Seaspan Corporation Q4 2009 Earnings Call Transcript

Mar.16.10 | About: Seaspan Corporation (SSW)

Seaspan Corporation (NYSE:SSW)

Q4 2009 Earnings Call

March 16, 2010 8:30 am ET

Executives

Sai Chu – CFO

Gerry Wang – CEO

Analysts

Mike Webber – Deutsche Bank

Scott Weber – Bank of America

Bascome Majors – Citi Investment

Noah Parquette – Cantor Fitzgerald

Operator

Good day, ladies and gentlemen, and welcome to the Seaspan fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions). As a reminder, today’s conference call is being recorded. I’d now like to turn the conference over to your host Mr. Sai Chu, CFO. Please go ahead.

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 21E 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 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 statements. 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 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. Thank you for joining today’s conference call. We have some slides on the web site that goes with the presentation. During the fourth quarter and the full year 2009, Seaspan’s business continued to operate as expected. First, our fleet remains fully secured on fixed rate time charters and it would continue to achieve strong utilization. Second, all of our customers continued to perform in accordance with our charter agreement. Third, we remain in compliance with all covenants for all of our debt facilities with our banks. Finally, we took decisive steps to hand our capital structure and finance our flexibility while continuing to distribute dividends to our shareholders.

Please now turn to Slide #3. Here are the highlights on the operational side. We took delivery of the MOL Emissary on November 20, 2009 and MOL Empire on January 8, 2010 from Hyundai Heavy Industries, being the third and the last of our four 5100 TEU vessels on 12-year charters to MOL Japan. All four ships have been performing attractively so far.

We also took delivery of the Guayaquil Bridge on March the 5th 2010 from Jiangsu Yangzijiang shipyard, being the first of the two 2500 key vessels on ten-year charters to K-Line of Japan. Also on March the 5th 2010, we took delivery of COSCO Japan, the first of the eight units of 8,500 TEU vessels on 12-year charters to COSCO of China.

We expect to take delivery of another five sister vessels this year, with the next ship delivery to be to COSCO Korea in April of this year. It is our understanding that all the eight vessels of this 8,500 TEU series will be facing to COSCO’s Asia-Europe phase.

With the delivery of three vessels in the first quarter of 2010, we are now currently operating a fleet of 45 vessels. Going forward, we expect to receive delivery of 23 newbuilding vessels about mid 2012.

Specifically, and subject to further changes, we expect to receive 10 more vessels for the rest of this year, 10 next year and the remaining three in 2012.

For the quarter, our fleet continued to perform well and we have achieved 99.7% utilization compared with 99.3% since 2005. We have incurred 13 days of off-hire for the Q4 and 38 days for the year, which impacted revenue for about $400,000 to $800,000 respectively.

Please note that our utilization rates include planned off hire for the scheduled dry docking requirements. It was unfortunate that on December 31st 2009, MV CSCL Hamburg was grounded in Egypt. The vessel is currently under repair at Dubai [ph]. We expect the vessel will be off-hire for about 100 days which will impact our revenue by about $2 million.

In terms of the dry docking, we expect one ship to be dry docked for Q1 2010, three ships during Q2 2010, another two during Q3 and one final ship during Q4 for a total of seven ships this year.

Please now turn to Slide #4. Here are the highlights on the financial side. We remain in compliance with all of our debt covenants. We continue to enjoy good relationships with our diversified international portfolio of lenders.

During the quarter, we increased our financial strength and flexibility by closing the second and final $100 million tranche of the $200 million preferred share issuance with a group of funders, led by Dennis Washington.

Based on the transaction as well as cash return from operations and debt equity financing currently in place, we have now secured most of the capital needed to finance our constructive growth of additional 23 newbuilding vessels.

I will now turn the call over to Sai who will go through the financial details for the quarter and the year. Sai, please.

Sai Chu

Thank you, Gerry. I'd like to begin discussing our financial results on Slide #5. As Gerry mentioned, we are pleased with our operational performance during the difficult period for our industry. Our revenue, normalized net earnings and cash available for distribution continued to grow during Q4 and the full year 2009 despite continued uncertainty and challenges in the global economy.

It is a testament to our business model of venturing into long-term fixed rate charters to selective customers and securing our cash flow. Revenues increased by 25% to $79 million for Q4 from $63 million in 2008 and $286 million for the year compared to $229 million last year. Increases in revenue are primarily attributable to the delivery of seven vessels during the year, including the one in November, and a full year of operations for the fixed shift delivered in 2008.

Q4 operating expenses were up 32% to $43 million compared to $33 million for 2008. For the year, they were up by 31% to $158 million compared to $121 million for the last year. Higher operating expenses were due to the operation of our larger fleet and increase in technical fees as of January 1, 2009.

We reported an increase in cash available for distribution of 14% for both the quarter and the year, $42 million for Q4 compared to $37 million in Q4 2008, an increase of 14% to $155 million for the year compared to $136 million last year.

We declared a $0.10 per share dividend for Q4, which was paid on February 12th, 2010. It is worth noting that we have now distributed $6.49 per share in cumulative dividend since our IPO in August 2005.

Normalized net earnings for Q4 increased by $700,000 or 3% to $21.1 million versus $20.4 million in Q4 of 2008. For 2009, normalized net earnings increased by $2.4 million or 3% to $78.5 million from $76.2 million last year. The increases in normalized net earnings were again attributable primarily to the increase in a number of operating days during the year.

The decreases in EPS were due to additional shares issued in our April 2008 equity offering and a non-cash dividend accrued to the preferred shareholders, as well as the 1.1 million accrual for delivery of fuel option expenses. Per share amounts for the quarter and the year would have been higher than the comparable prior year period if the impact of the deferred stock issuance were excluded as preferred dividend is non-cash and the earliest conversion date of the preferred stock is January 30, 2014.

For your information we are calculating our diluted EPS based on approximately 95 million common shares outstanding post the 2014 conversion of preferred shares and the current 68 million shares assuming no further equity issuances.

We had a $46 million non-cash gain for Q4 and the year for a change in fair value on our interest rate swaps. Including this non-cash adjustment, we had net earnings of 74.7 million or a $1.01 per share for Q4, and 145 million or $1.94 per share for the year.

As a reminder, we execute fixed interest rate swaps to mitigate interest rate risk and realized stable and attractive long-term cash returns to the benefit of our shareholders. Please refer to our earnings release for more information on how the change in fair value affects our financial statements.

Next on Slide #6, we will take a look at our balance sheet. As at year-end, we have strong cash balance of $133 million. Current assets totaled $146 million and total assets were $3.7 billion, of which $3.5 billion is comprised of operating vessels and new build installments.

We have drawn debt of $937 million for operating our fleet, $946 million to fund our vessels under construction $411 million for other long-term liabilities relating to our new build vessels finance using our UK cash lease.

It is important to note that except for certain circumstances our credit facilities do not contain traditional vessels market value covenants that requires to repay our facility solely because of a decline in value.

As previously mentioned, the variance [ph] ratio test on 1.3 billion credit facility continues to disallow us from drawing down remaining 270 million. This 270 million amount is not required for our CapEx program, as we have 3.6 billion of total committed debt available of the 3.9 billion and additional unencumbered ships.

In terms of CapEx, our expectation this year are approximately 720 million, broken down as 165 million for Q1, 310 million for Q2, 120 million for Q3 and 125 million for Q4. 2011 CapEx is expected to be 820 million and 2012 CapEx is expected to be 260 million. All guidance is subject to changes.

Turning to our equity capital target, I wish to clarify this amount is not required in one period, it’s required over a period of 18 months. And the range is approximately 180 million to 240 million over a period of 18 months beginning likely in Q1 2011 and ending Q2 2012.

However, we are comfortable with meeting this target, as we are actively pursuing other transactions and confident we will achieve our goal, materially reduced our equity needs and look forward to making new announcements in the next couple of quarters.

We will now be happy to take your questions. Operator, please begin the Q&A session.

Question-and-Answer Session

Operator

Of course. (Operator instructions). Our first question comes from Justin Yagerman of Deutsche Bank. Please go ahead.

Mike Webber – Deutsche Bank

Good morning, guys. This is Mike Webber on for Justin. How are you?

Sai Chu

Good morning, Mike.

Mike Webber – Deutsche Bank

Good morning. Just a couple of quick questions. Just first on the equity requirement you guys just mentioned. We’ve seen a lot of renewal activity in the broader shipping sector last couple of weeks. So maybe give some color on what sort of valuation metrics you guys really key on when thinking about raising equity and then what would you look to pull the trigger on the potential secondary?

Sai Chu

Hi, Mike, it’s Sai. First of all, our goal is to reduce our equity capital needs. So, we believe that we can reduce remaining equity capital needs through other transactions as opposed to raising equity.

Mike Webber – Deutsche Bank

Got you. When you threw out the [ph] 180 million to 240 million does that includes 100 million of cash savings from the dividend cut?

Sai Chu

Yes, it does, and again, we wish to reiterate that our goal is to eliminate and reduce that equity capital needs in the least dilutive manner.

Mike Webber – Deutsche Bank

Okay. And just I guess for book-keeping purposes what’s the minimum amount of cash you guys need to hold on your books?

Sai Chu

We don’t have any minimums.

Mike Webber – Deutsche Bank

No minimums? Okay. I guess next you mentioned the 267 remaining capacity that is restricted, and considering the size of your order book and the fact you’ve got this funding gap that you are looking to I guess eliminate the equity exposure for, I mean, how realistic is it to consider Seaspan I guess as an active buyer in the current market?

Gerry Wang

Well, basically, we are looking at focused on first of all, taking care of our building growth. We have approximately $1.8 billion of building growth, we need to take care of. Those are the big ships, the 8500 TEUs and 13500 TEUs plus the 4500 TEUs on chartered to COSCO and the K-Line. So they represent a substantial portion of total investments. So we want to make sure that all those ships were taking care of, delivered in time and with the cash, the CapEx available to take care of them.

And secondly, of course, we are looking at various ways of improving our balance sheet. As I said, we are looking at raising equity in the least dilutive way to make sure that shareholder value is preserved. And these two things are the focus. We have seen some business opportunities and some other distress situations, we keep eyes on them. But right now, our focus is on taking care of balance sheet, make sure that our building growth is taken care of.

Mike Webber – Deutsche Bank

Okay. All right. I guess, Gerry, maybe you can talk a little bit about this? I mean we have seen a fair amount of I guess rates shrink off of a bottom, but we still have about 10% in the global capacity on the sideline. How do you see that playing out over the next 12 months and at what point do you think we’re actually going to be seeing I guess the full fleet trading if you were to get us on that?

Gerry Wang

It’s a good question. At the end of the day, the liner majors, they only care about the ships they have to take care of. The 10% that you refer to is primarily the ships that are laid off, that are out of the charter coverage. Frankly, they don’t really care. The only point of time when those ships are activated is when profitability returns to operating those vessels. I don’t see that happening right away. For most of the vessels, of course, depending on the trade and individual requirements, some of the vessels may be activated to substitute for dry dock and requirements and other route arrangements this and that.

Generally speaking there is still sort of oversupply situation especially when you take into account the additional tonnage coming this year. I think the liner majors have done a terrific job in controlling the effective supply, I use the word, effective supply, the supply portion that is relevant to the liner majors, excluding the layoffs ships that are owned by certified owners, primarily the KG Investors [ph]. They’ve done a good job to take care of that.

On the demand side, as you know, the volume has come back, maybe on the demand side is primarily due to restocking for the inventories. Once the stocking is finished, the volume will come down to the normal level and at that point of time with the increase in the supply side and the decrease on demand side, the market will go through some sort of a normalization, I consider the current situation as sort of the abnormal situation is the first. Sooner or later, that will be sort of trending down, I think, overall speaking this year 2010, will be obviously much better than 2009 and even second half 2008, but other than that I think we are cautiously optimistic to say 2010 will be a great year.

Mike Webber – Deutsche Bank

Okay. Let me I guess maybe comment that in a different way. When you do your long-term budgeting and you don’t have that much actually (inaudible) near-term exposure but when you look at the 2012 and 2013 you start placing in estimates for some of your day rates. Are you doing that off of a I guess a fully delivered fleet or even for your budgeting purposes, are you guys anticipating that at least some of these capacities are going to remain sidelined?

Gerry Wang

Basically, we are looking at different scenarios. We would look at the worst scenario, i.e. for 4000 TEU vessels, because they could only earn $6,000, $7,000 per day, and we look at mid case in the best case scenario but in our budgeting process takes into account all the scenarios so that we would always be financially solid whatever situation comes up. We are confident in 2010 the market conditions will be improved. And those 4000 TEUs will be coming back in terms of the charter rates reaching sort of average level, historically.

Mike Webber – Deutsche Bank

Okay, all right. Hi, guys, appreciate the time. Thanks a lot.

Gerry Wang

Okay.

Sai Chu

Thanks.

Operator

Our next question comes from Ken Hoexter of Bank of America. Please go ahead.

Scott Weber – Bank of America

Hi, guys, it’s actually Scott Weber sitting in for Ken.

Gerry Wang

Hi, Scott.

Scott Weber – Bank of America

Hi. Just going back to the 270 million of capacity that under the credit facility, how far would your vessel values have to improve before you guys would have access to that again?

Gerry Wang

Scott, first of all, I want to make it clear, we don’t need the money, okay, number one. We are over debt finance for lack of a proper expression. Secondly, the value is improving. And I think at the end of the day the charter rates improving, the demand situation is going to be normalized. On the supply side, the liner majors continue to do good job, so I wouldn’t be surprised that the charter rates would reach the level of average historical amount over the next two years to three years. So probably that would be the time when the valuation would come back to the level that would allow us to do the drawdown of this $270 million.

Scott Weber – Bank of America

I see. And on one of the slides as of 12/31, you had a vessel value of about I think it was 3485, does that take into consideration the valuation that was done in December?

Sai Chu

Hi, Scott, it’s Sai. That’s from our balance sheet –

Scott Weber – Bank of America

Right.

Sai Chu

And those accounting is based on historical cost not market values.

Scott Weber – Bank of America

Okay. What was the valuation in December?

Sai Chu

We don’t disclose our valuation –

Scott Weber – Bank of America

Okay.

Sai Chu

The charter free [ph] valuation we feel are not appropriate or relevant for how we view our business, because we have long-term charters, so really charter or cash valuation actually have stayed relatively stable.

Scott Weber – Bank of America

I see.

Sai Chu

The fact that we have on average 11 years remaining charter life.

Scott Weber – Bank of America

Sure.

Sai Chu

That’s not a metric we typically disclose or discuss or feel that is relevant to our business.

Scott Weber – Bank of America

And just taking a step back to kind of the macro picture that you guys have laid out where you are cautiously optimistic, would you say that the market has bottomed or do you see potential for rates coming back down as new capacity comes on line later this year?

Gerry Wang

Scott, you have actually asked the question, I think the market for the foreseeable future has bottomed. But I also see the fed rates going through the roof right now. For example, if you look at the fed rates from Asia to Europe, the index right now is that over $1,500 per 20-foot from base spot in China and to base spot in Europe versus $350 12 months ago. So this is a huge jump for example. But I also see the increased supply and the normalization of demand after the restocking process I just mentioned.

So I would expect the fed rates to normalize, to come down a little bit, but at the same time we have to change our -- the fact that summer season has come out, depends on the U.S. dollar situation, depends on the global macro conditions, the American consumers and the European consumers, but we remain cautiously optimistic as far as next two years, three years are concerned.

Scott Weber – Bank of America

Okay, terrific, thanks, guys.

Gerry Wang

Thank you.

Operator

Our next question comes from Matthew Troy of Citi Investment. Please go ahead.

Bascome Majors – Citi Investment

Hi, Gerry, this is Bascome Majors in for Matt.

Gerry Wang

Hello.

Bascome Majors – Citi Investment

You talked a little bit earlier about your order book delivery schedule with the comment subject to further changes. I was just trying to get a feel for how firm that is and if the variables going forward around ships that you haven’t delayed yet or on vessels that may have some sort of options to be pushed out of few more months or longer at this point?

Gerry Wang

Thanks. First of all, we will publish the exact delivery schedules time on the web site subject to obtaining consent from our builders. We are in the process of doing that. We’ll give you pretty precise delivery times for all the 23 vessels over the next 2.5 years. The delivery situation right now is quite steady. The deferrals are not in the discussions any more, because the charters are not coming to us and asking for further deferrals. As a matter of fact we have received request from two charters to three charters to advance the deliveries a little bit for two to three weeks and four to five weeks respectively. So we believe the schedules that we will provide will be fairly reliable. And depending on the market conditions, we believe the further deferrals will be quite unlikely.

Bascome Majors – Citi Investment

Okay. So in the industry as a whole, we have seen a lot more slippage than cancellations at this point, do you feel like there is still potential for major cancellations on the bulk ship order book and if so, where and when does that come from?

Gerry Wang

Yes, we have seen some slippage in cancellations, conversions and all those things. But I want to really highlight a couple reasons behind the screen. Number one, there is still tremendous issues with regard to the availability of the capital. A lot of delays have been really due to the lack of capital, to finance the delivery of those vessels.

Secondly, we have seen that some delays that have been really caused by the requests of the charters in response to the market conditions, but we feel that part of the requirement is coming down, because the market conditions, especially for big vessels due to slow steaming, due to slippage, cancellations, all those things, they are doing pretty well.

So overall speaking that I don’t expect many cancellations or conversions for the big vessels; however, I won’t be surprised for some smaller vessels, the 2500 TEUs, 1700 TEUs to be converted into dry bulkers as we have seen from what has happened, for example, the First Ship Lease has converted some of the smaller vessels into dry bulkers. For the bigger vessels I don’t see that happening frankly speaking.

Bascome Majors – Citi Investment

One point, you mentioned that some people have actually been asking for earlier rather than later deliveries lately, has the view from your charter counterparties changed or have you stopped receiving enquires as far as rate discussions and that sort of thing with the rate improvements that’s happened in the last few months?

Gerry Wang

They wouldn’t have [ph] change dramatically and I just want to make sure that everybody understands that we have never entered into any renegotiations with any of our charters and all of our charters have performed exceptionally well, including our friends CSAV and Hapag-Lloyd. We are extremely pleased with the performance of our charters. So renegotiation has never been the case for us. And we are very comfortable with the portfolio of charters we have.

And going forward, the charters and creditworthiness will continue to be number one criteria when we decide which project to take. Then we look at the type of vessels that we want to take on. So in the long-term business we believe the charters creditworthiness would be the most important feature for our business. Secondly, I want to mention that our charters right now, they need vessels for certain trade.

For example, Asia-Europe trade, especially for larger vessels, there is tremendous super slow steaming going on, for example, 8500 TEUs will all be phased in into COSCO’s Asia-Europe services in the expanded slow steaming mode, i.e. from eight vessels for the loop, to ten vessels for the loop. So there is a demand for larger vessels to deal with the cargo surge and the demand restoration for the major trades.

Bascome Majors – Citi Investment

All right, Gerry, thanks for the time.

Gerry Wang

Thank you.

Operator

Our next question comes from Noah Parquette of Cantor Fitzgerald. Please go ahead.

Noah Parquette – Cantor Fitzgerald

Thank you. Good morning. I had a question on slow steaming, I was wondering if you could maybe quantify the effect of slow steaming has had on effective supply over the last year or so?

Gerry Wang

I think slow steaming is becoming more and more popular, starting from this year, given the increase in demand. The operators have been quite successful in working with each other in reducing the capacity effectively by operating more vessels on one route. And the economics is obvious, especially, if we take into account 35 or 40% of the operating cost being fuel cost.

At this point of time for Asia-Europe trade [ph], the general practice is to insert two additional vessels from eight to ten vessels, some from nine vessels to 11 vessels. The speed would come down from generally 23 to 25 knots to on average about 18 to 20 knots. And the economics is quite good. For example, for 8,500 TEU vessels, if we reduce the speed from 25 knots to 18 knots, we can half the fuel consumption, that is the dramatic impact on the operating cost. And the liner majors have seen that and they are executing the slow steaming mechanism quite effectively. This is the one of the main reasons for the effective supply to be really under control.

Noah Parquette – Cantor Fitzgerald

And so going forward, do you think that can reverse if rates rebound and fuel prices stay low or is that something that you think is semi-permanent?

Gerry Wang

I would see semi-permanent approach by the liner majors. Number one, the oil prices continue to stay high, that’s the agreement you and I have. Secondly, I think the liner majors also realize by slow steaming they actually are responding to the requirements of CO2 emissions and other environmental concerns.

Noah Parquette – Cantor Fitzgerald

Okay, great. And then another industry question. What effect do you think a Chinese currency revaluation would have on the container market?

Gerry Wang

Well, this is getting to politics now, and I don’t see major impact because then -- our charters are taking care of both imports and exports. As the Chinese currency goes up, probably exports will come down, but the imports move up, so then that would encourage sort of a more-balanced trade. So as far as operators are concerned I think they will be doing fine.

Noah Parquette – Cantor Fitzgerald

Great. And then just one final thing. Sai, how much was capitalized interest during the quarter?

Sai Chu

I believe it was around 3-odd million or so. I can come back and confirm that number to you.

Noah Parquette – Cantor Fitzgerald

All right, thanks.

Sai Chu

Okay.

Operator

(Operator instructions). I am showing no further questions there.

Gerry Wang:

Okay, great. So thank you very much for participating in the call. We are looking forward to talking to you next quarter. Thank you very much. Have a good day. Bye-bye.

Operator

Ladies and gentlemen that does conclude today's conference. You may all disconnect and have a wonderful day.

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