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Executives

Michael Mason – IR

Robert Perri – CFO

Michael Bodouroglou – Chairman, President and CEO

Analysts

Era Sadoor – Clarkson Capital Markets

Aures Sadoor – Clarkson Capital Markets

Box Ships, Inc. (TEU) Q3 2012 Earnings Call November 7, 2012 10:00 AM ET

Operator

Good morning, and welcome to the Box Ships Third Quarter 2012 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 Michael Mason of Allen & Caron Investor Relations. Please go ahead.

Michael Mason

Thanks, Andrew [ph]. Good morning and welcome to the Box Ships investor conference call to discuss to the financial results for the third quarter ended September 30, 2012. I’m Mike Mason of Allen & Caron Investor Relations.

Before we start the call, there are a couple of items I’d like to cover. Many of you received a copy of the press release. It was released today, November 7 at 7:00 AM. If you did not receive a copy of the release, it is posted on Box Ships’ website and in the client section of our website. You may call our office in New York at 212-691-8087 and we will email it to you right away. It is also posted on Yahoo! Finance and numerous other Internet sites. This call is being broadcast live over the Internet and may be accessed on the Company’s website at www.box-ships.com. A replay of the call will be available through November 16, and may be accessed from North America by calling 877-344-7529 and entering conference number 10020300. International caller 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 November 7, 2012, which can be found on the Company’s website and file with the SEC. The Company will make a presentation on the earnings results and then open the call to questions.

I would now like to turn the call over to Mr. Robert Perri, CFO of Box Ships. Hi, Robert.

Robert Perri

Hi, Michael, and thank you. Good morning, everyone. Welcome to the Box Ships earnings conference call, and joining me 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 third quarter and nine months ended September 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 then go into more detailed analysis of our financial results and turn the call over for questions.

Please turn to slide number 4. We are pleased to announce to our third quarter 2012 results which represents our sixth profitable quarter as a public company. During this quarter, we operated in an average of 8.96 vessels and we ended the quarter with 9 vessels after completing the acquisition of the OOCL China in July.

Our adjusted time charter revenue during the third quarter was $17.7 million, while our adjusted EBITDA was $11.9 million. We reported adjusted net income of $5.5 million or $0.25 a share which was up slightly from the previous quarter when we had two dry docks. More importantly, we announced that our board of directors approved a quarterly dividend of $0.22 per common share based on our third quarter results, payable on November 30th to shareholders of record on November 21st, which is in line with previous stated guidance.

On slide 5, you can see our current operating fleet, the duration of our charters and their exploration fleet. Our fleet consist of nine container ships with an aggregate carrying capacity of 43,925 TEU and an average of 7.8 years, which compares favorably to the industry average of 10.8 years according to Clarkson Research.

We have strategically decided to stagger the charters so that they roll off at different points in time. This way, we balance the need to generate stable cash flows and to assure the sustainability of our dividend while maintaining exposure to the container ship charter market. The average remaining term of our charter is 25 months and six of our charter is a well-known container [inaudible] operators that have been in business for many decades.

We have recently secured employment for the Box Trader and Box Voyager on short-term charters. The Box Trader has been fixed up abroad [ph] for a period of 6 to 12 months that commenced in late October at a gross daily rate of $6,750 per day. We also fixed the Box Voyager for one to two months to Hainan at a gross daily rate of $6,900.

The market for these vessels remains weak and under this market environment, we plan to continue to charter them for shorter term periods, maybe no more than a few months and wait for the market to recover before fixing them for longer periods. Even with these two vessels trading short term, we have 94% charter coverage for the remainder of 2012, an 81% coverage in 2013.

On slide 6, we would like to point what we consider our moderate levels of leverage. Currently, our total debt is $219 million after repaying $4 million since the end of the quarter, while our current cash position is $16 million, which means our corresponding net debt is $203 million, representing a moderate 48% net debt to total capitalization.

We also continued to be actively fixing our interest rate risk now that swap rates remain low. Currently, we have fixed approximately 36.5% of our debt, at an average slope [ph] rate of 0.85% for an average duration of four years. We will continue to look at the market conditions and fix our interest rate exposure opportunistically. We pay regular quarterly installments of $5.7 million on a straight line basis and we fund this from cash flow from operations.

We consider this level of leverage to be moderate because it allows to pay considerable dividends from our cash flow after these scheduled debt repayments. This is a crucial aspect of our conservative and sustainable business model which essentially creates equity value through the pay-down of debt over time, while shareholders receive attractive dividends.

Now, I wish to give you brief update on the fundamentals of the containership market. On slide 7, the first graph depicts the Shanghai Containerised Freight Index, which is an indication on the cost ship a container and the top-right graphs depicts the one year time-shared rate for 3,500 TEU vessels.

During the third quarter of 2012, you can see that the actual freight rates charged for transporting containers continued to decline slightly and there appears to be no sustained high-season rally in the market this year. However, rates remains over 20% higher year-to-date compared to the first nine months of last year. And this increase has helped the line of operators report profits here today, which is a significant improvement from the losses over a year ago.

This, however, has been offset by decreased container volumes being transported into Europe which has caused an increased amount of idle capacity shown on the bottom right-hand chart. In addition, the charter market continues to weaken. This weakness has pressured vessel values further and we expect that values will remain depressed for as long as the uncertainty remains in the global economy and lending remains tight. Given all these, we may believe it may take until the spring for the charter market to rebound.

On slide 8, I’d like to discuss supply. The left-hand graph on this slide presents the current expected deliveries based on the outstanding order bulk of the containership sector. Today, 22% of the fleet is on order, a level not seen since early 2003, which is down from 27% at the start of the year. And the silver lining of the current global financial uncertainty remains lack of ordering of new tonnage.

In today’s environment, banks have continued to tighten their lending requirements particularly perspective new buildings and if you are able to borrow, then you will get lower advance rates 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 old mistake of over ordering and should help the industry in the long run.

Even so, with the current order book, expectations are for fleet gross of approximately 78% for 2012 and 2013, which we consider in line given the historical growth rates of the container ship industry. On the demand side, the containership trade continues to be driven by global GDP growth and underlying consumer demand, which has slowed particularly in Europe, but is still expected to increase by 3% to 3.5% 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 expected containership demand growth of between 6% and 9% for the next few years.

Now on slide 9, I would like to walk you through our company’s operating performance. Due to non-cash items that affect our results, we would like to quickly walk you through our adjusted net income and EBITDA for the third quarter and nine months ended September 30th, 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 unrelated to common shareholders, so arrived at 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. These adjustments equal $1.6 million in the third quarter and $2.6 million for the first nine months of the year. In addition, we have non-cash share-based compensation expense of $282 million – or $282,000 to the third quarter and $841,000 for the nine-month period.

In summary, for the third quarter, these cash items totaled $1.9 million and after adjusting for preferred dividends and non-vested share awards, our adjusted net income with common shareholders was $4.9 million or $0.25 per share. In addition, our adjusted EBITDA for the quarter was $11.9 million.

On slide 10, we wanted to provide you with a quick updated scheduled of our dry-dockings and the quarterly scheduled non-cash items which has changed since the acquisition of the OOCL Vessels, and which we believe should be excluded from our financial performance as they are non-cash items that reduce our US GAAP net income.

The amortization of non-cash items mainly relates, as I mentioned, to the purchase price of vessels that was allocated to the time charters acquired along with the vessels, which was amortized going away from the time charter and reduces revenues.

From a modeling perspective, in order to drive at cash revenues, you would multiply our charter rates by operating days in the quarter. But then you had to subtract this amortization expense to get what we would report on the US GAAP revenue. Currently, we expect one drydock in 2013 related to the OOCL Hong Kong and two drydocks in 2014, relating to the OOCL China and the [inaudible].

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 $17.7 million. Well, our adjusted time charter equivalent rate was $25,220 per day.

Our cash vessel expenses were $4.3 million or $5,159 per day, while a total vessel operating expenses for TVOE was $5.8 million or $7,016 per day which excludes the amount of cash items and we consider among the best in the industry.

Our EBITDA for the quarter was $11.9 million or $18,185 per day for an EBITDA margin of 72%. Our total debt service for the quarter was $6.7 million, which brings our free cash flow for the period to $5.2 million or $10,054 per day. And based on this, we are comfortable paying a dividend for the third quarter of $0.22 per share. It is important to note that as mentioned, our debt service will increase next quarter due to the repayments for the new loan for OOCL vessels as the first repayment was due in October.

On slide 12, in conclusion, ladies and gentlemen, we continue to execute on our clear, simple business and financial strategy in a sector that is a proxy for global economic growth. Since our IPO, we’ve been actively acquiring tonnage during a period of depressed asset prices and we are positioned in the mid-sized container ship segment of the market which we believe has strong fundamentals and prospects going forward.

We have a portfolio of fixed-rate charters of two years supported by a solid and diversified group of charters with staggered maturities. In addition, we have a high-quality fleet with an average age of 7.8 years and strong operating performance and a moderately-leveled balance sheet. The bottom line that our model provides enough cashflow to pay down debt while maintaining a compelling dividend yield of 15%.

Thank you for listening and we can now open the call for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator instructions) The first question comes from Aures Sadoor [ph] of Clarkson Capital Markets. Please go ahead.

Era Sadoor – Clarkson Capital Markets

Hey, good morning and good afternoon everybody.

Robert Perri

Good morning, Aures [ph].

Aures Sadoor – Clarkson Capital Markets

Hey, so you guys beat my estimate, but I think what I did was expecting a little bit more OpEx in one area. So you did hit the dividend target. I guess that goes to the core question going forward is the dividend, which again was as expected for the quarter, you have two ships that are in relatively short-term charter. Can you – and I know you touched on in the call, but what’s the rate environment right now? How do you view it for next year? When are they going to be on longer charter, so it’s going to be easier for us to estimate a dividend going forward? I know it’s a multi-faceted question but just want to know more color there.

Michael Bodouroglou

Well, thanks for the question Aures [ph]. Unfortunately, to answer you precisely, I would need to consult my crystal ball which I don’t have. The previous charter rate that we had the ships and that was for a three-year duration as you may recall was $20,000 per day.

Aures Sadoor – Clarkson Capital Markets

Yeah.

Michael Bodouroglou

At the current rates, the market is actually below $7,000.

Aures Sadoor – Clarkson Capital Markets

Yeah.

Michael Bodouroglou

And unless we see actually – unless we see rates approaching the high double – well, near 20s, I will be reluctant to enter into – into a longer-term period charters. So for as long as the market remains at current depressed levels, I think that our preference will be to charter short term until the market shows some signs of improvement.

Aures Sadoor – Clarkson Capital Markets

Okay. We saw a competitor of yours recently indeed this week with somewhat of a similar structure but I would – certainly not comparing it apples-to-apples, but do a deal for 30 plus months at a very attractive rate, of course, the purchase price was very attractive – well, excuse me – was rather high and was attractive for the seller. Are there a lot of deals like that being passed around? Are you investigating similar kind of structures?

Michael Bodouroglou

Yes, there are kinds – there similar kinds of structures around. But as you rightly said, in order to entice a charter to actually – or a seller to actually sell your vessel and give you a lucrative rate for charter –

Aures Sadoor – Clarkson Capital Markets

Yeah.

Michael Bodouroglou

– you’ve got to pay a premium of the asset value. You know, this is basic, I think, fundamentals –

Aures Sadoor – Clarkson Capital Markets

Sure.

Michael Bodouroglou

– basic fundamental thinking behind these structures. And, frankly, we did a similar deal with the OOCL vessels, although I think that the premium we paid for those vessels was not significant compared to the very good charter rates to enjoy [ph]. So, going forward, we are – we will be looking at all kinds of deals.

The magic recipe for our decision making I would say is that every deal we make should be accretive to our cash flow and also accretive to our debt structure and balance sheet structure.

Aures Sadoor – Clarkson Capital Markets

Yeah, and dividends per share I presume.

Michael Bodouroglou

Of course, yes.

Aures Sadoor – Clarkson Capital Markets

Yeah.

Michael Bodouroglou

Including that.

Aures Sadoor – Clarkson Capital Markets

Yeah, of course.

Michael Bodouroglou

We are – we want to maintain a good dividend yield. This is what our shareholders are expecting and this is where – this is a major factor in our decision-making process.

Aures Sadoor – Clarkson Capital Markets

Okay. And then, final question, and you may have done it and I might have overlooked it. It’s been busy. We’re all playing catch up here because of the hurricane in New York, so I feel very behind. But did you give any guidance on dividend for next quarter or not?

Michael Bodouroglou

No, no. We had given a dividend guidance in the beginning of the year to say that during 2012 we will be –

Aures Sadoor – Clarkson Capital Markets

Right.

Michael Bodouroglou

– feel comfortable by paying $1 per share. And right – until this moment, we have – we are right on track with the guidance that we gave.

Aures Sadoor – Clarkson Capital Markets

Sure.

Michael Bodouroglou

But frankly, for 2013, it is too early to tell. There are too many unknown factors, primarily the markets. And, frankly, our dividend – the level of our dividend payment will be dependent on the rates we will be able to secure, primarily for Box Trader and Box Voyager.

Aures Sadoor – Clarkson Capital Markets

Great. Well –

Michael Bodouroglou

And so currently on short-term charters.

Aures Sadoor – Clarkson Capital Markets

Yeah, that’s sort of in line with what I was thinking. I just wasn’t sure if you had given guidance yet, but that’s totally fine. Understood. Thanks for your time. And, Rob, if you could give me a call offline, just to walk through some of the numbers, that would be great.

Robert Perri

Sure, not a problem.

Aures Sadoor – Clarkson Capital Markets

Thank you.

Robert Perri

Thank you for the question.

Operator

(Operator instructions) As there are no other questions, this concludes our question-and-answer session. I would like to turn the conference back over to Robert Perri, CFO of Box Ships for any closing remarks.

Robert Perri

Thank you, everyone, for your time and have a great day. Look forward to talking to you next quarter.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your line.

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