Michael Mason - VP, Allen & Caron, Inc. IR
Robert Perri - CFO
Michael Bodouroglou - Chairman, President & CEO
Chris Snyder - Sidoti & Company
Natasha Boyden - Global Hunter
Box Ships Inc. (TEU) Q2 2012 Earnings Call August 2, 2012 10:00 AM ET
Good morning and welcome to the Box Ships Incorporated second quarter and six months ended June 30, 2012 results conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Mr. Michael Mason of Allen & Caron, Investor Relations. Please go ahead sir.
Thank you. Good morning and welcome to the Box Ships’ investor conference call to discuss the financial results for the second quarter ended June 30, 2012. I am Michael Mason of Allen & Caron Investor Relations.
Many of you received a copy of the press release; it was released yesterday August 1st after the close of the market. If you did not received 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 to you right away. It is also posted on Yahoo! Finance and other internet sites.
This call is being broadcast live over the Internet and maybe accessed on the company's website at www.box-shifts.com. A replay of the call will be available through August 9th and maybe accessed from North America by calling 877-344-7529 and entering conference number 10016835. International callers should dial 412-317-0088. A replay of the webcast will be available immediately following the call and will continue for seven days.
Certain statements in this conference call may constitute forward-looking statements. Actual results could differ materially from those discussed in the call. Please refer to the complete cautionary statement regarding forward-looking statements in the press release dated August 1, 2012 which can be found on the company’s website. It is the company’s intention to make a presentation on the earnings results and then to open the call to questions.
I would now like to turn the call over to Mr. Robert Perri, CFO, of Box Ships. Good Afternoon Robert.
Good Afternoon Michael and Good morning everyone. Welcome to the Box Ships’ earnings conference call and joining me today is Mr. Michael Bodouroglou, our Chairman, President and CEO who will be available during the question-and-answer session after we finish our prepared remarks.
Today, we shall discuss our financial results for the second quarter and six months ended June 30, 2012. We will also update you on the latest developments since our last conference call, as well as our views on the container ship industry. Then I will go into more detailed analysis of our financial results and then turn the call over for questions.
On slide four, let me start by providing a brief overview of Box Ships and our philosophy. Box Ships were created by Paragon Shipping in 2010 to take advantage of opportunities in the container ship sector. Paragon remains our largest shareholder and together with our Chairman and CEO Michael Bodouroglou, own over 26% of the company.
Our focus is to maintain moderate leverage and to employ Box Ships existing fleet of nine vessels on period charters with staggered maturities, so that we will be in a position to meet our debt obligations and pay the majority of the remainder of our cash flow to our common shareholders in the form of dividends.
At the same time, we are constantly looking for acquisitions that will allow us to grow the company, expand our portfolio charters, while at the same time increasing our cash flow. We understand that the macroeconomic environment in containership markets today remain challenging and that is why we fixed 78% of our revenue days for the remainder of 2012 and for 2013.
However, we remain confident that the demand for containerships will continue to grow in the years ahead and that charter rates will improve. We have invested in the mid-sized segment which has sound fundamentals with staggered charter maturities we have positioned our company to take advantage of any upturn in the containership industry while at the same time securing our cash flows.
Please turn to slide number five. We are pleased to announce our second quarter result, 2012 results which represent our fifth profitable quarter as a public company. During this quarter, we operated on average 7.07 vessels and we ended the quarter with eight vessels after completing the acquisition of the OOCL Hong Kong in June. In addition, we took delivery of the OOCL China in July bringing our fleet to nine vessels.
Our adjusted time charter revenue during the second quarter of 2012 was $16 million, while our adjusted EBITDA was $8.1 million. We reported adjusted net income of $2.8 million or $0.16 per share which was down sequentially as expected due to the two drydocks we had during the quarter and we will go into details regarding our adjustments later in this presentation.
More importantly, we announced that our Board of Directors approved a quarterly dividend of $0.26 per common share based on our second quarter results payable on August 22nd, to shareholders of record on August 15th, which is in line with our previously stated guidance.
On slide six you can see our current operating fleet, the duration of our charters and their expiration dates. Our fleet consists of nine containerships with an aggregate carrying capacity of 43,925 TEUs at an average age of 7.5 years which compares favorably to the average age of 10.8 years for the entire containership industry.
We have strategically decided to stagger the charters so that they roll off at different points in time, this way we balance the needs to have stable cash flows and to assure the sustainability of our dividend with maintaining exposure to the containership charter market. The average remaining term of our charters is 25 months and all five of our charters are well known container liner companies that have been in business for many decades.
As you can see, two vessels in our fleet have recently been redelivered to us and given the low charter market conditions we expect it may take a little bit of time before committing these new charters for those vessels. Currently, the market for those vessels is around $6,000 to $8,000 per day and if the market remains weak, we will charter them shorter term maybe for no more than a few months and wait for the market to recover before fixing them for longer terms. It is important to note that even without employment for these vessels, we have 78% charter coverage for the remainder of 2012 and 78% coverage in 2013.
On slide seven, we will like to point out what we consider our moderate levels of leverage. Currently, our total debt is $227 million, after drawing down the new $25 million facility that was used to partly finance the OOCL vessels, while our current cash position is $24 million, which means our corresponding net debt is $203 million, representing a moderate 48% net debt to total capitalization.
During the end of 2012, we shall pay down an additional $10.1 million of debt with our cash flow from operations and we consider the level of our leverage to be moderate, because it allows us to pay considerable dividends from our cash flow after scheduled debt repayments. This is a crucial aspect of our conservative and sustainable business model which essentially creates equity value during the pay down of debt overtime while shareholders receive attractive dividends.
Now I wish to give you a brief update on the fundamentals of the containership market. On slide eight, the first graph depicts the Shanghai Containerized Freight Index, which is an indication on the cost to ship a container and the top right graph depicts the one-year time charter rate for 3,500 TEU vessels.
During the second quarter of 2012, you can see that the actual freight rates charged for transporting containers rebounded and are still 30% higher compared to second quarter of last year.
Freight rates are cyclical. So, while it's important to watch them closely, you also have to factor seasonality into the mix. To-date, the average freight rate is 20% higher than during the same period a year ago and liner operators are expected to start reporting profits in the second quarter of 2012.
This in connection with increased volumes of containers being transported has reduced the amount of idle capacity shown on the bottom right chart. In addition, an early indicator of upcoming market improvement is the increase in charter rates for larger vessels which is encouraging.
However, vessel values remain depressed and will remain so as long as lending remains tight. Given all this and the current seasonality, we expect the market to slightly improve. There may be a slight improvement in the market towards the end of the summer which is historically the high season for the container ship market.
On slide nine, let's discuss supply. The left hand graph on the slide presents the current expected deliveries based on the outstanding order book of the containership industry. Today, 22% of the fleet is on order, a level not seen the early 2003. And also which is down from 27% at the start of the year and the silver lining in the current global financial uncertainty remains the lack of ordering of new tonnage.
In today’s environment, banks continues to tighten their lending requirements particularly for speculate of new buildings and if you are fortunate enough to be one of the people who the banks do lend to, then you have to borrow less and pay higher margins and fees which is forcing owners to be more prudent in their decisions.
This pause will help the industry from repeating its own mistakes of over ordering and will help the industry in the long run. Even so with the current order book, expectations are for fleet growth of approximately 7% to 8% per year for 2012 and 2013 which we consider in line given the historical growth rates of the containership industry.
On the demand side, the containership trade continues to be driven by global GDP growth and underlining consumer demand which has slowed recently but its still expected to increase by 3.5% to 4% per year for the next several years globally and containership demand has historically grown by 2 to 2.7 times global GDP growth which translates to expect the containership demand growth of between 7% and 10% annually for the next few years.
On slide 10, I would like to walk you through our company's operating performance for the second quarter and six months ended June 30, 2012. Due to two non-cash items that affect our results we would like to quickly walk you through our adjusted net income and EBITDA for the second quarter and six months ended June 30, 2012.
From top to bottom, we have taken our US GAAP results and adjusted those figures to exclude our non-cash items and then back out all items that are unrelated to common shareholders to (inaudible) our adjusted figures. These non-cash operating items decreased our reported US GAAP EPS and should be reversed in order to show a clear picture of the company's cash earnings.
At Box Ships our main non-cash item is an adjustment to our revenues of below or above market time charters related to the acquisition of vessels with time charters attached. This adjustment equaled $525,000 in the second quarter and $1 million for the first six months of the year.
In addition, we also had a non-cash share based compensation expense of $279,000 in the second quarter and $559,000 for the six months period. In summary, for the second quarter these non-cash items totaled $804,000 and after adjusting for preferred dividends and non-invested share awards, our adjusted net income to common shareholders was $2.5 million or $0.16 per share. In addition, our adjusted EBITDA for the quarter was $8.1 million after drydocking expense.
On slide 11, let me show you our performance for the quarter. Time charter revenues, net of commissions and voyage expenses and adjusted for non-cash items were $15 million while our adjusted time charter equivalent rate was $25,085 per day. Our vessel operating expenses were $3.4 million or $5,291 per day while our total vessel operating expenses or TVOE was $4.9 million or $7,574 per day which excludes non-cash items and also includes around $200,000 related to our previous attempts to raise equity for the OOCL acquisitions.
Our EBITDA before drydocking expenses for the quarter was $10.2 million or $17,548 per day for an EBITDA margin of 70% and including drydocking expenses our EBITDA was $8.1 million or $14,428 per day. Our total debt service for the quarter was $6.4 million which brings our free cash flow for the period to $3.7 million or $7,579 per day and based on this, we are comfortable paying dividend for the second quarter of $0.26 per share.
Slide 12 provides a daily free cash flow analysis of our fleet of 7 vessels and now our latest acquisitions the OOCL China and OOCL Hong Kong increase our daily wages in free cash flow per share. As you can see, the OOCL vessels increased our revenue per day by almost 35%, our EBITDA per day by 41% and our free cash flow per share by 65%.
These vessels were financed using a combination of debt and equity and so from an accretion factor, we also need to factor in the expected free cash flow per share following the most recent offering which increased our share count my 26%.
Even with the additional shares, these acquisitions increased quarterly free cash flow per share by more than 29%. We make this comparison based on the assumption that Box Trader and the Box Voyager re-chartered at a net rate of $7,500 a day. These acquisitions are very positive for the company for several reasons. They increase their charter coverage; they open the relationship with one of the strongest line of operators. They improved our balance sheet and they increased their free cash flow to shareholders.
On slide 13, we wanted to provide you with our updated schedule of drydocking and non cash items which we believe should be excluded from our financial performance as they are non-cash items that reduce the US GAAP net income. As you may already know, our drydocks for the Marlin and Kingfish are now finalized and we do not expect any other drydocks until early 2014.
The amortization of non-cash items mainly relates to the portion of the purchased price of our vessels that was allocated by the time charters acquired along with the vessels which is amortized during the [life] of the time charter and reduces revenue.
From a Marlin perspective in order to drive our cash revenues, you would multiple our charter rates by available days in the quarter but then you would have to subtract this amortization expense to get what we reported as US GAAP revenues.
In conclusion on slide 14 ladies and gentlemen, we have a clear simple business and financial strategy in the sector that is (inaudible) for global economic growth. Since our IPO we have been actively acquiring tonnage during a period of depressed asset prices and we are positioned in the mid-sized containership segment of the market which has strong prospects going forward.
We have a portfolio of fixed rate charters of two years supported by a solid and diversified group of charters with stagger maturities. In addition, we have a high quality fleet with an average age of 7.5 years and strong operating performance and the moderately levered balance sheet. The bottom line is that our model provides an enough cash flow to pay down debt or maintaining a dividend at a compelling yield of 15.5% for 2012 based on the share price as of last night and our dividend guidance for 2012.
Thank you for listening and we can now open up the call for questions.
Thank you. (Operator Instructions) Our first question will come from Chris Snyder of Sidoti & Company. Please go ahead.
Chris Snyder - Sidoti & Company
I was hoping you guys can give me a little insight on how volumes going towards China have been in kind of how you expect that to grow may be over the next year?
Well, we are not really looking at the specific numbers and such in terms of absolute numbers but we are looking at the general volume in the main lines, how has that developed over the year as well as the container volumes in secondary lines, and it looks like the main lines are not doing all that greatly. Most of the incremental growth in this business coming from the secondary lines, primarily the north to South and the intra-regional lines.
(Operator Instructions) Our next question will come from Natasha Boyden of Global Hunter. Please go ahead.
Natasha Boyden - Global Hunter
Just a couple of quick questions. I know you talked about the box trade on the box which -- what is the spot market right now for these ships and is it not as good as you would have hoped. You know, you said you will put on the short-term chances, is that sort of four to six months or will that be up to a year?
No, well the spot market, when you talk about spot market in the (inaudible) of course we're talking about a duration of a few months. Similar to what we talk about when concerning ourselves with dry boxes for example. So the spot market is not all that great. It's actually, less favorable than we were hoping a few months ago.
As we mentioned in the presentation, the levels are $6000 to $8000 per day and we’re looking to fix both ships for a duration of few months. Our preference would be to for example, less than six months. However, sometimes this is not feasible because the charters in this currently depressed market, they would go for longer durations.
However, I can tell you that we’re already negotiating closely, one of the vessels at the levels I mentioned earlier and that will be a duration of a few months, less than six months actually. We would be looking to recharge the receipts for longer periods only when the market rebounds to levels which are closer to the historical average which is around $23,000 per day for these type of ships.
Natasha Boyden - Global Hunter
And then can you also talk about the acquisition climate for container ships particularly in the sector that you are looking at. Obviously is it the two OCL ships, but sort of what else is out there, is it pretty soft market or people actively looking to sell given the state of the market right now where rates are?
I think that people will be willing to sell, however they would – the ships. I think there's basically two categories of ships out there. The ships with charter, with a reputable charter on the other side and those that are charter free and obviously there's a huge gap. You might have been in between what sellers are expecting to get and buyers are expecting to pay as far as charter free vessels are concerned.
That's why I don't think that we've seen any deals recently on charter free vessels. And the deal is that I think people are looking for buyers in particular, are those who are coming with a sensible, with an attractive time charter and with a good name on the other side. And for this kind of deals, people are willing to pay prices similar to what we've been paying recently. And as far as we are concerned and Box Ships, these are the kind of transactions that we will be focusing on in the next quarter or so.
Natasha Boyden - Global Hunter
And obviously with the OCL Charter acquisitions, you did get bank financing for that, are the banks willing to finance on a charter free vessel or does any vessel that your purchase have to have a relatively long charter attached for the banks to get interested in extending credit for that?
I mean quite honestly it is a bit difficult right now to find financing if there is no charter attached. It also depends on the company behind it obviously and it also has a lot to do with the price paid for the vessel and the type of vessel. I mean for older vessels I will tell you won't be able to find financing at all without a charter attached. For some of the newer vessels, you might be able to find something but only if you had a very, very strong balance sheet without a charter attached.
Was the question regarding whether a ship finance is available for charter free ships?
Yeah, I think very difficult. Not very difficult, it is impossible.
Natasha Boyden - Global Hunter
Okay and then lastly you know obviously your fleet is fairly young. Are you going to continue looking to acquire ships in that sort of payment similar to the (inaudible) that you already have or do you think older ships still provide an interesting acquisition opportunity here?
We are not dogmatic about our investments in container ships. So we would be looking at any acquisition that is accretive to what we do, in particular to our cash flow per share and they are you know good shipping deals and interesting deals that provide a good return. So size, we will be looking at any size really.
(Operator Instructions) We have a question from [Gary Grinaker of Grinaker Investments].
Sorry if this has already been answered. The original share offering was for $12 a share and the current book value is over $11 a share. I was just curious as to why the recent public offering was at $7 a share, how did you come up with that?
Well, we didn’t come up with that. Actually it was the market that came up with that. Unfortunately we cannot there – there is so much the company can do to increase its share price, if you guys are determinant.
And our next question will come from it will be a follow up question from Chris Snyder of Sidoti & Company.
Chris Snyder - Sidoti & Company
Hey (inaudible) this is last time, but do you think that continued problems in the industry could create more potential to buy a ship with like a lucrative charter attached. Like for example if a company just had one ship with a good charter from a good counterparty, but it was the only ship they owned. It didn’t make sense for them to stay in the business. Do you think that could present opportunities for companies such as yourselves who are looking to buy these, such type vessels?
Yes I think so, absolutely. Right now ship lending is very difficult. People, many companies, not only public companies, but in particular private companies. They are struggling with their balance sheet. And so, a public vehicle like Box Ships I think has additional tools in its tool box, if you like to grow and make attractive acquisitions.
I mean if you look at our own acquisition, the latest acquisition with the two OOCL vessels, you know, in my view these are very good shipping. They make very good shipping sense in the sense that a charter, the revenue that is created from the charters writes down the vessels to be low scrap value. So there is virtually a negligible residual risk.
And at the same time, it’s a great financial transaction for the company as well because it strengthens the balance sheet further and diversifies our portfolio of charters further and it's also accretive to our cash flow per share. And you know, so the remark of a previous gentlemen about why we raised the equity of $7 per share. The answer is that even at $7, this transaction is very accretive to our cash flow per share. So it's very useful, very positive I think for our shareholders.
And ladies and gentlemen, this will conclude our question-and-answer session. I would look to turn the conference back over to Mr. Perri for his closing remarks.
Thanks everyone for your time on what I know is a busy morning. And we look forward to speaking with you again for our third quarter results. Have a good day everyone.
The conference has now concluded. Thanks for attending today’s presentation. You may now disconnect.