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Executives

Michael Bodouroglou - President, Chairman and CEO

Robert Perri - PAO and CFO

Michael Mason - IR, Allen & Caron

Analysts

Brandon Oglenski - Barclays Capital Inc

Fotis Giannakoulis - Morgan Stanley

Box Ships, Inc. (TEU) Q4 2012 Earnings Conference Call February 19, 2013 8:00 AM ET

Operator

Good morning and welcome to the Box Ships Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions) Please note this event is being recorded.

And I’d now like to turn the conference over to Michael Mason of Allen & Caron. Please go ahead.

Michael Mason

Thank you. Good morning and welcome to the Box Ships investor conference call to discuss the financial results for the fourth quarter and full-year ended December 31, 2012. I’m Mike Mason of Allen & Caron Investor Relations.

Before we start the call, there are a couple of items I need to cover. Many of you received a copy of the press release. It was released today, February 19 at 7:00 AM. If you did not receive a copy of the release, it is posted on Box Ships’ website and in the client section of our website. You may call our office in New York at 212-691-8087 and we will email it to you right away. It is also posted on numerous Internet sites.

This call is being broadcast live over the Internet and may be accessed on the Company’s website at www.box-ships.com. A replay of the call will be available through February 27 and may be accessed from North America by calling 877-344-7529 and entering conference number 10025326. International caller should dial 412-317-0088. A replay of the webcast will be available immediately following the call and will continue for seven days.

Certain statements in this conference call may constitute forward-looking statements. Actual results could differ materially from those discussed in the call. Please refer to the complete cautionary statement regarding forward-looking statements in the press release dated February 19, 2013, which can be found on the Company’s website and filed with the SEC. The Company will make a presentation on the earnings results and then open the call to questions.

I’d now like to turn the call over to Mr. Robert Perri, CFO of Box Ships. Good afternoon, Rob.

Robert Perri

Good morning Michael, and thank you. Good morning ladies and gentlemen, and thank you for joining us on today’s conference call.

First we will discuss our fourth quarter and full-year 2012 highlights, followed by a brief update on the Company. Then we will give you an update on the industry as a whole and a picture of the current shipping market followed by a more detailed financial update and we will close with our investment summary.

Please turn to slide number 4. Our fourth quarter 2012 results represent our seventh profitable quarter as a public company. Our adjusted time charter revenues during the fourth quarter of 2012 was $18.4 million for our nine vessels, while our adjusted EBITDA was $11.2 million. We reported adjusted net income of $4.9 million or $0.21 per basic share, which was down slightly from the previous quarter due to higher G&A in vessel operating expenses during the fourth quarter.

For the full-year 2012 we operated an average of eight vessels reported adjusted time charter revenue of $67 million and adjusted EBITDA of $42.1 million. Our adjusted net income for the full-year 2012 was $18.6 million and our basic EPS per share was $0.95 per share, while our diluted EPS was $0.89 per share, which takes us into consideration the dilution effect if we were to convert the outstanding preferred shares to common shares at the start of the quarter.

More importantly we announced today that our Board of Directors approved the quarterly dividend of $0.22 per common share based on our fourth quarter results payable on March 28th to shareholders of record on March 21st, which is in line with our previously stated guidance and fulfils our promise of delivering $1 per share in dividends for 2012. In addition, given the current market conditions we anticipate paying a dividend of $0.12 per share for the first quarter of 2013 subject to the approval of our Board of Directors.

On slide 5, you can see our current operating fleet. The duration of our time charters and their expiration dates. Our fleet consists of nine container ships with an aggregate carrying capacity of 43,925 TEU and an average age of 8.1 years, which compares favorably to the average age of 10.8 years for the entire container ship industry according to Clarkson Research.

We have strategically decided to stagger the charters so they roll off at different points in time. This way, we balance the need to generate stable cash flows and to assure the sustainability of our dividend while maintaining exposure to the container ship charter market. The average remaining term of our charters is 22 months and all of our charters are well-known container liner companies that have been in business for many decades.

We have recently secured employment for the Box Voyager on a 6 to 14 month charter at a rate of $6,850 per day to CMC, which is a member of the CMA CGM Group of Companies, with the earliest redelivery in July 2013. The market for these vessels remains weak and under this market environment we plan to continue to charter then for shorter term periods when the two vessels come off charter later this year, maybe for no more than a few months and wait for the market to recover before fixing them for longer periods. Even with these two vessels trade in shorter term, we have 85% charter coverage for 2013.

On slide 6, we would like to point out what we consider our moderate levels of leverage. Currently, our total debt is $212 million after repaying $4 million since the end of the fourth quarter of 2012, while our current cash position is $16 million, which means our corresponding net debt is $196 million, representing a moderate 47% net debt to total capitalization.

We also continued to be actively fixing our interest rate risk now that swap rates remain low. Currently, we have fixed approximately 36.3% of our debt, at an average swap rate of 0.85% for an average duration of four years. We will continue to look at the market conditions and fix our interest rate exposure opportunistically.

We pay regularly quarter installments of $5.7 million on a straight line basis and we fund this from our cash flow from operations. We consider the level of our leverage to be moderate because it allows us to pay considerable dividends from our cash flows after the scheduled debt repayments. This is a crucial aspect of our conservative and sustainable business model which essentially creates equity value through the pay-down of debt over time, while shareholders receive attractive dividends.

Now, I wish to give you brief update on the fundamentals of the containership market. On slide 7, the first graph depicts the Shanghai Containerized Freight Index, which is an indication on cost to ship a container and the top right graph depicts the one-year time charter rate for 3,500 TEU vessels. In 2012 the container ship markets are higher average freight rates than in 2011, but substantially lower charter rates.

During the fourth quarter of 2012, you can see that the actual freight rates charged for transporting containers rebounded and for 2012 as a whole freight rates were up 24% year-over-year compared to freight rates earned by liner operators in 2011. This increase was obtained through idling more tonnage as shown in the bottom right chart and creating higher demand through lower fleet productivity or slow steaming, which has helped the liner operators return to profitability.

Overall, container ship demand was only at 1.3% in 2012 according to Howe Robinson and this was the second worst growth in the past 25 years. The biggest drag to growth was Europe, where our container traffic declined by mid single-digits and the U.S. grew only marginally in 2012. This weakness was partially offset by strong growth in intra-Asia, Africa, India, and the Middle Eastern trade routes.

Mid sized vessels continue to be affected by the cascading effects as many have been cascaded out of the main routes and look for new homes on some of the minor trade routes. In addition, the weakness in the charter market has pressured vessel values further and we expect values will remain depressed as long as the uncertainty remains in the global economy and lending remains tight. Given all these, we believe it may take until the spring for the charter market to rebound from its historically low levels.

On slide 8, let’s discuss supply. In 2012, the container ship fleet grew at 5.5% after over 20% of the orderbook was delayed and over 3,28,000 TEUs were scrapped according to Howe Robinson Research. While this is the slowest fleet growth since 2009, it was offset by the weak demand for containerships after factoring in the ton-mile effect, which grew by only 1.3% as mentioned previously.

Going forward, the left-hand graph on this slide presents the current expected deliveries based on our outstanding orderbook of the containership sector. Today, 21% of the fleet is on order, a level not seen since early 2003, and which is down from 27% at the start of 2012. And this lack of ordering will help the market rebound once we get through the expected deliveries in 2013.

In today’s environment, banks continues to tighten their lending requirements particularly prospected new buildings and if you’re able to borrow, then you will get a lower advance rate and pay higher margins and fees, which is forcing owners to be more prudent in their decisions. This pause in ordering will help the industry from repeating past mistakes and should help the industry in the long run.

Even so, with the current orderbook, the continued delays and delivery in tonnage and expectations for scrapping, the projections call for net fleet growth of approximately 7% in 2013, which we consider in line given the historical growth rates in the container ship industry.

On the demand side, the containership trade continues to be the driver driven by global GDP growth and underlying consumer demand, which has slowed particularly in Europe, but the INS still predicting global GDP growth to increase by 3.5% in 2013 and by 4.1% in 2014. And containership demand has historically grown by 2 to 2.7 times global GDP growth, which translates to expected containership demand growth of between 6% to 9% annually. However, that remains the downside risk, particularly around growth in the U.S. and Europe.

Please turn to slide number 9. Our fourth quarter 2012 results represent our seventh profitable quarter as a public company and you can see revenues increased by 13.5% as our fleet grew from seven vessels in the fourth quarter of 2011 to nine vessels in the fourth quarter of 2012. Our adjusted average time charter equivalent rate in the fourth quarter of 2012 declined to $22,933 per day from $25,273 per day in the fourth quarter of 2011 due to the decline in re-chartering rates of the Box Trader and Box Voyager.

Our adjusted EBITDA for the fourth quarter of 2011 was down slightly to $11.2 million from the year-ago period, while our adjusted net income of $4.9 million and our adjusted basic EPS of $0.21 per share were also down period-over-period. For the full-year 2012, our average number of vessels was eight, up 35% compared to an average of 5.9 vessels in 2011, which help boost our revenues to $71 million in 2012, while our adjusted EBITDA for 2012 was $42 million and our adjusted net income was $18.6 million or $0.95 per basic share, and $0.89 per diluted share – sorry, $0.95 per basis share and $0.89 per diluted share.

In addition, it is important to note that our amortization of intangibles, which is primarily related to the above below market time charters was $1.6 million in the fourth quarter and $4.2 million for the full-year 2012. While our share based compensation expense was $0.4 million in the fourth quarter and $1.2 million for the full-year 2012. When we adjusted EBITDA net income, we back up these expenses to their non-cash nature.

On slide 10, let me show you our performance for the full-year of 2012. Time charter revenues, net of commissions and voyage expenses and adjusted for non-cash items were $67 million, while our adjusted time charter equivalent rate was $24,512 per day. Our cash vessel operating expenses were $15.8 million or $5,372 per day, while our total vessel operating expenses or TVOE was $22.8 million or $7,782 per day, which excludes non-cash item.

Our EBITDA for the year was $42.1 million or $16,010 per day for an EBITDA margin of 65%. Our total debt service for the year was $28.4 million, which brings our free cash flow for the year to $13.7 million or $6,315 per day. And based on this, we’re comfortable paying a dividend for the fourth quarter of $0.22 per share and living up to our promise of paying a dividend of $1 per share for 2012.

On slide 11, in conclusion, ladies and gentlemen, we continue to execute on our clear, simple business and financial strategy in a sector that is a proxy for global economic growth. Since our IPO, we’ve been actively acquiring tonnage during a period of depressed asset prices and we’re positioned in the mid-sized container ship segment of the market, which we believe has strong fundamentals and prospects going forward.

We have a portfolio of fixed rate charters of 22 months supported by a solid and diversified group of charters with staggered maturities. In addition, we’ve a high-quality fleet with an average age of 8.1 years and strong operating performance. The bottom line is that our model provides enough cash flow to pay down debt while maintaining its compelling dividend yield.

With that, we would like to open the call up to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) And our first question will come from Brandon Oglenski of Barclays. Please go ahead.

Brandon Oglenski - Barclays Capital Inc

Hey good morning or good afternoon, Rob. How are you?

Robert Perri

How are you Brandon? I’m also joined by Mr. Michael Bodouroglou, our Chairman and CEO.

Brandon Oglenski - Barclays Capital Inc

Good morning, gentlemen. I want to start up because obviously the dividends going to catch the headlines here. We can understand, being pretty conservative with the outlook for ’13 with a couple of vessels are on some pretty short-term rates, but what is it kind of take to get this long-term story all a bit more back on track and thinking about how we can expand the fleet in the future?

Michael Bodouroglou

Did you – what’s your – can you repeat – I mean, your question was about the market or …?

Brandon Oglenski - Barclays Capital Inc

Well, just more or less, I understand being conservative with the cash position this year, but what its going to take to become a little bit more aggressive again and being able to expand the fleet? Are we just waiting for the turn in the market or are there some other things you can do beyond the macro conditions?

Michael Bodouroglou

Right. Okay regarding the growth of the fleet as you know most of our free cash is distinguished by way of dividends to our shareholders. So growth will actually have – will actually require the Company increasing – raising additional equity. And we will do that as we’ve done in the past. For as long as we see a creative deal is ahead of us, and I think a lot will depend frankly on how that might develops. At some point these downturn will finish, we have an encouraging news regarding the supply. Basically the good news is that people are not ordered. I think slow steaming is at stay and it’s a question of demand catching up and for as long as the U.S. continues doing – creating some positive news about its – the process of the economy for as long as the Euro zone situation stabilizes we should see a further increase in demand, and this will hopefully be accompanied by stronger aids and therefore our EBITDA will be better.

Brandon Oglenski - Barclays Capital Inc

Have you been hearing from the liner companies, I mean, is there enthusiasm on the way that some of these initiatives like slow steaming and from the capacity that we’ve seen idled are starting to play out positively in the market or is it just going to take more time from here?

Michael Bodouroglou

Well, you hear conflicting news, there is not a lot of enthusiasm right now. There is, I would say caution accompanied with some cautious optimism. I would say, slow steaming is going to take – for slow steaming to – for speeds to proceeds to go faster, range will have to move significantly higher and frankly with the bunker prices being where they’re, I don’t think that ships will be going in faster for a long period ahead of us. I think slow steaming – I believe the slow steaming is here to stay.

Brandon Oglenski - Barclays Capital Inc

Okay. And Rob, on the balance sheet the Paragon facility which I think is coming due in April, what flexibility do you have around the repayment schedule?

Robert Perri

Well, it's something obviously we’re looking at. We have a fairly close relationship with Paragon, so we’ve been in some discussions with them. We’re also looking at many different options on how we can do that, but so far there’s really nothing to report. It is something we’re keeping in mind and looking at. But we do have several options we can use to figure out how to repay that facility or extend it [will be].

Brandon Oglenski - Barclays Capital Inc

Okay. And could you just comment on debt markets and also even the liner companies, just the types of opportunities that are out there, if the capital is available, are the sale leaseback transaction still the way that folks are looking to go here?

Michael Bodouroglou

Yes. Yeah, right now asset value seems to be under pressure. We haven’t seen a lot of transactions taking place. In fact, we’ve seen very, very few. And my reading of this is that, we don’t see transactions taking place because sellers are not willing to face the current market. There is a big gap between the buyer’s expectations and seller’s willingness to sell, and that’s why we don’t see any transactions so far. So, we have to wait and see how this plays.

Brandon Oglenski - Barclays Capital Inc

Okay, thank you gentlemen.

Michael Bodouroglou

Thank you.

Operator

And our next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis - Morgan Stanley

Yes, good morning and thank you. I want to ask about the market as well, and I heard that earlier Rob mentioning that he expects April (indiscernible) to be better for charter rates, and I assume that this comes mainly from a better demand. What are the early signals that you see in the market, and what do we need to expect to see before rates they move higher.

Michael Bodouroglou

Good morning, Fotis. Well, in the recent months and more particularly in recent weeks we’ve seen rates going up, but on larger vessels on post-Panamax and larger, and really what we are waiting to see is – but of course this has to be – remains to be very high. We have to see these strengthening rates creeping down to the smallest sizes, which we haven’t seen, I mean, rates for the smaller size have been very, very weak over the last year, year and a half, whereas larger sizes have been better. But recently we’ve seen a meaningful strengthening in our charter rates for larger vessels. And I think Rob mentioned spring, because historically this is the period during which the container market strengthens, spring and over the summer period.

Fotis Giannakoulis - Morgan Stanley

And may I ask regarding the sale and purchase market, all these years there has been a lot of discussion about the German KG market and the stress that the German banks have because of expensive – expensively acquired container ships. But so far we haven’t seen any significant activity in selling assets or distressed transactions. Do you see this situation changing recently, and do you expect that we will see more – higher sales in the months to come?

Michael Bodouroglou

Well that’s a very interesting question. For this, I must admit that personally I’ve been hearing about the possibility of distressed sales coming out of the German KG market. For instance, for a long time since two or three years ago I start – people were expecting that the distressed sales will have to take place at some point. But so far nothing has happened; I haven’t seen any distressed sales. Of course, everybody knows that there are problems in the banks portfolio regarding a lot of container ships in particular in Germany. However, it appears the banks are not able or are not willing to take – in order to face the market, because these would inevitably be associated with big losses, which I understand they’re not willing or they’re not able to take. Now whether that changes I think it's anybody guess. I think I’d be very surprised if we see distressed sales actually – especially now that sentiment has started to slowly change to the more positive. I think people will wait, the banks will wait.

Fotis Giannakoulis - Morgan Stanley

And can you explain to us, we’ve seen certain segments of the market especially the smaller type of vessels, the idle capacity in some cases is more than 10%. These vessels, are they idle and many of them I assume that they’ve a lot of debt and sometimes more debt than asset value. How are they supported by the banks? What is the mechanism and who pays the daily expenses of this vessels?

Michael Bodouroglou

Well, I think there are really many different cases. I don’t think that all cases fall in the same category. However, when you say it’s very accurate in the sense that we see a lot of scrapping on our ships. We have seen scrapping of ships built in the late 90s, 10, 12 year old vessels that are going to the scrap yard and I think some people take losses of our sales, but – those in this cases, but I suppose because they’ve the smaller ships, the asset values are not so high and the losses that banks or owners are taking – are not so significant and that’s why I think we see a lot of – we’ve seen a lot of scrapping of the smaller sizes and we haven’t seen so much scrapping of the bigger sizes.

Fotis Giannakoulis - Morgan Stanley

Thank you and one last question more of a modeling question. I saw that your G&A expenses were a little elevated compared to the previous quarter, is it just year-end expenses or how shall we think of your G&A expenses going forward?

Robert Perri

Hey Fotis, this is Rob. Yeah, I know it was – the bump in G&A this quarter was primarily due to year-end expenses and things like that. They should be backed down to a more normalized level around say what the third quarter was going forward.

Fotis Giannakoulis - Morgan Stanley

Thank you very much.

Robert Perri

Historically, it will typically be above. Yeah. No problem.

Fotis Giannakoulis - Morgan Stanley

Thank you very much, Rob. Thank you, Michael.

Michael Bodouroglou

Thank you, Fotis.

Operator

(Operator Instructions) Having no further questions, this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Perri for any closing remarks.

Robert Perri

Okay. Thanks everyone for joining the call. We look forward to speaking to you next quarter. Have a good day.

Operator

The conference in now concluded. Thank you for attending today’s presentation. You may now disconnect.

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