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Box Ships (NYSE:TEU)

Q3 2013 Earnings Conference Call

November 8, 2013 9:00 am ET

Executives

Michael Bodouroglou – Chairman, President, Chief Executive Officer

Robert Perri – Chief Financial Officer

Analysts

Aures Sadoor – Clarkson Capital Markets

Fotis Giannakoulis – Morgan Stanley

Mark Suarez – Euro Pacific Capital

Operator

Good day and welcome to the Box Ships’ third quarter 2013 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Michael Mason of Allen & Caron Investor Relations. Mr. Mason, please go ahead.

Michael Mason

Thanks very much. Good morning and welcome to the Box Ships investor conference call to discuss the financial results for the third quarter of 2013. I’m Mike Mason of Allen & Caron Investor Relations.

Before we start the call, there are a couple of items I’d like to cover. Many of you received a copy of the press release. It was released after the close of the market last night on November 7 at 4:01 pm Eastern. If you do did not receive a copy of the release, it is posted on Box Ships’ website and in the client section of our website. You can call our office in New York at 212-691-8087 and we will email it to you right away. 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 November 15 and may be accessed from North America by calling 1-877-870-5176 and entering conference number 10036516. International callers 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 November 7, 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, Rob.

Robert Perri

Good morning Mike, good morning everyone. Thank you for joining us on today’s conference call. Let me run through the agenda briefly. First we’ll discuss our third quarter 2013 highlights and recent developments, followed by a brief update on the company. Then we’ll 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 finally we’ll close with our investment summary.

Please turn to Slide No. 4. Our third quarter 2013 results represents our 10th profitable quarter as a public company. Our adjusted time charter revenues during the third quarter was $19.7 million for our nine vessels, and our adjusted EBITDA was $12.9 million. We reported adjusted net income of $7 million or $0.27 per basic share. In August, we prepaid $5 million of the Paragon loan and repaid the remaining $6 million outstanding from that loan in October, reducing our financial expenses and leverage while further strengthening our balance sheet to better position the company to weather the continued weakness in the containership market. On October 1, we paid the first cash dividend of our 9% Series C preferred shares, and on October 9 we sold an additional 340,000 shares, raising an additional $7.5 million in net proceeds, a portion of which was used to fully repay the outstanding unsecured loan to Paragon.

More importantly, we announced that our board of directors approved our 10th quarterly dividend of $0.06 per common share based on our third quarter results payable on November 28 to shareholders of record on November 21, which brings the total amount of dividends paid to shareholders to $2.05 per share since our IPO in 2011. We understand that the reduction in the dividend compared to the second quarter is significant, but at this point as the market remains weak and values remain under pressure, we want to ensure that we maintain our flexibility to improve our financial position in such a weak rate environment when we have several vessels coming off time charters in the coming months and only 48% fixed rate coverage for 2014, or potentially even grow the company while asset values remain at historically low levels.

The company remains committed to its policy of paying excess cash flow after debt service in the form of a dividend despite very challenging times. As a result, the board of directors will be evaluating at regular intervals market conditions to determine a potential increase in the dividend to prior levels as we find employment for our vessels that are coming off charter in the coming months.

On Slide 5, you can see our current operating fleet, the duration of our charters and their expiration date. Our fleet consists of nine containerships with an aggregate carrying capacity of 43,925 TEU and an average age of 8.8 years, which compares favorably to the industry average of 10.7 years for the entire containership industry, according to Clarksons Research. We have strategically decided to stagger the charters so that they roll off at different points in time, and the average remaining term of our charters is 13 months and all of our charterers are well-known container liner companies that have been in business for many decades.

The market for the 3,500 TEU vessels remains challenging but is slightly recovered compared to the rates we faced at the beginning of the year. Our charterers are satisfied and our operations and we have not been served any redelivery notice for Box Voyager. Every indication shows that they may continue to charter the vessel until their latest delivery, which is March 2014. In addition, we extended the time charter for Box Trader for a period of five to seven months at a gross daily charter rate of $8,000. In addition, our 4,500 TEU vessel, the Maersk Diadema is expected to be redelivered to us in early December. Currently, the market for 4,500 TEU vessels is weak with rates between $7,000 and $9,000 per day, depending on where the vessel is redelivered. We plan to continue to charter our vessels for shorter term periods, maybe for no more than a few months when the current employment ends later this year or early next as we wait for the market to recover before fixing them to longer terms.

On Slide 6, we would like to highlight that our company remains focused on strengthening the balance sheet and maintaining what we consider a moderate level of leverage. In October, we completed an $8.2 million follow-on offering of our 9% Series C preferred shares, which was used to repay in full the outstanding loan of $6 million to Paragon. This successfully reduces our interest expense going forward and improves our free cash flow. Currently, our total debt after repaying the Paragon loan is $181 million while our current cash position is $21 million, which means our corresponding net debt is $160 million, representing a moderate 41% net debt to total capitalization. We are also continually moderating our interest rate risk now that swaps remain low.

The Series C preferred shares are listed on the New York Stock Exchange and trade under the symbol TEUPRC, and you can find the quote in (indiscernible) under the tickler TEU-PC.

Now I would like to give you a brief update on the fundamentals of the containership market. On Slide 7, the top right graph depicts the Shanghai containerized freight index, which is an indication of the cost to ship a container, while the top left graph depicts time charter rates for 3,500 and 4,500 TEU vessels. During the third quarter of 2013 and year-to-date, the containership market has experienced lower average freight rates than the same period of 2012 and the charter rates remain at the same depressed levels in both periods.

Overall, container demand increased slightly for the first nine months of 2013 but there have been no clear signs of a rebound yet as supply continues to outpace demand. We have seen that rates on vessels above 5,500 TEU have also now come under pressure, although rates have declined to the mid-teens compared to the low-$20,000 per day, compared to time charter rates for Panamax sector where rates remain below $10,000 per day. There was also no clear peak season this year as liner operators geared up for Christmas season, and you can see from the above chart that any rate increase hasn’t been able to hold. Midsize vessels continue to be affected by the cascading effect as well, and many have been cascaded out of the main routes and look for new homes on some of the minor trade routes. In addition, the weakness in the charter market has pressured vessel values further, and we expect values to remain depressed for as long as uncertainty remains and the weakness in Europe continues.

We have six ships below 5,500 TEU that are expected to come open in the coming months, four of which currently have charters well above current market rates. Should charter rates for these asset classes remain at these depressed levels, we expect that we will earn significantly lower rates, including for short-term periods, than we currently have in place.

On Slide No. 8, you can see our financial results. Our third quarter 2013 represents our 10th profitable quarter as a public company, and as you can see, revenues increased by 3.4% mainly due to the greater number of operating days of Box Trader and Box Voyager compared to the third quarter of 2012. Our adjusted average time charter equivalent rate in the third quarter declined to $22,613 per day from $25,220 in the third quarter of 2012, mainly due to the lower re-chartering rates of Box Voyager. Our adjusted EBITDA was up 8.2% year-over-year to $12.9 million from $11.9 million in the year-ago period, and adjusted net income for the third quarter increased to $7 million or $0.27 per basic share from $5.5 million or $0.25 per basic share in the year-ago period. In addition, it is important to note that our amortization of intangibles, which is primarily related to above-below market time charters and share-based compensation expense for the third quarter of ’13, was $1.7 million and $0.5 million respectively, and when we adjust our EBITDA and net income, we back out these expenses due to their non-cash nature.

On Slide 9, let me show you our performance for the third quarter of 2013. Time charter revenues net of commissions and voyage expenses and adjusted for non-cash items were $18.7 million while, as I mentioned, our adjusted time charter equivalent rate was $22,613 per day. During the third quarter of 2013, our cash vessel operating expenses were $4 million compared to $4.2 million during the third quarter of 2012, a significant improvement year-over-year. On average, our cash vessel operating expenses for the third quarter were $4,876 per vessel per day compared with $5,159 per vessel per day in the third quarter of 2012, an improvement of 5% year-over-year. Our daily total vessel operating expenses, or TVOE for the third quarter of 2013 was also improved and amounted to $6,957 per day compared to $7,016 per day in the third quarter of 2012; however, we expect to see a seasonal increase in our G&A expenses in the fourth quarter along the lines of what we saw last year in the fourth quarter of 2012.

Our adjusted EBITDA for the third quarter of 2013 was $12.9 million or $15,592 per day, namely an EBITDA margin of 69%. Our total debt service for the quarter, excluding the prepayment to Paragon, was $8.7 million, which brings our free cash flow for the quarter to $4.2 million or $5,050 per day, and we are paying a dividend for the third quarter of $0.06 per share.

On Slide 10 and in conclusion, ladies and gentlemen, we continue to execute our clear, simple business and financial strategy in a sector that is a proxy for global economic growth, and despite weakness in the global economy, we continue to report profitable results. We were also able to complete a follow-on preferred share offering that allowed us to further strengthen our balance sheet going forward and prepare the company for the continued weakness in the market as six of our vessels are expected to renew their time charters in the current months.

Since our IPO, we have been actively acquiring tonnage during a period of depressed asset prices and we are positioned in the midsize containership segment of the market, which we believe has strong fundamentals and prospects going forward long-term. We have a portfolio of fixed rates charters of approximately 13 months supported by a solid and diversified group of charterers with staggered maturities. In addition, we have a high quality fleet with an average age of 8.8 years and strong performance.

We have paid $2.05 per share to shareholders since our IPO and have an owner who is willing to support the company, as he has proven time and again. We also believe that the reduction in the dividend is necessary to ensure the company maintains it’s financial flexibility so it can be in a better position when the market does turn.

With that, I can open the call to questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question is from Aures Sadoor from Clarkson Capital Markets.

Aures Sadoor – Clarkson Capital Markets

Hey, good afternoon guys. I guess you’ve just indicated some pretty strong weakness in the midsize containership sector, and I know you’ve cut the dividend so I’m sure you’re not pleased about how you at the market. However, we do see that there’s nothing on the order book in that ship size and obviously with just cutting the dividend and so on, it’s maybe not something you want to talk about; but what about further opportunities in this space? Are there ships for sale? What are the price ranges? Have they moved, where are asset values? It still seems like nothing’s been ordered in this space, so while the turnaround is taking longer than expected, really, what’s your outlook ’15 and ’16 down the road? Is there promise remaining in the space?

Michael Bodouroglou

Yes Aures, there is very little ordering. I agree with you that there is very little ordering in the Panamax sector, and not surprisingly really because the Panamax sector is the hardest hit, I think, among all size segments in the containership sector. I think the reason why you don’t see a lot of ordering in that sector is twofold: a, there is great uncertainty into what kind of sizes this industry will eventually need going forward. I can assure you that from discussions we have had with liner companies, they are equally confused. They do not know—they’re very conservative in their investment approach. They do not know how exactly the optimization of the various routes will play out with the new sizes being delivered and the redeployment of the various sizes on the routes. The so-called cascading effect is still an ongoing process and people are uncertain about how this will eventually play out, so that’s one reason why you don’t see a lot of ordering. Actually, you don’t see a lot of ordering in any sector, not only the midsize sector, which the Panamax sector.

But the other reason is that people are—liner companies as well as operators, shipping companies, they are stretched for liquidity, so there is not a lot of ordering, full stop, thankfully. Although the order book is still not negligible – there is still sizeable order book out there, albeit at historically low levels. The encouraging news is that there is not a lot of ordering and we are all waiting for the rebound of the industry, which at some should happen, especially in light of the absence of new orders. In our view, this is very closely related to what happens in the developing economies, primarily in Europe. America is doing quite a bit better, Japan as well. We are not worried at all about the developing world in tri-Asia and South America trade. What we need to see is some improvement in the European trades, which is the trade that has been suffering instead of increasing, which it has been doing for a number of years. In the past, it has been—the last few years, it has been decreasing. This is where we want to see an improvement.

Aures Sadoor – Clarkson Capital Markets

Okay, thank you very much, guys. I don’t think the—I appreciate that view on the market and I think there is long-term promise, but it’s good to hear your view. Thank you very much.

Michael Bodouroglou

Thank you, Aures.

Operator

Our next question is from Fotis Giannakoulis with Morgan Stanley. Go ahead, please.

Fotis Giannakoulis – Morgan Stanley

Yes, hi Mike and hi Rob. This is a very tough time for the containership industry, and it seems that this pain lasts longer. I want to touch on the dividend. Can you please tell us what was your rationale to keep maintaining a dividend? I would assume that right now there is a great opportunity to buy some assets and potentially build your fleet for when the market will recover when this is going to happen. Why you didn’t cut even further in order to maintain more cash to buy more assets?

Michael Bodouroglou

Well, we thought about this, Fotis – thanks for the question. We thought about that. We have thought of a number of options we have on the table, so eventually we prioritized our thinking as follows, I may tell you. The facts are the following. Fact No. 1 is that we have four of our vessels which are coming off lucrative charters by historical standards—well, by today’s standards, lucrative charters. And the market right now is considerably lower from the existing levels; in other words, for as long as the market continues to be what it is today, we are going to suffer a significant reduction in our income, in our cash flow, basically.

To cut the dividend completely—well, if the market doesn’t change, frankly, it will not give us enough purchasing power unless we raise additional equity – you know, the cash flow. By reducing our dividend even further or cutting it completely, it will still not produce enough cash for us to do any meaningful expansion in the current low asset environment, and at the same time we would be disguising—we would be hurting probably unnecessarily too hard our existing investors. So we thought the road that we are adopting is a proactive, prudent middle road. At the same time, we are still providing a meaningful, a significant yield to our investors while at the same time we are retaining cash in case this depressed market continues for longer than expected.

If on the other hand we are surprised positively by the market, if we see strength in the market and our cash flow increases, then this also gives us an opportunity then to consider either to increase our dividends or buy some assets at current levels, which are—you know, I admit that current vessel values are very attractive. They’re at historic lows, and for people that can afford to invest, I think it’s a great opportunity. And hopefully we will find ourselves in a position to do that in the foreseeable future.

Fotis Giannakoulis – Morgan Stanley

Yes. I want to ask you exactly about that. Are you still in the market and trying to take advantage of this kind of opportunity? Is there a chance that we see presenting to your investors some transaction that might be quite favorable that they will be willing to fund you, or you are abstaining completely from the sale and purchase market?

Michael Bodouroglou

Well, we are never abstaining completely. I mean, Fotis, we would not be doing our job if we did. We are always monitoring the market and we are always examining various possibilities and opportunities to implement meaningful transactions. We are always in the market, and I cannot say that we have something on the table right now but we are exploring all possibilities all the time, and these days in particular, actually.

Fotis Giannakoulis – Morgan Stanley

Do you think that there are available transactions with contracts? We saw another company recently announce some acquisitions with long-term contracts. Do you think that they are available, and if these opportunities are available, where are they going to come from? Are they going to be from liners, are they going to be from banks, and what would be a way for you to finance them?

Michael Bodouroglou

You can find acquisition opportunities from liners and banks as well; however, the opportunities that come from banks do not come from the cash flow—with the cash flow, sorry. They come—the vast majority of the deals that come from banks are on a charter-free basis, so you may be sort of incentivized to buy an asset on the cheap, so to speak; however, you have to suffer the current depressed chartering market.

What we are looking at in particular and the most interesting deals for the company’s needs right now are coming from liner companies, and they are about acquiring assets but by meaningful attractive charter rates over a meaningful period of time, during which you write down the value of the vessel to below scrap value, basically. These are the kinds of transactions that I think are meaningful and useful for the company, and it is these transactions that we are looking out to see and develop.

I have to clarify that we haven’t anything on the table, but we are always discussing, monitoring and exploring opportunities as the ones that I have described.

Fotis Giannakoulis – Morgan Stanley

Thank you for your answer. One last question – if you would have to give us some time line of the potential recovery, when do you think this is going to come? What should we start monitoring? Where do you see rates moving? You mentioned that they are between $7,000 and $8,000 for your type of vessels. If the recovery comes, at what levels would you expect the rates and when this possibly is going to happen?

Michael Bodouroglou

Well if I answered precisely to your question, I would be speculating. All one can say is that I agree the rates are $7,000, $8,000, where you said. I think it is useful to remember what the historical average rates are, and this, I think, is an indication of where rates can move once we see some balance between the supply and demand in the market.

Unfortunately, during the discussions we are having continuously with our charterers, our liner operators, we form the impression—and from our own reading of things, we take the impression that the recovery is going to take longer. Most people are not very optimistic about the next year; however, in shipping my personal experience is that we are very rarely not surprised by the developments in the market. We have seen what has happened in dry bulk, and if for example eight months ago or six months ago people were trying to convince others that there would be a recovery in the market, I think these efforts would remain in vain – it would not be very convincing. However, we have seen how quickly and how strongly sentiment has changed.

So all we have to do—it’s difficult to speculate. Things are not looking promising; however, in shipping things can move in one direction or the other very quickly and sentiment changes quickly. One thing we are certain about is that the recovery will come. We don’t know when exactly it will come, so we should be prepared and should be proactive, retain our liquidity and try to balance things as well as we can.

Fotis Giannakoulis – Morgan Stanley

Thank you very much, Michael.

Operator

Our next question is from Mark Suarez with Euro Pacific Capital.

Mark Suarez – Euro Pacific Capital

Yes, good morning everyone. Thank you for my call here. Just to go back on the vessels that are opening up for 2014 and looking forward here, can we reasonably expect the renewal of these vessels under short term contracts, as you talked about maybe leveraging the upturn when it comes, maybe late 2014 forward? How should we think about your re-chartering strategy here?

Michael Bodouroglou

Well, it will depend on the market conditions at the time of the redelivery of the vessels to us. If the market remains at low levels, current levels or a little bit higher, of course we would opt for short-term charters, as we have doing if you’re following the company, which I’m sure you are, with the Box Trade and Voyager during the last year. So we’ve been going for six-month periods, around six-month periods, and renewing after six months, et cetera because we do not want—and the reasoning is very simple, really. You don’t want to lock in too long periods under depressed rates, at rates at which you are losing money, basically.

If we saw a change of sentiment and a meaningful change in rates, then of course we would be considering longer periods and always in line with what our options are. When the market starts recovering the charterers are expecting that next year they will be paying a lot more than this year, they are willing to offer you combinations in the way—you know, they will be willing to pay a higher rate than the current rate, for instance, in return for the owner agreeing to offer the vessel for a longer period.

So depending on how rates are, we will make our decisions at that time.

Mark Suarez – Euro Pacific Capital

Got you. You also mentioned that obviously you’re not in a position to speculate as to when charter rates might improve, but you touched upon orders in the Panamax segment. We have actually seen – and maybe you can correct me if I’m wrong – a large number of new build orders from the major liner companies, especially in the large segment size, vessel size, if you will. And if you look at supply growth estimates over the past two or three quarters, they have actually risen and now they are at a point where they are actually above demand growth forecasts for 2014.

So my question relates to should we start looking at 2014 as a market similar to 2013, if you will, one that should be fairly balanced from a supply and demand perspective, and maybe 2015 and ’16 could provide maybe an upside, if you will? How should we think about this from the grand scheme of things?

Michael Bodouroglou

Well, what you’ve said is not far off our own thinking actually. We are not very optimistic about 2014. We are more optimistic about 2015 onwards, just on the basis of the numbers, of the supply numbers really. But eventually it will all depend on how the world economy does, it will all depend on the demand. And I think the positive note, if there is a positive note to be demonstrated here, it’s that this industry has been growing consistently at very compelling numbers – over 8% per year for the last 40 years, and it is only since the financial crisis started in 2009 that we have seen this trend change and sometimes reverse. We have not seen in the past the trade between Asia and Europe decreasing, but we have seen that. So if that changes, it would be a game-changer and the numbers will, especially the supply numbers, I think they will look a whole lot different than what they do today.

Mark Suarez – Euro Pacific Capital

Got you, okay. And just lastly on the option to acquire the two new builds from Paragon, are those vessels still scheduled for delivery mid-2014, and what are your thoughts as to when to best exercise the option and take delivery of those vessels at this point in the cycle? I mean, you mentioned charter rates haven’t really improved. What is your thinking around that?

Michael Bodouroglou

Well, the thinking is that while Box Ships has the option, right now as things stand at the moment, these ships are not earning money. They were ordered at higher numbers than the market is today, so it would not be an interesting acquisition for Box Ships as they are now. Paragon has declared they are going to sell the vessels anyway, and in all probability these vessels will be sold to a third party, but not Box Ships unless of course the market improves significantly by then and it becomes a very attractive investment, in which case we will go to shareholders and present the case. But the way things look right now, I don’t think that Box Ships will pay any attention to these vessels.

Mark Suarez – Euro Pacific Capital

Got you, okay. That was very helpful. Thank you for your time, as always.

Operator

Once again as a reminder, if you have a question, please press star then one.

Showing no further questions in our queue, this concludes the question and answer session. I would like to turn the conference back over to Mr. Robert Perri for any closing remarks.

Robert Perri

Thanks everyone for taking the time, and we look forward to talking to you next quarter. Have a good day and weekend.

Operator

The conference has now concluded. Thank you for attending today’s presentation. Please disconnect your lines.

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