Sai Chu - CFO
Gerry Wang - CEO
Ken Hoexter - Bank of America-Merrill Lynch
Josh Katzeff - Deutsche Bank (ph)
Keith Mori - Barclays
Michael Webber – Wells Fargo
Ben Nolan - Stifel
Seaspan Corporation (SSW) Q2 2013 Earnings Call July 30, 2013 8:00 AM ET
Welcome to the Seaspan Corporation Conference Call to discuss the Financial Results for the Three and Six Months ended June 30, 2013. 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 will open the call for questions.
I will now turn the call over to Sai Chu.
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 second quarter 2013 earnings release and earnings webcast presentation slides available on our website at www.seaspancorp.com as well as in our Annual Report on Form 20-F for the year ended December 31, 2012 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 converted. In regards to such financial measures and for reconciliation of such measures to the most closely comparable U.S. GAAP measures, please refer to our earnings release.
I will now pass the call over to Gerry, who will discuss our second quarter highlights as well as some more recent developments.
Thank you very much, Sai. Please turn to slide three of the webcast presentation. For Q2 we continue to execute on our strategy and deliver solid results. Firstly our operating fleet performed well and achieved high levels of utilization for the quarter.
Secondly our new building program is progressing very smoothly at both HHI and YZJ (ph). Thirdly we ordered certain large fuel efficient container ships, with one major Asian ship builder, as part of a growth strategy and expect to execute long term charters with one of the majors shortly. Finally we finalized sea financing transactions to cover our first fleet Yang Ming 14,000 tier vessels.
I will now review our results, for the second quarter in more detail. Seaspan's operating fleet achieved 99% utilization and continued to generate predictable and stable cash flows from its long term time charters. This provides fundamental support or our dividend, and combined with our strong balance sheet and flexible capital structure, it positions Seaspan to continue to capitalize on growth opportunities.
Our 10,000 TEU new building program at YZJ (ph) and our 14,000 TEU program at HHI are both proceeding nicely. We expect deliveries to take place at full contracts and the construction quality to meet our standards.
For the year 2014, including GCI vessels, we plan to take deliveries of 10,000 TEU vessels built at YZJ (ph). Our Board of Directors declared $31.25 per share dividend on our class A common shares for Q2 2013, representing an expected annual dividend of $1.25 for the year 2013.
We took delivery of 4,600 TEU vessel on a two year fixed time charter with MOL, which increased the operating fleet to 70 vessels at quarter's end. And we also took delivery of the second 4,600 TEU vessels on charter to MOL at the beginning of July to reach our current operating fleet of 71 vessels.
We've closed two financing transactions during the quarter, including $174 million term loan facility with an Asian Bank for two (inaudible) building container ships that will be charter Yang Ming. And subsequently last week we concluded the financing arrangement with a European bank for our third 14,000 TEU new building containership. This concludes the financing requirements for our first three ship charters with Yang Ming Lines.
Furthermore we also closed a $30 million term loan facility with a U.S. bank, and Australian bank to fund the acquisition of the two 4,600 TEU containerships on charter MOL. We now only have two 10,000 TEU vessels, remaining and financed but we have received a number of competitive financing proposals and we expect to conclude the transaction shortly.
Finally I am pleased to announce that we have started Q3 2013 by ordering certain large fuel efficient containerships with a major Asian ship builder, for approximately $550 million for delivery in 2015.
Seaspan expects to sign long term time charters for these vessels with one of the majors shortly. The allocation of the vessels between Seaspan and GCI is to be determined as per the ROFR. As part of our strategy we'll be actively pursuing additional growth opportunities and will report the transactions as soon as they are closed entirely. Before turning the call over to Sai, our CFO, a note that except for Seaspan Ningbo, which was delivered to us on July30th, our entire operating suite remains charted out.
Sai will now discuss our quarterly financial results. Sai please.
Thanks Gerry. Please turn to slide four for a summary of our second quarter and first half results compared to the results for the comparable period of 2012. Revenues were consistent in Q2 compared with last year as additional revenue from entire quarter’s worth of earnings from two 13,000 TEU vessels that delivered during Q2 were offset by lower revenues from the five 4250s operating in the short term market during the quarter. Vessel utilization continuing to be strong at 99% during the quarter, compared to 99.4% for last year’s quarter.
Our ship days increased by 86 days and operating days increased by 65 days during Q2 this year compared to Q2 of last year. Ship operating expenses increased by $5.8 million or 18.5% and by $8.8 million or 13.4% for the three months and six months ended compared to the comparable periods in 2012. The increases in ship operating expenses are primarily due to 233 and 535 more ownership and managed days in the quarter and six months ended and from modest increases in spare parts and timing differences.
In addition, the increases in ship OpEx were in part related to the addition of the four 13,000 TEU vessels during the first half of 2012. As the large vessels they provide significantly higher charter revenue to be up slightly higher daily operating expenses for the new, insurance and other operating costs compared to similar vessels.
General and administrative expenses increased by $5.2 million or 77.4% and $7.1 million or 56.7% for the quarter and six months ended compared to last year. As discussed in the previous quarter, increases in our G&A are primarily related to the accounting for non-cash stock appreciation rights or FARs, granted to our CEO and certain members of management.
The total amount of non-cash FARs expense in Q2 was $5.8 million. $2.6 million of this was related to an early accelerated recognition for accounting purposes of the stock based compensation arising from Seaspan stock price exceeding the 2150 base price for the first tranche over 20 consecutive days during the quarter. The timing of this expense would have been recognized later in 2013 were not for the strength in our share price during Q2.
Adjusted EBITDA decreased by $13 million or 9.8% and by $7.6 million or 3.1% for the three and six months ended respectively compared to the same periods last year. Cash available for distribution to common shareholders declined by $9.2 million or 12% and by $7.7 million or 5.4% for the same period.
The declines in both the adjusted EIBTDA and cash available for distribution to common shareholders in Q2 were primarily caused by the FARs as we discussed previously and also by combination of flat revenue and the increase in ship OpEx. Cash available for distribution was also impacted by the increasing of $1.5 million in Series D preferred dividends and that issuance was related to the growth in the business and financing that growth.
EPS, normalized EPS for the quarter was $0.18 compared to $0.35 last year. The decline in normalized EPS was again caused by several factors primarily the FARs and the previous factors we’ve discussed. In addition, Seaspan share count increased by 3.7 million shares in the quarter primarily due to participation in our drip.
On the balance sheet side, please turn to slide five for balance sheet information as of the quarter compared to year end. Total liabilities declined by $152.2 million or 3.4%. A $121 million of this decline was due to declines in Seaspan share value on financial instrument’s liability while the remainder was primarily comprised lower long term debt and other long term lease liabilities due to scheduled debt repayments and decreases in deferred revenue.
We continue to view our strong balance sheet and financial flexibility as a key competitive advantage in the current market environment. We had cash and cash equivalents including short term investments of approximately $340 million at the end of the quarter.
The cash used over the quarter was primarily due to the acquisition of the two 4600 TEU vessels on chartered MOL, one of which delivered during the quarter and the other in July. Also in installments in connection with our new building program and various financing expenditures net of operating cash flows.
On the capital structure side, we believe that our stable operating cash flows combined with a strong liquidity in access to capital markets continues as a core differentiator for Seaspan. Specifically, we believe these strengths provide us with the continued ability over the long term to support increase in common share dividends, opportunistically repurchasing additional shares, paying down and refinancing debt, and pursuing growth in a balanced and controlled manner.
During the quarter we completed term loans facilities for four of our previously announced growth vessels as follows, a $174 million term loan with a leading Asian bank for the two 14,000 TEUs on chartered to Yang Ming, a $30 million term loan with a U.S. bank to finance the two 4600 TEU vessels on chartered MOL. On July 19th we completed an $83 million term loan facility with the leading European bank, the third and final 14,000 TEU vessel for Yang Ming.
By finalizing this term loan we have now completed financing for the three 14,000 new builds for Yang Ming announced in January. We are currently evaluating term sheets from the two 10,000 TUE builds for MOL, and note that there continues to be very healthy and strong demand from our banks to fund this transaction. We will continue to peak to fund in the remainder of our new build program on attractive terms and continue to access financing for our future growth opportunities.
Please now turn to slide six for forward guidance. For 2013 we will benefit from a full year revenue from the four 13,000 TEU vessels that deliver during 2012. In addition we recently took delivery of the two 4600 TEU vessels on charter MOL which will also contribute to revenue and earnings for the second half of the year.
We also began to earn vessel management fees on the two 4600 TEU vessels that will be acquired by joint venture GCI. Partially offsetting these increases for revenue, will be the re-charter for up to four 4250s at short term current market rates throughout the year.
In March of this year we granted SARs to certain members of management together with the December 2012 FARs granted to our CEO. We expect to recognize non-cash compensation expense of approximately $3.5 million for the remainder of 2013 and $4.1 million through 2014. We anticipate approximately $3 million of the expected 2014 expense related to the FARs will be recognized in the first half of 2014. We believe these rights provide for alignment of interest with our shareholders with long-term incentives to higher common share price. Each of these items remains subject to adjustments.
I’d like to now turn the call back over to Gerry.
Thanks, Sai. Please turn to slide seven, where I will briefly the industries’ fundamentals. Consistent with our comments last quarter, there has not been a material change in market fundamentals. We continue to expect overall cargo demand growth and overall ship supply growth to be fairly balanced over the next three years or so with variability from trade land to ship land.
On the supply side, we expect tonnage growth of about 5% to 7% this year. Major operators continue to manage supplies through widespread slow-steaming and incremental idling of ships. The order book remains at a manageable level of less than 20% of effective loading capacity or about 7% per annum on average. It is expected that this amount will be further reduced by demolitions, potential order consolidations, and conversions.
On the demand side, we expect global containership volume to grow by around 4% to 5% in 2013 as per various forecasts. The fixed rate environment remains volatile from trade land to ship land, and charter rate for short-term charters, have been weak for the first half of 2013 especially for the smaller sizes. These market conditions create challenges for liner majors, many of whom are still struggling to return to profitability.
During our recent face-to-face meetings, CEOs of leading liner companies have reiterated that their primary focus is on reducing unit cost in order to remain competitive. Since banker costs account for 30% to 40% of a liner’s operating costs, modernizing their fleet with a larger and a modern fuel efficient vessels such as the ships built using Seaspan’s SAVER design has become a top priority. At the same time we understand the balance sheets of our customers are not as strong as they would like, which we anticipate will make ship outsourcing a larger part of the fleet modernization program.
We believe the industry situation fits well with Seaspan's strength and ability to capitalize on growth opportunities. Seaspan’s competitiveness is defined by our financial strength and deep technical and operational expertise building and operating large modern containerships.
As a matter of fact we have been very successful in winning new business for these large modern containerships. For the cost of ships we focused on vessels of 10,000 TEUs or larger, Seaspan and our partner, joint-venture partner GCI together can show 38% of the 2014 charter owner order book and 67% of the 2015 charter owner order book.
We have a strong base of cash flows, which you will grow through entering into long term charters as our customers modernize their fleets to reduce their operating costs. We are clearly capturing a significant part of the market versus our peers and believe this will translate to great value to our shareholders in the long term.
Please turn to slide 8. Slide 8 depicts risk target maturity profile of our charter portfolio and how well Seaspan is insulated from current charter market softness. The average remaining charter length of our operating fleet is approximately six years. We expect to have limited near term charter exposure with only four 4250 class vessels up for re charter during 2014 and 2013, representing approximately 2% of our contractor revenues. For these four units of 4250 vessels we intend to continue to follow the strategy of short term charters until the market cycle eventually plays out.
Please turn to slide 9, 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 see 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 primary focus will remain on designing, owning and chartering large modern fuel efficient container ships to credit worthy customers. As a ship leasing franchise, we consider it to be critical to consistently maintain a strong balance sheet, diversifying our capital structure and enhancing our financial strength, including maintaining appropriate leverage has been a core differentiator for Seaspan and will remain one of our top priorities.
Our results may be muted in the next few years as we continue to invest in new vessels for our future. However our strong base of cash flows from existing charters as well as future growth will enable our franchise to be strong and stronger for the long time value of our shareholders. We have history of returning capital to shareholders and we remain committed to sustainable increase in our common share dividend over the long term as we continue to opportunistically grow our business.
Operator that concludes my presentation. Please open the call for questions.
(Operator Instructions). Our first question is from Ken Hoexter Bank of America-Merrill Lynch, your line is open.
Ken Hoexter - Bank of America-Merrill Lynch
Sai, Just on the strategy of short term charters, it just you, I guess Gerry also noticed they're getting squeezed by the fuel inefficiency. So how do you think about structurally? Do you consider scrapping them or selling them in this kind of market if you can’t get true market value for those renewal rates or how do you think about those?
This is Gerry here. Our strategy is not to sell ships at the bottom of the market. We'll continue to hold on to them. 8000, 9000 tones today is not the best but still generates positive cash flow for us and we believe the cycle will eventually play out, we just have to be patient and wait for the right timing, at this point of time balance sheet is strong so we don't have to get into the disposal of assets at very bad prices.
Ken Hoexter - Bank of America-Merrill Lynch
Appreciate that. It sounds like most of the market hasn't changed much since your Analyst Day in terms of your view on things. So maybe just in terms of your debt coming due, Sai you mentioned you had some debt coming due in the quarter. What is up over the next year or two in terms of while you're still trying to refinance some of the newer vessels, anything of significance coming due?
All right Ken. Well first of all we didn't have any debt coming due during the quarter. We just had scheduled amortization. The first debt maturity is in May 25th in almost two years away. So first comment is we've got many opportunities to refinance that debt, and we're going to be patient about it. We got excellent support from our bank group and if it makes sense to consider refinancing earlier than that's certainly something we'll consider doing. We’ve got plenty of time. A chunk of that debt is already refinanced through a facility that we announced early this year. So it's well in hand.
Ken Hoexter - Bank of America-Merrill Lynch
Lastly I appreciate just the cleanup questions there but on the new, it looks like you're back to expanding again, great to see, because that really Gerry, gives you the view of what you think of the markets. So on this order that you just announced, the 550 million, when can we expect additional details? It sounds like you're not ready yet to give the number of vessels or with the liner companies that kind of imminent since you usually have them signed to a liner company kind of almost the same time as you're purchasing.
For commercial reasons Ken, we're not in a position to give more details than what we have given you, but we're extremely confident the deal will be closed shortly and as soon as the deal is closed entirely, we'll disclose all the details of the transaction. As I said we're extremely confidant.
And Ken just to add further to what Gerry said, I think you have to look at the history of the company and how we have run it. We are very conservative low risk. We don't enter into transactions unless we have a high probability of executing them well for the benefit of our shareholders.
Ken Hoexter - Bank of America-Merrill Lynch
So to that point Gerry, why don't you see over capacity if everybody is trying to purchase larger vessels, more fuel efficient ones in terms of all of the recent, call it the ones that were brought over the last 10 years that are now coming due, maybe not yet coming over due but maybe over the next four or five years. Why don't you see that as an excess capacity if the liners just wants the newer vessels?
Two reasons, one is you look at the order book, even though we have lot of offenders, storms, lightening, we haven't seen too much rain drop yet. The number of new vessels meeting the fuel efficiency designs haven’t been many. We're talking about 30, 40, 50 vessels in total. Compared with the overall industry the fleet is just a small percentage. You look at the order book. In total it presents less than 20%, which is frankly the historical low. So that's one of the reason.
Another reason is you look at, if you translate that into annual growth you are talking about 5% to 6% which is really matching the trade growth of 4%, 5%, 6%. So that's the reason why we say overall speaking there is balance or at least there is not a material imbalance, in terms of oversupply, but from trade land to trade land obviously you see issues come up specially with Asia and Europe. A lot of vessels have been deployed for that trade. But P3 is a good situation to have happened, because that pushes out a lot of vessels into idling lapse by the top three operators.
So slow steamy will continue to be there and you will see a lot of older vessels. Fuel efficient vessels will be pushed out, they will be laid out, were good to shorter economic life. And that's really what's the industry dynamics is all about for us. As I said in the presentation, our meetings with all the CEOs, I spent a lot of time meeting all the CEOs to understand where they come from. It is all about unit cost reduction. Nobody was talking about expansion or increase their ranking per say. So the competitiveness is defined by your fleet, your unit cost and I see that as a healthy development versus the massive order book. We haven't seen that yet. Ken hopefully I have given enough information to you and we can talk off the line if you have further questions.
Our next question is from Justin Yagerman of Deutsche Bank. Your line is open.
Josh Katzeff - Deutsche Bank
Hi it's Josh in for Justin. Just wanted to start up with the new order, and maybe this is not serious, maybe I am reading a bit too much into this. But can you talk about maybe the differentiation between this order and previous orders where you have actually signed the yard contract and not necessarily the time charter? Was there some sort of rush with the yards in order to secure those spots, or if you could just provide maybe some more details on that?
One flavor I can share for the audience is really we have very attractive pricing on those vessels, and we're very, very close on the charter negotiations and then we decided, it gives us great opportunity to capitalize on the attractive pricing we have got, and you probably have noticed major shipbuilders in Korea have decided to raise the prices for the ACO (ph) design containerships, and those ships were ordered prior to that and so we just want to capitalize on the opportunity in our hands, and grab some vessels with very attractive pricing. In the meantime, for commercial reasons I cannot say more but we're extremely close to finalize the charter arrangement with one of the majors, and we feel very confident the deal will go through and, so that's the flavor I want to send to you.
Josh Katzeff - Deutsche Bank
And maybe if you could just provide some more clarity into the deal pipeline for the rest of the year. Are there still more transactions in the queue? You mentioned at your Investor Day that you would announce one or more deals this year. Is this how we should be expecting in the near term?
We have couple of deals in the pipeline and we continue to finalize them as soon as they are closed 100%. Then we would be in a position to dispose and we're confident that there we'll be more transaction to be reported but at this time before it happens you never know. So we’re working hard on it.
Josh Katzeff - Deutsche Bank
And maybe Sai just quick question for you on the G&A side. You mentioned the $3.5 million of increased equity incentive compensation this year. Can you maybe talk about what a good baseline G&A number is to use as a Q1 2013 or Q4 2012 to then add this G&A to?
Josh, its Sai. I think that probably our Q4 of 2012 would be a good basis to look at. We can through that a bit more with you offline. But I think the challenge is these stock based compensation, they are function of accounting. So they are somewhat (inaudible) to our share price is. So if you strip out that amount which was close to $6 million I think for the quarter that gives you a sense. Our G&A is actually quite stable and as we manage quite well.
Our next question is from Brandon Oglenski of Barclays. Your line is open.
Keith Mori - Barclays
Good morning. This is Keith Mori on for Brandon. Quick question for Gerry. As a follow up to your comments regarding the Eco ship prices increasing at the yards, I mean is that just a function of an increase in demand for these ships or is this an increase in competition that you guys are seeing in the market and that the shipyards are kind of going out there and saying they’re going to raise prices over the near term?
I think couple of reasons behind. I would say two main reasons one is the other sectors have really done very well, i.e. the offshore sector and the gas sector. We’ve seen tremendous investments in the few sectors. And the shipbuilders obviously we're looking at the overall profitability as to what they should build and my guessing is they put more weight towards the offshore and the gas sectors because they are more profitable.
At the same time if the containerships don’t generate the same or similar return they would build less. So that strategy is get through higher prices and see what happens and that’s just the market situation and we see a lot of push to go for high prices from the Korean major shipyards publicly and then what we did was we had very attractive pricing on our hands prior to the attempt to raise prices. We thought it was great opportunity for us just to put our hands on those vessels.
In the meantime, we are extremely close to the charter party transactions. We decided to go ahead. So it’s not a deviation from our conservative deal strategy per say but same time the market dynamics in terms of new building projects dictates the pace of doing deals.
Keith Mori - Barclays
That’s helpful. And then I guess one for Sai. We see here a lot of the debt commitments have been raised now for the new builds and when we look at the current liquidity position, do you feel comfortable? Can you kind of give us a total dry-powder number maybe you have right now that you feel comfortable deploying on new opportunities or is that something you can provide that?
Generally we don’t want to do that for competitive reasons, but I can assure you we have enormous financial capacity to execute on the growth strategy in access to markets. We have a very good relationship with our bank group and they are very supportive. We’re fortunate that compared to our peers we have excellent capacity in all markets in Europe and Asia and the U.S. in terms of just standard ship finance debt. Its several hundreds of millions, if not more than that. In addition with having over $300 million of cash, we have plenty of room in our gearing ratio. So in terms of fulfilling the growth strategy, access to capital is not an issue for Seaspan.
Keith Mori - Barclays
I guess then one last question on the expense side, ship operating expenses. With the new builds coming on and the new builds coming into the JV, is there any guidance you could provide us on maybe a per day basis going forward that we should expense the range?
I mean, generally it’s going to vary. As the fleet gets larger the operating expense are going to increase, but not in a linear manner compared to the higher charter rates. And it changes. We don’t know how many of the large ships we’re going to have on stream, but I think typically we’re going to see operating costs getting up to 7,000 on average over the entire fleet. I think it’s best to kind of evaluate that as we see deliveries of the ships. But currently our average is somewhere in the $6,000 to $7,000 range for the entire 71 ships that we have on the ladder today.
Our next question is from Michael Webber of Wells Fargo. Your line is open.
Michael Webber – Wells Fargo
I just wanted to circle back briefly on the deal, and I know you guys can't really give a lot of details. But maybe you can kind of help us, kind of frame it out conceptually. In terms of what you guys are looking at, does it fall kind of within the parameters, because the assets you own now, or would it be something that would be a new category for you guys? I know that’s a pretty wide swath of sizes, but it is somewhere within that range and is it an existing counter party?
For commercial reasons, we cannot say more than what we have said. But one thing I can say to you, the charter deal is also of long term and it is also to our credit with the counter party. It is also of our SAVER design of larger vessels, 10,000 TEUs or plus. And the written profile is consistent with what we have achieved and we deliver, the credit worthiness of the counter party also gives us enormous capacity and access to debt financing.
So those are the features that I can categorically give you and we are pleased with the deal. As we said many times Seaspan operates the flagships with several leading liner operators. Our technical operational expertise in operating, building, designing, larger ships are probably one of the largest competitive advantage compared with our competitors out here and that would continue to capitalize on the growth opportunity in that regard and the deals we announce in the future would be of similar features. And that is just what we do, and we don’t deviate from our stated strategy, long term credit within those designs we like, in the larger ships, and few efficient designs, those other things are trademarks of Seaspan. They are our DNA.
Michael Webber - Wells Fargo
So I just circle back on one of Josh's questions and just to make sure I heard you right, in terms of that non-cash comp, that’s going forward and I guess $3.5 million for the rest of ’13 and $4.1 on ’14; you’re just saying kind of the base to tuck that on to it, that best base would be kind of Q4 ’12 which looks like about $6.5 million?
Yes Mike, I think generally our G&A excluding the non-cash stock comp is probably around $6.5 million range.
Michael Webber - Wells Fargo
Gerry, one more for you, and just kind of conceptually, and did mentioned something in one of your earlier answers that I though was interesting and if you recall, I think it’s something along the lines of, seeing a lot of lightning and hearing a lot of thunder but not really seeing a lot of rain yet, which is pretty appropriate. But if we kind of step a back and think about it, you guys are placing orders a bit, maybe a touch earlier been usually would in the process. The order books at 20% of the fleet. Prices are inching up. There is more private equity money in this space and you are talking about container lines that are extremely focused on margin and per unit costs. To the extent, you can look forward, when actually year-to-years, it is pretty likely it starts raining pretty hard and then we start seeing a significant bump in new orders, especially considering there seems to be financing available for the Asian yards?
We have seen a number of new entrants trying to get to the market, but the one thing that we feel very comfortable about ourselves is as I said the comparative advantage of Seaspan being strong in the operating, designing, building large ships; operating the flagships for the lead operators, coupled with very strong balance sheet, so that we can execute on large transactions. We don’t have to worry about financing because of our ship names and also because of the balance sheet. Whereas for the new entrants, the deals they do would have to be, we call it project basis.
When we say project basis, you need charters, you need financing, new building contracts to happen at the same time. Imagine if you talk about $1 billion transaction, 10 larger vessels, that would take months and months to conclude and we can put on the table is we will execute four new deals with our subsequent financing and we have the technical operation expertise.
Liner majors will look at the total package versus a cheap buyer, $200 - $300. The vendor they, as I said the number one cost items in the OpEx is that a banker fuel, a 30% to 40% depending on the size, the charter rate as the cost is only 10% or 10% to 12% as to the performance of the vessels, as the operations of the vessels.
So that’s why they look upon us as the specialist in operating, building and designing larger containerships. That’s our reputation in the marketplace. As I said before, Mike, I cannot imagine any lead liner operator, when they go outsourcing, they won’t invite Seaspan to the table and that's how bullish I feel about our positioning in the marketplace.
You look at what we’ve done, vessels that are 10,000 TEU or 14,000 TEU, Seaspan and (inaudible) have together controlled 38% of 2014 charter owner order book which is the one third and two thirds for 2015 charter owner order book. So those percentages will demand huge dominance in the sector and we’ll continue to take advantage of position in the marketplace and no matter what competition is in front us, but we feel very good about ourselves in the terms of least getting fair share of our business but that’s…
Michael Webber - Wells Fargo
No, that’s helpful and it certainly seems like you guys are pretty well positioned in the market and it's just getting a touch more competitive. When you look around, I guess, people that are competing with you for these deals, I think, you’ve mentioned that there is a lot of newer money that they still have the infrastructure or kind of the reputation backing that the Seaspan does, but there is also like CIMC, which is probably the largest container manufacturer in the world, has been very active in terms of buying ships.
When you look around the competitive landscape, can you talk maybe about, how that’s changed a little bit and the CIMC specifically, which just seems to be kind of an odd new competitor within the leasing space. Are you seeing kind of those kind of carve outs from lines competing with you for deals? Maybe just color who is competing with you when you’re going out looking at these deals?
I mean, you look at landscape right now. Our competitive landscape is actually (inaudible). You’ve mentioned CIMC, they weren’t the world’s largest container box manufacturer presenting almost 50% of the market share. You would imagine reason why they do containerships is to sell more boxes, as simple as that and how long will that marketing continue, plus the deal is subjective to financing. At the end of the day, the containership business is not as friendly as I thought and that I’m very close to them and I mean I can speak about it with authority to be honest, and I don’t think that would represent a trend and as a short-term solution, the side deal is a sweetener for marketing purpose and that shouldn’t represent the main trend and then you see other, the bank leasing companies and another thing. History has told us the bank leasing companies, I’ve never worked. So it's the short time a situation and the other competitors who have friends in Greece and elsewhere, we’re in the largest in the sector. We’re arguably one of the strongest, and we have our advantages, they’ve their advantages, we have a great comfort in our ability to get the more than fair share of the business.
(Operator Instructions). Our next question is from Ben Nolan of Stifel. Your line is open.
Ben Nolan - Stifel
My question sort of falls on with Mike’s last questionnaire. I was hoping that maybe you could a little bit of color as to what you’re hearing or thinking about how the liner majors are considering investments and assets. Has their thinking it all changed on whether the only asset, we will order and own the assets out right or the percentage of their fleet that they’re looking to charter in from last orders? There’s been in number of liner majors in the last few months that have placed pretty large orders on their books and just curious where you see that heading and if there’s been any change all on that?
Excellent, thanks Ben, and if you look at the liner majors for last two, three, four years, they haven’t done very well. Their balance sheets are not as strong as they would like to have to be honest. It is tremendous hindrance to their ability to own vessels themselves and you’ll see outsourcing to continue to be available. I would say 50% probably is very sensible percentage, given the situation we’re in.
The second reason is some liner operators have never operated ships over 10,000 TEUs. So they really rely on us being the specialist in designing, building and operating large containerships to give them the comfort and safety, so that they don’t get into trouble by expanding into big containerships to be owned by themselves.
So the balance sheet strength plus the lack of expertise on the liner major sides are the two key factors for the outsourcing we’ve been seeing. As I said I put 50% so the average outsourcing between self-owned and independent owned. That's been the average for last 20-25 years. I don't think that trend will change and there are other reasons why outsourcing is more favorable. We can talk about all those business school arguments, but at the end of the day I see the balance sheet weakness coupled with the lack of large ship expertise are the two main reasons for the continuing outsourcing at about 50%.
Ben Nolan - Stifel
Okay that's helpful and then sort of in conjunction with that, are you guys seeing much in the way for opportunities for say on lease backs of existing vessels, not too dissimilar from the MOLs. Has the appetite for capital on middle aged assets for instance changed at all with the liners?
We have been approached by two-three liner majors for transaction like that. Typically we would like to combine the sale lease back with a new building program, that's our preference given we want to make sure we end up having good assets on one hand, proportionally much larger and older assets on the other hand, proportionally much less, that's really our focus, pretty much like what we've done with MOL. If you're looking at deal party in the future for the combo deal, that would be sort of the benchmark for what we're due and will use our balance sheet strength, gives second hand vessels, we have to use our cash to buy them first, then whatever financing can come up with later on. So we need balance sheet strength to be able to strike a deal like that. And obviously speaking of that we’ve been working on a couple of deals in that direction. We'll see how things go.
Thank you. I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.
Okay if there's no further questions, I'd like to conclude the call by making a very quick remark and I just want to say thank you very much for taking the time to listen to me and Sai to the company for the quarter. Seaspan's business is solid and we are investing in new vessels for our future. We want to make the franchise strong and stronger in long term for the shareholder value and we're very confident we'll be able to grow our business as we have stated and we're looking forward to seeing you again in the near future. In the meantime, have a great summer. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.
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