directly participate including construction aggregates and semin tissues materials.
Are especially active where we participate in ocean freight stevedoring and terminal operations.
So we are experiencing softer near term market the long term supply and demand dynamics remain very favorable.
New building vessel supply remains highly constrained with lead times stretching into 2026, which we expect will keep fleet growth low for the foreseeable future.
Second hand asset values have recently softened a bit but remains strong in this market as the demand for eco tonnage any ultra Max segment has remained high.
As such we remain strategically focused on positioning our business to capitalize on the expected growth in global dry bulk volumes and favorable rate dynamics over the coming years.
Through August eight market market rates have continued to fall, averaging approximately $8500 per day compared to $10431 per day in the second quarter.
For Pangaea.
The third quarter represents the peak of our Arctic trade season, with all 10 of our ice class one eight vessels fully committed through October .
Ice class premium rates.
These ships remain a key value differentiator for us.
We have made.
Both financial and operating commitments to this important trade.
During the quarter, our post Panamax ice class ships built by US in 2021 received the D. N V class silent environmental notation, the first dry bulk ships ever to receive this designation, helping ensure our ships, making minimal footprint in pristine environments like the Arctic Ocean.
Along with our overall cargo focused strategy and key commodity trades, our efforts have allowed us to outperform the market by an average of 30% annually over the last five years and we remain the top performer on the vessel Index list of publicly listed dry bulk companies over that period.
We project that our third quarter, Tcs will significantly exceed the quarter to date indices.
Through August eight we have booked 3500 shipping days, returning $16700 per day for the balance of the third quarter.
While we remain focused on delivering above market returns for our shareholders capital allocations have also been a key priority for us.
Over the last 12 months, our operating cash flow conversion has been over 80% of our adjusted EBITDA.
Providing ample cash to derisk, our balance sheet invest in growth and return capital to shareholders through a consistent dividend.
We've grown our quarterly cash dividend to <unk> 10 per share representing a total payout of $18 million annually, which we believe represents a sustainable commitment regardless of current market conditions.
In June we took delivery of the 61000 deadweight bulk prudence, which we purchased for cash.
The acquisition expands our own fleet to 25 vessels and it's congruent with our continued strategic focus on owning and operating a newer more efficient fleet is well equipped to support client requirements on an on demand basis.
Also in June we closed on the acquisition of Marine Port Terminal operations in Florida, and Maryland, and all cash transaction.
This acquisition represents critical expansion of our North American terminal network to include the mid Atlantic and southeastern United States, adding.
Adding dry bulk distribution capabilities within growing commerce centers in alignment with our cargo centric strategy. We are already actively pursuing opportunities to leverage that footprint for growth with new and existing customers.
We're now beginning to break out our port terminal operations business within our financials to increase transparency as we focus on growing this business in coming years.
Looking ahead, we continue to win it anticipate pan J O will generate strong cash flow this year.
<unk> us to continue to reward our shareholders Derisk, our balance sheet and invest in our commercial expansion.
Strategically our focus is the same as ever.
We are confident in the long term tail winds that are setting up to support dry bulk economics, and we believe the most compelling value opportunity for our shareholders will come from sticking to our differentiated business plan.
Deepening our relationships with our customers and optimal positioning our fleet to maximize asset values and a higher market rate environment.
With that I'll hand, it over to Johnny for a discussion of our second quarter financial results.
Thank you Mark and welcome to all of those joining us today.
Our second quarter financial results continue to emphasize the durability of our business model.
We were able to maximize returns through our chartering strategy I mean, a soft dry bulk market and against the backdrop of record profitability in the second quarter of last year.
Second quarter TCE rates were approximately $15558 per day, a premium of 49% over the average published market rates for Super Max and Panamax vessels in the period.
It is supported by a long term seaways.
Our ability to opportunistically adjust our utilization of chartered in vessels and periods of softer market rates and forward bookings, which lock in rates for future cargo performance.
Okay.
Our adjusted EBITDA declined year over year to $15 9 billion with adjusted EBITDA margin of 13, 5%.
Down from record quarterly adjusted EBITDA of $44 2 million.
Adjusted EBITDA margin of 22, 6% in the second quarter of last year.
The decline was primarily driven by a nearly 40% year over year decline in revenues as market rates decreased by 60% year over year.
During this period of softer market rates, we minimized our chartered in days, which coupled with lower market rates served to reduce our charter hire expense by over 55% year over year from.
From an average of $26264 per day to $15209 per day in the second quarter of 2023.
Okay.
Vessel operating expenses increased by 2.2% year over year.
However, excluding technical management fees vessel operating expenses on a per day basis were 5517 per day.
From an average of 5805 for the full year of 2022.
In total our reported GAAP net income attributable to Pangaea for the second quarter was $2 8 million or six cents per diluted share compared to $25 million or 56 cents per diluted share in the second quarter of last year.
Excluding the impact of derivative instruments as well as other non-GAAP adjustments our reported adjusted net income attributable to Pangaea. During the quarter was $4 6 million or 10 cents per diluted share a decrease of $24 3 million or 54 cents per diluted share versus the second quarter of last year.
Moving on to cash flows.
Total cash from operations decreased by $35 million year over year to $2 million.
Due to the decrease in TCE rates.
The company also deployed <unk>.
$34 million in capital during the quarter on vessel and business acquisitions as Mark discussed a moment ago.
As a result, the company had $84 3 million in cash and equivalents and total debt, including lease finance obligations of approximately $287 million.
Of the $287 million in debt approximately $20 million became current at the end of the second quarter, representing balloon payments that are due in may of 2024.
This credit facility is currently locked in at a fixed rate of approximately $3 96%.
We are discussing with multiple lenders who are willing to provide the necessary financing, but we are tactically managing our cost of capital and the current interest rate environment by deferring a refinancing of a portion or the entire amount until closer to the maturity date.
Of our total debt and financial leases, 53% is fixed at an all in rate of 4%.
41% is capped at sofa rate of 3.25%.
And 6% is floating at sofa plus 196%.
During the quarter the impact of higher interest rates was relatively muted in our results due to our fixed rate and cap rate debt as well as benefits from interest yielding deposits, which generated over $1 million in interest income.
To the degree that interest rates remain at current levels or higher we would expect our blended interest rates remain largely in line with what was realized so far this year.
At the end of the second quarter of 2023, the ratio of net debt to trailing 12 month adjusted EBITDA was two one times.
In conclusion, our vertically integrated shipping and logistics model continued to deliver above market performance during a soft market supported by strong execution of our chartering strategy.
<unk> fleet expansion and disciplined capital allocation.
Strategically our focus is consistently generating and returning value to shareholders, while leveraging our current balance sheet to optimally position on our business to capitalize on long term opportunities in the dry bulk market.
During periods of market softness, we believe that our business model will continue to deliver above market returns and consistent cash flow generation.
With that we will now open the line for questions.
Yeah.
Thank you.
At this time, if you'd like to ask a question. Please press the star and <unk> on your telephone keypad.
They remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question.
And our first question will come from Liam Burke with B Riley Your line is open.
Thank you excuse me good morning, Marc Good morning, Johnny.
Good morning, Lee and thanks for joining us.
Mark we talked about your fixtures for the third quarter at twice the current market.
You mentioned, obviously, it's the peak Arctic season, and Youre getting the ice class premium, but could you talk about the rest of the fleet is at the C O as at or above market or youre getting a premium to spot with other vessels.
Lee and thanks for the question.
The ice class ships 10 ships in our own fleet. They are are they are earning.
The ice class premium in this period of time during the third quarter is the biggest part of our ice season.
But the rest of the business.
We did take some cargo earlier in the year with what appeared to be than.
Low rates with everybody's expectation.
But we know it is.
Our business plan to give up a little bit of the market spikes those infrequent market spikes in order to protect ourselves from downside periods in.
Times like this so we were a little bit opportunistic earlier in the year and we are working off some of those and you will see Oh age that are that were booked earlier this year.
Great. Thank you.
You closed on the Marine Port acquisition.
You incurred some terminal of <unk> expense in the second quarter.
Is that a fixed cost or was there any revenue associated with that.
Theres some revenue.
Identified in the in the income statement, it's only one month, so it's hard to draw any real conclusions over at the.
The expenses that we incur Johnny were they in the in the in cost of sales or were they in.
G&A down below.
To close the transaction the transaction costs legal expenses environmental reviews et cetera.
Yes.
It's absolutely.
Worth, noting that we closed in June we have one month of activity and we're now starting to show decent financial information.
<unk> for that for that entity.
So again, it's one month of activity. It is there are two new line items in our P&L being terminal and stupid or revenue and then terminal and Steve to our expenses and.
In addition to that there was G&A incurred during the quarter.
Leading to the closing that was part of our.
Part of the increase that we saw in.
And G&A.
But going forward.
That that'll be part of that is part of our P&L operating segment for us.
But the other components of that of that business.
That are in joint ventures will continue to be recorded unfortunately in other income below the line, but this entity now will be will be.
Above the line.
Great. Thank you Jonny. Thank you Mark.
Thank you.
Again that is star one two last quick question.
And our next question will comes from Poe <unk> with Alliance Global Partners. Your line is open.
Yes.
Can you just talk about.
The decision to break out the terminal EBITDAR in.
When you look at it it's less than 1% of revenue.
You know can you just talk about that it does this indicate that it might become a more meaningful business down the road. So W. P.
Hi, Brite any plans to deploy capital into that business and then if I do the math on it you know it.
Roughly 28% gross margin.
Just.
Look at revenues and then at the costs and can you just talk about sort of the margin profile on that business.
Yeah. So sure on the first on the first question I know there's levels of of.
You know how we can break this out from an accounting perspective right.
It's definitely a new operating segment for us it's a different type of revenue, it's a different type of a.
Business is complementary obviously and strategically important to us, but the nature of its revenues are different than voyage revenue our charter revenue, which are our two other main streams of revenue so from that perspective.
<unk>.
It is.
It is warranted to breakout and we have but there's other levels. We don't this is won't be a separate reporting segment just yet.
It will be a new operating segment, but its not a reportable segment.
We hope to grow it and to continue we have we've.
We've made an effort.
And you've heard it on conference call After conference call and presentation. After presentation that this is part of our this is part of our strategy to diversify and have a larger offering to customers than what a traditional shipping company would necessarily provide so it's definitely a strategically important and and showing the information.
As we have on our P&L, which essentially is our two new.
Our revenue and expense lines I think it's important.
Again, what I said to Liam it is one month of activity.
<unk>.
The business can be lumpy there can be.
There can be periods of multiple ships at port and it can be periods, where theres fewer ships.
So one month of activity I don't think it's the best indicator on a go forward basis, but it is certainly certainly helpful.
On a longer term.
Slightly lower slightly lower margin than what we saw in the first month of activity.
But it still will be it will be shown separately and it is important to us to continue growing it.
Great and then.
Could you quantify the ice class premium.
Booked in your forward cover.
200 <unk>.
I think if I did the math correctly its about 26% a year Court days book can you just quantify what those 920 days were booked out as far as the rate.
Okay.
Yes, Hi, Paul.
In this current rate environment.
So the average return on that.
<unk> business and the occupied is about twice the current index.
Okay.
It's even if it's twice the current index it implies that the rest of the fleet as.
You know was well above.
What current rates are and can you just talk about potentially whether you get them.
Ford booked into the fourth quarter, two and so that we could.
Potentially you're going to see you know why.
Above average bookings for the fourth quarter as we look at the third quarter conference call.
I mean, we.
We do have we do have a pretty similar.
A similar book I would say, it's a Q3 outside the <unk>.
So sorry for Q4 outside the us business.
As Mark alluded to earlier the numbers that we've reported so far for Q3 and not driven solely by the Isa is also off our sort of all the business that also helped the degree of Cabo going into that quarter.
Okay and then.
When when you look at the overall business I think a competitor.
You always mentioned that the Coa business has backed off.
Companies are making shippers are making less firm commitments as we look out call. It six months or so are you are you seeing the same thing and and then what does that imply as far as your chartered in fleet you know for the third and fourth quarters.
In terms of the chartered in fleet that is in our business always a pretty dynamic number depending on the market conditions at any current time right. So.
In terms of the outlook I would say that this is not typically the season, where are those sort of contracts for once it was yes, a maintenance typically happens towards the end of the year.
And we are still having discussions with several of our customers about longer term commitments into both 24 and 25.
So I think it depends on where are you on the market.
What's sort of service you're offering to your customers whether it is.
We'll have those discussions.
And a little bit of where you think the market is going to be a year from now so.
If you think the market is going to be twice what it is today a year from now you don't want to put your ship out that far but.
On a.
A shipper might want to contract for today's rate for.
For another year. So there is a gap there between whats acceptable buyer and seller.
Okay, I guess to get a little more specific you only had a charter or you chartered in 20 vessels during the second quarter.
Is that a good number to use for the rest of the year.
Yes, I think so I mean, it's obviously a bit of a bit of guess work on.
Statements, but if the market continues the way it has been for Q2 I don't see why we should change that number dramatically.
It's all about how do we get the best sort of short term value out of those arbitrage opportunities pool right.
Whether you want to take a ship for a couple of legs. So you just take a field trip and then.
And in a soft market as we've had for the last <unk>.
Six months, maybe even.
We don't want to take those risks go out at all on chocolate in China, as we get more value out of just executing on the trips.
Yeah, Okay. That's helpful. Thanks, Matt.
And then could I just ask you a couple of questions about the.
The.
The cash flow statement.
Two items.
Two items jump out at me one is for you.
You know theres, a pretty meaningful increase in the.
Accounts for.
Doubtful doubtful accounts provision for doubtful accounts.
It was negative in the first quarter in which over $1 million in the second quarter.
For a six month run rate.
Can you just talk about that and then secondly, you.
You had a working capital deficit are used in the second quarter do you expect that to reverse over the course of the rest of the year.
Yes sure.
Yes.
The the.
Part of the working capital.
The draw on working capital we have.
<unk>.
We had the cash acquisitions at the ball Prudence and the acquisition of the Port terminal.
In addition, we had a.
You know a re class of debt.
Coming to.
In may of 2024, so that.
That is now in our in our current current liabilities. So it is affecting our working capital our expectation there as I said in my prepared remarks is.
We're pretty comfortable in the interest rate that we have it was fortunate we've locked in a significant amount of our debt when we did.
Interest rates that were far more favorable.
So as we approach maturity. We are we're currently working talking to some lenders.
We have no.
We have no worries about the potential refinancing as it approaches.
It's just a matter of tactically looking at.
How much we will refinance and how we can be as efficient as possible in that in that respect.
So yeah I don't think we'll see a similar draw on working capital that we did in Q2.
On the.
On the reserve front.
We did we did make a slight adjustment in our general reserve policy.
So these are just overall.
Macro tight.
So nothing that would necessarily be on a specific specific way, but just overall general reserve, we made a slight adjustment to our general reserve policy, which which resulted in a slight increase in <unk>.
So I don't expect.
I expect that that modification too.
To not have any further impact for the balance of the year.
Sounds good and then just.
Two other things came out one is that you mentioned that some of the.
Some of your terminal and stevedoring activities have run through the JV.
Uh huh.
On a gross revenue basis, how much is that generating you know what.
How meaningful is that relative to the current <unk>.
Reported.
Terminal Stupid Jordan revenue and then secondly, just if you wouldn't mind quantifying the extra or.
G&A or transaction costs that you incurred in the second quarter with associated with the acquisition.
Okay.
Sure.
So I'll start with with the JV so the.
<unk>.
We've had these joint ventures for years, so the impact of them should be.
Same.
Going forward right and it was always recorded are our pro rata share of the net income of those entities was recorded in other income.
We've been in these joint ventures some since.
I don't know 2016 2017 and some.
Some a little bit more recent but.
Since there they are held in joint ventures.
The accounting for them in the recognition of the income will continue to be reflected in that manner. So we'll continue to just recognize our pro rata share of income and other income.
The.
Yeah.
Oh, I'm, sorry, and the gross revenue of.
Of the entities. We're just we're not we're not we wouldn't be shown here were not consolidating it in.
But it would be.
$510 million is probably the range where we.
We're seeing for that activity.
Understood Yes.
It's all captured through the JV, but its just sort of trying to figure out on a gross basis or yeah, how meaningful it is cuz overall business.
And then your second question there on the G&A related to the acquisition.
In the MD&A, we do have some discussion about it in the 10-Q.
But it was closing costs one time.
<unk> cost just over $300 million our sector is at $300000.
[laughter] closing costs.
That were incurred in the quarter that we don't expect to.
Obviously too.
Occur again throughout the year yeah.
Yeah, I was going to guess around 3% or so a big alcohol seven 2 million.
Acquisition.
Right. Thanks for your help congratulations on a good quarter.
Thanks, Thanks, Bob Thank you.
<unk>.
Thank you and at this time there are no further questions in the queue. So I would like to turn the call back over to Mark who will now Keith 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 Pangaea, LLS Dot com and a member of our team will follow up with you. This concludes our call today you may now disconnect.
Yeah.
Thank you ladies and gentlemen, this concludes today's presentation and we appreciate your participation you may disconnect at any time.
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