Danaos Corporation (DAC) on Q3 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 September 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'll open the call to a question-and-answer session. I would now like to turn the conference over to Mr. Evangelos Chatzis. Please go ahead.
Evangelos Chatzis: Thank you, operator, and good morning to everyone, and thank you for joining us this morning. 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 these detailed safe harbor, and risk factor disclosures. Please also note that where 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?
John Coustas: Thank you, Evangelos. Good morning, everyone. This quarter marked the retreat of the container markets from unsustainable stratospheric highs to more normalized levels, albeit well above 2019 levels. The liner market has experienced a combination of supply chain normalization and demand destruction due to various factors. These include, but are not limited to, rampant inflation and declining GDP growth, the uncertainties created by the war in Ukraine and an energy crisis. This has been compounded by high inventories in warehouses and delayed collection of containers, both indirect impacts of easing of supply chain disruptions. The drop in demand for containerized freight has also significantly reduced vessel demand from opportunistic market participants, who were aggressively contracting smaller vessels or extra loaders, which were used during the peak of demand last year. This has led to a significant correction in the sub-3,000 TEU segment as charterers are on the sidelines waiting for the market to drop before they commit a vessel. Charter periods have also been reduced to as little as six months for smaller vessels as charterers are waiting to see how the CII requirements will impact fleet scheduling and what additional slow steaming will be needed to meet the requirements. Danaos is well-insulated from the current market environment and achieved record operating profit in the third quarter of 2022. Our commercial efforts earlier this year resulted in a number of new vessel fixtures for our vessels, and we ended the quarter with a multi-year backlog of $2.3 billion in contracted revenue. We have also continued to strengthen our balance sheet and we have now fully liquidated our shareholding in ZIM, as we stated we would. In addition, we have new commitments from our bank group to extend existing bank debt facilities until 2027. This means we have no significant capital requirements or re-financings until then, and we have the necessary flexibility to pursue our strategy of growth, share buybacks, and acquisitions. In fact, our net debt will be very close to zero by the end of this year, which protects Danaos from the recent dramatic increase in interest rates. With a fortress balance sheet, we are looking at the future with great optimism and evaluating the steps that will keep Danaos at the forefront of the industry. Danaos' management team is fully aligned with our shareholders, and we will continue working to enhance long-term value of the company. Thank you. Evangelos?
Evangelos Chatzis: Thank you, John, and good morning again to everyone. Now we briefly review the results for the quarter and then open the call to Q&A. This quarter we are reporting adjusted EPS of $8.71 per share, or adjusted net income of $176.9 million compared to adjusted EPS of $5.32 per share, or $109.5 million for the third quarter of 2021. This increase of $67.4 million in adjusted net income between the two quarters is a result of a $64.1 million increase in operating revenues, and $11 million incremental net dividend booked in relation to our ZIM Equity Holding and a $2.5 million improvement in net finance expenses are fairly offset by higher total operating expenses of $10.2 million, mainly due to the increase in the average size of our fleet by five vessels between the two quarters and inflationary pressures that resulted in incrementally higher daily operating expenses. More specifically, operating revenues increased by $64.1 million to $160 million in the current quarter, compared to $195.9 million in the third quarter of 2021. This increase is attributed to a $76.9 million increase in revenues as a result of higher charter rates. $11.1 million incremental revenues as a result of the vessel additions to our fleet between the two quarters, and the $4.5 million increase in recognition of assumed charter liabilities of recent vessel acquisitions. Finally, we also have the $28.4 million reduction in revenues due to lower non-cash revenue recognition in accordance with U.S. GAAP. Vessel operating expenses increased by $4.5 million to $39.2 million in the current quarter from $34.7 million in the third quarter of 2021, mainly as a result of the increase in the average number of vessels in our fleet. While the average daily vessel operating costs increased to $6,173 per day for the current quarter from $5,918 per day in the third quarter of 2021, mainly due to COVID-19 related increase in crew remuneration and increase in travel expenses, as well as increased insurance premiums between the two periods. However, our daily OpEx figure remains as one of the most competitive in the industry. G&A expenses decreased by $0.2 million to $7.1 million in the current quarter compared to $7.3 million in the third quarter of 2021. Interest expense excluding finance costs amortization decreased by $1.3 million to $13.1 million in the current quarter, compared to $14.4 million in the third quarter of 2021. This decrease in interest expense is a combined result of $1.5 million decrease in interest expense because of lower average indebtedness by approximately $467 million between the two periods due to extensive deleveraging that we have done since then. And that was partially offset by an increase in cost of debt service by almost 1.5%, mainly as a result of rising floating interest rates. We also had a $1.3 million decrease in interest expense due to capitalized interest on vessels under construction. And we also have reduced positive recognition through our income statements of $1.5 million of accumulated accrued interest in relation to our 2018 refinancing that has since been fully repaid. Adjusted EBITDA increased by 42.4% or $63.5 million to $213.1 million in the current quarter from $149.6 million in the third quarter of 2021 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation posted on our website, as well as subsequent events disclosures. A couple of highlights followed below. As of the end of the third quarter our contracted cash revenue backlog stood at $2.3 billion with a three and a half year average charter duration, while contract coverage is at 100% for 2022, 88.4% for 2023 while even for 2024, it is already at 62%. Our investor deck has analytical disclosure on our contracted charter book. Finally, as reported in our earnings release, the company is wanting to conclude a $437.75 million refinancing within Q4 that would extend maturities of bad debt to not before than 2027 at improved pricing terms. While most of this amount or $382.5 million will be in the form of a revolving credit facility that would provide the company with increased flexibility in managing capital allocation. Finally, pro forma for these refinancing transactions more than 60% or 45 vessels out of 71 vessels of the company's fleet will be debt free and unencumbered. 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 from Jefferies. Please go ahead.
Omar Nokta: Thank you. Hey guys good afternoon. I did have a couple ofâ¦
John Coustas: Hi, Omar. How are you?
Omar Nokta: Hey, I'm good. I'm good. Thank you. I just wanted to follow-up maybe Evangelos on your -- you're just touched on the new facility, you're going to have 45 unencumbered ships from the 15 currently, just thinking about that. That's 30 ship increase, right and debt free capacity. Is that simply because you're not needing to put up 30 vessels as collateral for this new facility? Or is it simply that you're going to be paying down a big chunk of debt and not really draw on the revolver once it's completed?
Evangelos Chatzis: No. Thank you for this question, Omar. Well, these vessels that were previously securing the debt that is now being refinanced. This was a facility that was put together in 2021, it was for $850 million. And at that point, these vessels were part of the security package, because they were required to be. Since then, we have significantly reduced the facility down to $438 odd million. So these securities are no longer required. And part of this refinancing exercise was also to rationalize security allocation on that facilities, which is being achieved. And also, of course, the revolving feature gives us way more flexibility than we previously had.
Omar Nokta: Okay, yes. Thank you. And then just to the extent you can say, how much do you think of the revolving portion of the facility, you'll draw down from the GetGo?
Evangelos Chatzis: I don't expect we will draw down from the GetGo any of it. It will be fully committed with two or three business days' notice to draw funds whenever we want. All the securities will be in place. But we're not going to draw it unless we need it. And I don't expect we're going to require it in the near-term, at least this side of this year.
Omar Nokta: Wow, okay. All right. That's sounds great. So maybe just kind of taking a big step back. Clearly, you've taken advantage of a pretty robust market here over the past two plus years. You've strengthened your cash position, you've lowered your debt. You've got the backlog at $2.3 billion. Have you sold the final piece of them, and your cash balance is now pushing close towards that $600 million? In the past, you've sold ships, bought chips, ordered ships, paid down debt, bought stock, paid out dividends. What do you think as we get into 2023, as the priorities for use of cash and generally, strategically, how are you thinking about the company as you get into next year?
Evangelos Chatzis: Yes, John, do you want to take that?
John Coustas: Yes. Well, Omar, as I said, we will wait. We said -- but we will continue with the share buybacks. And we'll have to really wait and see when the opportunities come. As you know, shipping is a cyclical business. And there's definitely going to be a downturn with all what's happening, I don't believe we have already seen, really the extent of the drop because all the increase of interest rates et cetera has been pretty much sudden. But I'm pretty sure that going forward, we will see the effects of all this type of thing and inflation. And we will be there to take advantage of all the opportunities that are going to realize, we have six rebuilding vessels, which is in progress, and this is a very important that these ships were the first kind of green vessels ordered by the company. And it's very important to be able to follow after that market is going to be important, how really we're going to the whole shipping industries is going to respond to these decarbonization requirements. The good thing is that with interest rates also going up as Evangelos said, we are totally insulated as we will be practically zero by year-end and we will really hope to be able to make let's say accretive acquisitions within the next, let's say one to two years.
Omar Nokta: Okay, yeah, definitely. That sounds like you guys have the liquidity both in terms of cash and really $400 million plus of a revolver capacity. It'll be interesting to see. Thanks, John. Thanks, Evangelos. I'll turn it over.
Operator: The next question comes from Chris Wetherbee from Citigroup. Please go ahead.
Christian Wetherbee: Hey, thanks. Good afternoon guys.
John Coustas: Hi, Chris.
Christian Wetherbee: Hi, I guess maybe first detailed question, can you give us a sense of what you expect for drydocking in the next couple of quarters?
John Coustas: I have to check my records. But to the best of my recollection, I think that'd be four ships. So yes certainly like 5 million or 6 million.
Christian Wetherbee: Okay. Okay, that's helpful. And then in terms of the vessels that you have rolling off charter in the next six months, where there isn't another charter or options, I guess, I guess I'm curious about what your sense is in terms of shipper demand, obviously, the market is in a significant period of flux right now with spot rates dropping fairly drastically over the last several months. But there has been some expressed interest by shippers to make sure there is capacity and unchartered out as such, but what do you get the sense in terms of the real time conversations you have with shippers? What their expectation is, and sort of what their position is going into rate negotiations? How aggressive do you think shippers are beginning to get?
John Coustas: Well, definitely the rate negotiation ship from shippers, towards the line of company, there are no rate renegotiations between the line of companies and ourselves, that has never been really the case. For the time being, the biggest difference we have it's not that the number of chips is really either ships should increase dramatically. What we have is on one hand, that utilization of the vessels has dropped. And this is exactly because utilization has dropped the pressure on container freight rates has also dropped. But for the time being, as I said, there are no idle ships. I mean, we had one ship that was opening towards -- it's opening towards year-end, the small one around 2200, the smallest we had. And we chartered it in line with the market for six months for around $16,000, I mean we shipped prior to let's say prior 2019, it was earning somewhere between let's say $8,000 to $10,000 a day. So, as I said, we're still above that. What is really for the time being change, apart from the way drop is that charters are not willing to commit long-term. And this is basically, we're talking about six month periods, whereas before. I mean for the same ship, for example, when subsistence ships that we've chartered, before we managed to get three years, that's no longer in the cards.
Christian Wetherbee: Okay, so the expectation would be maybe rate, maybe agreements would end up being shorter term in nature, from the liners.
John Coustas: Yes, it will be shorter term and of course, considerably lower than the peak that we have seen which in any case, we always knew that that was never going to be forever.
Evangelos Chatzis: And just to add, Chris, and I don't want to say the obvious here, but we obviously insulated from such softening, right because we have tremendous contract coverage. I just want to mention. Yes.
Christian Wetherbee: Got it. Okay, that's helpful. And then you guys have done a really good job in terms of vessel OpEx. Can you give us a sense of whether or not you're seeing inflationary pressures on the vessel OpEx as you move forward? Any sense of how we should be thinking about that for the next couple of quarters?
John Coustas: Well, I'm going to hand to Evangelos here.
Evangelos Chatzis: Well, I mean we obviously, there are such inflationary pressures. I believe that. I mean, if you look at our order book, not just for our company, but both for the sector, it's been more or less a flatline for the past many years. I don't expect that this will continue to be the case over the next few quarters, we will see increases, but I don't consider them to be spectacular or like maybe 2%, 3%. So obviously, it will not be flat as before, but it will not be something that will materially affect earnings.
Christian Wetherbee: Okay, that's helpful. And then I guess just last question, following up on the last one from Omar around the lines of sort of new investments, so you have six vessels coming in 2024, do you think that that's sort of it for the time being, would you be willing to put anything into the order book beyond 2024, just kind of curious what your appetite is for new building vessels?
John Coustas: With these new building vessels, we wanted of course to meet the process, also reviewing the fleet. It's very important also to show to our customers that we are minded about vessel quality going forward and also to experiment on the new vessels. As you know, new ships are ordered to be ready, so at some stage, we will do kind of the conversion. For the time being, really there is no clarity as to what's going to happen with alternative fuels. And also as everything also is a factor of cost, we had seen for example, that all the LNG vessels today, LNG powered vessels today due to the price in LNG, they are running on fuel oil. So, with this kind of energy crisis that we're going to have for a considerable amount of time. All the decarbonization let's say will need to be revisited. What is extremely important is that with the upcoming CII regulations, we are going to see a lot of new efforts in order to use emissions by optimizing the vessels as much as we can, but also which is very important. Our charterers we need to adjust the speeds of the ships in order to reduce the carbon footprint.
Christian Wetherbee: Okay, that's helpful. Thanks very much for the time. Appreciate it, guys.
John Coustas: Okay. Thank you, Chris.
Operator: The next question comes from Climent Molins from Value Investor's. Please go ahead.
Climent Molins: Good morning. Thank you for taking my questions. Cash balances have increased noticeably on a quarter-over-quarter basis in line with very strong operating performance. Despite the strong cash generation, few repurchases have been conducted on top of the $25 million buyback you announced alongside quarter two earnings. Was there any reason that made you curtail buybacks during the second half of the quarter? And looking ahead, you provided some high level commentary on capital allocation. And I was wondering if you could provide some more insight on how do you plan balancing potential vessel acquisitions with share repurchases and dividends?
John Coustas: Well, as I said share repurchases need to be timed accordingly. And for the time being we are working towards let's say, maximizing the operational performance and operational income of the company. And the buybacks will be at a time that we believe is opportune. It's not, we don't have a specific let's say problem and say, we're going to buy so many shares every month, the market is fluctuating quite a lot. And we want really to optimize the share purchase for the benefit of our long-term shareholders.
Climent Molins: All right, that's helpful. And looking at the new builds, you had previously mentioned potentially taking delivery of those on an unlevered basis. Is that still the plan? And secondly, after recent weakness in rates, how should we think about associated charters? Are longer-term contracts still available? Or would we be looking at shorter-term say, two, three years?
John Coustas: If you're talking about, let's say the existing fleet for the time being, the contract for the smaller vessels are up to six months. There is slightly larger ones, you could do maybe a year or so maybe even a bit more. As far as the buildings are concerned, yes, I mean whatever we are discussing. The interest from various parties is a push from five years plus.
Climent Molins: All right, that's helpful. That's all from me. Thanks for taking my questions and congratulations for the quarter.
John Coustas: Thank you, Steve.
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: Well, thank you everyone, for your interest in our story. We will work and continue to deliver the best possible results for our shareholders. Thank you.
Operator: Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.
