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Rand Logistics (NASDAQ:RLOG)

Q3 2014 Earnings Call

February 06, 2014 8:30 am ET

Executives

Alison Ziegler - Vice President

Laurence S. Levy - Executive Chairman

Scott Bravener - Director, President of Lower Lakes & Lower Lakes Transportation, Chief Executive Officer of Lower Lakes and Director of Lower Lakes

Joseph W. McHugh - Chief Financial Officer and Principal Accounting Officer

Edward Levy - President

Analysts

Jonathan Tanwanteng - CJS Securities, Inc.

William W. Horner - BB&T Capital Markets, Research Division

Matthew Dodson

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

David Pointer

Operator

Good day, and welcome to the Rand Logistics Inc. Third Quarter Fiscal 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to Ms. Alison Ziegler, Vice President, Cameron Associates. Please go ahead, Ma'am.

Alison Ziegler

Thank you, and thank you, operator, and good morning ladies and gentlemen, and welcome to Rand Logistics Third Quarter Fiscal 2014 Conference Call. On the call today from the company are: Laurence Levy, Rand's Executive Chairman; Ed Levy, Rand's President; Scott Bravener, President of Lower Lakes; and Joe McHugh, Rand's Chief Financial Officer. A live audio webcast and accompanying slide presentation is available on the Rand website at www.randlogisticsinc.com/presentations.html. Just look down below the upcoming conference presentations for the link.

Before we begin, we would like to remind everyone that this conference call contains forward-looking statements. For all forward-looking statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or otherwise beyond our control, and some of which might not even be anticipated. Future events and actual results affecting our strategic plan, as well as our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements. Important factors that contribute to such risks include, but are not limited to, the effect of the economic downturn in our market, weather conditions on the Great Lakes and our ability to maintain and replace our vessels as they age. For a more detailed description of these uncertainties and other factors, please see the Risk Factors section in Rand's annual report on Form 10-K as filed with the Securities and Exchange Commission on June 12, 2013, as well as other recent filings.

And with that, I'd like to turn the call over to Mr. Laurence Levy. Go ahead, Laurence.

Laurence S. Levy

Thank you, Alison, and good morning, everyone. Thank you for joining us on today's call. After my opening remarks, Scott Bravener, President of Lower Lakes, will discuss our operating results. Joe McHugh, Rand's CFO, will review the financial results; and Ed Levy, Rand's President, will provide further insight into the remainder of fiscal 2014 and fiscal 2015. We will then open the call up for your questions.

We are pleased to report operating income plus depreciation and amortization of $13.1 million for the third quarter, which represents a 15.3% increase compared to the same quarter last year. The improvement was driven in part by a 3.4% increase in tonnage carried despite having 1 less vessel in operation for the period, as well as a 6.4% reduction in vessel operating expenses per sailing day. This performance was achieved despite 2013 sailing season challenges with respect to commodity mix, customer shipment interruptions, inefficient trade patterns and weather-related delays.

One of our primary objectives in the 2013 sailing season was to improve our operational execution. We were able to offset challenging demand and weather conditions by improving the operating reliability of the fleet. We experienced positive year-over-year improvements in many of the operating reliability metrics that we measure. The investments we made over the last 2 years, including augmenting the personnel in our engineering department, enhancing our safety and maintenance operations, implementing best practices across the fleet are yielding improvements.

At the present time, the demand environment, particularly in the aggregates and salt markets, has improved relative to the 2013 sailing season. We were successful in leveraging our network to capture market share, and as we previously announced, we have been awarded several new business opportunities for the 2014 sailing season, which will enable us to rebalance our commodity mix and improve our trade patterns. As Ed will report, while we are experiencing an improved demand climate, at the present time, we are not planning to introduce our 16th vessel back into service for the 2014 sailing season. We are confident that we can operate 15 vessels and both accommodate our customers' forecasted demand and drive operating efficiencies. We believe that this should enhance vessel margin per day in the 2014 sailing season.

With that, I'd like to turn the call over to Scott to review our operations. Scott?

Scott Bravener

Thanks, Laurence. Entering the 2013 sailing season, we communicated that our commodity mix was not going to be optimal from a scheduling and profitability standpoint. We would characterize the 2013 sailing season demand as adequate but erratic. We were not able to optimize our trade patterns for a number of reasons, including softness in the aggregates markets, particularly in the April through August periods, poor weather conditions at both the start and the end of the sailing season, and a seismic event resulting in a mine interruption experienced by one of our customers.

As a result of these factors, we could not maximize the percentage of time that our vessels operated in efficient revenue loaded conditions. However, when you look at the factors, we had more direct control over, we are pleased with the execution of the business during the 2013 sailing season. Year-over-year, we increased our tonnage carried by 6.7%; reduced lost sailing days due to incidents by approximately 85%; reduced lost time due to mechanical delays by over 33%; fully integrated the new vessel we introduced into service in October 2012 into our fleet network; and reduced the operating expenses per day. We also secured new business and increased market share, which, in 2014, will help we rebalance our commodity mix more in line with historical levels and will be accretive to vessel margin per day.

For the 3-month period ended December 2013, we operated 15 versus 16 vessels during the prior 3-month period ended December 31, 2012. One of our vessels was in long-term lay-up status during the 3-month period ended December 31, 2013. The company's vessels sailed an average of 91 sailing days during the 3-month period ended December 31, 2013, compared to an average of 85 sailing days during the same year-ago period. This performance resulted in a fleet utilization of 99.3% versus 92.3% achieved in the prior year period.

The company's vessels sailed an average of 261 sailing days during the 9-month period ended December 31, 2013, representing 95% of the theoretical maximum compared to an average of 243 days -- sailing days during the 9-month period ended December 31, 2012, or 88.4% of the theoretical maximum. In the month of January 2014, we operated for 243 sailing days as compared to 130 days in January 2013. Historically, vessel margins from sailing days in January are less profitable relative to the average for the sailing season. This is particularly true in January 2014 due to the severe weather conditions experienced on the Great Lakes. We measure delay days, which we define as the lost time incurred by our vessels while in operations. Delay days occurred due to mechanical issues, inclement weather, dock delays and traffic congestion.

We experienced 178 delay days during the 3-month period ended December 31, 2013, compared to 160 during the 3-month period ended December 31, 2012. We reduced delay days arising from vessel mechanical issues by 16 days, or 37%, as compared to the 3 months ended December 31, 2012. However, the reduction in mechanical related delays -- delay days during the 3-month period ended December 31, 2013, was offset by an increase of 34 days during the 3 months ended December 31, 2013, related to increased traffic congestion, dock and weather delays.

Weather-related days accounted for approximately 50% of the delay days in the 3 months ended December 31, 2013, as compared to approximately 45% of the delays -- delay days in the comparable period. Delay days as a percentage of total sailing days equals 13% for the 3-month period ended December 31, 2013, compared to 11.8% for the 3-month period ended December 31, 2012. We experienced 400 delay days during the 9-month period ended December 31, 2013, compared to 354 during the 9-month period ended December 31, 2012. We reduced delay days arising from vessel mechanical issues by 41 days or 33% during the 9 months ended December 31, 2013, as compared to the 9 months ended December 31, 2012. However, the reduction in mechanical delay days during the 9 months ended December 31, 2013, was offset by an increase of 87 delay days related to traffic congestion, dock and weather. Weather accounted for over 37% of the delays -- delay days in the 9 months ended December 31, 2013, versus approximately 28% for the same period ended December 31, 2012.

For the 3 fiscal quarters ended December 31, 2013, delay days as a percentage of total sailing days equaled 10.2% compared to 9.5% for the 9-month period ended December 31, 2012. For the 9 months ended December 31, 2013, lost sailing days due to incidents equaled 23 days, or 0.6%, of total days sailed versus 149 days, or 4%, of total days sailed during the 9-month period ended December 31, 2012. The reduction in lost days due to incidents and delays -- delay days due to mechanical issues indicates that our investments over the last 2 years to improve our operating procedures and protocols are yielding desired results. We were able to reduce our vessel operating expenses per day by approximately 6.4%, or $1,629, in the quarter ended December 31, 2013, versus the comparable prior year period.

As we have discussed on previous calls, vessel margin per day is a key performance metric that we monitor to evaluate fleet performance. Despite the challenging weather conditions and inefficiencies in our trade patterns, for the quarter ended December 31, 2013, vessel margin per day before winter work was $11,675 compared to $10,776 in the same year-ago period. We estimate the vessel margin per day in the quarter ended December 31, 2013, was reduced by approximately $467 due to the change in the average exchange rate.

We reduced our vessel operating expenses per day by approximately 7.8% or $2,087 in the 9 months ended December 31, 2013, versus the comparable period in 2012. Vessel margin per day before winter work was $12,927 compared to $13,031 in the same year-ago period despite a 3.7% decline in the value of the Canadian dollar versus the U.S. dollar. We estimate the vessel margin per day was reduced by approximately $291 on account of the change in the average exchange rate.

For the sailing season ended December 31, 2013, our tonnage carried increased by 6.7% to 21.5 million tons. This increase was consistent with our expectations for the season. Our commodity mix and overall 3.4% increase in tonnage carried in our third fiscal quarter versus the same period a year ago was relatively consistent with our expectations coming into the sailing season.

Aggregate shipments increased 16% Lakes-wide during the quarter versus the same period 1 year ago. Our aggregates tonnage increased by approximately 13.3% versus the same quarter last year and accounted for over 45.4% of our tonnage carried in the third quarter. The increase versus prior year was as a result of improving customer demand and more ratable shipments. Iron ore comprised approximately 13.4% of our total third quarter tonnage. Shipments decreased 1.8% Lakes-wide during the quarter versus the same period 1 year ago. Our shipments decreased by 28% during the third quarter as compared to the same year-ago period. This increase was due to the impact of the commodity mix shift we have experienced.

Coal comprised approximately 13.2% of our total third quarter tonnage. Shipments decreased 2.4% Lakes-wide during the quarter versus the same period 1 year ago. Our coal shipments increased by 17.4% during the third quarter as compared to the same quarter last year due to a backloading of shipments by our primary coal customer.

Salt comprised approximately 8.2% of our total third quarter tonnage. Our salt tonnage carried decreased by 18.4% this quarter versus the prior year, primarily due to the temporary shutdown of a salt customer's operations, which also impacted the efficiency of our trade patterns in the quarter.

Grain comprised 16.3% of our total third quarter tonnage. The grain tonnage that we carried increased by 25% -- 25.3% during the third quarter versus the prior year. The increase was due to a record Canadian grain crop that resulted in a commodity mix shift for our largest bulk carrier.

With that, I'd like to turn the call over to Joe McHugh for a review of the financial results. Joe?

Joseph W. McHugh

Thanks, Scott. I would now like to provide a more detailed explanation of our financial results for the quarter ended December 31, 2013, compared to the third quarter of the prior fiscal year. Marine freight and related revenue generated from company-operated vessels increased by $2.5 million or 6.8% to $39.9 million. Excluding the impact of currency exchanges, freight revenue increased 10.4%. The increase was primarily attributable to a 3.4% increase in tonnage carried, contractual price increases and 11 additional sailing days. Fuel and other surcharges decreased by $3.1 million or 26.0% to $8.9 million. In addition to reduced fuel prices over the past year, we renewed certain customer contracts and reset our contractual-based fuel price to reflect prevailing market conditions for fuel. These renewals resulted in a reduction in fuel surcharges and an equivalent increase in marine freight revenue.

Marine freight and related revenue per sailing day increased $1,621, or 5.9%, to $29,101 per sailing day. Total revenue for the quarter was up marginally to $49.9 million. The shift in the commodity mix that we transported reduced fuel surcharges, and the effect of the weaker Canadian dollar was mostly offset by increased tonnage and increased prices.

Vessel operating expenses decreased by approximately $2 million or a 5.6% to $32.7 million. This decrease was attributable to the weaker Canadian dollar, reduced fuel pricing, reduced vessel incident costs offset in part by 11 additional sailing days. Vessel operating expenses per sailing day declined by $1,629, or 6.4%, to $23,901 per sailing day.

Our general and administrative expenses were $2.9 million, a decrease of 6.3% from $3.1 million in the year-ago quarter. The reduction was due to the weaker Canadian dollar partially offset by both additional compensation and benefit costs related, in part, to our increased shoreside operational support headcount, including expanded engineering and operational infrastructure. Our general and administrative expenses represented 7.4% of marine freight revenues compared to 8.4% in the year-ago quarter.

The company's operating income increased $1.6 million, or 26.7%, to $7.7 million for the third quarter of fiscal 2014 primarily due to improved vessel margins as described above. Operating income plus depreciation and amortization increased 15.3% or $1.8 million to $13.1 million. For the quarter ended December 31, 2013, the average exchange rate equaled USD 0.953 per Canadian dollar as compared to USD 1.009 per Canadian dollar for the quarter ended December 31, 2012. The change in the exchange rate resulted in a reduction of operating income plus depreciation and amortization of approximately $497,000 as compared to the same quarter last year and $1 million on a year-to-date basis. We estimate that on an annual basis, a change of the exchange rate by $0.01 impacts our operating income plus depreciation and amortization by approximately $250,000.

For the quarter and 9 months ended December 31, 2013, our effective income tax rate equaled 69.2% and 68.6%, respectively. Our statutory tax rates, however, are approximately 37% and 26.5% in the U.S. and Canada, respectively. Our actual tax rate is higher than our blended statutory tax rate because we forecast we will have approximately $2.2 million of permanent differences for our fiscal year ending March 31, 2014. Permanent differences are either nondeductible expenses for tax purposes, or intercompany income that must be reported for tax purposes but is eliminated in our consolidated results. Our provision for income taxes is calculated by applying our blended statutory tax rate to the sum of our year-to-date income before income taxes plus permanent differences. Consequently, this results in a year-to-date effective tax rate of 68.6%.

Because our vessels do not sail in our fiscal fourth quarter, we incur a substantial loss before income taxes. Accordingly, most of our deferred income tax expense that we have reported year-to-date will reverse in the fourth quarter. We forecast deferred income tax expense to be less than $1 million for the year ending March 31, 2014.

Now, I'd like to turn the call over to Ed. Ed?

Edward Levy

Thanks, Joe. We have substantially renewed existing material customer contracts that were up for renewal between now and the beginning of the 2014 sailing season. With regard to securing new contracts, we were successful at leveraging the benefits of our existing network to capture new business and have secured in excess of 250 sailing days of additional new long-term contractual business for the 2014 sailing season. These contracts, which are a combination of new business, market share gains and organic market growth, are expected to help rebalance the company's 2014 sailing season commodity mix to levels more consistent with prior years. The new business wins, which will increase next year's tonnage of many of the commodities that we carry, should allow us to better optimize our scheduling and trade patterns, resulting in improved efficiencies for the 2014 sailing season.

While we are experiencing an improved demand climate, at the present time, we are not planning to reintroduce our 16th vessel back into service for the 2014 sailing season. As a result, we will continue to incur approximately $1 million of expenses related to this vessel primarily related to the lease expense of approximately $775,000 per year.

We remain committed to growing our business to meet our customers' forecasted demand and when warranted, are prepared, along with the owner of the barge, to expend the capital necessary to reintroduce this vessel into service. While we have not finalized our fiscal 2015 budget, we have substantially completed receiving tonnage nominations from our customers for the 2014 sailing season.

As discussed on previous calls, there is no contractual guarantee that our customers will fulfill all of their annual nominations. However, these nominations reflect what we believe is an improved demand climate. Based on our customer nominations to date, we are preliminarily projecting an approximate 14% increase in total tonnage to 24.5 million tons in the 2014 sailing season. In the aggregates market, while remaining well below historic levels, we are beginning to see a modest improvement in demand and are continuing to gain share. As a result of a newly signed long-term contract, we are projecting that our iron ore demand will increase materially in the 2014 sailing season versus the 2013 season. Projected growth in our salt tonnage is being driven by a new business win, which begins April 1, 2014, and anticipated customer restocking requirements as a result of the abnormally cold and wet conditions that have existed this winter in the Great Lakes region. Historically, we have achieved high vessel efficiency levels in sailing seasons with strong salt demand. We are expecting that our grain business will benefit from a record Western Canadian grain crop and improved utilization of our largest bulk carrier in this trade. Finally, we will benefit from a new contract to carry coal, which begins April of 2014.

We are currently budgeting operating 3,993 days in the 2014 sailing season versus 3,918 days in the 2013 sailing season. Management believes that the scheduling efficiencies inherent in adding new business, as well as organic demand growth while continuing to operate the same number of vessels, will be accretive to vessel margin per day as compared to the 2013 sailing season. Consistent with the 2013 sailing season, our 2014 sailing season focus will remain on executing our business plan and building on the advances we have achieved.

We are projecting that capital expenditures and dry docking in fiscal 2015 will equal approximately $13 million as compared to $13.5 million in the current winter. We have 1 vessel that is scheduled for dry dock this winter and 2 next. Our projected capital expenditure numbers exclude the vessel that we elected not to sail during the 2013 and 2014 seasons.

As we have previously discussed, we have been focused on upgrading our trip reporting procedures, including developing new software that will allow us to capture and analyze time-based variances on a trip-by-trip basis. The application was installed and tested during the quarter ended December 31, 2013. The new system should be in place, fleet-wide for the 2014 sailing season. When fully implemented, we believe the data that we collect will be beneficial in analyzing the services which we provide and maximizing the efficiency of our scheduling.

Great Lakes water levels have rebounded and are now at near historical norms with the exception of Lake Huron and Lake Michigan. Although these lakes remain significantly below historical norms, they're almost 12 inches higher than their levels of 1 year ago. While we are encouraged by the customer tonnage nominations that we have received for the 2014 sailing season, extensive ice conditions that currently exist on the Great Lakes may delay the beginning of our sailing season. While there is no certainty at this time that the start of the sailing season will be delayed, if it is, it may have an impact on our April financial performance. We would not expect that a delayed start to the 2014 sailing season will meaningfully impact our overall fiscal 2015 results.

Finally, we continue to be in discussions with potential financing sources to refinance our approximately $16 million of accrued preferred dividends. We are satisfied with the collaboration and direction that these discussions are advancing.

Operator, we'd now like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Jon Tanwanteng at CJS Securities.

Jonathan Tanwanteng - CJS Securities, Inc.

My question is did you have any idea when the new sailing season may start given the ice cover? Or is it too early to tell?

Scott Bravener

Jon...

Laurence S. Levy

Scott, go ahead.

Scott Bravener

Scott here, sorry. Yes, typically, the Great Lakes season starts in the last week of March. March 25, the Soo Locks open for the season, and the St. Lawrence Seaway opens roughly around the same time. That being said, there may be some impact that there's severe ice conditions at the outset where we may delay the sailing of some of our vessels.

Jonathan Tanwanteng - CJS Securities, Inc.

I mean, is it a -- could it be a week or 2 or something more than that? That's my question really.

Scott Bravener

No, it would be in the -- in the week to 2-week range if there was severe ice conditions. But we anticipate having a good portion of our fleet going prior to the 1st of April.

Jonathan Tanwanteng - CJS Securities, Inc.

Got it. And then what are the potential vessel margins you could achieve given the expected commodity mix for next year and assuming the water levels are better?

Edward Levy

At this point, as you know, typically, we come out with our guidance in our June conference call. At this point, I think, because we have not completed our budgets and -- we're not prepared to discuss that. I would look historically though in terms of where our vessel margin per days have been, and that'll be a good proxy in terms of where we think -- what we think we could achieve. And obviously, we believe that we can generate some nice efficiencies in 2014 based on what our nominations look like at this point.

Jonathan Tanwanteng - CJS Securities, Inc.

Okay. And then finally, what's leading you not to reactivate the McKee Sons vessels given the improvement in tonnages?

Edward Levy

I think that the company's focus has been to continue to drive the percentage of time that our vessels are in revenue-loaded condition. And it's our view that we can drive that metric in 2014 -- improve that metric in 2014 relative to prior years and still, most importantly, fulfill all of our customer demand requirements and provide the customer the kind of service that's the basis of our product offering.

Jonathan Tanwanteng - CJS Securities, Inc.

Okay, great. And I might have missed this. Did you talk about the refinancing or the preferreds and what the progress was on that?

Edward Levy

We continue to be actively focused on that, and we're pleased with the discussions that we're having in that area.

Operator

We'll go next to Kevin Sterling at BB&T Capital Markets.

William W. Horner - BB&T Capital Markets, Research Division

It's actually William Horner on for Kevin. Ed, going back to the new business wins for 2014, how should we think about it? Is it primarily a single large contract with a customer? Or is it more multiple longer-term contracts that are helping to enable to rebalance your fleet?

Edward Levy

It's multiple contracts, William, across all commodities. They're contracts that -- or pieces of business that we had targeted for several years. Many of the pieces or certain of the pieces of business, I should say, were focused when we went out and did the UMG acquisition that we closed at the end of 2011. When we did that acquisition and acquired those vessels, we had these contracts in mind, and so we have finally -- we're finally now being able to fully integrate and properly drive the profitability of those new pieces of equipment. Scott, I don't know you want to add anything to that.

Scott Bravener

I think that pretty much covers it.

William W. Horner - BB&T Capital Markets, Research Division

That's good color. And this is kind of a tossup. Regarding Q3, I appreciate the metrics you all gave for your performance, but I was hoping can give more guidance or at least speak directionally to maybe what your core pricing gains were x all the factors of your tonnage, fuel and currency. Or maybe another way to ask is what sort of range should we think about for your contractual price increases, and typically, what percentage of your business are you renewing annually?

Joseph W. McHugh

Well, the price increases -- increased by -- on all of our contracts, even those that are not renewing. So it's not just the renewing contracts that are going to have price increases. There's CPI tight price increases in the other contracts.

Scott Bravener

We had less than 10% renewed in the past year of our contractual days, William, of our existing contractual days and going next year, we have very little rolling off. It's not a big year for us in renewals next year.

William W. Horner - BB&T Capital Markets, Research Division

Okay. And then maybe you can answer this, but in terms of the actual core pricing you're getting in those contracts and those renewals -- in the renewals and the gains that you have alluded to, is it a couple of percentage points, 2% to 3%? Is that how we should think about it?

Scott Bravener

We continue to make gains on pricing in the market, and I guess, we can say we're quite comfortable with -- especially with the new contracts and the pricing range that we've been able to attain.

Edward Levy

William, I think the other -- the 2 branches of profit improvement, 1 is price, and the other is vessel efficiency and driving the vessel efficiency in order to improve our vessel margins. And I would say the latter is something that we are -- have been very focused on. It's reflected in the fact that we're only going to be sailing 15 vessels in 2014 sailing season, notwithstanding that we had in excess of 250 sailing days.

William W. Horner - BB&T Capital Markets, Research Division

Right, and that actually points to my next question. Regarding these efficiencies that you've been driving, you've done a good job of driving down expenses and reducing vessel downtime. And I know you've got your trip reporting system teed up for 2014. So x all the other factors outside of your control, that being weather, water levels, erratic customer demand, et cetera, what inning are you in, in terms of getting all these efficiencies, initiatives in place? And how much more room do you have to go?

Scott Bravener

William, we believe we've still got quite a bit more run room with regard to the one -- the issues that we can control within the business. We all -- especially from the -- as Ed just touched upon on the scheduling side, we think we've made great strides in rebalancing and improving our mixes going to really showing the scheduling, and scheduling is what drives our business. And the last thing I would add to that is on the factors that we don't control, we think we've seen a bit of an anomaly in the past year, and we think we've got some run room there also next year.

Operator

We'll go next to Matthew Dodson at JWest, LLC.

Matthew Dodson

Ed, I guess can you help me understand this issue, is -- you guys are talking about tonnage being up 14%, and you're talking about your currently budgeted operating days going to be almost close to 97%. So that's up a couple percent from last year's sailing days. And I guess, you're not going to bring out the 16th, you're going to stay with 15, but yet, when you talked to the first analyst, you said look at historical per-day margins on your vessels. It seems like if this all comes to fruition, the per-day margins have to move up substantially or have to be a lot better than they've been in the past because to get that much stuff moved, your utilization is going to have to up go pretty significantly in the ships. Or is there something that I'm missing? Or can you just help me understand that?

Edward Levy

Sure. I don't think there's anything that you're missing. We're budgeting 95 increased sailing days 2013 to 2014. We're adding an excess of 204 -- 250 sailing days of new business. The implication is that there's about 160 days of inefficiency that existed in 2013 sailing season that won't exist in the 2014 sailing season. Okay? We've got this cost structure. We've got the same cost structure.

Matthew Dodson

Right, but -- yes. But beside that efficiency...

Edward Levy

Same cost structure -- sorry.

Matthew Dodson

Yes. But beside that efficiency, you're going to have a better backhaul, right? Because, I mean, you guys bitched about all last year that you didn't have the right commodity mix, and now you're going to have the right commodity mix because you got iron ore and you got the backhaul of salt. So it seems like the per-day margins have to go up pretty substantially from this fiscal year and should hit, if you don't screw up and hit something, I mean, they should hit record margins, right? I mean, I know you haven't done it yet, but I mean, that's what it's pointing to if you can execute. Is that fair?

Edward Levy

I think that this is now down to execution, John. I think management would agree with that. The business is in place. Assuming that the customers take what they've nominated and again we don't control that -- it's not take or pay, as you know, in our business, but assuming that the customers take what they have nominated and we continue to execute, we feel pretty good about where 2014 could end up -- 2014 sailing season, excuse me.

Matthew Dodson

Right, right. But it's fair to say -- is this a fair assessment that this last year, this last sailing season, you did a good job. You didn't have any accidents, et cetera. You brought all that down. You didn't have a favorable mix. And this year, if things play out, your mix should be a lot favorable just because of what's happening in iron ore but especially what's happening in salt and aggregates. Is that fair?

Edward Levy

Yes, I think that's a fair comment. Yes.

Matthew Dodson

Okay. Can I just ask you, you've talked several quarters about refinancing the converts, and there's a lot of people out there that don't think you have the ability to refinance the converts. And I know you said you're in late stages or whatever, but can you give us any more clarity on what that means, what you're trying to achieve? And the other question I would ask is if you'll look at your other debt you have, it's denominated in Canadian dollars. So the Canadian dollar is depreciated pretty significantly, it makes paying off that debt pretty attractive. So can you just help us at all think about what you're trying to achieve here and what you're trying to do with the refinancing holistically?

Edward Levy

Yes, I think where we are heading, John, and we have been very prudent in terms of the refinancing process, we're trying to reduce our cost of capital. We are trying to clean up the accrued preferred dividend, and we appreciate and recognize that there's an opportunity to capture some discount on our Canadian-denominated debt to the extent that we use U.S. dollar-denominated debt. Now we are -- we've got to be a little bit careful because a significant percentage of our earnings are still driven by Canadian -- actually, they're still in Canadian dollars, and so we've got to make sure that we've got the right hedging instruments in place so that we can't get caught if Canadian dollar strengthens over the next several years. And so there's a couple of elements in play. We're trying to make this a value-creating refinancing, and we don't just define value creating as trying to reduce our all-in cost of capital. That's obviously important to us, but there are some other elements that we believe we can add to the refinancing. And as I said in my remarks, we're pleased with the direction the discussions are advancing in at this point. I'd like to leave it there for this -- at this point.

Matthew Dodson

Can you give us any kind of time frame of if you achieve it, when you think you'd have it done? Is it 60 days? Is it 90 days? I mean, we've been waiting for a long time. I think a lot of people don't think you're going to be able to do it, so I'm just curious.

Edward Levy

Yes. It is an active part of what this management team is working on right now. It is -- I'll even go so far as to say we're very active focused on -- focusing on. That's not to say with certainty that will occur, but it is something that we are very actively focused on right now, John.

Matthew Dodson

Okay. And then the other question I would just ask, with the 15 ships, you've reiterated you have at least 250 days of new business. Can you quantify that more for us? I mean, it seems like your -- that it's more than 250. Is it substantially more than 250? And then the other thing I would ask you is do you see -- are you in an overbooked situation? So one thing, when you guys used to run very well, you used to be overbooked, and I guess, as you go into this sailing season with what you've seen so far with the new business wins and with the tonnage that people had given you, are you in an overbooked situation?

Scott Bravener

I'll answer that as best I can, John. We feel that we are in that situation on paper. And that said, business has to materialize. We feel that's well within our comfort range with the 15 vessels right now that we can adequately supply our customers as Ed mentioned. We are in excess of 250 days right now, not materially, but we are also in discussions with -- on a couple of additional opportunities that, if successful, could lead us in the future to reevaluate the McKee Sons.

Operator

[Operator Instructions] We'll go next to Rick D'Auteuil at Columbia Management.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Just to follow up on that last question -- can you guys hear me all right?

Edward Levy

Yes, we can.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

So what is the terms of the lease on the McKee Sons?

Edward Levy

It runs through December 2018, $775,000 of lease expense per year increasing by CPI-U. Then, we've got an incremental $200,000 of wharfage expense and insurance on the vessel.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Right. And then my understanding was that vessel needed CapEx. So if -- as a follow up, I think, on Scott's last answer, you're successful in landing incremental business that requires more capacity. Is that a viable option? Or I don't know what the state of the maintenance has been and what it needs, whether it needs an upgrade or what. Can you bring us up to date? And I understand that would be something you'd likely have to discuss with the vessel owner, too, right?

Scott Bravener

Rick, to answer that question, yes we've done extensive analysis on what we would require for a return on investment, and we believe that if we are successful that the vessel will warrant being brought out. We do know the cost, and we have an agreement with the owner of the barge to share in that cost, and we would only proceed on the basis that it provides a sufficient return on that investment to reactivate the vessel. But we do believe it will at this point, and so therefore, that vessel remains a pretty important part of our future growth.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

But from a timing standpoint, I don't know what the timing is on this incremental new business, if you were able to land it. What -- how long...

Scott Bravener

[indiscernible]

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

I mean, are we looking at a 3-month kind of...

Scott Bravener

From a timing perspective, Rick, we could put it back in action within a quarter.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Okay. All right. That's all on that one. From the -- I understand incentives were put in place as it relates to the incidents and operation of your vessels. Can you talk about what, in fact, was paid out under those incentives to the folks operating the ships?

Edward Levy

The -- we just finished out the season, Rick, the last 10 days or so, and so we have not done the calculation -- the final calculations around what that incentive pool is going to be. And again, to repeat, that's not an incentive pool for the senior management team. That was specifically designed for captains and chiefs. But we don't have the number around that just yet.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Okay. So that -- where would that -- I mean, you just presented numbers to us, and we're in a no-shipping mode right now, so that all hits in Q4 when there's no revenues.

Edward Levy

That's correct. That's correct.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Okay. Would we expect -- Q4 was pretty -- was not very good last year on the loss front and the negative EBITDA. What would we expect this year to be, directionally better, worse or the same?

Edward Levy

The 2 variables that will affect Q4 are the January results. We know we sailed 243 days in January. We have a rough sense to what revenue number is for January. We don't know what the expense number was. It was a -- it was not the most efficient of days in January quite frankly though, Rick, given what weather and ice conditions were on the lakes. So that will have an impact on Q4. And then the other impact on Q4 will be how early we can get our vessels out in March. As Scott mentioned earlier, a significant portion of our fleet is slated to get out in the month of March. The business certainly exists for us to get out in March. Again, this is going to be a question of weather. And so those 2 variables, or those 2 elements, will impact our fourth quarter. I will say, however, that we will benefit in the fourth quarter by the -- from the Canadian exchange rate relative to where it was last year in Q4. Our Canadian-based expenses will be less when we convert to U.S. dollars.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Okay. How does it compare to -- so you said that -- how many days did you sail in January of 2013?

Edward Levy

130.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

And relative efficiency of those days?

Scott Bravener

Rick, in those days, those 130 days last year, you remember we had very little ice cover. This year, we had extreme ice conditions, so the relatively efficiency this year, as Ed touched upon, was not good.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Okay. What's the -- anything changing on the competitive dynamics of the River Class in the Great Lakes?

Scott Bravener

Not at this time, no.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

So no more dry dockings. I mean, no more new builds, no -- what -- same capacity as a year ago in that class.

Scott Bravener

That's correct.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

Okay. And then one other thing, you talk about scheduling and having more business, but one of the frustrating things has been customers being sporadic in their use of your services. So maybe getting up to their commitments of their nominations but not doing it in a manner that allowed you to run efficiently in sort of smoothing out their demand. Have you had conversations with your customers? And what success, if any, have you had along those lines?

Scott Bravener

Again, that's largely a function of the economy in the Midwest, and it has started. As we discussed, we are seeing signs of improvement that -- we had more ratable movement through this fall versus the previous year. And having a better mix within our thing allows us more choices to work around when customers have issues. Our biggest issue from a customer standpoint this year was a closure of a mine that was completely beyond the customer's control. It was...

Edward Levy

Scott's referring to the salt mine where they had the seismic event, Rick. That impacted our trade patterns coming out of Cleveland starting mid-August running, frankly, through the end of the year.

Richard G. D'Auteuil - Columbia Funds Series Trust I - Columbia Small Cap Core Fund

And going back to the capacity issue, is there an option that's being looked at that says instead of bringing the McKee Sons back on, if you get more business to potentially just upgrade the mix of business and unload the poor margin business?

Scott Bravener

We continue to analyze that all the time, Rick, but we believe that the business that we have right now is business that we want to retain. But if we get in a situation where we have -- we've identified, through our analysis, a poorly performing business, we will not hesitate to exit that, yes.

Operator

We'll move next to David Pointer at VI Capital Management.

David Pointer

Most of my questions have been answered, but just to kind of come back on the earlier question about pricing and if I just add a couple percent to the revenue per day, it looks like kind of $31,500 in that range. I mean, would that be -- that's kind of your CPI adjusted -- is that a reasonable kind of modeling number for revenue per day next year?

Scott Bravener

Yes, David, I would think that's a fairly safe assumption.

David Pointer

Okay. And then your operating expenses per day last 12 months were actually lower than '08. How much more -- I mean, is -- that's really driven by -- it's not really taking cost out of the business, right? It's just the efficiency in the usage of the fleet. Is that fair? Or how -- what kind of...

Scott Bravener

The biggest driver is taking the incidents out of the fleet and reducing the cost. We've also added lower fuel cost, et cetera, last year, but the biggest driver is taking the incident cost out and the mechanical...

David Pointer

Okay. So fuel, in your...

Scott Bravener

[indiscernible]

David Pointer

Okay. But contractually, fuel's the pass-through, right, with your customers or no?

Scott Bravener

That's correct.

Edward Levy

We get that if fuel price goes up our expenses go up, but our pass-through revenue also increases, so it's a direct offset.

David Pointer

Okay, I see. And then the way we should think about revenue per day with kind of this -- this kind of more normal mix as we shift back to -- and we have some more salt backhaul, that just increases your percentage of revenue-bearing days, right? That's the main impact on the business and...

Scott Bravener

It creates a drastic reduction in the amount of time you're spending in ballast. Yes, you increase the amount of time you spend in the loaded condition.

Edward Levy

Our costs, David, per hour, are the exact same if we're carrying water or we're carrying revenue commodities. So if we can reduce those hours in carrying water, it has an impact on our vessel profitability. And that's the goal for 2014 sailing season [indiscernible] .

David Pointer

Okay. And then just real quick...

Edward Levy

[indiscernible]

David Pointer

Okay, real quick clarification on McKee Sons, the lease, 2018. Was that what you said?

Edward Levy

Correct.

Operator

And that does conclude today's question-and-answer session. At this time, I'll turn the conference back over to management for any closing remarks.

Laurence S. Levy

Thank you, operator, and we thank all of you for participating on today's call. We look forward to keeping you apprised of Rand's progress during the fourth quarter and hopefully, this upcoming shipping season. Thank you for participating today.

Operator

And that does conclude today's conference. Again, thank you for your participation.

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