Pangaea Logistics Solutions Ltd

NASDAQ:PANL

Earnings Call Analysis

Pangaea Q4 Showcases Resilience Amid Changes

Pangaea Logistics concluded Q4 with a robust adjusted net income at $7.4 million, and $31.4 million for the year, supported by their strategic focus on core trades and geographic expansion. Their TCE rate exceeded benchmarks by 27%, signaling resilient performance despite market volatility. Pangaea plans to expand its fleet and port operations, having already booked 3,500 shipping days at favorable rates for Q1 2024, in anticipation of continuous strong demand, especially in iron ore and construction materials. They've acquired three marine port terminals and are focusing on the US Gulf Coast expansion through cost-effective partnerships. Challenges like a high canal transit fee and increased charter-in costs resulted in a slight EBITDA dip to $19.7 million. With a strong balance sheet, $99 million in cash, and a considered investment strategy, Pangaea is well-positioned for success in 2024 and beyond.

Resilient Performance and Strategic Business Model

Pangaea Logistics Solutions ended the year with their Time Charter Equivalent (TCE) rates significantly outperforming benchmark indices by 27%. Despite the traditional slowdown in the fourth quarter, geopolitical disruptions increased demand, leading to higher shipping days and freight rates. This helped the company to achieve an adjusted net income of $7.4 million for the quarter and $31.4 million for the full year.

Challenges and Adjusted Earnings

While the company posted strong results, its adjusted EBITDA for Q4 2023 did see a decline to $19.7 million, influenced by market rate volatility and notably high canal transit fees caused by environmental disruptions. Additionally, they reported a year-over-year increase in charter-in days by 33% due to increased customer demand but faced margin compression as spot charter-in rates rose above their overall TCE, leading to an adjusted EBITDA margin drop to 14.9%.

Strategic Investments and Operational Efficiency

Pangaea is committed to expanding its fleet and logistics capabilities, a strategy bolstered by the acquisition of three marine port terminal operations in 2023. In 2024, they plan to grow their U.S. Gulf Coast and Florida operations. Lower vessel operating expenses, decreased by 4% year-over-year, combined with a TCE rate booking of over 3,500 shipping days at an average of $17,430 per day, reflect the company's effective cost management and indicate a solid financial strategy.

Market Volatility and Hedging Initiatives

Pangaea faced market volatility in Q4 2023, which was evident from the unrealized losses on bunker swaps, forward freight agreements, and interest rate caps. Their reported GAAP net income was $1.1 million or $0.02 per diluted share, a decrease from the fourth quarter of the previous year. When excluding these unrealized losses and other non-GAAP adjustments, the adjusted net income stood at $7.4 million or $0.16 per diluted share.

Liquidity Position and Debt Management

As of the quarter's end, the company held $99 million in cash against total debt of approximately $268 million, including finance lease obligations. They are evaluating refinancing options and considering paying off approximately $20 million in balloon payments due in May. Despite higher interest rates, the impact was relatively muted thanks to benefits from interest-yielding deposits, which generated nearly $1 million in interest income, reflecting a prudent approach to financial management.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning. My name is Todd, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Fourth Quarter and Full Year 2023 Earnings Teleconference. Today's call is being recorded and will be available for replay beginning at 11 a.m. Eastern Time. The recording can be accessed by dialing [phone] for domestic users or [phone] for International. [Operator Instructions] It is now my pleasure to turn the floor over to Stefan Neely with Vallum Advisors.

[Stefan Neely]

Thank you, operator, and welcome to the Pangaea Logistics Solutions Fourth Quarter and Full Year 2023 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.

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 fourth quarter and full year 2023 results. Our results were a good finish to the year as we continue to achieve a consistent TCE rate premium above our benchmark indices.

While the fourth quarter is generally a slower period for Pangaea as we exit the peak of our Arctic trade season ongoing geopolitical trade disruptions have led to increased demand within our traditional trade routes contributing to increased shipping days in the period, together with a corresponding increase in freight rates.

We reported adjusted net income of $7.4 million for the fourth quarter and $31.4 million for the year. For the fourth quarter of 2023 our adjusted EBITDA of $19.7 million, though strong declined on a year-to-year basis, even as our TCE rate exceeded our benchmark BSI Index by 27%. Market rate volatility can be impactful over quarterly periods, but our business model smooths the effects over longer periods.

Our markets in the current quarter are showing surprising strength on a seasonal basis as global trade disruptions have led to persistent market inefficiencies, a dynamic support of a structurally higher freight rate environment. With supply growth limited by worldwide shipbuilding capacity to produce new ships in our segments, we think there is a long runway for continued strong performance.

Beyond the favorable dynamics being created by geopolitical disruption, we continue to see strong demand growth in the core trades that we serve, specifically construction aggregates, cement, and iron ore and iron products. Through today, we booked over 3,500 shipping days at an average TCE rate of $17,430 per day versus a market rate of approximately $13,000 per day in the first quarter 2024.

Given these favorable underlying demand conditions and our expanding cargo book, we intend to prioritize capital investment in fleet expansion and renewal while continuing to scale our onshore logistics capabilities. In addition to these organic and inorganic investments, we'll seek to further fortify our balance sheet, all while continuing to support a consistent return of capital program as demonstrated by our consistent quarterly cash dividend.

At a strategic level, we remain focused on providing a growing base of integrated shipping and logistics solutions that address the unique demands of our customers. To that end, following the acquisition of 3 marine port terminal operations in Florida and Maryland in mid-2023, we've been actively working to expand our onshore relationships with new and existing customers.

During 2024, we will expand our footprint across the U.S. Gulf Coast and in Florida through strategic joint operations, partnerships and site leases. We believe this approach is a lower cost, less capital-intensive method of entering a market, albeit 1 that allows us to build stronger relationships with current and potential customers and a center on building around our ocean transport offerings.

This accelerating dry bulk demand growth, limited volume of new build dry bulk vessels scheduled to enter service over the coming years, and a focus on expansion of our fleet and port terminal operations sets up for a favorable strategic success in 2024 and beyond.

With that, I'll turn it over to Gianni for a deeper discussion of our fourth quarter financial results.

[Gianni DelSignore, executive]

Thank you, Mark, and welcome to all of those joining us today. Our fourth quarter financial results continue to emphasize the flexibility of our business model as we were able to deliver premium returns to mid-market volatility, strong year-over-year growth in shipping days all while reducing our vessel operating expenses per day.

Fourth quarter TCE rates were approximately $17,684 per day, a premium of 27% over the average published market rates for Supramax and Panamax vessels in the period, which is supported by ice-class performance early in the quarter as well as our long-term COAs and forward bookings, which lock in rates for future cargo performance. Our adjusted EBITDA declined year-over-year to $19.7 million. Our adjusted EBITDA margin also declined year-over-year to 14.9%, given volatility in rates, which negatively impacted our charter-in expenses.

We also recognized an unusually high canal transit fee during the quarter, resulting from environmental disruptions at the Panama Canal. This fee resulted in a $1 million negative impact to our adjusted EBITDA during the fourth quarter and a reduction in our overall TCE earned.

During the fourth quarter, we saw year-over-year increase in charter-in days, which increased 33%, due to increased demand from our customers and our ability to supplement our fleet with chartered in vessels. However, in accordance to our short-term charter-in strategy, we recognized higher spot charter-in rates in comparison to our overall TCE, resulting in margin compression, which may happen during times of rising rate environment.

Through today, we've booked approximately 1,400 charter-in days at an average cost of $17,100 per day in the first quarter of 2024. Furthermore, this dynamic was offset by lower vessels, lower vessel operating expenses net of technical management fee, which decreased by 4% year-over-year from an average of $6,200 per day last year, to $5,900 per day in the fourth quarter of 2023.

The decrease continues to highlight the success of our efforts to manage vessel operating expenses. As we have mentioned in the past, we utilized forward freight agreements and bunker swaps to selectively hedge our exposure to the market on our long-term cargo contracts and forward bookings. This approach helps us lock in future cash flows and minimize the impact of market volatility, but can lead to fluctuations in our reported results on a period-to-period basis.

Given the market volatility during the fourth quarter, our reported net income reflects an unrealized loss of [indiscernible] relating to the mark-to-market adjustments of bunker swaps, forward freight agreements and our interest rate cap. In total, our reported GAAP net income attributable to Pangaea for the fourth quarter was $1.1 million or $0.02 per diluted share compared to $15.5 million or $0.34 per diluted share in the fourth quarter of last year.

When excluding the impact of the unrealized losses from derivative instruments that I mentioned as well as other non-GAAP adjustments, our reported adjusted net income attributable to Pangaea during the quarter was $7.4 million or $0.16 per diluted share, a decrease of $6.9 million or $0.16 per diluted share versus the fourth quarter of last year.

Moving on to cash flows. Total cash from operations decreased by $9 million year-over-year to $23.9 million due to decrease in TCE rates. At quarter end, the company had $99 million in cash and total debt, including finance lease obligations of approximately $268 million. Of the $268 million in debt, approximately $20 million represents a balloon payment that is due in May of this year. This credit facility is currently locked at a fixed rate of 3.96%, and we are currently evaluating numerous refinancing partners as well as the potential of paying off the debt and owning the underlying vessels outright.

During the quarter, we continued to see relatively muted impact from higher interest rates due to our fixed rate and cap rate debt as well as benefits from interest-yielding deposits, which generated nearly $1 million in interest income. At the end of the fourth quarter of 2023, the ratio of net debt to trailing 12-month adjusted EBITDA was 2.1x. As Mark mentioned, our capital allocation focus in 2024 is investing in growth by expanding our onshore footprint in owned vessel capacity.

Our current balance sheet and the strong cash flow profile of our business gives us the flexibility to be thoughtful about the most advantageous ways to finance our growth plans. Importantly, I would reiterate that we continue to prioritize a consistent return of capital strategy. We believe that our current dividend is 1 that we can sustain through the market cycle.

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

[Operator]

[Operator Instructions] Our first question comes from Liam Burke with B. Riley.

[Liam Burke, analyst]

Mark, can we discuss the charter hire -- charter-in expenses that sort of squeezed your margin during this quarter. Flexing your fleet using leased vessel chartered-in vessels as part of your overall strategy. Was this a short-term anomaly in terms of the margin squeeze? And does that make you think about your longer-term strategy about chartering vessels?

[Mark Filanowski, executive]

No. The strategy is still solid, Liam. This isn't unusual for us in times of where we book cargo forward today, and we don't perform until 1 month from now. Things can happen in the market that caused chartered-in fleet to be a bit more costly as market rates rise. When they go the other way, it becomes cheaper for us to bring in ships. So we're careful on the cargo we book and the timing we take to charter-in ships.

But when we have a big spike like we did in December, unexpected, it can temporarily cause a little disruption. We're also -- it depends a little bit on where -- if you're comparing to the charter-in cost to the market, it depends a little bit on where that increase in market rates occurred. If it occurred in the places where we are active, say, the North Atlantic that -- North Atlantic did spike a bit more than the rest of the world. So if you're comparing our charter-in cost to the worldwide rates, then we're a little bit higher than if you compare to just the North Atlantic market.

[Gianni DelSignore, executive]

Great. And Liam, if I could just add, it's Gianni. Just to add, it's not necessarily -- when we look at it on a quarter-by-quarter basis, we'll see these potentially these reductions in margin or expansion in margin. And for example, Q1 of '22, we were in a similar situation, the chartered-in fleet did have a negative margin for the first quarter of '22.

So we look at it quarter-by-quarter, and then these spikes in market rates can result in that margin squeeze. But for the full year, just to say it for full year of 2023, the margin on our chartered-in fleet was around $1,800 a day. So it was a positive and it continues to be. So I don't think there's any -- it is unfortunate for the quarter. But when we look at it on a long-term basis, it's consistent with what we want to accomplish.

[Mark Filanowski, executive]

Liam, we do look at the pieces and what it costs us to charter-in ships versus and what those charter-in ships produce against our chartered -- our cargo book or spot cargoes. But the concept here is that we free up tonnage on our own ships that can then participate in a higher market. So -- but we do look at the pieces we have to -- we're really trying to make the whole work better.

[Liam Burke, analyst]

Great. On the first quarter partial fixtures, sequentially, it's almost flat, where typically, you'd expect it to be down with first quarter being a seasonally slow quarter. Is that primarily the Panama Canal or there are other things in there that's giving you really looks like a seasonally strong -- I mean, a strong seasonally slow first quarter.

[Mads Petersen, executive]

Yes. Liam, it's Mads here. The Panama now, of course, has an effect. But I think our main driver is also the fact that we were able to book cargo in Q4 that we are now executing on in Q1 at what are historical pretty attractive levels. So of course, it's a result of the sort of general strengthening, but also the fact that we were able to secure some pretty decent [indiscernible] cover.

[Operator]

Our next question comes from Poe Fratt with Alliance Global Partners.

[Charles Fratt, analyst]

Good to see you on Monday. Can we just dig a little deeper on the charter hire expense. It was roughly $34 million for the quarter. Do you have -- I'm calculating that your charter-in days were about $1,750, and so I'm calculating a chartered-in expense in the fourth quarter of just over $19,000. Is that -- are those numbers closed? Or can you give us an idea of...

[Gianni DelSignore, executive]

I can give you the numbers, Poe. Yes. And actually, in my prepared -- in our remarks earlier in the call, I did also mention what the chartering cost is for the first quarter, what we've sort of booked and incurred so far. So you have that as well. But for the fourth quarter, the chartering cost was $17,986 per day. The chartering days were approximately 1,800 chartering days.

[Charles Fratt, analyst]

Okay. Great. And then looking at that forward chartered-in costs of 1,300 days at $17,100 -- how many -- can you give me an appreciation for sort of how the whole quarter might look like? Will the chartered-in days be close to what they were in the fourth quarter? And the cost should be a little bit lower just because maybe you can avoid that spike that you saw in December?

[Gianni DelSignore, executive]

Well, we're pretty close to the end of the quarter here. So I don't expect significant changes to what we said. But you're right, the fleet remains around -- we're still around 45 to 50 vessels. Q4, we had about 44 total fleet. So yes, I think as far as volume of activity, it's relatively similar. And then since we are pretty close to the end, I think the numbers that we gave there are a very good indication of what it will be for the full quarter.

[Charles Fratt, analyst]

Okay. Great. And then, Mads -- I guess another thing I just support cover, Gianni, do you have -- for the rest of the year, are you -- can you give me an idea of sort of how your forward covered looks for the rest of the year and then your chartered-in costs are you willing to sort of look beyond just this quarter or this exact date and time?

[Gianni DelSignore, executive]

So Poe, we don't give out beyond the first quarter. But as far as our core business, the sort of core contract that we're operating in our typical long-term cover. We discussed our long-term cover on our own fleet remains the same.

But in the near term, we're always looking forward into subsequent quarters and the market is always changing. But we haven't given out those longer term other than our long-term numbers -- on our long-term contracts.

[Mads Petersen, executive]

And in terms of the chartered-in fleet, Poe, that -- our approach to strategy around that hasn't really changed. The vast majority of that is short term in nature so that will always reprice relatively quickly. We're not looking to add a significant amount of charter-in [indiscernible] over a longer period, for instance. That's not part of the strategy, really.

[Charles Fratt, analyst]

Yes, you sort of want to avoid taking market at other than with your owned fleet, right, Mads, you don't want to charter-in long term and get exposed to negative moves in the market.

[Mads Petersen, executive]

Yes, 100% correct, right? I mean the chartered-in fleet for us is essentially an arbitrage around the own fleet and a way to employ the entire fleet of the company in a more sort of sensible way rather than ending up ballasting too far to pick up a cargo just because you don't want to fix in the ship. So it goes back to what Mark said earlier that you sort of have to look at the whole not just pick out the [indiscernible] the chartered-in because it serves the purpose in the greater picture of things where you were in a quarter like this, you can have a quarter that's just in that particular part of the business looks a little disrupted as Mark said.

[Charles Fratt, analyst]

Yes. And I know that your -- hasn't been sort of talking about your forward cover book. But -- has anything changed where you typically have 10 to 12 working -- 10 to 12 ice-class vessels working during the ice season over the course of call it the summer and early fall.

[Mads Petersen, executive]

Yes, that part of the fleet is owned primarily. So we don't expect any huge changes in that part of the fleet note.

[Mark Filanowski, executive]

But if we have booked other business that those ships now have to leave to go north into the Arctic, we made -- it is a more active part of the season for us, that third quarter, not just because the ships go north, but because then we have to replace -- take some ships from the market to participate in moving cargoes that we booked. We probably have a little higher chartered-in fleet during that period.

[Charles Fratt, analyst]

Okay. And then, Mads, are you seeing anything on the demand side changes either positive, negative that you can highlight for the rest of the year?

[Mads Petersen, executive]

I think I want to point to what was in Mark's written comments that we are seeing increased demands in the businesses in the trades where we're pretty busy such as construction material. That is not just across the ships we own or operate, but also in our terminals business. So we feel pretty confident about the demand going forward in those commodities. I mean you know sort of probably we're not a big sort of long-haul iron ore owner-operator.

So there, I think I read the same data as you do, and I think demand-wise, things look pretty good, not fantastic, but okay. And that, combined with attractive supply side we feel pretty confident about where the market is and where it's heading.

[Charles Fratt, analyst]

Okay. And then you talked about the terminaling business. There was a sequential drop in revenues there. Margins were still healthy, but there's a seasonal drop or sequential drop in revenue in the stevedoring terminaling. is that seasonal and we should expect a pickup in this quarter and the rest of the year into the fourth quarter? Or can you just give me an idea of sort of how the cadence of that business?

[Mark Filanowski, executive]

It depends on demand -- ships coming into our terminals. So I don't think the decrease was that high -- that much. It could be affected by the number of ships that come into port during that quarter. Our most active port is Port Everglades. And there we have -- we do container ships -- we do -- we load ferries. We discharge dry bulk goods, commodities that come in.

So it really depends on the schedule of those ships that are visiting the ports. We do have some more active things happening in some of the other ports. So things should move up this year, Poe. The Port Everglades business is new to us from last June. And so I think in the beginning, you'll see a little bit of ups and downs, but not significant. They've been fairly steady.

[Charles Fratt, analyst]

Okay. And then, Gianni, if you could just highlight where that $1 million transit fees, what part of the expense line did it come in? Was it in voyage expense or charter hire -- I know it's nitpicky, but I just wanted to sort of understand where that was recognized.

[Gianni DelSignore, executive]

Yes. It was recognized through voyage expenses, which obviously impacted our overall TCE. And I think we spoke about this on our last call regarding the situation of the Panama Canal. And unfortunately, we were there, and we had to bid on a slot to get through. And it was $1 million impact to voyage expenses and reduction -- equivalent reduction in TCE and adjusted EBITDA. So yes, that's where it's recognized.

[Operator]

[Operator Instructions] At this time, I show no further questions in queue. I'll go ahead and turn the call back to Mark Filanowski for any additional or closing remarks.

[Mark Filanowski, executive]

Thank you for joining us today for our call, and we'll see you next quarter.

[Operator]

This does conclude today's call. We thank you for your participation. You may disconnect at any time.