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Edited Transcript of SSW earnings conference call or presentation 7-Aug-19 12:30pm GMT

Q2 2019 Seaspan Corp Earnings Call

Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Seaspan Corp earnings conference call or presentation Wednesday, August 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bing Ruan Chen

Seaspan Corporation - President, CEO & Director

* Peter Curtis

Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer

* Ryan Courson

Seaspan Corporation - CFO

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Conference Call Participants

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* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* J. Mintzmyer

Value Investor's Edge - Lead Researcher

* Kevin Wallace Sterling

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Liam Garrity-Rokous;Citigroup;Equity Research Associate

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Welcome to the Seaspan Corporation conference call to discuss the financial results for the quarter ended June 30, 2019. I would like to remind everyone that this conference call is being recorded today, August 7, 2019, at 8:30 a.m. Eastern Time and will be available for replay starting today at 11:30 a.m. Eastern Time.

Hosting the call today is Mr. 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 and -- 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 Mr. Ryan Courson. You may begin.

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Ryan Courson, Seaspan Corporation - CFO [2]

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Good morning, everyone, and thank you for joining us to discuss Seaspan's second quarter earnings. This morning, we issued a press release announcing Seaspan's second quarter results for the period ended June 30, 2019. The release as well as the accompanying presentation for this conference call are available on the Investor Relations section of our website.

If you 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, 2018.

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.

With that, I will now pass the call over to Bing Chen to discuss highlights and recent developments.

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [3]

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Thank you, Ryan. Please turn to Slide 4, operational and financial performance. I will first provide brief financial highlights for the quarter and then Ryan will elaborate further.

Our industry-leading second quarter utilization of 98.7%, was an improvement from last year's second quarter performance of 98.6%. Revenue for the quarter was $275.4 million. Our better-than-expected operating income of $110.4 million was driven by lower operating expense per ownership day, which we'll continue to improve upon.

Our cash flow from operations was $369.9 million for this quarter. The increase from prior period is primarily due to the collection of a $227 million charter modification payment as discussed last quarter.

EPS per diluted share was $0.10 compared to $0.34 in the second quarter of 2018. However, I would like to note that onetime $227 million charter modification payment we benefit from in the first quarter of 2019 brought forward earnings we would have recognized on those charters in this quarter and subsequent quarters as well. Also, the changes in fair value of our financial instruments contributed to a loss of $0.07 per diluted shares for the second quarter, primarily due to the tightening of the yield curve.

Given better-than-expected operational performance and a decrease in LIBOR, we will be revising guidance positively for revenue, operating expenses and operating lease expense for 2019 based on stronger-than-expected first quarter performance -- first half performance.

As previously mentioned in our closing call, we closed our $1 billion portfolio financing program, which will be our primary source of secured financing going forward. We have continued to execute on our capital strategy, repaying the remaining $311.4 million outstanding on our 2019 notes in April and subsequent to the quarter end have prepaid $231.3 million of the secured debt, increasing our pool of unencumbered assets to 40 vessels.

Please turn to Slide 5. While we continue to deliver on our 5 priorities, I would like to provide an update every quarter on key developments with regard to each of these focuses. We have made significant progresses this quarter end. Throughout this presentation, we will discuss some of our recent accomplishment as they related to these key priorities.

Our continued drive for operational excellence allows us to deliver better-than-anticipated operating earnings via improved operating expenses.

Our team has a strong focus on providing best-in-class service at a best-in-class cost. We do this by consistently investing and building on our integrated platform to enhance our customer-centric focus.

We continue to build upon our customer partnership, signing significant charters this quarter, including several multi-year charters for our Panamax vessels to 3 of our key customers.

We have also been focused on deepening partnerships with our customers beyond our core business, highlighted by our recent framework agreement for strategic cooperation with COSCO SHIPPING Energy Transportation.

I'm pleased with our accomplishment this quarter, and our team continues to build a solid track record for always executing on promises we have made to our customers, employees, financial partners and our shareholders.

Please turn to Slide 6. Since the last -- since the start of the quarter, we have concluded 7 fixtures with one of our largest customer, COSCO SHIPPING, which includes several multiyear time charters. We continue to guide our customers on fuel changeover procedures and make progress on our previously announced scrubber projects.

The projects and technology team is also working on several boat modifications to ensure we are able to provide best-in-class performance for our customers.

June 2019 was the first month since April 2017 with no off-charter days, meaning that all of our 112 vessels were on charters for the entire month. This has been a focus for Seaspan internally and demonstrates our ability to provide excellence in both our in-house technical and commercial management of our fleet.

As we continue to strive towards achieving operational excellence as a key value driver for our customers, our lost-time injury frequency performance continues to improve. Additionally, our seafarer retention has improved to 96%.

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

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [4]

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Thank you, Bing. Please turn to Slide 7. This past quarter we saw the charter market continue to move in a positive direction, despite box rates struggling against the backdrop of compliant fuel and the geopolitical environment. We saw improving charter rates in medium-sized segments, with the idle Panamax fleet declining to the lowest levels since Spring of 2018. There's only 1 or 2 presently idle and, as a result of the much improved rates, currently above $12,000 a day.

We expect that an increasing scrapping momentum will realize towards the end of the year and into 2020, when the higher fuel prices will take their toll on older and smaller vessels. This will provide additional tailwinds for rates and potentially provide further opportunities for rate improvements.

In the larger size segments, the 8,000 to 10,000 TEU segment continues to be in high demand, which was partly driven by the need for replacement tonnage due to scrubber retrofitting. We have seen owners secure longer charters, given the high demand for these vessels, and expect the supply for the rest of the year and the full year of 2020 to remain tight.

With reduced acquisition interest in the feeder segment below 3,000 TEU, there has been relatively little sale and purchase activity within the first half of the year as compared with previous years.

We saw the sale of a few Panamax vessels and all the tonnage remains available for sale. That said, there remains no newbuilds in the 4,000 to 9,900 TEU segment, this being the case for a few years now. And we believe this will provide ongoing support for rates. This segment accounts for nearly 10 million TEU of the global capacity of 23 million TEU, and we believe the lack of newbuilds is material in respect to the continued rebalancing of the supply chain. These segments are important for many trade routes for reasons, including volumes, port infrastructure and land side logistics capabilities.

In summary, we remain optimistic about rates and asset values for the remainder of the year. In fact supporting such an outlook include the impact of scrubber retrofitting, which I will discuss further.

Additionally, the likelihood of further slow steaming, with a forecasted overall reduction of around 0.5 of a knot due to fuel expenses and pressure through the IMO to reduce carbon footprint will potentially drive a meaningful increase in vessel demand into 2020 and onwards.

Please turn to Slide 8. In terms of supply and demand, the rate of global trade growth has slowed marginally in the face of persisting trade tensions. Forecast of annualized growth was softened as the year has progressed. However, as mentioned, we also see improvements in the management of supply-side dynamics, thus leading to a more balanced environment across most segments. Mainlane box trade is expected to grow by approximately 2.6% in 2019, supported by the Asia-Europe trade, while the rate of growth in the transpacific volumes has softened, but remains positive. Uncertainty exists with regard to Transpacific trade lanes due to the potential effect of tariffs.

In spite of this, there continues to be potential for marginal freight rate improvements as the summer hit or season progresses. A helpful indicator of the industry is that of utilization on the main trades.

The primary East-West trades of Asia-Europe and Transpacific appear to follow a repeated or repeating seasonality fluctuation, currently with headhaul utilization at around 90% on the former and 95% on the latter.

Growth in other trades, however, remains robust. Non-Mainlane East-West routes and the North-South routes continue to experience positive increases in container volumes, and Intra-Asia container volumes are expected to benefit as a result of trade tensions and general trade growth.

Please turn to Slide 9. On the supply side, the idle fleet, order book and demolition volumes have shown positive fundamentals in the second quarter of 2019. This demonstrates that the industry continues to manage the supply of vessels in an appropriate manner. There have been several encouraging developments, including a growing number of scrubber retrofitting programs requiring replacement tonnage, a lower idle fleet and a near all-time low order book to existing fleet ratio at 11.2%. The order book continues to be polarized, with approximately 70% of the order book in terms of vessel numbers being below 3,000 TEU and about 40% of the order book in terms of TEU being larger than 15,000 TEU. In fact, the lower order book demonstrates both an increase in ordering discipline as well as limited resources for the ordering of new vessels, which we see as positive developments for Seaspan as we are able to take advantages of our size, scale and financial strength.

On scrubbers, approximately 1.2% on average of container ship numbers in 2019 and 1% in 2020 is expected to be affected by scrubber retrofitting. But we actually expect more, resulting in upward pressure on time charter rates as line of secure replacement tonnage. Thus, demand has cascaded down to smaller vessels, driving the rate increases and a 27% decline in the idle fleet since the end of Q1. It is interesting to note that the rate of increase in tonnage removed from the service for scrubber retrofits has accelerated considerably in Q2 and likely represents the picture going forward well into 2020 or even further.

To illustrate this, in January there were 3 units of an aggregate of 18,000 TEU out of service. In April, that increased to 15 units of about 140,000 TEU. And in July, 30 units of 350,000 TEU aggregate, or about 1.5% of global capacity, was out of service for scrubber retrofit.

Cycling back to idle tonnage. I think it is useful to explain that as of last week, the idle ship lineup of 140 vessels consists of around 100 units less than 3,000 TEU, which are not prime candidates for scrubbers and most of which were idle on spot waiting employment.

In the largest segment of 3,000 TEU and above, there were 38 units idle made up primarily of scrubber candidates, and significantly, these vessels were liner controlled with employment.

In regards to scrapping, demolitions are expected to increase materially towards the end of the year. The increase was largely driven by smaller vessels due to the higher average age of this segment as well as the time charter rate environment. Year-to-date, scrapping has already marginally exceeded figures from full year 2018 but is still well south of that of 2016 and '17.

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

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Ryan Courson, Seaspan Corporation - CFO [5]

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Thank you, Peter. If we could all please turn to Slide 10, where I will provide an overview of our financial performance for the second quarter.

Our vessel utilization for the quarter was 98.7%, an increase from the 98.6% in the second quarter of 2018. Operating cost per ownership day was $5,743, a 7% improvement from the comparable quarter of 2018 and a 4% improvement from the first quarter of 2019.

Revenue was $275.4 million, a 2% decrease from the second quarter of 2018, the differential primarily driven by changes in daily charter rates from the charter modification.

General and administrative expenses were $6.9 million in the second quarter. This represents a decrease of 24% from the second quarter of 2018, primarily due to the transition payments in 2018 related to prior executives.

Our operating earnings for the quarter were $110.4 million, an 8% decrease over the comparable quarter in 2018, due in part to higher operating lease expense as a result of the changes in the accounting treatment of operating leases, which we have previously discussed as well as the charter modifications that took place in the first quarter.

GAAP diluted EPS for the quarter was $0.10 compared to $0.34 in the second quarter of 2018. As Bing noted previously, our charter modification in the first quarter resulted in a $227 million cash payment, which was reported as a onetime gain during the first quarter. While this transaction was significantly NPV-positive it did have the effect of lowering future revenue and net income in subsequent periods post this charter modification, as future charter payments were accelerated to the first quarter of 2019. Additionally, changes in fair value of financial instruments contributed a loss of $0.07 per diluted share for the second quarter and a loss of $0.07 per diluted share for the first half of 2019.

Cash flow from operations for the quarter was $369.9 million compared to $125.4 million in the same quarter of the prior year. This includes the $227 million charter modification payment that had been collected on April 1, 2019, as previously discussed.

We can turn to Slide 11, where we will discuss our capital structure developments. Upon the close of the first quarter, we continue to execute on our capital plan and have made significant improvements to our capital structure and liquidity position.

Our deleveraging efforts continue, most notably through the receipt of the $227 million from the charter modification payment on April 1 and subsequent paydown of the outstanding principal on our 2019 notes.

Following the close of the quarter, we had prepaid $248.5 million in secured debt, which unencumbered 6 assets. As of August 7, 2019, we have 43 unencumbered vessels, 16 of which will enter into our vessel portfolio financing program.

With the closing of our $1 billion financing program, our unencumbered fleet is an increasingly liquid source of capital, as the flexible borrowing base structure allows us to finance these vessels on a short-term basis. This provides us a meaningful amount of flexibility in how we manage our capital structure and liability management program. I will discuss this in more detail on the following slide, which we can now turn to.

As announced during the financing's closing call in May, we see the closing of this $1 billion vessel portfolio financing as a structure that will fundamentally change the way business can be done in the container shipping space. The program was a major step in our capital plan.

With the closing, we continue to progress on refinancing credit facilities and drawing on the initial $1 billion. As previously mentioned, we intend to grow this program in the near term.

In addition to improving our cost of capital and amortization profile, the program greatly enhances our flexibility to manage our liabilities. We designed the financing structure to be flexible and controlled by a borrowing base, which allows for Seaspan to draw or repay debt and add or remove secured assets. With this facility in place, our pool of unencumbered assets becomes more liquid and valuable from a flexibility standpoint.

As a final note, the flexibility of the program actually brings much needed simplicity to our capital structure. The program alleviates administrative burden across the treasury team; reduces cash trapped by credit facilities, bringing up working capital; and finally, provides a more streamlined and lighter set of covenants.

If we could turn to Slide 13, I will go over the forward-looking guidance. Please note that any forward-looking guidance is based on current information and estimates are subject to change.

As stated in our previous earnings calls, we will issue only annual guidance as we believe it is more consistent with our strategy to build long-term franchise value. We intend to update our annual guidance on a semiannual basis with each second quarter earnings release. We will additionally update guidance for material events as we did in the first quarter of 2019. Absent a material event, we do not intend to update guidance during the first and third quarters of our fiscal year.

Given our better-than-expected operating performance over the past 2 quarters, we would like to revise our guidance on revenue, ship operating expense and operating lease expense.

Revenue will be between $1.115 billion and $1.12 billion. We increased the lower end of the range by $5 million. Ship operating expenses will be between $240 million and $245 million. We lowered the upper end of the range by $5 million. Operating lease expense will be between $155 million and $160 million. We lowered the upper end of this range by $5 million. G&A will continue to be between $30 million and $35 million. This is unchanged, and we reaffirm the expected range.

If we can now please turn to the next slide. We would like to take this time to announce and invite you all to our 2019 Annual Investor Day, which will be held on November 22nd at the New York Stock Exchange. In 2018, we held our first Investor Day in many years and it served as a reintroduction of the company. Going forward, we value this communication platform to meet all of our investors and capital partners to take the time to update them on our business as well as to address any questions you may have. We look forward to seeing you all there.

That concludes my formal remarks. 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 any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question coming from the line of Chris Wetherbee with Citi.

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Liam Garrity-Rokous;Citigroup;Equity Research Associate, [2]

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Sorry, this is Liam on for Chris. And we just wanted to ask you a quick question about your leverage profile. So we understand that your leverage profile has improved recently. And we just wanted to get a sense of how comfortable you are with your current level of leverage after factoring in your prepayment. And has your thought process evolved at all when it comes to the level of leverage you want to reach? And what leverage level you would like to be comfortable at before you consider another acquisition?

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Ryan Courson, Seaspan Corporation - CFO [3]

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Thank you for that. On a -- from a leverage perspective, we continue to execute on our capital plan that we outlined on our 2018 Investor Day. We think that the deleveraging profile of the company is, currently, continues to be in the right direction. And we always evaluate capital allocation opportunities, both on the capital structure that we have currently as well as capital outlay opportunities from an M&A or acquisition opportunity perspective.

That said, from a long-term goal, we continue to believe that we're on track to achieve an investment-grade credit rating.

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Liam Garrity-Rokous;Citigroup;Equity Research Associate, [4]

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All right. Thank you for that additional color there. When you think about your available capacity on your current credit facilities and also your ability to upsize your vessel portfolio financing program, under what situations would you want to upsize that facility? Is this something you guys would consider using in M&A? Or are there any restrictions on it that could prevent you from doing so?

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Ryan Courson, Seaspan Corporation - CFO [5]

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It's a good question, and you can find the relevant 6-K that details the terms of that on EDGAR. What I would say with the portfolio financing program is that it is going to be the cornerstone secured financing program that we have for our current outstanding asset portfolio.

So as we think about the upsizing, it really allows us to manage that asset -- that current asset portfolio we have in a more dynamic and flexible manner. And so when we think about increasing the size of it just for the current assets, what we think about is also removing current secured bilateral facilities that are outstanding. As we remove those secured bilateral facilities, we increase the flexibility not only to operate and manage those liabilities, but also to do things within -- inside the business on a cleaner, more streamlined basis.

From a capital outlay program, we continue to have significant capacity available under that facility. It's a $2 billion total capacity facility, and we're going to have drawn $1 billion at the close of the first phase. And so we will have capacity to work through vessel acquisition opportunities in that, determined by the financial profile of those vessels.

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Liam Garrity-Rokous;Citigroup;Equity Research Associate, [6]

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All right. And I guess just one final question there. I mean what are your thoughts on the current shipping market and valuation levels across it? Are there any portions of the container market that look particularly attractive to you right now in terms of a TEU range or anything like that?

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [7]

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Thank you. This is Bing. That's a good question as well. I think for us, obviously, we have over 20 years accumulated proprietary knowledge with regard into the assets. And that's what we are here for is to managing the assets.

That being said, we don't really particularly focusing or prefer one particular class versus the others. The way we're looking at the acquisitions of the assets, the purchases, whether it's a newbuild or it's a secondhand is just really looking at, first, is the risk-adjusted return. The return is very important.

And secondly, we also look at -- is from the impact of our balance sheet in terms of how that's financed.

And the third part we're looking at is the customer needs because that's very important. Ultimately, the customer demand is the driver in addition to the other criteria we consider.

So in general, I think your question is -- was regarding to which class of the vessels is more in demand or have more value. I think we -- in a previous phone call -- the calls, we have mentioned is that particularly at current, maybe the over 12,000 TEU vessels, those are the vessels that's much more versatile. And that's -- actually, you can see from the fleet composition of ours that, that -- actually majority of 70% of our fleet is above 10,000 TEU.

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Operator [8]

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Now our next question coming from the line of Randy Giveans with Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [9]

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A few quick questions for me. So Slide 7 shows some recent improvement in our short-term rates on the 4,400 TEU vessels. So what are kind of current 1- to maybe 3-year, I guess, time charter rates for these container ships? And do you expect to keep operating these in spot? Or you look to sign a bunch of these away on some charters?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [10]

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Randy, it's Peter here. So firstly, our spot vessels or our short-term vessels are primarily in the segment of the Panamax. We have been successful in putting away some of these vessels for longer periods. As the demand -- or the demand has essentially exceeded the supply, so we found an opportunity to put vessels away. So we've been fairly successful in that.

In regards to the general dynamic, one of the comments I made a little earlier was that the segment between 4,000 and just below 10,000 TEU has got a 0 order book, and this constitutes nearly 40% of the total capacity of the global fleet. So it comes against more economic tonnage in the future, which reflects back at what Bing was looking at or was talking about in terms of our future prospects. But in essence, we see a good prospect for this fleet of ours. We review fairly frequently what we want to do with the tonnage. And so far, our aims are to retain the tonnage.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [11]

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Okay. I guess since you just locked in a few away, what rates were you locking them in at, and what duration?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [12]

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We've done a few on multiyear. And some of them have been fixed rates and some of them have been on what's called a floating rate context. And you would have seen these -- we've mentioned this in our previous call.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [13]

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So for the fixed rates, sort of $10,000, $12,000, $14,000 a day, can you give some kind of range around that?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [14]

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No. They're sort of between $9,000 and $11,000 a day.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [15]

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Okay. And then -- yes, go ahead.

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [16]

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The market today has increased quite considerably due to the shortage. We -- what you see in the market today is above $12,000 a day. And our most recent fixture was 7.

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [17]

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It's actually -- if you're looking at the beginning of the year, the rate is almost doubled in a sense that right now, as Peter said, it's actually moving in APAC areas close to $13,000, the most recently we fixed.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [18]

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Great. Okay. That's good detail there. All right, second question. Has there been any increased interest from some charterers to install scrubbers on the vessels with long-term charters, maybe either through Seaspan paying the CapEx forward and then them doing a rate step-up, something like this?

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Ryan Courson, Seaspan Corporation - CFO [19]

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Randy, could you maybe repeat the question just for -- to make sure that we all...

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [20]

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Sure. So has there been any increased interest in recent months from the charterers, on the vessels with long-term charters, to install scrubbers, maybe by you, Seaspan, paying the upfront CapEx for the scrubber installation and then the charterer thus increasing their day rate by $2,000, $3,000, $4,000 a day to repay you over the next 3, 4 years?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [21]

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Yes, it's Peter again. In essence, the answer is yes, we continue to discuss with our customers. The 2 methods that you've mentioned are, in fact, the methods that we employ already with the units that we are retrofitting or will be retrofitting starting in Q4. We maintained discussions with our customers going forward as to the interest. And in certain cases, there's more interest than others.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [22]

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Okay. And then can you give me the number of vessels that are currently scheduled to get scrubbers installed, either later this year or early 2020?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [23]

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Between our fleet, we have 10 units.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [24]

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10 units for scrubber installing?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [25]

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Yes.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [26]

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Awesome. All right, well one more question, just kind of general. Obviously, U.S.-China trade war making new headlines. So how do you kind of see the container ship market being impacted by these new tariffs? Will there be some replacement of routes? Or is it kind of too late at this point and the logistics are already in place that there won't be much impact to the Transpacific trade?

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [27]

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Yes. Thanks, Randy. This is Bing. As we previously stated, actually for Seaspan, we don't see any impact. This is actually evidenced by the fact that for the past, since June, that we have 0 idle for the entire fleet of 112 vessels.

For the industry, we see, based on the forecast by the research, I think for the industry as a whole, probably the impact is somewhere around, in a guesswork, around about 2% as a negative impact to the total industry. The impact, obviously, will be primarily in the areas of Transpacific. That being said, as you correctly pointed out, the -- ultimately, it's a matter -- for shipping, it's the matter that you're moving the goods from point A to B. You're just changing the routes from -- cross transpacific to maybe other routes. That's one thing. And the other part is this is also that if you're looking at it in terms of the growth, as Peter mentioned earlier, the industry as a whole, I think the traffic north to south and other regional traffic, actually, the growth of the other areas would -- actually offsetting the negative impact from the trade war.

And if we're looking at the other reference point is that, if we're looking at last year when the tariff discussions were initially added on, actually accelerated the demand because the goods needs to get in earlier. So if we're looking at this run of tariff discussions that is going to -- in other words, the U.S. is going to impose on this additional $300 billion of tariff effective September 1, actually, that probably could also have acceleration factor to the demand side of it. As Peter mentioned earlier, again that if we're looking at right now just for the sector of Panamax for 4,000, 5,000, 5,500 TEU sectors right now, this is 0 in the market. This is 0 idle vessels. So that give you some color in terms of the impact.

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Operator [28]

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Our next question coming from the line of Amit Mehrotra with Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [29]

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This is Chris Snyder on for Amit. So as we move closer to 2020, can you talk about the impact of higher fuel prices on the business? Of course, you guys pass it through, but how do you think about higher fuel prices as it relates to the broader container ship demand and your counterparties' ability to handle the step-up in fuel costs?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [30]

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Chris, it's Peter. So generally speaking, you're quite right. We see additional fuel costs coming on. With the improvement in the supply-demand equation, part of which has been the retrofitting of scrubbers, which we expect will continue through -- probably into 2021, would be my prediction, which causes, by the very meaning, tonnage coming out of service, and therefore, a further tightening of the supply-demand service -- supply-demand equation.

With the increase in costs against other aspects, such as the environmental aspects regarding carbon footprints, et cetera, what we think would likely happen would be some speed reductions, which would be, yes again, a further influence on a tightening supply-demand equation.

So all in all, we see that these changes in the environment of fuel cost, carbon footprint reduction, et cetera, are all very positive signs for Seaspan and which we've actually -- we are starting to see being realized in the market.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [31]

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Okay. Fair enough. And then just following up on the slow steaming. Can you maybe just talk about the speed of the current fleet? And how low could this potentially go in 2020?

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Peter Curtis, Seaspan Corporation - Executive VP and Chief Commercial & Technical Officer [32]

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What we're seeing currently is our larger vessels are operating at about just below 19 knots on average. The smaller vessels are just above 19 knots on average. There's predictions of maybe about 0.5 of a knot reduction, which would have a meaningful effect on fuel consumptions and therefore, on carbon footprint reduction.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [33]

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Okay. And then the second question. So the market has gotten pretty tight despite the trade tensions. However somewhat surprisingly, there's really been no ordering for container ships since Q1 despite market being tight and the order book at a 20-year low. So I guess, firstly, are you just surprised at the lack of ordering? And is it the result of maybe just negative sentiment around trade or something more structural going on?

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [34]

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Chris, this is Bing. I think that we are not surprised. As you know that the industry, in general, is developing towards a healthier demand-and-supply dynamics. In terms of the shortage of the newbuild, I think it's, in a way, expected. And we would expect that it's going to continue going forward as the demand and supply is getting more healthier.

Just in a way that those shortages is actually to a certain extent, it's also been compensated by the alliances, which, as you know, that with alliances, that's continued to forge ahead, that actually brings the further efficiencies across the liners. And that's, I think, one of those healthy development as well.

And speaking of the fuel costs, as you raised the question earlier, I think we are very confident in a sense that our customers, over the long term, they will be -- manage these fuel costs effectively. And I think that overall that -- from the demand and supply perspective, and I think that's the fundamental of the industry, it's moving towards the positive direction. And I think all the other regulatory compliance, environmental requirements, is actually -- it's healthier to really, I think, improve the standards and also the participants in the industry.

And I think from Seaspan's perspective that we are actually working to see this as a great opportunity that we're working with our customers, that to manage the fuel changeover, to work on the scrubber installation, to looking at new LNG-powered solutions for the newbuild. So we are actually seeing these very encouraging development that allows us, like companies like Seaspan, to work with our customers at the partnership across the issues in there, whether it's a newbuild and; operations, environmental, including the financing to be able to best to service them and being a partner long term.

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Operator [35]

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(Operator Instructions) Now our next question coming from the line of Kevin Sterling with Seaport Global Securities.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [36]

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You guys -- your 0 off-charter days in June is quite impressive for a fleet of 112 vessels. And as you focus to keep all your ships moving, what are some of the key drivers to keep your off-charter days at 0? Is this just more a function of a tightening market? Or are there some things that you can do on your end, such as maybe better maintenance, just so the ships don't break down and keep them moving?

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [37]

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Kevin, that's an excellent question. Actually, for us to be able to manage a size of 112 vessels with 0 idle rate, and that's actually quite significant, market obviously helped to a certain extent. But this is really the hard work and determination of the team here at Seaspan. We have been consistently working very hard to improve. And this quality of service that we -- as we said, we provide a best-in-class service to our customer in terms of providing the reliability, flexibility and scalability to our customer.

Not only that we will be able to managing these vessels technically, which our team has done a tremendous, tremendous job in a way that to manage the size and the diversity of the fleet, but also that we have a very trusted customer relationship and partnership, which is built over the time whenever that they have the needs, as we said.

To date, our customers' not just looking for a vessel alone. They're looking for a solution, they're looking for a service, and this is where Seaspan has built and invested in our platform, integrated platform over the past 20 years. And with this platform, we will be able to provide, again, the reliable, flexible and scalable services, whatever those needs are, which is being embedded in the vessel chartering. And that is the result as we see that -- we continue to strengthening our customer partnership and our customer continue to appreciate and really more.

And for example, with environmental changes, the fuel IMO 2020, and I think we, increasingly, our customer comes to us and asking for advice. And that's one of the very encouraging development. But after all, as we know that the cost is also very important, as you see from our press release that we have continued to drive down our operational cost. And this is -- it's something that is maybe we don't take it for granted that easy, if you see that in the level and the magnitude and consistency of the way that we drive down the cost.

So as we said, this result is very encouraging, but that is a result of our strive to the best-in-class service with the best-in-class cost.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [38]

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Yes. Got you, Bing. Let me take a step further, if you don't mind, on your operating expenses, your ship operating expenses. And like you said, you guys have lowered those. And I imagine if you can, you want to keep lowering those. Is there some more low-hanging fruit that you can pick off to keep driving your ship operating expenses lower? Are there things that you can keep doing to get those levels lower? Or is it more about scale?

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Ryan Courson, Seaspan Corporation - CFO [39]

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Thanks, Kevin. So at a first level, the team has done a great job focusing on an OpEx basis through and through, day in and day out as Bing mentioned. We continue to believe that there's opportunity because we continue to innovate in this space. But we don't provide guidance as it relates to what we think is available from an order of magnitude or an absolute number standpoint. But we have a best-in-class scale and a best-in-class operating platform, as Bing mentioned. And we continue to believe that there is opportunity, and we continue to innovate in the space, and we expect to continue to see improvements over time.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [40]

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All right. And Bing, I just got one more question. It's a big picture question. So you guys -- obviously, you've been quite busy. You've done a lot over the past year, 1.5 years, your new financing, the acquisition of CGI (sic) [GCI] or streamlining of expenses. But as we look forward, what's on your to-do list now? What are some of the things you're looking to accomplish, say, the next couple of years, whether it's on the strategy side, operations side? I would just love to hear, big picture, what are some of the things you're focusing on now since you've accomplished quite a lot, but what are you looking to -- what are some of the things you're focusing on now?

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [41]

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Yes. The -- whether it's a strategy or an operation, our #1 priority and focus is to create the shareholder value long term. And with that being the ultimate goal on the strategic side, we will continue to managing the business professionally and to streamline our process. Our team has done a great job, for example, this first half of the year that we really revamped it, our systems, to continue to stay in the forefront of leading edge of our industry. We continue to drive the cost. We'll continue to invest in people and platform.

So overall, I think that the first part in terms of our bread and butter is that we're going to continue to focusing on operational excellence, as I highlighted.

At the same time, as you know that our business is actually -- our business model is very stable and predictable in a sense, as you can see. Yet given all these different cycles and events that our business is very stable and resilient, which means also that we're actually generating a very sizable amount of capital, free cash flow.

As we said, this is one of the areas that we're going to continue to focusing on in terms of strategies to best allocating our capital to the way that we're going to get the best returns for our shareholder. That being said we will continue, as we said from a growth perspective, that we're focusing on our core business, which is the container shipping. Whether it's within the container shipping, we're looking at the newbuild, we're looking at the secondhand. And as we said that we have a very, very clear and stringent criteria in the sense as to what our investment criteria is. And so that is the area that -- guiding us in looking at the container space as well as the adjacent space, which in the areas, as we mentioned it earlier that, for example, we have signed the framework agreement with the COSCO SHIPPING -- COSCO Energy Transportation, okay.

In general, our strategy is to grow, but it's grow on a very controlled, risk-adjusted basis where that we leverage on our levered -- leverage on our platform, that our platform is in -- consisted of the innovative, for example, the financing that we have done, the operations we'll continue to build the scale and efficiency and on a customer side. So with all those being the basis for our growth that we believe that -- whether it's within the container space or in adjacent area, we find -- we will find the right growth opportunities and be able to create incremental value for our shareholder going forward.

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Kevin Wallace Sterling, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [42]

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That's great. And congratulations on a solid quarter, and also just how you guys are thinking out of the box.

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Operator [43]

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And our next question coming from the line of J. Mintzmyer with Value Investor's Edge.

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J. Mintzmyer, Value Investor's Edge - Lead Researcher [44]

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Yes. First of all, just exceptional transition for the company. And I've been following Seaspan for many years, and were kind of in the woods a couple of years ago. And just very impressed with transition, a whole new team in place. So Bing, led by you, so congratulations on that.

Shifting a little bit here, I got on the call just a few minutes late. We had a bunch of calls this morning. But looking at your new Panamax contracts, I see you have a few multiyear deals. Can you talk to me a little bit on the structure there? Are those floating rate? Are those fixed rate? How do those transition via the market?

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [45]

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It's a combination of both. We have some fixed rate, some floating rate. And that depends on what we see at the market and the right time that we will choose the different structure.

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J. Mintzmyer, Value Investor's Edge - Lead Researcher [46]

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Excellent. And what percent of the Panamax fleet does that make up? Because I know you had a lot of Panamax on those short-term charters.

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [47]

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I think it is a sizable amount in terms of the long-term contract that we currently have with our Panamax fleet.

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J. Mintzmyer, Value Investor's Edge - Lead Researcher [48]

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Excellent. And then looking over to your Swiber transaction working over there in the Vietnam LNG-to-power project. With the Asian gas prices coming down, it seems like that import project would be pretty economical. I didn't see any direct updates in your press release or in the presentation. Was there anything else to share on that or is it still in progress?

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [49]

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Yes. As you know that the Swiber transaction is a traditional managed process in Singapore, which is quite a lengthy and complicated process. As you could appreciate that, we would not be able to disclose anything other than what's been disclosed by them. And it's a process that needs to -- managed by the traditional manager, and we will update you as the material developments occurs.

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Operator [50]

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And at this time, I am showing no further question. I would like to turn the conference call back over to Mr. Chen Bing for closing remarks.

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Bing Ruan Chen, Seaspan Corporation - President, CEO & Director [51]

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Okay. So thank you, everyone, for your questions and also for listening to us. We will look forward to updating you on our third quarter results and wish you, everyone, have a great day, and thanks again.

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Operator [52]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Good day.