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Edited Transcript of PANL earnings conference call or presentation 8-Nov-19 1:00pm GMT

Q3 2019 Pangaea Logistics Solutions Ltd Earnings Call

NEWPORT Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Pangaea Logistics Solutions Ltd earnings conference call or presentation Friday, November 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Coll

Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO

* Gianni DelSignore

Pangaea Logistics Solutions, Ltd. - CFO & Secretary

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Conference Call Participants

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* Charles Kennedy Fratt

NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst

* Sean Silva

Prosek LLC - Associate VP

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Presentation

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Operator [1]

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Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions Third Quarter 2019 Earnings Teleconference. Our hosts for today's call are Mr. Ed Coll, Chairman and Chief Executive Officer; and Mr. Gianni DelSignore, Chief Financial Officer.

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 (800) 585-8367 or (404) 537-3406 and referencing ID number 6638359. (Operator Instructions)

It is now my pleasure to turn the floor over to Mr. Sean Silva with Prosek Partners.

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Sean Silva, Prosek LLC - Associate VP [2]

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Thank you, Maria, and thank you for joining us for this morning's third quarter 2019 earnings conference call for Pangaea Logistics Solutions. With us today from the company are Chairman and CEO, Mr. Ed Coll; and Chief Financial Officer, Mr. Gianni DelSignore.

Before I turn the call over to Ed, I'd like to read the safe harbor statement. This conference could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Pangaea Logistics Solutions. Forward-looking statements are statements that are not based on historical fact. Such forward-looking statements are based upon the current beliefs and expectations of Pangaea Logistics Solutions' management and are subject to risks and uncertainties, which could cause the actual results to differ from the forward-looking statements. Such risks are more fully discussed in Pangaea Logistics Solutions' filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Pangaea Logistics Solutions does not assume any obligation to update the information contained in this conference call.

Also, please recall that a supplemental slide presentation will accompany this call. Those slides can be found attached to the 8-K that was filed with last evening's release, which is available on the Investors section of www.pangaeals.com, under Company Filings, or on the SEC's website at sec.gov.

Now I would like to turn the call over to Pangaea Logistics Solutions' Chairman and CEO, Mr. Ed Coll. Ed?

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [3]

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Thanks, Sean, and good morning to all of you, and thanks for joining the call. This morning, I'll provide an update on our operations and the overall market before turning the call over to Gianni, our CFO, to provide a more detailed overview of the third quarter financials. We'll then open the line for questions.

We hope you had time to review our press release and the accompanying presentation, which were issued last evening. Our strong Q3 results validate our business model as our long-term contracts of affreightment, specialized fleet and cargo-focused strategy allowed us to maintain strong margins even as improved market conditions tightened the spread of our TCE rate premium, which still outperformed an improved market by 16%. Our consistent outperformance of the prevailing market is important, but more importantly, we continue to operate profitably, driven by the differentiators I just mentioned. In fact, we are now marching toward 5 straight years of reported annual profits. We're really different.

During the quarter, we benefited from both improved market conditions and the arrival of the summer ice season. The BDI rose from a seasonal low of 1,354 at the end of the second quarter to 1,823 at the end of the third quarter, and the BDI's average of 2,023 during Q3 was up 24% year-on-year.

The summer ice season, which is seasonally one of our strongest, once again, meaningfully impacted our results as our ice class fleet provided our clients with specialized services required for demanding conditions.

We've also continued to execute our strategy by prudently allocating our capital across various initiatives, which I'll cover in a minute. We've generated strong momentum year-to-date, which we'll carry into the fourth quarter and into 2020.

I'll now summarize our results for the quarter. We recorded total revenue of $118.9 million compared to $95.3 million during Q3 of 2018. Income from operations was $13.1 million compared to $12.1 million during Q3 of 2018. Net income from the quarter was $8.3 million, which matches our strong results from the third quarter of 2018. Lastly, we recorded cash levels of $36.7 million compared to $56.1 million at the beginning of 2019. This was driven by our payment of a quarterly cash dividend, deposits made on 2 new ice vessels, acquisition of 2 second-hand vessels and debt repayments, all of which are positive value-enhancing initiatives. Gianni will provide more detail on this shortly.

Turning now to other highlights for the quarter. During the quarter, we acquired the motor vessel, Bulk Friendship, which advances our efforts to renew our own fleet with high-quality and efficient tonnage. The ship is already profitably engaged in our cargo business. Our ice fleet was fully deployed during the quarter to meet our clients' needs during the summer arctic season. We chartered additional tonnage to meet demand from our clients as our operating fleet expanded from an average of 40 ships in the second quarter to 50 ships in the third quarter. We believe our ability to execute Arctic voyages, which present challenging conditions is an example of what makes us truly different. Notably, we again pioneered a voyage from the Arctic, as we completed a breakthrough voyage from Greenland on one of our ice-class vessels.

On October 1, we announced that we expanded our order from 2 to 4 for a high ice class post-Panamax dry bulk vessels from Guangzhou Shipyard in China. We also announced our new joint venture with Hudson Structured Capital Management as a part of the financing of this transaction. We're excited to partner with Hudson Structured and look forward to future transactions as we continue to implement our vision for growth in these trades.

During the quarter, we also advanced our other strategic initiatives that complement our shipping operations and set the course for future logistics projects. We were excited to receive the first cargo shipment to our Newport Terminal at Brayton Point. We were awarded a contract to perform stevedore operatings -- operations at our customers' port terminal on the Mississippi River. These kinds of cargo strategies are another example of our differentiation.

Looking ahead, we expect 2020 to be somewhat bumpy, but expect some strengthening over the year in terms of the market. Our flexible business strategy allows for quick responses to change. The uncertainty of IMO 2020 is ahead of us. Ever, our path is certain as we ourselves will not install scrubbers on our fleet and will burn compliant fuel. We have chosen what we consider the economically logical environmentally correct approach to complying with IMO 2020, simply use the fuel that is compliant within environmental regulations. As the market adjusts to the changes, we don't anticipate a material impact to our operations.

We look forward to updating you further as the year progresses. I'll now turn the call over to Gianni, who will provide additional detail on our financials and our strategy, after which we'll open the call for discussions. Gianni?

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [4]

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Thank you, Ed, and thank you all for joining us on today's call. I'll first walk through a few operational highlights followed by our financials. As discussed on our prior calls, we have been generating record levels of cash flow for multiple quarters and have been focused on effectively allocating our cash resources into operating initiatives and expansion opportunities. We are selectively deploying our capital in ways that complement our current business and secure our position for the future.

As Ed mentioned, we've expanded our fleet with acquisitions of secondhand vessels. We've increased our order for ice class vessels to maintain our industry-leading position, and we've reacted to customers' needs by increasing our chartered-in fleet. We expect these initiatives will continue to pay off in our results.

In addition, we are able to reward our shareholders in the form of a cash dividend again this quarter. Further, to expand on Ed's comment about fleet renewal, in October, we entered into agreements to sell 2 older vessels, the Bulk Juliana and the Bulk Patriot, which we expect to complete in the fourth quarter. The sales of these unencumbered vessels will generate approximately $11 million in cash and a book loss of approximately $8.6 million, which will be reflected in our Q4 financials. It has always been a part of our strategy to continually rebalance our owned and chartered-in fleet and manage our average fleet age, while reinvesting the cash generated.

With that, I'll now turn to our financials. Total revenue for the third quarter of 2019 increased to $118.9 million compared to $95.3 million. The total number of shipping days performed increased by 12% to 4,636 days compared to 4,157 days during the third quarter of 2018. Voyage revenue, which are revenues generated from carrying cargo for our clients increased by 27% to $103.8 million compared to $81.8 million. The increase in voyage revenue was primarily due to an increase in the number of voyage days, which were 3,712 as compared to 3,193 and by an increase in TCE rates.

Our TCE rates were up 13% to $15,915 per day from $14,111 per day for the third quarter of 2018. We continue to outperform the market and to maintain an overall average premium over market rates of approximately $2,187 per day or a 16% premium, driven by our long-term COAs, our cargo focused and specialized fleet.

Our cargo-first approach allows us to maintain an industry-leading premium in various market cycles. Charter revenues increased to $15.1 million from $13.5 million or approximately 11%. The increased charter revenue was driven by an increase in higher rates, offset by a slight decline in time charter days. Again, our nimble chartering strategy allows us the optionality to release excess days into the market under time charter arrangements on a spot basis.

Total expenses during the third quarter increased from $83.2 million in the third quarter of 2018 to $105.8 million in the third quarter of 2019, the significant components of which are as follows: Voyage expenses were $45.1 million compared to $36.7 million for the same period in 2018, an increase of approximately 23%. This was primarily driven by an increase in voyage days. Charter expenses paid to third-party ship owners increased to $42 million compared to $28.5 million in Q2 of -- Q3 2018, driven by an increase in higher rates in a rising market and the increase in chartered-in days to meet customer needs. Vessel operating expenses, including technical management fees paid were $11.3 million compared to $9.9 million in the third quarter of 2018. This 15% increase is due to an increase in owned days to 1,939 from 1,848 in the 3 months ended September 30, 2018.

Moving on to the balance sheet and cash flows. Total cash and cash equivalents of $36.7 million reflect debt and finance lease repayments, dividend payments made and capital allocation initiatives that I referenced earlier, as we effectively deployed cash into accretive projects and are well-positioned to return value to our shareholders. These cash levels compared to $56.1 million reported at December 31, 2018.

As you can see, we're continuing to build our specialized and differentiated platform in the market through various expansion opportunities, securing best-in-class vessels for our clients and rewarding shareholders throughout the process.

With that, I will now turn the call back over to Ed for any additional remarks before we get to the Q&A portion of our call. Ed?

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [5]

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Thank you, Gianni. As you can see from our strong results and the expansion of our platform, we have reason to remain optimistic about the path forward. We thank our customers, business partners and shareholders for their continued commitment and partnership, and we look forward to updating you further in the coming quarters.

I'll now open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from the line of Poe Fratt of Noble Capital Markets.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [2]

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Ed, you mentioned that you thought that 2020 was going to be bumpy and you mentioned IMO 2020. Could you sort of expand on that comment and sort of give us an idea of sort of what you're thinking is looking into 2020? And any change on the -- your customer behavior looking at 2020?

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [3]

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No, thank you, Poe, for the question. I think we've been pretty consistent with our view. And I'm pretty sure that it's going to turn out to be the right view. First of all, we've environmentally, if you take a step back, really the use of compliant fuel is good for the environment, that simple. And so as a company that cares about the environment, we are, first of all, going to care about doing the right thing.

Secondly, as a business, the idea of investing huge amounts of capital in scrubbers, we see it as a very risky idea and difficult to quantify. There are too many factors that you have no control over. And we think it's a poor use of capital. We'd better just to comply. And economically the reason to say that is simply because there are so few percentage of the drybulk fleet that actually is going to do it, that the market levels, the rate levels are going to adjust to whatever the bunker prices in the future are. And if you put open-loop scrubbers on their ships, which continually every day get banned more and more around the world, no-one quite knows if you're actually dumping -- first of all, environmentally, you're dumping sulphuric acid into the ocean, which I can't believe is a good thing, but also your equipment that you were running sulfuric acid through, it really is a question of how long that can last. So we're not at all a fan of that. And we trade in pristine areas, right, so it makes our decision easier. We're up in the Arctic. We're up in places that are very sensitive environmentally, and we simply would not jeopardize environmentally the things that we're doing, it's very important for us.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [4]

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And so it's -- was that comment, Ed, in specifically to IMO, then it sounds like a little more than just the -- some of the things that are going on globally as far as trading tension or other -- other economic -- the economic environment?

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [5]

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Well, look, globally, people are going to do what they do. I mean, it's a different calculation. If you had to keep a fleet of capesize ships that are lot of time at sea and a lot of consumption, your calculation is probably different. We are having to work day-to-day because we are owning 22 ships, but we have 65 ships on the water. So we have a lot of chartered ships. To make these adjustments to compliant fuel is a lot of work for the chartering and operations guys in the group to get it right. And I'm sure we will get it correct. But in the big picture, the shipping industry is getting dragged, kicking and screaming, into trying to be environmentally correct, and that's not going to change. It's going to happen, right? And so the easiest thing to do is just comply.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [6]

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Got you. And then from the customer standpoint, just cargo flows, any changes that you're seeing into 2020?

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [7]

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Well, the markets have been remarkably resilient, right? And when we deal with a lot of specialized situations and a lot of different types of cargo and it's remarkably resilient. So we get inquiry every day to do different things in different parts of the world. And for us, it's creating value for the enterprise where we can create margins and help people and more and more, our business is that way, doing things where we can create value and help customers. What we did in Greenland recently, we're very proud of. We went up there and built a port where no-one even lives, there's nothing there at all. And we made that happen and with guys living there on barges, and that's going to turn out, I'm confident, to a long-term thing for the company. So we do things a little bit differently, as we're not so exposed to the spot market. A lot of the things that we've seen happen, are a lot to do with trade and with the trade wars. And it's because people can't make decisions, right? It's -- how can people make economic decisions when things change every 2 hours, right? And you can't believe when they do change, and next week, it'll be something different. So if that could actually get normalized, I think the market will react positively to that. But right now, everyone is just going ad hoc.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [8]

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Yes, simply sort of been reactive -- as reaction mode as opposed to being able to plan, as you say. When you look at what you're doing at breaking point, and this -- it's the early phase there, what -- can you just either put a color on sort of how the progress -- how we should measure the progress at Brayton Point going forward? And sort of what -- if you could put sort of a color on the -- or some texture on to the economics of that facility and sort of your contribution and sort of how it might impact the -- your operating results as you look into 2020 and beyond?

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [9]

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Okay. Well, of course, where we are in that project is we have an expertise in international trade across a lot of different commodities, and we know how to work that. Our partner in managing the terminal is a stevedoring company that's pretty highly respected, and they know their part of it. So I would say that, that terminal, it's highly sought after because on the U.S. East Coast, there are not -- there simply are not a lot of terminals available for people to grow business, and there's not a lot of land available. So I would -- I'll bet you a year from now, the terminal is completely full. So we're very excited about the way that's developing, right? And so how it affects the bottom -- the bottom line, it's a bit too early to tell, but I think it'll continue over a number of years to be a positive thing for the company. And that's an area where we're going to continue to work to get into different parts of the logistics chain.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [10]

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Great. And then when you look at, Gianni, on the new builds, you already put down a $7.5 million or $7.7 million deposit. Will you continue to fund the construction and then reimburse once or -- essentially effectively reimburse once the sale leaseback on delivery? Or sort of can you talk about the mechanics of how that -- the capital is going to be? Or how those new-builds are going to be funded?

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [11]

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Yes, no problem, Poe. Yes, I think this one is one where we're excited to do 2 things. One, we are able to support our client, right? So we're building these ships for a need of one of our core clients, and we want to be there to support them and grow with their business. So allowing us to do that in a very efficient way is what we basically try to accomplish. And the next installment, we did make the first installment on the first 2, we will make the first installment on the second 2 option vessels. And then the nice thing about the financing, it's -- there'll be a drawdown during the construction phase. So the next installment for us or installment 2 on the 4 vessels will be approximately 5%, as we draw down a portion of the financing. So it's an efficient way for us to do this. And that's -- I mean, I think that's always been our goal, is to serve our clients and grow the business as efficiently as possible and do it in a way that doesn't put undue pressure on the company, so.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [12]

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So if I look at it, Gianni, you're going to be essentially paying the 5% of -- or I'm sorry, 25% of the amount due on launch? Is that...

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [13]

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No. So the installments are 10%, 20% and then at delivery of the balance. So we've made the first 10% deposit. At the next launching, we'll make a 5% deposit, and then the balance of that installment will be met by financing through a good sale leaseback.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [14]

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Okay. So you'll contribute 5% and then you'll draw down for the other 15%?

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [15]

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Correct. Yes. And then remember, we're also -- Poe, we're also, as we said, we're doing this in a joint venture. So we have partners. So that's another way to keep this as efficient as possible for us.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [16]

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And would you remind me on the joint venture ownership, how much of that JV you own? Is it 50-50? Or sort of...?

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [17]

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Yes, it's 50-50. So that one is 50-50 JV.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [18]

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Sorry about that. And then when do you expect launch at this point in time? Is it -- can you put a little -- I know delivery is, for the first 2 is, first half of 2021 and then the second 2 are September of '21, if I recall correctly.

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [19]

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Yes.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [20]

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When do you think launch is going to be?

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [21]

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I think we're technically thinking about 12 months from now, is when we'll have launching and then delivery early -- or second quarter of 2021.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [22]

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Okay. And then when you look at the decision to sell the Juliana and Patriot, are there -- will you continue to sell older tonnage and then acquire? Is that sort of something we should expect? Or were these sales sort of one-offs based on interest that you got?

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [23]

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Yes. I'll defer to some of this to add on the decision-making process. But I think just from a holistic perspective is, as Ed mentioned earlier in his comments, one, we look at it -- we look at the ratio of owned versus chartered, we look at the vessel needs going forward, and then just trying to bring the average age or manage the average age of the fleet. So I think we look at it, and we're opportunistic. We'll sell when we see an opportunity. We're not committed to any specific vessel that comes down to meeting the needs of our customers. So if we see an opportunity to sell, we'll do that. But I think Ed probably can give you a better answer as far as looking ahead and our decision-making process in that.

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [24]

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Well, I think as a general view, we need to -- with older ships and we can use them, to a certain point, and we've been fortunate to be able to do well with them. The ships that have been reported sold, they're debt free, so -- but they're old, right? So your decision-making process is sort of do you make an investment in keeping an old ship? Or do you want to take the cash and roll it into renewing your fleet? And I think it's pretty straightforward that you want to renew your fleet and you want to get younger ships. And that's the process for going through. It's opportunistic. With the older ships, the market is still pretty okay. There's a market for the ships at decent prices. We never know what the future is going to bring. Our goal is to be opportunistic and then replace those ships going forward with younger ones.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [25]

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Great, great. And then when you look at sort of your chartered-in capacity over the next quarter and even into 2020, do you -- how are you managing that balance, Ed?

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [26]

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Well, I mean, as you know, our strategy always is the ships that we own, we own for purpose. And then the other ones, the chartered ships are normally flexible in their duration, so that we can maneuver in the market when it changes. So going forward, we will continue that strategy, which is -- it's been successful. And I would say that as we went through to the third quarter and into the present situation, the fleet has grown a lot. The number of ships that are underwater, collectively have grown a lot. As we go into Q1, I -- it's totally a guess, but I think it may be a little bit less because we're cycling out of the summer ice season with Nordic and with Baffin Island, but that's okay. If you look at the forward curve, Q1 in the market perceives it to be softer. I'm not quite sure if that's true or it isn't, but we'll be reactive to that. And our view always is that it doesn't matter if we have 40 ships or we have 80 ships. It's all about what we earn with them. And so I think the company runs very efficiently in terms of number of personnel, in terms of cost per day for running the ships, and in addition to doing all the project works. So I think, yes, I think that's basically where we are. We're certainly not going to go out and take ships on long-term period. We've never done that. That's not really what we do. And as we get into more projects then we will get more ships.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [27]

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Great. And Gianni, if I could just ask you about G&A. It looked like it was down, not only sequentially, but year-over-year, and you may have touched on this in your comments. But was there anything unusual in G&A that pushed it down and sort of what's a reasonable run rate going forward?

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [28]

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No, I don't think there's -- I think with G&A and I see similar things about operating -- OpEx on our vessels, sometimes looking at it quarter-to-quarter is not the best view. And looking at it at the whole -- the full year is sort of a better view of both of those numbers. So there's nothing really unusual. It's more of a timing issue or timing and recognition of expenses in the quarter versus last year. But for year-to-date and for the full year, no unusual, or we're not expecting any significant changes.

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Charles Kennedy Fratt, NOBLE Capital Markets, Inc., Research Division - Senior Transportation and Logistics Analyst [29]

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So you should be close to last year's G&A level, if you look at sort of $15.5 million or $16.5 million range that was in 2018.

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Gianni DelSignore, Pangaea Logistics Solutions, Ltd. - CFO & Secretary [30]

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Absolutely. I think that would be a fair assessment of the full year and what we're expecting.

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Operator [31]

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And there are no further questions at this time. I would like to turn the call back over to management for any additional or closing remarks.

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Edward Coll, Pangaea Logistics Solutions, Ltd. - Co-Founder, Chairman of the Board & CEO [32]

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Okay. Well, thank you all for taking the time to join us this morning, and have a good day.

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Operator [33]

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Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.