Good day, and welcome to the Box Ships Second Quarter 2013 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. I would now like to turn the conference over to Michael Mason of Allen & Caron Investor Relations. Please go ahead.
Thanks Emily. Good morning and welcome to the Box Ships investor conference call to discuss the financial results for the second quarter of 2013. 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 after the close of market last night on August 06 at 4:01 PM. If you did not receive a copy of the release, it is posted on the Box Ships’ website and in the Clients section of our website. You may call our office in New York at 212-691-8087 and we will email it to you. It is also posted on Yahoo! Finance and numerous other 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 August 14, and may be accessed from North America by calling 1-877-870-5176 and entering conference number 105683. International caller should dial 1-858-384-5517. 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 August 06, 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 would now like to turn the call over to Mr. Robert Perri, Chief Financial Officer of Box Ships. Good afternoon, Robert.
Good morning, Michael. Good morning, ladies and gentlemen. Thank you for joining us on today’s conference call. First we will discuss our second quarter 2013 highlights and recent developments followed by a brief update on the Company. Then I 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’ll be closing with our investment summary. I'm joined today by Michael Bodouroglou, our Chairman and CEO, who will be available for questions after we finish the prepared remarks.
Please turn to Slide 4. Our second quarter 2013 results represent our ninth profitable quarter as a public company. Our adjusted time charter revenue during the second quarter of 2013 was $19 million for our nine vessels while our adjusted EBITDA was $11.4 million. We reported adjusted net income of $5.5 million or $0.20 per basic share and $0.18 per diluted share after adjusting for the dilution factor if we were to convert the recently retired Series B-1 preferred shares, an improvement year-over-year due to the increased average number of vessels.
More importantly, we announced that our Board of Directors approved our ninth quarterly dividend of $0.12 per common share based on our second quarter results payable on September 17 to shareholders at record on September 10, which is in line with our previously stated guidance and offers a material dividend yield of 11.5% annually. This brings the total amount of dividends paid to shareholders to $1.99 per share since our IPO in 2011.
Finally, on July 29, we sold 558,333 shares of our 9% Series C preferred shares raising $12.6 million in net proceeds including $5 million bought by our Chairman and CEO. The proceeds from the offering and approximately $7.2 million of our cash were used to redeem all of the outstanding Series B-1 preferred shares. In additions, we prepaid $5 million of our loan with Paragon Shipping and we believe these moves have helped streamline and strengthen our balance sheet and better position the Company to weather the continued weakness in the container ship market.
On Slide 5, you can see our current operating fleet, the duration of our charters, and their expiration dates. Our fleet consists of nine containerships with an aggregate carrying capacity of 43,925 TEU and average age of 8.5 years. This compares favorably to the average age of 10.7 years for the entire containership industry according to Clarkson Research. We have strategically decided to stagger the charters so that they roll off at different points in time. The average remaining term of our charter is 16 months and all of our charters are well known container liner companies that have been in business for many decades.
Even though the market for our 3,500 TEU vessels remains weak, our charters are satisfied with our vessels and our operation. We have not been served any redelivery notice yet for the Box Trader or Box Voyager as these charters must give us 30 days notice before a redelivery can take place. Every indication is that they may continue to charter the vessels until their latest deliveries, which is November for Box Trader and March 2014 for Box Voyager. We plan to continue to charter our vessels for shorter term periods when their current employment ends 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 trading shorter term, and the Maersk Diadema charter ending in January 2014, we have 81% charter coverage for the remainder of 2013 and 44% in 2014.
On Slide 6, we'd like to point out what we consider our moderate level of leverage. Currently, our total debt is $193 million after prepaying the $5 to Paragon, while our current cash position is $17 million, which means our corresponding net debt is $176 million representing a moderate 42% net debt to total capitalization. In July, we completed the $13.4 million offering of our 9% Series C preferred shares which reduced the cash on hand to repay all of the 9.75% Series B-1 preferred shares outstanding as well as to repay $5 million to Paragon, which successfully streamlined our balance sheet and reduced our interest in preferred dividend expenses going forward, which improves our free cash flow. These Series C preferred shares are listed on the New York Stock Exchange and traded under the symbol, TEUPRC, and you can find them in Yahoo! Finance under the ticker TEU-PC or Google Finance under TEU-C.
Now I wish to give you a 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 bottom right chart graph depicts the Clarkson’s Containership Timecharter Index. During the second quarter of 2013, the containership market saw a slightly lower average freight rates than in the same period in 2012 and the charter rates remained at the same depressed levels in both periods. Overall, container demand increased slightly in the first half of 2013 but there has been no clear signs of rebound yet and supply continues to outpace demand.
We have seen rates on vessels above 5,500 TEU strengthen back to more reasonable levels but vessels below 5,500 TEU continue to be under the pressure. Mid-sized vessels continue to be affected by the cascading effect as may have been cascaded out of the main routes and are now looking for homes in some of the minor trade routes. In addition, 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.
We have four ships that are expected to come open in 2014, all of which are below 5,500 TEU and should charter rates for these asset classes remain at these depressed levels, we expect that we would earn significantly lower rates and for shorter periods than we currently have been facing.
On Slide 8, let's discuss the supply side of the equation. In the first half of 2013, roughly 764,000 TEUs have been delivered while approximately 232,000 TEUs have been scrapped for a net fleet growth of roughly 3% year-to-date. It is also important to note that the majority of the deliveries are in the larger post-Panamax sizes above 8,000 TEUs, while most of the scrapping is taking place in the smaller below 5,000 TEU sizes, and we expect another strong year of scrapping for older, smaller vessels in the containership fleet, as year-to-date scrapping is up 52% year-over-year compared to the first half of 2012.
Today, the current order book stands at 20% of the total fleet which is now historically low and the order book for our size class of vessels, between 3,000 and 7,000 TEU, is only 8.2% of the current fleet, and spread out over three years, this translates to roughly 2.1% growth annually. In 2013, we have had a more normalized market as net fleet growth is expected to be roughly 6% while demand growth is forecasted around 5%. And as scrapping increases, which it may as long as rates remain weak, we may see fleet growth equal demand growth for the remainder of the year. And in 2014 it appears that demand will outpace supply once again based on current expectations, although how this improvement in supply may affect the containership fleet is unknown.
Please turn to Slide 9. Our second quarter 2013 results represent our ninth profitable quarter as a public company, and as you can see, revenues increased by 19% as our fleet grew from seven vessels in the second quarter of 2012 to nine vessels in the second quarter of 2013. Our adjusted average time charter equivalent rate for the second quarter of 2013 declined to $22,506 per day from $25,254 per day in the second quarter of 2012 due to the decline in re-chartering rates of the Box Trader and Box Voyager.
Our adjusted EBITDA and adjusted net income for the second quarter of 2013 were increased to $11.4 million and $5.5 million or $0.20 per basic share respectively from the year-ago quarter. In addition, it’s important to note that amortization of intangibles which is primarily related to above and below market time charters and share-based compensation for the second quarter of 2013 were $1.6 million and $0.5 million respectively. When we adjust our EBITDA and net income, we back out these expenses due to their non-cash nature.
On Slide 10, let me show you our performance for the second quarter of 2013. Time charter revenues net of commissions and voyage expenses and adjusted for non-cash items were $18.1 million which translates to a time charter equivalent rate of $22,506 per day. During the second quarter of 2013, our cash vessel operating expenses were $4.2 million compared to $3.4 million during the second quarter of 2012 due to the increased number of vessels we currently operate. On average, our cash vessel operating expenses for the second quarter were $5,134 per day compared to $5,291 per vessel per day in the second quarter of 2012, an improvement of 3% year-over-year.
Our daily vessel total operating expenses or TVOE for the second quarter of 2013 was also improved and amounted to $7,131 per day compared to $7,574 per vessel per day in the second quarter of 2012. Our adjusted EBITDA for the second quarter of 2013 was $11.4 million or $14,334 per day for an EBITDA margin of 64%. Our total debt service for the quarter was $8.8 million which brings our free cash flow for the quarter to $2.6 million or $3,599 per vessel per day; and based on this, we are paying a dividend in the second quarter of $0.12 per share.
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, and despite the weakness in the global economy, we are continuing to report strong results. We also were able to complete a preferred share offering that allowed us to streamline the strength of our balance sheet going forward. Since our IPO, we have been actively acquiring tonnage during a period of depressed asset prices and we are positioned in the mid-sized containership segment of the market which we believe has strong fundamentals and prospects going forward.
We have a portfolio of fixed-rate charters of approximately 16 months supported by a solid and diversified group of charters with staggered maturities. In addition, we have a high-quality fleet with an average age of 8.5 years and strong operating performance. We have paid $1.99 per share back to shareholders since our IPO and have owners that are willing to support the Company as it is proven time and again.
With that, we are happy to open the call for questions.
(Operator Instructions) Your first question comes from Brandon Oglenski of Barclays. Please go ahead.
Keith Mori - Barclays
This is Keith Mori on for Brandon. Just wanted to touch on the supply side for a minute, we see that the balance could happen between supply and demand in 2014, maybe lending to charter rates improving, we're seeing a wave of new orders come in recently, the larger ship classes, does this kind of give you a moment to pause and say, maybe the supply is actually going to be higher for 2014, 2015, if we continue at this pace of ordering, and do you kind of feel that that could be an impediment to a recovery?
We don't think that the recent orders are of the magnitude that they can change the expectations going forward, at least for the next two years, and as you rightly said, these orders relate to larger vessels, and on top of these, they will be replacing larger vessels as well. The cascading effect I think has advanced well down the road and really what we are looking for is for the Panamax segment, which we are very interested in, to take its toll and see some improvement in the rates going forward. This is for us a critical question going forward, and we hope that this happens in 2014.
Keith Mori - Barclays
And I guess staying on 2014, I mean you do have three vessels up for charter in the first half, will the strategy be to re-charter them or would you look to sell them, I know they are relatively newer ships, they're not 15, 20 year vessels, would the strategy be to re-charter them?
No, we are not thinking of re-chartering them, they are very good ships, very good quality – sorry, we are not thinking of selling them, they are good quality modern vessels, we will be looking to charter them surely. It actually depends on the rate environment that we will be facing at the time of re-chartering. If they stay where they are today, we will be seeking to cover the vessels short term, much in the same way as we have done with Box Trader and Voyager, but if the market rates, the charter rates have strengthened in the meantime, we will be probably going for a longer time. It depends on what happens to the market and the view that we take of the market at that particular moment in time.
Keith Mori - Barclays
Okay, that's helpful. And I guess one last one for me. You guys have an option to purchase two ships from Paragon next year, could you maybe give us an update, are these ships being constructed right now or is there the possibility that that order could be pushed out again?
They are being constructed right now. The scheduled delivery is for mid-2014. We are monitoring the situation and the market, we are also monitoring the chartering markets. I can tell you that there has been interest for employing rate charters and employ these vessels, but the rates at which this interest is currently expressed is not what we are looking for. So we will be waiting to see how the market develops, and depending on how the market develops, we will probably go ahead with the delivery, we will probably decide to push them back, or take delivery of them as scheduled. It also depends on how prompt the shipyard will be in actually making the scheduled deadlines of the bidding process.
Keith Mori - Barclays
So right now it's on schedule, the construction is on schedule for a 2Q delivery, correct?
Well, I cannot definitively say that because it's too early, but yes, we have no reason to see that it's not on schedule, but it's too early to tell.
Keith Mori - Barclays
Okay, thanks guys for the color and I'll pass it along.
Our next question is from Aures Sadoor of Clarkson Capital Markets. Please go ahead.
Aures Sadoor - Clarkson Capital Markets
You mentioned you like the Panamax size, what about smaller ships in specialized markets like 2,500 TEU geared ships, are they available, what's the charter rate there in your view, or if you want to say you have a view, you don't have to mention it but if you do have a view that would be great, and is that a ship size you'd like to get involved with or do you want to strictly stay towards the mid-size, Panamax size and stick with that?
As I have said before numerous times over this, we are not dogmatic about our choice of vessels, so we will look at every ship size that has obviously strong fundamentals and provides attractive returns. As we said, the 2,500 geared vessels seem to be doing better than others right now, the larger vessels, the 6,000 plus TEU have been doing better than everything else, even since a couple of years ago. So going forward, really we want to see, because most of our fleet are Panamaxes, we want to see what kind of rates we are able to charter to re-charter the ship that are coming off charter in the coming months, and depending on what the market is and what we achieve, we will determine our liquidity and our next moves.
Aures Sadoor - Clarkson Capital Markets
Okay, fair enough. I was just very interested in that ship size, and I apologize I was not on the call at the very beginning, have you given any guidance or indication on dividend going forward?
No, we have not. The dividend going forward will be based on the market really.
Aures Sadoor - Clarkson Capital Markets
Of course, I just wondered if you had mentioned.
It will depend on what kind of rates we are able to re-charter our Panamax. On the basis of that, we will decide on our dividend policy.
Aures Sadoor - Clarkson Capital Markets
Alright, excellent, and thank you very much for your time guys.
We see no further questions. This includes your question-and-answer session. I'd like to turn the conference back over to Mr. Perri for any closing remarks.
Thanks everyone for taking the time to listen to us today and we look forward to talking to you in the next quarter. Have a good day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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