Pangaea Logistics Solutions Ltd.

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 Pangea 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 -839-5630 for domestic users or -220-2557 for international. All lines are currently muted and after the prepared remarks there will be a live question and answer session. If you would like to ask a question during the Q&A segment, please press star 1 on your telephone keypad. If your question has been answered, you may remove yourself from the queue at any time by pressing star 2. We do ask that you pick up your handset for optimal sound quality. It is now my pleasure to turn the floor over to Saffan Neely with Valum Advisors. Please go ahead.

Thank you, operator, and welcome to the Pangea Logistics Solutions fourth quarter and full year 2023 results conference call. Leading the call with me today is CEO Mark Filanowski, Chief Financial Officer Johnny Del Signore, and COO Mads Petersen. Today's discussion contains forward-looking statements about future business and financial expectations. As you know, the 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.

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 continued to achieve a consistent TCE rate premium above our benchmark indices. While the fourth quarter is generally a slower period for Panchaea 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 in 2023, our adjusted EBITDA of $19.7 million, though strong, declined on a -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 supportive 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've 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 three 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 one that allows us to build stronger relationships with current and potential customers, and is centered 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 Johnny for a deeper discussion of our fourth quarter financial results.

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 amid market volatility, strong -over-year growth and 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 Supermax 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 -over-year to $19.7 million. Our adjusted EBITDA margin also declined -over-year to 14.9%, given volatility in rates which negatively impacted our charter and 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 -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 with 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 vessel operating expenses net of technical management fee, which decreased by 4% -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 utilize 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 -to-period basis. Given the market volatility during the fourth quarter, our reported net income reflects an unrealized loss of approximately $5.7 million relating to the -to-market adjustments of bunker swaps, forward freight agreements, and our interest rate cap. In total, our reported gap net income attributable to Pangea 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-gap adjustments, our reported adjusted net income attributable to Pangea 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 -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 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 2.1 times. As Mark mentioned, our capital allocation focus in 2024 is investing in growth by expanding our onshore footprint and 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 one that we can sustain through the market cycle. With that, we will now open the line for questions.

At this time, the floor is now open for questions. If you have a question, please press star 1 on your telephone keypad. You may remove yourself at any time by pressing star 2. We do ask that you pick up your handset when posing your question for optimal sound quality. We will begin that star 1 to ask a question. Our first question comes from Liam Burke with B. Riley. Please go ahead.

Yes. Good morning, Mark. Good morning, Gianni.

Hi, Liam.

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 is 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?

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 a month from now. Things can happen in the market that cause 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.

And Liam, if I could just add, it's Gianni, just to add, you know, it's not necessarily, when we look at it on a quarterly, a quarter by quarter basis, we'll see these, you know, 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 the full year of 2023, the margin on our chartered in fleet was around 1800 a day. So it was a positive, you know, and it continues to be. So I don't think there's any, you know, it's unfortunate for the quarter, but when we look at it on a long term basis, it's consistent with what we want to accomplish. Liam,

we do look at the pieces, you know, 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 we do look at the pieces, we have to, we're really trying to make the whole work better. Great. Thank you, Mark.

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?

Yeah. Hi, game is Matt here. The Panama Canal, of course, has an effect, but I think the main driver is also the fact that we were able to put 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 general strengthening, but also the fact that we were able to secure some pretty decent paying for cover.

Great.

Thank you,

Matt. Thank you, Mark. Thank you, John.

Yep. Thanks, Liv.

Thank you. Our next question comes from Po Fratt with Alliance Global Partners. Please go ahead.

Good morning, Mark. Good morning, Gianni. Good morning, Matt. Good to see you on Monday. Hey, can we just dig a little deeper on the charter higher expense? It was, you know, roughly $34 million for the quarter. Do you have, I'm calculating that your charter in days were about 1700, 1750. And so I'm calculating a chartered in expense in the fourth quarter of just over 19,000. Is that, are those numbers close or can you give us an idea? Yeah, I can give you

the numbers, Po. That'd be great. So, 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 encouraged 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 1800 chartering days.

Okay, great. And then, you know, looking at that forward, you know, chartered in cost of 1300 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.

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 know, you're right. The fleet remains around, you know, we're still around 45 to 50 vessels. Q4, we had about 44 total fleet. So, yeah, 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, you know, a very good indication of what it will be for the full quarter.

Okay, great. And then, Mads, I guess another thing on just the forward cover, 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, you know, sort of look beyond just this quarter or this, you know, exact date and time?

So we don't give out beyond the first quarter. But, you know, as far as our core business, you know, 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, you know, we're always looking forward into subsequent quarters, you know, and the market is always changing. But we haven't really, we haven't given out those longer term other than our long term numbers on our long term contracts.

And in terms of the chartered in fleet pose, you know, 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, you know, add up a significant, you know, amount of chartered in trying to show a longer period, for instance. That's not part of the strategy really.

Yeah, you sort of want to avoid taking market bets other than with your own fleet, right, Mads? You don't want to charter in long term and get exposed to negative moves in the market?

Yeah, 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, you know, 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 chartered in because it serves a purpose in the greater picture of things where you will in a quarter like this, you can have a quarter that just in that particular part of the business looks a little disrupted, as Mark said.

Yeah, and I know that you're sort of talking about your forward cover book, but has anything changed where you typically have, you know, 10 to 12 working, 10 to 12 iceclad vessels working during the ice season over the course of, you know, called the summer and early fall?

Yeah, that part of the fleet is owned primarily so we don't expect any huge changes in that part of the fleet, no. But if we have booked other business

that those ships now have to leave to go north into the Arctic, we may, 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've booked. We probably have a little higher chartered in fleet during that period.

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

I think I want to point to what's in Mark's written comments that we are seeing increased demands in the businesses and in the trades where we are pretty busy such as, you know, 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 that's going forward there in those commodities. I mean, you know, we're not a big sort of long haul iron ore owner operator so there I think, you know, I read the same data that you do and I think demand-wise things look pretty good, not fantastic but okay. And that combined with attractive supply side, you know, we feel pretty confident about where the market is and where it's heading.

Okay. And then you talked about the termling business. There was a sequence of drop in revenues there. You know, margins were still healthy but there's a seasonal drop or a sequential drop in revenue in the stevedoring terminal. Is that seasonal and we should expect to pick up in this quarter and the rest of the year into the fourth quarter or can you just give me an idea sort of the cadence of that business?

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. You know, our most active port is Port Everglades and there we have, we do container ships, 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, Paul. You know, 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.

Okay. And then, Gianni, if you could just highlight where that million dollar transit fee, you know, 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.

Yeah, it was recognized through voyage expenses which obviously impacted our overall TCE. And, you know, I think we spoke about this in our last call regarding the situation at Panama Canal and unfortunately we were there and we had to bid on a slot to get through. And it was a million dollar impact to voyage expenses and reduction, you know, equivalent reduction in TCE and adjusted EBITDA. So, yeah, that's where it's recognized. Great.

Thanks, Paul. Very helpful. Have a great day.

Thanks, Paul.

As a reminder, if you would like to ask a question, please press star 1 at this time. And 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.

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

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