Title

Presentation

Operator: Good morning. My name is Shelby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Fourth Quarter and Full Year 2022 Earnings Teleconference. Today’s call is being recorded and will be available for replay beginning at 11:00 o’clock a.m. Eastern Standard Time. The recording can be accessed by dialing 800-283-9429 domestic or 402-220-0871 international. It is now my pleasure to turn the floor over to Noel Ryan with Vallum Advisors.

Noel Ryan: Thank you, operator. And welcome to the Pangaea Logistics Solutions’ fourth quarter and full year ’22 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 Filanowski: Thank you, Noel. And welcome to those joining us on the call and webcast today. After the market closed yesterday, we issued results for the three and 12 months ended December 31, 2023. Last year, we continued to develop a leading dry bulk logistics and transportation services company of scale, while providing our customers with specialized shipping, supply chain and logistics offerings in commodity and niche markets. Our record full year profitability and operating cash flow put on display the durability of our vertically integrated premium rate shipping logistics model during a period of pronounced market volatility. TCE rates were strong in the first half of 2022, with the first six months being some of the best we’ve seen in years.

During this period, we capitalized on the strong demand and rate environment by fully utilizing our fleet, including our four new build Ice-Class vessels, together with five second hand vessels purchased in the prior 24 months and the purchase of one third interest in our NBHC joint venture from one of our partners in late 2020, which effectively added two more vessels to our fleet. During the fourth quarter, our chartered-in strategy drove positive arbitrage in a falling rate market. While market conditions deteriorated during – beginning in the latter half of 2022, our long-term transportation contracts and flexible chartered-in fleet positioned us to perform well in excess of the market indices. TCE earn declined 38.5% on a year-over-year basis in the fourth quarter, but our average TCE rate exceeded the average benchmark by 41% in the period.

First quarter 2023 to date, our TCE booked for 3,970 ship days is $15,065 per day. Our premium rate model, which leverages the integrated benefits of specialty cargo carriage and onshore supply chain solutions, contributed to the 480 basis points adjusted EBITDA margin expansion realized in the fourth quarter when compared to the prior year-end year period. In 2022, we generated nearly $100 million in free cash flow, positioning us to pursue a balanced self-funded approach toward organic and inorganic growth investments together with a robust and consistent dividend program. In 2023, our capital allocation priorities will include fleet renewal and measured expansion, expanding our logistics platform, particularly as it relates to complementary, immediately accretive onshore opportunities, further debt reduction and continued support of our quarterly cash dividend, which on an annualized basis represents more than $18 million in dividends to shareholders.

Looking ahead to the remainder of 2023, we anticipate that a post-pandemic reopening in China and stable economic activity in the west should provide incremental support for global dry bulk demand. On the supply side, global dry bulk shipping capacity is constrained for the foreseeable future, given the combined impact of low new-build activity and recent introduction of new IMO mandated emissions reduction regulations that will impact older, less efficient fleets and will further restrict new building orders. In January 2023, we entered into an agreement to sell our Bulk Newport, a 2003 Supramax vessel, for $9.2 million. This sale is consistent with our strategy of maintaining a modern and efficient fleet amid tightening global emissions regulations.

Looking ahead, we intend to opportunistically manage our fleet and commercial operations with the purpose of maximizing TCE rate, while continuing to support client requirements. In closing, I want to personally thank all of our employees, partners and shareholders for their continued support. We see many opportunities for profitable growth on the horizon, and we look forward to providing you regular updates on our progress. With that, I’ll hand it over to Gianni.

Gianni Del Signore: 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 maximize our operating leverage through our chartered-in strategy and deliver solid returns that made a weakening dry bulk market. Fourth quarter TCE rates were approximately $20,000 per day, a premium of more than 40% to the average published market rates for Supramax and Panamax vessels in the period, which is supported by our long-term COAs and our ability to opportunistically lock in short-term cargo business. Adjusted EBITDA for the quarter was $26.8 million, capping off 2022 with full year adjusted EBITDA of $140 million, a record for Pangaea.

Our margins expanded approximately 480 basis points on a year-over-year basis in the fourth quarter even as adjusted EBITDA declined year-over-year. The overall decline in adjusted EBITDA in the fourth quarter was primarily due to a 45% year-over-year decrease in total revenue attributable to lower market rates and a 29% decline in total shipping days. This revenue decline was partially offset by lower chartered-in higher expenses, which declined by $86.8 million year-over-year to $28.2 million in the fourth quarter. Chartered-in days declined by 55%, as the company’s favored trip charters over period charters in the fourth quarter of ’22 versus 2021. Vessel operating expenses increased approximately 21%. However, for the full year, vessel operating expenses on a per-day basis, excluding management fees was approximately $5,800 a day, an increase of about 10%, mainly due to increased crew travel expenses and crew management expenses.

As we’ve discussed in the past, we utilized forward freight agreements and bunker swaps to selectively hedge our exposure to the market on our long-term cargo contracts and forward bookings. While this approach locks in future cash flows, the mark-to-market unrealized gains or losses can lead to fluctuations in our reported results on a period-to-period basis, while settlement of the position and execution of the physical will occur at a future date. As such, during the fourth quarter, our reported net income reflects unrealized gains of approximately $1.1 million and $465,000 relating to mark-to-market adjustments on bunker swaps and forward freight agreements respectively and an unrealized loss on interest rate derivatives of $371,000. In total, our reported GAAP net income attributable to Pangaea for the fourth quarter was $15.5 million or $0.34 per diluted share in line with the fourth quarter of 2021.

Moving on to the cash flow statement. Total cash from operations increased 73% year-over-year to $32.9 million in the fourth quarter of 2022. As a result, the company had $128.4 million in cash and cash equivalents and total debt, including finance lease obligations of $299.5 million. During the quarter, the impact of higher interest rates was relatively muted in our results due to our fixed rate and cap rate debt. Of our total long-term debt and financial leases, 53% is fixed at an all-in rate of 4.04%. 40% is capped at LIBOR rate of 3.25% and 8% is floating at LIBOR plus 2.1%. At the end of the fourth quarter of 2022, the ratio of net debt to trailing 12 month adjusted EBITDA was 1.25 times. In conclusion, our vertically integrated shipping and logistics model delivered above-market growth during the fourth quarter, supported by strong execution of our chartered-in strategy, continued fleet expansion and disciplined capital allocation.

Entering 2023, our liquidity position has never been stronger, positioning us to drive strategic investments in new vessels and logistics operations, while continuing to reduce debt and pay a stable quarterly cash dividend. As we seek to deploy capital toward new growth opportunities, we will aim to further optimize our return on capital invested, consistent with our commitment to long-term value creation for our shareholders. With that, we will now open the line for questions.

See also 20 Biggest Publishing Companies in the World and 10 Most Profitable Cryptocurrency Stocks.

Operator: Thank you. And we’ll take our first question from Liam Burke with B. Riley.

Liam Burke: Thank you. Good morning, Mark. Good morning, Gianni.

Mark Filanowski: Morning, Liam. Good to hear from you.

Liam Burke: Thank you. Mark, you mentioned the IMO mandate in terms of carbon emissions and slow steaming. I know it’s early in the year, but are you seeing any further capacity tightening on the global fleet related to slow steaming?

Mark Filanowski: We don’t see it yet, Liam. I think people are still trying to figure out exactly how the CII regulations are going to affect everyone. You’ve got to be careful on how you plan your voyages and try to operate your ships as efficiently as possible to make sure that you don’t end up with a problem at the end of the year by doing something that’s going to affect you early in the year. So people are trying to work their way through these regulations. We’re looking at the CII impact of voyages already on our ships and trying to make sense of exactly what we’re going to have to do toward the end of the year to make sure that we get the best ratings on our ships. Mads Petersen is here with me. He is really leading the charts here on the Pangaea side in terms of these regulations. Maybe he has a comment directly.

Mads Petersen: No. But thanks, Mark. Hi, Liam. It is actually a question at the moment of Pangaea. We’re sort of shadow complying with it, where we are monitoring and tracking how we are stacking up against the new regulation, but it’s not something that has an operational impact yet. I hope this was helpful for many others.

Liam Burke: Okay. Got it. Your CapEx is relatively low, except if you go out and buy more assets. But cash flow should be strong, your balance sheet is in the best shape ever. How are you looking at capital allocation in 2023?

Gianni Del Signore: Hey, Liam. It’s Gianni. I think we’re pretty consistent. Our strategy remains the same. It’s been for many years. And I think we – like you said, we’ve never been in a better position. We can be opportunistic and we can look at different things that, in the past, perhaps we wouldn’t be in a position to look at. That being said, I think if we look at our priorities, our chartered fleet and our own fleet are always priorities for us. We’re selling the Bulk Newport. We may look at one or two additional assets this year to sort of supplement the fleet and continue to look for some opportunities to renew. Debt service, we continue to pay down debt. We’re paying $8 million to $10 million a quarter for 2023. And then we have our first meaningful balloon in Q2 of ’24.

So we want to be in a position to have a flexibility to do what we want as we approach that balloon. It’s about $20 million, $20 million balloon in 2024. And then we said it before, our message to everyone is we try to be consistent and that goes for our dividend as well. So we want to continue to be in a position where we can pay that dividend through the cycle for as long as possible. But it’s good to be in a position we’re in and it’s good to have that flexibility so we can be opportunistic.

Liam Burke: Great. Thank you. Gianni. Thank you, Mark. Thank you, Mads.

Operator: We’ll take our next question from Poe Fratt with AGP.

Poe Fratt: Good morning. Gianni, for you first. Can you just talk – I mean you sort of alluded to it, but can you just talk about cash on the balance sheet has almost doubled over the last year or more than doubled. It’s – you’re carrying about $2.85 of cash on the balance sheet. Granted, you’re – you still – you have a reasonable amount of debt. Can you just talk about you’re a little more deeper into your cash management strategy? And then on top of that, you’re selling the Newport so that you get another roughly $8.5 million net coming in. So does it make sense to carry that much cash?

Gianni Del Signore: So I think – Thanks, Poe. It’s a great question, and we are certainly looking at that internally and at the Board level as well. The first thing, I guess, I would point you to and others is Note 4 in our 10-K, which is a reconciliation or a breakdown of our cash. And I think it’s worth noting that some of that cash of the $128 million is held in joint ventures that are consolidated. So we have our partners that also have a say in the utilization of that cash. So if you look at Note 4, there’s the amount of cash attributable just to Pangaea and we have full access to, let’s say, versus consolidated is about $85 million. But in whole, I agree with you. It’s – we’re looking for opportunities to deploy it. There’s actual yield now at different banks.

But back to my comments to Liam, I think being able to have the – to be as opportunistic as possible, to be in a position where we have flexibility to look at different projects, I think, is important for us. And we’re trying to – we are returning cash to shareholders. We are paying a dividend. We’ve incrementally increased it over 2022. And if we see opportunities to do other things or return in other forms then we certainly are looking at that as well.

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

Gianni Del Signore: Yes, we did. We are – we’re doing that. We paid a $15 million dividend out of one of our joint ventures, and we’ll continue — we will continue to do that, absolutely. So I think the – we revisit that periodically at the Pangaea Board level, and we revisit it with our partners frequently as well. So we don’t want to sit on cash if we don’t expect to use it. We want to be able to deploy it in ways that are meaningful to the business and are generating value. And I think that will be – that’s how we view our cash, and that’s how we’ll view it going forward.

Poe Fratt: And then who would have thought over the last 10 days, some of the things that are happening in the banking industry. Can you just comment on how – whether you’ve run a risk analysis on where your cash is and where you potentially might see some concerns?

Gianni Del Signore: Yes, we – you’re absolutely right. It’s – it certainly sends some panic to the market on where you have your cash and we’re very mindful of that. We’ve always reviewed our banks. We’re not just a U.S.-focused banking system, but we’re global, right? We’re making payments. We’re receiving payments all across the world. So we’ve generally been in the big banks, and we have a lot of our cash, almost all of it, in what we would gain the larger banks and larger Western banks in the U.S. and Europe. So yeah, we’re looking very closely. We feel we are in a good position where our cash currently is. So who knows? I know who knows what’s ahead, but we’ll try to keep it in a place that we feel as comfortable as possible.

Poe Fratt: Great. And then Mads, if we could talk about, one, how is the Ice-Class market looking for the rest of the year? And then two, you really scaled back the chartered-in fleet over the course of the fourth quarter. Can you give us an idea of where you are on the chartered-in fleet right now? And how you – how the charted-in fleet looks for the rest of the year? And then just layer on top of that, just where you might see the one to two assets? Is it Ice-Class or non-Ice-Class? Sort of what you’re looking at to continue the fleet renewal program?

Mads Petersen: Happy to do that. I think assets, starting with your last point there in terms of the assets we’re looking at for – to add to the fleet to the own fleet. Our focus is on our sort of conventional fleet, the Supramax and Ultramax. That is probably €“ you know, that’s why we have our focus and that’s why we look to that to the fleet. We’re not looking to add to the aircraft fleet at the moment in any size really. In terms of the chartered-in fleet, I mean, that number will fluctuate in accordance with the market, our customers, how busy they are and ultimately, of course, our view on where we think the market will be. So you’re absolutely right. That number did go down throughout the latter half of last year. That’s the way that this part of the business is designed to operate.

It – when the market is dropping like it is, the last quarter last year, we can re-price the fleet. We can redeliver the challenging fleet as we go and then we fix and ship cheaper, right? So that means that rather than having maybe some short period shifts in the fleet, we will just execute on time to have trips to extract the most value out of whatever market is at the current time, right? We have done that before. We didn’t want to load up on peer times going into Q1. That proved to be the right decision as the market kept trending lower. But as things are improving now, I imagine that this part of the fleet will actually sort of will grow a bit over the next, yeah, three to six months depending on what happens in the market. We’re always seeing the early signs of better value in the short period market, and we are trying to extract that.

We don’t have a fixed number of ships that we need to employ in this part of the business that it is designed to be dynamic and contract and expand in line with the market. And then on the Ice-Class front, the ships have been predominantly engaged in sort of the North Atlantic market at the moment, and we have been doing some business out of the San Lorenzo. We haven’t done really anything in the Baltic following our decision that was already taken last year to not engage in any trade from Russia or the Russian with cargoes bus in origin. So that did impact the earnings of that fleet compared to where normally would be this time of year. But it is an efficient fleet, it’s a modern fleet. It can do conventional driver business. So – and it is for the quarter, right?

And of course, we are still – we still have our Baffinland contract that’s coming up over the summer, where all sand ships will be engaged in that business. So yeah, does that answer your questions?

Poe Fratt: Absolutely. Great color. Thank you And Mark, not to leave you out.

Mark Filanowski: Thank you.

Poe Fratt: When you look at – you’ve been talking about expanding the logistics business for a couple of quarters, if not longer. Can you just talk about strategically what you want to accomplish on the logistics side? It hasn’t hit the radar screen as far as materiality yet. But can you just talk about strategically what you want to do there? And then also give us an idea of sort of how much capital you might be able to deploy? And then if you could just talk about what kind of return on capital your targets might include?

Mark Filanowski: Okay. First of all, the strategy is really, Poe, is to get more cargo to put on our ships, expand the opportunity for shipping, right? So we can get closer to cargo by developing a relationship with a miner or a producer and get more cargo on our ships to deliver to customers on the other end of the voyage, then that helps our shipping business. But it also gives us a little return on the activity we’re doing, even during activity we might be doing in the low form. So overall, our margins increase. Our throughput increases. Our revenue increases and it gives us other opportunities for other movements that miner might be making. On the other side, where we arrived with cargo, say, in our Sabine terminal, we take the – we arrived with our ship or another person’s ship, another company ship and comes in and we discharge that cargo.

We get closer to the end user on that point. So maybe if they’ve got cargo to ship into the U.S. Gulf, they can ship it into Sabine, we can do the same thing and get more cargo on our ship coming to our managed terminal where we get additional margin for doing the extra work. So that’s really the strategy to expand the shipping business by doing these other things on each end. Now that gives – having the opportunity, having the operation going in Sabine gives us other opportunities to do business for other ships. Back last summer when Houston was very crowded, decongested, we did some business with third-party companies, either suppliers or buyers of commodities that were trying to get into Texas into Houston, but they came to Sabine instead and we helped them in that area, and we developed relationships with those customers that are ongoing.

So it’s just expansion of the whole touch of cargo from beginning point to end point is what we’re really after, Poe. In terms of capital, we could spend a lot of money going on buying real estate up and down the Mississippi River or in the U.S. Gulf Coast, but not in our target right now to do that. We’re trying to do it where our customers – our current customers are active. Maybe trying to get hold of another terminal that we can operate with existing customers to expand our business with them and expand, like I said, in different ways with suppliers, producers, shippers to get more cargoes on the ships. In terms of ROE, we’re looking at projects today that would be in the mid-teens, I guess, in terms of if we just took that opportunity by itself.

But really, again, what we’re trying to do is expand returns on the whole business by getting additional freight on carriage of cargo and extra services, stevedoring services, packaged altogether gives us an overall higher return. So again, that’s the strategy, looking at individual projects, probably mid-teens is our target right now.

Poe Fratt: Okay. And then, Mark, would you – I think I heard it, but when you characterized the logistics business is lower risk and a little more consistent than on the fleet side that there is risk adjusted, the volatility is going to be a lot lower, maybe the returns are lower in peak cycles, but there is more consistency, so it creates a little more consistency in the overall business?

Mark Filanowski: Yes. For instance, Poe, we’re looking at a project right now to take cargo into a new port that we’re trying to develop a relationship with in the Gulf Coast. So the project comes with – it’s really based on a contract for carriage of commodity into that port. So if we can get a contract for 1 year or 2 years or 3 years for this commodity business, because we’re doing this stevedoring on the discharge port or the stevedoring on the low port, then that adds consistency to the whole business. We put together the contract, carry the goods along with the stevedoring. So we’re not dependent on market fluctuations so much. That’s why we think it’s more consistent.

Mads Petersen: And just one comment, Poe. We’re not looking to create something that is like that operate totally independent from each other, right? The broad offering actually depend on each other for the maximum milestone, right? Stevedoring alone, without any activity on our own ships sort of derived from that, that is not coming that will generate comparable returns to buying a bulk carrier, for instance, right? But the combination is really powerful and drives higher margin and much more meaningful relationships that you find, especially in the shipping market. It’s a way to operate and create a niche for yourself. It’s not different approach to it and now, you know, it’s not different from our Ice-Class business, for instance.

It’s the same idea, just a different way of getting to the same end result of a more sort of – of offering a more comprehensive service that is of higher value to the customer than just moving stuff from A to B and not really thinking about what happens before.

Poe Fratt: Great. Those comments are really helpful. Thank you.

Operator: Thank you. It appears that we have no further questions at this time. I will turn the program back over to Mark Filanowski for any additional or closing remarks.

Mark 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: That concludes today’s teleconference. Thank you for your participation. You may now disconnect.