Danaos Corp (DAC) 2011 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Danaos Corporation conference call and the second-quarter 2011 financial results. We have with us Dr. John Coustas, President and Chief Executive Officer, and Mr. Evangelos Chatzis, Chief Financial Officer of the Company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, on Tuesday, July 26, the year 2011.

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

Good morning, everyone, and thank you for joining us today. Before we begin, I quickly want to remind everyone that management's remarks this morning may contain certain forward-looking statements and that actual results could differ materially from those projected today. These forward-looking statements speak 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.

Now let me turn the call over to Dr. Coustas, who will provide a broad overview of the quarter. John?

Thank you, Evangelos, and good morning, everyone. Thank you all for joining today's call to discuss our results for the second quarter of 2011. This quarter we continued with the delivery of our contracted fleet and have reached 56 vessels of 265,559 TEU capacity, and quickly heading towards the completion of our newbuilding program.

In terms of financial results, see a steady increase quarter-on-quarter in our net income as the new ships come on stream despite the one-off items which still drag down our performance. In this quarter, we recorded revenues of $114.8 million, adjusted EBITDA of $78.4 million, and adjusted net income of $16.1 million, adjusted for non-cash charges and certain nonrecurring items.

During the quarter, we saw continuing erosion of the box rates, which at the end affected also charter rates. Some weakening was experienced due to charterers subletting vessels and suspension of a number of transpacific and Far East-Europe services.

On the newbuilding front, ordering of vessels mainly by the financially strong liner companies continued for larger vessels. This will weigh negatively on the pricing power which we may achieve from 2013 onwards.

Overall the long-term health of the market will be determined by the demand characteristics which relate to the growth of the Western and world economies. With that, I will hand over the call back to Evangelos, who will take you through the financials for the quarter. Evangelos?

Thank you, Dr. Coustas; and thanks again to all of you for joining us today. I will briefly review the results for the second quarter and then give the chance to the participants of this call to place questions.

During this last quarter we had an average of 54.4 containerships compared to 43.4 containerships for the same period in 2010. In this last quarter we took delivery of three vessels while our (technical difficulty) was at 97.4%.

Our adjusted net income was $16.1 million or $0.15 per share for the quarter. Adjustments account for negative non-cash changes in the fair value of derivatives of $3.3 million; non-cash amortizing and accrued finance fees of $2.6 million; and $0.2 million of one-off legal fees related to our Comprehensive Financing Plan; as well as realized losses on swaps of $10.2 million attributable to our over-hedging position.

Adjusted net income for the second quarter of 2011 decreased by $1.1 million compared to the second quarter of 2010. This decrease is mainly attributed to an increase in the realized loss on our interest rate swaps recorded this quarter and increased interest expense due to higher average indebtedness, which was partially however offset by a reduction in the cost of debt servicing, further offset by increased income from operations.

Operating revenue increased 35.2% or $29.9 million to $114.8 million in this quarter from $84.9 million in the second quarter of 2010. The increase was primarily attributable to the increase in the average number of vessels in our fleet.

Vessel operating expenses increased by 55.9% or $10.5 million to $29.3 million in the second quarter of 2011. This increase is mainly attributed to the increased average number of vessels in our fleet, as well as incremental operating costs for certain vessels that were on layup during the second quarter of 2010, while they were in full operation during the second quarter of 2011.

The average daily operating cost for the current quarter was $6,166 per vessel, at par with the previous quarter and higher from the $5,477 average daily operating cost for the second quarter of 2010. This increase is mainly attributed to upward pressures on Euro-denominated costs resulting from a comparatively weaker US dollar between the two periods; higher lubricant oil expenses, driven by higher crude oil prices; and increased repairs and maintenance expenses due to the higher number of drydockings during the current quarter compared to the second quarter of 2010.

General and administrative expenses decreased by 17.5% or $1 million to $4.7 million in the current quarter. This decrease was mainly the result of legal and advisory fees incurred during the second quarter of 2010 related to preparing and structuring our Comprehensive Financing Plan that were not incurred in the current quarter, partially offset by increased fees to our Manager due to the increase in the average number of vessels in our fleet.

Interest expense increased by 32.7% or $3.2 million to $13 million in the second quarter of 2011 from $9.8 million in the same period in 2010. The change in interest expense was partially due to the increase in our average debt by almost 22% to $2.8 billion in the second quarter of 2011 from $2.3 billion in the second quarter of 2010; the delivery of newbuildings, which resulted in increased interest by $2.9 million being expensed rather than such interest being capitalized; all the above partially offset by a reduction in the underlying costs to which our floating debt is subject to.

Loss on fair value of derivatives was reduced by $8.5 million to a loss of $35.4 million in this quarter compared to $43.9 million loss in the second quarter of 2010. The decrease is mainly attributed to the decrease of non-cash changes in the fair value of interest rate swaps of $19 million due to hedge accounting ineffectiveness and an increase in realized losses of $10.5 million related to persisting low LIBOR rates to which our floating rate indebtedness is subject to, as well as increased average notional amounts of interest-rate swaps compared to one year ago.

In addition, realized losses on cash flow hedges of $8 million in the current quarter were deferred to accumulated other comprehensive loss, rather than being recognized as expenses, and will be reclassified into earnings over the depreciable lives of these vessels after construction, which are financed by loans for which their interest rates have been hedged by interest-rate swaps.

Adjusted EBITDA increased by 32% to $78.4 million in the second quarter of 2011 from $59.4 million in the second quarter of 2010. This increase is attributed to the vessels we added to our fleet during the last year and is indicative of the growth path of the Company which, at delivery of the full fleet in the second quarter of 2012, is expected to almost double the annual EBITDA run rate when compared to the full-year 2010 adjusted EBITDA levels.

With that, I would like to thank you for listening to this first part of our call. Dr. Coustas and I will now take your questions. Operator, we are ready to open the call to Q&A.

(Operator Instructions) Michael Pak, Clarkson Capital Markets.

Good afternoon, guys. This is Mike Pak from Clarkson. How are you guys?

Could you please give us one second? We are having a technical difficulty here. I am trying to patch in Dr. Coustas again. Hold on.

Okay, sure.

I think we have restored the technical problem. We have Michael Pak on the line. Go ahead, Michael.

Just a couple of things. On the vessels that you laid up during the quarter, can you get more specific in terms of how many vessels did you lay up and the rationale behind that?

Do you expect the third quarter to have a similar type of situation in your fleet, if you will? Then I have got a couple others as well.

Michael, we didn't lay up any vessel. I don't know where you are getting this from. (multiple speakers)

Okay, well, I think they were 15 days in lay-up, but I could be mistaken there. But I thought that was in your release.

(multiple speakers) It was not in lay-up.

No, let me clarify here. We had in the second quarter of 2010, we had something like five ships on lay-up, which gradually started coming out of lay-up since then. We had one ship which actually went out of lay-up during the second quarter, around April.

So this is part -- the charterer of this ship elected to keep it laid up until the end of the contractual obligation.

Okay, so you had a ship that was -- spilled into lay-up into 2Q in April, but now you currently have zero, correct, in lay-up?

And this is coming from the lay-ups of a year ago or even more than that.

Okay; yes, it started from a year ago. I see. So that's totally wound down. Okay, so we should expect probably zero going forward, right? Unless market conditions change, correct?

This layup that we had, Michael, it was laid up that we were paying. We were paid. It wasn't a lay-up that we were actually losing income.

Okay. I see, I see. I understand. Great.

The other thing is, John, you or in the press release there was comments about the box rate weakness. What are you guys seeing now from the field in terms of what kind of data you are looking at on the box rates?

Is this a concern for you, John, as you head into the third quarter and into the second half here this year?

Well, I don't really -- my concern is not so much about the immediate future, but rather about a lot of new deliveries being placed that undermine the future. Here we have a situation which is, let's say, more or less balanced. That's why we don't see a collapse.

We see of course, let's say, a weakening, but it's definitely not a collapse and nothing like the 2009 situation. However, in the long run I would prefer to see liner companies being a bit more subdued in their growth plans, mainly because we don't really know how much the world economy is going to grow.

I see. Are you -- yes, sorry, John.

You go ahead.

No, I was going to say, the market share competition that has heightened up in the main lane routes, on top of that the order book bias towards these very large container ships, how do you see that as a dynamic, as we look forward the next 8 to 12 months?

Do you think that the market could be rational enough to -- could the cascading effect in your mind be effective enough in the container space to absorb sort these new vessels that are coming online given how the liner companies are behaving today? I'd like to get your thoughts on that, those dynamics.

It's very difficult really to say because here, apart from the actual let's say demand-supply considerations, we have each individual line's kind of market share issue. It's really how much market share various liner companies would like to regain that will ultimately create the competitive environment.

So we have seen a lot of liner companies after 2009, into '10, when we had really a strong market to try and utilize that to regain market share by chartering ships and opening new services. That is a move that has its inherent dangers, because we have seen a relative slowdown in the world economies, which of course is nothing like -- we don't see a contraction, but it's definitely less than -- considerably less than the increase we had in 2010, which of course started from a very low base due to the drop in 2009.

I appreciate that. Evangelos, just one last question, if I may. If you can help me think through the reconciliation of the various derivatives lines, just real quick. The $35.4 million and the realized loss on derivatives of $32.1 million, that $32.1 million is a gain, right? Then the $35.4 million I can think of as the cumulative cash and non-cash; and the $32 million gain is the realized part of that. Is that (multiple speakers)

No, let me --

Can you just help us -- yes; thank you.

Yes, actually there is a pretty good table on page 5 of the earnings release. What you have is you have $40.1 million realized losses on swaps. These are cash realized losses $8 million out of which has been deferred to OCI because they relate to debt that is related to newbuildings and therefore it is being capitalized.

So the net result in P&L of the realized losses is $32.1 million. The $3.3 million is the fair value mark-to-market movement or ineffectiveness, if you will, through P&L, which is a non-cash item. So this is the analysis for the quarter.

Okay. So then help me understand why this $32.054 million is a reduction? You are reducing that in your reconciliation as though this was a gain. You add back a loss, I understand that; but I don't understand is $32.054 million. Can you help me understand that?

What we are doing here, you are referring to the reconciliation to adjusted net income. Right?

Exactly, your non-GAAP reconciliation, correct.

All right. What we are doing is we're adding back the $35.394 million, which is the full amount recorded in our P&L as a loss. So we add all that back.

And we take out again the portion that is realized. So effectively you strip out the unrealized portion or the non-cash portion.

I see, okay. That's very helpful. This $10.158 million, what is that, Evangelos? Help. Because that doesn't tie to the $8 million.

This is a realized loss, but it relates to overhedging. As you may have read in the earnings release, we have this legacy of overhedging for various reasons -- deferrals in shipyard payments and other financial arrangements.

This is something that will go away, if you will, as we take delivery of our ships until the second quarter of next year. We adjust it in net income as a nonrecurring item. That is not representative of the true operating performance of the Company.

Okay, great. I appreciate you breaking that down for us. Very helpful. Thanks, gentlemen.

Ken Hoexter, Merrill Lynch.

Good morning, it's Scott Weber in for Ken. You have a handful of charters that were set to expire around the back half of 2011 here. I was just wondering if you could give us a sense for how the discussions are going for those vessels and how new charters compare generally in duration and/or rates that you are negotiating.

Yes, we have practically four charters until year-end. These are for, let's say, September dates. We will practically start really to negotiate more firm in the first half of August.

Okay.

There are some requirements out there, but of course the market is weakening. And we definitely expect that the rates which were achieved, let's say, in the second quarter, early in the second quarter this year are no longer achievable.

Okay. John, what kind of duration do you anticipate then on those vessels? Would you expect to put them on shorter charters if the rates are lower than you hope? Or is it still going to be a very long-term charter?

Typically these vessels will be employed for a year.

Okay.

These are -- this is the type duration that we are envisaging.

Okay. Then also, John, in your commentary you mentioned that the liner company ordering would weigh on pricing power. Do you mind just elaborating on that point? I want make sure I understand whose pricing. When you say pricing power, who you are --

I am referring about their pricing power in terms of the box rates, not in terms, say, the charter rates. Because mainly the liner companies are ordering the larger vessels, and these (technical difficulty) the ones that will compete and will weigh down the rates on transpacific and the Europe-Far East. That's where also the biggest percentage decrease recorded.

I see. All right, yes. No, that's helpful.

Then the last question I would ask and this was discussed a little already, but in terms of the unscheduled off-hire, we have seen that metric build somewhat over the last three quarters. What's really the main cause of the unscheduled off-hire? Is it repositioning between charters or what's causing that?

The unscheduled off-hire has to do purely with accidents.

Okay.

It's accidents. (multiple speakers) Damages. We had some of those and that was really the reason that we had an increase in unscheduled off-hires.

I see. Okay, terrific. Those were all my questions. Thanks a lot, guys.

(Operator Instructions)

If there are no further questions --

(Operator Instructions) Michael Rindos, Rodman & Renshaw.

I wanted to ask a quick question regarding your asset values. Do you have assessed on a quarterly basis what the underlying fleet rate is before the value of charterers?

What do you mean underlying fleet rate?

As it would relate to the vessel values relative to the Company's compliance with debt covenants. Do you have independent ship brokers validate a certain (multiple speakers) fleet rate on a quarterly basis?

Yes, we have. Of course, we're doing all that.

Can you share with us what that (multiple speakers)?

I can give you an indication. We have a particular formula that we use with all of our financing banks based on which we calculate the charter adjusted value of our fleet, since most of our fleets is employed under long-term charters. I can tell you that the asset cover metric for June 30 is in excess of 150% based on this formula.

Okay. All right, great. Thank you.

There are no further questions, gentlemen. I will hand the conference back to you, sirs, for any closing comments. Thank you.

Well, once we have no further questions, I would like to thank all of you who joined this conference call. I appreciate very much the time and your continued interest in our Company.

Our strategy has been forming one of the largest independent containership companies worldwide. We believe we will soon be able to transform the already strong but increasing cash flows into bottom-line results and focus on transforming such results into increased value for our shareholders. Thank you very much for your time.

Thank you very much, ladies and gentlemen. That does conclude our conference call today. Thank you all for participating and you may now disconnect.