Danaos Corp (DAC) 2008 Q3 法說會逐字稿

Welcome to the Danaos Corporation conference call on the third quarter and nine months 2008 financial results. We have with us Dr. John Coustas, President and Chief Executive Officer and Mr. Dimitri Andritsoyiannis, Vice President and Chief Financial Officer of the Company. At this time all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today Monday, November 3, 2008.

We now pass the floor to one of your speakers today, Mr. Dimitri Andritsoyiannis. Please go ahead, sir.

Good morning everyone and thank you for joining us today. Before we begin, please allow me to remind you that this presentation contains certain forward-looking statements within the meaning of the Safe Harbor Provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.

Forward-looking statements reflect our current views with respect to future events and financial performance, may include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. As a result, you are cautioned not to rely on any forward-looking statements.

Although these statements are based upon assumptions we believe reasonable based on available information, they are subject to risks and uncertainties detailed from time to time in our periodic reports. We expressly disclaim any obligation to update or revise any of these forward-looking statements whether because of future events, new information and change in our views or expectations or otherwise. We make no prediction on statements about the performance of our common shares.

We will now turn the call over to John.

Good morning everyone and thank you for joining today's call to discuss results for third quarter and nine months for 2008. The nine months and third-quarter results were excellent. We had net earnings of $28 million or $0.51 per share for the quarter and $93.2 million or $1.71 a share for the first nine months of the year, up on both accounts from 2007 results.

Our combined fleet today stands at 70 large cellular containerships, all of which are chartered for long periods at fixed rates. Out of these 70 vessels, we expect 32 to be gradually delivered for operations until the third quarter of 2011.

During this particularly challenging third quarter, we were able to successfully continue to expand our credit facility and implement our growth strategy by adding new vessels to our fleet. We also managed to extend the chartering arrangement while we applied further cost control strategies to boost quality operations and performance of our business.

Since the beginning of the year, we have arranged $1.1 billion new credit facilities. Out of those, $560 million were negotiated in the first quarter and since the beginning of the third quarter, we have arranged additional credit lines of another impressive $550 million. We believe that this fact underscores the strength of Danaos' credit and the faith of our lenders and our business model and our hands-on management. We will continue to arrange further credit facilities in line with our expansion program and overall strategy which has not changed following the unraveling in the financial sector and the events that transpired in early fall.

On the operation side, we added two 4250 TEU new building containerships which were immediately entered into 12-year charters with a ZIM Lines. In September, we also extended the employment of the MAERSK Deva at an increased daily charter rate for another two years until March 2011.

Last particularly important, I would like to refer to our successful cost management. Slow steaming and rapidly falling average age of our fleet combined with our efforts to further control costs related to cruise and maintenance have lead to notable results. Our daily operating cost per vessel for the first nine months of 2008 increased by just 2.8% compared to that for the same period in 2007.

We believe that our business model which is based on long-term fixed rate chartering to some of the largest liner companies in the world gives protection to our top line against volatility and weakness in the charter markets. Furthermore, our continued and recently demonstrated ability to raise debt during a period where credit has become very scarce underlines both our solid strategy and the continued confidence in Danaos by our lending banks.

Further, we would like to inform shareholders that we have not had any indication by any of our clients on renegotiating existing contracts. The container ship industry structure and the counterparty contractual chartering arrangements have always been distinctively better than ones in other shipping sectors. Unilateral resetting of key and other parts of rechartering contracts in periods of crisis has not happened in our industry. Danaos has grown in both periods of increased vessel demand and periods of contraction. We are currently focused on our existing expansion program which includes 32 more container ships for which we have already arranged long-term chartering with our usual large customers.

However, as we continue to have a strong balance sheet and strong cash flows, we will closely monitor the sale and purchase market to consider opportunities for further growth as it may arise.

Finally on October 24, our Board of Directors declared a dividend of $0.465 per share for the third quarter which will be paid on November 19. This dividend reflects the continuing growth of operations, our confidence in the ability of the business model, and our dedication to support shareholder value through enhanced distributable cash flows.

And now we will hand over back to Dimitri who will take you through the financials for the quarter. Dimitri?

Thank you, John. And again, thanks to everyone who is with us this morning. I will briefly review our financial performance for the third quarter of 2008 to give the chance to the participants of this call to make any questions.

This quarter was one more period of growth for Danaos and this has been reflected in our financial performance. During the third quarter, Danaos had an average of 38.1 containerships as opposed to 31.1 containerships for the same period of 2007. We acquired two vessels, the Zim Rio Grande on July 4, 2008 and the Zim Sao Paolo on September 22, 2008, while our fleet utilization reached again 98.8%. Our net income was $28 million or $0.51 per share for the quarter compared to $25.5 million or $0.47 per share for the same quarter of last year. This represents an increase of almost 10%. Distributable cash flow was $40.5 million for the quarter.

Our declared dividend of $0.465 per share or $25.4 million for the quarter represents 62.7% of our distributable cash flow. For the nine months of our net income was $93.2 million or $1.71 per share compared to $78.4 million or $1.44 per share for the same period last year. This represents an increase of 18.9%. Earnings-per-share excluding the gain of sale of vessels of $14.9 million were $1.44 for the nine months ended September 30, 2008.

Distributable cash flow reached $126.9 million. Our cumulative dividend paid for the first half of the year and declared for this quarter in aggregate represent 60% of our distributable cash flow for this nine months of this year.

Operating revenue increased 22% to $76.4 million in the quarter ended September 30, 2008 from $62.6 million in the quarter ended September 30, 2007. This was the result of the net addition to our fleet of six new vessels on a year-on-year basis and a net additional three more vessels which joined our fleet during the third quarter of last year. For the nine months operating revenue increased by 32.7 million to $220.2 million from $187.5 million in the first nine months last year. Again, attributed mainly to the overall net additions we made to our fleet.

Our daily operating expenses per vessel compared to those of the second quarter of 2008 decreased actually by 2.9% which was mainly attributed to the decrease of the average age of our fleet as a result of the addition of two new building vessels during the third quarter of 2008, lower lubricant expenses attributed to slow steaming, and finally, lower insurance costs.

In absolute numbers, vessel operating expenses reached $22.8 million in this quarter from $15.5 million in the same quarter a year ago. The increase was mainly due to the increase in the average number of our vessels in our fleet. On a nine-month basis, our daily operating expenses per vessel between 2007 and 2008 increased by only 2.8%. The increase was mainly due to higher crew wages partially offset by lower lubricant expenses attributed to slow steaming and again, lower insurance costs.

In absolute numbers, vessel operating expenses increased by $18.5 million to $65.1 million in the nine months ended September 30, 2008 from $46.6 million in the same period of 2007. The increase was mainly due to the increase in the average number of our vessels in our fleet.

Interest expense reached $10 million this quarter from $4.8 million in the same quarter last year. The change in interest expense was due to the increase in our average debt by $1.1 billion to $1.8 billion from $748.8 million in the same quarter a year ago. Partially, however, offset by the financing of our new building program which resulted in interest capitalization of $12.6 million for the quarter as opposed to $6.1 million of capitalized interest in the same quarter last year.

For the nine months, interest expense increased by $10.6 million to $25.1 million from $14.5 million in the first nine months of 2007. The change in interest expense was due to the increase in our average debt again by about $1 billion to $1.6 billion from $693.9 million in the same period of 2007 partially offset by the financing of again, our expense in new building program ground which resulted in capitalized interest of $35.4 million for the nine months ended September 2008 as opposed to $13.1 million of capitalized interest for the nine months ended September 30, 2007.

EBITDA increased by 26.6% to $51 million this quarter from $40.3 million in the same quarter of last year. EBITDA for the first nine months of 2008 increased by $34.1 million or about 30% to $156.9 million from $122.8 million in the same period a year ago.

And with these actual facts, I would like to open the floor for any questions.

(Operator Instructions) Urs Dur, Lazard Capital Markets.

Good afternoon, gentlemen. Thank you for the presentation. Dimitri, maybe if you could take us through your liquidity position going forward for your new building order book one more time. I think you mentioned it but to bring us through that again and what needs you have going forward and possibility of equity issuance over the next couple of years?

Yes, quickly as we have said many times, we are facing an order book of 32 vessels which are going to be gradually delivered to us as from today, if you will, up to August 2011. This is a capital expenditure schedule, if you will, that amounts to about $2.3 billion. Out of this $2.3 billion, we have now been able to cover almost half with about $1.2 billion, if you will, remaining as an unfunded part which basically corresponds to vessels coming on board in the years 2011 and 2010 in some part.

In other words, including the new facility that we have recently entered into which is for an additional $300 million including the facility of the $252 million that we have already have in place, and as well the liquidity available from all the rest of the facilities that we have arranged, we are now able to tell you that we will be financing our new building program without the need of resorting to more debt up to the beginning of 2010. So in other words, we do have now 1.5 about year to arrange for the remainder part which as I said is about $1.2 billion.

As far as equity is concerned, we maintain our usual position. We do not expect or think that we will be in need of new equity considering that we have already financed our obligation under our credit facilities of 20%, if you will, equity down payment for the total schedule of our capital expenditure going forward. Therefore, under this situation, we do not believe that we will be obliged or be in need to raise more equity. But of course, it is an issue that has -- must be constantly revised as we see the situation changing the equity capital markets.

Sure, sure. Excellent, thank you. More macro question here, just to hear your views on the containership order book and I know your contracts are in place at this point in time and they are being paid and it is not a concern in this quarter. But it is a very large order book and we are going into what does by many people's accounts looks like a substantial global recession. What is your view of the order book? How that could possibly be financed? Whether it will shrink and how that could possibly impact your position with your contracts going forward? I think investors are very interested in that now.

What will be really in danger will be speculative orders because today (technical difficulty) that does not have a charter commitment, will not be able to be financed efficiently. We believe that orders, speculative orders especially in let's say smaller kind of vessels are the ones that are most in danger. Of course we do not know if there is -- if let's say the liner companies are going to discuss with shipyards any kind of rescheduling. But as far as for example we are concerned and companies like us, we have a specific contract to deliver a ship into charter. So we do not have let's say any reason to ask for what ever let's say change in its terms unless of course we have a charter that requests us jointly with to do it with the shipyard. And until now, we have not had of course any kind of such approaches.

Okay. Thank you. And then finally and I'm getting a lot of questions from investors on this as well and I think it's important to highlight. In your loan agreements, in your covenants, how are you impacted by loan-to-value or VMCs going forward if at all? And what other market-related measures do the banks have in your loan covenants that may or could or could not possibly restrict dividends going forward? What kind of restrictions are possible going forward, if any?

We have in our agreements loan-to-value covenants. However, the actual let's say loan-to-value covenants are not on just spot on free charter values but they take into consideration practically the income stream of the ships and that is why the fluctuations of these values are considerably smaller than let's say the fluctuation of the free market values that you may get from certain broker. So of course we do not know what kind of fluctuation there is going to be in the marketplace but definitely its effect on our covenants is considerably smaller due to this kind of effect and we have specifically designed that in order to avoid problems with fluctuating charter free values.

Fair enough. Thank you very much for your time.

Omar Nokta, Dahlman Rose.

Thank you. Good afternoon, guys. Just off of this latest credit facility with Fortis and Lloyds TSB, just wondering if you can give us some details on how that facility looks compared to what you were able to get I think it was in August with the same group of banks and how that facility really compares to your other loans outstanding?

Omar, first of all, our latest credit facility is not with Fortis. Fortis is the one obviously is one of the latest but not the last. We have actually -- and let me just put it very clearly, we have seen that certain of our competitors do not disclose pricing anymore or in fact have never done so. And under the situation as it is in the credit markets where actually funding has become a critical aspect of our competitive edge, we have also decided not to disclose specifics of the transaction. A, because we don't want to compromise our own competitive position and B, if you will, because also that compromises the position of certain of our banks who we have understood in certain cases actually very visibly have gone out of their way to support Danaos exactly because of our steady income and the overall structure of the company.

So in this, if you will, I will just answer to you quite broadly. These facilities are quite similar if not exactly the same with other facilities that we have so far put together in terms of [tenure] and in terms of way of amortization and they are priced at what we think very competitive prices, spreads over LIBOR, if you will, considering the market today. On top of which, I must also stress the fact that we have been one of the very few if not the only company that has been able to arrange for a loan during this period.

Okay. I note usually you guys have been very good at disclosing the different banks that you deal with and then -- but how much is outstanding commitments per quarter or semi-annually plus like I think the LIBOR spread -- I'm not really sure. But going forward, do you expect to still in your filing show a table that has that?

We expect to show everything except from pricing which we believe at this point in time is critical to us and even more so to the banks that have come forth to support us with new facilities.

Okay, just to double check, I think you said this -- I just want to confirm. Basically right now all of your -- you have all the funding in place for your 2009 commitments.

That is correct.

Okay. And you are still open 2010, 2011 and that should be around the $1.1 billion, $1.2 billion?

$1.2 billion and we have actually covered a certain amount of deliveries or number of deliveries, if you will, in 2010.

Okay. And then just switching gears a little bit on the operations side, obviously the containership market has lost a lot of steam and for a while there your older ships were seeing some attractive rates and still longer term contracts. How do you see going forward your let's say your '70s built and maybe potentially your '80s built ships, what do you think the demand will be for those going forward?

Omar, the '70s built ships will definitely head for demolition as we have already discussed mainly because of the fuel costs. And despite the fact that fuel costs are down considerably let's say from last year, we are still back let's say two 2007 levels. It's not we are back to the $20 a barrel. So practically the actual oil, the price of the fuel is today the most critical element in a charter's let's say expense build. I mean the amount of the pay for fuel is always considerably higher than what they pay for charter.

That is why from 1984, we have had a change in the design of the engines of the ships after the oil crisis of 1980 and practically the efficiency of the engines which was achieved in 1984 has remained more or less stable until today. So for ships let's say built 1984 and further, we don't really see any significant difference in terms of consumption compared to the ships let's say built in 2000.

That is why we definitely there is considerable differential in terms of charter rates for older ships, pre-1984, mainly due to let's say the consumption. I mean just typically to tell you a 2.5 thousand TEU ship built in 1980 will consume maybe 19 knots around 85 tons. The 1984, 1985 built ship, the equivalent one, is going only to consume maybe 60 tons on that kind of speed, which makes 20, 25 tons, it is around today $12,000, $15,000 a day.

That is a big difference.

Yes, that is why on a ship that typically has a charter rate let's say of 15,000 to 20,000 as you understand, if you deduct 15,000, you practically have to take the ship back at 5000 to start to make sense. That is why we believe that there is a kind of specific cutoff line which relates not to the age of the ship but to its fuel consumption.

Just sticking with that and on the fuel consumption side, with oil coming off as it has, are using any differences or changes in how liner operators are choosing to speed their vessels? Slow steaming was definitely the big thing and it still is I would presume. But with falling oil prices, does that diminish it a little bit or is it just that the revenues on the -- are so light that they will just continue to slow steam anyway?

No, no. All the vessels that had started slow steaming are continuing along the same line. We have not seen any change of attitude from liner companies.

Thanks a lot for the help.

Ken Hoexter, Merrill Lynch.

Good morning. John, can you just talk a little bit about what your thoughts are on the dividends as far as -- in this environment, do you move to just keep it at these levels going forward? Conceptually obviously I know you have just declared this quarter's dividend but do you look to preserve some equity capital to counterbalance what is going on in the markets right now?

Ken, the dividend declaration is not my job it is declared by the Board. We'll have to wait until really the next dividend declaration date in order to see what the Board decision is going to be. It's not something I can preempt. Of course all your thoughts are of course valid but we don't have let's say an issue on being able to fund the dividend. So that is definitely not a problem.

Your issues of course that you raised let's say to try to preserve equity is always something that the Board will consider. But there is no decision. It's too early to be able really to tell. We are in a turbulent situation now which will definitely settle down within the next couple of months. And everyone will be able to make a much more reasoned decision.

I just want to double check that. So you are talking about this $1.2 billion that you need to still get capital for that you haven't funded with debt. I mean you guys do make a recommendation to the Board and you are an 80% owner. I am just wondering what your thought process would be in this environment? Would you suggest then keeping -- I mean, you say it's too early, but in this environment would you think that you would likely keep the dividend at these levels as opposed to increasing or would you be more apt to increase as you get more vessel deliveries in the back half of the year?

So far, the last one we had suggested to the Board really to proceed with the dividend as we have done. As I said, things are changing fast and it's very difficult for me to give you really such a changing kind of world to give you an answer to preempt you that we will definitely pay the next few year's dividends unconditionally. That is why dividend declaration is a thing happening every quarter.

Okay, let me change the subject then. ZIM is one of your customers, is that correct?

Correct.

Is it true -- I guess maybe I heard it in some press reports they have been in some financial difficulties. Have you heard anything to that extent and have they approached you about their charters at all in any way or have any charterers approached you about renegotiating lately?

No, not at all. Neither ZIM to whom we have delivered already quite a few vessels, neither any one of ours. And don't forget that ZIM, as you know, is a company which is owned by one of the wealthiest companies, shipping companies in the world and also has a very significant participation from the government. So it's a company that because it really ensures Israel's trade is definitely a company that will be fully supported to be able to go forward.

Fair point. And then coming back to the asset value test on the covenants, you kind of highlighted -- I think the question was actually in relation to dividends. My question would just be are there any covenants that you are pushing here because of the asset value tests or could test soon because of declining asset values in the market that could restrict not your ability to pay dividends but to get access to more capital?

There are -- yes, there are restrictions in our facilities that if -- well, general that if we breach our whatever covenant we cannot pay dividends. That is a general kind of restriction. No bank would allow you to pay dividends if you are in breach.

Have asset values gotten anywhere close to that point yet or do you still or can you --?

No. We are very comfortable. I mean the last as you see -- in June we had a 50% roughly let's say more or less -- 48% and as I said, we do not get a one-on-one lets a change in terms of market values mainly because we use as values the cash flow stream and not just the charter free market value. So that makes the fluctuations considerably smaller.

Fair point. Last question is just a technical one for Dimitri. The restricted cash increased up to about $323 million from about $270 million in the second quarter. I forget, was there a reason why that scale is higher or is that something to do with vessel deposits or anything?

Yes, it does actually. It has to do with certain management that we did concerning our existing facilities. We decided to basically draw an amount of cash and then basically put it back as collateral if you will. And that has to do with a rearrangement that we did within our existing facilities whereby we earmarked this amount of money which is about $300 million for financing of certain vessels in the future and we freed up certain other vessels to be used as collateral with new facilities that we are under negotiation as we speak. So that was basically an internal management thing. It doesn't really mean anything as such.

Great, thanks for the time, guys.

Gregory Lewis, Credit Suisse.

Thank you and good afternoon. I just wanted to touch on the comments about the CapEx. Could you just run through the numbers what it is in 2009, 2010 and 2011?

We have a very good idea, if you will, obviously because we know the exact payments that we have to do so 2009, we have a number that is a little bit higher than $800 million, actually it is $816 million. That is, if you will, all covered now. Then for 2010, we have $889 million part of which is now covered about $100 million, $120 million covered. And for 2011, $552 million to be paid for delivery of our last eight vessels.

Okay, great. When I'm looking at your balance sheet and when I'm looking at your net debt to capital, it looks like right now it is around 60%. John, when you think about the balance sheet and the strength of it, what sort of debt level are you comfortable going up to? Are you comfortable being at like 85% levered or even potentially higher?

No, no, no, no. I don't think we have ever indicated anything going higher. Originally we said that we would like our debt to be in the region of maybe 65%. And then that fluctuating a bit up or down depending on the cycle. But definitely not to 85%. We have never indicated we will go up to that level.

But, Greg, just to be on the clear side, if you will, what you just said refers to book values, right? There is no -- yes you refer to book values whereas the way we view it and actually we view it because our lenders view it like that, we view it on the basis of market value. So in other words, one has to restate, if you will, the actual stated book values on our balance sheet in numbers that reflect the market values of our assets and then do (inaudible).

So we need to have the adjusted number for market prices. The adjusted number is far higher than our book values.

Okay and the only reason I'm touching on -- I'm going to look at book value for the moment. When you hear -- have you heard anything about potentially containership vessels that were being ordered maybe by some of the liner companies that are now being considered already before they are even delivered being converted to other types of uses?

No, we have not really heard anything like that.

Okay. And then just a follow-up on your balance sheet. Typically the fourth quarter sees some of the liner companies potentially trying to shop around some of their vessels either to book the gains or strengthen their balance sheets. In this environment, have we seen any of your customers or any other liner companies come to Danaos and potentially want to do some only spec transaction?

We have not seen and I don't believe that we are going to see. And the reason is that today we have a very lets say distorted market view which is created by the lack of availability of credit. No one would really just go and do a deal at any rate unless there is someone who is really so desperate that every penny that he puts in the kitty will make a difference. We have not seen really anything like that at present.

Of course, there is no doubt that the liner companies are not having the best of times. However, the significant drop in fuel oil prices is definitely one of the biggest helps that they get during this time. Don't forget that the reason for although volumes and everything were up in the first half of the year, liner companies would not make a lot of money mainly because of fuel prices which represents something like 30% of their overall expense bill.

Okay, great. You mentioned in the press release that one of the MAERSK vessels was extended for another two years and you mentioned that it was increased. Are you able to disclose the magnitude of that increase or are we thinking somewhere along the lines of 0% to 5% or is it like potentially like north of 20%?

It was a small increase. That was the exercise of an option.

Yes, okay. Then looking at the other MAERSK vessel that comes up for charter, I think it's your only vessel that comes up for charter next year. (multiple speakers) That is -- what sort of level should we -- or should I say have discussions begun about potentially extending the contract on that vessel?

Well, no, actually MAERSK had both ships on charter. They declared on one and didn't declare on the other. On the one they had it already in a kind of trade which they needed it. The other one they didn't need it and so they didn't declare the option.

Okay, at this point, you would expect that vessel to go to a different liner company?

Yes, although it is still --

It's still early.

It is still early. We are about five months away from delivery. We will see. Definitely the best time for a charter in a containership is the spring.

Okay, great. And then just real quick, when we look at counterparties, is it -- if we look at your fleet, it's what -- roughly 95% of it we can assume is tied up in the name of the vessels who the counterparty is? Or would it be 100%?

What do you mean?

I mean if I look at the CSCL -- I mean obviously that is a CSCL ship. Is that basically 95 -- is that all your vessels or have the names of their counterparty --?

Yes, yes, all yes. A couple ships that are let's say on a sublet basis but this is a couple of ships only.

Okay, great. Thank you.

(Operator Instructions) Charles Rupinski, Maxim Group.

Good afternoon, John and Dimitri. Congratulations on the quarter. Actually my questions have all been asked and answered. But thank you very much.

Thanks very much.

Thank you. There are no further questions at this time. I would now like to hand back for any closing comments.

Well, thank you everyone for listening and taking part on the conference call. We very much appreciate your time and interest for Danaos and look forward to talk again on the next quarter. Thank you.

Thank you. That is conclude our conference for today. Thank you for participating. You may all disconnect.