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Seaspan Corporation (NYSE:SSW)

Q4 2012 Results Earnings Call

March 6, 2013 8:00 p.m. ET

Executives

Sai Chu – CFO

Gerry Wang – Co-Chairman and CEO

Analysts

Urs Dur - Clarkson Capital Markets

Gregory Lewis - Credit Suisse

Ken Hoexter - Merrill Lynch

[unintelligible] - Deutsche Bank

Operator

Welcome to the to the Seaspan Corporation call to discuss the financial results for the quarter and year ended December 31, 2012. Hosting the call today is Gerry Wang, Chief Executive Officer, Co-Chairman, and Co-Founder of Seaspan Corporation, and Sai Chu, Chief Financial Officer of Seaspan Corporation.

Mr. Wang and Mr. Chu will be making some introductory comments and then we’ll open the call for questions. I will now turn the call over to Sai Chu.

Sai Chu

Thanks, operator. Good morning, everyone, and thank you for joining us today. Before we begin, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the fourth quarter 2012 earnings release and earnings webcast presentation slides available on our website at www.seaspancorp.com, as well as our annual report on Form 20-F for the year ended December 31, 2011 filed with the SEC.

I would also like to remind you that during this call, we will discuss certain non-GAAP financial measures including adjusted EBITDA, cash available for distribution to common shareholders, normalized net earnings, normalized earnings per share, and normalized converted earnings per share.

In regards to such financial measures and for reconciliation of such measures to the most widely comparable U.S. GAAP measures, please refer to our earnings release. I will now pass the call over to Gerry, who will discuss our fourth quarter highlights as well as some more recent developments.

Gerry Wang

Thank, Sai. Good morning from Hong Kong. Please turn to slide three of the webcast presentation. Against a backdrop of all the uncertainties in the global economy, and our shipping industry, simply speaking, our business continued to perform as expected during the year of 2012.

Our revenue and normalized earnings grew to record levels as we took delivery of the final four of the [unintelligible] [TEU] new vessels to command 12-year time charters with cost comp. We diversified our capital structure and enhanced our financial flexibility.

We returned capital to shareholders, distributing $1 per share in common dividends and repurchasing over $170 million of our common shares. And, more importantly, we are taking advantage of growth opportunities, further increasing our contractual revenue streams and cash flows and enhancing our high-quality customer base.

Turning to fourth quarter results, I would like to highlight three points. First, we now have 69 vessels in service. Our operating fleet achieved vessel utilization rates of 98.5% and 99.0%, respectively for the fourth quarter and the full year 2012 without any material off hire incidents. Specifically, our revenue and cash available for distribution grew by 8.8% and 8.2% respectively for the quarter, compared to the same period in 2011.

Second, we remain committed to growing our common share dividend in a sustainable manner that balances our financial strength and our ability to expand our fleet. I am now pleased to announce that we will increase our first quarter 2013 quarterly common share dividend by 25% to $0.3125 per share, representing an expected annual dividend of $1.25 per share for the four quarters ending December 31, 2013.

Third, we completed the public offering of our series B preferred shares for proceeds of approximately $75 million. This equity offering represents another innovative transaction for Seaspan, further strengthening our balance sheet and positioning the company to capitalize on the attractive acquisition opportunities for growth.

We are pleased to have commenced 2013 with the announcement of two important transactions that will grow our total managed fleet to 89 vessels. The two deals validate the benefits of our innovative SAVER design and the need for fuel efficient vessels while demonstrating the importance of Seaspan’s operational and technical strength as a material success factor in the competitive bidding for the project.

First, we signed a contract with Hyundai Heavy Industries for the construction of five 14000 TEU newbuilding container ships for 2015 delivery. At the same time, we entered into 10-year fixed rate time charters with Yang Ming Lines of Taiwan at market rates.

Subsequently we signed a contract with [Jiangsu] [unintelligible] Shipyard of [unintelligible] for the construction of four 10000 TEU class newbuild containerships for 2014 delivery and entered into eight-year fixed rate time charters with MOL of Japan at market rates.

In connection with this new order for the MOL transaction, we also agreed to purchase four 10-year old 2003-built 4600 TEU container ships, which are scheduled for delivery over the next 12 months and the two-year-plus charters option for one more year at fixed rate time charters with MOL at above the market charter rates.

We are very pleased with this deal, which is economically viable on a standalone basis and it becomes even more attractive when combined with the newbuilding. The 10000 TEU vessels offer tremendous upside potential and far outweigh any potential downside on the 4600 TEU vessels.

I must emphasize the significance of these two transactions by highlighting the fact that these two vessel classes will represent [unintelligible] for Yang Ming and the second largest ship class for MOL, two of the best [unintelligible] in the industry.

Worth mentioning here, we have been successfully operating COSCO’s flagships being our [10000] TEU vessels. Given the charter [credit worthiness], combined with Seaspan’s strong balance sheet, we anticipate smooth financing arrangements with certain banks, primarily Asia-based. Under our right of first refusal with GCI, Seaspan will retain the ownership of three of the five 14000 TEUs and two of the four 10000 TEU newbuild and two of the four 4600 TEU two or three build vessels. GCI will acquire the remaining vessels, which will be included in Seaspan’s management fleet.

I would now like to turn the call over to Sai and discuss our quarterly financial results. Sai, please?

Sai Chu

Thanks, Gerry. Please turn to slide four for a summary of our results for the quarter and the year compared to the results for the comparable period of 2011. We began 2012 with 65 vessels in operation and accepted delivery of four 13100 TEU vessels during the year, bringing our operating fleet to a total of 69 ships at year-end, with an average age of approximately five years and an average remaining lease period of approximately seven years.

Revenue increased by 8.8% in the fourth quarter, compared to the fourth quarter of 2011, due to the increased number of operating days and higher time charter rates attributed to the delivery of our larger newbuild vessels in the first half of the year.

Vessel utilization was 99% for the year, compared to 99.3% last year, with the decrease reflecting a 142 day increase in unscheduled off-hire. The unscheduled off-hire includes 118 days of the Seaspan Dalian, Seaspan Felixstowe, and Seaspan Ningbo in between charters.

While the Seaspan Dalian and Seaspan Felixstowe were off charter, we took the opportunity to complete the dry docking. As discussed last quarter, there were also 22 days of unscheduled off-hire related to mechanical issues experienced onboard the COSCO Indonesia. During the year, we completed six dry dockings, which resulted in 80 days unscheduled off-hire.

The ship opex, overall, the expenses increased by a lower percentage than our revenue increase in 2012. This is consistent with the operating efficiencies achieved by our larger newbuild vessels, which have lower operating cost per TEU.

As a result of the acquisition of our Manager, Seaspan Management Services Limited, in January 2012, and as discussed on prior earnings calls, we now expect ship operating expenses to be more variable on a quarter to quarter basis as they are now based on the direct operating costs of the vessels as opposed to the fixed technical services fees that were in place pre-acquisition.

In addition, the Manager’s general and administrative expenses that previously would have been included in the technical services fee and reported as ship operating expenses are now presented as general and administrative expenses. For a more meaningful comparison to the 2011 figures, it would be appropriate to add back these reclassified amounts to ship operating expenses.

On an adjusted basis, ship operating expenses for the quarter and the year ended increased by 10.8% and 10.1% respectively, compared to the same periods in 2011. Of these increases, 4.2% and 5.8% respectively were due to an increase in ownership days.

The remaining increase was due primarily to an increase in ship operating expenses related to the addition of the four 13100 TEU vessels during 2012. These larger TEU vessels are more expensive to operate. Therefore the increased costs of lubes, insurance, and other operating costs associated with these vessels contributed to a higher ship operating expense per day.

On a per ownership day basis, average ship operating expenses were approximately $6,400 per day for 2012, compared to $6,100 per day in 2011, representing a 4% year over year increase, an improvement and less than the 10% we projected prior to the acquisition of the Manager. Accordingly, these savings have been realized by our shareholders.

For general and administrative expenses for the quarter and year ended, they increased by $1.3 million and $7.8 million respectively. The increases were due mainly to the reclassification of general and administrative expenses that would have been included in ship operating expense prior to our acquisition of the Manager.

Stock compensation expense and integration costs increased in 2012 compared to 2011, but were partially offset by a decrease in professional fees for the year compared to fees incurred last year, again primarily related to the acquisition of the Manager.

In December, we entered into an amended and refitted CEO employee contract. The primary change is the extension of Gerry’s employment terms until March 31, 2015 and the granting of noncash stock appreciation rights, or SARs, providing for further alignment of interests with our shareholders of long term [unintelligible] and sustainable common share prices.

These SARs vest and become exercisable in three tranches of approximately 1.9 million units when and if the fair market value of the common shares equals or exceeds certain base prices for each tranche, being $21.50, $24, and $26.50 respectively for any 20 consecutive trading days on or before the expiration of each tranche, which would be December 7, 2015, 2016, and 2017, respectively.

Operating lease expense. In June 2012, we sold the Madinah to a U.S. bank and we are leasing the vessel from the bank for approximately nine years. Prior to June 2012, Seaspan owned the vessel and financed it with a term loan of $53 million, which we repaid using the proceeds from the sale to the U.S. bank. As discussed last quarter, we have been reflecting the lease back of this vessel as an operating lease expense on our income statement since Q3.

For the quarter and the year, we incurred operating lease expenses of $1.1 million and $3.1 million, respectively. Compared to the prior period, we would have incurred interest expense on the $53 million loan and depreciation expense on the vessel.

Adjusted EBITDA and cash available for distribution to our common shareholders for the quarter and the year ended, each increased by approximately 8% and 21% due to the increased operating days and the higher contribution of our larger newbuild vessels. Our normalized converted EPS for Q4 2012 was $0.27 compared to $0.31 in Q4 of last year.

Positive EBITDA and cash flow contribution of our large and newbuild vessels was offset at the normalized earnings level by higher interest expense associated with an increase on our operating debt and other financing adjustments and the slightly lower utilization and lower charter revenues on our four 4250 vessels that were deployed in the short term market, offset by savings from a lower share count from the tender offer.

In terms of our dividend policy, as Gerry mentioned our board declared a $0.25 per share quarterly dividend for Q4, which was paid on February 27 and has determined to declare a first quarter 2013 common dividend of $0.3125 per share, which will represent the fourth increase to our quarterly dividend of Q1 of 2010. We feel that this is a sustainable dividend level that balances return to shareholders while maintaining financial flexibility to allow us to opportunistically invest to take advantage of the current newbuild ordering environment.

Our board also declared and paid quarterly dividends for the quarter ended June 30 on our 9.5% Series B preferred shares and 7.95% Series E shares.

Please turn to slide five for balance sheet information as of year-end. As Gerry mentioned, we view our strong balance sheet and financial flexibility as a key competitive advantage in the current market environment. As of year-end, we had cash and cash equivalents of $430 million.

Our increasing operating cash flows combined with our strong liquidity and access to capital markets continued to serve as a core differentiator for Seaspan, positioning us to effectively redeploy our cash flow for the benefit of our shareholders.

Specifically, we believe these strengths provide us with the continuing ability over the long term to support increasing common share dividends, opportunistically repurchasing additional shares, paying down and refinancing debt and pursuing growth in a balanced and controlled manner.

In December, we raised net proceeds of approximately $75 million through the issuance of just over 3 million Series B perpetual preferred shares with a dividend rate of 7.95%. This was another ground breaking transaction for us, representing our first true professional preferred security issued in the industry.

We repurchased just over 31,000 shares under our open market share repurchase plan in the fourth quarter at an average of $14.93 per share. An initial $47.8 million is authorized under the plan.

On January 28, we entered into a term loan facility with a leading Chinese bank for up to $340 million that may be used toward the refinancing of existing vessels. The facility bears interest at LIBOR plus a margin. As we have done in the past, we intend to be opportunistic in our approach to accessing new capital markets as we seek to diversify our capital structure, develop capacity for growth, and focus on refinancing needs in advance.

We are fortunate to have access to multiple sources of financing and note that there is a very strong competition to fund our announced new deals. We appreciate the continued support of our existing bank group and welcome new banks to participate in our new deals as we consider both refinancing and the new vessel transactions that have been announced and are also in the pipeline.

In terms of forward guidance, please turn to slide six for our latest forward guidance on our vessel deliveries, dry docking, capex, and expected converted share count, which is relevant for the accurate calculation of our normalized converted diluted EPS.

For 2013, we will benefit from a full year of revenue on the four 13100 TEUs delivered last year. We will take delivery of two 4600 TEU second hand vessels on time chartered MOL, commencing mid this year. We will also begin to receive vessel management fees from the other two 4600 TEU vessels owned by GCI. Partially offsetting these increases, the revenue will be a recharter of up to six 4250s at the current short term market rates throughout 2013.

For ship operating expenses, we are budgeting an approximately 5% increase from those daily [unintelligible] per day this year.

In relation to the SARs discussed earlier, we expect to recognize additional noncash compensation expense for accounting purposes through the G&A line of approximately $8 million to be recognized evenly through the quarter. Each of these items remains subject to adjustment.

I would now like to turn the call back over to Gerry.

Gerry Wang

Thanks, Sai. Please turn to slide seven, where I will briefly discuss the industry’s current fundamentals. On the supply side, our customers’ [unintelligible] continue to manage supply through widespread slow steaming and incremental idling of less efficient vessels. The order book remains at a manageable level of about 21% for effective loading capacity or about 7% per annum on average. This will be further reduced by demolitions, potential order cancellations, and conversions.

On the demand side, 2012 growth was weaker than expected at 4.5%, primarily due to lower levels than anticipated on the Asia-Europe trade lane. However, expectations are for the container trade to grow by around 7% into 2013. Thus, we continue to expect cargo volume and the ship supply growth to be fairly balanced over the next three years.

The rate environment for container freight and short term vessel charters, particularly for the smaller vessel classes, remains weaker during the fourth quarter. Our customers had another challenging year in 2012, and they remain disciplined and focused while returning to profitability. They are placing a high priority of fleet modernization to address the need for larger, modern, fuel-efficient vessels that will drive economies of scale and significantly lower their operating costs. This underscores the opportunity that exists for owners with strong balance sheets and access to capital, like Seaspan.

Slide eight depicts the staggered maturity profile of our charter portfolio and how we have protected our contractual revenues generally remaining from the current charter market softness. The average remaining charter length of our fleet is seven years. We have limited near term recharter exposure with six [unintelligible] 4250 TEU vessels fully chartered in 2013 and 2014.

Now please turn to slide nine, where I will reiterate our vision for the future. We believe Seaspan is well-positioned to continue to both enhance its leadership position and create shareholder value over the long term. We will continue to purse fleet growth with a controlled and balanced approach, being patient and disciplined and using our financial strength and technical operational leadership position to pursue opportunities that meet our strict criteria.

Our core focus will remain on designing, owning, and chartering large, modern, fuel-efficient container ships to credit-worthy customers. As a ship leasing franchise, it is critical to consistently maintain a strong balance sheet. Diversifying our capital structure and enhancing our financial strength, including maintaining conservative leverage, has been a core differentiator for Seaspan, and will remain one of our top priorities.

We have a history of returning capital to shareholders and remain committed to sustainably increasing our common share dividends over the long term as we continue to opportunistically grow our business.

We would now like to open the call for questions. Operator, please begin.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question is from Urs Dur of Clarkson Capital Markets. Your line is open.

Urs Dur - Clarkson Capital Markets

I was wondering if Sai could tell us a little bit more about the new Chinese facility and can you identify which vessels this refinances, what the terms are, if anything? You may not be able to say anything, but I think that’s of interest for everyone, because for many other shipping companies, it doesn’t seem available to them. And if you can’t speak to the terms, maybe you can talk about why it’s available to you and not available to them.

Sai Chu

That’s a great question. Again, we’re very fortunate that we have access to pools of capital that other owners simply don’t have. This financing is related to one of our Chinese liner customers, and they are terms that are very favorable for the company. They are beyond the normal terms of the market, which are 3-5 year tenures. So this is well in excess of that. The pricing is quite reasonable, and on the LTV basis, on the charter free valuation, it is certainly above market as well. So it goes to, again, the heart of our decision making and having the strong credit quality of the Chinese charters. So again, it’s a unique financing that Seaspan has been able to obtain, and also we have [unintelligible] capacity in the market for some of our new deals as well.

Urs Dur - Clarkson Capital Markets

As to the dividend, it seems a little bit higher than what the Street had expected, so that, I guess, is good. You guys remain very confident about its sustainability going forward. Should we expect this to be more of an annual event? Or is this going to be reviewed pretty aggressively each quarter given the performance of the container market? Looks like demand should exceed supply [unintelligible] and 2016.

Sai Chu

I think the board prefers to have an annual decision on the dividends. Having said that, at a certain point they will look at opportunities to return capital as they did with the tender offer last year. So the preference is really to do it on an annual basis, but if events are such that the board considers looking at the dividend policy on a [unintelligible], they would.

Urs Dur - Clarkson Capital Markets

One last question, and it’s really stuff you touched upon in your presentation, but you’ve ordered a bunch of ships of late, with GCI, and you’ve bought some ships as well, some second hand tonnage that’s, I believe, 9 or 10 years old. How much growth do you expect to see this year? How many projects are you looking at? Are they of similar size? What’s the frequency look like for you?

Gerry Wang

I’ll tell you one thing, we have never been as excited as we are today about the opportunities, dealing with all the new growth opportunities and also the financing transactions that we’re doing. A couple of reasons.

Number one, the tremendous demand for fuel-efficient vessels as the process of modernization has deeply taken place within the line managers. They realize, because they take advantage of the opportunities they have now with cheap prices and cheap planting costs and good designs, to reduce their unit cost in order to remain competitive.

Another reason is, as you know very well, the last two or three years, line managers have not made much money, which creates the opportunity for us with a strong balance sheet to fulfill the void they have in the capital space. So that’s why to have a stock based compensation and cash in hand will really help us.

We’re just working on several projects at the same time, and I would anticipate some new deals to happen this year. I think Seaspan is the leader in this space. We’ll continue to do very well in terms of working with the leading operators, the top notch operators, in their modernization process.

Urs Dur - Clarkson Capital Markets

And then finally, can you remind us, your consistent in the past has been always have a long term contract, and then of late as well, always have financing in place at the announcement of an order. So everything’s fully funded under contract at this point on the new stuff. Your strategy, you don’t intend to change that any time soon, and you’re not going speculative any time soon, is that correct?

Gerry Wang

100% correct, and for Seaspan, we have not deviated from our funding principles. When we look at a project, we look at the credit worthiness of the counterparty and we look at the type of vessels we’ve built, and then we look at the profitability of the project. You know, we’re in the business of doing business. And then we look at the bankability, the finance-ability of the project. And if it meets all those requirements, we do it. If not, then we just stay patient.

And I think we have cash in hand, we have a tremendous reputation on the technical operational side, and we’re just staying poised. Right now the opportunities are plenty, to be honest, and we just want to pick the ones that suit our purposes and meet the criteria.

Financing, at this point, is not a concern to us. As Sai mentioned, we have a little bit of healthy competition right now for some of the projects that were just completed on the financing side, and we are pleased with the participation from our existing banks and the new banks, coming to Seaspan’s relationships. And all those banks are primarily Asia-based, and they look at the counterparties and Seaspan’s name very favorably.

So we’re very fortunate. We have the excess capital with the equity or debt, and that gives us the tremendous support to pursue new growth opportunities.

Operator

Our next question comes from Gregory Lewis of Credit Suisse. Your line is open.

Gregory Lewis - Credit Suisse

Clearly it seems like it sounds like it’s a really exciting time for you guys, just given some of these opportunities. So I guess what I’m curious about is you’ve been in this market now for over a decade, ordering vessels, ordering newbuilds, getting charters on long term charters. Clearly there’s been probably lots more competition over the years, maybe, than you’re seeing today. Has that been able to translate into better initial returns on your investment? And if so, how are spreads trending for these newbuild opportunities that are coming across your desk?

Gerry Wang

Definitely the deals are getting better, because of less competition, also because you can take advantage of the strength we have when we deal with the shipyard. I think you have the payment terms we want to get the [unintelligible] we want. So in total package, we’re very happy with the deal.

This isn’t a leasing company. We have to grow when the market is low, so that we can have assets that have the upside potential. We have to deal with our legacy issue, even though our fleet is only four years old, but going forward, you must be able to take advantage of low cycles to become healthy over the long term.

That’s what we do, and we’re fortunate to be in the position to have more opportunities, healthy ones, good ones, in our hands to deal with. And we’re very, very excited about the time we are in. And personally, as I said, I have never been as excited as this place, and it is a great, great time to do business.

Gregory Lewis - Credit Suisse

So in thinking about that, since it’s clearly a good time to be ordering vessels, because vessels are, I guess one could call it, I don’t know if they’re at depressed levels, but at lower levels from where they were during the peak. Does it make sense to charter vessels on newbuilds on shorter term contracts in anticipation of an eventual rebound when the cycle turns or is in a better market five to seven years down the road and then be able to generate an outsized return on that investments as asset prices recover? Is that something that you’ve thought about, or not really?

Gerry Wang

Obviously we’ve thought about it. If you look at our [MOL], it is eight years. And it’s not a material deviation. It’s a little bit. When you have cheap assets with upside potential, probably you don’t want to go too long, 12 years, 13 years, that kind of thing. So that’s precisely what we’ve done.

Gregory Lewis - Credit Suisse

You have a couple of vessels rolling off this year. You mentioned in the press release that some are already fixed. How should we think about those vessels and modeling those in the first quarter?

Gerry Wang

We would choose [not to go along] to be honest. We were offered for one year or longer term at $11,000 to $12,000 per day. We decided to turn it down because we wanted to focus on short term to [dance] with the market. The market is always cyclical and we have the financial strength to afford us to sit and wait and to be opportunistic. There’s no point for us to lock in long term when we don’t need to. And I know the market will move up and down. That’s [unintelligible]. And we’ll just flow with the market, and we’re confident the 4000 TEU vessels will be doing better. And as a matter of fact, a couple of vessels out of the fleet of 89 vessels represents almost nothing. It doesn’t really concern us that much. At the same time, why commit to a long term charter when the market is at the bottom?

Operator

Our next question is from Ken Hoexter of Merrill Lynch. Your line is open.

Ken Hoexter - Merrill Lynch

Can you just walk through the discussions on some of these new vessels? Was it pricing? Was it the opportunity for them to get the lower-cost vessels? Kind of just talk to us about how the discussions and the results came about.

Gerry Wang

Basically, we look at new projects from the angle of three things. One is those vessels are historically the cheapest. You look at the per-TEU cost for newbuild. It’s historically the lowest. And the vessels are better, with all the technology and everything. So they’re cheaper and better. And also, we look at the financing costs. The interest rates are the lowest in the history of the world.

When you combine all those things, cheaper, better, and financing costs the lowest, it gives you a sense as the best time to get in when you have those assets in your hands, coupled with decent charter with almost the best credit you can come up with. And with the financing you can usually have access to, because of that credit, it’s just time to act. And we’re really excited.

We did that about 10 to 12 years ago. We took advantage of the Asian financial crisis. Now we’re much stronger. We have a big balance sheet behind us. We have 80 to 90 ships behind us. Our technical operational reputation is second to none. We won a couple of orders of business because of our technical strength, and of course financial strength as well. So we’ll continue to utilize those strengths to make sure we pick the best credit.

Again, I’ll reiterate our criteria: credit-worthiness of the charter, the type of vessels that we want to have - fuel efficient, larger ones, the flagship vessels, those kinds of things. Then profitability, and it’s a good time to get the maximum return when competition is not much. Then we look at bankability, and make sure that the deal can be easily financed.

So we’ll just be patient and selective, and I’m very confident over the remaining part of the year we will have a couple of deals at least to be completed, to be able to take advantage during the down cycle, to make our overall fleet even healthier over the long term. That’s where we are, and we’ve been positioning for this moment for some time. We’re so excited right now.

Ken Hoexter - Merrill Lynch

It’s wonderful to see you back in the acquisition market with some better flowing capital. When you think about that, Gerry, how do you balance your desire to go get second hand capacity versus targeting newbuilds? And I presume all the second hand stuff is without the joint venture. So is that just a capital return kind of equation without a second party?

Gerry Wang

No, the second hand vessel is not really our primary target. For this transaction we have with MOL, they came in as a package. What we offer to our customers is a replacement situation. You give us those vessels, we give you new vessels, then work out the economics. As I said in the presentation, the MOL 4600 TEU vessels standing alone would be economical. Then you combine that with the, I want to use the expression juicy, newbuilding contracts, it becomes a no-brainer.

Ken Hoexter - Merrill Lynch

Lastly, where do you see capacity versus supply in the field for your customers right now? How far is that imbalanced still?

Gerry Wang

You look at the order book right now, at 21%, 20%, that’s historically the lowest. We have never had an order book being as low as today, even though we can talk about all the uncertainties, all the things, but the fact is, the order book represents the lowest percentage in the history, and the line [managers] are so motivated to modernize their vessels.

Can I just give you a little inside knowledge of the operating costs? The ship cost is about 10-15%. The fuel cost, [unintelligible] cost, is about 35-40%. Then on top you have the stevedoring costs, the box costs, and the overhead, IT, all those things. So fuel cost alone is more than one-third. The newer vessels have so much more fuel economy. We’re talking about 25-30% fuel efficiency over the older generation.

Seaspan’s fleet is about four years old. We are motivated, with a younger fleet, to modernize our fleet. This shows, again, the overwhelming saving and advantage of the new designs. Coupled with cheap vessels and very cheap financing costs, we are excited.

Operator

Our next question is from Justin Yagerman of Deutsche Bank. Your line is open.

[unintelligible] - Deutsche Bank

Hi guys, it’s [unintelligible] for Justin. I just wanted to start off maybe more on the macro outlook. You mentioned the current order book being historically low at 20%. But I think you mentioned demand growth of approximately 7%. That seems a bit higher than some of the liners and freight boaters are quoting. Just wanted to get a sense, is that an internal projection? Or is that coming from a third party?

Gerry Wang

It’s coming from a third party.

[unintelligible] - Deutsche Bank

And I guess you’ve mentioned the very favorable outlook for new projects over the next year or so. Can you talk maybe about competition for these deals? I know a lot of owners are kind of stressed out there, but are there more leasing companies and new participants competing for some of these deals?

Gerry Wang

The competition is always there, but in the end, there are things that we possess that other people don’t have. For example, we operate the flagships for COSCO, for Yang Ming, for China Shipping, for MOL. And nobody can replace our position in the marketplace, in terms of our specialization in large, modern container ships. That’s something that is very, very important.

As I said to you, the ship charter cost represents only 10-15% of the operating costs for the line [managers]. So a little bit more [unintelligible] doesn’t really matter, to be honest. Then the fuel cost is 35-40%. So a well-designed, well operated container ship will drive more economics to our line [managers]. That’s how they look at who to select when the competition is there.

On the other side, you can count on your fingers very few owners who can really make an offer without subject to financing, basically. I’m just honest with you. And we are one of the very few that can really go in and say, we can do this project for $1 billion without [unintelligible] financing. Because we’re still confident in our financing capability on top of the cash we have and that’s another strength.

Obviously we’re taking advantage of those things, and we’ll only focus on the top credit and the vessels that we want to build, and we’ll just stay patient. If the right opportunities come up, we do it. If not, then we just sit and wait. We know our competition is scared, and the competition is not as healthy, and why not just take our time?

[unintelligible] - Deutsche Bank

With regard to the bank market, you guys seem pretty positive on the outlook there. Can you talk about maybe just general financing levels? Are you talking 60-70-80% for these new orders?

Gerry Wang

I can add more to that. Financing doesn’t really matter. We can get 60-70%, up to 75-80% easily when you have competition. That’s the beauty of competition, right? But for us, we have a very strict capital structure, and we’re conservative. We don’t want the leverage to be too high. So we don’t want to be over carried by the leverage in our overall capital structure.

So we’re sensitive to that, and at the same time, the whole exercise as a leasing company [unintelligible] is to drive down our cost of capital. You look at Seaspan’s balance sheet, the total cost of capital, if we can drive down that by 1%, we save $40-50 million a year. So that’s one of the most important things we want to work on, which is to use our strength, use our credit worthiness, use our balance sheet, to make sure we drive down the cost of capital.

That would be one of the key objectives for the management for the year and years ahead, so that we always stay more competitive in terms of cost of capital, coupled with our technical operational strength. Then we really can solidify our position as the leader in this space. That’s the way we want to be, and hopefully we’ll get there.

[unintelligible] - Deutsche Bank

Just one last question. Assuming that 60-70% leverage, Sai, maybe you can talk about how much dry powder you think you have right now for acquisitions, assuming no more capital raises?

Sai Chu

Well, we have $400 million of cash on our balance sheet, and we’ve got a facility available of $40 million, plus we’ll add another $400 million for the new vessels. So there’s significant capacity, but we’ve learned from our history we’ll always be ahead of our capital needs. So we will open up new sources of capital this year. That’s one of our key goals that we haven’t done before. So there is certainly, I would say, a billion or more of capacity that we have.

Operator

I’m not showing any further questions in the queue. I’d like to turn the call back over to Gerry Wang for any concluding remarks.

Gerry Wang

Thanks for taking the time to listen to me and Sai. As I said during the call, we are very excited about the time we are in and Seaspan’s franchise is offering us the technical and operational strength, coupled with our financial strength. We are very competitive, and we’ll just take our time, be patient, and do the right deals, and we realize that growing the business is important focus on our business over the long term, and we’ll just do the right things for the franchise for the shareholder value over the next five to 10 years. We’ll continue to remain disciplined, and we look forward to speaking to you again for the next quarter. In the meantime, I’ll say goodbye to you guys. Thank you very much for your interest in Seaspan. Thank you, good bye.

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