Pangaea Logistics Solutions Ltd

NASDAQ:PANL

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Savannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Second Quarter 2024 Earnings Teleconference. Today's call is being recorded and will be available for replay beginning at 11:00 a.m. Eastern. Recording can be accessed by dialing [phone] domestic or [phone] International. [Operator Instructions]

It is now my pleasure to turn the floor over to Stefan Neely with Vallum Advisors. Please go ahead.

[Stefan Neely]

Thank you, operator, and welcome to the Pangaea Logistics Solutions Second Quarter 2024 Results Conference Call. Leading the call with me today is CEO, Mark Filanowski and Chief Financial Officer, Gianni Del Signore, and COO, Mads Petersen.

Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. At the conclusion of our prepared remarks, we will open the line for questions.

With that, I would like to turn the call over to Mark.

[Mark Filanowski, executive]

Thank you, Stefan, and welcome to those joining us on the call today. After the market closed yesterday, we issued a release detailing our second quarter 2024 results. Our results for the quarter represent consistent execution of our cargo focused business model, amid a seasonably stable period for the dry bulk market. While the second quarter is typically 1 of our softer quarters in terms of demand, our fleet was well utilized on cargo contracts with key customers in Atlantic trade routes. Our strong utilization and consistent execution resulted in earned TCE rates exceeding the benchmark index by 7%.

We reported adjusted net income of $4.6 million for the second quarter and adjusted EBITDA of $15.9 million. Our adjusted EBITDA was about flat with the second quarter of last year as our achieved TCE rate improved 4% year-over-year but were offset by higher charter and vessel operating expenses.

At a macro level, the global demand for dry bulk remains strong and has proven to be resilient in the face of ongoing political disruption and bottlenecks in key trade routes. Nonetheless, the overall supply of new build vessels remains constrained, which we believe will continue to put upward pressure on dry bulk rates in the near and intermediate term.

The second half of the year represents a seasonal peak for our business due to heightened demand within our niche Arctic trade routes. Combined with our differentiated cargo-focused business model, we are well positioned to continue delivering consistent premium TCE returns relative to the prevailing market while also navigating any potential market volatility.

While certain parts of the market have been under pressure since the end of the second quarter, we are seeing strong demand as the Arctic trade season begins to accelerate.

Through today, we booked over 3,298 shipping days at an average TCE rate of $17,978 per day. Strategically, we were very focused on capital allocation during the second quarter. Continuing to fortify our balance sheet and opportunistically build our fleet of owned vessels. As we announced last quarter, we expanded our owned operating fleet of vessels by entering into an agreement to purchase two 58,000 deadweight ton sister ships built in 2016 for a total consideration of $56.6 million.

We took delivery of the first of these 2 ships, the Bulk Brenton, in late July, and we will receive the Bulk Patience next week. Gianni will provide more specifics around our balance sheet here shortly, but I am happy to report we arranged financing for these 2 ships and refinanced balloon payments with a new $50 million credit facility with D&B Bank, another strong capital partner to our lending portfolio.

During the quarter, our Terminal and Stevedore business delivered its highest level of profitability since we acquired the business in June of last year. We continue to focus on building out this segment with our Port of Tampa activity scheduled to begin expanded production in the second half of 2025.

As we enter the peak demand season for our business in the second half of the year, we are well positioned to weather market volatility and deliver consistent return premiums over the prevailing market.

Over the longer term, our cargo focused business model, expanded fleet of vessels, and strategic presence in niche trade routes, will enable us to continue delivering above-market returns, while our lean balance sheet supports our ability to utilize opportunistic growth capital investment, and provide our shareholders with a consistent dividend program.

With that, I'll turn it over to Gianni for further discussion of our second quarter results.

[Gianni DelSignore, executive]

Thank you, Mark, and welcome to all of those joining us today. Our second quarter financial results are highlighted by continued premium TCE returns and strong operating cash flow generation. Second quarter TCE rates were approximately $16,223 per day, a premium of approximately 7% over the average published market rates for Supramax and Panamax vessels in the period, which is supported by strong demand within our key Atlantic trade routes and our contracts of affreightment, which locked in rates for cargo performance.

Our adjusted EBITDA for the quarter was flat compared to the prior year at $15.9 million. Our adjusted EBITDA margin decreased 137 basis points to 12.1% as higher charter hire and vessel operating expenses offset higher market rates and growth in total shipping days year-over-year.

Our total charter hire expense increased by 12% when compared to the second quarter of 2023, due to a 3% increase in total charter-in days and a 45% increase in the prevailing market rates for Panamax and Supramax vessels.

Our charter-in cost on a per day basis was $16,583 per day in the second quarter of 2024. And through today, we've booked approximately 1,674 days at $14,505 per day for the third quarter. Vessel operating expenses net of technical management fees increased by 13% year-over-year from an average of 5,517 per day last year to $6,246 per day in the second quarter of '24. The increase in expenses per day was primarily driven by timing of expenses incurred in the second quarter of 2024 versus 2023. However, for the 6-month period ended June 30, vessel operating expenses, net of technical management fees increased by only 3.5% from $5,575 to $5,773 per day.

In total, our reported GAAP net income attributable to Pangaea for the second quarter was $3.7 million or $0.08 per diluted share compared to $2.8 million or $0.06 per diluted share in the second quarter of last year.

When excluding the impact of the unrealized loss from 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 $0.10 per diluted share, which was flat when compared to the second quarter of 2023.

Moving on to the cash flows. Total cash from operations increased by $6.9 million year-over-year to approximately $9 million as stable profitability was bolstered by improved cash generation by net working capital. At quarter end, the company had $77.9 million in cash and total debt, including finance lease obligations of approximately $253 million.

As Mark mentioned earlier, the second quarter was an active 1 from a financing perspective, as we paid off the final balloon payment on the Bulk Endurance, Bulk Pride, and Bulk Independence credit facility of approximately $20 million. We subsequently entered into a new $50 million facility which was initially utilized to refinance the Bulk Endurance only for $17.6 million.

The remaining capacity of this facility will be used for the delivery financing of the Bulk Brenton, which delivered in July and the Bulk Patience, which will be delivered in August, the initial drawdown of $17.6 million is payable over 5 years with a balloon payment at maturity of $9.7 million and an interest rate based on 3-month SOFR plus 250 basis point spread.

Further, in July, we refinanced the Bulk Prudence with a new lender generating $15.2 million of cash payable over 5 years with a balloon payment at maturity of $8.6 million and an interest rate based on 3-month SOFR plus a 190 basis point spread.

On a pro forma basis, after completion of these financings, our total debt to vessel book value is approximately 54%, which is flat when compared to the prior year period. And when adjusted for fair market value of our vessels, is approximately 43%.

During the quarter, our overall interest expense remained flat relative to the prior year interest rates due to our fixed rate and cap rate debt, as well as benefits from interest yielding deposits, which generated nearly $700,000 in interest income. At the end of the second quarter, the ratio of net debt to trailing 12-month adjusted EBITDA was 2.1x.

In the near term, our capital allocation focus will be on maintaining our nimble balance sheet in order to continue opportunistic investments in growth through the expansion of our onshore footprint in owned vessel capacity. We are also continuing to prioritize a consistent return of capital strategy as evidenced by our consistent dividend, which we believe can be sustained through all phases of the market cycle.

With that, we will now open the line for questions.

[Operator]

[Operator Instructions]

Our first question will come from Liam Burke with B. Riley.

[Liam Burke, analyst]

Mark, on the fleet renewal program, you're balancing between charted-in and owned. Right now, the way you're looking at the market depending on asset prices, would you be more inclined to stay at pat? Or would you add or subtract vessels here?

[Mark Filanowski, executive]

I think we want to stand at pat for just a little bit, Liam, see where the market's headed. We were -- we've been looking for good ships for a while. Maybe we watch the market move up in front of us. We've been on a few ships late last year and early this year, and we are just behind the market a little bit. And we finally found a couple of ships that really fit our fleet nicely. So we are aggressively -- aggressive in getting those ships. And that satisfies us for a little while. I think, not long term. But right now, I think we can take a breath.

[Liam Burke, analyst]

Okay. Gianni you still have vessels under finance leases. Is there any opportunity to refinance those to further take down your debt -- your interest expense?

[Gianni DelSignore, executive]

Some of them actually, one is coming due in September, Liam. And then others, we're -- I think we're pretty comfortable. And I gave that pro forma sort of look at our debt balances against our asset, both from a book value and a fair value perspective. I think right now, we're fortunate to be able to be flexible in our acquisition process, both last year with the port acquisition and then this year with a couple of ships.

So I think that still remains important to us, to have that flexibility. And I think where we look at our sort of total balance sheet, I think we're pretty comfortable. Not to say we won't attack that in the future if it presents itself, but I think where we are right now and I think, ultimately, having that flexibility, I think, is still important to us.

[Operator]

[Operator Instructions]

Our next question will come from Poe Fratt with AGP.

[Charles Fratt, analyst]

The macro question I have is a little -- I'm just highlighting in your presentation, so you talked about the Arctic trade accelerating. And I'm just wondering whether that's any different than previous years when you typically see an upturn in activity in Arctic in the third quarter? Or is there something different happening this year?

[Mads Petersen, executive]

Yes. I think the difference Poe is mainly an earlier start than we've had in previous years. So I think that was what we were referring to there. The fleet of our ships is fully committed to that trade for Q3 and a little longer than that. So, yes.

[Charles Fratt, analyst]

Does that mean Mads that it will end earlier? Is it a finite time frame? Or is that just a benefit this year that you'll see.

[Mads Petersen, executive]

I think it's a little bit too early to say. It's obviously dependent on the ice conditions out there in the end of October, right? But we certainly expect to have the same amount of business there this year, timing of it might move a little bit.

[Charles Fratt, analyst]

Okay. And then in the same sentence or the same section you say that market rates are mixed. Could you just expand on that comment?

[Mads Petersen, executive]

Yes. I think if you look at the overall market for the quarter, it's sort of been remarkably stable. But individual pockets of the market, so geographical medians still have volatility, right? So I think when the quarter started, the Pacific was trading higher than the Atlantic, which is sort of an anomaly if you look at it in a longer view. That trend has sort of emerged in the last couple of months. So back to something that reflects the normal situation. So that is what we're referring to there.

[Charles Fratt, analyst]

Okay. And are you seeing, Mads, any change in demand. There's a lot of concern about just the macroeconomic picture out there. Any change in demand that you're seeing from your customers at this point in time?

[Mads Petersen, executive]

I think our customers in our trades are still pretty optimistic in our rent to trade for sure around our construction materials, cement and aggregate and that stuff. Same on metallics, pretty optimistic still. And I think macro sort of overall demand is up quarter-on-quarter compared to last year, right? So for reasons that also has to do with sort of the trading disruptions that we have talked about before, I think.

[Charles Fratt, analyst]

Sounds good. And then, Mark, when you look at the overall fleet, expanded to 26, is that sort of something we should look at stability going forward? Or do you -- is there -- there are potentially opportunities to sell some of those to improve the age profile?

[Mark Filanowski, executive]

We're constantly looking at the fleet and ways to maintain the average age, Poe. So I think you'll see us over time sell off some older ships and add newer ships. Of course, we do have an appetite to grow the fleet as well. So we're looking for opportunities to do that, in the right way at the right time.

[Charles Fratt, analyst]

Okay. And then Gianni, on the refinancing and just the financing front, the Prudence, I think you've refinanced and it looked like you paid down about $4.6 million of one of the facilities. Could you highlight which facility that $4.6 million came out of.

[Gianni DelSignore, executive]

Yes. We had the balloon, the final maturity on the Bulk Endurance, Bulk Pride, and Bulk Independence facility that came due in May within the quarter, right around the end of May. We subsequently took only the Endurance and we refinanced her, so the balloon payment was around $21 million, and we refinanced the Endurance for about $17 million and kept the Pride and the Independence debt-free as of today.

So that was in reference to that transaction. And then part of that transaction with the Endurance basically was the first step in that $50 million facility we put together, in the quarter, and that gave us a lot more sort of flexibility going into the year where we could acquire those, the Brenton and the Patience. So yes, that debt reduction was just part of that sort of transaction.

[Charles Fratt, analyst]

Okay. And then the $50 million senior secured facility, it looks like you've drawn down $32.8 million with the latest financing. Is that correct? And what would the remainder be in your store? Is that correct.

[Gianni DelSignore, executive]

So the first tranche was the Endurance at $17.6 million and then the Bulk Brenton delivered on July I think it was July 26 around, it delivered, and we used around $15.6 million for the Brenton. And now the Bulk Patience is coming next week, August -- between August 15 and August 20, she's coming, and we'll use the balance of the facility for that.

So we're basically -- we -- we added a little capacity right on that facility, so we could sort of have a somewhat of a hunting license to go out and acquire ships. But we were pretty quick to fill it. And after delivery of the Patience, the facility is basically full.

[Charles Fratt, analyst]

Okay. I guess I'm looking on the subsequent events in the 10-Q, and it references the $15.2 million senior secured term loan was financed to Bulk Prudence, is that...

[Gianni DelSignore, executive]

Right. That was separate. The Bulk Prudence was a different facility, also closed late -- sorry, early in the third quarter, right around the second week of July. So a sub event for the second quarter. But in our remarks just a few minutes ago, Poe, I do give sort of a pro forma after completion of all of these financings. What is our balance sheet from a leverage perspective look like from asset value debt versus vessel asset value.

And also, we gave a comment about -- from a fair market perspective as well, what we think, what we believe the leverage profile looks like as well. So that was -- and those numbers are all after we complete these financings that we've discussed as subsequent events.

[Charles Fratt, analyst]

Yes. So Gianni, if you have it handy, could you run through the Brenton, how much you drew down, what's the interest rate spread, the amortization and then the balloon payment and the same with the Patience, if you have that handy.

[Gianni DelSignore, executive]

Sure. Yes. No, absolutely. So the Brenton was a drawdown of $15.6 million. And it's part of the facility. So it's a SOFR plus 2.5%, and it amortizes over 5 years to a balloon of about $8 million.

[Charles Fratt, analyst]

Okay. And then the Prudence, I know that -- will that be roughly the same?

[Gianni DelSignore, executive]

Prudence is actually quite...

[Charles Fratt, analyst]

I am sorry, the Patience.

[Gianni DelSignore, executive]

Patience will be very similar, correct. It falls into the same facility. It has the same 5-year amortization and the balloon will be very, very similar.

[Charles Fratt, analyst]

Same as Brenton, so roughly...

[Gianni DelSignore, executive]

Correct.

[Charles Fratt, analyst]

Okay. And so you're not going to actually fully draw down that $50 million of -- you'll have a little bit, just a little...

[Gianni DelSignore, executive]

We'll have a little bit of capacity. Obviously, we're not going to keep that capacity open. We'll cancel the remaining $1 million or $2 million that's there. And then we'll work with that bank on future deals, which is good. So we have another option at our disposal.

[Charles Fratt, analyst]

And then can you just talk about the port logistics business, a really healthy increase in the third quarter. Is that seasonal? Or is it something that will continue into the fourth quarter and into 2025. And then what's the impact of the expansion in Port Everglades and how much capital are you putting into that expansion?

[Gianni DelSignore, executive]

So as far as the margins in that business this year, we did -- we have the operation in Baltimore, which is pretty consistent, right? It's a monthly -- it's a monthly sort of a fee that we're being paid to operate that port, and it's pretty consistent volume. But with Everglades, it can be lumpy. There are seasonal peaks.

In the second quarter, we did have some dry bulk vessels come to port, which do drive higher margins. So -- and it was decent volumes for the second quarter. We're -- we want to grow that business, and we're happy to see that there is some increase in volume there. But is a focus for us, and we'll keep doing it. But it is a lumpy business, and it's seasonally driven. So -- and then as far as the -- Mads will comment on the -- a bit on the expansion.

[Mads Petersen, executive]

The expansion -- Poe, I just want to clarify, do you mean the Tampa expansion?

[Charles Fratt, analyst]

Yes. I'm sorry, the one that hits in second half '25, that was put out as a...

[Mads Petersen, executive]

No, that's in the Redwing Terminal in Tampa. It is not something that is expected to be a big draw on our capital. I think we're $3 million to $5 million maybe, we will be operating that facility with JV partners. So it's a shared investment. So it's -- again, we expect that operation to be up and running in maybe Q3 -- late Q3 next year, second half, for sure, of the year.

[Gianni DelSignore, executive]

Yes. So far in Tampa, what we do have and what you're seeing maybe in our financials is the ground lease. We have -- we've leased 2 acres of space at the port, and it ends up on our balance sheet as a right-of-use asset and a lease liability, pretty small number, but that is the 2-acre property that we're leasing there in Tampa.

[Operator]

And this will conclude today's question-and-answer session. I'd like to now turn the call back over to Mark Filanowski for closing comments.

[Mark Filanowski, executive]

Thank you all for joining us on a summer Friday morning. Please enjoy the rest of your day. Thanks. Thanks again.

[Operator]

And this will conclude today's conference. Thank you for your participation, and you may now disconnect. .