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Box Ships (NYSE:TEU)

Q4 2013 Earnings Conference Call

March 12, 2014 9:00 am ET

Executives

Michael Bodouroglou – President, Chief Executive Officer

Robert Perri – Chief Financial Officer

Analysts

Mathias Fitchen (ph) – Morgan Stanley

Keith Mori – Barclays

Aures Sadoor – Clarkson Capital Markets

Mark Suarez – Euro Pacific Capital

Operator

Hello and welcome to the Box Ships Fourth Quarter and Year-End Results conference call. You will be in a listen-only mode during the presentation but there will be an opportunity afterwards to ask questions. Instructions will follow at that time. If you need assistance during the call, you may signal an operator by pressing star then zero on your touchtone phone. This conference is being recorded.

Now I’d like to turn the conference over to Michael Mason. Mr. Mason?

Michael Mason

Thank you. Good morning and welcome to the Box Ships investor conference call to discuss the financial results for the fourth quarter and year ended 2013. I’m Mike Mason of Allen & Caron Investor Relations.

Before we start the call, there are a couple of items I need to cover. Many of you received a copy of the press release. It was released after the close of the market last night on March 11 at 4:05 pm Eastern time. 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 March 19 and may be accessed from North America by calling 1-877-870-5176 and entering conference number 10045562. International callers should dial 1-858-384-5517. A replay of the webcast will be available immediately following this 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 March 11, 2014 which can be found on the company’s website and filed with the SEC. The company will make a presentation on the earnings results and then open the call to questions.

I would now like to turn the call over to Mr. Robert Perri, Chief Financial Officer of Box Ships. Good afternoon, Robert.

Robert Perri

Good morning, Michael, and good morning ladies and gentlemen. Thank you for joining us on today’s conference call. Let me run through the agenda briefly before I get started. First, we will discuss our fourth quarter 2013 results and recent developments, followed by a brief update on the company, then I will give you an update on the industry as a whole and a picture of the current shipping market, and finish with a more detailed financial update.

Please turn to Slide No. 4. Our fourth quarter of 2013 represents our 11th profitable quarter as a public company. Our adjusted time charter revenue during the fourth quarter was $18.6 million for our nine vessels while our adjusted EBITDA was $11 million. We reported adjusted net income of $5.2 million or $0.19 per share. On January 2, we paid a cash dividend to our 9% Series C preferred shares and expect to pay our next dividend in early April.

On the chartering front, we fixed the Box Queen, formerly the Maersk Diadema, at $6,100 per day with MSC for a period of eight to 10 months, extended the charter of the Box Voyager for a period of six to eight months at $7,350 per day, and extended the charters of the CMA CGM Kingfish and the CMA CGM Marlin for a period of four to seven months at $7,000 per day. In view of this continued decline in rates, the board of directors has decided not to pay a common stock dividend with respect to the fourth quarter of 2013 in an effort to maintain our liquidity and help ensure the sustainability of the company going forward. The board of directors will continue to evaluate the market conditions at regular intervals to consider a potential reinstatement of the common stock dividend when the market recovers as we remain committed to our policy of paying out any excess free cash flow in the form of dividends.

On Slide 5, you can see our current operating fleet, the duration of our charters, and their expiration dates. Our fleet consists of nine container ships with an aggregate carrying capacity of 43,925 TEU and an average age of 9.1 years, which compares favorably to the average age of 10.9 years for the entire containership industry according to Clarksons Research. Following the extension of the charters for three of our vessels, the average remaining term of our charters is 12 months and all of our charters are well-known container liner companies that value our operations.

As of today, the market for the Panamax vessels remains very challenging. We chartered our 4,500 TEU vessel, the Box Queen, to MSC at $6,100 per day for a period of eight to 10 months. This rate is $21,900 per day less than its previous employment. We also extended the charters of the Box Voyager, the Kingfish and the Marlin at $7,350 per day, $7,000 per day, and $7,000 per day respectively with six to eight months with regards to Box Voyager and a period of four to seven months with regards to each of the CMA Kingfish and the CMA CGM Marlin. This adds up to lost revenues of approximately $54,000 per day, which significantly impacts our cash flow. We plan to continue to charter our vessels for short-term periods, maybe for no more than a few months when their current employment ends later this year, and wait for the market to recover before fixing for longer periods.

On Slide 6, we would like to highlight that the company remains focused on strengthening the balance sheet and maintaining manageable leverage position. Currently, our total debt is $174 million while our current cash position is $19 million, which means our corresponding net debt is $155 million, representing a moderate 39% net debt to total capitalization with a straight-line repayment profile. We also continually monitor our interest rate risk now that the swap rates remain low.

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 costs to ship a container, while the top left graph depicts charter rates for 3,500 and 4,400 TEU vessels. During the fourth quarter of 2013 and year-to-date, the containership market has experienced lower average freight rates than in the same period for 2012 and 2013, and the charter rates remained at depressed levels in both periods. Overall, container demand increased slightly in 2013 year-over-year but there has been no clear signs of a rebound yet as supply continues to outpace demand. We have seen that rates on vessels in our size classes remained at very depressed levels of around $6,000 to $8,000 per day. Midsize vessels continue to be affected by the cascading effect as many vessels have been moved out of the main trade routes and have been utilized in some of the minor trade routes.

We have a young fleet and the charterers are satisfied with our vessels and our operations, which is why we were able to secure employment for our vessels at a time when there has been an increased number of vessels laid up to 4.5% of the current fleet, compared to an average of 3.6% of the total fleet laid up during 2013. In addition, the weakness in the charter market has continued to pressure vessel values, and we expect values to remain depressed as long as charter rates are weak and there is uncertainty around global growth.

Please turn to Slide No. 8. Our fourth quarter 2013 represents our 11th profitable quarter as a public company, although revenues decreased by 4.2% mainly due to the idle days of the Box Queen. Our adjusted average time charter equivalent rate in the fourth quarter of ’13 declined to $22,237 from $22,933 per vessel per day in the fourth quarter of 2012 due to the redelivery of the Box Queen on November 30 from their charterers, which was partially offset by the higher rates achieved on the charter extension of Box Trader in the fourth quarter and the higher voyage expenses incurred in the fourth quarter of 2012. Our adjusted EBITDA was down slightly year-over-year to $11 million from $11.2 million in the year-ago period, and our adjusted net income for the fourth quarter of 2013 increased to $5.2 million or $0.19 per basic share from $4.9 million or $0.21 per basic share from the year-ago period. In addition, it is important to note that our amortization of intangibles, which is primarily related to the above below-market time charters and share-based compensation expense for the fourth quarter of 2013 was $1.6 million and $0.6 million respectively. 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 fourth quarter and full year 2013. During the fourth quarter, our cash vessel operating expenses were $4.4 million compared to $4.6 million during the fourth quarter of 2012, a significant improvement year-over-year. On average, our cap special operating expenses for the fourth quarter of 2013 were $5,300 per vessel per day compared to $5,552 per vessel per day in the fourth quarter of 2012, an improvement of 4.5% year-over-year. Our daily total vessel operating expenses, or TVOE, for the fourth quarter of 2013 increased slightly to $8,790 per vessel per day compared to $8,521 per vessel per day in the fourth quarter of 2012 primarily due to higher USD-euro exchange rate year-over-year. For the full year 2013, we averaged a TVOE of $7,589 per vessel per day, an improvement of 2.5% year-over-year from the $7,782 per vessel per day recorded in 2012. Our adjusted EBITDA margin was 63% and our total debt service for the quarter, excluding any one-off payments, was $8.7 million.

On Slide 10, in conclusion, we have entered a challenging time at Box Ships and we were forced to preserve liquidity as our above-market time charters expired and new rates are well below historical averages. We are focused on strengthening our balance sheet and preserving our liquidity. We believe that the decision not to pay a common stock dividend in relation to the fourth quarter of 2013 is necessary to ensure the company maintains its financial flexibility so that we can be in a better position when the market does turn, and to give us added liquidity if the downturn continues longer than expected. We have an owner who is willing to support the company as he has proven time and again, and we remain committed to our policy of paying out excess free cash flow in the form of dividends once the market does turn and we are generating excess cash flows again.

With that, we can open up the call for questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

The first question comes from Mathias Fitchen from Morgan Stanley.

Mathias Fitchen – Morgan Stanley

Good morning. I have one question about—I have a question if you could give us a bit more color about the Panamax market and how you see it developing. I read briefly that the intra-Asia trade is sort of taking away some of the excess Panamax tonnage and sort of giving relief there. How do you see the market developing and where do you see potential areas that sort of initiate a recovery for the Panamax sector?

Michael Bodouroglou

I think that I would share your view. We believe that most of the incremental demand for Panamax sizes going forward will be coming from the intra-regional trades, and the intra-Asia trades in particular. In respect to what happens in the main trades – you know, Asia to Europe or Asia to the U.S., these trades have been taken over now by larger vessels and we have seen the cascading effect that this is causing, this full extent. So the intra-regional trade is where in time Panamax vessels, I think, will be employed.

Mathias Fitchen – Morgan Stanley

Okay, so how do you see rates developing? I mean, right now they’re very low – like you said, they’re $10,000 below what you were receiving before. Do you think rates will stay at this level long-term, or do you see them going up, and what sort of time scale do you see there for these rates to start recovering?

Michael Bodouroglou

Yes, well actually I wish I had an intelligent answer for this. If you asked me last year, and some people did, I think, in our last year calls, we were expressing the view that this downturn is bound to end at some point; it’s a question of when. So it’s still very difficult to predict, It will depend largely of course on the developed economies, how well the EU and the U.S. is doing because this is going to push—it accounts for a big part of the containership trade, and we need to see increases in the volumes on these routes. We have seen that growth in the intra-Asia and intra-regional trades very healthy in the last few years, and we expect that this will continue. So it’s a question of time, but it’s very difficult to predict when this is going to happen. We are happy that our ships are new. We are happy to see a lot of scrapping taking place, in particular with vessels over 20 years of age. So it’s a question of time, and because of the fact that we cannot predict what is going to happen, we decided to be careful, proactive, and maintain as much liquidity into the company as we can. There is no doubt that the upturn will come; it’s a question of when, and we need to be around when this happens. A year ago, if somebody was telling you that things would be different very soon in the dry bulk sector, I think that very many people would be convinced by it. But we’ve seen a pretty healthy recovery in the end of last year in the dry ship sector. I expect that we will see that also in the containership sector, but the question is when.

Mathias Fitchen – Morgan Stanley

Yeah, that makes sense. Well, thank you very much for your answers. That’s it for me.

Operator

Thank you. The next question comes from Keith Mori from Barclays.

Keith Mori – Barclays

Hi, good morning gentlemen. I’d like to start in for a second on the liabilities. I know you mentioned a potential waiver, you’re renegotiating a little bit with the banks here. Can you maybe give us an update on how that’s proceeding, the timing around when the waivers could come due, and some of the events that could take place over the next 12 months?

Michael Bodouroglou

Sure, yeah. I would like to start by saying that right now we are not in breach of any covenants.

Robert Perri

Yeah – no, we are not in breach of any covenants today, as we mentioned. We do have some waivers that start rolling off basically starting this year in 2014, one facility that we look to be in compliance with even when they roll off in the first quarter, depending on values, and then some others roll off in the second and third quarter. We’ve had initial discussions with the banks but nothing concrete yet. We do plan on getting into more concrete discussions later, and we’ll keep you updated. In the past, we’ve always had a good record of getting these things done and we’re confident we’ll get something done. It’s just a matter of timing, and I can’t give you a direct timeline today.

Keith Mori – Barclays

Okay, that’s good color. Michael, one question from my end on the supply picture – I mean, what do you see in the market could accelerate a recovery in the Panamax fleet? I know you alluded to increased scrapping in 20 year-plus vessels. Does that need to continue to pick up to kind of accelerate a recovery, maybe, so we could see one later this year or early 2015?

Michael Bodouroglou

Well yes, scrapping is definitely one of the things that we need continuing and probably increasing further, and I think that for as long as the market remains at these levels, we are going to see scrapping increase. It is also encouraging that we do not see new orders, especially in this size segment, in the Panamax sector, which is another comforting factor. We want to see also growth, growth on the demand side. On the supply side, it’s enough. I think it is just the fact that we don’t see orders –that’s a good sign, and we want to see more scrapping, which I think we will.

Keith Mori – Barclays

Okay, and I guess one last one – we’ve seen new build prices tick up in the containership side, but we haven’t really seen it so much in the secondary market. What is your view on where asset prices are today and the returns could be generated, given where rates are? Do you see them maybe continuing to rise? We’ve heard some other containership companies kind of speak about new build prices rising and maybe a knock-on effect there. Do you have any view on that?

Michael Bodouroglou

My view is that shipbuilding prices in general are on the increase, and the reason is that especially in dry bulk in the tanker sector, many people take the view that we are now in the recovery part of the cycle. Some –a lot of shipyard capacity has be taken, especially as far as second and third tier shipyards are concerned, a lot of shipyard capacity has been taken out of the market. The fact that shipyards are full for 2015 and probably the better part of 2016, shipyard capacity that is available I mean, means that shipyards can be selective and aren’t willing to take orders, even of containership vessels, at a loss. So I expect a certain upward trend with some volatility maybe, depending on how the other sectors develop as well as the containership sector. However, there aren’t a lot of—my view on the situation is that there are not a lot of orders in containerships, new orders, because there is a big gap between what shipyards are willing to contract to accept new orders as well as—and price levels at which ship owners are willing to order ships. So there aren’t—there are not many orders placed, especially in the midsize sector – very few, actually.

Keith Mori – Barclays

Okay, well thank you gentlemen for your time. I’ll pass it along.

Robert Perri

Thanks Keith.

Operator

Thank you. The next question comes from Aures Sadoor from Clarkson Capital Markets.

Aures Sadoor – Clarkson Capital Markets

Good afternoon guys. Everything’s really been questioned about the marketplace and where we stand. I don’t see much on the order books in the Panamax size whatsoever, though. Is that correct? You haven’t seen any orders of late, have you?

Michael Bodouroglou

No, we have not. We have not, but we have seen yards quoting for Panamax size vessels at significantly higher levels than they used to a year ago.

Aures Sadoor – Clarkson Capital Markets

Right. Do the Panamax sizes—I mean, what’s your view then on excess capacity of, say, the first generation post-Panamax ships coming in and poaching what were traditionally Panamax trades, especially with the expansion of the Panama Canal? What are the future routes for the ship size, and I do think they hold promise – there is certain nothing on order in that space. Just sort of what are the future routes and what do you expect to be the best deployments over the next five to 10 years for ships of this size?

Michael Bodouroglou

We are expecting Panamax size vessels to be employed largely in the intra-regional routes in Asia and the north-south routes and intra-regional in general. The Panamax—the enlargement of the Panama Canal affects all kinds of ships, not only Panamaxes but also larger vessels. So I think—I believe that the Panamax vessels will be used in intra-regional routes and also the main routes.

Aures Sadoor – Clarkson Capital Markets

Okay. Excellent, that’s really all I wanted to hear. Thank you very much.

Operator

The next question comes from Mark Suarez from Euro Pacific Capital.

Mark Suarez – Euro Pacific Capital

Yeah, good morning gentlemen. Michael, you talked about new building prices. You’ve seen increased competition for space. Now, if we turn to the second-hand market, have you see the last quarter or so, given credit availability, any material changes in demand for particular vessel segments? Have you seen increased tonning activities, for example, from specific sources? If you can just give me what your sense in the second-hand market in your area in the Panamax segment.

Michael Bodouroglou

Well generally, liquidity has been very scarce. Very few transactions have been taking place lately, but lately the last couple of months, there has been some movement and some appetite by buyers for Panamax-size vessels, largely because of the low levels, low asset values at which sellers these days – some sellers – are willing to sell their assets. Obviously some people see that there is opportunity in the Panamax sector for as long as they pay historically low values. So they are expecting the market will correct itself at some point and that creates a good return for their investment.

So this is what we’ve seen. I don’t know how many transactions have taken place, but there are not a lot. Certainly, there is more talk, there is more interest in Panamax-size vessels but at low values.

Mark Suarez – Euro Pacific Capital

Got you, and have you seen increased tonning activities, let’s say from banks per se, now getting sort of desperate to move some of the tonnage away from their balance sheet, or any other sources that you think are sort of getting to the point where now they’re willing to maybe bring you a more attractive deal in the second-hand market?

Michael Bodouroglou

Well I mean, the question of banks has been debated widely in the last two or three years, and many people are speculating that there must come a time when banks would have to sell vessels that are problematic on their balance sheets; but so far, we haven’t seen anything significant. We’ve seen one or two here and there, but I haven’t seen any significant moves of any significant size, I mean, by banks to that effect.

Mark Suarez – Euro Pacific Capital

Got you. Finally on the balance sheet, I know you mentioned you’re amortizing your debt, I would say fairly aggressively vis-à-vis peers. Is there the potential to maybe banks to sort of make you accelerate those debt repayments going forward, or how do you feel about that? How comfortable do you feel about your debt repayment schedule?

Robert Perri

We feel pretty comfortable about it. As you said, we tend to amortize our debt at a fairly quick clip, and we’ve always been current, as you know, and the banks have always appreciated us for the repayment profile that we like. So I do think at least we have runway and we’re able to repay our debt at a regular clip, as we have been. Our plan is to continue, at least for the foreseeable future, doing that.

Mark Suarez – Euro Pacific Capital

Got you. Okay, great. That’s all I have for now. Thanks guys.

Robert Perri

Thank you.

Operator

Thank you, and there are no more questions at the present time, so I would like to turn the call back over to management for any closing remarks.

Robert Perri

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

Operator

Thank you. That does conclude today’s teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.

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