Seaspan Corporation (SSW) CEO Bing Chen on Q4 2018 Results - Earnings Call Transcript

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About: Seaspan Corporation (SSW)
by: SA Transcripts
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Earning Call Audio

Seaspan Corporation (NYSE:SSW) Q4 2018 Earnings Conference Call March 6, 2019 8:30 AM ET

Company Participants

Ryan Courson – Chief Financial Officer

Bing Chen – President & Chief Executive Officer

Peter Curtis - Executive Vice President & Chief Commercial & Technical Officer

David Sokol - Chairman of the Board

Torsten Pedersen - Executive Vice President of Ship Management

Conference Call Participants

Chris Wetherbee - Citigroup

Ken Hoexter - Bank of America/Merrill Lynch

Noah Parquette - JPMorgan

Fotis Giannakoulis - Morgan Stanley

Michael Webber - Wells Fargo

Operator

Welcome to the Seaspan Corporation Conference Call to discuss the Financial Results for the Quarter and Year Ended December 31, 2018. I would like to remind everyone that this conference call is being recorded today, March 06, 2019 at 08:30 Eastern Time and will be available for replay starting today, at 11:30 Eastern Time.

Hosting the call today is Bing Chen, President and Chief Executive Officer; Peter Curtis, Executive Vice President and Chief Commercial and Technical Officer: and Ryan Courson, Chief Financial Officer.

We will open the call for questions after the presentation from management at which point David Sokol, Chairman of the Board and Torsten Pedersen, Executive Vice President of Ship Management will also be available for questions.

I will now turn the call over to Ryan Courson. You may begin.

Ryan Courson

Good morning, everyone, and thank you for joining us to discuss Seaspan's fourth quarter earnings. Yesterday after the market closed, we issued a press release announcing Seaspan's fourth quarter results for the period ended December 31, 2018. The release as well as the accompanying presentation for this conference call are available on the Investor Relations section of our Website.

If we could please turn to slide 3. I would like to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements, due to risks and uncertainties associated with our business, which are discussed in the risk factors section of our Annual Report filed with the SEC on Form 20-F for the year ended December 31, 2017. Our risk factors may be updated from time-to-time in our filings with the SEC. Please note that, we assume no obligation to update any forward-looking statements.

As I mentioned last quarter, we are not providing our historically disclosed non-GAAP measures including adjusted EBITDA, normalized net earnings and cash available for distribution to common shareholders. In the future, we may disclose certain non-GAAP measures, but only if we believe they provide investors with a more helpful and complete understanding of our results, while being consistent with how we view our financial results internally. We will increasingly focus on cash flow from operations as a key metric for our performance.

With that, I will now pass the call over to Mr. Bing Chen to discuss Seaspan's performance.

Bing Chen

Thank you, Ryan. 2018 was my first full year with Seaspan Corporation. And I would like to look back and provide an assessment of our accomplishments during the year. We refreshed the leadership team bringing in high-performing individuals with diverse experience. Ryan Courson was appointed CFO in April 2018. Tina Lai joined us as Chief Human Resource Officer in July. And Torsten Petersen started as Executive Vice President of Ship Management in November.

On top of these additions, we continue to benefit from the leadership expertise of Peter Curtis, as well as many long-term leaders among our 4,300-plus seafarers and our 300 on-shore personnel. We enjoy benefits from the varied, but complementary expertise of our leadership and appreciated the diverse perspective that this team brings to solve both old and new problems.

Over the course of the year, we raised approximately $1.5 billion of capital, which allows us to pursue our growth initiatives and strengthen our balance sheet. We completed the acquisition of Greater China Intermodal in early 2018. This was the largest acquisition in Seaspan's history, which was seamlessly and flawlessly integrated.

Our record financial performance was primarily driven by the acquisition of GCI and the delivery of the last of our order book vessels, which included five large SAVER concept vessels on long-term charter. We also expanded on our relationship with Maersk through the acquisition of two 2500 TEU vessels in last February, which were then chartered to Maersk.

We secured a $1 billion investment from a highly regarded long-term investor and now strategic partner Fairfax Financial Holdings. The second tranche of this investment closed in January of this year, and included $250 million in 5.5% coupon debentures, and $250 million in equity through exercise of warrants as previously agreed.

Fairfax is now our largest shareholder with approximately 36% of common – of Class A common shares outstanding. This investment greatly strengthens our balance sheet and positions Seaspan well for the future. We're excited to have two long-term shareholders being Fairfax and the Washington family, our founding shareholder as the key strategic partners to Seaspan going forward.

Please turn to slide 5. We set out a clear five priority focus, when I joined as CEO and have made significant progress on each of these priorities. These priorities are operational excellence, customer partnership, financial strength and flexibility, the pursuit of growth opportunities and thoughtful capital allocation. Throughout the presentation, we will discuss some of our recent accomplishments as they related to these key priorities. For all these accomplishments, I would like to thank our dedicated teams at Seaspan and our customers each a trusted partner.

Please turn to slide 6. Operational and financial performance, I will first provide brief financial highlights for the quarter and Ryan will elaborate further. As we have grown year-over-year from 89 owned vessels at the end of 2017 to 112 vessels now. Our fourth quarter utilization of 97.3% was a strong improvement from last year's fourth quarter performance of 96%.

Revenue came in at the top end of our guidance range at approximately $295 million. This represents a 38% growth in revenue year-over-year. Our cash flow from operations was $149.3 million for this quarter, which is a 68% increase from the same quarter of last year and a record quarterly high.

Earning per share per diluted – earning per share was $0.25, which represents a 26% increase year-over-year, due to an increase in our weighted average shares outstanding during the period.

Financing developments, on January 15, 2019 we closed the second tranche of Fairfax's $1 billion investment, which was $500 million in aggregate. Since the end of the third quarter, we have repaid debt which will unencumber an additional 14 vessels for a total of 32 unencumbered vessels after release of the collateral. Ryan will provide more details on our financial developments later in the presentation.

Please turn to slide 7. Two aspects I would like to focus on are, strengthening customer partnerships and our operational improvements. Our partnership with our customers and our ability to be flexible and creative to meet their needs provides our customer with confidence to secure long-term supply commitments from owners such as Seaspan with quality and reliability of service. For example, we entered into agreements with two customers to install 10 scrubbers with different payment structure to meet their specific needs.

Our customers know they're well supported by our integrated platform and scalable business model. There are several new charters with new customers that I would like to highlight. In the fourth quarter, we signed our first ever charter with Evergreen Marine and now have working relationships with all of the top eight charters. We also signed our first charters with KMTC and HMM during the quarter. We hope to continue to develop these relationships and ensure we are the partner of choice for all reputable container lines.

We continue to sign long-term contracts with our existing customers adding nine extensions and a new charter with one of our largest customer, COSCO Shipping. Including in this are two multiyear charters. We also signed extensions with CMA CGM for three vessels. 2018 also marked several significant operational achievements. Our lost-time injury frequency improved 16% from 2017, representing our safest year on record. And we recorded a 30% improvement in Port State Control deficiencies over 2017.

On top of this, our crew retention was over 95% for 2018. We continue to strive towards operational excellence. This is one of the most important aspects of our business and one of the key reasons why major liners continue to broaden and deepen their relationship with Seaspan.

I will now pass it over to Peter Curtis, who will discuss the current industry outlook.

Peter Curtis

Thank you, Bing. Please turn to slide 8. In Q4, we saw further softening in charter rates as a result of excessive fleet growth in the first half of 2018 and postponed scrapping arrangements due to strong markets. Charter rates for Panamax vessels took the largest hit as redeliveries into the market increased driving rates down. However, we believe that there will be several factors in play that will provide support to charter rates going forward, including a short-term demand spikes as vessels are taken out of service for scrubbers and increasing prevalence of slow steaming.

We remain optimistic about the rates for the remainder of the year as we continue to see improved supply and demand characteristics. Charter rate improvements over the past 24 months have led to improved asset values. However, sale and purchase activities slowed in the fourth quarter, providing less indications of asset values in market.

In the fourth quarter, deliveries of newbuildings remained polarized with no deliveries in the 3,500 to 10,000 TEU range. We expect the limited deliveries in the 3,500 to 10,000 TEU range to provide support to these asset values while order books trend towards vessels greater than 18,000 TEU. We believe these more balanced supply and demand characteristics, the upsizing on the intraregional trade routes into the underbulk sectors and relative shortage of tonnage below 15,000 TEU will be the driving forces for continued charter rates support for Seaspan's fleet albeit bumpy at times.

Please turn to slide 9. The demand for global seaborne trade remains a positive macro demand force impacting our positive outlook for Seaspan and the container shipping market. As we continue to see fleet growth and throughput growth move towards equilibrium, forecast of capacity growth is expected to be below global throughput growth through both 2019 and 2020 and potentially into 2021.

Given the order book is baked in until late 2021, we anticipate a continued improvement in balance between supply and demand as both global capacity growth and throughput growth converge, creating a more stable environment in the container industry.

On the demand side, there was a positive 4% growth in demand supported by container volume frontloading to avoid US-China tariff implications on the transpacific route. However, 2018 still saw a robust growth in other regions except for the Middle East which was hurt by the sanctions in Iran. We expect broad-based growth in trade to support positive growth in demand, providing support to charter rates.

As mentioned, additional supply remains largely focused on the large or very large vessels which are limited in deployment opportunities, yet increasing trades in other areas, enjoying the higher rates of growth should provide positive stimulus for appropriate tonnage-sized sectors. Several regions such as Africa, Southeast Asia, India and Oceania enjoy improving port infrastructure opening them up to vessel segments larger than the traditional fleet size. Regions such as these have complemented the soft growth of the Asia-Europe trade and the normalized transpacific trade in other words without frontloading.

Please turn to slide 10. Turning to the supply side, the idle fleet order book and demolition volumes show that the industry is more appropriately managing the supply of vessels. First, on the details of idle vessels, approximately 3.9% of the vessel -- of the fleet is idle with around half of the current idle fleet made up of vessels below 2000 TEU where demand has been weak as liners focus on larger vessels with lower slot costs.

The order book-to-existing fleet ratio is among all-time lows at about 12% having improved year on year. And the larger majority of vessels we delivered into the market during the 2019 and 2020 period are in excess of 10000 TEU. Over 45% of the order book is ultra-large, meaning greater than 18000 TEU which can only go on Asia-Europe trades.

As such, our short-term fleet is well placed to avoid the direct large ship competition. And being in the underbulk sector of 3000 to 9500 TEU, we believe that the actions by several liner operators to apply scrubbers will result in many units being withdrawn for typically 30 to 40 days plus phase-in and phase-out considerations requiring backfill or causing tighter supply during that phase through 2019 and 2020.

In regards to recycling, 2018 ended with scrapping volumes well below the 2016 highs and at their lowest levels since 2011. The majority of scrapping in 2018 was in the last quarter, driven by healthy steel prices. And 80% of the tonnage scrapped was below 2000 TEU, with an average age of 24 years. We anticipate that with the ballast water treatment system requirements and the impending impact of IMO 2020 becoming ever closer, there may be more positive impetus to delete all the tonnage.

I would now like to pass the call over to Ryan to discuss our financial results and forward-looking guidance.

Ryan Courson

Thank you, Peter. If everyone could please turn to slide 11, I will provide a brief summary of our financial results for the fourth quarter.

From an operating metric standpoint, ownership and operating days increased 25% and 26% year-over-year respectively. This increase was primarily driven by our acquisition of GCI, vessel deliveries and was partially offset by some asset disposals.

Our vessel utilization for the quarter was 97.3%, an increase from 96% in the fourth quarter of last year. Operating cost per ownership day, which is measured as ship operating expense divided by ownership days, was $5,600 per day, a 7% improvement from the fourth quarter of 2017.

On the revenue side, our revenue came in at $294.9 million, the high end of our guidance range, up 38% compared to the prior year. This was primarily due to the additional operating days mentioned above and higher average charter rates for vessels that were on short-term charters.

On the ship operating expense side, we saw an increase of 16% to $55.6 million over 2017. This increase was due primarily to the increase in ownership days noted above, is favorable to our guidance of $58 million to $62 million, due to several initiatives that we have internally, leading to stronger operating efficiencies for the quarter.

These improvements in operating expenses allow Seaspan to continue to meet targets for operational excellence, maintaining best-in-class reliability, while allowing Seaspan to continue to pass on cost savings to our customers.

On the G&A side, we were at the -- beat guidance by $7.1 million, sorry, our G&A expense was $7.1 million for the fourth quarter, below our guidance of $8 million to $10 million. On an operating earnings perspective, we came in at $134.4 million, up 67% from the fourth quarter of last year.

Net earnings attributable to common shares in the fourth quarter of $44.9 million, was up 6% from $42.4 million in the fourth quarter of last year. GAAP diluted EPS for the quarter of $0.25 compared to $0.34 in the same quarter in the prior year.

For the fourth quarter, I will note that an expense of $14.3 million related to the change in fair market value of our derivative instruments, this equated to approximately $0.08 per share with $5.4 million of this expense relating to an unrealized change in fair market value of our swaps of approximately $0.03 per share. This unrealized $5.4 million number can be found disclosed on our cash flow statement.

Cash flow from operations for the quarter was $149.3 million compared to $89 million in the same quarter in the prior year, 68% increase and a record quarterly high. As I mentioned in our prior conference calls, we will increasingly focus on cash flow from operations as we believe it is the most comprehensive financial metric for our business.

Our cash balance at the end of the fourth quarter, including short-term investments, was approximately $360 million. Total borrowings of $4.2 million improved from the prior quarter's borrowings of $4.3 billion, primarily as a result of our focus on reducing our secured debt position.

If we could all turn to slide 12, I would like to highlight our strengthened balance sheet. We have made continuous improvements since the last quarter to work on our liquidity and capital structure, advancing us towards our long-term credit objectives.

We enhanced our liquidity position with several strategic financings, including the closing of the second tranche of Fairfax's $500 million equity investments and the subsequent repayment of various credit facilities.

Over the fourth quarter, we repaid $109 million of secured debt and prepaid an additional $147 million in January. Through thoughtful capital allocation, including the proceeds from Fairfax investments and cash flow from operations, we have reduced our secured debt and increased our pool of unencumbered assets, both of which improve our liquidity position and financial flexibility. As of today, our pool of unencumbered assets stands at 32, up significantly from our 12 unencumbered vessels at the time of March 2018.

At year end, we had $507 million of liquidity, which includes cash, cash equivalents and undrawn commitments on our revolving credit facility. If you include proceeds received from Fairfax's January 2019 investment of $500 million and the repayment of $147 million of secured debt during the same month, our liquidity position would increase to approximately $860 million.

On the capital structure side, the $250 million equity investment from Fairfax in January meaningfully improves our equity capitalization and net debt-to-equity position. We have made significant progress using our discretionary cash flows to reduce our secured credit facilities. I am very pleased with the progress we have made over the past quarter and we are well positioned to continue building long-term value, with our goal of achieving an investment-grade credit rating.

Turning to slide 13, I would like to highlight an important change to our financial reporting in 2019. Starting on January 1, 2019, we adopted the new lease accounting standard change ASU 2016-02. As such, in 2019 quarter one will be our first set of financial statements using this new lease guidance. The prior year comparatives included in these financial statements will not be restated to new accounting standards and thus will remain consistent with previously filed financial statements.

Under the new leasing standard, some of our sale-leaseback transactions which we have used to finance vessel acquisitions in the past, are classified as operating leases and will come onto our balance sheet. During the first quarter we will add approximately $1.1 billion and right-of-use or ROU assets. We will add a similar amount in lease liabilities relating to these ROU assets.

Concurrently, we will also derecognize a deferred gain relating to these sale-leaseback transactions in the amount of $181 million, which is currently represented in our other long-term liabilities. And as a result of this, we will adjust our opening retained earnings by that same amount.

For the purposes of being clear, this new lease standard does not impact Seaspan's accounting for the leases to our customers, just the sale-leaseback transactions we have used to finance vessel acquisitions.

Going forward, our operating lease expenses will be recognized on a straight-line basis before adjusting for changes in LIBOR. This will result in timing differences compared to the current standards, which recognize expenses consistent with the amount paid. This will be reflected in our Q1 financial statements.

As a result of these changes of the new leasing standard, we expect our operating lease expense as detailed on our income statement to increase. This increase is primarily related to no longer amortizing the deferred gain of $181 million, which was previously recorded as a contra-expense against our operating lease expense.

The amortization of this deferred gain is a non-cash expense and does not impact our cash flow from operations. The non-cash changes to our operating lease expense for 2018 were approximately $24 million or $0.15 per share. This can be found broken out in our cash flow statement under operating leases. These changes will be reflected in our provided forward-looking guidance.

Everyone could please turn to slide 14 I will go over our forward guidance for 2019. As we stated in our previous earnings calls, going forward we will issue only annual guidance as we believe it is more consistent with our strategy to build long-term shareholder value. As always, please note that the following amounts are based on current information and estimates are subject to change.

For 2019, revenue will be between $1.14 billion and $1.16 billion, the increase versus the prior year driven primarily by the contribution of the GCI acquisition on a full year basis. Ship operating expense is expected to be within a range of $240 million and $250 million.

Operating lease expense is expected to be in a range of $155 million to $165 million. As noted on the previous slide, our operating lease expense is expected to be higher year-over-year, because we no longer amortize the deferred gains from our sale-leasebacks. On the G&A side, we expect the range to be between $30 million and $35 million.

That concludes my formal remarks. And with that, I'd like to turn the call back over to our President and CEO Mr. Bing Chen.

Bing Chen

Thanks, Ryan. I'm very pleased with the improvements that we have achieved what we set out to do in 2018. And I'm confident in the ability of our new leadership team to execute on Seaspan's key priorities. While the refreshed leadership team and all 4,600-plus employees achieved a tremendous amount in 2018 there remains more challenges and opportunities ahead. And I look forward to seeing what our team can deliver throughout 2019 and onward.

We thank you for your time today. And with that, I will pass the call back to the operator who will open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Chris Wetherbee from Citigroup. You may begin.

Chris Wetherbee

Yes, hey, thanks. Good morning. Thanks for taking the call. I guess maybe I wanted just to start on the capital structure and where you feel like you are in the spectrum of deleveraging. Obviously, you're up to 32 unencumbered vessels. Wanted to get a sense of maybe where you think you need to continue to go and what we should expect as part of the guidance for 2019 in terms of deleveraging?

Ryan Courson

Thanks. This is Ryan. I think we laid out pretty clear objectives as it relates to our capital structure at our Investor Day in November. As a reminder, those slides are online in our Investor Relations Website. As a management team, we are very focused on the continued credit accretion of Seaspan. And so as we think about capital allocation opportunities, we always weigh not only the returns, but the opportunity cost of not deleveraging. It's a highly important strategic imperative from our board down. And so what I would say is we have a high level of cash flow from operations that we will continue to use to strategically delever to the extent that there are opportunities, we will obviously consider both the deleveraging as well as external capital allocation opportunities.

Chris Wetherbee

Okay. And in terms of that external capital allocation opportunities, can you just give us an update on sort of what you see in the market? Are there other opportunities? You've done some stuff that's either been adjacent or in some cases maybe a little bit different than the core. Kind of get a sense of maybe what the opportunity set looks like for 2019 specifically?

Bing Chen

Yes, this is Bing. In terms of the opportunities that we see first we still see the consolidation opportunities within our sector and also we see the -- specifically on asset side whether it's the second-hand acquisitions or the newbuilds. In terms of the adjacent markets, we see that in terms of LNG and other logistics infrastructure type of opportunities. For us specifically as we laid out that first of all we are very disciplined and careful in terms of our capital allocation.

And we're constantly evaluating opportunities whether it's a newbuild, second hand and adjacent whether it's horizontal or vertical. But the most important part for us is that I think that we need to be patient. And also we need to -- because the nature of the cyclicality of our industry that we need to find the right opportunity. For example, the GCI acquisition is an example. Okay? Because I think that in terms of question you might ask us is that what we have done for the last year for the remaining of last year?

I think that we have evaluate a lot of opportunities, but we just have not find the right -- the transaction that have the -- meet the criteria of the risk-adjusted return, the business rationale and also when we also consider is the impact on our balance sheet. So we will continue to be very carefully evaluating opportunities both within the container sector as well as it's in adjacent sectors to looking at the opportunities. But ultimately, we're looking for any kind of allocation that will create long-term shareholder value.

Chris Wetherbee

Okay. No, that's helpful. And then maybe switching gears last question from me is just really on the chartering environment. So I'm kind of curious, how charterers are approaching sort of employment of vessels for later 2019 and then into 2020 in the context of the IMO changes. Should we expect to see a lull in chartering activity as people sort of assess the marketplace and how much of the fuel costs they're actually going to be able to pass onto their customers or is that or is this sort of business as usual? Want to get a sense of maybe what you're seeing in terms of the pace of activity. Maybe there's some activity that goes on before the second half of 2019. I kind of just want to get a sense of what we should expect?

Peter Curtis

Yes. It's Peter Curtis. First on the chartering activities or maybe translated to what we're interested in is the rate environment, we saw rates drop at the back end of Q4 into the typical Christmas and Chinese New Year soft environment, bearing in mind that Chinese New Year this time around was very close behind Christmas.

A relatively small number of idle Panamax vessels caused the volatility in that sector. And applying to that relatively small population of vessels that were all bought, we now see charters trying to fix for 12 months indicating a forward need on their behalf.

Additionally, additional vessels greater than 6,000 TEU are becoming scarce as customers fix for a year or more which we believe is in anticipation of scrubber outfitting needs, in other words the backfill, and due to the lack of supply in the segment greater than 6,000 TEU.

As the larger vessels become scarcer and the non-main-line routes that I alluded to earlier as they continue with their more robust growth the demand will precipitate into the midsized of 3,500 to 6,000 TEU considering that this is an under-bulk sector.

So, what we're seeing is in our discussions, there's been a strong surge for all the large vessels fixing well into -- well, 12 months, shall I put it that way? And that is more linked to the -- what we believe is a decline in the deliveries roundabout the 10,000, 12,000 TEU as well as if you consider each vessel going in for a scrubber will be out of service 35, 40 days in the yard they've got to relocate the vessels. So, there needs to be some form of backfill.

And on the Panamaxes whilst we've seen the softening just recently, we're now starting to see fixing requirements for -- in excess of six months. So, in that regard we think that there's the regular cyclicality on top of these other aspects that I mentioned -- but about IMO 2020, am I correct?

Chris Wetherbee

Yes.

Peter Curtis

Yes okay. So, there's a couple of things there. Of course the big one is that relating to the change of fuel. We've been early to our customers which was appreciated on their side in discussing how we would do our preparations.

The methodology that we've discussed and agreed with most of them is one which would not affect service. So, our vessels would continue to operate as normal as we prepare for the compliant fuels tank-by-tank.

Chris Wetherbee

Okay. Okay. Thanks very much for the time. I appreciate it.

Operator

And our next question comes from the line of Ken Hoexter from Bank of America. You may begin.

Ken Hoexter

Hey good morning. Just Peter just following on that is there any trade -- impact of trade on the carrier thoughts on contracts, I guess, just as we extend or maybe end the disagreements with U.S. and China on trade policies? Has that impacted, I guess, as you think about -- I know you don't control it but the liners do, but in terms of pre-shipping, what that meant for vessel needs and releasing maybe some demand as we moved into the beginning of the year.

Peter Curtis

Okay. Just to clarify you're talking about the transpacific issue at present?

Ken Hoexter

Yes.

Peter Curtis

Yes, okay. So, well, we did see frontloading. The typical utilization on that route if you recall from our last earnings call was around about 96% utilization. And the last quarter, utilization on the transpacific, notably, the China-U.S. peak leg -- what they call peak leg was marginally below 100%. So, definitely, we did see frontloading.

If you translate that into numbers, it really was an impact upwards of about 0.1% on global container moves. So, the corollary with the lack of back loading would be something similar perhaps to the negative, but that occurred over a quarter.

Our first quarter this year, of course, is the normal slow season. I mentioned Christmas and Chinese New Year. So, we anticipate to see that -- well, there's also been shall I say not negative news in the most recent tweets. So, we hope that we'll see a normalization of those trades.

But in regards to Seaspan's fleet, the bulk of our fleet is on long-term charters. So, that would not necessarily affect us. Our vessels that are open to the variability in charter rates are the smaller tonnage sector the Panamax primarily. We have our large vessels fixed as you know and these vessels do not trade on this trade. They are on the intraregional or some are on the transatlantic, some are on the north-south trade. So, we don't see an impact necessarily on our earnability.

Ken Hoexter

So -- thanks for that. And then I appreciate -- as well as your large vessels being fixed and not on that lane, but your insight's still helpful. The -- maybe just a question -- I don't know if this is for Bing or you Peter. But on the draw to sign up new customers, was that a strategic desire to add, kind of, round out the top eight in terms of customers? Was that just given vessel availability or rate discussions or just walk us through how that came about.

Peter Curtis

Okay. Well, it's Peter here. Our focus is always on maintaining a broad footprint in the industry. Historically we ended up where we are primarily through the new build programs. But as our -- all the tonnage has rolled up into sort of short-term or spot markets, we've passed on it very wide.

So, getting a direct working relationship with customers that ordinarily we have not enjoyed is a big win for us because once you have this direct relationship, you end up with an improved familiarity company-to-company. So this is partly a strategy partly utilization of short-term tonnage. And you'll see us continue to expand our footprint further down the line in terms of the pecking order of the container industry.

Ken Hoexter

Great. And then lastly for me Ryan just if I can return to you on the -- I think one of Chris's questions, I was wondering, is there a specific debt-to-cap or debt-to-EBITDA target for 2019 post the equity infusion and the expected cash flow? Is there -- I know your target is to get a lot lower. Is there specifics you want to put given the target cash flow or a range?

Ryan Courson

Hey Ken. Thanks for that. We don't hold the capital structure to targets or metrics. So we tend to look at every opportunity from a capital allocation standpoint on its own merit, so whether it's deleveraging from the returns available there or the return opportunities from external capital allocation, it's really a returns-driven decision. And we feel that that allows us as a management team to make the best long-term decisions for our shareholders.

Ken Hoexter

Okay. Thank you. Thanks for the time guys.

Operator

Thank you. And our next question comes from the line of Noah Parquette from JPMorgan. You may begin.

Noah Parquette

Thanks. [Technical Difficulty] five, I think you said you're being reimbursed at cost. Just to be clear, are you guys trying to get any return on that or is that simply just installing [Technical Difficulty].

Ryan Courson

Hey, Noah. This is Ryan. You were pretty faint there. Do you mind speaking up or repeating the question just so the management team can hear you?

Noah Parquette

Can you hear me okay?

Ryan Courson

Now we can.

Bing Chen

That's better.

Noah Parquette

Yes, okay. Sorry. So I was just asking about the scrubbers particularly the five that I think you said you're being reimbursed at cost. Is there -- just to be clear, is there any return from Seaspan on that or is that simply just installing them for the charter?

Peter Curtis

Yes. It's Peter here. So we're actually fitting 10 scrubbers. And we've applied a mechanism that suits our customer. In one case it's a payback over a period of time. In the other case it's a payback over a much shorter period of time, which would be a cost plus basis. A longer period would attract an increased charter rate to affect the payback. In all cases there's a rate of return. There's a return in terms of operating costs et cetera. I hope that clarifies.

Noah Parquette

[Technical Difficulty] of that nature or is that kind of it for near term?

Peter Curtis

Sorry, you disappeared again.

Noah Parquette

I'm sorry. I think my connection’s bad. Yes, my connection's bad. I'll take it offline. Thanks.

Peter Curtis

Okay.

Operator

And our next question comes from the line of Fotis Giannakoulis from Morgan Stanley. You may begin.

Fotis Giannakoulis

Yes. Hi, gentlemen and thank you. You mentioned about the fact that you haven't seen any attractive acquisition opportunities out there. Can you give us a little bit more color why you think that there aren't deals that they can generate sufficient return? Is it because of increased competition from Chinese and Japanese leasing houses or you think it's the liners? They do not feel that there is a need to get into long-term deals despite the fact that the order book has declined substantially.

Bing Chen

Yes. That's a very good question. Thank you. Yes, what we need to clarify is there are activities out there. What I'm trying to say is that those are the activities today for Seaspan that we have not taken on these activities, because that does not meet our investment or capital allocation criteria. So that's one thing that we need to clarify.

In terms of what is the cause of that, I think, it's -- you have to look at whether it's a newbuild, whether it's a second hand, whether it's some other assets or business opportunities. In the newbuild area, I think today it's primarily driven by the liners. And I think the number of the newbuild is relatively low and as Peter mentioned earlier, it's almost a decade low in terms of the newbuild volume.

So from that perspective I think there are, A, advantages for the liners to build these vessels themselves or some of those opportunities been taken on by some of the leasing companies, which they would be looking into those opportunities as attractive to them. In terms of the second-hand market, I think the activities -- there are activities out there, but those are the opportunities today, I think today if you take a sophisticated or comprehensive views on the residual risk of these assets then the return could be varied quite significantly.

And once again, today, Seaspan will take a very -- because we have our own proprietary views on the residual value of those second-hand assets. And in taking those valuations into the consideration of returns for us we don't see attractive opportunities. So that's why we have not taken on additional acquisition whether it's an asset or fleet.

And then looking at in terms of the adjacent sectors, I think there are different opportunities that is out there whether it's boxes infrastructures and others. We are selectively looking at opportunities once again based on our criteria. One is that we don't take any kind of speculative views on these opportunities. First of all, we're looking at how -- what is the business rationale? How that's related to our customers? That is very important.

Secondly, we're looking at the return that has to be significantly accretive. And that return has to be risk adjusted. And thirdly, as we said it before, we continue with the focus on deleveraging and increase our credit quality long-term so that we need to consider the effect on our balance sheet. And then fourth part, we also did think about particularly with the revenue or cost synergies those opportunities is going to bring.

One thing that's very important for this management team is that we don't make the investment or capital allocation for the sake of making the allocation like typically investment people say, dollar-cost averaging. We don't do that dollar-cost averaging. We only take the opportunities that just meet our criteria. That's why we've been very disciplined and we've been very patient. And we only do the right deals that brings the value and maximized value for our shareholders long-term.

Fotis Giannakoulis

Thank you for this detailed answer. I appreciate that. Would it be possible to give us an idea of what is the required risk adjustment return for a containership investment, let's say a typical new building investment?

And do you expect that this required expected return could be reduced as you improve your balance sheet and as you move closer to your target of turning into an investment grade company, which possibly could open the door for more transactions?

Ryan Courson

Hey, Fotis. This is Ryan.

Bing Chen

Okay. Ryan should go ahead.

Ryan Courson

This is Ryan. So we don't disclose our financial thresholds from a returns perspective. And what I can tell you on the newbuild or the second hand market, those transactions end up being very idiosyncratic. And so any heuristic we provide you wouldn't be that useful, because it depends a lot on how the financing is structured and what the ultimate deal is with our counterparty.

So in general, no disclosure but please know that we try to be very thoughtful with how we think about the capital allocation opportunities whether it's newbuild, second hands or other capital allocation opportunities beyond shipping.

Fotis Giannakoulis

I fully understand. It's worth the effort. Can -- shifting gears right now, you have signed a preliminary agreement about a potential investment in LNG-to-power project in Vietnam. Can you give us some color where this project stands? What are the steps that would need to be taken until it reaches FID? And what is the probability of this project moving forward within the next 12 months?

Bing Chen

Yeah, thank you. This is Bing again. With the Swiber you're referring to that investment is that we --what we – because, one is that we are subject to compliance with the Swiber's disclosure requirement, so that we would only be able to disclose to the extent that we continue the progress in investment of Swiber. As you know they are currently in a judicial management process.

The process, it's a legal process that is similar to large extent to the U.S. Chapter 11 but that process is it's own uniqueness in Singapore's process. We are actively in the progress and we will update and disclose as when is necessary per Swiber's disclosure requirement.

Fotis Giannakoulis

Thank you. I appreciate.

Operator

Thank you. And our next question comes from the line of Michael Webber from Wells Fargo. You may begin.

Michael Webber

Hi, good morning guys. How are you?

Ryan Courson

Hey, Mike.

Bing Chen

Morning.

Michael Webber

Just to follow up on Fotis' last question with regards to Swiber, can you disclose whether there's been any change in any capital call scheduled or capital commitments associated with that investment?

Bing Chen

Yeah, this is Bing again. Whatever we have disclosed in the term sheet that is public available up to this point there's no material changes. And if and when there's any further progress that we will disclose again per Swiber's disclosure requirement.

Michael Webber

Yeah, no, no that's helpful just to know that there's no change. Just to look back on the question earlier on your scrubber investment and forgive me if I missed this somewhere, but can you give us in detail in terms of whether those were open or closed loop?

And then with regards to the different payment structures, just the vague term around that and the angle I'm looking -- I'm trying to get at is how covered are you in the cost plus scenario for maintenance CapEx and/or is the value?

Peter Curtis

It's Peter here. So the scrubbers that we have agreed to fit are what are called hybrid ready open loop scrubbers. So these are -- once they are fitted will be operating essential as open loop scrubbers. They are capable of taking on additional effluent treatment equipment if that decision is made later and that will be part of the engineering package. In other words the design will be there, but the actual equipment will not be.

So the corollary to that is that in areas where you are not allowed to operate in open loop, you actually -- the way we've structured this physically is that you can open one exhaust valve and close the other, and then we bypass the scrubber and we go to compliance fuel in the areas where we're not allowed to operate this -- the open loop. But the vessels that are fitted are large vessels long-haul trades. So the percentage of time in the either closed loop or 0.1% sulfur fuel region will be fairly small.

In regards to the cost structure, let me pass you over to Ryan.

Ryan Courson

Hey, Mike. This is Ryan. So from a specific standpoint, obviously, we don't disclose the agreements that we have with our customers. But the arrangements on whether it's on the rate of return or the cost plus methodology, we are definitely comprehensive as it relates to identifying all of the costs that not only go in the return calculation cost but also the cost plus calculation. So we're thoughtful about all of the ins and outs, whether it's maintenance cost, the capital requirements and/or the residual value impact.

Michael Webber

Okay. And then again not to get into too many specifics, but with regards to covering those costs, is it fair to assume that that extends over the life of the vessel, I guess and/or the investment?

Ryan Courson

Yes, again not to be overly specific here, but we would want to in general try to focus the coverage of each of those investments over the course of the life of the scrubber versus the life of the asset.

Michael Webber

Okay. I can follow-up offline. And then just with regards to the changes in lease accounting, obviously, a pretty big deal and this year and then certainly next year when the private entity start suiting it. Just curious have you guys noticed any change yet in maybe the approach from your counterparties in terms of the lease types they're looking at in terms of any changes in term options or what have you? Just curious whether those changes have started to permeate the way they think about layering in kind of variable capacity.

Ryan Courson

Yeah, so why don't I take the first blow at this and then Peter or Bing if you want to step in. So, in general, as a full service provider, we look to accommodate our customers' requests. And so, we've had multiple conversations with our customers around how this lease standard change may impact them. And we've done our best from a financing standpoint to engage with them in deep rich conversations about what products or services may look like in the new regime. We have not found anything that is particularly palatable on either side yet, but those conversations are open and we remain flexible.

Bing or Peter, do you have any thoughts there?

Peter Curtis

Yeah, it's Peter. So, as Ryan says, we engage with our customers wherever they are. The sense of it is very significantly many of them are not overly concerned about this. Others are more inquiring as to if there's anything we could do about it. But just as yet nothing has been completed.

Operator

All right. [Operator Instructions] Our next question comes from the line of Randy Giveans from Jefferies. You may begin.

Unidentified Analyst

Hey, gentlemen. This is Greg on for Randy here at Jefferies. Thanks for taking the time. Just one quick question on guidance for 2019. Last year you guys gave guidance on depreciation. And this year for 2019 you don't give that guidance. Can you guys give guidance on depreciation for the year?

Ryan Courson

So, this is Ryan. Thanks for the question. And so one of the things that you'll notice in our calls is that we are increasingly focused on cash and cash oriented metrics. And so, from a management standpoint, we believe cash flow from operations is the best financial KPI, best financial metric used to evaluate our financial performance. And as you can sympathize D&A wouldn't help you get to that number.

Unidentified Analyst

Right. Okay. And then on -- back to I guess, Noah and Mike talked about this a little bit on the scrubbers, but wanted to kind of follow up more on IMO 2020 and kind of what's your strategic plan. And how do you guys are internally viewing that that you guys can kind of disclose to us.

Peter Curtis

It's Peter here. So, really IMO 2020 is about the usage of a low sulfur fuel. So, of course, we don't buy the fuel. Our vessels are on either -- predominantly on time charter or on bareboat charter where procurement of fuel is actually performed by our customer for and on their own behalf. That said, of course, we've been interested in what would the dynamics look like going forward.

To that end, we've been interested in availability of fuels and the types of fuels which we've engaged with refiners and the oil majors on. As a matter of fact, we've engaged with our customers as well.

The picture for the 0.05% fuel type is slowly becoming clearer. I understand that just recently Standard & Poor's actually marked some trading in -- limited trading in the 0.05% fuel. So we have no concern in terms of availability of the fuel. We believe that the world is fairly well covered for that.

In terms of the actual impact on us, I mentioned a little earlier that we've been early to discuss with our customers the preparation for that. And the preparations really are limited to essentially the cleaning of tanks so you don't have contamination from prior high sulfur fuel to this lower sulfur fuel. So, technically speaking, that's not an issue. And we're well underway with our preparations and agreements with our customers.

Unidentified Analyst

Okay. Perfect. Perfect. And last question from me and I'll hop offline here is A, do you guys have a share repurchase program? And then when it comes to returning capital to shareholders, do you -- are you all looking at both share repurchases and an increased dividend in time?

Bing Chen

Yes, this is Bing.

Ryan Courson

This is Ryan. So from a share repurchase standpoint, we don't have an active plan right now. That said, we have a very engaged Board of Directors. And to the extent the senior management team was keen to recommend or thought there was a disconnect to value, I don't believe it would take us very long to effectuate that type of policy.

And then from a dividend question our Chairman who's on the line has been fairly vocal with our views on the dividend over the past several quarters. We view that the dividend right now is adequate in size. And we believe that it is appropriate for the company right now.

Unidentified Analyst

Perfect. Well, thank you guys. I appreciate it. I'll hop off the line. Thanks.

Operator

Thank you. And I'm actually showing no further questions at this time. I'd like to turn the call back to Bing Chen for closing remarks.

Bing Chen

So, thank you everyone for taking the time for the call and have a great day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.