Nov 3, 2015
Executives
Gerry Wang - Chief Executive Officer, Co-Chairman and Co-Founder Sai Chu - Chief Financial Officer
Analysts
Michael Webber - Wells Fargo Securities Benjamin Nolan - Stifel, Nicolaus & Company Brandon Oglenski - Barclays Capital Christian Wetherbee - Citi Research Amit Mehrotra - Deutsche Bank Charles Rupinski - Seaport Global Securities Shawn Collins - Bank of America/Merrill Lynch
Operator
Welcome to the Seaspan Corporation conference call to discuss the financial results for the three and nine months ended September 30, 2015. Hosting the call today is Gerry Wang, Chief Executive Officer, Co-Chairman and Co-Founder of Seaspan Corporation; and Sai Chu, Chief Financial Officer of Seaspan Corporation.
Mr. Wang and Mr.
Chu will be making some introductory comments and then we will open the call for questions. I will now turn the call over to Sai Chu.
Sai Chu
Thank you, operator. Good morning, everyone, and thank you for joining us today.
Before we begin, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by 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 third quarter 2015 earnings release and the earnings webcast presentation slides available on our website at www.seaspancorp.com, as well as in our Annual Report on Form 20-F for the year ended December 31, 2014 filed with the SEC. I’d also like to remind you that during this call we will discuss certain non-GAAP financial measures, including adjusted EBITDA, cash available for distribution to common shareholders, normalized net earnings and normalized converted earnings per share.
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. I will now pass the call over to Gerry, who will discuss our third quarter highlights as well as some recent developments.
Gerry Wang
Thank you, Sai. Good morning from beautiful Vancouver, Canada.
Please turn to slide 3 of the webcast presentation. During Q3, we continued to deliver on our strategic objectives.
We expanded our operating fleet with the delivery of two SAVER design vessels. We signed $1 billion Framework Cooperation Agreement with the Export-Import Bank of China.
We continue to enhance our capital structure by accessing diverse sources of capital to fund our growth, maintain financial flexibility and enhance our capital structure. Turning to our third quarter results, I would like to highlight three points.
First, we ended the quarter with 84 vessels in our operating fleet, 99 vessels including our managed fleet and a total of 118 vessels in our managed fleet, including newbuilds. The delivery of the YM Warmth in October marked the 100th vessel in our owned and managed fleet, an important milestone that solidifies our position as the largest independent charter owner and manager of containerships.
As noted earlier during, the third quarter, we took delivery of one 14,000 TEU vessel which began a 10-year fixed rate time charter with Yang Ming. We also took delivery of a 10,000 TEU vessel which began a five-year fixed rate time charter with Maersk.
Our operating fleet achieved 99.3% utilization for the quarter, including our four scheduled drydockings, and the fleet continued to generate stable cash flows from long-term time charters. Our newbuilding program has been proceeding smoothly at all three shipyards: YZJ, HHIC and CSBC.
Today, there are 18 vessels under construction for Seaspan and GCI. Second, we completed several financings and refinancings during the quarter, raising a total of approximately $1.3 billion thus far in 2015.
Finally, during the quarter, we executed repurchases in our common and preferred share repurchase plans. Our Board of Directors authorized the repurchase of certain of our undervalued securities.
Details of those repurchase plans and completed transactions can be found in our earnings release and the 6-K to be released very shortly. I will now turn the call over to Sai to discuss our quarterly financial results.
Sai, please?
Sai Chu
Thanks, Gerry. Please turn to slide 4 where I will discuss our results for the quarter and nine months ended.
Revenue increased by $27 million or 14.5% due to the delivery of seven vessels in 2015 and full-period contributions of the four 2014 deliveries, partially offset by lower charter rates for vessels that were in short-term charters and an increase in drydocking days. Vessel utilization was 99.3% compared to 99.2%.
During Q3, we completed four drydockings for a 24-day increase offset by 25-day reduction in unscheduled off-hire. Ship operating expenses were $49.4 million, a $7.9 million or 19.1% increase primarily due to 10.9% increase in ownership days, increased stores spares purchased, higher repair and maintenance for our older ships.
We expect quarterly ship OpEx to continue to increase consistent with the expansion of our fleet and a slightly higher cost related to some of our older ships. G&A was $7 million, a $1.2 million or 14.6% decrease primarily due to reduction in non-cash stock-based compensation.
Operating lease expense was $11.2 million, an $8.8 million increase due to the operating lease financing on three 10,000s in 2014, one 10,000 and two 14,000s this year. We may finance additional newbuilds using similar leases which could increase our operating lease expense going forward.
In Q2 of this year, we changed our non-GAAP presentation of certain lease financing arrangements to recognize the gain on sale as an upfront one-time item. This will impact our non-GAAP cash metric of adjusted EBITDA and DCF.
Normalized net earnings is not impacted by these changes as this is an accrual-based metric. This results in higher adjusted EBITDA, distributable cash flow vessel delivery and lower adjusted EBITDA and DCF in subsequent periods.
Comparative historical results represented under the revised presentation. Adjusted EBITDA for the quarter was $183.5 million, or a $23.4 million or 14.6% increase.
Cash flow available for distribution for the quarter was $117.5 million, a $19.7 million or 20.1% increase. Both cash metrics are higher due to the realized gain on sale of the Yang Ming Wellness delivered in 2015 compared to the MOL BRAVO delivered in 2014, in addition to higher cash flows from delivery of vessels.
Normalized net earnings for the quarter increased by $5.3 million or 13.9%. Normalized EPS was $0.30 compared to $0.25, a 20% increase.
We expect continued EPS increases due to the 2014 and 2015 deliveries and eight in 2015. However, EPS improvement may be muted due to the capital costs associated with investing in our large newbuild programs through 2017 and the effect of the operating leases.
Our Board declared a Q3 dividend of $0.375 per common share. We view this as a sustainable dividend level that balances returns to shareholders while allowing us to maintain maximum financial flexibility and take advantage of attractive growth opportunities.
We periodically review our long-lived assets to determine if [indiscernible] accounting purposes. As of Q3, our vessels are not impaired.
However, if time charter rates do not improve meaningfully from the current market rates during the next nine to 12 months, based on current assumptions, for accounting purposes, we may be required to record a non-cash impairment charge in the range of $230 million to $300 million as early as Q2 of 2016. The amount, if any, and the timing of any impairment charges may materially differ from those used in our estimates as of today.
In terms of balance sheet, please turn to slide 5. The $180 million increase in our total assets is primarily due to newbuilds.
Our debt and capital lease balances were $3.7 billion versus $3.6 billion, a $99 million decrease primarily due to refinancing of three 4,500s, repayments partially offset by the drawdown of term loans for the three 14,000s and one 10,000. Overall, total liabilities increased by $152 million and shareholders’ equity increased by $26.1 million.
On the capital structure side, our capital structure continues to evolve and diversify. We entered into a $75 million term loan for 10,000 TEU vessel.
The YM Wellness was funded using $144 million operating lease. We plan to continue to pursue attractive financing alternatives that diversify our capital structure and provide financial flexibility to continue growing and improving our returns for our shareholders, which may include additional lease financing arrangements.
Please turn to slide 6 for the latest forward guidance with details of delivery dates, vessel size, customer information, CapEx, and tentative drydocking dates. Each of these items is based on current information and estimates and remains subject to adjustments.
Please turn to slide 7 for our forward guidance for the next quarter. We do not intend to update our quarterly guidance in the ordinary course of communications.
For Q4, we expect normalized converted EPS range of $0.29 to $0.32. These estimates are subject to change.
In terms of the newbuild order book, please turn to slide 8 for details of our nine ship order book for a total capacity of over 100,000 TEUs, with information on customer, yard, delivery dates, size, charter length as well as the allocation of other ships to GCI. We expect to fund the rest of our newbuild fleet with $155 million of additional borrowing under debt facilities in place and another $560 million in additional financing we are currently negotiating.
I would now like to turn the call back over to Gerry.
Gerry Wang
Thanks, Sai. Please turn to slide 9 of the web presentation where I will briefly discuss the industry.
Utilization levels of around 90% on certain ship lanes have led to a challenging fleet rate environment for certain carriers. On the supply side, we expect tonnage growth of about 7% to 9% for this year, the year 2015, and around 5% for next year, the year of 2016.
Major operators continue to manage supplies through scrubbing, redeployment, slow steaming and idling off ships. The total order book remains low at approximately 20% of effective loading capacity or about 6% per annum on average.
Vessel scrubbing is expected to continue, particularly for the 1980s and 1990s build ships. On the demand side, we expect global container volume measured in TEUs to grow by around 4% in 2015 and 6% in 2016.
Panamax charter rates have softened with demand slightly balancing. 87% of vessel deliveries in 2015 are for vessels of 7,500 TEUs or larger size, as the liner majors continue to modernize their fleets and improve their cost structures with large modern vessels.
We have seen continued demand and interest for our SAVER design vessels of 10,000 TEUs and 14,000 TEU classes from our customers as they focused on reducing slot costs. Finally, we expect the outsourcing trend by liner companies to continue as demonstrated over previous cycles.
Given that we are the leader in the space that we continue to maintain our strong customer relations, we expect to continue to capture a reasonable share of the growth opportunities in our industry. Please move to slide 10.
This chart shows the staggered maturity profile of our charter portfolio. The average remaining charter length of our operating fleet is approximately six years on a TEU weighted average basis.
For the remainder of 2015, we have no Panamax vessels up for recharter, and in 2016, up to 15 vessels. Overall the 2016 vessels represent approximately 5% of our estimated 2016 EBITDA.
On the past 12 months, we have seen volatility in charter rates for Panamax vessels. With increased global uncertainly, we will continue to monitor market conditions to determine the best strategy for those vessels.
In Q3, we took delivery of one 14,000 TEU vessel, the YM Wellness, and the one 10,000 TEU vessel, the Maersk Guayaquil. Following the delivery of the 14,000 TEU YM Warmth in October, we do not expect any further deliveries in 2015.
In 2016, we expect to take delivery of two 14,000 TEU and three 10,000 TEU vessels. In 2017, we expect to take delivery of three 11,000 TEU vessels and one 10,000 TEU vessel.
All those future deliveries together represent TEU growth of roughly 17% of our current fleet capacity. Despite the substantial fleet growth we have experienced over the past three years, we expect to continue to see opportunities for further growth.
Please turn to slide 11 where I will reiterate our vision for the future. We believe Seaspan is well-positioned to continue to enhance its leadership position and create shareholder value over the long-term.
We will continue to pursue fleet growth with a controlled and balanced approach, being patient and disciplined, and using our financial strength, and technical and operational leadership position to capitalize on opportunities that meet our strict criteria. Our core focus will remain on designing, owning and chartering large, modern, fuel-efficient containerships to creditworthy customers.
We have a history of returning capital to shareholders. We remain committed to sustainably increasing our common share dividend over the long-term as we continue to opportunistically grow our business.
As a ship leasing franchise, we consider it to be critical to consistently maintain a strong balance sheet, diversifying our capital structure and enhancing our financial strength, including maintaining appropriate leverage will remain top priorities. As previously stated, we may expect our 2015 results to be somewhat muted as we continue to invest in new vessels for our future.
However, we also expect that our strong base of cash flows from existing charters as well as future growth will enable our franchise to become stronger and it will establish for the long-term value of our shareholders. Operator, please open for the questions.
Operator
[Operator Instructions] Our first question comes from Michael Webber of Wells Fargo.
Michael Webber
Sai, I wanted to go back to a comment you made in your remarks around the potential impairment as early as Q2 2016, I guess up to $250 million or $300 million, and forgive me if you mentioned this, the ramp up into that comment, but was this tied to a specific size of assets? And then relative to what you’re looking at for the remainder of 2016, is that a cumulative total for 2016 that could be recognized in Q2 or could we see anything else beyond that in 2016 if rate start to recover?
Sai Chu
We feel that’s the range probably in Q2 or Q3. It’s a dynamic situation.
I want to stress that this is strictly for accounting purposes. As you know, accounting is very different from economic, but that’s the range that we’re expecting as really for the smaller-sized classes like less than 5,000 TEUs.
Michael Webber
If I think about it from an accounting perspective, but from a credit perspective, does this impact any of your existing or forward facilities, I’m thinking specifically of this excellent financing you guys finalized during the quarter. Was this math already baked into that thought process or is it something that would need to be revisited?
Sai Chu
As I said, we look at it periodically the impairment charge and it really has no impact on our debt facilities, given we’ve got plenty of room and things. So this is not an issue.
Michael Webber
So it’s just around the Panamax that you guys said I think it was a like a year and a half or two years ago?
Sai Chu
Correct.
Michael Webber
Gerry, you gave a cautious outlook which generally makes sense for this space and you guys continue to source opportunities, but we’ve seen I guess earlier this month Maersk [indiscernible] which is – benchmark is around – mile-marker for this space in terms of one of the newer really large scale assets getting laid up. I’m just curious whether you think we’ll see more of those extremely large scale pieces of tonnage laid out?
And when you think about credit risk, counterparty risk rather throughout this space, do you think that’s appreciably higher today than it was a year ago?
Gerry Wang
From our perspective, yes, the outlook looks a little bit more stable given the situation vis-à-vis the global economy. But [indiscernible] one vessel in this case as purely operational and seasonal that represent the trend for the larger vessels.
The larger vessels will continue to dominate the trade given the economy of scale and the competitive slot costs. We believe for the whole year 2015, the line operators will be actually doing pretty good, because the first half was very strong, second half of this year was not as good as anticipated.
But overall speaking, I think 2015 will prove to be fairly decent for at least for most of the leading operators. Next year would be full of question marks, even though the fuel cost has come down substantially and the low cost will continue to stay, but the fleet rate situation for especially two main trade routes, one is South America-Asia trade lane and Asia-Europe trade lane remain depressing.
And we don’t know what will happen next year. If the current trend continues, we will see some undesirable results for certain areas.
Michael Webber
Maybe let me comment that a different way. You mentioned that the trend for newbuilds certainly being towards the larger size, but if I think about vessel utilization for a larger asset, the trend would be that we’re seeing more idled capacity and it’s obviously still generally a small portion of the large capacity in this space and it is growing.
So if I think about maybe year-over-year, this time next year, or if we think about it just in terms of the cycle, if things stay where we’re at now, do you think we’ve seen peak – rather trough utilization levels for larger scale tonnage or do you think it could get worse next year, significantly worse next year if we don’t see an improvement?
Gerry Wang
I don’t see that happening. I think it’s just typical seasonal adjustments.
Q4, Q1 periods, you see 2%, 3% of idling and this year is no exception. Obviously the headline catching everybody’s eyeballs on Triple E, as I said just the one-off seasonal operational...
Operator
Our next question comes from Ben Nolan of Stifel.
Benjamin Nolan
Following on the theme what Mike was asking about, but maybe a little bit more around how you guys think about your capital structure. To the extent that the market is a little bit weaker, do you give any consideration to maybe focusing a little bit more than you had been on delevering the balance sheet or strengthening your balance sheet as opposed to growth or do you think that your mindset with respect to how you’re approaching both growth and the strength of your balance sheet is same it has ever was?
Gerry Wang
As I said in my speech today, we always pursue our growth in a disciplined and balanced approach. Leverage is very important for us, but to control the leverage at a certain level is even more important to us.
Generally speaking, we try to keep our gearing ratio below 60%, to be somewhere between 50% to 60%, and that’s our approach for those years. And we do not want to grow for the sake of growth, but at the same time if there are good opportunities that add value to us and good customers, good vessel types, good charters, we’ll pursue them.
Our capital structure is flexible enough that gives us the flexibility to pursue those opportunities. And we feel quite confident about continuing to grow, in spite of the headwinds, because we believe, as demonstrated over the period of cycles, outsourcing would continue to be there, given our operational and technical supremacy, our customers will want to work with us for their outsourcing requirements.
I [don’t think that has changed] and we’re confident about our future growth prospects.
Benjamin Nolan
Let me direct that, you guys have been buying back a limited amount of common and preferred equity and early next year will be the time when you normally revisit your dividend policy. Would you envision more of that, more limited share repurchase of both preferred and common and maybe continuing that steady progress of dividend increases or does it make more sense here to maybe retain more cash?
Sai Chu
I think as we all know, there are four choices with cash flows and the management’s job is to drive and increase cash flow per share for our shareholders, which we achieved through the delivery of newbuilds and structuring our financing and capital structure. The Board does review our cash generating capacity and the size what’s in the best interest of shareholders every year.
And we’ve demonstrated over many years that we are focused on long-term shareholder value that is between dividend increases, buying back stock at certain points, reinvesting in the business and paying down debt. So we can’t provide you guidance today, unfortunately it’s a standard answer that we provide to you, but it will be reviewed at the next Board meeting and we’ll provide guidance at that point.
Benjamin Nolan
And then lastly, I didn’t see it at least in the release, but could you maybe walk me through your debt amortization schedule is for the next couple of years?
Sai Chu
It’s generally in the range of $150 million to $200 million.
Gerry Wang
Ben, to add one thing here, up to now for the share repurchases, we have spent about $0.5 million up to now. You’ll see that in 6-K disclosures in great detail.
Benjamin Nolan
I did see that. So it’s been pretty limited, but obviously this is albeit limited, it’s a bit of a change from what it had been in previous quarters.
Sai Chu
Yes. Again, it’s being opportunistic, as we know some of the securities have been undervalued, so we step into the market occasionally.
Operator
Our next question comes from Brandon Oglenski of Barclays.
Brandon Oglenski
Sai, real quick, can you just walk through the cash liabilities that you have for the next 12 to 18 months, because I think you did say that you need to get about $0.5 billion of lease financing arranged over the course of time, so can you walk us through at a high level, just where your cash costs are going to be and how you expect to meet those?
Sai Chu
Let’s differentiate between our financing needs at just over $500 million, that’s not an issue for us in anyway. We have strong demand in the bank market and we have term sheets that we’re currently negotiating.
The cash requirements for the business on an annual basis are comprised of paying our debt facilities and the dividends. So we’re in good shape in terms of dividend, payout ratio of probably around 40%; debt repayment, as I said earlier, on the range of $150 million to $200 million over the next several years.
So we have more than adequate cash, given we’re generating significant amount of cash flows from our operating business.
Brandon Oglenski
What specifically is the cash requirements on the newbuilds, because you did say that you have no problems on the $500 million, but can we just walk through the details of that a little bit further?
Sai Chu
I’m not sure like the CapEx schedule there funded through our debt facilities. So I’m not sure – I mean, if you look at our remaining amount, there is a schedule on slide 8.
So 2016, we have approximately $400 million to fund and that’s going to be comprised of our debt facilities.
Brandon Oglenski
Which are in place right now?
Sai Chu
We do have in place a certain amount and we’re negotiating and finalizing the remaining debt financing.
Brandon Oglenski
That’s what I’m getting at, Sai, here. What have you not had committed yet?
Sai Chu
I think I answered that question previously. We have just over $500 million that we’re currently arranging.
Brandon Oglenski
And just because there’s been a lot of volatility in markets, you don’t see any concern on that $500 million, that’s all where I’m getting at?
Sai Chu
Again, I think no company other than Seaspan has demonstrated a better ability to raise capital. We have a tremendous capacity and demand in the bank market for our facilities.
So funding the $500 million is not an issue to me in anyway.
Brandon Oglenski
And you think that we’ll maintain the return profile that you’ve been given some of the volatility that we’ve seen?
Sai Chu
Yes. I think that if we – given the term sheets that we’re looking at, our access to capital, I have no issues in delivering the returns that we have on our assets.
Brandon Oglenski
I think this issue is important for your equity holders, to understand that and see the confidence that the returns aren’t going to change, obviously?
Sai Chu
It’s a good question and I think that if anything, our access to capital despite the volatility in the market has continued to be very good. We’ve accessed – this is a core strategy of Seaspan.
We have diversified and developed our access to a lot of different markets to raise capital and that’s the primary reason for just what you said, the volatility that can occur. And having long-term high-quality assets with the long charters that we have, there are no issues in terms of obtaining financing at rates that are going to generate returns for our shareholders.
Brandon Oglenski
Gerry, how does the industry sits itself, we’re not getting the growth that we expect, we’re just not at that multiplier GDP like it used to be. We have a lot of supply still delivering.
I know that the big vessels bring lower unit cost, but they also impact lower unit revenue. What happened here?
Do we need to maybe take up some of this liquidity at markets that’s allowing all this supply growth, not necessarily for your company, but more broadly?
Gerry Wang
Obviously, as you said, this is not really directly related to our business. We sign long-term charters at a fixed rate.
So the spot ups and downs will raise, cargo volumes do not affect our business directly. But I do share your concern about the overall container shipping market conditions, given we have a lot of new vessels coming to services this year; we’re talking about 79% against a volume growth of only 5%, 6%.
So there is an imbalance which result in freight rates at very low level. We have had 90% utilization, the freight rates are not good, especially for certain trades.
We’re talking about South American trade and Asia-Europe trades, the freight rates are very depressing. North American trades are doing pretty good; intra-Asia trade is strong; Asia-South Africa is doing well; Atlantic is doing well; but as I said, South America-Asia trades are bad and Asia-Europe is not good.
I think the industry, we have to adjust to that. Obviously, they’re being helped by very low fuel cost.
That’s definitely a huge plus. But the market is just not there, of GDP translating to the cargo volume growth.
So with supply at a high level is a big issue for the industry and so you’ll see a lot of adjustments in slow-steaming to become even super-slow-steaming, in most cases adjusting the operating profile to enable the tonnage of the vessels to operate more efficiently. And this is not the first time to experience such a rebalancing situation.
So I’m pretty sure the operators will do everything possible to adjust their operating profiles and maximize the performance benefit to themselves. And as far as we’re concerned, we just work with them and whatever they want to do as far as vessels, we just follow their instructions.
As I said, we are somehow insulated from the ups and downs, that’s been our strategy and at the same time, I think next year will be quite interesting. And if the current trend continues, next year will be pretty challenging for certain carriers, the carriers that have more tonnage, more vessels operating in the Asia-South American trades and Asia-European trades.
Operators that have more exposure to Transpacific, Asia to North America, Asia to South Africa and inter-Asia operations will fare much better in my opinion. So it’s a mixed bag and we’ll keep our eyes open.
At the same time, as I said in my speech, the outsourcing trend will continue. We’re part of the tonnage modernization program for our operators, for our charters.
We continue to see good opportunities working with them. And we’re taking advantage of whatever is available in front of us by exercising our technical and operational supremacy compared with other charter owners in this space.
Operator
Our next question comes from Chris Wetherbee of Citi.
Christian Wetherbee
I wanted to touch sort of bigger picture Gerry on your view of the fleet as you look out in year two or three from now, particularly as it pertains to the smaller vessels, less than 5,000 TEU, do they have a place in the fleet longer-term or how do you think about that? Are there opportunities to potentially continue to upsize the fleet, which would include both obviously buying larger newbuilds, but also potentially selling some of these smaller guys, just want to get your sense as far as how you think about this two or three years down the road.
Gerry Wang
So [indiscernible] very simple. As we grow our fleet with larger and larger vessels, the percentage of our smaller vessels will become less and less.
For example, we have 16, 15 vessels up for renewal, Panamax vessels, next year. That represent only 4%, 5% of our EBITDA.
That shows the relativity of our Panamax fleet, the smaller vessels in our fleet. That’s number one.
That’s part of our strategy to focus on growing on bigger vessels to dilute the impact of smaller vessels, we internally call them the legacy vessels, okay? The second thought to that is over the last four or five years, we’ve seen very little order book for the smaller sizes, especially the 3,000 TEU, 4,000 TEU vessels.
And those vessels, in terms of operating profile, are actually very flexible. They’re good for intra-Asia trades, they’re good for Asia-Australia and New Zealand trades, they’re good for Asia-Indian trades [indiscernible] they can operate from China-Pacific trades.
So they’re fairly flexible. And the vessel design is also pretty good.
And our vessels are very well maintained, our customers really speak very highly of the quality of the service we provide to our customers. I would think, given there is literally nothing being built on the supply side for this category, given the flexibility of this type of vessels, we’re continuing to see a reasonable demand and supply balance in two, three years time.
And we should wait and see. Even for first half this year, we saw rates for this category went up to 14,000 TEU, 15,000 TEUs for which we took advantage fixing our vessels.
And next year, we’ll see. If the rates stay at [$13,000, $14,000] per day for peak season, we’re quite happy to keep them and if prices pick up, we’ll sell them.
Again, we take a wait and see attitude and that particular part of the fleet, that portion of the fleet is fairly minor, especially when we take deliveries of big vessels. So we’re cautiously optimistic and we just take our time and see what happens.
Christian Wetherbee
So more portfolio management, not necessarily pushing for a sale, but continue to diversify a way towards larger vessels?
Gerry Wang
No, we don’t have to sell them. As I said, 13,000 TEUs today generate very good cash flows for us and we have no problem in operating them.
And as I said, for our portfolio management, we need small vessels, old vessels to [indiscernible] train our crew members so that they can move up to larger and bigger vessels. So for our system to work, we need smaller vessels, older vessels to train our troops and our crew members to move up to larger and better vessels.
That’s one of the reasons why you look at Seaspan operational record is very good and during the previous call I mentioned up to now for the last two or three years, we have not lost even one box. Typically, we carry about 5 million boxes on an annual basis.
That is really a record up to now. We’re very pleased with that record.
So when we speak to our customers, that record, zero box lost record is really a phenomenon. So something I want to share with you and it is part of our overall strategy.
And obviously if somebody wants to offer a decent price give us a very good return and why not, we will sell them. So those vessels were greater, they have no debt on them and so we can sell them at anytime we want.
So we keep ourselves totally flexible about those assets. As I said, we just take wait and see attitude.
In the meantime, charter rates during summertime have been quite pleasant for us and we’re happy with the cash flows those vessels generate for our suite.
Christian Wetherbee
Thinking about continued fleet development, what dynamics cause a pause in fleet growth? So we have not particularly good fundamentals in the underlying container industry, but certainly extremely attractive financing profiles for companies like yourself.
So how do you think about what potentially – is it just ultimately the financing market potentially being different is what changes or potentially causes a pause or is there some scalability issues above 100 vessels that we should be thinking about? I’m just curious how to think about the longer-run big picture growth of Seaspan overtime?
Gerry Wang
Let me just address this question from two aspects. One is industry-wise and then I’ll address Seaspan, ourselves.
For the industry situation, probably aware there is a Tier 3 deadline that was December 31 this year that expands – there is a rush for lot of new orders and a lot of newbuilds, because the Tier 3 feature will cause approximately $5 million for 10,000 TEUs and above, plus the operating cost increase you’re talking about probably around $2,500 per day, incremental cost for the new features as a result of Tier 3. And obviously the liner operators and certain owners have tried to avoid that by ordering vessels before December 31, 2015.
That explains why we have seen a surge for the newbuilding orders happening this year and during second half of last year. We expect up to the search is over for next two, three years, you will see a very, very low newbuilding order activities.
So the four, five-year, six-year cycle, the supply side will balance out. So we look at 6%, 7% on an annual basis, which is consistent with the historical average, which is not really a curvet and the industry always has certain reserve newbuilds on line over the next two or three years, it’s just part of the industry fundamentals.
Addressing our own situation, as we grow and add new vessels, we’ll just wait and see what happens to the Panamax vessels, smaller vessels. As I said, we have intention to get rid of that, provided there is good enough value that we can obtain for them.
If charter is the only option, then we’ll continue to deploy them in the charter market. If somebody offers a decent price, which gives us better value comparing to owning those vessels, keeping those vessels in the charter, we would not hesitate to do that.
So our philosophy is not really to grow our fleet for the sake of growth that we don’t have really a target of 120, 150, 200 vessels per se. If the growth makes sense, the opportunities for larger vessels and medium-sized vessels that make sense, we’ll do them.
If not, then we wouldn’t do that. So we’ll just continue to be opportunistic.
So that would be our strategy because this business over the years has demonstrated you have to be dynamic, you have to be flexible and you have to have a strong balance sheet and flexible capital structure. When opportunities come up, then you can be there to grab them.
You cannot just be carried away by three month of bad time or six month good time. So we have to be disciplined and we have to be patient about our business.
Operator
Our next question comes from Amit Mehrotra of Deutsche Bank.
Amit Mehrotra
I got disconnected mid-call, so I apologize if this question was already asked. But, Sai, if we extrapolate the current charter rates to the 15 expirations next year, what would the impact be to distributable cash flow?
My expectation prior to recent downturn was that we’d still see a double-digit improvement next year in the distributable cash flow, just wanted to confirm that or maybe get an update in terms of the recharterings?
Sai Chu
I think our expectation is somewhere in the range of $350 million to $400 million of distributable cash flow.
Amit Mehrotra
That obviously includes the recharterings?
Sai Chu
Yes. We do have some assumptions in there for the big chartering.
Amit Mehrotra
Gerry, I just wanted to ask, most of my questions have been asked and answered, but just wanted to ask a more open-ended question to you related to how you see Seaspan’s fortunes, I guess is the best word, relative to the fortunes of the liner companies, because on one side the duration of the charters insulates the company from the volatility that we’ve seen this year especially, but overtime you’re very much tied to the fundamentals of the trade in terms of charter rates, vessel values and even just the general health of the customers and counterparties. So can you just offer your thoughts or insights on this?
I ask this because investors are generally split on the issue and maybe that explains some of the share price movements despite basically you saw the rest of the management doing exactly what you said you would do all along?
Gerry Wang
I think my comments on your question would be the following three aspects. The first thing is I just wanted to say we are operating in a niche market, outsourcing market space and we focus on utilizing our technical and operational know-how.
We’re the leader for the larger vessels, the SAVER class, 10,000 TEUs, 14,000 TEUs and we are part of operating vessels at the highest level, which gives our customers a very good outsourcing partnership opportunity. That will be the first comment.
We’re not just private equity-backed ship owner, buying ships and chartering ships. We are heavily, heavily involved in the technical and operational aspects working with our customers, we’re fully integrated with our customers.
That is something we consider as a competitive advantage that we have versus other competitors. That’s the first aspect.
The second aspect is our business, the leasing business, financing is a big deal. We try to use our balance sheet, our capital structure to get the best financing available to us in terms of flexibility, accessibility, and also cost of capital.
We’ll be quite accretive in accessing certain capital markets that are not available to other operators. We use our scale, we use our size, we use our reputation to obtain the best financing available, driving down our cost of capital, improving our performance, return on the charters, on the assets we purchase.
So that will be the second aspect. The third aspect, our long-term charters tend to have years that provide a good shelter, insulation for us.
Typically, shipping markets is a three, five years cyclical. Our strategy is, as long as we can act and strike by a [indiscernible] we’ll be doing well.
The worst is obviously [indiscernible] enable to make acquisitions, then for us to continue along, then you would lose long-term sustainability. So those will the three things that I want to share with you.
Number one, technical, operational know-how; number two, our financing probability; number three, our long-term charters which give us the insulation and ability to moving when the market is actually experiencing tough times, i.e., assets are cheap, and we’ll try to use our strength in acquiring assets from – as we see.
Operator
Our next question comes from Charles Rupinski of Seaport Global.
Charles Rupinski
Most of my questions have been answered. I just had a couple follow-ups.
Sai, just for the amortization, when you mentioned $150 million to $200 million, is that over the next couple of years?
Sai Chu
Yes, each year.
Charles Rupinski
And just another question, this is a little granular maybe, but I have been hearing about some of these liner companies like APL having more expedited services. That wouldn’t counter to the whole slow steaming concept.
And I’m wondering is this a factor that people should be factoring in when they’re thinking about supply demand in terms of maybe some of these expedited services expanding or becoming more of a trend and would that go against the slow steaming concept.
Gerry Wang
Generally speaking, the slow steaming will continue to stay. But for certain trades and for certain customers, if they carry high value items, they’re sensitive to time, then they would demand for faster delivery schedule.
We’re seeing that come out, especially as a result of the super-low fuel costs. But it’s not the main trend.
I just want to add one thing. If you look at SAVER design vessels, 14,000 TEUs, 10,000 TEUs vessels we have, we all have the speed reserve that we need.
We typically would have one or two cylinders in excess to give the speed reserve you would need for our vessels. That’s the reason why I keep saying Seaspan is a different company.
We are technically, operationally very advanced. We do not want to build vessels for today, but we want to build vessels not only for today, but also for tomorrow.
Who knows what would happen to the speed requirements. All our new vessels are there for faster speed, if required.
It would cost us a little bit more upfront in terms of CapEx, but over the long term, over the longevity of our assets, the speed reserve, in my opinion, will prove to be very valuable. It’ll make our assets more tradable and our customers would want to have the flexibility of the speed reserves that we would provide to them.
I just want to make that comment to you.
Operator
[Operator Instructions] Our next question comes from Shawn Collins of Bank of America.
Shawn Collins
A big picture question on global trade. Gerry, when you cite that Maersk parked its Triple E for seasonal reasons, what gives you confidence that this is seasonal in fact rather than a new trade pattern, especially in light of not seeing a peak season this past summer in Asia and also potentially not seeing a peak season in summer 2014.
Any color you could provide on that, please?
Gerry Wang
As I said, over periods of cycles, we always see market conditions going through ups and downs. For this year, the peak season actually started much earlier, during first quarter and second quarter, nobody had anticipated a strong Q1 and Q2.
And obviously Q3 was not as good as anticipated. The so called peak season never occurred, and partially because Q1, Q2 were strong anyway.
I believe the Triple E situation is just a one-off for operational reasons and I don’t think that represents the long-term trend. I think for next year, you’ll see probably Q1, Q2 to be not as good as Q1, Q2 this year, but Q3 to be better than Q3 this year.
I think some normalization will take place and going forward we will see. And as I mentioned South American trades are going through tough times, given the situation in Brazil, in Argentina, in that part of the world.
And Europe is recovering and at least it’s not getting worse or I see some recovery over there. And the only thing I can say is I’m cautiously optimistic and the cargo volume hopefully will get into a situation where restocking will take place and the volume will recover somewhat.
And I expect the next year to be fairly challenging, but reasonable. There is good opportunity for some normalization and hopefully the liner majors, our customers can make some money.
Just remember, the fuel cost which is the number one cost item, is very, very low. That helps our charters substantially.
Shawn Collins
Second question, also a big picture, somewhat global trade question. Is there any industry talk about the country of Iran and the easing of trade sanctions against the country in 2016?
Can you comment on your expectation of whether Iran shipping lines becomes more involved in global trade and do you expect that to be a possible opportunity at all for you?
Gerry Wang
Yes. We have received requests from our customers for trades to Cuba and Iran, both.
And we’re studying the current legislative situations to decide what to do with permitting our vessels to go there at the request of our customers. I think Iran hopefully will come to the international shipping stage with some operating capacity.
They’ve stated they want to order, build some large containerships to compete with everybody else. But that would take time, even though they order today, the ships won’t be delivered until 2018, 2019 to be the earliest.
So I don’t think there is eminent impact, but the trade sanctions certainly is something under considerations. If the sanctions can be lifted, certainly both Cuba and Iran will boost the trade volumes to some extent.
So we’ll keep our eyes open, especially for the Panamax vessels, smaller vessels. For big vessels, I don’t think there would be any material impact.
Shawn Collins
And just a last quick question, a quick one. Congrats on the $1 billion new credit facility with Export-Import Bank of China.
It sounds like you’re still finalizing that, but still quite an achievement in the current financing environment. Can you just talk about what type of maturity you expect this to have, whether it’s a three-year, five-year or seven-year type of...?
Gerry Wang
It’s a long-term financing to match the charter duration. And to be honest with you, this financing facility will be utilized for a potential newbuilding order book we are contemplating for China.
And until the newbuilding charter arrangements are finalized, I wouldn’t be able to give you full colors. But this facility [is for] long-term.
Operator
Thank you. At this time, I’m showing no further participants in the queue.
I’d like to turn the call over to management for any closing remarks.
Gerry Wang
I just want to say a couple of things very quickly. We are from sunny Vancouver, Canada, and we feel quite confident in our business, even though I know there are some clouds in the sky, but I believe sun will come out tomorrow, if not tomorrow the day after tomorrow.
Given our business model, we have long term charters with pretty strong balance sheet and the flexible capital structure, we’ll be able to weather whatever storms is ahead of us. We went through 2008, 2009 financial crisis without any material damage.
So we’re very confident about our future and I want to share that with the audience, with our investors. And going forward, we’ll continue to execute on the same strategies as we have utilized in the past.
And I believe Seaspan represents the leadership, the best in class for our business and we’re very happy with where we are and we’ll continue to work very hard and be creative trying to make sure we build a strong balance sheet, enhance our capital structure and grow the business in a disciplined and balanced approach. That’s been the message I try to deliver to you every quarter and it’s actually what we do here every day.
I like to thank you very much again for taking part in this call. And have a great Thanksgiving and winter coming forward.
Thank you very much for your participation, once again.
Operator
Ladies and gentlemen, thank you for your participation on today’s conference. This concludes your program.
You may now disconnect. Everyone have a great day.