Danaos Corp (DAC) 2009 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Danaos Corporation conference call on the second-quarter and half-year 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. (Operator Instructions). I must advise you that this conference is being recorded today, Tuesday, July 28, 2009. We now pass the floor to one of your speakers today, Mr. Dimitri Andritsoyiannis. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today. Before we begin, please allow me to as always remind you that this presentation contains certain forward-looking statements within the meaning of Safe Harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements reflect our current views with respect to future events and financial performance, and they include statements concerning plans, objectives, goals, strategies, future events or performance and everything and underlying assumptions and other statements which are other than statements of historical facts. 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 as 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 predictions or statements about the performance of our common shares.

And with that, I will now turn the call over to John.

Thank you, Dimitri. Good morning and thank you all for being with us on today's call to discuss the results for the second quarter and first half of 2009.

In the second quarter of 2009, our vessel utilization reached 99.9%, which means that out of the 3645 ownership days, we only lost 27 for scheduled of hire days and just four days in unscheduled of hires. The second-quarter results of 2009 came to net income of $15.9 million or $0.29 a share. We managed to increase our fleet by adding one more newly built 4053 key new vessel, which immediately commenced its 12-year charter as planned.

During this quarter we secured waivers for amendments running through at least January 2010 for all the covenant breaches we had in relation to certain of our loan facilities, and we are currently in the process of securing extensions up to full year ahead of such waivers wherever this may be required.

On the operating cost side, we had once more proved to be very effective. We reduced our average daily operating costs per vessel by 2.5% compared to that of the second quarter of 2008. During this quarter we also advanced our efforts to secure federal bank debt in relation to our new building cover. We are currently in close discussions with export agencies both in China and Korea, as well as with the commitments of some of our existing commercial banks to arrange for the financing of two vessels due for 2010 and five more due for 2011.

Out of the seven new deliveries in 2009, we have so far incorporated into our operations three new builds and expect to get delivery of a further four vessels until the end of this year. All of these vessels have the arranged financing.

Further, out of the 12 expected deliveries in total for 2010, we have yet to allocate two under specific facilities for which, as I indicated, we're in discussions to do so in the near future. We are aiming to finalize this effort within a reasonable timeframe to be able to inform you in detail regarding the outcome of our negotiations.

On the broader market front, we are still getting signals of a visible recovery based on volumes traded. Indeed, today there are certain routes where the vessels are once again running at maximum capacity defying prevailing pessimists. This is an accessory preceding site for any broader recovery in the sector. We believe that during the upcoming August/September peak season liner companies should be able to restore some pricing power in box rate, which will be important for both their financial outlook and a reduction of the risk premium that markets seem to assign to our industry today.

In closing, I would like to stress our commitment as management and majority shareholders to doing everything necessary to achieve our covered growth to gather investments and their returns in the near and long-term horizon. With that, I will hand over the call back to Dimitri who will take you through the financials for the quarter. Dimitri?

Thank you, John, and thanks again to all of you for joining us this morning. I will review our financial performance for the quarter and half-year and open the call for possible questions by participants in order to provide us with further color.

In the last year of -- in the last period, if you will, we added six newly built containerships and sold off three 30-year-old vessels. The major financial highlights for this quarter and half-year are as follows. We had net earnings of $15.9 million or $0.29 per share and $35.9 million or $0.66 per share for the quarter and half-year respectively. Our operating revenues were $79.1 million and $154.4 million for the quarter and half-year respectively, and our EBITDA came in to $49 million for the quarter and $96.9 million for the half-year of 2009.

Comparing the second quarter of 2009 to that of 2008, during this quarter Danaos had an average of 40.1 containerships as opposed to 37.5 containerships for the same period of 2008. Operating revenue increased by 7% or $5.2 million to $79.1 million in the quarter ended June 30, 2009 from $73.9 million in the quarter ended June 30, 2008. The increase was primarily attributed to the addition of six vessels to our fleet, which contributed additional revenues of $10.4 million during the three months ended June 30, 2009. These revenues were offset in part by the sale of three 30-year-old fully depreciated vessels that contributed revenues of $4.4 million for the three months ended June 30, 2008 compared to no revenues in the three months ended June 30, 2009. Our vessel operating expenses increased 5.3% or $1.2 million to $23.8 million in the quarter ended June 30, 2009 from $22.6 million in the quarter ended June 30, 2008. The increase was due to the increase in the average number of vessels in our fleet during the quarter ended June 30, 2009 compared to that quarter of 2008. The overall increase was offset by the successful implementation of efficient management controls on our operating expenses during the average daily that resulted, if you will, to an average daily operating cost per vessel of $6533 for the three months period ended June 30, 2009, compared to $6699 for the three months period ended June 30, 2008.

Interest expense increased by 118.2% or $9.1 million to $16.8 million in the quarter ended June 30, 2009 from $7.7 million in the quarter ended June 30, 2008. The change in interest expense was due to the increase in an average debt by $643.2 million to $2,212,700,000 million in the quarter ended June 30, 2009 from $1,569,000,000 in the quarter ended June 30, 2008, as well as the increased margins over LIBOR on which our indebtedness is subject to following our arrangements with our lenders to waive certain covenant breaches as of December 31, 2008. The financing of our extensive new building program resulted in capitalizing interest, if you will, capitalization rather than such interest being recognized as an expense of $9.4 million for the quarter ended June 30, 2009 compared to $7.8 million of capitalized interest for the quarter ended June 30, 2008.

An additional information that we would like to give you is that the weighted average interest rate margin over LIBOR payable under our credit facilities has now increased by approximately 1.1% per annum during the wavers period following our agreements with our lenders to waive certain covenant breaches as I mentioned as of December 31, 2008.

Resulting of all these, our net income on a comparable basis from continuing operations was $15.9 million or $0.29 per share for the three months ended June 30, 2009 compared to $24.4 million or $0.45 per share for the three months ended June 30, 2008, excluding a gain on sale of vessels of $9.3 million recorded during the second quarter of 2008. This represents a decrease of 34.8% or $8.5 million compared to the three months ended June 30, 2008, which is mainly attributable to increased interest expense of $9.1 million during the quarter ended June 30, 2009 compared to the same period of 2008, due to the increase of our average indebtedness, as well as increased (technical difficulty)-- over LIBOR on which our indebtedness is subject to.

On the half year, briefly we had operating revenue increases by 7.4% or $10.6 million to $154.4 million for the six months of 2009 from $143.8 million for the six months -- the first 6 months, if you will -- of 2008. The net addition to our operating revenue was attributed to the increase of the average number of containerships to 39.5 as compared to 36.9 for the same period of 2008.

On a half-year basis, we again managed to reduce our average daily operating cost per vessel, which was $6412 compared to $6504 for the six months ended June 30, 2008. Interest expense increased also on a half-year to half-year basis by 95.4% or $14.4 million to $29.5 million and from, if you will, [$16.1] million in the six months ended June 30, 2008. The change in the interest expense was due to the increase in our average indebtedness by $682.3 million to $2.15 billion in the six months ended June 30, 2009 from $1.475 billion in the six months ended June 30, 2008, as well as the increased margins over LIBOR in which our indebtedness is subject to following the agreements we had with the lenders to waive certain covenant breaches as of December 31, 2008. The financing of our new building program resulted in interest capitalization rather than such interest being recognized as an expanse of $16.6 million for the six months ended June 30, 2009 compared to $18.1 million of capitalized interest for the six months ended June 30, 2008.

Our net income, therefore, on a comparable basis from continuing operations was $35.9 million or $0.66 per share for the six months ended June 30, 2009 compared to $50.3 million or $0.92 per share for the respective period of 2008, excluding a gain on sale of vessels of $14.9 million recorded during the second half of 2008. This represents a decrease of 28.6% or $14.4 million, which is mainly attributable to increased interest expense of $14.4 million rather than the six months ended June 30, 2009 compared to the same period of 2008, which is due to the increase of our average indebtedness, as well as the increase of margins over LIBOR, which our indebtedness is subject to as I have already mentioned earlier.

With that, we have come to the end of our commentary regarding the second-quarter and half-year results of 2009. John and I will now take your questions. Operator?

(Operator Instructions). Matt Troy, Citigroup.

I was curious about your comments on a visible volume recovery with some vessels you said running at maximum capacity. Do you have a sense, one, are there specific trade lanes where you are seeing that occurring or regions or geographies that stand out as potentially feeling a bit better than three or four months ago?

And two, what would you attribute to just normal seasonality, i.e. box volumes do pick up in the back half of the year? You have had a lot of capacity removed from the global fleet. How much of it is just simply that normal seasonal ramp versus really something feeling better than it did a few months ago?

Well, we are not saying that we are back at last year's volumes. What we say is that definitely there is a pickup from what we saw from the beginning of the year that had already started from April, and we already spotted that in our previous earnings call. We definitely see a good recovery in most trades. Actually the ones that are, let's say, still the weakest are the US trades, and that is not necessarily just a result, let's say, of lack of transportation to United States. But because actually these trades suffered less than the other ones, there was less removal of capacity. So there is still overhang of capacity, which is now in the process of being corrected. It is Europe, Far East, so, of course, the most dramatic turnaround, and we have today's ships running at almost 100% of capacity.

Secondarily, can you talk to vessel values, where you have seen them, how much on a percentage basis have they moved off the base or the trough in recent months? I noticed that you in your disclosure today announced that you were in breach of some vessel value covenants as of 6/30. I am just wondering if you could help us directionally bogey how far off are you from the hurdle rates and what kind of move or what kind of remediation can we see to get you back into compliance?

Well, it is not a very straightforward kind of answer because we had, let's say, vessel values dropping disproportionately, let's say, between the older ships and the newer ships. And our covenants actually they are using also the income side of the ships in order to get their value, so it's a kind of, let's say, charter attached value, which is, of course, a much more fair calculation. And the thing is the reason that actually we are in breach is because we have a lot of new buildings, which for most of them we have already provided all the equity. But the valuation of that has not been incorporated in the valuations. So practically if, let's say, we are in today's values calculating our breaches on the basis of all our contracted fleet, then we do not have any breaches.

Okay.

So practically if we just, let's say, continue like that taking delivery of the ships, assuming that the values will remain as they are, eventually the breaches are going to be corrected by themselves.

Okay, okay. And in terms of the banks, you feel that you will be able to obtain waivers and expect to announce or update us on that shortly? It is not a material breach?

Yes. I mean we are just with the banks in discussions to extend the waivers that we have already gotten. We are almost completed. You know, we just have a couple of banks that are still waiting.

And my last question is, you have obtained waivers structurally for 2009, but they will be revisited in 2010. Based on your discussions with the banks, what needs to change or what is going to be the focus of those discussions if the market remains where it is today into next year? Where are the sensitivities in the debt structure and the amended agreements such that we should keep an eye out for 2010 in those discussions? What are the one or two things that you need to see happen that make you feel comfortable we won't see a material change in your debt cost as a result of those resetting in 2010?

So practically the discussions that we had are for extensions of the waivers under mostly the existing agreed terms. And that is not, let' say, kind of market-related because in our case we don't have really income issues.

This is Dimitri. Just to clarify we have already gotten certain waivers if not all of them with some exception, if you will, for these extensions as we said. So we have covered, if you will, 2010 a year from now, which means that a waiver-based definition means that we are not revisiting it. Is that clear?

Okay. Thank you.

Gregory Lewis, Credit Suisse.

My first question is you mentioned the margin increase to over LIBOR of 1.1%. Is that the all-in, or is that an increase on the pre-existing spread over LIBOR?

That is the increase. It is not the all-in margin. That is the increase, so you have to make your own calculations.

Okay. Great. And then you mentioned briefly that you are in discussions with Korean and Chinese banks to fund part of the new building payments going forward. Were these pre-existing relationships, or is this something that has evolved more recently as some of the Chinese and Korean banks have decided to step up and support their shipbuilding industries?

Well, listen, I mean these are relationships that have definitely been upgraded during the last year. We have been -- we know these guys. For example, Danaos Corporation was the first non-Korean bank -- a non-Korean entity in shipping to do a deal with KEXIM. So we do go back many years with some of these institutions. With others, we have had the chance to initiate relationships of a couple of years ago. But, as I said, in these times, the last nine months if you will, we have upgraded this relationship.

Okay. Great. And then just really quickly, one question regarding the new building fleet in 2010. At this point how much remaining debt needs to be secured for the 2010 new buildings?

I will respond to you the following. As we mentioned, we have just two vessels that have not been allocated under specific funding securities or other facilities, if you will, that are expected to be delivered in 2010 and three that are again under the same status with expected delivery in 2011. For these, 2 plus 2, so we have -- yes, plus another two vessels. We are now looking for actively, if you will, the funding for 17 total vessels, for which the total amount that we are looking for is about $500 million, if you will, $540 million or something, you know. That is the area of the number that we are looking at.

Okay. Great. And then just really quick on those three new builds, is that the front half or the back half of 2010?

The deliveries you mean? Yes, the deliveries are towards the back end of the year.

Okay. Great. That is what I thought. And then --

For 2010, right? For 2010 because --

Yes, yes. And then real quickly, it looks like you had that financing charge of around $800,000. I'm assuming that was for debt restructuring. Is that sort of going to be an ongoing finance cost, or is that a one-time issue?

It is related to the securing of our waivers. Certain of these amounts that we have agreed to pay to the banks have been expensed as a one-off item. Many of these amounts, however, under US GAAP have been deferred to over the life of the loan. The answer, the quick answer is for that amount, yes.

Yes, it is a one-time issue, or yes, it is a continuing item?

Well, that is one-off item. It is not -- I mean, you know, as such, the number it is a one-off item. We will, as I say, be amortizing certain of these expenses according to US GAAP. I would not expect that you will see the exact same number, but some sort of that number will probably reappear.

Okay. Thank you very much for the time, gentleman.

Ken Hoexter, Merrill Lynch.

When you look at the volume starting to flow again and you were talking about how things are kind of filling up on some of the vessels, are there any plans to delay some more of the vessels? Are you in discussions with the yards? Are there discussions with some of the charters to go the other route and maybe keep to this schedule? Can you talk about how your discussions are going now?

Well, the discussions with charters and the yards as far as delays are concerned have been more or less concluded to what we have already reported. So there is nothing new, let's say, going on in that front.

Okay. You mentioned there were three vessels that were sold. Was that during the quarter, or are you talking about the 30-year vessels that have -- are they -- was that in the last quarter?

No, these were vessels sold in the same quarter back one year. When we do the comparison, we have to refer to the three vessels -- the three 30-year-old fully depreciated vessels, which we had at that point in time in our fleet. They were sold in the second quarter of 2008.

Okay. I understood. And then on the review, the valuation review, what changed? Was this just a mark-to-market on the vessel values, or was there something else in the review that you mentioned some of the including charter revenues? I'm just trying to understand that process. I want to understand what the next process is for obtaining these final waivers.

You broke off. Can you just repeat, yes?

Sure. Just on the -- I want to understand in the review that you had that changed your -- I guess some of the covenants here, I just want to understand what changed. Was it just a vessel valuation as the market continued to deteriorate? Was there something else aside from vessel values, and what process is left for getting the final few waiver changes?

Right. Well, listen, I mean definitely, when we made applications on the covenants based on, if you will, valuations on half-year, we kind of have a few more, and actually three, if you will, covenants for three facilities, three covenants breached. These are basically the value of the vessels. That is, if you will, the short answer.

We actually have certain covenants that have been cured, if you will, because of the positive move of the interest rates and, therefore, the positive move on the fair value of our force, for example, which had affected the certain covenants' year end. We are now in discussions, as we said, with these banks that have not yet availed us to waivers for a full year ahead, and we expect that we will get them in the next weeks at most.

Urs Dur, Lazard Capital Markets.

My questions have been asked largely. Can you -- and I may have overlooked this, but I don't see it in the release -- can you give us a CapEx schedule for the remainder of 2009 and also for 2010 at this point in time just given the delays of ships and so on?

The total CapEx for 2009 is about $0.5 billion. We have paid so far $190 million or so. The remainder is to be paid from now until the end of this year covering the progress payments and including, of course, deliveries of these vessels. The total CapEx for 2010, which is the $900 million -- and that is it. And we have, of course, a deferral of about $370 million for 2011 and $450 million in 2012. So this is, if you will, the numbers.

Okay. I'm just reconfirming that that has not really changed much. Thank you very much.

Charles Rupinski, Maxim Group.

I just had a quick question -- most of my questions have been answered -- but it is just on the industry. You know, talking about strengthening trades, is there a particular size of vessel that is stronger that you are seeing out there?

And the second just follow-up is, there are a lot of laid up vessels that have been discussed. Is there any idea about how many are cold layups versus short-term layups and how quickly that capacity might come back?

Well, first of all, there are, let's say, cold layups, but I assume that this is for no more than, let's say, a third of the idle vessels. And in terms of, let' say, particular sizes, which you mentioned, well, at this moment there is surplus in the charter market practically on all sizes. So that has not changed. I mean the charter market has not strengthened. It might have become more active by charters picking up some more ships, but again at practically breakeven rates. So, as I said, we will need to see charterers getting pricing power, getting box rates up, and then once the ships are full, then they will start employing new ships so that they don't really destroy the supply/demand balance.

I see. Okay. So do you think that it's safe to assume that you are expecting that whatever supplies overhang out there is going to come back in a disciplined manner?

Correct.

Michael Demaray, Elevated Capital.

Just a point of clarification. We have talked about ship valuations with respect to your LTV covenant. Have you been able to obtain valuations? I know that some other shipowners are not able to get those. Are you finding those a problem to get at this point, or have you been able to get those?

Well, it is true, not all brokers are able to give valuations. However, there are various brokers who have contracts with the banks to provide valuations. So these guys, they have to give something out, and once they have to give it to the bank, then they give it also to ourselves. So yes, we have been able to get values.

On the other hand, most of these valuations, especially when we talk about, let's say, newer larger ships, are purely theoretical. Because there is actually no transaction over there. So it is just pure, let's say, speculation. And if you read actually the disclaimers that they put on these valuations, then to be honest, their worth is a bit questionable.

I guess another point of clarification to follow up from the Citigroup, gentleman, do the waivers have built-in extensions then? So that even though it says the waiver lasts until January 2010, did you say that there was a built-in extension into that waiver?

No, no, we said that we are negotiating, and actually we have obtained already from the majority of our lenders, extensions which are part of a new discussion, negotiation with the bank, and it is not anything of an automatic resetting.

Right. And then just one quick technical question. On the capitalized interest, do you depreciate that over the life of the ship then, the 30 years?

Correct.

(Operator Instructions). [Meno Kumar], OCB Investment.

Can you just comment on the strength of your charterers? In the broader industry, first we had CSAV and now media reports say Hapag-Lloyd is seeking rate cuts. So do you think rate renegotiations will be a common phenomenon now?

Well, for example, in Hapag-Lloyd we have not heard of any, let's say, rate renegotiations. We have heard that shareholders are going to make an equity infusion, but that is about it. With CSAV it was a more complex deal that some of the owners elected to, let's say, to transfer a part of the charter into equity in the company, and some others just kept their charters intact without participating in the equity of the Company. So that does not -- how can I say it -- does not really say anything about any forceful, let's say, change in the charter rates.

And can you comment on your charterers as well, like what you see for them?

Well, for the time being, we have not had any change in our charter rates. We have continuous discussions with our charterers in order really to monitor their operations and their financial strength. And for the time being, we don't see any signs of alarm.

Okay. There is no doubt that they are in a difficult situation because they are actually losing money overall in some trades. However, they expect that in the second half of 2009 the losses are going to be dramatically reduced, and they expect to be able to breakeven in 2010.

(Operator Instructions). As there are no further questions at this time, we will now pass the floor back to Dr. Coustas for closing remarks.

I would like to thank you all for listening in and taking part in this conference call. We appreciate your interest in Danaos and our efforts to manage our significant growth model during such times.

In closing, I would like to once more emphasize our commitment to deliver what we believe to be of significant value to our shareholders who have co-invested along with us through the past years. Thank you very much for your time.

And that does conclude our conference today. Thank you all for participating. You may now disconnect. Thank you, gentlemen.

Thank you.

Thank you. Bye-bye, sir.