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Edited Transcript of SSW earnings conference call or presentation 1-Mar-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Seaspan Corp Earnings Call

Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Seaspan Corp earnings conference call or presentation Wednesday, March 1, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Spivak

Seaspan Corporation - CFO

* Gerry Wang

Seaspan Corporation - CEO, Co-Chairman and Co-Founder

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Conference Call Participants

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* Mike Webber

Wells Fargo Securities, LLC - Analyst

* John Humphreys

BofA Merrill Lynch - Analyst

* Chris Wetherbee

Citigroup - Analyst

* Noah Parquette

JPMorgan - Analyst

* Kevin Sterling

Seaport Global Securities - Analyst

* Fotis Giannakoulis

Morgan Stanley - Analyst

* Michael Gyure

Janney Montgomery Scott - Analyst

* Joe Nelson

Credit Suisse - 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 and year ended December 31, 2016. Hosting the call today is Gerry Wang, Chief Executive Officer, Co-Chairman, and Co-Founder of Seaspan Corporation; and David Spivak, Chief Financial Officer of Seaspan Corporation. Mr. Wang and Mr. Spivak will be making some [introductory] remarks and comments, and then we will open the call for questions.

I will now turn the call over to David Spivak.

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David Spivak, Seaspan Corporation - CFO [2]

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Good morning, everyone, and thank you for joining us today. Before we begin, I would like to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by these forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the fourth-quarter 2016 earnings release, and the earnings webcast presentation slides available on our website at www.seaspancorp.com, as well as in our annual report filed on Form 20-F for the year ended December 31, 2015, and our report filed on Form 6-K for the three months ended September 30, 2016.

During this call we will discuss certain non-GAAP financial measures, including adjusted EBITDA, cash available for distribution to common shareholders, normalized net earnings, and normalized earnings per share diluted. For definitions of such non-GAAP financial measures and for reconciliations of such measures to the most closely comparable US GAAP measures, please refer to our earnings release or the appendices at the back of the earnings slides.

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

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [3]

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Thank you, David. Please turn to slide 3 of the webcast presentation. 2016 was a challenging year for the container shipping industry in general, and for Seaspan as well. The steps we took were continue to enhance our balance sheet and to strengthen our industry leadership position for the long-term value of our shareholders.

I would like to point out a couple of highlights from the year 2016.

Firstly, we continue to upgrade our fleet. During the year, we added five vessels on long-term contracts: two 14,000 TEU vessels on 10-year charters with Yang Ming; two 10,000 TEU vessels on eight-year charter with MOL; and one 10,000 TEU vessel on a five-year time charter with Maersk. We are also being opportunistic remodernize our Panamax fleet by [culling four units] of seven- to eight-year-old Panamax vessels from banks at scrap value.

Secondly, we strengthened the balance sheet. We raised about $660 million of common and preferred equity. We completed two strategic financings out of Asia. And we reduced debt, and ended the year with a net debt to equity ratio of about 1.7 times.

Thirdly, we continued to reduce operating costs throughout the year. We benefited from our focus on cost controls. We were able to reduce ship operating expense by 11.7% during Q4 and 8.8% year-over-year. We view this as very positive progress that demonstrates the strength of our operational capabilities.

2016 was a challenging year for Seaspan primarily for two reasons: firstly, Hanjin declared bankruptcy, which result in the termination of three lucrative long-term charter contract; secondly, the Panamax vessels have experienced record low charter rates. However, we continue to manage the business with challenging market conditions, taking necessary steps to improve our operating costs and strengthen our balance sheet.

While we believe the market conditions will improve, after careful consideration the Board of Directors has made the difficult decision to reduce the quarterly common dividend to $0.125 per share. We believe a reduction in the dividend is in the long-term interest of our shareholders and will allow us to be both defensive and offensive play while maintaining financial flexibility.

I will now turn the call over to David to discuss our quarterly financial results.

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David Spivak, Seaspan Corporation - CFO [4]

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Please turn to slide 4, where I will discuss our results for the fourth quarter of 2016 compared to the fourth quarter of 2015. Revenue decreased in Q4 2016 by $5.3 million from the same quarter of the prior year. The decrease was primarily due to unscheduled off-hire related to the three 10,000 TEU vessels previously charted to Hanjin, and lower average charter rates for vessels on short-term charters. These decreases were partially offset by the delivery of newbuilding vessels and the addition of two leased in vessels in 2016.

No drydockings were completed during the quarter. We had 519 days of unscheduled off-hire in Q4, including 220 off-charter days for the three 10,000 TEU vessels. The remaining unscheduled off-hire days primarily relate to periods in between charters for vessels operating in the short-term market. The amount of these off-charter days is similar to what occurred in Q3 2016.

Ship operating expenses were $46.9 million, a decrease of $3.6 million from the same quarter of the prior year. This is despite a 5% increase in ownership days. As a result, Q4 2016 ship operating expense per ownership day was approximately $6,000, a reduction of 11.7% compared to around $6,800 per day in the same quarter of the prior year. We were able to achieve this reduction through disciplined ship operating cost management.

General and administrative expenses were $7.2 million, similar to Q4 2015. The non-cash stock compensation component of G&A increased from approximately $1.6 million in Q4 2015 to $2 million in the fourth quarter of 2016. Operating lease expense was $26.6 million in Q4 2016, a $12.2 million increase from the same quarter of the prior year. We ended the quarter with 13 vessels under operating leases versus eight vessels at the end of Q4 2015.

Normalized EPS diluted was $0.21 per share compared to $0.35 per share in Q4 2015. The decline in normalized EPS was largely driven by a lack of revenue from the 10,000 TEU vessels previously chartered to Hanjin, and lower re-chartering rates and an increase in off-charter days. This more than offsets the benefits of lower ship operating costs and hedge interest costs.

Adjusted EBITDA for the fourth quarter of 2016 was approximately $131.9 million, a $49.2 million decrease from the same quarter of the prior year. Cash available for distribution for the fourth quarter of 2016 was approximately $71 million, a $44.8 million decrease from the same quarter of the prior year. The decreases in both metrics were primarily attributable to lower gains on sales from sale-leasebacks as well as lower normalized earnings.

We previously announced that we expected to recognize a non-cash impairment charge in Q4 related to some of our smaller vessels. During Q4 2016, we recognized a non-cash vessel impairment charge of approximately $82.4 million related to six vessels. The total impairment charges for fiscal 2016 were $285 million, which is consistent with previous guidance. In December, we sold a 4,600 TEU vessel, the Seaspan Efficiency, to a ship recycler for net sale proceeds of approximately $6.2 million, resulting in a loss on disposition of approximately $15.4 million.

Our cash balance at the end of 2016, including short-term investments, was $368.3 million. Total borrowings decreased by $328 million in 2016. As a result of our capital initiatives in 2016, our net debt to equity ratio declined to 1.7 times compared to 2 times at the end of 2015.

I will now turn it back over to Gerry.

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [5]

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Thank you, David. Please turn to slide 5, where I will discuss container ship industry in general. In 2016 approximately 200 container ships, representing 655,000 TEUs or just over 3% of the world container ship capacity, was scrapped. Scrapping in 2017 was expected to increase further to 750,000 TEUs or more, with already over 165,000 TEUs scrapped in the first two months of 2017. The current order book stands at around 15% of the global fleet, and we expect significant deferrals as operators seek to manage capacity.

New vessel ordering in 2016 was extremely low, at less than 200,000 TEUs, with little new ordering on the horizon for the year 2017 or 2018. On the demand side, we saw a 1.8% increase in volumes for the Far East to Europe trades for the year 2016. The Far East-US trade volume continued to show strength, with a 4.3% increase, and reached an all-time high of 14.2 million TEUs for the year of 2016. Global container exports increased by 3.5% to a new high of 181 million TEUs in 2016, and is expected to grow by 2% to 4% in 2017.

We believe the container industry has turned its corner. We see strong signs of supply and demand balance in works. While the overall container shipping recovery remains fragile, this does take off a lot of pressure off our customers. We hope this will also translate soon into the recovery of the charter markets.

Please turn to slide -- next slide. One of the core principles of Seaspan's business model is the pursuit of long-term fixed rate time charters with a strong counterparties. This is the foundation of our business model. We currently have a contracted revenue backlog of about $5.2 billion. The average remaining charter time for long-term portfolio is approximately 6 years, and the average vessel age is approximately 4 years.

For 2017, we anticipate that the long-term portfolio will generate approximately 94% of our revenue. This young and large vessels provide a stable foundation from which we are able to navigate through the volatility of the business cycle. Our short-term fleet, made up mostly of Panamax vessels, accounts for about 6% of our expected revenue over the next 12 months.

Even though the overall container shipping rates have recovered substantially, charter rates for the short-term portfolio are currently at historical lows and below breakeven, which is not a sustainable situation. Weak owners or ships not upgraded to the prevailing operating standards will unfortunately be the victims.

As this continues, we believe there is significant upside for this part of our portfolio, as improving supply and demand dynamics will ultimately drive rates higher. For simple math, an increased charter rate of $1,000 per day in spot rates equates to approximately $10 million increase in annual earnings, or around $0.10 per share. While we will continue to modernize our Panamax fleet, we plan to scrap several of our older Panamax vessels during the year 2017. We have no intention to sell them for further trading, for competitive reasons.

Turning to slide 7, I will discuss Panamax market conditions in more details. Over the past few years, we have seen declining Panamax rates as a result of the cascading impact and the opening of the new set of locks in the Panama Canal. We believe our Panamax fleet of 4,250 TEU design, pioneered by Seaspan, will continue to be the workhorse. The problem is too many of this design were ordered. Spot rates reached all-time lows in 2016 from a very distant 2015, which led to a significant increase in scrapping.

Worth noting here, the order book for new Panamaxes is virtually zero. We believe current conditions are unsustainable, and lower rates and asset values will result in continued high levels of scrapping and ultimately lead to a more favorable rate environment.

I will now pass it over to David to discuss our forward guidance. David, please.

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David Spivak, Seaspan Corporation - CFO [6]

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Please refer to slide 8 for our forward guidance for the current quarter. We do not intend to update our quarterly guidance in the ordinary course of communications.

Looking forward to Q1 2017, we anticipate that revenue will be between $200 million and $204 million. There are 90 revenue days in Q1 2017 versus 92 days in Q4 2016, which has a negative impact on the revenue line. In providing the range of revenue, we continue to assume no revenue from two of the three 10,000 TEU vessels previously charted to Hanjin; while the third 10,000 TEU vessel is on short-term charter for a portion of Q1.

We've recently signed short-term charters for all three of the 10,000 TEU vessels, beginning in early Q2 for a period of up to 12 months, excluding extension options.

Ship OpEx is expected to fall within a range of $48 million to $51 million, which includes the impact of recent vessel transactions. We expect our operating lease expense to range between $26 million to $28 million. We anticipate that G&A expense will range between $6 million to $8 million in Q1. The non-cash stock compensation component of G&A will be approximately $1.8 million. Interest expense at the hedged rate is expected to range between $37 million and $39 million. Note that these amounts are based on current information and estimates, and are subject to change.

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

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [7]

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Please turn to slide 9, where I will make a few closing remarks. We remain committed to our core business model and strategy, and we seek to grow and strengthen our leadership position during this period of volatility. While some in our industry will have great difficulties to survive, we know that the best returns occur during the periods of weakness and down cycles, as Seaspan was born during Asia financial crisis. It's part of our DNA.

We have taken necessary measures to maintain a strong balance sheet which will support the business to take advantage of cycles. We will be looking to modernize the fleet through selective disposals, acquisitions, and upgrades; and to trade older assets for newer assets, at zero or minimum net cost.

We will look to grow our long-term contract backlog, primarily through distressed opportunities, including more than secondhand transactions, sale-leaseback opportunities, and other distressed opportunities as they may arise. We will be creative in pursuing potential partnering opportunities as well. Finally, we'll continue to position the Company to benefit from the recovery in the industry.

Please open the call for questions, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Mike Webber, Wells Fargo.

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Mike Webber, Wells Fargo Securities, LLC - Analyst [2]

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Wanted to first just jump in at a very high level; obviously preserving cash with that dividend cut. David, can you talk to how that cash ends up being used? Maybe what may or may not change within your lending base, and whether you'll be prepaying any debt, maybe for the Hanjin vessels that fell off charter that you referenced -- that Gerry, you referenced in your charter update. Just give us an update in terms of how that capital stack and liquidity profile -- how you'll actively manage that going forward with a bit more cash on hand.

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David Spivak, Seaspan Corporation - CFO [3]

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Sure. I guess first thing, I think as we mentioned on the Q3 earnings call, that we were in advanced discussions to amend the facilities that were against the Hanjin vessels, and we did do that. As part of that in Q4, we paid down about $15 million on a couple -- against a couple vessels. In another case, we put a small sort of restricted deposit; but effectively what we did is we pushed things out.

In one case, we have till really Q4 of this year to find a replacement charter that's acceptable. And then the other case it is to Q4 2018. That kind of [weta] has played out, and so there really wasn't much cash there.

I think on the dividend, what we focused on a lot was just the -- given the weak environment, just the profitability and rightsizing the dividend for the environment that we're in. I think as far as a use of the retained cash flow, I think if you look back to last year we did a fair bit of deleveraging. We raised a lot of equity capital and we paid down debt, and particularly focused on maturities between 2018 and 2020, 2019, and just to lower that. In our 20-F, when it comes out, you'll see how that's changed.

In the same way we are focused on certain capital structure metrics. Part of that, retain cash, clearly is going to be used for deleveraging. But we want to also have a flexible balance sheet where we can grow and pursue opportunities as well.

In some ways, as the Board looked at the dividend, it was as much of the current environment and profitability, as well as just protecting the Company as well. So it was multifactored.

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Mike Webber, Wells Fargo Securities, LLC - Analyst [4]

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That makes sense. Just to follow up on Hanjin for a second, I think -- and I just -- make sure I'm not confused. The three Hanjin assets are not included -- and there is no revenue included for those assets within the revenue guidance, correct?

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David Spivak, Seaspan Corporation - CFO [5]

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There's a small amount on one of the vessels.

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Mike Webber, Wells Fargo Securities, LLC - Analyst [6]

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Right.

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David Spivak, Seaspan Corporation - CFO [7]

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But all three of them have been chartered for early Q2, which is basically at some point during April.

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Mike Webber, Wells Fargo Securities, LLC - Analyst [8]

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Right. So I'm trying to jive up or trying to make sense of -- they're not included in the revenue guidance. But they have all been chartered out on a forward basis for up to a year, starting in Q2. But then it does -- it also seems like they're still -- you're still looking for appropriate charter hire for your lending base.

My question is, is there something within that charter structure that keeps you from recognizing [any] revenue? And then, subsequently, where is the threshold for what is deemed to be appropriate charter hire if that 12-month charter does not fit that bill?

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David Spivak, Seaspan Corporation - CFO [9]

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Look, the reality is -- and Gerry can get into the charters -- but the economic rationale is we wanted to charter for a period of up to 12 years. So that was the decision. It wasn't driven at all by the lenders. The lenders have actually been very reasonable. This was not contentious. The loan to value on these vessels is well below 100%. Realistically, this concept of acceptable replacement charter, it's just -- it's something that we don't expect any issues, regardless of how things play out. These lenders were actually very straightforward to deal with. We're really looking at it just from a business perspective, what is the best commercial way to deploy the vessels.

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Mike Webber, Wells Fargo Securities, LLC - Analyst [10]

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Okay. Gerry, one for you, and I'll turn it over. Obviously a pivot here, but one that could help you all in the space start to move past Hanjin, which is continuing to throw ripples through the space.

When you look at the liner complex today, we've seen some quasi-consolidation and then some actual consolidation. But I'm just curious, are there any -- without naming names, do you think another Hyundai-like restructuring is feasible in the next 12 to 18 months? If we take Hanjin and that mess off the table, something more orderly where we see another data point around tangible counterparty risk. How realistic do you think that is in the next 12 to 18 months?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [11]

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Hi, Mike. I think Q4 was a very good quarter and that trend has continued for Q1. And the rate increases, starting from March 1, are pretty much in the graphs. And looks like trans-Pacific has experienced the best volume for the year. 2016 was a record year for 14 million boxes coming to North America. I think that takes off a lot of pressure off the shoulders of some of the smaller operators.

I do not anticipate anything of the nature of the restructuring, like HMM or Hanjin Shipping, in the near future. And I think, generally speaking, the industry has come to expect some profitability. And some period of stabilization will prevail, and hopefully it's about time to make some money.

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Mike Webber, Wells Fargo Securities, LLC - Analyst [12]

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Got you, okay. I will stop there and turn it over. Thanks for the time, guys.

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Operator [13]

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John Humphreys, Bank of America.

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John Humphreys, BofA Merrill Lynch - Analyst [14]

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I just wanted to start with the newbuilds that you have that were built without charters. Could you talk about how negotiations are going for finding charters for those?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [15]

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Yes, we have two newbuilds with YZJ which were originally scheduled for delivery during 2017. And they've been deferred for delivery to 2018 with our option to take delivery earlier, if we want to. So what we will practically do is to shop them for charters. If the charters make sense, then we just take deliveries as needed. Otherwise, we just sit on them and see how things go for the year, and be prepared to take deliveries of them for the year of 2018.

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John Humphreys, BofA Merrill Lynch - Analyst [16]

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Okay, great. And then second, back to what was touched on before on the consolidation that's expected later this year. How do you anticipate where you see the market going, changing negotiations with liner companies? And what can we expect as far as leverage of the industry and how that will shift?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [17]

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On the consolidation of the liner industry, in our opinion is helpful for our business because our counterparties are becoming stronger by working together. We don't see any fundamental change in terms of our ways of dealing with the [liner measures] because they know that they're still operated independently, no different than the airline alliances -- Star Alliance, global alliance as well.

Our customers are finally seeing some profits coming to them. As I said, Q4 was good, and Q1 momentum continues. And we expect 2017 to be pretty good, and we'll see some hopefully recovery in the charter markets coming to benefit us. Because the current level for the Panamax vessels, the rates are just not sustainable. And on the other hand, would continue to push more Panamax vessels to the scrap yard, which is a healthy thing for the industry, generally speaking.

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John Humphreys, BofA Merrill Lynch - Analyst [18]

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With that consolidation, could the argument be made that they have more leverage over you and are able to keep rates depressed for longer, if you have fewer customers you're dealing with that are in a stronger position?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [19]

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No. It's just that the alliance is simply organizations. They are not fully own the ships so we still deal with individual charters, per se.

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John Humphreys, BofA Merrill Lynch - Analyst [20]

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Okay, great. That's it for me. Thank you.

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Operator [21]

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Chris Wetherbee, Citi.

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Chris Wetherbee, Citigroup - Analyst [22]

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I had a question on the -- your thoughts on scrapping as you move through 2017. I guess it's maybe twofold. So when you think about the Panamax ships that you have left -- and I think you talked a little bit about potentially scrapping, not selling, for competitive purposes -- and you think about the value that you are carrying some of these vessels. Should we be thinking about the potential for incremental losses on some of these sales, or do we think about write-downs?

David, you talked about write-downs for 2016. Do we have some guidance for 2017? Is that something we should be thinking about? Any help there would be great.

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David Spivak, Seaspan Corporation - CFO [23]

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Sure. When we look at some sort of scrapping -- and to give an example, on page 6 -- of that short-term fleet, the average age is 11 years. We have five vessels that are 15 years old. And if we were to scrap those five, some are coming up for drydockings; some sort of drydocked in the last year. That would reduce that average age to about 10 years. Those vessels are carried on our books probably at around $25 million apiece, something like that. And so realistically, if we were to go dispose those five vessels, you'd have about a $100 million loss.

As far as the impairments, we just went through the year-end process. We did go through and test all the vessels in the current environment. And we had the incremental for Q4 about $82 million impairment. If rates stay where they are, we would expect, in the back part of 2017, to have some other impairment charge.

It's not something that we can really give quantitative guidance on now. I know historically, the Company gave guidance well in advance for the first set of impairments. But we just really went through this process just based on current conditions, so I wouldn't want to try and put a number out there for the end of the year.

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Chris Wetherbee, Citigroup - Analyst [24]

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Okay. All right. That's very helpful, though, in terms of carrying value. My second question, just thinking about the post- the reduction of the dividend and how you guys might be thinking about deploying capital. And I think you guys have talked a little bit about being opportunistic and maybe seeing if there's partnerships or other things out there. I don't know if you could give us any more color on that, and maybe specifically in terms of the timing.

Do we think that 2017 is a deleveraging year where you look internally to continue to do work there from a leverage perspective? Or could we see you move that quickly into the market to do something opportunistic? Or are we maybe thinking about that in 2018 or 2019?

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David Spivak, Seaspan Corporation - CFO [25]

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A lot of the deleveraging occurred in 2016. When you actually really look at -- from the end of 2015 to 2016, the leverage did come down. We paid off actually a lot of secured bank debt, and especially the next few year maturities. We're in a position where we can do both. We want to maintain a strong balance sheet, so capital structure is front and center.

But to the same point, we have a very good track record of raising capital. We did do two financings in Asia in 2016, and in our minds that was strategic to build out that investor base. We continue to think about broadening that on a global basis. And so we want to be in a position where we can capitalize on growth. And whether that's creatively through partnering or just direct, we feel comfortable that we can do both.

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [26]

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And, Chris, just add on to what David has just said. We actually see a lot of opportunities, distressed opportunities, in the landscape. So at the end of the day, as I said in the opening remarks, we'll be selective; we'll be careful; we'll do the right things at a time. So 2017 will be an interesting year. And we'll see what happens.

I try to say it again that we want to stay disciplined. And at the same time we will always focus on taking advantage of the distressed opportunities during the down cycle. That's really part of our DNA. We want to grow through down cycles to go after the right assets and the right value, and build our long-term contract backlogs. That's the business model we are not going to deviate from.

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Chris Wetherbee, Citigroup - Analyst [27]

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Okay. That's very helpful. Thanks for the time this morning, guys. I appreciate it.

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Operator [28]

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Noah Parquette, JPMorgan.

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Noah Parquette, JPMorgan - Analyst [29]

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I wanted to ask about vessel OpEx. I think it came in about $46.5 million. I think you guided $50 million to $53 million last quarter, so that's a pretty good number. What allowed you to achieve that level? What exactly did you guys focus on? And what allowed you to do it in this quarter? And going forward, how much of that can be captured in the future?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [30]

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Well, what has happened is we put a focus on the cost control. And our slogan within the organization is the market is what it is; that we have no control. But we have to put her hands on things within our control, i.e., the expenditures related to the crew members, the insurance, the spares, the lubricating oil, G&A, which make up for the operating cost.

We actually have made good progress in all those areas. Our crewing cost has come down. Our chartering cost for the crew members have especially come down through consolidating -- working together with our charter agents and doing bookings for our crew members ourselves.

Our lubricating oil contract prices has come down as a result of negotiations. The insurance cost has come down primarily because of our strong operating performance. Just to remind you, last year we carried 9 million, 10 million boxes, but we did not lose even one. For several years in a row, we did not lose even one box; a perfect record.

So all those things have [combinedly] led to the reduction of operating costs, and we believe that trend will continue into the year 2017. And we'll be working very hard in this regard to save money, wherever, whenever possible.

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Noah Parquette, JPMorgan - Analyst [31]

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Okay. That's great color. And then I wanted to follow up on the scrapping question and the opportunity in that Panamax sector. Obviously you got rid of one vessel. You have a few others that would meet that criteria, or criterion. What do you see in terms of market upside here? Is this a question of renewing the age of your fleet? Do you think there is opportunity here? Or are you exiting the sector?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [32]

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Well, this is a combination of both the reducing the age of fleet and also some distressed opportunities that are available for us. The Panamax sector, especially for 4,250 TEU original design by Seaspan, has been the workhorse for the industry for many years. As I said in the opening remarks, the issue has been just too many that were ordered. And also with the cascade impact from the larger Panamax vessels, the 4,600 TEUs and the 5,000 TEUs coming from the old Panama Canal trades have come and flooded the Panamax sector.

So, the sector is going through the demand/supply cleansing. Then we will see more scrapping in this regard. Simply speaking, a lot of owners just cannot afford to go through the special survey in dry dock and spend another $2 million, $3 million to keep the vessels in the working conditions.

I remind you, the operating requirements today are much tougher than before. And as you know what you are doing, and also we have the financial resources to keep the vessels up to the environmental and operational requirements the vessels will not be able to come back to the market again.

So, as scrapping continues with demand staying at the same level or increasing, depending on the trades, we see the balance to come back. And then we'll hopefully the charter rates for the Panamax vessels will be restored.

To remind you, not long ago during the year 2015, the Panamax charter rate for 4,250s were in the neighborhood of $13,000 to $15,000 per day. As I put in the opening remarks, $1,000 [per TEU] in the spot market would translate to approximately $10 million of incremental earnings to us: imagine $10,000, $15,000 per day. We're not dreaming about it, but at least we are hopeful the market will stabilize and trade at such levels.

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Noah Parquette, JPMorgan - Analyst [33]

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Okay. And then just really quick, following up on the carrying value. Did I hear you right that you have the 15-year-old Panamaxes are roughly around $20 million, $25 million carrying value?

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David Spivak, Seaspan Corporation - CFO [34]

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That's right.

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Noah Parquette, JPMorgan - Analyst [35]

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Okay. And then you guys just went through the process of reevaluating the carrying value. Can you talk about what assumptions you used to maintain that compared to (multiple speakers) of scrap?

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David Spivak, Seaspan Corporation - CFO [36]

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Yes. The reality is there's -- you go through this undiscounted cash flow analysis, first to determine whether to impair. So you look over the remaining life and there's a future charter rate that you use. And in our case, it's a blend of historical averages as well as some forward-looking numbers that are published. And you go through projected operating costs, inflation, and all of that stuff, and you come up with a number.

And if the number is above your carrying amount, then you don't impair. If the number is below your carrying amount, then you do a present value calculation. And it's standard across the industry; people's assumptions may differ here and there.

And so in determining what to impair -- and we impaired 16 vessels in 2016. Those were the vessels that sort of where the numbers worked out to actually do the present value calculation. Hopefully that sheds a little bit of light.

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Noah Parquette, JPMorgan - Analyst [37]

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Okay. So it's like the remaining life is in this 30 years-ish, or is it less than that (multiple speakers) long-term numbers, long-term rates?

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David Spivak, Seaspan Corporation - CFO [38]

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Yes, that's right.

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Noah Parquette, JPMorgan - Analyst [39]

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All right, thanks.

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Operator [40]

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Kevin Sterling, Seaport Global Securities.

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Kevin Sterling, Seaport Global Securities - Analyst [41]

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As you think about the opportunities that you've talked about, do you see more secondhand vessel opportunities, to acquiring secondhand vessels that you maybe discounted prices? Or maybe buying some newbuild shipbuilding slots that might become available?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [42]

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Both. Even though our preference would be on the newbuilds and the larger vessels, the vessels either left by distressed owners at the shipyard or the owners that have those vessels with contracts attached that are going through financial distress. Or even liner measures, they're looking at sale-leaseback. And even some existing Chinese financial leasing companies going through their internal restructuring, given the challenge they face on the Forex, and also their container requirements for more operating accounting treatment.

So, we're seeing bits of everything. So we're actually quite excited by the distressed opportunities in front of us. That was part of the reason of reducing the dividend, just to have more firepower, ammunition on hand to grow our business through this down cycle.

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Kevin Sterling, Seaport Global Securities - Analyst [43]

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Got you. Thanks, Gerry. And I know you guys talked a lot about scrapping for this year, and accelerating scrapping, particularly the Panamax vessels. Do you have a targeted number you want to scrap? Or is it just as we go along, and as you see opportunities, you'll scrap? I was just curious if you had a targeted number in your mind of number of vessels you want to scrap.

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David Spivak, Seaspan Corporation - CFO [44]

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As Gerry said, it's a bit of a balance between offense and defense. If you look at what we did in 2016, we scrapped two 13-year-old 4,600s where we didn't like the design, so there was a business reason for that. But we acquired four younger vessels. And so I think this concept of buying young, selling old, modernizing with little out-of-pocket cost is something that is very interesting. That opportunity doesn't come up too many times, when you think about it. But I don't know that we really want to pin down the number. As you get older in the fleet, those are natural candidates, especially as we are getting close to drydockings. So I think that example of five isn't a bad example, and could be a touch higher. It really depends.

We want to maintain a footprint. We may bring it down a little bit, but it's something where we want to modernize. And, frankly, our clients want the vessels, so it's part of a broader business strategy.

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Kevin Sterling, Seaport Global Securities - Analyst [45]

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Got you. Thanks, David. That's very helpful. Appreciate that. And lastly, along those lines of accelerated scrapping, how should we think about drydocking expenses this year? Could we see those come down, particularly as you scrap some of the older vessels? So maybe help us as we think, to help us walk through and talk through how we should think about drydocking for the year.

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [46]

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Well, Kevin, generally speaking -- I'll give David the opportunity to talk about the CapEx for drydocking [special survey]. But generally speaking, yes, the docking costs have come down. And we've been able to negotiate very hard with the shipper repairs to go through the special survey and drydocking requirements for our vessels. That's just a general trend.

David, do you want to talk a little bit more about the -- our planned special survey and drydockings?

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David Spivak, Seaspan Corporation - CFO [47]

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Yes. I don't have a specific number as far as what we expect for the year, kind of an annual guidance for drydocking. But look, the reality is we think about the Panamaxes and scrapping, I think the economics are impacted by capital expenditures on vessels. It's a consideration. But frankly, in many cases, it's also the commercial element that drives the decisionmaking, as well; and working through the vessels, the operating characteristics, and a lot of other factors. It's not just about drydocking or accounting, or anything like that.

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Kevin Sterling, Seaport Global Securities - Analyst [48]

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Okay. Gerry and David, I really appreciate your time this morning. Thanks a lot, and best of luck to you.

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Operator [49]

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Fotis Giannakoulis, Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley - Analyst [50]

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I would like to follow up on the newbuildings. You mentioned earlier that you have postponed the delivery of the un-contracted newbuildings. Can you give us what is their remaining CapEx? And how much of this remaining CapEx is covered from a debt financing? And also if there are any contingencies on drawing down the debt financing?

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David Spivak, Seaspan Corporation - CFO [51]

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Yes. On the two 10,000s newbuilds, the remaining CapEx is about $150 million on those vessels. That's due when they're delivered. At this stage, we haven't even looked to put financing in that. As far as the financing, a lot of that will be impacted by the charters that are attached to those vessels. In delaying to 2018, but having the flexibility to accelerate into 2017, we're letting really the chartering decision dictate the timing. And from that, then, we would look at putting some secured financing against it.

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Fotis Giannakoulis, Morgan Stanley - Analyst [52]

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Thank you. And you mentioned that you think the market is very close to a turnaround point. I was wondering how long do you think it's going to take for it to see charter rates moving higher. And how low the idle capacity has to drop before we start seeing the inflection point in the charter market?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [53]

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Yes, a very, very good question. That's the question I ask myself: how long it takes before the charter market recovers. And generally speaking, there is a lag. The correlation is there. But, generally speaking, there is a time lag, sometimes three months up to six months. But one thing I can say categorically, with more scrapping happening with the recovery of container ship industry as a general backdrop, I think the Panamax rate of recovery is just a matter of months. We'll see what happens.

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Fotis Giannakoulis, Morgan Stanley - Analyst [54]

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Thank you very much, Gerry.

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Operator [55]

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(Operator Instructions). Michael Gyure, Janney.

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Michael Gyure, Janney Montgomery Scott - Analyst [56]

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Can you guys talk a little bit about maybe off-day, what you're looking here for the first quarter compared to the last two quarters, should that number could smaller, bigger? What you're thinking there.

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David Spivak, Seaspan Corporation - CFO [57]

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We don't really give guidance on something like that, but the -- generally when we give guidance, we're pretty conservative when we actually approach it. What I would say is that if you look at Q3 and Q4 -- and I think it was noted in the speaking notes -- is that the number of off-charter days from our vessels operating in the short-term market were identical, despite the fact that the number of vessels in the short-term market actually increased in Q4 versus Q3. And so our utilization has been good. And I think it's really due to the relationships and the hard work of our commercial team.

But it's something where we've had good utilization; but inevitably there will be off-charter days, because the charters generally tend to be shorter and there is down time between charters. We'll see how it plays out. But when you actually cut through it realistically, just from a revenue perspective, the rates on Panamaxes are so weak right now that when you get into sort of a revenues, the off-charter days isn't a big driver of revenue when you really get into it.

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Michael Gyure, Janney Montgomery Scott - Analyst [58]

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Okay. And then on a separate area, on the hedging and the swaps. Did you unwind any swaps here in the fourth quarter, or is that just related to some of the debt repayment?

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David Spivak, Seaspan Corporation - CFO [59]

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In the fourth quarter there may have been a very small unwind, but it was a very small notional. Realistically what's happened is as we have paid down some debt, probably more in Q3, we did pay down, pro rata, a swap associated with that facility. And some of that what's rolled forward into Q4.

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Michael Gyure, Janney Montgomery Scott - Analyst [60]

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Great. Thanks.

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Operator [61]

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Gregory Lewis, Credit Suisse.

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Joe Nelson, Credit Suisse - Analyst [62]

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This is Joe Nelson on for Greg today. Just one quick one for me. In the Panamax sector, you guys made some comments today about being out there and seeing opportunities. You're seeing estimates that the market might be oversupplied by as many as maybe 100 Panamaxes. I'm just curious, as you think about the opportunity set of how many assets may be available, is there a number you think, or percentage of that excess capacity that might be up for grabs, so to speak?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [63]

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I think 10% is about right, which is about 60, 80 vessels need to be scrapped before the demand and supply the balance will be restored. It's hard to pin down exactly how many vessels will be available for us to acquire. Frankly, the prices have gone up and we had put in bids several times at scrap value. Unfortunately, the last three or four times, we have been unlucky. And so there's more confidence and interest in the secondhand Panamax vessels now.

And the Chinese have been active buyers, and some other historical shipowners just -- there's looking at this asset class as well. So there's more competition right now. We'll see how things go. Again, we are happy with the number of Panamaxes that we have. And the opportunities are there to modernize our vessels, buying new ones and trading the old ones with a minimum cost, and we will do it. Otherwise, we just sit and wait and focus on the other opportunities.

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Joe Nelson, Credit Suisse - Analyst [64]

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All right, sounds good. Well, thank you very much for the time today.

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Operator [65]

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Thank you. There are no further questions in queue. So now, at this time, I would like to hand the conference back over to Mr. Gerry Wang, Chief Executive Officer, Co-Chairman, and Co-Founder of Seaspan Corporation, for closing comments and remarks. Sir?

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Gerry Wang, Seaspan Corporation - CEO, Co-Chairman and Co-Founder [66]

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Good. Thank you very much for taking the time with us. As I said in the opening remarks, we've been through challenging times. The industry is turning around a little bit. But then they -- hopefully the charter market will see some recovery and improvements in the charter rates. And [we're at] the position of reducing the dividend for both defensive and offensive play; where, therefore, the long-term value of our shareholders and the franchise has never been as strong as where we are today.

And we're going to have a very interesting year for 2017 as the industry is going through the pivotal stage of the changes. And we're well positioned. And we'll continue to drive down our costs, and hopefully the market for our Panamax vessels will turn around, as well.

And we look forward to working with you, and thank you again for your support for our franchise. Thank you very much.

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Operator [67]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and you may all disconnect. Everybody have a wonderful day.