Danaos Corp (DAC) 2021 Q4 法說會逐字稿

Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the 3 months ended December 31, 2021. 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. Please go ahead.

Thank you, operator, and good morning to 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 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, now let me turn the call over to Dr. Coustas, who will provide a broad overview of the quarter.

Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the fourth quarter of 2021. The amount of media and analyst coverage about the positive dynamics in the container market speak for themselves and echo our market view. We foresaw the ongoing disruption in the supply trades and tightening of the container market through 2022, many quarters ago.

Our outlook directed our growth and chartering strategy, both of which have maximized our returns. On the other hand, our investment in Zim shares has surpassed all reasonable expectations and led to Danaos posting in excess of USD 1 billion in reported net income for 2021. As a result of these factors, our share price quadrupled in 2021, bringing the company's market capitalization close to USD 2 billion.

What is equally important is that our chartering policy will generate even better cash flows in 2022. And overall, our USD 2.8 billion contracted revenue with average charter duration of 4 years, provides certainty about the future. As a result of our significant earnings visibility, we have decided to increase our quarterly dividend by 50% to $0.75 per share. The company's significant cash flow support increased dividend and also provide us flexibility to pursue accretive growth opportunities, continue to reduce leverage and also begin to consider a share buyback.

There have also been significant environmental initiatives that advanced in 2021. And already, the path to the future decarbonization of the industry is becoming clearer. There is growing consensus that significant investments need to be made to reduce the carbon footprint of existing vessels. These investments will accompany reductions in speed, which will further support the ongoing market strength.

Green fuels have a long way of becoming widely available, which means that the industry will have to adapt to continue using fossil fuels. Further, the EU commission rightly proposed in the latest EU Fit for 55 climate initiatives to place the burden of absorbing carbon cost in vessel operators who are responsible for fuel procurement and speed determination rather than the vessel owners.

To conclude, 2021 was phenomenal for the entire container industry and even more so for Danaos. The element of counterparty risk that dominated the previous decade has completely disappeared. Long-term charters are also becoming the norm. Fortunately, liner companies are targeting their expansion in the inland/air transportation and logistics front to vertically integrate their offering. In conjunction with uncertainty about future vessel propulsion standards, this has put a lid on new building ordering, which I hope can be maintained.

Also, the German KG market, which was responsible for 70% of the ordering during the last shipbuilding boom does not exist today. The future is bright, and Danaos is well positioned to benefit from it and continue to reward its shareholders. With that, I'll hand over the call back to Evangelos, who will take you through the financials for the quarter. Evangelos.

Thank you, John, and good morning again to everyone, and thank you for joining us this morning. I will briefly review the results for the quarter and then I'll open the call to Q&A.

For the full year 2021, we are reporting a record-breaking net income in excess of $1 billion or $51.15 per share while adjusted net income more than doubled in 2021 versus 2020, and is being reported at $362.3 million for this year or $17.60 per share versus $170.9 million or $7.18 per share in 2020. For the fourth quarter of 2021, we are reporting adjusted EPS of $6.10 per share, which corresponds to adjusted net income of $125.8 million compared to adjusted EPS of $2.29 per share or $47.8 million for the fourth quarter of 2020. The increase of $78 million in adjusted net income between the 2 quarters is the result of a $95.4 million increase in operating revenues, combined with a $16.2 million dividend, which was collected from Zim, these being partially offset by higher total operating expenses of $23.9 million, mainly due to the increase in the average size of our fleet by 13 vessels between the 2 quarters.

We also had an $8.1 million increase in net finance expenses and a $1.6 million decrease in income from Gemini that was fully consolidated in the third quarter of 2021, while it was an equity investment in the fourth quarter of 2020.

Now more specifically, the $95.4 million increase in operating revenues, which corresponds to $215 million operating revenues in the current quarter compared to $119.6 million for the fourth quarter of 2020 is mainly attributed to a $38.3 million increase as a result of higher charter rates and $23.6 million incremental revenues as a result of the vessel additions to our fleet that were mentioned earlier.

Revenues also increased by a further $15.2 million mainly due to straight-line revenue recognition accounting and by -- further increase by another $18.3 million being the amortization of assumed charter liabilities of recent vessel acquisitions.

Vessel operating expenses increased by $8.5 million to $37.2 million in the current quarter from $28.7 million in the fourth quarter of 2020, mainly as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating cost increased to $5,861 per day for Q4 of 2021 versus $5,571 per day for Q4 of 2020, mainly due to COVID-19-related increase in crew remuneration and still remains as one of the most competitive daily OpEx figures in the industry.

G&A expenses increased by $12.1 million to $18.5 million in the current quarter compared to $6.4 million in the fourth quarter of 2020, mainly due to noncash, stock-based compensation of $8.6 million recorded this quarter together with increased management fees for the additional 13 vessels that have joined our fleet.

Interest expense, excluding finance cost amortization and accruals increased by $7 million to $14.1 million in the current quarter compared to $7.1 million in the fourth quarter of 2020, and the increase in interest expense is a combined result of a $1 million increase in interest expense because of an increase in debt service cost by approximately 50 basis points, partially offset by a decrease in our average indebtedness by approximately $85 million between the 2 periods and reduced positive recognition through our income statement of accumulated accrued interest of $6 million that had been accrued in 2018 in relation to 2 of our credit facilities that had at that point being refinanced. And they have since been refinanced in 2021. And as a result of the refinancing, the recognition of such accumulated interest has been decreased.

Adjusted EBITDA increased by 91.8% or $76.2 million to $159.2 million in the current quarter from $83 million in the fourth quarter of 2020 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation that has already been posted on our website.

A few highlights that on the operating side. Over the past few months, we have forward fixed several vessels at higher -- considerably higher than current charter rates. Our investor presentation has analytical disclosure on contracted charter book and the step-ups in the charter rate that I mentioned.

As a result of these improved fixtures, our contracted revenue backlog now stands at $2.8 billion, with a 4-year average charter duration while contract coverage is at 95% for 2022, 77% for 2023, while even 2024 is already at 57%. 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 Instructions) Our first question today comes from Randy Giveans with Jefferies.

Congrats on, yes, seriously, a great year. Obviously, you wisely use the capital, some timely acquisitions. You clearly have a very strong balance sheet, cash balance, substantial cash flow visibility now. So with all that, how is the new dividend amount decided on? I know it's a 50% increase, which is meaningful. And then going forward, how do you plan on balancing further dividend increases with share buybacks, especially at these levels?

Well, it's one thing at a time. I mean, first of all, we were committed for a dividend increase. We believe that the 50% dividend increase is pretty significant. And that is giving us really the ability to be able to further grow our dividend. I mean, this is not a kind of a special one-off dividend. We want to be pretty proactive in setting a dividend that can not only be maintained, but also is able to grow through time.

Because, I mean, as ourselves, we are long-term investors in the company, we want the same type of mindset for our investors to know that our strategy is really on maintaining and increasing rather than just popping a number which in a couple of years down the road might need to be readjusted. We believe that for the type of business model that we have and the strategy of the company, this is the right way ahead.

Now in terms of the share repurchases, as you can see, we closed the year with around, let's say, $130 million in cash. So it's not that we are sitting in to $0.5 billion. Of course, this amount with all what is going on is growing rapidly within 2022. And that is why we would like really to announce the share buyback at the moment that we have the money in the bank.

Maybe some people, when they look on the amount of cash and marketable securities, which is, I don't know, in excess of $0.5 billion, it's not that we are sitting on $0.5 billion of cash. I mean, the vast majority of that is, let's say, Zim's shares. And to be honest, we believe that there really substantial upside in our Zim shareholding. So there is no point in kind of swapping the Zim's shareholding with Danaos shares at this moment.

Got it. No, that makes sense. That's fair. And then looking at your fleet, you sold those 2 vessels recently for a very nice profit. On your vessels coming available in, let's call it, early 2023, how will you balance additional vessel sales with maybe forward fixing for new long-term contracts?

It's -- we are here to combine, let's say, asset play with operating profit. So if we have an opportunity mainly to sell older vessels, we might look at it. But in our mindset, it's always that we need to also to grow the company with newer vessels, and we are exploring opportunities like, for example, the last one the 6 vessels that we bought last year and which have proved to be a tremendous success because practically rechartering only of the 2 of the vessels is covering close to half, let's say, the amount that we have spent.

Got it. Okay. No, that's fair. Well, that's it for me. Really been great to see the vast improvement in the company and Danaos shares over the last 18 months. So keep up the great work.

Our next question comes from Omar Nokta with Clarksons.

John, Evangelos. Yes, congrats on another strong quarter and clearly more to come. I do have a couple of questions and maybe just touching on maybe Randy's last point. And Evangelos, you discussed it a little bit in your opening remarks. I wanted to ask about the 5 large ships that you have -- or the largest ships you have, the 13,000 TEUs. Those have been on long-term contracts with HMM going back 10 years since their delivery.

And a key dynamic, I guess, for the market over the past year really has been the forward fixing. It feels like we're forward fixing farther and farther ahead of time or well ahead of deployment. With those 5 vessels starting to come open here in 2024, I know it's still, call it, 2 years away, but it's starting to approach. What are you thinking in terms of redeploying those vessels? Anything you can give in terms of the type of duration we can expect for those ships? .

Well, I think that for charterers, once they have the vessels until that time and also options which they may exercise for another couple of years -- 3 years, sorry, for another 3 years, which are, of course, at very profitable levels for the company. I don't really expect to have anything from them. I mean, if I was a charterer, fine, I would -- they can declare that option about 6 months prior, let's say, the expiry date.

So by mid-2023, we will know what are their intention, but it's very, very early. And also, even the ships that we are fixing forward now are maximum until, let's say, the first half -- opening in first half of 2023. Some of the larger ones, but not really the 2024 date.

Okay. So just -- I didn't -- okay, so there are some extension options that could be 2 to 3 years for those -- the 5 biggest ones?

Yes.

Okay. All right. And then maybe then, I wanted to ask about the overall -- the way the market has been developing here, it seems like definitely last year, there was a lot of focus on long-term contracts, primarily on the biggest ships or at least the Panamax and above, while the feeders were kind of more short term in nature, how are you seeing that market here over the past -- how is that market developed for feeder over the past 4 to 6 weeks compared to say, maybe, call it, in October?

I know you only have 11 ships in that segment. It's a small piece of your business. But generally, could you give us some sense of how -- what's the liner appetite now for the feeder market as compared to, say, a few months ago? .

I think that there is a pretty strong interest in that kind of feeder market. And exactly because I mean these ships in general are shorter -- have shorter duration of employment usually. There is more kind of turnover in the fixing of these vessels. I mean the large vessels, they are chartered for years, et cetera. I mean these vessels, we used -- they used to be at, let's say, 6 months, maximum 12 months charters. I mean, now there are some owners who are just holding out to get a huge, let's say, 3 months charter or whatever, $80,000, $100,000 a day. But definitely, the appetite is still there and out there to say it's increasing.

Okay. Would you say there's liquidity to fix the feeder ships out 3 years or 5 years at a time?

Yes, definitely, 3 years today from what I've seen is really kind of the minimum. And depending on, let's say, you want kind of a lower rate, you can definitely take feeder ship up to 5.

Got it. And one final one for me. I just wanted some color on the 2 vessel sales that you announced a few weeks ago for $130 million. And as Randy highlighted, it will be a big profit. One thing I did notice is that the delivery isn't until November of this year. And so I just wanted to ask about that. Is that -- maybe one, what drove you to sell those ships. I understand that it's a 20 years old. And then are they being sold to a liner? Is that kind of what's behind the sale?

As we said, there are confidentiality agreements, and we cannot disclose the actual buyer.

Our next question will come from Chris Wetherbee with Citigroup.

I guess maybe first starting kind of big picture on the industry, curious your take on the state of congestion in the container market. And I guess, any thoughts around how you would see that playing out? So obviously, asking you to kind of take a look into the crystal ball here a little bit and give us a sense of maybe how you see some of the congestion dynamics playing out over the rest of this year? Does it spill into 2023? What's your view?

Well, to be honest, we have seen a kind of a steady situation in the ports. There is no worsening, but it's not getting better either, which stabilize, let's say, to a certain situation, waiting time.

Especially in Asia, with all the COVID restrictions, which are much more stringent, especially in China compared to the rest of the world. Productivity overall is lower. And we need really -- if we don't see any, let's say, normalization in the opening of all these countries, I think that disruption will continue. And I think that, I mean, 2022 on one hand, it may see, let's say, some kind of better utilization of the vessels. On the other hand, what we see in the whole world is that in order for companies to be able to withstand the supply chain disruptions, they have changed their policy into increasing their inventory substantially because they cannot just rely on just in time. And this creates an additional kind of pressure.

There are no more ships coming. I mean in 2022, we will have less ships that were delivered in 2021. It's -- let's say, the bottom of delivery. Of course, deliveries will start ramping up from 2023. But then from 2023, we have to see the effect of the environmental regulations and the effect they're going to have on the speed.

So I'm pretty sure that 2022 is going to be a kind of a strong year for the liner industry. And in 2023, we believe it's -- it will continue to be a good year for the liner industry overall because the liner companies themselves will be even healthier through the ability to sign long-term contracts at least double the historical rates.

Okay. Okay. That's very helpful. I appreciate that. And then I guess maybe just a specific follow-up, you mentioned the stock-based comp, and we're looking at G&A for the quarter, fairly elevated. I guess when we think about 2022, can you give us a sense of maybe what the normalized level will be there? Obviously, a larger fleet that you have, but I want to get a sense maybe of how you think about G&A for 2022.

Yes. It's going to be about a region 6 million a quarter. 6 million to 6.5 million a quarter. That's the run rate.

(Operator Instructions) Our next question will come from J. Mintzmyer with Value Investor's Edge.

Congrats on an excellent quarter. I wanted to start off by, first of all, congratulating you on the 2 vessel sales, very, very firm pricing and a forward delivery, just pretty impressive. I was curious if there's any other shifts in your fleet that would be -- that you would be interested in selling, maybe some other ships that are older? You have 2 other 6,000 TEU ships that are 20 years old, one comes up, off charter about a year. You got a couple of feeders that are 24 years old. Are any of those ships up for sale as well?

As I said, if there are any interesting opportunities for asset play, we will, of course, look at them. As far as let's say, these other 6,500, I think these ships, they are on charter longer term, and they have also some options, which take them further forward. So if these ships were, let's say, for actual delivery in 2022, they would be much more interesting as S&P candidates. The same stands for our smaller vessels, which all of them, they are chartered until -- for 3 years until almost 2025. So we have secured excellent revenue from those and...

Yes, it certainly makes sense. Just a very, very impressive ship sales. So just curious if there's any more candidates on the block. I wanted to circle back a little bit. I know, Randy asked about the share repurchase program. You had some clear language in your report saying that you're at the point where you would consider it. I was curious what the catalyst would be? Is there an upcoming Board meeting you're waiting for? Are you waiting for that Zim dividend? What would be the catalyst to push it forward into a share repurchase program?

Well, the catalyst it has to be -- we'll have -- as I said, we'll have to build up, let's say, the cash. It's not that -- as I said, it's not that we are sitting into $0.5 billion of liquidity, and we are just doing nothing about it.

Of course, cash will start, let's say, building up in 2022. And we need -- actually the amount of cash which is coming. One part of this, of course, we're giving it to dividends. We will need, let's say, in one part, we're using it for deleveraging. And of course, there is another part that we need to use for growth because everything is fine, but the assets are getting older. And we need to be very mindful of the long-term, let's say, strategy of the company. We want to be there 10 years down the road, not just, let's say, 5 or 6 that we will just kind of squeeze everything out of our fleet and then we will be out with an overaged fleet.

So all this is a balancing exercise. And for anyone who has let's say, any doubt about what we're doing. First of all, look at our track record of what we've done in the last, let's say, 2, 3 years. And additionally, the fact that we are, by far, the largest shareholders. And what we're doing, really, whatever decision we take, it primarily hurts or benefits ourselves.

So that's the best, really, assurance that we are on the same boat as long-term shareholders. I mean short-term shareholders, of course, is a different story because that -- if someone wants to buy the stock now, pop it and make money 3 months down the road and go out. Of course, this is also part of the game. But as far as we are concerned, we want really consistent long-term returns for our long-term shareholders.

Yes. That's certainly a logical response. I think the only other point on the repurchase is that if you're looking at an extreme discount to NAV or a discount to foreign cash flows, right? It might be more accretive to repurchase shares than to acquire new growth. But anyway, last question for you. Last time we talked with your CFO a few weeks ago and we had brought up the topic of a share split.

Now obviously, the share split doesn't change the fundamentals of the company, but it could improve the trading liquidity, it could improve the bid-ask spread, it could make it more attractive. There's a lot of retail investors that look at share prices before they buy things. Have you considered a share split something like a 4:1 or 5:1 share split? And if so, when could that happen?

J, yes, you're definitely right. It's something that we are considering, but we would like to do that in conjunction with the announcement of the share buyback. I don't know if it makes sense just to do the share split without announcing the share buyback, but definitely, these things are going to go hand in hand.

Ladies and gentlemen, it appears we have no further questions at this time. I would like to turn the call back over to Dr. Coustas for any closing remarks.

Well, I would like to thank everyone for listening to this call. We believe that we are doing the right thing for our shareholders and looking forward to present you with even better results for 2022. Thank you. Goodbye to you all.

Thank you all for joining this conference call and for your continued interest in our story. We look forward to hosting you on our next earnings call. You may now disconnect. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.