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Seaspan Corporation (NYSE:SSW)

Q1 2010 Earnings Call

May 12, 2010 8:30 am ET

Executives

Gerry Wang - Chief Executive Officer

Sai Chu - Chief Financial Officer

Analysts

Gregory Lewis – Credit Suisse

Scott Weber – Merrill Lynch

Urs Dur – Lazard Capital Markets

Rob Salmon – Deutsche Bank

Matt Troy – Citigroup

Noah Parquette – Cantor Fitzgerald

Ben Nolan – Jefferies & Company

Operator

(Operator Instructions) Welcome to the Seaspan Corporation Conference Call to discuss the financial results for the three months ended March 31, 2010. Hosting the call today is Gerry Wang, Chief Executive Officer for Seaspan Corporation and Sai Chu, Chief Financial Officer of Seaspan Corporation. Mr. Wang and Mr. Chu will be making some introductory comments and then we will open the call up to Q&A. I will now turn the call over to Sai Chu.

Sai Chu

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 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.

We will now begin our presentation. Please refer to the live webcast presentation slide as provided on our website. In addition, you will find details regarding our Q1 results and our earnings release filed yesterday after market close. Please turn to slide three of our webcast presentation.

During the quarter we earned $20 million in normalized net earnings compared to $19 million for 2009. The increase is due to deliver of 10 additional vessels to bring our operating fleet to 45 vessels this quarter compared to 35 at the end of Q1 last year. This resulted in 3,797 operating days this quarter versus 3,149 for Q1 of last year.

Our normalized diluted EPS for the quarter was $0.20. Our normalized converted EPS for the quarter was $0.24. This compares to $0.25 for Q1 last year. I will discuss in further details our EPS and methodology of calculation later on in the presentation.

We generated $40 million in cash available for distribution, a 16% or $5.6 million increase from Q1 of last year. We declared 10-10 dividend per share for Q1 2010 which will be paid on May 18, 2010. This will result in a total of $6.59 per share in cumulative dividends since our IPO in August 2005.

I will now pass the call over to Gerry who will provide details on our highlights for the quarter.

Gerry Wang

Please turn to slide four. First, we’re pleased to announce the completion of transaction by one of our wholly owned subsidiary companies for the sale and leaseback of one of our previously unencumbered 13,100 TEU vessels to an affiliate of a leading public traded Chinese bank. This transaction demonstrates our continued success in funding our contracted fleet growth and represents about $150 million at up to 80% of the anticipated original vessel deliver costs of about $180 million.

Seaspan will also maintain operational and commissional control of the vessel. We also retain the right and the flexibility to make a partial or full repayment of the lease post-delivery. This will provide us with the ability to essentially cancel the transaction and reacquire the ship post-delivery subject to certain fees. We would like to highlight that this transaction is consistent with our stated goal of enhancing our capital structure while minimizing dilution to our shareholders. We’re pleased with our progress in this regard.

During Q1 we also continued to grow our fleet and achieve a milestone with the delivery of the COSCO Japan to COSCO Container Lines. This ship is the first of 8,500 TEU vessels to be delivered to COSCO and has been introduced into the Asia/Europe trade route. The delivery of the COSCO Japan marks the beginning of a total of 16 large vessels to be delivered to COSCO over approximately the next two years. We look forward to continuing to meet the needs of the Chinese and other Asian liner measures as we fully solidify our position as a valued business partner in this important region.

During Q1 2010 we accepted delivery of three vessels in total. The COSCO Japan as just mentioned, the 2,500 TEU vessel on charter to K-Line and the 5,100 TEU vessel on charter to MOL. The vessel delivery to K-Line is the first of two 2,500 TEU sister vessels and the first of a total of seven vessels to be chartered by Seaspan to K-Line.

The vessel delivery to MOL was the last of four Seaspan vessels on charter to MOL all of which are subject to 12 year contracts. We’re pleased to mark the completion of the significant new build in project for MOL. We’re proud to be one of the first non-Japanese owners to provide vessels to the major Japanese line operators for long term charters, which allowed us to further diversify our customer base.

For the quarter, vessel utilization was 97.2% this included 20 days of scheduled off-hire for the CSCL Vancouver, one day of unscheduled off-hire for the Cap York and 90 days of unexpected off-hire for the CSCL Hamburg. The CSCL Hamburg ran aground in the Gulf Aqaba on December 31, 2009, resulting in a total of about 100 days off-hire and as I mentioned, 90 days was specific to Q1 2010. The approximately 100 days off-hire represents about $1.8 million in lost revenue. Further, we have incurred about $200,000 in insurance deductibles and some other miscellaneous expenses.

Although the vessel was not expected to undergo its next scheduled five year survey until 2013 we choose to combine the repairs with an earlier dry-docking to achieve savings and defer the next scheduled dry-dock for the ship to 2015. The vessel was back in service on April 12.

I would like to turn the call back to Sai for discussions on our financials.

Sai Chu

Please turn to slide five for our Q1 income statement for 2009 and 2010 comparison. As discussed, our results have increase due to delivery of three ships during Q1 and seven ships from Q2 to Q4 2009. Q1 revenues increased 27% to over $80 million from $63 million last year. Ship operating expenses were up 27% to $22 million compared to $18 million in 2009. Our results were impacted again by a $66 million non-cash mark to mark adjustment for interest rate swaps due to a decrease in the forward Libor curve.

As I mentioned at the beginning of the call, normalized earnings increased by 6% to $20 million in comparison to 2009 of $19 million. EBITDA increased by 29% to $56 million compared to $43 million last year.

I’d like to spend a few minutes discussing our share count for EPS. As mentioned previously, our normalized diluted EPS for the quarter was $0.20 compared to $0.24 for the same period in 2009. For diluted EPS we base this on US GAAP methodology that requires us to convert our Series A Pref shares into common shares using the 30 day trailing average price of our shares calculated at the beginning of the applicable quarter. Unfortunately there have been some variations for analysts and street consensus EPS and share counts and it may have been due to the confusion over our diluted EPS calculation using the US GAAP methodology, along with changes in our delivery schedule and other factors.

Given our transparency, our conservative and predictable business model, we feel EPS estimates should be more in line. As a result, we’ve now introduced a new non-US GAAP EPS calculation which we believe is more representative of our operations along with being simpler and more objective than US GAAP methodology as it is not subject to predicting a future share price that may not be relevant in the actual conversion price of our press.

The normalized converted EPS uses a fixed $15 conversion price for our Pref shares which is the automatic conversion price if our shares are over $15 at the conversion date. If the shares are below $15 we do control conversion, by having an option to continue the press. Under this methodology our normalized converted EPS for the quarter was $0.24 compared to $0.25 last year. We recommend that analysts and investors use this methodology in the future to insure consistent and comparable EPS forecasts given our highly predictable model.

Please refer to page 14 of our earnings release for a detailed discussion and calculation for basic, diluted and converted EPS. We will continue to provide all three EPS figures for comparative purposes in the future. Based on the normalized converted $15 conversion price methodology the converted common shares for this quarter was 82.2 million shares. I will discuss later our share count expectations for the rest of the year.

Please turn to slide six for our balance sheet as of March 31, 2010, compared to December 31, 2009. We continue to have a strong cash balance of $80 million, total current assets were $89 million, and total assets were $3.9 billion of which $3.8 billion is comprised of operating vessels and new build installment. For debt we’ve drawn $1.2 billion for operating fleet, $882 million to fund our vessels under construction and $491 million for other long term liabilities related to our new build vessels finance using a UK tax lease and the sales leaseback transaction.

We have more than sufficient debt to fund our CapEx program and we are in full compliance with all of our debt covenants. Now that we’ve covered our key financial characteristics for the quarter, I would now like to discuss our expectations for the coming quarter.

For revenues we would like to direct you to our fleet list and associated vessel charter rate and OpEx rates as disclosed in our notes for Q1 2010 financial statements. These rates can also be found on our website under tab Seaspan fleet shortly. For deliveries, going forward we expect to accept delivery of 21 new builds through to approximately mid 2012, specifically and subject to further changes there will be a total of 12 expected deliveries for this year of which five have already been delivered, three in Q1 and two so far in Q2 being COSCO Korea and the COSCO Philippines.

For 2011 vessels are expected to be delivered and our final three of our current new build fleet are expected to be delivered in 2012. Again, all deliveries are subject to occur the changes based on customer scheduling requirement. Further details on our upcoming deliveries and dates can be found on our website under the tab Seaspan fleet shortly.

In terms of dry-dockings, we expect approximately a months worth of dry-docking for Q2 including the dry-docking incurred for the CSCL Hamburg. We expect a total of 90 days of dry-docking for the full year; these numbers are subject to change.

CapEx, our expectations for the remainder of the year is approximately $460 million broken down as $220 million for Q2, $110 million for Q3, and $130 million for Q4. 2011 CapEx is expected to be about $790 million and about $230 million for 2012. Again all guidance is subject to change. Please note that we have no equity capital needs until the beginning of Q2 2011 and ending Q2 2012 then we will need approximately $140 million over that 12 month period to fund our remaining CapEx new build.

I’d like now to review our expected converted share count for 2010, this is relevant for the accurate calculation of our normalized converted diluted EPS as discussed earlier on the call. Based on no planned equity raises, our anticipated converted share count is approximately 82.3 million for Q2, 82.7 million for Q3, and 83.2 million for Q4.

I’d now like to turn the call back to Gerry for a discussion on our company’s business model and general industry fundamentals.

Gerry Wang

I would like to reiterate our company fundamentals and the conservative business model which we believe has enabled the company to perform well, especially during challenging times.

Please now turn to slide seven. As you know, Seaspan is the leading independent container ship owner with a large modern fully contracted fleet of 68 vessels, representing approximately 4% to 5% of market share. We produce stable cash flows from our primarily long term fixed rate charters of our fleet to high quality liner managers. Our customers have continued to perform as expected.

Our manager provides full scale efficient ship management with proven technical expertise and innovation. I would like to highlight that we have achieved a high utilization rate of 99.2% since IPO. Our uniqueness lies in our experienced management team with a strong business relationship foreseen risk convert conservative business model. Our strong sponsor support with long term commitment to the company demonstrated through their cash investment over $700 million. Our history of prudent divisions to raise capital both debt and equity to enhance our capital structure and our history of seizing opportunities including our significant growth during market downturns.

Please now turn to slide eight. You can see graphically that Seaspan has built in strong building growth. The company has more than tripled its contracted fleet capacity since IPO representing an annual growth of about 39%. However, 21 remaining ships are to be delivered by approximately mid 2012 for which we have nearly all our capital in place.

Please now turn to slide nine, our projection. We expect to exceed approximately $700 million for year of contracted revenues, $500 million of EBITDA and $300 million of distributable cash flow starting from the year 2013 when all our new builds are delivered.

Please now turn to slide 10. You can see that as of today we will have approximately $7 billion in contracted revenue for our fleet, specifically 90% of our revenue will come from strong Chinese and Japanese liner managers.

Please now turn to slide 11. I would like to speak about the container shipping industry even though Seaspan have no ships up for renewal until mid next year. 2010 year to date has shown strong recovery in industry fundamentals, most liner managers have reported profit for Q1 2010. Specifically demand in 2010 appears to be improving faster than expected according to industry reasoned estimate; cargo volume will grow about 10% for the year 2010 which is significantly greater than the original forecast of 5%.

The trend supply contrasts 2009 demand contraction of approximately 10%. Additionally, energy supply growth continues to be curtailed through deferrals, cancellations, conversions, extra slow steaming, etc. As a result of controlled energy supply and the improved cargo volume, freight rates have been showing stable and upward trends. However, uncertainties in the global economy in general continue to exist. We are cautiously optimistic about the future demand picture.

In spite of all the uncertainties we believe the worst is over and Seaspan has emerged from the worst period of time in the container industry unscathed. We now view the current market conditions as an opportunity to continue to increase our market share.

Before opening the call to questions I would like to reiterate that through a challenging time for the container industry Seaspan’s business model has been stress tested and it has continued to perform as expected. We have made significant progress funding our growth and have continued to expand both our fleet and the contracted revenue stream.

Going forward, we’ll continue to improve our balance sheet and capital structure so that we can always stay healthy and be in the position to capitalize on the opportunities through different cycles. We have a pretty strong franchise and we will try our best to solidify our position as the leading container ship supply in order to maximize value to our shareholders on the long sustainable basis.

Now I would like to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gregory Lewis – Credit Suisse

Gregory Lewis – Credit Suisse

Congratulations on the sale leaseback transaction. Could you provide us some more detail on that in terms of what the current lease rate is is there a purchase option, what is the price of the purchase option?

Gerry Wang

Basically this transaction is to cover the financing for one of the 13,100 that still unencumbered out of the eight 13,100 that we have on long term charter to COSCO. Because of COSCO’s name and because of Seaspan’s healthy vantage the Chinese bank, one of the largest Chinese banks have decided to step in to buy the ship from us hence the long term leaseback to us, on a back to back basis on the basis of the charter that we have with COSCO.

The structure of the transaction is to be off balance sheet to provide not just financial but also contribution to capital structure to give us the flexibility in case we need to take the ship back we can do that. There is a formula built in for different prices, different times, if we choose to take the ship back. This is a financial lease so we have tremendous flexibility before the delivery of the ship throughout the expiring of the charter Seaspan has the option to take the ship back at any time.

Gregory Lewis – Credit Suisse

What are the terms of the leased in rate?

Sai Chu

The key terms we do not wish to disclose for competitive reasons but it is a market transaction in terms of practically better than market because it represents 80% of the vessel delivered cost. In addition, the rate is certainly within the market range of about 150 basis points to 300 and it’s a 12 year term. The cost of the financing is not materially different than our existing all in cost debt which is around 6.1%, it is probably within 100 basis points of that.

Gregory Lewis – Credit Suisse

Are you able to disclose which vessel it’s for, of the eight?

Sai Chu

Its one of our unencumbered ships, its Hull 2181.

Gregory Lewis – Credit Suisse

Should we expect more of these types of transactions to sort of filter out over the next couple quarters, or is this a one time transaction?

Gerry Wang

We have been working on similar transactions for some time and obviously we’re quite interested in this type of transaction to give us the flexibility for our capital structure and also to take care of the financing of the unencumbered vessels to further give us additional financing capability. At this point in time we have concluded this one and we don’t have anything firm to report at this point in time. I can assure you we continue to be working hard to look for opportunities like this to further enhance our capital structure.

Sai Chu

I want to clarify a couple other things. We saw your note this morning and we wanted to make sure it was understood that even though this is $150 million it does not count one for one against reducing our equity capital needs. In addition, we want to make very clear that Seaspan Corporation is not providing a guarantee on this transaction; it’s really a transaction of our subsidiary so it is non-recourse to Seaspan Corporation. For accounting purposes this will appear on our balance sheet on a consolidated basis but it’s strictly for accounting purposes, whereas legally Seaspan Corporation does not have an obligation.

Operator

Your next question comes from Scott Weber – Merrill Lynch

Scott Weber – Merrill Lynch

In looking at the container market overall it seems that rates strengthened in recent weeks. Do you see that as short term or the beginning of a sustainable rise and would you say that that’s what’s been responsible for that has been more strengthening demand, supply getting scrapped or is it slow steaming, what would you attribute the recent rise in rates to?

Gerry Wang

There are two reasons; one is the controlled supply, tonnage supply as I’ve just mentioned the industry’s done a very good job in terms of deferrals, cancellations, conversions, and also super slow steaming for the major trades especially between Asia and Europe. The second reasons is on the demand side cargo volume has been growing faster than anticipated. We anticipate approximately 10%. Those two factors combined really have produced a very stable rate and as we can see for most of the liner majors they have reported profits for Q1.

We are still cautious and optimistic about the future developments especially related to the demand side given what we’ve seen with the EU zone and also the uncertainties in the global economy in terms of the slowdown of the consumer purchasing power and also the sovereign debt issues related to quite a few countries as you have seen.

The charter rate has recovered quite substantially and we can report that today the TEU vessel, the charter rate for one year to two year period should be around $20,000 per day which is substantially more than $6,000 to $7,000 per day a month ago which is a strong sign of recovery of the industry fundamentals.

Scott Weber – Merrill Lynch

When you think about that and you look forward into 2011 with the vessels you have coming off charter then, I think that $20,000 a day is still below long term average. Would you think about, two questions really, those vessels coming off are older so relative to the rest of fleet would you look to charter those out again likely or to maybe sell them and if you were to charter them out do you think you’d look for shorter term charters if you expect continued rise in rates or would you still focus on longer term charters?

Gerry Wang

You are 100% correct; we don’t have any ships up for renewal until mid second half next year. We’ll see where the market conditions will be at that final time. We have 12 months in the hands to deal with the renewal issue provided China shipping the current charter is going to exercise the option for the charter of those ships. We’re optimistic about the charter rate we can obtain, we don’t have specific plan in place as to whether we dispose of the ships or continue to charter the ships for longer term or shorter term.

At this point in time we want to wait and see and good news is the market has been improving and charter rate for this type is about $20,000 per day which is substantially higher than what we’ve seen over the last 12 months. Even those ships are 10 years old the conditions and also the technology for this design are still very good and we don’t see any reason to have a discount to the ships that we have coming out of charter next year.

Operator

Your next question comes from Urs Dur – Lazard Capital Markets

Urs Dur – Lazard Capital Markets

I noticed on the questions in regard to the sale leaseback but I also noticed requirement for equity is down from mid year next year to mid year 2012. This has contributed to that improved situation correct?

Sai Chu

That’s correct.

Urs Dur – Lazard Capital Markets

But it is a non-recourse deal but still the contract operates on the P&L very similar to how it was operating before right?

Sai Chu

That’s right.

Urs Dur – Lazard Capital Markets

The other thing is obviously you’re very in touch with things on the ground in China not just leasing ships. I was wondering if you could give us some color in your view on, obviously not speaking for those involved, your views on whether China can take air out of certain perceived bubbles and have a slower/softer landing or are there real stresses in the overall structure that make you nervous?

Gerry Wang

I’m actually very bullish about the Chinese economy and I don’t agree with the bubble theory. In my view a bubble is very, very high supply without demand, which is not the situation in China especially when I refer to you the real estate housing market in China; there is a tremendous demand there for better housing, for better living conditions, and the signs of living there improving very fast. I think the Chinese economy will continue to do very well.

The Chinese exports will continue to perform very well and you will be surprised at the Guangzhou export fair this year. I think you will see some very good numbers come out of the Guangzhou fair. The challenge to the Chinese export industry right now is believe it or not a shortage of labor for the coastal regions because of the development going on in the interior part of China. I think the Chinese banks are pretty healthy with the support of the Chinese government. I think they will be very strong.

I think also the domestic demand in China will continue to do very well. The standards of living will continue to improve and I see a very healthy Chinese economy going forward even though we will see some changes in the growth rate from 12% or 13% probably down to 8% or 9% which is still a tremendous growth rate in my opinion.

Urs Dur – Lazard Capital Markets

You mentioned a relatively firm domestic demand but China is still while developing tremendously and I’m fairly bullish myself, China is still very dependent on the Western economies recovering as well as it still export driven. Then there’s this question as to possibly revaluing the Yuan up, however if the West goes into double dip that doesn’t make much sense. If they were to revalue up and I don’t believe it has any impact on you but would it have any impact whatsoever on Seaspan’s contract/operations?

Gerry Wang

To answer the last part of your question, first the Chinese Yuan situation has nothing to do with operations; all our contracts are in US dollars. To answer the first part of the question, the Chinese exports are very important to the Chinese economy but we must keep in mind the Chinese export is only related to about 2% to 3% of the Chinese GDP, the majority of the growth of the GDP is from domestic consumption of the products and services. We should always keep that in mind.

Even we take out the 2% to 3% as I mentioned related to the exports completely the Chinese economy would still be 8% to 9% growth derived from the domestic consumption of products and services and the government expenditures etc. Going forward there will be pressure on the Chinese RMB but I believe the impact on the overall Chinese economy as a result of the appreciation of RMB will be limited.

Operator

Your next question comes from Rob Salmon – Deutsche Bank

Rob Salmon – Deutsche Bank

A couple company specific questions before I shift to broader industry topics. You guys had mentioned that your equity capital needs to moderate to about $140 million down from $180 to $240 million in the press release. Was you ability to temper your equity needs was this the direct result of the sale leaseback transaction or is there something else going on?

Sai Chu

A significant portion of that equity capital need reduction was from the sales leaseback transaction but also just refinements in our corporate model and adjustments in the delivery schedule accounted for that reduction.

Rob Salmon – Deutsche Bank

It sounded like the sale leaseback opportunity is something that you guys may look to employ more going forward. I think you had mentioned how many unencumbered vessels that you have that could be structured in a similar sale leaseback transaction.

Sai Chu

Yes, we’ve got another ship that’s unencumbered; we also have another two ships that are under leveraged. There is additional capacity for financing as we stated as far back as 18 months ago we would look at a variety of transactions that would be helpful in strengthening our capital structure and given its greater flexibility and we’ve already executed four in the last 18 months. We are active and focused on executing transactions that again, enhance our capital structure going forward, with the least dilutive effect to our shareholders.

Rob Salmon – Deutsche Bank

Shifting broader topic to the industry, the industry has significantly reduced its field consumption needs through the use of slow steaming going down to speeds of roughly 18 to 20 knots down from 23 to 25 for example. What do the economics look like for further reducing speeds from current levels and is this a tactic that you expect the industry to employ as more of the new builds enter the seaborne trade over the next several years?

Gerry Wang

You are 100% correct. The speed level has come down from an average of 23 to 25 knots to approximately 18 to 20 knots for the major trades. The future development will very much depend on the oil price. If oil prices continue to rise I would expect further reduction in speed performance. One of the main reasons for that is fuel costs account for approximately 35% to 40% of the operating costs for the liner majors which is significant if you look at all the other components; the ship costs, the steaming costs, container blocks costs, fuel costs the single largest item in the overall operating costs for the liner majors.

Also specific to different routes for shorter routes for smaller routes, slow steaming hasn’t been a major factor, super slow steaming has been very evident to the major trades especially between Asia and Europe and Asia and North America. For example, we have delivered so far four 8,500 TEU vessels to COSCO all of which actually deployed in the slow steaming mode between Asia and Europe, that’s just a good indication why I was talking about the controlled tonnage supply in the demand supply curve which has led to the influence in the freight rates. The demand is moving up but the supply is actually coming down or at least saying flat.

Rob Salmon – Deutsche Bank

Obviously we’ve seen a pretty big spike off depressed rates overall in the liner industry. Have your expectations in terms of your credit philosophy, has that changed given the move that we’ve seen off the depressed rates as the demand has picked up?

Gerry Wang

No, and we’ve been conservative throughout all the cycles and our philosophy is to stay very conservative and make sure that we keep our own system healthy first before we do anything to enhance our growth. Our philosophy will not change as far as Seaspan is concerned as far as the industry is concerned I’ve seen more discipline during this cycle than all the other cycles in the past.

I guess most line majors were prepared for longer and more severe downturn than what we have seen. Nobody had anticipated a dramatic recovery starting from Q1 2010. You probably have seen the report from the major liner operators including Maersk, CSCL and others, all of which have reported profits for Q1 2010.

Operator

Your next question comes from Matt Troy – Citigroup

Matt Troy – Citigroup

I wanted to start broadly on an industry question. We’ve seen idle bound ship capacity come down from the 10% to 12% range to more of a 7% to 9% range recently depending on whose figures you look at. The order book is still pretty high though at north of 30% of the un-watered fleet. I was wondering if you could talk about given your share, your presence, your relationships when do you see a more poundable supply/demand equilibrium is it 2012, is it 2013 and what are the changes that need to occur to get us there?

Gerry Wang

The industry still has some ships idling but the key answer to the question is actually size specific. For large sizes generally speaking we have no ships idling especially for ships over 3,000 TEU. The demand 4,000 TEU, 8,000 TEU, 10,000 TEU, 13,000 TEU is actually very strong, partially because of economy of scale advantage. For the smaller ones depending on the sizes and the location you will see more and more ships freed up from lay-ups.

I think towards second half this year if there’s no further disruptions like what we’ve seen through the EU zone, through the global economy you will see most ships coming out of the last four or different sizes. As we speak right now the largest ships are not in lay-ups at all, the smaller ones are there from place to place.

Matt Troy – Citigroup

Is the behavioral change vis-à-vis the order book is that something where the ship holders, the yards themselves, the banks, everyone has to throw a little bit into the kitty or do you see a change in behavior in terms of the ship yards willingness to be more flexible where we’ve obviously seen you able to negotiate several terms? How do we start then scaling that 30% order book to a more accountable supply demand equilibrium one or two years out?

Gerry Wang

I hope the industry will stay disciplined to be honest with you and I don’t see any new build orders to be placed in the near future, primarily because of the issue related to the availability of the capital given in all the headaches that the banking industry has gone through. Plus the liner majors have just come out of probably the worst downturn in history earning a lot of cash and the owners are still going through some tough times and so you put all those things together.

The order book for further new builds will be very limited over the next six to 12 months and existing order book of 30% you will see two different pictures one is a situation where ships actually being delivered a little bit earlier probably you’ve seen one or two of our 8,500 TEU are being delivered a little earlier than originally scheduled which is a sign of strength. COSCO charter has opted to take delivery of the ships a little earlier for the scheduled purposes and also to meet the demands of the cargo volume coming out of China.

The other picture you will see is some liner majors, some owners still struggling with the availability of capital to finance the deliveries of those ships. Those ships are being deferred even further not because of the demand and supply situation on the industry side it’s because of the availability of the capital. I believe at the end of the day the 30% of the order book will be there but the industry will be able to absorb that pretty fast.

Also one thing I want to mention to you, through this cycle the industry has become quite focused on the efficiency of our operations and the older vessels, the less fuel efficient vessels will have more disadvantages compared with before, partially due to the high fuel costs. Towards mid next year, second half next year, I think demand and supply will come into a pretty reasonable equilibrium and the freight rates will probably stabilize approaching the second half of this year in anticipation of the demand and supply banners.

Matt Troy – Citigroup

Relating to the $140 million in equity needs that you foresee remaining, you’ve shown a willingness to explore alternative options with the preferreds with the sale leaseback, you haven’t been to the equity market in a while, some of your peers have been trying to take advantage of the recent equity strength as a window of opportunity to raise capital directly. I was wondering, could you perhaps give us a sense of both timing, when you see putting that $140 million to bed and also maybe if you’re leaning towards a certain solution maybe help us understand how you might raise that capital need in the next year or so?

Gerry Wang

Generally whatever we decide to do, whatever our Board decides to do would be the least dilutive to our shareholders. We will not issue common shares which would dilute our shareholder value substantially, that’s really the bottom line. We’ll be pursuing creative solutions and also we shouldn’t forget that in our franchise tremendous volume in terms of attracting alternative investment opportunities and we’ll continue to explore all those opportunities including further sale leaseback transactions to take care of the $140 million that we would need for the year starting from Q2 mid next year to approximately mid 2012. We’re very optimistic and confident that this requirement is not a major challenge to the company.

Matt Troy – Citigroup

The timeframe, is it possible to assume that you could have addressed the majority portion of that $140 million by the end of this year? I know obviously there are various moving parts and pieces, market variables where rates are, what the markets look like. In terms of timeframe is it reasonable to assume that 2010 will see the majority of that addressed or is it more of a 2011 solution?

Gerry Wang

We’re very confident that this will be taken care of before the end of this year but one thing I want to highlight to you and to the audience here; what we are trying to do is not just taking care of the equity requirements starting from mid year 2012 what we want to do is really to create additional fire power for the company to take care advantage of the opportunities that arise from the distressed situations that I have just mentioned in terms of the unavailability of financing for some of the new building vessels that are under construction or that have already been finished in terms of construction. That’s our set plan and we’ll continue to be very diligent and to make sure that whatever we do is not going to dilute our existing shareholders.

Sai Chu

I want to remind people that we do have more debt than we actually need to finance our existing fleet. I think our history has demonstrated that we act well in advance of any potential issues so that’s something to remember.

Operator

Your next question comes from Noah Parquette – Cantor Fitzgerald

Noah Parquette – Cantor Fitzgerald

I wanted to get your thoughts on with the firming of demand for the larger ships, have you seen any increase in asset values at all, any more liquidity in the S&P market, more willingness from bank to finance ships or still things pretty.

Gerry Wang

I think the asset values are firming up in the end the assets values should be a correlation with the earnability of the assets which is in our industry the charter rate. With charter rates firming up I believe asset values should move up. Having said that, there is still disconnection within the earnability charter rates and the prices people pay for certain assets, primarily due to the challenging environment on the ship finance side.

As you know, this crisis ship financing structure and its landscape have changed forever, gone are the days where money was readily available. As I mentioned in the past, repeatedly, we have sub-prime situation for the real estate in the United States and Europe but we also have sub-prime situation in ship finance. There was too much liquidity available to the ship industry, money was too easy to be obtained which caused tremendous oversupply of vessels which contributed to the class of the freight rates and the industry. Luckily the industry is coming back with an improved demand and also with a disciplined control on the supply side.

Going forward I shouldn’t be surprised that the asset values will continue to improve, whether or not we reach the level of what we saw during ’06 and ’07 will remain to be seen. I’m quite cautious; the main concern comes from the availability of capital. If you have no money, no matter how cheap it is you cannot buy anything.

Operator

Your next question comes from Ben Nolan – Jefferies & Company

Ben Nolan – Jefferies & Company

I got most of the CapEx timeline that you put out there but I’m missing a couple. Could you run through that one more time really quickly?

Sai Chu

For Q2 its $220 million, Q3 is $110 million, Q4 is $130 million. 2011 is $790 million and 2012 is $230 million. Total about $1.5 billion.

Ben Nolan – Jefferies & Company

Going back to the sale leaseback which you guys mentioned that you had one unencumbered ship and then two that are under-levered. Just trying to get a handle on what that might translate into as it relates to potential reduction in your additional capital needs on that $140 million. Is it fair to assume maybe somewhere in the range of anywhere from $60 to $100 million if you’re able to repeat a similar transaction what you’ve done here plus get a little on the under-levered ships that you could reduce that $140 million by, like I said maybe $60 to $100 million?

Sai Chu

Each transaction is unique so that’s important. If it was a similar transaction for the remaining vessels certainly it is quite realistic to achieve a reduction in the equity capital needs at the range you stated. It depends really.

Operator

I’m showing no further question at this time.

Gerry Wang

Thank you very much for taking the time to listing to the call. We look forward to talking to you for Q2 in the summertime. Thank you very much.

Operator

That does conclude today’s conference. You may disconnect. Have a wonderful day.

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Source: Seaspan Corporation Q1 2010 Earnings Call Transcript
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