Seaspan's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 2.12 | About: Seaspan Corporation (SSW)

Seaspan Corporation (NYSE:SSW)

Q2 2012 Earnings Call

August 2, 2012 10:00 AM ET

Executives

Sai Chu – CFO

Gerry Wang – CEO, Co-Chairman and Co-Founder

Analysts

Ken Hoexter – Bank of America Maryland

Josh (ph) – Deutsche Bank

Josh – Deutsche Bank

Michael Webber – Wells Fargo

Urs Dur – Clarkson Capitalization

Brandon Oglenski – Barclays

Operator

Welcome to the Seaspan Corporation conference call to discuss the financial results for the three and six months ended June 30, 2012. Hosting the call today is Gerry Wang, Chief Executive Officer, Co-Chairman, and Co-Founder of 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 for questions. I will now turn the call over to Sai Chu.

Sai Chu

Morning, everyone, and thank you for joining us today. Before we begin, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by these forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the second quarter 2012 earnings release and earnings webcast presentation slides available on our website at www.seaspancorp.com, as well as in our annual SEC report on Form 20-F for the year ended December 31, 2011.

I’d like to remind you that during this call, we will discuss certain non-GAAP financial measures including adjusted EBITDA, cash available for distribution to common shareholders, normalized net earnings, normalized earnings for share, and normalized converted earnings per share.

In regards to such financial measures and for reconciliation of such measures, the most closely comparable US GAAP measures, please refer to our earnings release. I will now pass the call over to Gerry, who will discuss our second quarter highlights as well as some of our recent development.

Gerry Wang

Thank you, Mr. Chu. Please turn to Slide 3 of the webcast presentation. Q2 was another quarter of smooth sailing. I would like to make four highlights for this quarter. Firstly, we continue to generate strong operational and financial results. All our operating fleet remain fully employed without any major off-hire incidents.

We achieved vessel utilization of 99.4% including off-hire for dry-docking and special survey (ph) and we continued to grow revenues, cash available for distribution and normalized net earnings.

Second, our new building program has progressed according to plan. We took delivery of the final two 13,100 TEU vessels, which commenced 12-year fixed rate time charter with COSCON. We have now completed our eight ship 13,100 TEU new building program within the heavy industries.

These vessels are the largest in our fleet and they also present COSCON flagship containerships. Seaspan now has 69 vessels in operation and over 400,000 TEU of carrying capacity. The construction of our 10,000 TEU SAVER class at (inaudible) is also progressing well.

Third, our focus remained on improving our capital structure and positioning Seaspan to continue to opportunistically implement our balanced and disciplined growth strategy.

The financing for the three 10,000 TEU SAVER class vessels to be charted to Hanjin Shipping has been secured with a leading Chinese bank and reason to have successfully amended our $1.3 billion credit facility, improving our flexibility and reducing costs.

Fourth, our board declared dividends on our common stock and our Series C preferred shares. The dividend of $0.25 per common share represents a 33% increase over Q2 of last year.

I would now like to turn the call to Sai to discuss our quarterly financial results. Sai, please?

Sai Chu

Thanks, Gerry. Please turn to Slide 4 for a summary of our second quarter and first half 2012 results compared to the results for the comparable periods of 2011.

Revenue increased by over 24% in the second quarter due to the increased number of operating days and higher time charter rate attributed to delivery of our larger new build vessels.

Overall, ship operating expenses increased by a lower percentage than our revenue increased. This is consistent with the operating efficiencies achieved by our larger new build ships, which have lower operating costs per TEU.

As a result of the Manager acquisition in January of this year and as discussed in prior earnings calls, we now expect ship operating expenses to be more variable on a quarter-to-quarter basis as they are now based on the direct operating costs of the vessels as opposed to the fixed technical services fees that were in place pre-acquisition.

Ship operating expenses for the second quarter decreased by 3.9% compared to 2011. This decrease was primarily attributable to the reclassification of a portion of the ship operating expenses because they are not operating in nature to general and administrative expenses since the closing of the Manager acquisition.

For the three and six months ended, the amounts reclassified were approximately $2.3 million and $2.2 million respectively. For a meaningful comparison to the 2011 figures, it would be appropriate to add back the reclassified (ph) amounts of (ph) ship operating expenses.

On an adjusted basis, ship operating expenses for the three and six months would’ve been increased by approximately 3% and 10% respectively compared to the same periods in 2011 primarily due to the 7.9% and 8.9% respective increases in ownership days resulting from the four deliveries during 2012 and a full period of expenses for the 10 vessel deliveries in 2011.

In the second quarter, ship operating expenses were lower than expected due to ongoing cost saving initiatives, some one-time items, and timing differences. Average ship operating expenses were approximately $6200 per day for the first half of 2012 compared to approximately $6100 the first half of last year.

This 2% increase compares favorably to our expectation that daily ship operating expenses will increase on average by 8% per vessel day this year. This favorable variance represents approximately $4 million year-to-date and could be viewed as a proxy for the benefits and savings accruing to Seaspan shareholders from our acquisition of the Manager.

Our adjusted EBITDA and cash available for distribution to common shareholders increased by 37.7% and 42.7% respectively due to the increased contribution margin of our larger new build vessels.

Our normalized converted EPS for the quarter was $0.35. As Gerry mentioned, our board has declared a $0.25 per share quarterly common dividend for Q2 in line with our guidance of $1 annual dividend for this year. This is a very sustainable common dividend tail ratio of 17%.

Our board also declared and paid $8.59375 per share quarterly dividend for the three months ended July 30th on our 9.5% Series C preferred shares.

Please turn to Slide 6 for our balance sheet information as of June 30, 2012 and December 31, 2011. As of June 30, we had cash and cash equivalents of $338 million. We consider our strong liquidity and financial flexibility to be a key competitive advantage in the current market environment.

Further to our discloser last quarter in June 2012, United Arabs Shipping Company returned the UASC Madinah to us. The vessel was owned by one of Seaspan’s subsidiaries that financed the vessel with a term loan of $53 million from a leading US bank. This term loan matured upon the sale lease-back of the vessel.

On June 27, Seaspan subsidiary sold the vessel to a US bank for $52.1 million which was the amount of the outstanding under the term loan. The US bank leased the vessel back to Seaspan’s subsidiary for approximately nine years. On June 20, Seaspan fixed the Madinah on a three-month time charter with Yang Ming and an additional four-month option.

Please refer to Slide 7 for the quarterly details of our vessel deliveries, dry-docking, CapEx, and converted share count guidance, each of which may be subject to adjustment due to customer schedule and requirements and other changes.

For dry-dockings in terms of anticipated and scheduled off-hire days, we expect approximately 24 days in Q3 and 12 in Q4. At this time, we estimate 100 days of scheduled off-hire days for each of 2013 and ‘14.

In terms of CapEx, we expect approximately $20 million in Q3, $60 million for the year of 2013, and $193 million for 2014 representing total capital spending of approximately $273 million for which we’ve already secured all necessary funding.

For diluted share count, our expected converted share count is relevant for the aggregate calculation of our normalized converted and diluted EPS. Based on our current common stock outstanding, which reflects 11.3 million shares repurchased in January to our tender offering approximately 4.2 million shares issued for the acquisition of Manager.

Assumptions for drift participation rates of $0.25 quarterly common dividend, common share price, and a $15 conversion price for our Series A preferred shares. We currently expect 85 million and 86 million shares for Q3 and Q4 this year, 87.1 million for 2013, and 89.1 million for 2014.

On the capital structure side, our increased and stable offering cash flows combined with our strong liquidity and access Cap markets continue to serve as core differentiators for Seaspan positioning us to effectively redeploy our cash flow for the benefit of shareholders.

Specifically, we believe these strengths provide us with a continued ability over the long term to support increasing common share dividends, opportunistically repurchase additional shares, pay on debt, and receive growth in a balanced and controlled manner.

During the quarter, we repurchased 22,100 shares on our open market repurchase plan on average of $14.83 per share for a total of less than $300,000. Our board has salvaged the open market repurchase plan in February authorizing the repurchase of up to 50 million of our common shares.

Further to our discussion last quarter in July, three of Seaspan’s subsidiaries entered into a $224 million loan facility with a leading Chinese bank willing to financing of our three 10,000 TEU new building vessels.

These vessels are scheduled to be delivered in 2014 when they will commence operations on their charters with Hanjin Shipping for a period of ten years plus an additional two years at Hanjin’s option.

Seaspan has agreed to conditionally guarantee certain financial obligations of its subsidiaries to a Chinese bank under the loan facility.

Also in July, we completed the amendment of our $1.3 billion credit facility to reduce the lenders’ commitment from $1.3 billion to a billion, the amount currently drawn and outstanding under the facility, saving approximately $700,000 in annual commitment fees and it allows us the flexibility to refinance this facility and sell its vessels in a systematic manner.

Going forward, we will refer to this as our $1 billion facility. We’d also like to thank our bank group for their support in executing this amendment. We intend to be opportunistic in our approach to access in the capital markets as we seek to diversity our capital structure and create additional capacity for growth.

I would now like to turn the call back over to Gerry.

Gerry Wang

Thanks, Sai. Please turn to Slide 8 where I’ll briefly discuss the industry’s current fundamentals. On the supply side, the order book currently stands at a little over 20% of effective loading capacity or about 7% to 8% return (ph) on average.

This will be further reduced by demolitions, potential order consolidations, and conversions. Our customers have continued to manage supply through incremental slow steaming and idling of ships.

On the demand side, we expect continued cargo demand which is a derivative of global economic growth to continue to grow at 7 % to 8% (inaudible). So in general, we expect cargo demand and the ship supply growth to balance out in the next three to four years.

Freight rates have increased significantly for the year 2012 with our customers successfully implementing a series of general rate increases on the main shipments.

However, the increase in freight rates has not fully compensated the operators for the run-up in bunker fuel prices and other costs and this is growing the need for larger, modern, and the fuel efficient ships that will drive economies to scale and significantly lower their operating costs.

Once again, it highlights the opportunity that exists for owners with strong balance sheet and access to capital like Seaspan.

Please turn to Slide 9. Slide 9 depicts the staggered maturity profile of our charter portfolio and how well-protected our contracted revenues are from the current charter market softness.

The average remaining charter length for our fleet is seven years and we have limited near-term re-charter exposure with only one more (4250) TEU, which is (inaudible) up for re-charter in 2012 and only two 4250 TEU ships up for re-charter in 2013 representing less than 1% of our contracted revenues that year.

We have re-chartered three vessels that have charter expiring so far this year all on short-term time charters with exchange options with leading liner operators. The Ningbo expander (ph) is chartered with China Shipping for six months with an additional six month extension option.

The Dalian entered into a four-month charter with Hyundai Merchant Marine with an additional two month extension option and Madinah entered into a three-month charter with Yang Ming with an additional four-month extension option.

Please now turn to Slide 10 where I will reiterate our vision for the future. Our overall strategy is to continue grow our fleet in a controlled and balanced manner. Due to the near-term and certain outlook for the global economy, we intend to continue to be patient and disciplined using our financial strength and technical operational leadership position to pursue growth opportunities that meet our strict criteria.

We’ll continue to concentrate on designing, owning, and chartering large, modern, fuel-efficient container ships to create would-be (ph) customers. We intend to continue to emphasize our server (ph) vessel design concepts which we believe provides customers with improved efficiency and operating savings.

Seaspan has a history of retaining capital to shareholders and we remain committed to sustainable increasing our common share dividend over the long term as we continue to opportunistically grow our business

As a ship leasing franchise, it is critical to consistently maintain a strong balance sheet, diversifying our capital structure, and enhancing our financial strength including maintaining conservative leverage, having a core differentiator for Seaspan and will remain one of our top priorities.

With a proven business model that was stress tested by the financial crisis of 2008 and 2009, we believe Seaspan is well-positioned to continue to both enhance its leadership position and create shareholder volume over the long term.

We would like to open the call for questions. Operator, please begin.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from Ken Hoexter of Bank of America Maryland. Your line is open.

Ken Hoexter – Bank of America Maryland

Great, good morning. Gerry, can you talk a little bit about your view on the market? Are there opportunities to you – you talk about expansion and getting through the stress of the financial contraction.

Do you want to start re-expanding in this environment or are you content saying we’re fully chartered, it still is weak, and you mentioned three, four years before you felt like supply-demand would get in balance. Just want to get kind of your insight on where we see the company go from here.

Gerry Wang

Hi, Ken. Obviously we’ve been quite actively involved in various discussions with the leading line managers for the growth opportunities. We’re not in the position to say too much about the outcome of those discussions. I just want to make sure we are continuing with the discussions.

One thing that we do differently, which is we want to make sure the deals we do that would meet our strict criteria. We put a lot of emphasis on the crazy (inaudible) of the customer. We put a lot of emphasis on the type of vessels and the charter conditions that we want and we also want to make sure that any deals we do would be financeable, bankable.

With all those things we’re putting together, we just want to take our time, be patients. The opportunities are there. People see the importance of going for fuel-efficient designs to enhance the competitiveness, to serve the operating cost, and to enhance the profitability. So we’re working very closely with them and hopefully deals will happen before the end of the year.

Ken Hoexter – Bank of America Maryland

Is there any update on the status of the joint venture in terms of making those investments or would it be more a Seaspan-focused investment?

Gerry Wang

For the deal structure going forward would be a partnership with a carrier and that structure has not changed. We will continue to pursue the pattern of that structure going forward.

Sai Chu

Just a reminder, I mean, we do have the (inaudible), right? So any deals Seaspan has, first look at it through the (inaudible).

Ken Hoexter – Bank of America Maryland

Yes, Sai, if I can just wrap up with you on in terms of bringing the Manager in-house, and you mentioned a couple million dollars of favorable benefit that can be contributed to bringing that in-house.

Can you talk about I guess go forward, is that kind of the extent to what we expect? Are there more opportunities based on now that it is fully in-house of doing different things to work to keep those costs lower than maybe we expect?

Sai Chu

Well, I think if we – as we discussed in the past the benefits of acquiring the Manager because it’s one of the top ship management companies in the world based on our ability to achieve among the lowest ship operating costs historically. That was based on a fixed cost arrangement.

So the benefits to the shareholders are in line, the interest in having an entire company under the public sight, and all the benefits that we’re able to achieve accrue to the shareholders.

There’s going to be a bit more variability but certainly going forward, I mean, the key metrics of our operations people are safety first, ensuring the performance of those ships, and meeting the charter expectations but also maintaining a good balance on costs. So everyone is incentivizing and the interests are aligned in that respect.

Going forward, we achieved about a 2% increase on a daily operating cost basis as opposed to an 8% increase that we projected. So the focus for the operations side and for the company management is to continue to maintain the lowest possible operating costs, again, ensuring the safety and performance of those ships.

So we’re going to be in a range. We can’t give you for our guidance say we’ll always be at 2% but I can tell you that everyone’s motivated and incentivized to keep the costs low.

Ken Hoexter – Bank of America Maryland

And just refresh me, if you can, on the debt side. When is your next amortization payment?

Sai Chu

Well, amortization for the billion begins in 2014. The facility matures in 2015.

Ken Hoexter – Bank of America Maryland

OK, appreciate that, thank you.

Operator

Our next question comes from Michael Webber of Wells Fargo. Your line is open.

Gerry Wang

Hi, Michael.

Sai Chu

Hello?

Operator

Pardon me, Mr. Webber? Our next question comes from Justin Yagerman. Your line is open.

Josh (ph) – Deutsche Bank

Hey, good morning, guys. This is Josh on for Justin.

Gerry Wang

Hi, Josh.

Sai Chu

Hi, Josh.

Josh – Deutsche Bank

Just want to kind of start off with the new time charters. I guess no surprised that they were fixed in the short term charters but I guess I’m not sure if I missed this, but did you provide the rates for those ships?

Gerry Wang

No because typically for such small charters, we don’t get into the great details and the average charter rate has improved over last year substantially, actually, and we hope the rates will be reaching historical average towards second half this year and the first half next year and the average rate we have for the fee vessel we have charter out is about $10,000 per share. We’re quite happy with that.

Josh – Deutsche Bank

Jumping to the loan amendment, I guess maybe if you could talk about the changes to the I guess collateral replacement formula and I guess we need a primary driver for the amendment. Was it just to reduce I guess your commitment fees?

Sai Chu

Yes, I mean, we’re very fortunate that we have great relationships with our bankery and we looked at the facility and based on market values today, we weren’t going to be able to draw the remaining balance of about $277 million I think it is.

I mean, we could’ve negotiated access to it but we just felt that the cost didn’t make a whole lot of sense to access the remaining amount and that’s what really drove it at the end of the day and we had an opportunity to reduce or eliminate, quite frankly, that remaining commitment fee.

But also given the opportunity, we felt it was important to structure those facilities so we have the flexibility to begin the refinancing portions of that fleet and perhaps sell ships over time, not necessarily today but over the next several years. So that’s what drove the decision really to amend that to solely and it was quite – it was our desire to make that decision and reduce that amount. It wasn’t really adding anything right now.

Josh – Deutsche Bank

Makes sense, definitely makes sense. Just switching gears to acquisitions, I guess maybe can you guys provide some sort of commentary on the competition?

I mean, I guess everyone read all the comments in the press about the Evergreen offer and it initially falling through but then it seems like it still got done at a pretty competitive rate with the private owner.

So I guess can you talk about maybe who else is in the market I guess to provide long-term leases to owners and I guess maybe how competitive rates have gone to?

Gerry Wang

Hi, Josh. The competitive landscape has changed dramatically over the last three, four years. The predominant player in the marketplace before the financial crisis was the German KG system, which is no longer in – competing with us anymore.

So that takes away almost 75% of the competing power for lack of a better expression. And then you look at today’s situation. Probably the number one challenge is the financing.

The European banks are not lending anymore with limited capacity. The Asian banks pretty much are relationship-driven. They provide limited financing. Then we see that as a good opportunity for Seaspan in terms of competitiveness.

We have great relationships with the Chinese banks and Korean banks, Japanese banks, and we also have strong relationships with traditional bank friends in Europe.

The $1.3 billion Manager is a good testimony of the strong relationships we have with using the banking relationships. So that tends – other things tend to be competitive landscape dramatically.

When it comes to the Evergreen deal, it was done very competitively for the benefit of Evergreen and obviously with shipping out help dramatically as well by lowering the ship price and we view the current situation in terms of new (inaudible) price and the financing, all those things, to be in our favor for some time.

And the new (inaudible) project is probably will continue to go down and the competitors competing with us are not many and so that’s one of the reasons we want to be very patient and disciplined and assume on later something will happen. In a market condition like this, it’s very, very important to be level-headed in the core and do the right deals. That’s what we try our best to do. Thank you, Josh.

Josh – Deutsche Bank

And then just one more quick follow-up before I turn it over. I guess what is it going to take for the liners to maybe start ordering again. Is it going to be a change of macro sentiment?

Is it going to be I guess maybe more geo rise (ph) or rates increasing further? I mean, we haven’t seen very many deals since I guess first half of 2011, so just kind of getting your thoughts on that.

Gerry Wang

Josh, our understanding is there will be very limited new (inaudible) order book coming from the line operators for two reasons. One is their balance sheets are just not that strong to support further CapEx requirements. Number two, for those that want to modernize their fleet with their own new building program have always done.

I think the future ordering activities will primarily come from the independent container ship operators, people like Seaspan. I think long term charters will dominate the future new builds for the big container ships over next two, three years. That’s our understanding and we hope that would be the case for next two, three years.

Josh – Deutsche Bank

Got it, thank you for your time.

Operator

Our next question comes from Michael Webber with Wells Fargo. Your line is open.

Michael Webber – Wells Fargo

Hey, good morning, guys, how are you?

Gerry Wang

Good, Mike.

Michael Webber – Wells Fargo

Bad timings on line issues this morning. If I ask any questions that’ve already been asked, I apologize.

I did hear someone ask about the rates that you guys weren’t disclosing on the smaller charters and that makes some sense. If memory serves, the option streams you guys have on the longer term charters require a year notification if they’re not going to exercise those options.

Have you guys received any notifications there? That is a – you’ve got a lot of charter coverage going forward but it could be eroded if they start exercising those options or not exercising those options, I should say. Have you got any notifications yet?

Gerry Wang

No, we have one ship that has been declared by the charter not to continue the options. That ship will be open June, the second half of this year. We are very close to fix that ship for short term. Again, our strategy is for a down market like this. We go for shorter term charter and for a good market, we go for longer term charter.

As for the (inaudible) large vessels in terms of the options and those things, so far we haven’t received any indication the ships will be delivered earlier to us and will continue to monitor the market conditions and again, the $1.3 billion amendment has given us the flexibility in terms of asset transactions. Prices are good, probably we’ll just sell. Prices not good, we’ll just do the short term charters.

As you know, Michael, the market is always cyclical and our balance sheet is very strong, so we can wait out.

Michael Webber – Wells Fargo

Got you, that makes sense and in that chartering strategy perspective, you disclose which vessel would receive the notification on already?

Gerry Wang

The (inaudible).

Michael Webber – Wells Fargo

OK, fair enough. I know Josh asked you about the credit deal take that off-line. Sai, I wanted to follow-up on one of Ken’s questions around OpEx and maybe kind of coming at it from I guess a higher view.

If you take – your OpEx is off $3 million quarter over quarter, in what percentage of that would you really attribute to the in-house management and I guess the area I’m going with this is the Manager you brought in-house for $55 million, OpEx of bringing Manager in-house are never good but you guys are recognizing $10 million a year in cost savings. That’s a pretty solid payback period so I’m trying to get at, again, what, on a quarterly basis, what you guys are stating.

Sai Chu

I think we identified that being approximately $4 million for the first half but again, it’s a bit more volatile. I think the benefit of our model is there’s not going to be huge volatility but there’s certainly opportunities where we can shave off a few million here and there and that really makes a difference for our shareholders.

Michael Webber – Wells Fargo

Got you, so in terms of – I mean, you guys kind of hate to give annual guidance on this but if we were to think about $6 million to $8 million annually, is that a pretty fair and conservative number?

Gerry Wang

What typically, Michael – this is Gerry – we don’t want to give specific numbers. As Sai mentioned, the OpEx will be in a little bit varying given the nature of the fixed cost is taken out but we are optimistic.

And the current market conditions in our favor in terms of driving down the cost in dry-docking, in spares (ph), in the services we get from the vendors using our financial strength, as well, and also the scale of our fleet that we’re quite happy with the things are going forward and hopefully we’ll continue to drive down the cost and improve our bottom line.

Michael Webber – Wells Fargo

Fair enough.

Sai Chu

We’ve achieved savings also on lubes (ph) as well, right? Those are benefits that accrue to the shareholder if we’re opportunistic.

Michael Webber – Wells Fargo

All right, no, that’s helpful. I appreciate it. Sai, it looked like you guys kind of nibbled at some buybacks during the quarter under that authorization. Can you talk about, I guess, what metric you look at the most there to actually start taking advantage of that buyback program and maybe just a little bit of color on that?

Sai Chu

I think it’s an open market repurchase plan and quite frankly, companies go into the market when they believe there’s good value for their shareholders. So we won’t disclose what the formula is and it can end at any time. We have a good liquidity position. I think that again, if we see good value, we think it’s time to step in the market, we will be in there.

Michael Webber – Wells Fargo

Sure, OK, that’s fair. I appreciate the time, guys. Thanks a lot.

Operator

Our next question comes from Urs Dur with Clarkson Capital. Your line is open.

Urs Dur – Clarkson Capitalization

Morning, guys. Hey, what’s going on? I had some questions that really relate to what possible deals could be out there and I know people have asked that already and I know it’s fairly (inaudible) at the moment. You’re in discussions.

But what kind of prices are you seeing per slot for say, a 10,000 TEU-plus and what kind of – I guess the secondary question to that is with the new sort of Ecospec ships, against what kind of rates are you seeing terms about and where is the slot price and what kind of IRRs are you looking at in today’s possible deals?

Gerry Wang

This is Gerry. The price we’re seeing is about $9000 per TEU, which is almost historical low and we think that there may be further room to go down given the softness on the demand side and as you mentioned, the three main sectors of the shipping industry, the dry-dock (ph) obviously is going through tough times.

The oil tanking industry suffering, as well, and the container industry is doing OK but fare rates are still not as high as they need to be because of the cost and the returns for the liner operators.

So the overall industry has been through tough times and the order book, the demand, is just not there to justify the new ships that the shipyards really want to build given the increased capacity on the new build side of last five, ten years. So we continue to see the ship building industry to go through this softness that we have been seeing for the last two, three years.

I don’t think there would be a strong chance for the ship prices to move up. On the other hand, we believe the prices will continue to be sliding downward even though it would be too much going down given the prices have already producing very little profitability or even for most of the major ship builders, a money-losing situation.

So in terms of charter rates, I won’t guarantee the rate (inaudible). We’re not a bank, OK? We’re ship owner. We’re leasing franchise. Obviously we are looking at decent return for the capital we deploy and we want to make sure we’re using our design capability, operational expertise as leading franchise this sector to get to the best deal we can and so we’re working very hard on that working with our liner measures.

As I said, the liner measures, because of the three, four year performance on the industry, they have limited capacity in terms ordering the ships themselves. They have to tend to the third-party independent owners for outsourcing and we think that gives us a tremendous opportunity and also allowing for the fact, the KG system is not competing against us anymore.

So we excited and the same time, we have to be very, very patient and disciplined in making sure that we’re doing the right deals with the right people for the right ships and that’s been our focus and the market conditions have been volatile, will continue to be volatile.

It’s very important for us to be very, very careful to pull the trigger but hopefully by the end of the year, we will be able to do something to a couple of deals and again, we just want to make sure we do the right deals.

If the charter rates make sense, if returns makes sense, the type of ships makes sense, the right charters with good bankability, then we’ll go ahead and do it and we have no problem in doing deals but we want to do the right deals.

Urs Dur – Clarkson Capitalization

Sure. With the Monitor and Ecospec that you guys are pioneering, and credit to you on that, and given the very low slot price, it would indicate that if somebody came along and had the equity to be a ship owner, they might consider getting involved given the long life of the asset. If you look at your strategy in the past, it’s been typically very long charters, say ten years, but those returns were on offer were better of course at that time.

So the returns are tighter now but the ships are historically cheap. Would you guys consider taking maybe a two, three, five year contract instead of a ten year deal to get a new Ecospec ship on the water and then come into maybe on a lower IRR and then come into a much stronger market down the road?

I mean, from a ship owners perspective, that might be attractive. I just wonder what you’re thinking there.

Gerry Wang

As we’re thinking alike as well. We’re obviously looking at certain charter periods which are not just twelve year, ten years. We’re also looking at some five years, seven years, eight years, and ten years, twelve years.

At the end of day, our balance sheet is strong enough, our fleet is big enough, and our financial strength is there, so we are capable of being in deals that would be really generating the maximum return to the company on long term basis.

So we’re opportunistic. We’re looking at other things in the pockets and hopefully as I said, something will happen by the end of the year. You will see more details once those deals are announced.

Urs Dur – Clarkson Capitalization

Great. All right, thanks for your time, guys.

Operator

(Operator instructions). Our next question comes from Brandon Oglenski with Barclays. Your line is open.

Brandon Oglenski – Barclays

Hey, good morning, everyone. Gerry, maybe if we can follow up from that line of discussion there. Looks like the fundamentals on the freight rate side coming out of the major trade runs have actually improved quite a bit this year.

From your discussion with the carriers, do you think that’s driven more by them taking the utilization hit and just holding rates firm or is there really some underlying fundamental drivers of that rate improving that you think signal things can be better in the six to 12 month time frame?

Gerry Wang

Brandon, basically we have looked at the whole situation from two, three aspects One is of course the amount of supply are fairly balanced through the (inaudible) such as slow steaming, idling, and (inaudible), all those things.

If you look at the supply side for last year, the total increase was about 7% to 8% and the volume went up 7% to 8% so they balanced out and you look at this year, we expect the same thing.

You look at utilization of the ships and the load factor for the main (inaudible), for the 13,000 TEUs, the 10,000 TEUs we have for those services, typically they’re loading approximately 90% to 95%. When you have such a strong load factor, then you are in the position to price a little bit more aggressively. That’s precisely what the industry has been doing.

In the past what happened was there were other factors that caused the freight rates to fall other than just the amount of supply. I think we’ll continue to see with the amount of supply factors to be more predominant versus other political factors and other organizational factors effecting the freight rates and the liner managers have seen in the ups and downs of the freight rate.

And I think we’re determined to make sure the fare rates are to be kept reasonably high level so that the costs can be covered so that they can be in a position to make some return to the huge capital base they put in for the scheduled services that benefit the shippers and the consumers and people that are shopping at Wal-Mart and I think that will be the norm going forward.

I think the liner operators are beginning to pursue that more aggressively. That’s how we look at next three, four years in terms of the freight rate development.

Brandon Oglenski – Barclays

Given a pretty favorable supply-demand balance that’s developing here, when do you think that would start to be reflected in asset prices and charter rates? I mean, should we read into you doing six to 12 month charters as being the time frame where we could see a little bit of recovery?

Gerry Wang

Yes, I think the recovery will be a gradual basis. You look compared this year to last year, we’ve seen dramatic recoveries already and I think that recovery probably will continue to be in evidence and at the end of day, that process takes long time. There’s always interruptions.

For example, the current EU softness has cast some doubts to the situation for the operators, for the liner managers, on the fare rates, and the asset value but going forward, we think the values will recover and charter rates have recovered quite a lot from six, seven (inaudible) you see today on average $10,000 to $11,000 per day.

So we’re optimistic and again, I just want to remind you, Brandon, the market is always cyclical. There’s ups; there will be downs. When there are downs, there will be ups and we just want to pursue our strategy which is in down market, we fix our ships on short term basis and when market is up, then either we sell them or we just fix them longer.

We have the strength in our balance sheet and the cash position to afford to do those things and we’re very comfortable with where we are and also going forward.

Brandon Oglenski – Barclays

Well, thank you, and Sai, just on the OpEx in the quarter, you did mention that there were a few one-time items that benefited 2Q.

Sai Chu

Yes.

Brandon Oglenski – Barclays

Could you just give us some sort of a range of how to quantify that because obviously you’re implying that’s not going to continue going forward?

Sai Chu

Yes, that may not but there’s other areas where we can find some opportunities on OpEx but for the quarter, it was about $1.5 million.

Brandon Oglenski – Barclays

OK, so –

Sai Chu

There were just better recoveries that we’re able to achieve on some of the operating items.

Brandon Oglenski – Barclays

Maybe a little bit more on the inflation side then, the 2%, but still looking to beat that 8% guidance that you put out there earlier.

Sai Chu

Yes, I mean, I think that we achieved 2% and I think probably for the rest of the year we’ll be somewhere between 2% and 8% but obviously we’re trying to manage it closer to the lower range.

Brandon Oglenski – Barclays

OK, thank you.

Operator

I’m not showing any further questions. I would now like to turn the call back to Gerry Wang for any further remarks.

Gerry Wang

Once again, thank you very much for taking the time during this busy time watching the Olympic Games and thanks once again for the interest in Seaspan. We’re looking forward to talking to you again next quarter. Thank you very much and enjoy the rest of the summer. Thank you. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.

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

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

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!