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Executives

Sai Chu – CFO

Gerry Wang – Co-Chairman and CEO

Analysts

Greg Lewis – Credit Suisse

Ross Briggs – Wells Fargo

Seaspan Corporation (SSW) Q3 2012 Earnings Call October 31, 2012 10:00 AM ET

Operator

Welcome to the Seaspan Corporation Conference Call to discuss the Financial Results for the Three and Nine Months Ended September 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’ll open the call for questions. I will now turn the call over to Sai Chu.

Sai Chu

Good 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 those 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 third quarter 2012 earnings release and earnings webcast presentation slides available on our website at www.seaspancorp.com, as well as our annual SEC report on Form 20-F for the year ended December 31, 2011.

I would also 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 per share, and normalized converted earnings per share.

In regards to such financial measures and for reconciliation of such measures to the most closely comparable U.S. GAAP measures, please refer to our earnings release.

I will now pass the call over to Gerry, who will discuss our third quarter highlights as well as some more recent developments.

Gerry Wang

Thanks Sai. Good morning from Hong Kong. Please turn to slide three of the webcast presentation. For the third quarter, Seaspan’s business continued to perform in line with our expectations. On the financial side, we managed to achieve growth in revenue, cash available for distribution and normalized net earnings compared with Q3 of 2011. Our board declared dividends on our common stock and our Series C preferred share. The dividend of $0.25 per common share represents 33% increase over Q3 of last year.

Our third quarter operational results were also strong. Our 69 vessel operating fleet remains fully employed on time charters. We achieved 98.9% utilization, this includes 31 days of unscheduled off-hire for the Seaspan Dalian and Seaspan Felixstowe in between the charters, at which time we completed their scheduled drydockings. And another 22 days related to mechanical issues onboard the COSCO Indonesia, which were successful result.

Our newbuilding construction program continues to progress well. The three 10000 TEU fuel efficient vessels are expected to be delivered in 2014 when they will commence operations under charters with Hanjin Shipping for period of 10 years plus an additional two years at the option of Hanjin.

During the quarter, we also continue to take steps to strengthen our balance sheet and capital structure. We secured financing for the three 10000 TEU newbuildings with a leading Chinese bank and we amended our $1.3 billion credit facility reducing the lenders commitment to $1.0 billion and improving our flexibility.

Based on our strong balance sheet and access to capital, we remain quite well positioned to capitalize on the attractive ship acquisition environment and further implement our disciplined growth strategy. We’re committed to providing creditworthy customers with state-of-the-art fuel efficient vessels and creating long-term value for our shareholders.

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

Sai Chu

Thanks, Gerry. Please turn to slide four for a summary of our results for the quarter and nine months ended September 30, 2012 compared to the results of the comparable period of 2011.

Revenue increased by 8.9% in the third quarter compared to the third quarter of 2011, due to the increased number of operating days and higher time charter rates attributed to the delivery of our larger newbuild vessels in the first half of the year.

Overall, ship operating expenses increased by a lower percentage than our revenue increased. This is consistent with the operating efficiencies achieved by our larger newbuild ships, which have a lower operating cost per TEU. As a result of the acquisition of our Manager, Seaspan Ship Management Ltd. in January of this year and as discussed on 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 vessel, as opposed to the fixed technical services fees that were in place pre-acquisition.

Ship operating expenses for the third quarter of 2012 decreased 5.8% compared to Q3 of 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 months and nine months ended September 2012, the amounts reclassified were approximately $3.1 million and $7.9 million respectively. From a meaningful comparison from 2011 figures would be appropriate to add back these reclassified amounts to ship operating expenses. On such an adjusted basis, ship operating expense per day for the three months and nine months ended, we have increased by approximately 8.9% and 9.8% respectively compared to the same periods in 2011, primarily due to the increased ownership days resulting from four vessel deliveries in 2012 and a full period of expenses for the 10 vessels that were delivered in 2011.

Average ship operating expenses were approximately $6,500 per day for the third quarter compared to approximately $6,100 per day for the same quarter last year. This increase of 5.7% compares favorably to our expectation that daily ship operating expenses would increase on average by 8% per vessel day in 2012, and in fact, the results of Seaspan’s cost saving initiatives and the benefits of acquiring the Manager.

Operating lease expenses as discussed last quarter on June 27, 2012, we sold the Madinah to a U.S. bank and we are leasing the vessel from the bank for approximately nine years. Prior to this date, Seaspan owned the vessel and financed it with a term loan of $53 million, which we repaid using the proceeds from the sale to the U.S. bank.

From Q3 onwards, we will be reflecting the leaseback of the ship as an operating lease expense on our income statement. For the quarter, we incurred operating lease expense of $2 million. In the comparable prior period, we would have incurred $1 million of interest expense and depreciation expense on the vessel. This accounted for most of the difference from the Street consensus.

Adjusted EBITDA and cash available for distribution to common shareholders, our adjusted EBITDA and cash available for distribution increased by 10.4% and 12.1% respectively, due to the increased operating days and contribution margins of our larger newbuild vessels.

Please turn to slide five for a normalized per share metrics. Our normalized converted EPS for Q3 was $0.30 per share. In terms of dividend policy as Gerry mentioned, our board has declared a $0.25 per quarter common dividend for Q3 in line with our guidance of $1 dividend for 2012. Our board has declared and paid $0.59375 per share quarterly dividend for the three months ended October 30 on our 9.5% Series C preferred shares.

Please turn to slide six for our balance sheet information as of June 30, 2012 and December 31, 2011. As Gerry mentioned, our strong balance sheet and financial flexibility is a key competitive advantage in the current market. As of September 30, 2012, we had cash and cash equivalents of $273 million.

Our increasing operating cash flows combined with our strong liquidity and access capital markets continue to serve as a core differentiator for Seaspan, positioning us to effectively redeploy our cash flow for the benefit of our shareholders. Specifically, we believe these strengths provide us the continued ability over the long term to support increasing common share dividends opportunistically repurchasing additional shares, paying down debt and pursue growth in a balanced and controlled manner.

During the quarter, we repurchased 94,401 shares under our open market share repurchase plan at an average of $14.87 per share for a total of $1.4 million. Our board established the open market repurchase plan in February 2012, authorizing the repurchase of up to $50 million of our common shares.

As discussed in our last earnings call, in July, three of our subsidiaries entered into a $224 million loan facility with a leading Chinese bank related to the financing of the three 10,000 TEU newbuild vessels. Seaspan has agreed to conditionally guarantee certain obligations of its subsidiaries to the Chinese bank under the loan facility.

Also in July, we completed the amendment of our $1.3 billion credit facility to reduce the lender’s commitment from $1.3 billion to $1 billion, the amount then undrawn under the facility and to change mandatory repayment formula for the amount we would need to repay on the removal of a vessel from that facility. Going forward, we will refer to this as our $1 billion facility.

We intend to be opportunistic in our approach to accessing the capital markets as we seek to diversify our capital structure and create additional capacity for growth.

Please refer to slide seven, for our latest forward guidance on vessel deliveries, drydocking, CapEx and expected converted share count, which is relevant for the accurate calculation of our normalized converted diluted EPS. Each of these items remains subject to adjustments. We should point out that we expect that operating expense should increase $0.02 to $0.03 for the next quarter just due to seasonal adjustments for our operating expenses.

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

Gerry Wang

Thanks Sai. Please turn to slide eight, where I’ll briefly discuss the industry’s current fundamentals and our discussions for next year.

On the supply side, things have continued in line with our discussions for the first time of 2012. Our customers, our charters continue to manage supplies through widespread slow steaming and incremental idling of ships. The order book remains at a manageable level of approximately 20% of effective loading capacity all about 6% to 7% per annum on average. This will be further reduced by demolitions, potential order consolidations, and conversions.

On the demand side, 2012 has been weaker than expected and primarily due to low levels – lower levels than anticipated – anticipated on the Asia-Europe trade land. However, expectation for 2013 are that, container trade growth will return to approximately 7%. Overall, we continue to expect cargo demand and supply – ship supply growth to be fairly balanced over the next three years to four years. The continuing challenges facing our customers underscore the need for larger, modern fuel-efficient ships that will drive economies of scale and significantly lower the operating costs and highlight the opportunity that exists for owners with strong balance sheet and access to capital like Seaspan.

Please turn to slide nine. Slide nine depicts the staggered maturity profile of our charter portfolio. Our contracted revenues remain protected from the current charter market softness. The average remaining charter length for our fleet is about seven years and we have limited near-term re-charter exposure.

We have adopted a strategy of going for short-term charters when charter market is soft. Currently, we have 4250 TEU vessels and the short term charters to various Asian charters. These charter rates are about $10,000 per day on average. We anticipate another two 4250 TEU vessels come up for charter 2013 and 2014. The six vessels represent 2.9% of 2013 revenue and 3.5% for 2014 revenue.

Please turn to slide 10. I will reiterate our vision for the future. We believe Seaspan is quite well positioned to continue to both enhance its leadership position and create shareholder value over the long term. We’ll continue to pursue fleet growth with the controlled and balanced approach, being patient and disciplined and using our financial strength and technical and operational leadership position to pursue opportunities that meet our strict criteria. Our call focus will remain on designing only and chartering large modern efficient container ships to create to creditworthy customers.

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 has been our core differentiator for Seaspan and will remain one of our top priorities. We have a history of returning capital to shareholders and we remain committed to sustainably increasing our common share dividend over the long term as we continue to opportunistically grow our business.

I would now like to open the call for questions. Operator, please?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Gregory Lewis. Your line is open. Please go ahead.

Greg Lewis – Credit Suisse

Thank you for taking my call.

Gerry Wang

Hi.

Greg Lewis – Credit Suisse

Hey, Gerry. Gerry, you mentioned the vessels that are rolling off contract, clearly Seaspan has been pretty successful in placing vessels or selling vessels that they deem sort of non-core. When we think about those vessels, you – clearly, there are only about 3% of the total fleet, is that something where Seaspan could potentially pursue potentially a bareboat option, with the purchase option for the customer, is that how we should be thinking about those vessels?

Gerry Wang

Basically, when market is soft, we just roll over to those short-term charters. When market improves, either we just sell them all right or we make arrangements like what we did with MSC for the M class vessels.

Greg Lewis – Credit Suisse

Okay. And then just in thinking about, some of your – some of the other – your competitors, other charter asset owners had sort of looked the market and they’re thinking about potentially, I mean it looks like they’re potentially thinking about going out and acquiring secondhand vessels. I mean Seaspan has always sort of been focused on the newer vessels. Is that how we should think about it going forward? And with that, when you think about growth over the next two years, did you expect there to be opportunities for you to deploy in the capital that Seaspan has embedded in its balance sheet?

Gerry Wang

Well, basically as I said, our core focus is on newbuilding vessels. But if there are deals that make sense, secondhand vessels, if they are more than that meet our requirements, we’d take a look at them. Again depends on the value proposition. As far as growth is concerned, (inaudible) we’re quite busy right now. And hopefully by the end of the year, we’ll have couple of deals concluded, and obviously, we’re in the process of finalizing the documentation. And we’re not in a position to say much. They’re pretty much off the market transactions and that’s all I can say at this moment. We’ve continued to work on the opportunities and I’m very confident that we’ll be able to deploy capital into the growth.

Greg Lewis – Credit Suisse

And in thinking about that, I mean clearly you have the ability to increase the dividend and I’m sure there is conversations are ongoing with the board. But in thinking about potential dividend growth, should we think about the common dividend rising in line with fleet growth or maybe just to raise the capacity to increase the dividend, maybe we could see dividend growth in the near term or medium-term maybe without fleet growth?

Gerry Wang

Greg, our board obviously has been looking at the factors you just mentioned and as I said, we increased the dividend substantially over last year, 33% compared with Q3 at 2011. And at the end of day is the balance and we want to focus on sustainability of the dividends over long term. And the factors you mentioned are important for us and we change the value of returning capital to our shareholders and we are looking out to the opportunities – growth opportunities, our balance sheet and the capital markets and all those factors and then our board will evaluate on quarterly basis and then we’ll go from there.

Greg Lewis – Credit Suisse

Okay. And then just one final question, I mean, clearly, it sounds like you’re looking at potential projects. In conversations that you’re having with shipyards, I mean, clearly, everyone’s looking at state of newbuilding prices. Should we think about the state of newbuilding prices that you may see in the trade rag as being a fair indication of the market or do you – or is there a potential for will – wiggle room around the state of newbuilding prices?

Gerry Wang

The prices recorded are pretty much in line with the actual prices. We are in the negotiations with the shipbuilders.

Greg Lewis – Credit Suisse

And those are for plus 10,000 TEU vessels?

Gerry Wang

Yeah, there will be 10,000 TEU or plus, that’s the focus of our growth and that’s the strategy we follow. We want to focus on large modern fuel efficient vessels.

Greg Lewis – Credit Suisse

Okay, perfect. Thank you for the time.

Gerry Wang

Thanks, Greg.

Operator

Thank you. Our next question comes from the line of Justin Yagerman of Deutsche Bank. Your line is open. Please go ahead.

Unidentified Analyst

It’s actually Josh sitting in line for Justin.

Gerry Wang

Hi, Josh.

Unidentified Analyst

I just want to follow up on one of Greg’s questions, regarding this potential, I guess, new orders, Gerry, can you maybe talk about number of vessels, I know it’s preliminary, nothing has been signed but can – I guess, is there any way to give us an indication of the size?

Gerry Wang

Justin, I’m sorry. We are not in the position to talk about, it’s off the market transaction and before the dotted lines are signed with the signatures, we are not in the position to comment on that.

Unidentified Analyst

Fair enough.

Gerry Wang

But we are busy, we’re busy – we are busy with counting’s.

Unidentified Analyst

That’s good to hear. And I guess, maybe can you give us a bit more of an indication of the level of activity in the sell and purchase market or – sorry, I guess the newbuilding market with your customers, I mean, we haven’t seen very much new orders placed in the past kind of six months to – six months to a year period but are there a lot of deals being talked about right now?

Gerry Wang

The activities have picked up substantially and as a result of the healthy Q3 for virtually all the line of measures and so that’s why we’re quite busy dealing with all the things right now.

Unidentified Analyst

And I guess maybe, if you just talk about how I guess management and the board thinks about different ways to – for I guess allocation of capital between the share repurchases, increased dividends and I guess new vessel opportunities. Is – can you give us a better sense of how you guys view deployment of this capital. I mean you’ve been active a little bit in the share repurchase market, you haven’t increased the dividend in I guess the few quarters and I guess now you’re ready to deploy capital for ships. So how should we be thinking about those three, I guess pathways going forward?

Gerry Wang

I’ll let Sai handle this question, Jeff – Josh if you don’t mind.

Sai Chu

Thanks Gerry. Josh, well I think we’ve been fairly consistent with that. We take a very balanced approach. And I think that we’re fortunate that we’ve got good liquidity. I think that we’ve always said that we’re more – we continue be in a growth cycle. So balancing the needs and desires of our shareholders with return of capital whether it is through an increased dividend, share buybacks, if they’re opportunistic and also growth are really looked out on a regular basis by the board and management. Although we haven’t increased the dividend, we don’t look at it every quarter but we do look at it on an annual basis and evaluate it unless there are really significant circumstances.

So, we would expect that the shareholders should not expect dividend increase every quarter, but we look at it in a very systematic approach. In terms of growth capacity, we certainly have the ability to do in excess of $1 billion of growth and we will continue to look for opportunities to add additional growth capital. So there is a tremendous amount of flexibility in our capital structure and we are committed to increasing value through returning capital to shareholders over time. So it’s going to be a balancing act, it just depends at a point in time and the different opportunities that we have.

Unidentified Analyst

And I guess, when you say additional growth – opportunities for additional growth capital, I guess, should we be expecting maybe more preferred equity offerings or even common equity?

Sai Chu

It’s not likely that we would consider common, but certainly if we feel that there are going to be opportunities to continue to have immediate growth and looking at the market make some sense. But again, we don’t have anything to announce at this time, but we do anticipate that we will have growth in the next quarter or two.

Unidentified Analyst

Thanks. That was helpful. And I guess one more question for maybe Gerry before I turn it over.

Gerry Wang

Yeah.

Unidentified Analyst

May be, I guess, more on the container ship fleet in general, kind of the cascading that we’ve been seeing. I guess, how do you think about the 4250s coming, going forward and that kind of size as an asset class now that we’ve seen some of the larger ships than we originally thought start entering the trends by trade?

Gerry Wang

Our 4250 is like Boeing 737. It’s just a very handy class of vessels. So they can be deployed for inter-Asia, they can be used for Asia to Australia, they can be used between Asia and South America, Asia to South Africa and Asia to Indian Ocean. So we would expect this class to continue to perform well.

Obviously, you all now know very well, there’s always seasonality and winter season is always very slower and we expect the chartering conditions will improve for spring next year. And I think this cost is still very viable and as to have a lot of and much of the vessels in the industry and they will have to be sent to the graveyards way before the 4250 TEU – 4250 TEU becoming – the class becoming obsolete.

Unidentified Analyst

I appreciate the color. Thanks for the time guys.

Gerry Wang

Thanks.

Sai Chu

Thanks, Josh.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Ken Hoexter from Bank of America Merrill Lynch. Your line is open. Please go ahead.

Unidentified Analyst

Hey. Good morning, Gerry and Sai. It’s actually Roslyn sitting in for Ken. I had a question on the, I guess, the short-term charters, you guys are kind of rolling into short-term charters as well. I mean, how do we think about – how are the conversations going on about longer-term charters because I know that you guys do seek to kind of shield to kind of minimize the volatility there. So I know that you mentioned that you wanted to keep rolling them over until there’s, some markets are better, but when do you – when would you expect for that to happen at least in this charter market or that given indications that some of that is going on or some conversations have been going on?

Gerry Wang

I think once the demand supply situation improve on both sides, the 4250 TEU will perform accordingly. And we expect probably second half 2013 and first half 2014, this class will become active and hopefully, the value will pick up. As I mentioned, at the beginning if chartering makes sense, either will go for three years, five years or longer term, or we just sell them, whatever makes sense to us. That’s really our strategy in today’s market, doesn’t make sense to lock up those vessels for long-term charters, because the rate is just not there. So we just balance it with the market and go through the short-term volatility and low cycle and for us it’s about 3% of the revenue. So we can carry that through quite easily. So that’s really our strategy.

Unidentified Analyst

Sure. And if I could take this to slightly different direction, when I – when we think about I guess, the open market purchases that you guys did, I mean, Sai, how do you approach and I know you gone through a lot of detail but would you dig a little bit into further about when you decide that the price is right for Seaspan to go back into the open market supply, how do we, is there price point that we should think about or just how do we approach that (inaudible)?

Sai Chu

Well, I think we’re opportunistic with the open market plan. I think that the disclosure on the price levels that we’re purchasing at, we feel that there is good compelling long-term value for our shareholders when that program will kick in.

Unidentified Analyst

Got it. Thank you.

Sai Chu

Thank you.

Operator

Thank you. Our next question comes from the line of Ross Briggs from Wells Fargo. Your line is open. Please go ahead.

Ross Briggs – Wells Fargo

Thank you. Good morning guys.

Gerry Wang

Hi.

Sai Chu

Hello.

Ross Briggs – Wells Fargo

Most of my questions have been asked. I just wanted to follow-up on the newbuild question. I realize that you can’t say too much, but it certainly sounds like you’re closer to getting something done than you were last quarter. And I just wanted to follow-up and ask, is that a function of just kind of the normal process of things that you’ve been in discussions for a while or is it a situation where something has changed or maybe there is new people they you’ve kind of begun discussions with or the outlook has changed a little bit for the next few years?

Gerry Wang

Right now it’s pretty much in (inaudible) we’re doing things, long term charters, newbuilds and probably a little bit variations, other than that there would be newbuilds, long-term charters, export agency financing and that kind of things.

Ross Briggs – Wells Fargo

Okay.

Gerry Wang

That’s just the way we do business.

Ross Briggs – Wells Fargo

Just a process. And then Sai, you’ve made a comment on the OpEx that seasonal factors being pushing things slightly higher and in Q4, I’m not quite sure I heard what the number was or if you gave a number, but could you maybe point to what that number is and what those – I mean it doesn’t look like there is drydockings, this is just higher operating expenses in the winter months?

Sai Chu

Yeah, and just typically Q4 is when we do have a bit more operating expenses as it’s just as it is closer to the end of the year.

Ross Briggs – Wells Fargo

Okay

Sai Chu

But we’d expected that it could be an additional our $0.02 to $0.03 for Q4. So – but again, we won’t know until the end of the quarter. We continue to try and manage our operating expenses fairly tightly.

Ross Briggs – Wells Fargo

All right. That’s all I have. Thank you.

Gerry Wang

Thanks.

Operator

Thank you. And with no further questions in queue, I’d like to turn the conference back over to Mr. Gerry Wang for any closing remarks.

Gerry Wang

Thanks again for taking the time to attend to this call. And Sai and I are looking forward to speaking to you next quarter. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

Sai Chu

Thank you.

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