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Seaspan Corp. (NYSE:SSW)

Q3 2009 Earnings Call

November 4, 2009 08:30 AM ET

Executives

Sai Chu - Chief Financial Officer

Gerry Wang - Chief Executive Officer

Analysts

Omar Nokta - Dahlman Rose

Urs Dur - Lazard Capital Markets

Gregory Lewis - Credit Suisse

Noah Parquette - Cantor Fitzgerald

Michael Urban - Deutsche Bank

Matthew Troy - Citigroup

Operator

Welcome to the Seaspan Corporation conference call to discuss the financial results for the three and nine-month period ended September 30th, 2009. Hosting the call today is Gerry Wang, Chief Executive Officer of the 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 up the call to questions and answers. I will now turn the call over to Sai Chu.

Sai Chu

Good morning everyone and thank you for joining us today. Before we begin, please allow me to remind you that this presentation contains certain forward-looking statements as such term is defined in Section 21-E of the Securities Exchange Act of 1934 as amended, concerning future events in our operations, performance and financial condition including, in particular, the likelihood of our success in developing and expanding our business.

These forward-looking statements reflect the management's current views only as of the date of this presentation and are not intended to give any assurance as to future results. As a result, you are cautioned not to rely on any forward-looking statement.

Although these statements are based upon assumptions we believe to be reasonable based upon available information, they are subject to risks and uncertainties detailed from time to time in our periodic reports.

We expressly disclaim any obligation to update or revise any of these forward-looking statements whether it’s because of future events, new information, a change in our views or our expectations or otherwise. We make no prediction or statement about the performance of our common shares.

I will now turn the call over to Gerry.

Gerry Wang

Good morning everyone. Thank you for joining today’s conference call. During the third quarter, Seaspan continued it’s successful operations despite the ongoing industry downturn.

We achieved the following: first, we continued to grow aboard our fleet and in contracted revenue streams. Second, our fully time chartered fleet continued to achieve strong utilization with minimal upside.

Third, we continued to receive revenue from our charterers all of whom performed their obligations as expected under their respective charter party agreements. And finally, we enhanced our capital structure and the financial flexibility while continuing to distribute dividends to our shareholders.

Please turn to slide three, which summarizes Seaspan’s third quarter financial and operational highlights. In terms of our financial performance, we reported revenue of $74.1 million, normalized earnings of $20.2 million and the cash available for distribution of $38.6 million.

On October the 1st, we closed the second and final $100 million tranche of the $200 million preferred share issuance with a group of our sponsors including Dennis Washington. We appreciate the strong support our sponsors continue to demonstrate for the company’s strategy and the future prospects.

During the third quarter our fleet continued to perform very well achieving 99.4% utilization. We once again had no major incidents related to piracy, collisions or the environment, which is a result of our modern fleet, experienced crews and commitment to operational excellence. Charter parties continue to perform as expected.

During the third quarter, we also took delivery of two new vessels increasing our operating fleet to 41 vessels. 27 container ships are to be delivered over approximately the next 2.5 years. These are the new building contracts we have contracted.

All of the 68 vessels of Seaspan’s contracted fleet are committed to long-term time charters. Seaspan’s contracted annual revenue for its 41vessel operating fleet, currently totals approximately $300 million. Upon delivery of our entire fleet of 68 vessels, annual revenue and cash flow are expected to grow substantially.

For the third quarter, we declared a $0.10 per share dividend increase in cumulative dividends declared since our IPO in August 2005 to $6.39 per share. It is important to highlight that the $0.10 dividend represents a conservative PI ratio and it reflects our prudent focus on redeploying Seaspan’s growing cash flow to help fund our new building program.

This conservative PI ratio combined with other actions we have taken including the $300 million preferred share issuance that I discussed a moment ago and the delivery deferral of 30 new building vessels has significantly enhanced the company’s financial strength and the capital structure.

Based on cash returns from operations combined with our committed debt and equity financing we have now secured nearly all of the capital needed to finance our contracted fleet growth.

Now please turn to slide four. I will review the company’s contracted revenue stream. Seaspan’s fleet of 68 vessels are all signed to long-term contracts with a total contracted revenue of approximately $7 billion. Our operating fleet continues to perform in accordance with our charter agreements.

All 41 operating vessels are committed to long-term time charters with average charger ratings of approximately seven years and maturities staggered over a period of approximately 12 years. The earliest contractual renewal is around mid 2011. Upon delivery of our 27 new buildings, our total fleet of 68 vessels will commence time charters with an average duration of approximately nine years and maturities staggered over a period of approximately 15 years.

Please turn to Slide 5, where I will briefly discuss our customer relations. Seaspan’s customer base consists primarily of leading Asian liner companies, which we believe represent a core differentiator for the company in the current economic environment. Our future deliveries of 27 new buildings remain committed to charters with 16 ships to COSCO, two to MOL, seven to Kline and two to CSAV.

Upon delivery of all new buildings, approximately 90% of our contractor revenue will be derived from Chinese and Japanese liner companies. 70% of our contractor revenue will be derived from COSCO and China Shipping of China and approximately 20% from MOL and the Kline of Japan. The remaining 10% of contractor revenue will be from Hapag-Lloyd, Maersk and CSAV combined.

Before turning the call to Sai, I would like to highlight the following points. We believe the proactive measures that we have taken over the last year to reduce the company’s capital needs have solidified our leadership in the industry and will help strengthen Seaspan’s long-term prospects.

We’re pleased with the company’s progress to-date and continue to look for opportunities to further enhance our financial strength. We’re also pleased with the performance of our charters and our charter party agreements. We believe Seaspan’s conservative business model centered on a risk weighted portfolio of strong charters with long duration fixed rate contracts will continue to provide both short-term and long-term value to shareholders.

Regarding the near term outlook for the industry, we continue to see some positive developments such as increased freight rates and volumes in most major trades. While rates remain lower than their highs we’re encouraged by the recent volume and rate increases. And a reminder, the container shipping remains a critical link in the global infrastructure for the worldwide delivery of consumer and industrial goods.

I would like now to turn the call over Sai. Sai please.

Sai Chu

Thank you Gerry. I'd like to begin discussing our financial results on Slide 6. Revenue for Q3 was $74 million, an increase of 29% from $58 million last year and $270 million for the nine months ended September, compared to $167 million for the comparable period in 2008, an increase of 24%.

The increases are primarily attributable to the delivery of nine vessels between October 2008 and September 2009, one of which occurred in September of this year. During Q3, we operated a fleet of 41 vessels compared to 31 in Q3 of ’08.

We continued to achieve strong fleet utilization with 99.4% for Q3, compared 99.2% for the same period last year and 99.8% for the nine months compared to 99% for the nine months in 2008 and 99.3% historically.

20 days of off-hire were incurred for Q3 and 25 days for the nine months, which impacted revenue, a total of $0.5 billion and $0.6 billion respectively.

We reported an increase in cash available for distribution of 14% to $39 million for Q3, compared to $34 million for Q3 last year, an increase of 13% to $112 million for the nine-month period compared to $99 million in the nine months of 2008.

Total operating expenses for Q3 were up 32% to $41 million compared to $31 million for last year. For the nine-months total operating expenses we up by 31% to $115 million compare to $88 million for 2008. Higher operating expenses were due to the operations of a larger fleet and increase in the technical fees as of January 1, 2009.

Normalized net earnings for Q3 increased by $1.2 million or 6% to $20.2 million versus $19 million in Q3 of last year. For the nine-months normalized net earnings increased by 1.7 million or 3% to $57.5 million, compared to $55.8 million for a comparable period last year.

Normalized basic EPS for the quarter and nine months was $0.25 and $0.73 per share compared to $0.29 and $0.89 for comparable periods last year. Normalized diluted EPS for the quarter and nine months was $0.24 and $0.73 compared to $0.29 and $0.89 for the comparable periods in 2008 respectively.

Decreases were due to additional shares issued in our April 2008 equity offering and a non-cash dividend that’s accrued to the preferred shareholders. We also had a change in fair value from the non-realized change and the interest rate swaps of $90.6 million for the quarter and $76,000 year-to-date.

For more information on that change in fair value and its effects on our income statement and balance sheet, please refer to our earnings release. Including this non-cash adjustment, we reported a net loss of $66 million or $1.03 per share for Q3 versus a net loss of $5.1 million or $0.08 per share in Q3 of last year.

As a reminder, we had a few fixed interest rate swaps to mitigate interest rate risk and rely on stable and attractive long-term cash returns to benefit our shareholders.

Next on slide 7 we will take a look at the balance sheet. As of September 30th, 2009 we had a strong cash balance of $104 million, which includes $80 million received from the second tranche of the sponsored preferred shares. $20 million was received on October 1st.

Current assets hold $112 million while total assets were $3.6 billion of which $3.4 billion is comprised of operating vessels and new build installments. We have drawn debt of $869 million for operating our fleet and $1.36 million to fund our new building program.

As of September 30th, Seaspan has secured $3.9 billion, $3.6 billion of which is available in long-term credit sold using leases.

Please turn to slide 8 where we will discuss our diversified group of lenders. As a result of our strong banking relationships, the debt portion of our fleet has been fully secured through a diverse group of leading international banks.

As a reminder we do not have traditional value maintenance clauses in any of our debt agreements although the decline of market values may limit the availability of the un-drawn amounts in our $1.3 billion facility.

This on June 2009 charter fee evaluation we currently would not be able to access the remaining $268 million available under this facility if we submitted that drawing request. We have sufficient debt capacities so that the temporary loss of the $268 million does not require us to obtain additional debt to fund the debt portion of our remaining CapEx.

Before questions, I would like to provide the following closing remarks on Seaspan’s financial strength and flexibility. In order to ensure the financial strength and flexibility we’ve continued to take proactive and decisive measures. Specifically we closed the second $100 million tranche of our $200 million preferred share issuance in October. The two-stage financing was entered into with certain members of the Washington family as well as other co-founders at a premium to the market.

Also during the third quarter, we finalized agreements to defer the delivery date of 13 of our new build vessels. Due to the success of these two initiatives and with our conservative payout ratio, we have reduced the amount of capital required to fund the remaining portion of our vessels that the company has contracted to purchase.

As a result, we have retained approximately $30 million this quarter and $70 million year-to-date in cash to fund the new build. Starting in Q4 of 2010 or Q1 of 2011 and ending in approximately Q2 of 2012, we intend to raise in the range of $180 million to $240 million in common or other equity or other forms of capital.

This requirement is a significant reduction compared to the $900 million equity requirement we had in Q3 of last year. Going forward, we intend to continue to seek opportunities to further increase our financial flexibility and strength.

We will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Omar Nokta - Dahlman Rose.

Omar Nokta - Dahlman Rose

I just wanted to ask about the - Sai on your comments about the $268 million. I know you talked about it last quarter as well. Are there any ramifications on the rest of the facility; any restrictions in place there as a result of that market valuation?

Sai Chu

No Omar. As we said before, the $268 million really has no impact. It's not a covenant; it's only an advance ratio. So what happens is, if we were to draw, we are required to look at the valuation, but after drawing we don’t look at that.

The only case is if there is a charter default. But it’s important to note that we do have more debt than we actually need to fund our new-build build program.

Omar Nokta - Dahlman Rose

And that’s what you were saying, really, you do have the debt capacity to replace that $268 million?

Sai Chu

Yes absolutely. We probably have over $400 million of debt that we don’t actually require to fund our new-builds. And we also have effectively three ships that are unencumbered that could potentially raise another $450 million of debt or other capital.

Omar Nokta - Dahlman Rose

$450 million on three unencumbered shifts?

Sai Chu

Yes, we have two at our unencumbered and two ships that are under leveraged. So if you look at those, we do have to potentially raise upto $450 million of other capital, whether it's debt or lease, all sorts of choices there.

Omar Nokta - Dahlman Rose

Just switching gears, I just had a question on the charters. Gerry had mentioned that you have a couple of contracts that come up for renewal in 2011. How do you feel right now? Are you getting an indication yet from your charterers on whether they are looking to extend those or is it --?

Gerry Wang

We haven’t received any indication at this point of time and the market conditions feel volatile. We’ll see what happens over the next 18 months.

Omar Nokta - Dahlman Rose

If I remember correctly, do these require a one-year notice of extension?

Gerry Wang

Correct, six months to one-year prior notice.

Operator

Your next question comes from Urs Dur - Lazard Capital Markets.

Urs Dur - Lazard Capital Markets

You mentioned that you have enough debt now for all of your needs and you’ve mentioned before and I haven’t yet seen it in the release. Perviously you’ve discussed how much equity you may need in the future. Am I to understand you no longer need any?

Gerry Wang

Well basically Urs we do not expect to have any requirement until later part of the delivery cycle, which is 2.5 years, until mid 2012, depending on the delivery schedules and also depending on the market conditions and the transactions we’re working on, we don’t really have any timing in our hands right now to discuss it.

Urs Dur - Lazard Capital Markets

Yes, but in previously, and again maybe, and I just haven’t seen it yet, You’ve indicated 2012, about how much in 2012?

Gerry Wang

We need approximately $180 million to $250 million.

Sai Chu

Urs, I just want to clarify we don’t have any equity capital needs until Q4 of 2011.

Urs Dur - Lazard Capital Markets

Yes Q4 2011.

Sai Chu

Yes. Q4 2010, Q1 2011. That’s when it starts. And the range is still $180 million to $240 million. We’re just saying that we have more debt than we actually need to fund the new build program.

Urs Dur - Lazard Capital Markets

That should clarify it. Gerry, can you discuss a little bit what we’re seeing with the order book? It seems like everybody’s numbers are getting slashed. I mean you saw Alphaliner go from a 13% pace to an 8% pace for this year and slashing for next year.

What other kind of slippage are we seeing and what do you expect for the growth next year and is the order book really now getting spread into 12, 13 and 14 and beyond?

Gerry Wang

I think when we’re taking about supply, the key to focus on is the effective supply, because we have to take into account the ships being (inaudible) and all those things that as you have properly pointed out. The deferrals play a major part in the effective supply as well. So we would expect next year the supply to be substantially reduced.

As a matter of fact, if you look at the stock probably next year, we’re looking at somewhere between 5% to 10%, in fact it could a little bit less than that, depending on the cancellations, conversions and all those things that I've just discussed.

The over supply situation next year won't be as a major problem as anticipated because of the actions taken have been quite effective. One thing I want to highlight here is this concept that we want to bring out to the audience here, is the term we call it super slow steaming.

We’re looking at effectively, the engine output of 10%, 15% or 20% in order to reduce the fuel consumption and also reduce the speed effectively reducing the overall supply of the ships.

This would have a major impact on the effective supply and we’ll be talking a little bit more about the super slow steaming let on during the course of the next three to six months to educate the investors and make sure that investors understand that the industry is looking very hard to reduce the effective supply.

Urs Dur - Lazard Capital Markets

It’s good to reduce the supply. The other side of the coin, demand has been improving from some areas but sort of stabilized in the last few weeks again. What’s your outlook? Are we going to see growth year-on-year 2010 over 2009 on through for the boxes, what’s your look there?

Gerry Wang

The output, if you look at the next year and the year after next, there’s one encouraging piece of information that I would like to share with you. When I was in China about 3 weeks ago, we had the Guangzhou, the Canton Autumn Fair.

What they achieved was remarkable. It was 19.6% increase in terms of volume. That’s pretty good indication of the Chinese made goods that would export in the next year. So you will see some increase on the volume out of China.

Whether or not we have a positive growth, I don’t know. But I’m sure the slow down will be reduced.

Urs Dur - Lazard Capital Markets

And on your two biggest charterers, COSCO and China Shipping, we have seen generally positive support. They have a lot of debt available to them, which they don’t necessarily need. But they’ve also reported some tough quarters. Can you comment as to what you think their specific position is in your opinion?

Gerry Wang

Well, basically ’09 emerges as you see, experiencing challenges due to the industry conditions. There is considerable stress with them. Having said that, the business is cyclical and they make significant profits in good times and during bad times they’re losing money.

And I would believe our customers are pretty well prepared, especially COSCO and China Shipping, would have a tremendous backing from the Chinese financial institutions, which are probably the healthiest in the world.

Both COSCO and China Shipping are Chinese State controlled entities and we feel that they will be the winners. Our Japanese liners represent about 20% of our contractor revenue. At this point of time, we think they’re also pretty well prepared.

So we’re quite happy with the group of charterers that we have and we have a great confidence in their ability to perform the contracts going forward.

Operator

Your next question comes from Gregory Lewis - Credit Suisse.

Gregory Lewis - Credit Suisse

Gerry, I wanted to follow up on Urs’s question about shipyard delays. You’ve been pretty successful in delaying at this point, 13 of your vessels preparing (inaudible) on to delivery. Is this something that used to be on going (inaudible) where we could potentially see more vessels pushed down and delayed and even some of the existing delays extended?

Gerry Wang

Well Greg, it depends on the market conditions and we typically work with our charterers who will tell us when they would prefer to receive those new-building vessels. At this point of time, we are quite happy with the delivery schedules.

At the same time, we are also working on some potential, further defaults as well, but nothing has been finalized. But yes, it is an ongoing process and the market conditions will be the major factor in determining the process of the further deferrals.

Gregory Lewis - Credit Suisse

And then just following up on that question. You guys have those undrawn credit fees and given that part of the reason for deferral is driven by the counter-party, has there been discussions whereby the counter-party would help pay some of those undrawn credit fees?

Gerry Wang

No, we have not entered into any discussions of that kind.

Gregory Lewis - Credit Suisse

Would that be something that would be better?

Gerry Wang

Yes, we have been talking about it, and as a matter of fact, we have been talking with the ship builders who build our ships, but nothing definitive at this point of time.

Operator

Your next question comes from Noah Parquette - Cantor Fitzgerald.

Noah Parquette - Cantor Fitzgerald

My first question back to the counter-parties. Is there any more color that you can give, particularly to some of the counter-party problems that you discussed last quarter, Hapag-Lloyd in particular?

Gerry Wang

First of all, I would like to reiterate what I said on the call. All of our charterers continue to perform in line with the charter agreements. All our charter hire remains current.

Regarding Hapag-Lloyd, effectively, as you have seen, both have taken steps to improve their situation. Hapag-Lloyd is restructuring themselves and have about ten (inaudible) supporting their equity capital from their shareholders.

So their plan appears to be proceeding well. The same with the CSAV who was taken off the inactive watch list by S&P. So we don’t really have any issues at this point of time and those are high-quality companies for our core charters.

As I said 90% of revenue comes from COSCO, China Shipping, MOL, K-Line in Japan and the remaining 10% coming from Maersk, Hapag-Lloyd, CSAV combined with this. We are very happy with the group we have.

Noah Parquette - Cantor Fitzgerald

And then Sai, with all the delivery delays that you had, you have done a great job with that, what's the new CapEx requirements going forward for the fourth quarter in 2010?

Sai Chu

Yes. In terms of Q4, it's again depending on our current delivery schedule. It's about $100 million for Q4.

Noah Parquette - Cantor Fitzgerald

And in 2010?

Sai Chu

For 2010, we are looking at - I’ll just use ranges because these things are moving. It's $600 million to $700 million for 2010, 2011 it’s $700 million to $800 million and for 2012 it's $300 million to $400 million.

Noah Parquette - Cantor Fitzgerald

And just lastly, most of the questions are answered, but can you talk more about how you calculate dilutive effect of preferred shares? Do you use like a market price or do you -can you just talk a little bit more about that. I think you mentioned in the press release that it was anti-dilutive at one point?

Sai Chu

Yes it’s really a function of the share price and it can be anti-dilutive. It just depends on the share price that you use. I think that the key for us is we just view it as $15 conversion price.

Otherwise, you get really long key numbers, because the reality is this doesn’t convert five years out and the company controls conversion. For accounting purposes you have to use the market price at the time of the quarter, which results in some pretty confusing numbers. So in our guidance we would suggest that it’s best to use sort of the basic EPS number.

Noah Parquette - Cantor Fitzgerald

Right. Okay. That’s what I wanted to confirm. Just, for the accounting treatment they use the market price?

Sai Chu

Yes. And we apologize to all of our audience for hedge accounting and the diluted effect of preferred shares. It’s a pain in the butt.

Operator

Your next question comes from Michael Urban - Deutsche Bank.

Michael Urban - Deutsche Bank

A couple of quick follow up questions. I guess Gerry maybe you can talk a little bit about - I know you guys are approached pretty much constantly with new business and assets are still obviously way down.

Just curious to how close are the term profiles to your threshold or your hurdle rates and what do you think gets unto the point where you guys will start potentially looking to take advantage of this?

Gerry Wang

Well interesting question Mike. I think it is important to note this trend and already has significant building growth from new building program. And with us it’s been -we have a history of going after growth during times of industry distress.

And for example our business started during the Asian financial crises about ten years ago. We actually considering attractive opportunities, since the timing, frankly we haven’t seen too much of it.

But we believe the opportunity will come and our philosophy is not to act too soon. We want to be very patient and we believe there will be opportunities to buy very cheap distressed assets at very good prices. The time will come.

Michael Urban - Deutsche Bank

But I guess the question I asked is, is there still asset value downside from here? I mean and so how much?

Gerry Wang

I think we’re still on the downside, going down the values. So we have to be very patient.

Michael Urban - Deutsche Bank

Just a point of clarification. You guys mentioned before that you had $400 million in excess debt. Is that inclusive or exclusive of the $268 million that you guys can’t throw in right now?

Sai Chu

Yes that includes it. So there is about $268 million of the $1.3 billion that (inaudible) capital. But there’s another $200 million committed debt facilities that we are not going to be using. And also there are two unencumbered ships, and also two that are underleveraged that we could raise probably another $450 million in capital.

Michael Urban - Deutsche Bank

All right. So I if - you have about $650 million I think.

Gerry Wang

Yes close, yes.

Sai Chu

Yes that it. Well there is - yes. $468 million that’s the amount needed.

Michael Urban - Deutsche Bank

Okay. And I guess moving to the equity. I mean you guys don’t have to - obviously you' don’t have any requirements until the back half of 2010 or even the first half of 2011?

Sai Chu

That’s right.

Michael Urban - Deutsche Bank

How do you guys think about that going forward? You’ve been pretty creative with bringing in equity, I guess along the way have you seen pockets of strength?

Do you guys think you'll be very proactive in trying to do that if we see a balance in the first half of this year or is this something that you're going to want to wait and see until we get a lot closer to your actual requirement?

Sai Chu

Well, we have to be prudent and responsible for our shareholders. We have taken some pretty strong measures in the last year bringing down our equity capital needs from over $900 million to now, $180 million to $240 million.

And our goal has always been to provide long-term shareholder value and to reduce our equity capital needs in the least dilutive manner. But we’ve been very active in the last year, looking at a lot of different transaction and we continue to evaluate the different transactions, but the important thing is we don’t have any immediate needs.

If it makes sense, depending on the transaction and if we can improve our financial flexibility and our financial strength at a reasonable cost then we certainly will consider it and we will consider the timing of it as well.

As we demonstrated that, we certainly don’t wait till the last minute on anything. We want to be ahead of the curve on things. So, as things continue to develop, sometimes these transactions take a while to do and they are new and they are complex, so our team is very active in evaluating each alternative.

Michael Urban - Deutsche Bank

A follow up to Omar’s question, I mean you guys have a series of options on most of your vessels and I think you require a one year lead time, running short of cancellation and that option, or that extension rather.

Do you guys have any sort of plan as to how you disseminate that information if and when those options are canceled? Is there something to take out of the Q or is that something you guys would be proactive about getting up to the market?

Gerry Wang

I think most likely we will talk on quality basis, because we have very few ships coming up for 2011, 2012. Our philosophy has been to have staggered, repetitive schedules. Typically, we have no more than six, seven or eight vessels to come up for the year. So, for us the impact would be quite minimum to be honest regardless of the market conditions at that point of time.

Operator

(Operator Instructions). Your next question comes from Matt Troy - Citigroup.

Matthew Troy - Citigroup

You talked about the deferrals you have been able to achieve, I was wondering if you could provide us with a little bit of detail in terms of fourth quarter and then the quarterly spread in 2010 in terms of specific delivery expectation. Just trying to get a sense for the model, when we can expect the new scheduled deliveries to hit?

Gerry Wang

Matt, we have one more ship to be delivered most likely for the remaining part of the year and next year, according to the current schedule, we have 14 ships to be delivered, again depending on the market conditions and discussions with charterers and with the shipyards. So those are all the rough estimates.

Then for the year 2011, we have approximately nine vessels and in 2012, we have four vessels, which come together for the 27 vessels to be delivered. And those delivery dates are, again estimates at this point of time. We are still looking on some additional deferrals, adjustments on the delivery time.

The key for us Matt, is when we look with charters and shipyards, we want to make sure the deliveries are out of the slow season. You want to deliver the ships as much as we can starting from February, March and finish off in October. We've been doing that for quite a few years and we’ll continue to do that.

Matthew Troy - Citigroup

And so the 14 ships, if I'm hearing you correctly, for next year, it was reasonable to assume that they would be skewed towards mid to back half of the year with very few deliveries in the first quarter?

Gerry Wang

Yes, we start from February or March, pretty evenly almost every month I have a couple ships, until approximately October.

Matthew Troy - Citigroup

And then secondary you talk about working on additional deferrals. Of the 27 remaining is it possible to delineate those which have firm or hard commitments which you cannot defer and those where you do have flexibility or do they all have some degree of flexibility and ability to defer over the timeframe?

Gerry Wang

Frankly Matt, all of them have some flexibility and we always tweak the delivery time. Some of them could be subject to minor changes and some of them could be extensive deferrals.

Again the market condition is the most important factor. We work closely with charterers and with builders, we only three builders, Samsung and (inaudible). Fortunately all the three builders are in good shape and our charterers are in good shape. So the discussion is a tripartite discussions and an ongoing process.

Matthew Troy - Citigroup

We’re obviously all hearing about anecdotes and strength in the fourth quarter in maritime shipping. I think China Shipping container line was out last night talking about strong demand thoughts persisting into November and December.

So certainly on a near term basis the sense is that we’re seeing good seasonality, we’re seeing some restocking benefit. I was just wondering Gerry, given your extensive relationships and kind of global view, what are you hearing from customers about the first quarter?

Obviously seasonally a very weak period, but might there be some spillover from the fourth quarter as restocking is a reality that hasn’t existed in past seasonality or are people looking at the first quarter with a big question mark and not quite yet sure. I'm just wondering if you're getting any initial read on needs of capacity and what might be idled or put back into service around that slower periods?

Gerry Wang

Just a couple of observations related to your question. Firstly I believe Q1 next year is going to be much better than Q1 this year, first observation. Second as I mentioned we see the Canton Autumn Fair, the volume going up and close to 20%. That will be somehow translated into the volume increase, whether the increase will be effective Q1, Q2 I'm not so sure. But at the end of the day, at least some of it will be translated into the export increase relatively speaking.

Having said that, Seaspan’s model is best on long-term fixed rate contracts. We have no exposure to this spot rate situation and the short-term volume and our contracts have an average duration of seven to nine years and we have staggered the delivery schedules.

So our model has been built to mitigate our exposure to the cyclicality of the industry and our charterers, their business model is more cyclical. They make good money in good times and that they lose money in bad times.

And our model has been built to take care of the cyclicality to make sure our cash flow is stable. To make sure our exposure on the redelivery would be minimized as well.

Operator

Your next question comes from Wilson - BAS-ML

Unidentified Analyst

I had a question looking at some of the (inaudible) for the fleet. Do you have four-second hand Maersk vessels currently on hand and I know there is a couple of them coming off contract in coming years.

Do you have any plans to sell these ships since they tend to be a little bit older than the seven years that you guys are targeting for your fleet right now?

Gerry Wang

Yes, we do have four older vessels from Maersk that we purchased from them against charter back to them. We don’t have any plans at this point of time. Again it depends on the market conditions for the year 2011, 2012.

I just want to reiterate that we have very few ships coming up for 2011, 2012. So we are not that concerned about the impact because the impact would be quite minimal.

Unidentified Analyst

And I guess to dig a little deeper on the deferral of ships, I think you guys said you something like, I counted at least ten other ships that are at least up for delivery in the next two years at least. And how much of them are actually locked in right now in terms of being built that you would be able to defer delivery of them like you have with the 11 that you just announced for the quarter?

Gerry Wang

The building cycle is about six to seven months. If construction has already started then it would be pretty hard to move around the dates, but we still can get anywhere from one month to three months flexibility. For ships that construction has not been started then they have more flexibility on moving around the date.

Operator

And that does conclude today's question and answer session and that also concluded today's conference and we thank you for participating.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Seaspan Corp. Q3 2009 Earnings Call Transcript
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