Q2 2023 Pangaea Logistics Solutions Ltd Earnings Call
Participants
Gianni Del Signore; CFO & Secretary; Pangaea Logistics Solutions, Ltd.
Mads Rosenberg Boye Petersen; COO; Pangaea Logistics Solutions, Ltd.
Mark L. Filanowski; CEO & Director; Pangaea Logistics Solutions, Ltd.
Charles Kennedy Fratt; MD of Equity Research & Senior Transportation Analyst; Alliance Global Partners, Research Division
Liam Dalton Burke; MD; B. Riley Securities, Inc., Research Division
Noel R. Ryan; Senior Partner; Vallum Advisors
Presentation
Operator
Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Second Quarter 2023 Earnings Teleconference. Today's call is being recorded and will be able for replay beginning at 11:00 a.m. Eastern. The recording can be accessed by dialing (800) 934-5153 domestic or (402) 220-1182 international. (Operator Instructions)
It is now my pleasure to turn the floor over to Noel Ryan with Vallum Advisors. Sir?
Noel R. Ryan
Thank you, operator, and welcome to the Pangaea Logistics Solutions Second Quarter 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.
And with that, I would like to turn the call over to Mark.
Mark L. Filanowski
Thank you, Noel, 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 that 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 $15,558 per day for the 3 months ended June 30, 2023, compared to an average of $27,139 per day for the same period in 2022. Our long-term COAs, specialized fleet and cargo-focused strategy helped us to significantly outperform index rates in a declining market environment. In the second quarter, excess dry bulk capacity created by easing port congestion and high voyage operating speeds viewed the normal seasonal recovery that occurs in this period.
Global trade and ton-mile demand remain buoyant and markets in which we directly participate, including construction aggregates and cementitious materials, are especially active where we participate in ocean freight, stevedoring and terminal operations. Though we are experiencing a softer near-term market, the long-term supply and demand dynamics remain very favorable. New building vessel supply remains highly constrained with lead time stretching into 2026, which we expect will keep fleet growth low for the foreseeable future.
Secondhand asset values have recently softened a bit, but remains strong in this market as the demand for eco tonnage in the Ultramax 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 8, market rates have continued to fall, averaging approximately $8,500 per day compared to $10,431 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 1A vessels fully committed through October at 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 DNV class silent environmental notation, the first dry bulk ships ever to receive this designation, helping ensure our ships make a minimal footprint in pristine environments like the Arctic Ocean. Along with our overall cargo-focused strategy in key commodity trades, our efforts have allowed us to outperform the market by an average of 30% annually over the last 5 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 TCEs will significantly exceed the quarter-to-date indices. Through August 8, we have booked 3,500 shipping days, returning $16,700 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 for 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 $0.10 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 61,000 deadweight bulk prudence, which we purchased for cash. The acquisition expands our own fleet to 25 vessels and is congruent with our continued strategic focus on owning and operating a newer, more efficient fleet as 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 transactions. This acquisition represents critical expansion of our North American terminal network to include the Mid-Atlantic and Southeastern United States, adding dry bulk distribution capabilities within growing commerce centers. In alignment with our cargo-centric strategy, we are already actively pursuing opportunities to leverage this 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 anticipate Pangaea will generate strong cash flow this year, positioning 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 tailwinds 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 optimally positioning our fleet to maximize asset values in a higher market rate environment.
With that, I'll hand it over to Gianni for a discussion of our second quarter financial results.
Gianni Del Signore
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 as we were able to maximize returns through our chartering strategy in 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 $15,558 per day, a premium of 49% over the average published market rates for Supramax and Panamax vessels in the period, which is supported by our long-term COAs, our ability to opportunistically adjust our utilization of chartered-in vessels in periods of softer market rates and forward bookings, which lock in rates for future cargo performance.
Our adjusted EBITDA declined year-over-year to $15.9 million with adjusted EBITDA margin of 13.5%, down from record quarterly adjusted EBITDA of $44.2 million and an 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 charter-in days, which, coupled with lower market rates, served to reduce our charter hire expense by over 55% year-over-year from an average of $26,264 per day to $15,209 per day in the second quarter of 2023.
Vessel operating expenses increased by 2.2% year-over-year. However, excluding technical management fees, vessel operating expenses on a per day basis were $5,517 per day, down from an average of $5,805 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 $0.06 per diluted share compared to $25 million or $0.56 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 $0.10 per diluted share, a decrease of $24.3 million or $0.54 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 $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. In 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 in 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 SOFR rate of 3.25% and 6% is floating at SOFR plus 1.96%.
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 rate to 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 2.1x.
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, continued fleet expansion and disciplined capital allocation. Strategically, our focus is on 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.
Question and Answer Session
Operator
(Operator Instructions) And our first question will come from Liam Burke with B. Riley.
Liam Dalton Burke
Mark, can we talk about your fixtures for the third quarter at twice the current market? You mentioned, obviously, it's the peak Artic season and you're getting the ice-class premium, but can you talk about the rest of the fleet? Is it the COAs that are above market? Or are you getting a premium to spot with other vessels?
Mark L. Filanowski
Liam, thanks for the question. The ice-class ships, 10 ships in our own fleet, they are earning the ice-class premium in this period of time. During the third quarter, it's 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 then low rates with everybody's expectation. But we -- it's 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 annual COAs that were booked earlier this year.
Liam Dalton Burke
Great. And you closed on the marine port acquisition. You incurred some terminal and stevedore expense in the second quarter. Is that a fixed cost? Or was there any revenue associated with that?
Mark L. Filanowski
There's some revenue identified in the income statement. It's only 1 month. So it's hard to draw any real conclusions over it. The expenses that we incurred, Gianni, were they in the -- in cost of sales or were they in G&A down below, cost to close the transaction costs, legal expenses, environmental reviews, et cetera? Gianni?
Gianni Del Signore
Yes. Liam, it's absolutely worth noting that we closed in June, we have 1 month of activity and we're now starting to show decent financial information discretely for that entity. So again, it's 1 month of activity. It is -- there are 2 new line items in our P&L being terminal and stevedore revenue and then terminal and stevedore expenses. In addition to that, there was G&A incurred during the quarter related to the closing. That was part of the increase that we saw in G&A. But going forward, that will be part of our P&L. That's an operating segment for us. But the other components 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 above the line.
Operator
(Operator Instructions) And our next question will come from Poe Fratt with Alliance Global Partners.
Charles Kennedy Fratt
Gianni, can you just talk about the decision to break out the terminal and stevedoring? I mean, you look at it, it's less than 1% of revenue. Can you just talk about that? Does this indicate that it might become a more meaningful business down the road and sort of if you can highlight any plans to deploy capital into that business? And if I do the math on it, it's roughly 28% gross margin. If you just net look at revenues and then at the cost, can you just talk about sort of the margin profile on that business?
Gianni Del Signore
Yes. So sure, on the first question, I know there's levels of how we can break this out from an accounting perspective, right? It's a -- it's definitely a new operating segment for us. It's a different type of revenue. It's a different type of business. It's complementary obviously and strategically important to us. But the nature of its revenues are different than voyage revenue or charter revenue, which are our 2 other main streams of revenue.
So from that perspective, it's warranted to break out than we have. But there's other levels. We don't -- this won't be a separate reporting segment just yet. It will be a new operating segment, but it's not a reportable segment. We hope to grow it and to continue. We've -- we made an effort and you've heard it on conference call after conference call and presentation after presentation that 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 strategically important and showing the information as we have on our P&L, which essentially is our 2 new revenue and expense lines. I think it's important. Again, what I said to Liam, it is 1 month of activity. The business can be lumpy. There could be periods of multiple ships at port and there can be periods where there's fewer ships. So 1 month of activity, I don't think is the best indicator on a go-forward basis, but it is certainly helpful.
On a longer term, we project slightly lower margin than what we saw in the first month of activity, but it's still -- it will be shown separately, and it's important to us to continue growing it.
Charles Kennedy Fratt
Great. And then could you quantify the ice-class premium that you booked in your forward cover 200 -- I think if I do the math correctly, it's about 26% for forward days booked. Can you just quantify what those 920 days were booked at as far as the rate?
Mads Rosenberg Boye Petersen
Yes. Hi Poe, Mads here. I mean in this current rate environment, sort of the average return on that ice business (inaudible) is about twice the current index.
Charles Kennedy Fratt
Okay. And if -- even if it's twice the current index, it implies that the rest of the fleet is -- was well above what current rates are. And can you just talk about potentially whether you forward booked into the fourth quarter too and so that potentially, you're going to see above average booking for the fourth quarter if we look at the third quarter conference call?
Mads Rosenberg Boye Petersen
I mean we do have a pretty similar book, I would say, to Q3 outside the ice season, right? So for Q4 outside the ice business and as Mark alluded to earlier, the numbers that we reported so far for Q3 are not driven solely by the ice business or our sort of our other businesses and also a healthy degree of cover going into that quarter.
Charles Kennedy Fratt
Okay. And then when you look at the overall business, I think a competitor of yours mentioned that the COA business has backed off, companies are making -- shippers are making less firm commitments as we look out, call it, 6 months or so. Are you seeing the same thing? And then what does that imply for your chartered-in fleet for the third and fourth quarters?
Mads Rosenberg Boye Petersen
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 those sort of contracts for 1, 2 years are made. It 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 you are in the market and what sort of service you're offering to your customers, whether there's -- we have those discussions on that.
Mark L. Filanowski
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 a shipper might want to contract for today's rate out for another year. So there is a gap there between what's acceptable buyer and seller.
Charles Kennedy Fratt
Okay. I guess to get a little more specific, you only had a chartered-in -- or you chartered in 20 vessels during the second quarter. Is that a good number to use for the rest of the year?
Mads Rosenberg Boye Petersen
Yes, I think so. I mean it's obviously a bit of guesswork into that statement. But if the market continues the way it has been for Q2, but I don't see why we should change that number dramatically. It's all about how we get the best sort of short-term value out of those arbitrage opportunities program, whether you want to take a ship for a couple of legs or you just take it for a trip. And in a soft market as we've had for the last 6 months, maybe even, we don't want to take those risks and go out long on chartered and tonnage. We get more value out of just executing on the trips.
Charles Kennedy Fratt
Okay. That's helpful, Mads. And then Gianni, can I just ask you a couple of questions about the cash flow statement? Just 2 items. Two items jump out at me one is that you -- there's a pretty meaningful increase in the accounts for doubtful accounts -- provision for doubtful accounts. It was negative in the first quarter and was over $1 million in the second quarter for a 6-month run rate. Can you just talk about that? And then secondly, you had a working capital deficit or used in the second quarter. Do you expect that to reverse over the course of the rest of the year?
Gianni Del Signore
Yes, sure. So the part of the working capital, the draw on working capital, we had the cash acquisitions of the bulk prudence and the acquisition of the port terminal. In addition, we had a reclass of debt coming due in May of 2024. So that is now in our 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 locked in a significant amount of our debt when we did at interest rates that were far more favorable. So as we approach that maturity, we're currently working -- talking to some lenders, and 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 respect. So yes, I don't think we'll see a similar draw on working capital that we did in Q2.
On the reserve front, we did make a slight adjustment in our general reserve policy. So these are just overall macro-type reserves, nothing that would necessarily be on a specific way. But just overall general reserve. We made a slight adjustment to our general reserve policy, which resulted in a slight increase in our reserves. So I don't expect -- I expect that modification to not have any further impact for the balance of the year.
Charles Kennedy Fratt
Sounds good. And then just 2 other things came up. One is that you mentioned that some of the -- some of your terminal and stevedoring activities are run through the JV. How -- if you -- on a gross revenue basis, how much is that generating what -- how meaningful is that relative to the current recorded terminal and stevedoring revenue? And then secondly, just if you wouldn't mind quantifying the extra G&A or transaction costs that you incurred in the second quarter associated with the acquisition?
Gianni Del Signore
Sure. The -- so I'll start with the JV. So the -- we've had these joint ventures for years. So the impacts of them should be the same going forward, right? It was always recorded. 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 a little bit more recent. But since they're held in joint ventures, the accounting for them and 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 the income and other income.
In the gross revenue of the entities, we're just -- we're not -- we wouldn't be showing you. We're not consolidating it in. But it would be $5 million, $10 million is probably the range we're seeing for that activity.
Charles Kennedy Fratt
Understood. Yes, it's all captured through the JV, but I was just sort of trying to figure out on a gross basis sort of how meaningful it is to the overall business.
Mads Rosenberg Boye Petersen
And then your second question there on the G&A related to the acquisition, I think in the MD&A, we do have some discussion about it in the 10-Q. But it was closing costs, onetime closing costs just over $300 million -- $300,000 of closing costs that were incurred in the quarter that we don't expect to -- obviously, to occur again throughout the year.
Charles Kennedy Fratt
Yes, I was going to guess around 3% or so of the overall $7.2 million acquisition. Congratulations on a good quarter.
Mark L. Filanowski
Thanks, Poe.
Operator
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 Filanowski for any additional or closing remarks.
Mark L. Filanowski
Once again, thank you for joining our call. Should you have any questions, please feel free to contact us at investors@pangaeals.com, and a member of our team will follow up with you. This concludes our call today. You may now disconnect.
Operator
Thank you, ladies and gentlemen. This concludes today's presentation, and we appreciate your participation. You may disconnect at any time.
