Danaos Corporation (DAC) on Q2 2022 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Danaos Corporation Conference Call to discuss the financial results for the three months ended June 30, 2022. As a reminder, today's call is being recorded. Hosting the call today is Dr. John Coustas, Chief Executive Officer of Danaos Corporation; and Mr. Evangelos Chatzis, Chief Financial Officer of Danaos Corporation. Dr. Coustas and Mr. Chatzis will be making some introductory comments, and then we will open the call to a question-and-answer session. I would now like to turn the conference over to Mr. Evangelos Chatzis, Chief Financial Officer. Please go ahead.
Evangelos Chatzis: Thank you, operator, and good morning everyone, and thank you for joining us today. Before we begin, I quickly want to remind everyone that management's remarks this morning may contain certain forward-looking statements and that actual results could differ materially from those projected today. These forward-looking statements are made as of today, and we undertake no obligation to update them. Factors that might affect future results are discussed in our filings with the SEC, and we encourage you to review the detailed safe harbor and risk factor disclosures. Please also note that whether we feel appropriate, we will continue to refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA, and adjusted net income to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and accompanying materials. With that, let me now turn the call over to Dr. John Coustas, who will provide a broad overview of the quarter.
John Coustas: Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the second quarter 2022. Danaos business model continued to generate strong results in the second quarter, more than doubling our adjusted net income compared with a year-ago. Given our fixed charter coverage over the next 12 months, we expect these metrics to improve further. At the same time, however, we're closely following economic conditions and the potential impact to our industry. A confluence of factors including high energy prices, inflation, and the effects of the war in Ukraine will likely result in slowing economic growth and negatively impact trade volumes. On the other hand, to assist in efficiencies of the charter side and the supply chain and COVID resurgence in China are keeping vessel utilization high with increased waiting times in port. Additionally, increasing fuel costs will likely prompt liner companies to use vessel shading as soon as vessels are available. However, we do not expect that to happen until second quarter 2023 and onwards. Environmental regulations, particularly the CII Compliance is leading liner companies to redesign their operating rigs with lower speeds to ensure they do not breach requirements and to also assure their customers that they are actively reducing CO2 emissions. These mitigating factors point to a weakening rather than a collapse of the market that we expect with the resulting rates much higher than pre-pandemic levels. For the time being, charter rates are holding firm as available economy is very start. The company is very well positioned with a strong liquidity position and the balance sheet that can sustain severe deterioration of economic conditions. This is reflected in upgrades by both S&P and Moody's to the highest level among public shipping companies validating efforts to create a leader in our sector. We are also insulated from rising interest rates as we have reduced our floating rate debt nearly equal to our cash and marketable securities. We will continue to use our balance sheet opportunistically with a continued focus on state-of-the-art buildings with environmental profiles, our liner customers, which also gives a great confidence about the future of our already ordered six metal already green new buildings, we are also continuing to return value to our shareholders through our dividends and our share buyback problem with huge number of outstanding shares by approximately 2% in the course of about one month. With that, I will hand the call over back to Evangelos who will take you through financials of the quarter.
Evangelos Chatzis: Thank you, John and good morning again to everyone. And thanks again for joining us this morning. I will briefly review the results for the quarter and then give call participants the opportunity to ask questions. We are reporting adjusted EPS for the second quarter of 2022 of $7.59 per share, or adjusted net income of $157.1 million compared to adjusted EPS of $3.34 per share, or $68.9 million for the second quarter of 2021. The increase of $88.2 million in adjusted net income between the two quarters is a result of an increase in operating revenues of $104.5 million and a $13.9 million net dividend book in relation to our ZIM equity holding partially offset by higher total operating expenses of $20.2 million, mainly due to the increase in the average size of our fleet by 11 vessels between the two quarters, a $7.8 million increase in net finance expenses, and a $2.2 million decrease in income from Gemini that was fully consolidated in the third quarter of 2021. More specifically, operating revenues increased by $104.5 million to $250.9 million in the current quarter, compared to $146.4 million in the second quarter of 2021. This increase is attributed to a $62 million increase in revenues as a result of higher charter rates and $23.9 million incremental revenues as a result of the vessel additions to our fleet between the two quarters. Revenue also increased by $2.9 million mainly due to straight line revenue recognition accounting, and further increase the NAV by another $15.7 million being the amortization of assumed charter liabilities of recent vessel acquisitions. Vessel operating expenses increased by $7.7 million to $40.6 million in the current quarter, compared to $32.9 million in the second quarter of 2021 mainly as a result of the increase in the average number of vessels in our fleet, while the average daily operating costs increased to $6,463 per day for the current quarter, compared to $6,241 per day in the second quarter of 2021. And that was due mainly to COVID related increase in crude remuneration and increased insurance premiums due to the tightening of the insurance market between the two periods. Our daily OpEx costs still remains one of the most competitive in the industry. G&A expenses remained stable at $7.1 million in both the current quarter and the second quarter of 2021. Interest expense excluding the amortization of finance costs decreased by $1.4 million to $12.9 million in the current quarter, compared to $14.3 million in the second quarter of 2021. This is a combined result of a $2.2 million decrease in interest expense because of a reduction in our average indebtedness by approximately $311 million between the two periods partially offset by an increase in debt service costs by approximately 44 basis points, mainly as a result of rising interest rates. We also have $0.7 million decrease in interest expense due to capitalization of interest on vessels under construction. We also have reduced positive recognition through our income statement of accumulated accrued interest of $1.5 million that have been accrued in 2018 in relation to the financing that was consummated. And as a result of financing arrangements, we put in place in April of 2021, the recognition of such a cumulative interest has been decreased. Adjusted EBITDA increased by 85.2% or $88.4 million to $192.1 million in the current quarter from $103.7 million in the second quarter of 2021 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation, which is posted on our website, as well as subsequent event disclosures. A few of the highlights follow. During the second quarter we substantially reduced leverage by early debt and lease repayments of $434 million and realized the gain of $22.9 million in relation to this debt extinguishment, which early prepayment combined with scheduled debt repayments, and including a new credit facility of $130 million that was put in place in the current quarter overall have led to the reduction of the corporate net debt to last 12 months adjusted EBITDA ratio to below one and more specifically to 0.9x. Currently, 15 of the company's vessels are debt-free. And this early debt repayments will reduce debt and lease amortization to approximately $25 million run rate per quarter going forward. Through the end of July, we have repurchased 409,200 shares of our common stock in the open market for $25.1 million executing under our $100 million share repurchase program. As at the end of the second quarter our contracted cash revenue backlogs to the $2.3 billion with a 3.6 year average charter duration, while contract coverage is at 99% for 2022 and 80% for 2023, while even 2024 is already contracted at 55%. Our investor presentation has analytical disclosure on our contracted charter books, and all the other matters that have been discussed. With that I would like to thank you for listening to this first part of our call. Operator, we are now ready to open the call to Q&A.
Operator: Thank you. We will now begin the question-and-answer session. . Our first question comes from Omar Nokta with Jefferies. Please go ahead.
Omar Nokta: Thank you. Hey guys. Good afternoon, John and Evangelos. Well, congrats again, on a very strong quarter. And really nice to see you guys taking advantage of the situation really paying down debt and further strengthening that balance sheet. I wanted to ask about the 15 ships that are unencumbered debt as you say they're worth charter free 1.6 billion. If I recall, you've agreed to sell two of them previously. How should we think about the remaining 13? Are those sales candidates? Are those assets that are you're holding on to with added flexibility. But how do you just generally be those chips in the announced framework going forward?
John Coustas: Well, first of all Omar, welcome back.
Omar Nokta: Thank you.
John Coustas: It's nice to have you covering us as being really one of the first analysts that covered since 2006. So I think you've got probably the most extensive knowledge of the company from all analysts covering us. Yes, well, as I said, these 15 ships are not held for sale. Of course, as we sold the ships if we get a very interesting let's say purchase proposal, we can never deny, but for the time being. Now, these ships just are shipping in the company. And actually, they provide terrific security to our -- to the unsecured. Let's say that is a debt holders of our company which makes really the bond rock solid.
Omar Nokta: Got it. Thanks, John. And thanks for your words. towards me. It's been a pleasure following Danaos for so long and it's become such a long way here especially the past two years. And one of the next question asked, in terms of, as you highlighted your methanol, new buildings as you prepare for stricter regulations upcoming, if you think about strategically deploying capital today in anticipation of that. Do you see more incremental capital going towards the new buildings? Or do you try to find secondhand ships that are younger, eco, similar to the ones, those ships you acquired last summer?
John Coustas: Well, it's -- we are open to all, let's say possibilities that make sense. For the time being, second hand ships are pretty expensive. And we do not want really to have a very high capitals burden on all your vessels. If we make an investment, we're definitely need to be on green technology, because at some stage, really the whole fleet that we are waiting to see how IMO we have developed in terms of their commitment, because for the time being, which let's say 50% reduction until 2050. With what's happening in the world today, there is with decarbonization. There's a lot of pressure to amend that net zero by 2050, which means that we need a much more aggressive investment strategy to green buildings. And we're following that very closely. So that we are really on top of the game.
Omar Nokta: Yes, definitely. And, John, one final question. Just more market related. Obviously we've seen you guys have been at the forefront of chartering your shifts on longer and longer term contracts. How would you characterize the market today, vis-Ã -vis this backdrop of easing freight rates and uncertainty ahead? How would you characterize liner's appetite today? For four fixing ships that come open say in '23? How does that look today, versus say maybe six months ago?
John Coustas: Well, there's no doubt that people are, in general more conservative. There are requirements around. So the issue here is not that liner companies do not have requirements. It's just that because we're talking about 2023, nobody feels, let's say the edge to pay top of the market at this moment and hope that by waiting, we might be able to get the ship let's say cheaper. So it's not show much that there is no requirement, it's just that people are holding off in the hope that they will be able to commit the ships at a lower level. And on the other hand, exactly, because the owners are not in distress. They are not prepared really to, let's say to put their pants down as they did with the changes in the past in order just to get fixed at any rate. So we'll have to see how the world situation develops. So that the seasons about chartering will be made. Rather than for example, in a year, as before, actually the requirement as it was a change until six months ago, maybe they will definitely need to do it. Maybe six months or eight months before the requirement, which is still longer than the kind of two to three month period that was the change pre-pandemic.
Omar Nokta: Got it. Thanks, John. Very helpful. Appreciate it. And congrats again. I'll turn it over.
John Coustas: Thank you. Thank you, Omar. Thank you.
Operator: . Our next question comes from Chris Wetherbee with Citigroup. Please go ahead.
Chris Wetherbee: Yes, hi, thanks for taking the call. John, you talked about the normalization in the market, I think at higher levels than what we've seen in the past. I know this is a difficult question to answer, but I'm curious what you think that means. So where do we think that sort of the -- maybe 2023, 2024 normalization in the market? What does that look like in terms of the level of rates? We know there are continuing to be constraints and obviously supply chain challenges, but in any sort of thoughts, you have just the magnitude of potential normalization would be very helpful.
John Coustas: Yes, well Chris, in general, let's say the long-term rates in the market are dictated by a combination of the actual new building costs, and the financial costs. Two, are really very much on the high side today which means that there is no let's say incentive for someone, it's alignment of ship for a longer period to connect, it needs really to pay on the basis of these two factors, okay, new equity returns of the owner is let's say of course another factor, but the decisive one is the price of the ship and the financial costs, I mean, these two things have showed up. That's why no one will go and build ships today, if they are not really compensated, and on the other hand, this is keeping also an anchor in the second hand market. Because the alternative of someone to have a long-term new ship is to take amazingly short term for example, three year period charter of an existing ship until the situation becomes clearer.
Chris Wetherbee: Okay, okay, that's helpful. I appreciate that perspective. And maybe just thinking about sort of the balance sheet, and what do we think the right level of debt is, obviously, from an EBITDA perspective, we're running at a pretty robust level here. And maybe there's a normalization coming. So I don't know how much work you kind of think you need to do from here, in terms of paying down debt, and how you balance that with share buybacks and obviously, incremental investments in the fleet?
John Coustas: Well, I think you know exactly because shipping is a cyclical industry. It's what you really need to see is how your debt-to-EBITDA moves through the cycles. Of course now, it's a very strong market, that we had a debt-to-EBITDA of 0.9. And actually, if we take into account also some of our other marketable securities, it's even lower than that. But this is really now that we are at the top of the cycle and at a moment that we have not done any significant expansion. We believe that, let's say through the weakening of the market, and our material expansion, this could go somewhere as maximum up to about three. And that's really the level that we want to keep, because we are very much aware that the rating that we get is directly influenced by these ratios. And we consider a very high rating as a key to our future by being able really to borrow cheaper than our competitors.
Chris Wetherbee: Okay, that's clear. It's helpful. I appreciate the time today. Thanks so much.
John Coustas: Okay, thank you. Thank you, Chris.
Operator: Our next question comes from . Please go ahead.
Unidentified Analyst: Hello, everyone. I would like to first congrats you for the recent quarter. The financial statement looks amazing. And definitely you did a great job there. I would like to ask a question, I had the issue at the beginning of the call. So maybe I missed it. And you mentioned it before. But regarding the buyback program, you mentioned to the SEC, the program will be around the $100 million. The recent financial statement mentioned that 25% of it. I wonder if there is going to be a continuous of the program or any change of it. In case you're going to extend it or complete the plan as declared at the beginning? Thank you very much.
John Coustas: None of the plan remains in place. We have executed the share buyback at leverage that we want to be accretive for shareholders. And additionally, this was done in a period of pretty slow market during the summer, since we have declared the share buyback, which means that we could not really buy many more shares in that period of time, because liquidity was not there.
Unidentified Analyst: Yes, I totally get it. So, the program remains the same, and you will complete it to a $100 million eventually.
John Coustas: If I may I mean the program by nature is opportunistic, right. It is in place. It's there is no expiration date. And it's up to the board to decide, at whatever point if they want to discontinue it. So it's an open program, which we will seek to execute in the best possible way for our shareholders. And the board reviews these matters periodically, so I cannot give you a perfect answer. But that's how it is.
Unidentified Analyst: I see. Thank you very much. Good luck.
John Coustas: Thank you.
Operator: Our next question comes from Climent Molins with Value Investor's Edge. Please go ahead.
Climent Molins: Good morning, gentlemen. Thank you for taking my questions. Following up on represent authorization, you've already used a quarter of that. But you continue to trade a very significant discount to NAV. So other repurchases are very attractive. What's the current like -- what's your current view on the tradeoff between increasing the dividend and additional repurchases?
John Coustas: Well, first of all, as far as we said before, the repurchase program remains in place. As I said, we're going to use it to the best interests are as we see fit for our shareholders. Regarding the dividend for the time being, it remains steady and it's going to any reevaluation of the dividend, it's going to be definitely not earlier than 12 months from the previous rates.
Climent Molins: All right, that's helpful. And your balance sheet is now very strong and will continue to strengthen going forward. Do you still believe new building pricing is attractive or do you prefer to take a wait and see approach going forward?
John Coustas: It's for the time being, we do not see any attractive opportunities. But as I said, this is the nature of shipping its cyclical. We are best positioned that everyone else to jump into any interesting opportunity that we're going to encounter in it.
Climent Molins: In it. That's all for me. Thank you very much for taking my questions and congratulation for this quarter.
John Coustas: Thank you.
Operator: It appears we have no further questions at this time. I would like to turn the call back over to Dr. Coustas for any further comments or closing remarks.
John Coustas: Thank you all for joining this conference call and for your continued interest in our story. I look forward to hosting you on our next earnings call. Have a nice day.
Operator: Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.
