Danaos Corp (DAC) 2011 Q4 法說會逐字稿

Ladies and gentlemen, and welcome to the Danaos Corporation conference call on the fourth-quarter and full-year 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 Wednesday, February 22, the year 2012.

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 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 for the quarter.

Thank you, Evangelos. Good morning and thank you for joining us on today's call to discuss our results for the fourth quarter of 2011.

This year was one of the most eventful ones in recent history. The year started with a strong container market, but towards the end of the second quarter we started to experience weakness in all segments, and liner companies started to lose pricing power. This was due to the combined effect of a fight for market share from industry leaders, the slowdown in Europe-Far East trade due to the European debt crisis, and the inflow of substantial new capacity in this trade, the combined effect of which resulted in a new sharp deterioration in box freight rates.

We are now entering 2012 with the liner companies in severe cash drain, which will hopefully be reversed by the rate hike announced for March. The charter market is also in breakeven mode, with more than 0.5 million TEU idle, which will delay any improvement in charter rates in the months ahead. The only fortunate item is a complete standstill of new orders or even cancellation of some existing ones.

On the Company front, early 2011 we completed our restructuring, which gave us a solid capital structure to withstand market downturns. We continue to execute our newbuilding program, and during this last quarter we took delivery of two containerships of 8,500 TEU entering 12-year time charters. Remaining newbuilding program is on track, and we have already taken delivery of a 13,100 TEU containership in February 2012. And five more vessels totaling 61,000 TEU will be delivered through the end of the second-quarter 2012.

Our financial performance was strong, as adjusted EBITDA was $88.8 million in the fourth-quarter 2011 compared to $65 million in the fourth-quarter 2010. Adjusted EBITDA for 2011 was $318.6 million compared to $243.8 million for 2010. Adjusted net income, likewise, was $16.1 million or $0.15 a share, and $61.2 million or $0.56 a share for the quarter and 12 months ending December 31, 2011, respectively.

Our charter coverage for 2012 currently stands in 94% in terms of operating revenues. We have at present three older vessels on cold lay-up to minimize cash outflow. We are monitoring the development of the market in order to decide on their reactivation.

We are presently concentrating on the delivery of the remaining vessels to enhance cash flow generation and to commence debt reduction process post-2012.

Thank you. I will now proceed with a brief review of the results for the fourth quarter and then give the chance to the participants of the call to place questions.

During this last quarter we had an average of 57.9 containerships compared to 49.9 containerships for the same period in 2010. In this last quarter, we took delivery of two 8,500 TEU vessels, while our fleet utilization was at 96.9%.

Our adjusted net income was $16.1 million or $0.15 per share. The adjustments account for unrealized gains in the fair value of derivatives of $7.1 million; non-cash accrued and amortizing finance fees of $3.5 million related to our Comprehensive Financing Plan; realized losses on swaps of $8.7 million attributable to our overhedging position; as well as $2 million of non-cash stock-based compensation related to one-off equity awards made to the officers of the Company.

Adjusted net income for the fourth quarter increased by $5 million when compared to the fourth quarter of 2010. This increase is attributed to an increase in income from operations, offset to a certain extent by the increased finance costs incurred this quarter, mainly to higher average indebtedness between the two quarters.

Operating revenues increased by 27.7% or $27.8 million, to $128.3 million in the quarter from $100.5 million in the fourth quarter of 2010 as a result of the increase in the average number of vessels in our fleet, and an increase by 12% in the average daily charter rate that our fleet has earned, up to $24,900 in the current quarter from $22,200 a day in the fourth quarter of 2010.

Vessel operating expenses increased by 16.5% or $4.5 million to $31.7 million in the fourth quarter of 2011 due to the increase in the average number of vessels in our fleet. The average daily operating cost for the current quarter essentially remained stable at $6,318 per day per vessel, compared to $6,310 average daily operating cost for the fourth quarter of 2010.

G&A expenses effectively remained the same between the two quarters, recording an increase of $100,000. Interest expense increased by 45.5% or $5 million to $16 million in the fourth quarter of 2011 from $11 million in the fourth quarter of 2010. The change in interest expense was partially due to the increase in our average debt by $424 million to $2.98 billion in the fourth quarter of 2011, from $2.56 billion in the fourth quarter of 2010.

The delivery of newbuildings resulted in increased interest of $1 million being expensed rather than being capitalized. And all of the above is partially offset by a reduction in the margin over LIBOR to which our floating debt is subject to.

Realized losses on derivatives increased by $7.6 million to an expense of $34.9 million during this quarter, compared to $27.3 million in the fourth quarter of 2010. This increase is attributed to the increased average notional amount of interest rate swaps compared to a year ago, as well as a reduction in the realized losses being deferred between the respective periods, following the gradual delivery of our newbuildings, all of the above partially offset by slightly higher LIBOR rates in the current quarter when compared to the fourth quarter of 2010.

Realized losses on cash flow hedges of $6.4 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 under construction, which are financed by loans for which their interest rates have been hedged by interest rate swaps.

Adjusted EBITDA increased by 36.6% to $88.8 million in the fourth quarter of 2011 from $65 million in the fourth quarter of 2010. This upward trend will continue until the Company takes delivery of all of its newbuildings by the end of the second quarter of this year.

With that, I would like to thank you all for listening to this first part of our call. Dr. Coustas and I will now take your questions. Operator?

(Operator Instructions) Gregory Lewis, Credit Suisse.

Yes, thank you and good afternoon. Evangelos, when we look at the fleet list it looks like there's three vessels that are laid up. When we think about revenue going forward, could you talk about the impact that those laid up vessels had in the fourth quarter, and when and if you think that those vessels will go back to work at a certain point this year? Or are those vessels potentially going to be targeted for scrapping?

Yes, I can give you some numbers on the effect on Q4; and then maybe John can talk on the commercial issues. We had 130 days during the fourth quarter of cold lay-up for these ships. And depending on what charter rate you assume -- $10,000, $12,000 a day -- this is the loss in revenue that you would have. So it is about $1 million, $1.5 million.

Of course, you do not incur the operating expenses. The reason that we did not charter these ships was because we had -- we were being offered levels at or below operating expenses, so we decided to wait it out and wait for the market to get stronger post the Chinese New Year, and decide on deployment March or April. I don't know if John wants to add something.

Yes, I mean the reason that actually we laid these ships up and not sending them for scrap is because we believe that there will be a market for these vessels going forward. Of course at present, things are not, let's say, very bright. But what is important is that in this kind of segment we have very, very little newbuildings, which means that we are going to see incremental demand going forward as soon as some kind of revival comes in the world economy.

Okay, great. Then just in thinking about the others, looks like you have about six Panamaxes of about the same size that are going to be rolling off contracts -- I guess it looks like in Q2 and Q3. Should we expect a similar approach for those vessels as well? Or are we already seeing some demand or potential extensions of charters for those vessels?

Well, the majority of ships are due, let's say, for renewal practically from June and July onwards, and we have got quite a bit of time. This is really the period that we see, let's say, the upturn in the market. So we will have to wait and see how this thing develops.

Definitely we believe that the market around that time will be better than what it is today. I cannot really tell you how much better, because it all depends on really if we are going to see any kind of rebound in world trade in the next few months.

But all in all, I think that for these smaller ships we are going to see some demand. Because there is -- for reasons, let's say, of savings, we will see services (technical difficulty) smaller ships getting up-size with trips, with ships of between 3,000 and 5,000 TEU, which is the ships that we have presently on lay-up.

Okay, okay. Perfect. Then, Evangelos, if you could just talk a little bit about how financing costs are going to look going forward. As we take delivery of the last vessel and I guess in next quarter, and then as the swap rolls -- the overhedging related to the swaps expires at the end of this year, so in thinking about -- I guess should we think about the first quarter of 2013 is going to be the first quarter of really a clean interest expense? Is that the right way to think about it?

We expect overhedging to run off, yes, by September, October this year. We expect it to run off completely. So yes, the comment is correct.

Q1 2013, overhedging is no longer there. And with the swaps that we have in place that average around 5% fixed rate, and margins, a blended margin which is around 1.8%, you should be looking at an all-in cost of debt of 6.8%.

Perfect. Then once I remember discussing -- when all the newbuildings were eventually going to be delivered, I believe that management mentioned that it might actually go back and try to renegotiate better terms with its lenders. Is that something that is still on the table at this point?

Well, you know, I think that the agreement that we have with our lenders is pretty good, and I don't think really we indicated that we intend to really renegotiate the agreement.

Practically, the basic restriction that we have from the agreement is relating to dividends, which requires, as you know, we have already said, a debt-to-EBITDA ratio below 6 in order to be able to start considering dividends. I think that is really the only kind of a, let's say, limitation.

Okay, perfect. So okay; that answers my question. Perfect. Thank you very much.

Michael Pak, Clarkson Capital Markets.

Good afternoon, gentlemen. Just a couple questions here. One, if you can, John, if you can talk a little bit more about the idling of containerships and the impact on charter rates, understanding that it would delay recovery of charter rates. Can you talk about the near-term impact in terms of taking capacity out of certain of these mainline trade routes, or how it could perhaps balance capacity with demand?

Well, it is already balancing capacity, because we see that as we have read, everyone is let's say removing capacity mainly from the Europe-Far East, because that is where the overcapacity exists. The other routes are not really suffering.

It is Europe-Far East which on the other hand had the biggest percentage of increase in capacity last -- back in 2011. And it is the one actually that is suffering most because of the increase in capacity and the European slowdown.

So everyone is taking, from what we can see, the right approach by removing capacity. Also as far as we are concerned, to contribute really in the market stability, we prefer to lay up the ships rather than just operate them at practically breakeven rates.

Cash flow-wise there is minimal small difference for us. But in terms of, let's say, actual effect on the market, it is definitely a plus.

Okay, no, that is encouraging. What about cascading the ability of liner companies to transfer capacity to other higher interregional trade routes and such? Do you think that that could also have a positive impact on the current situation, or is cascading something that has a diminishing return?

Well, cascading is a process that has been going on for many, many years. As far as diminishing returns is concerned, the theory of diminishing returns works for every time that you substitute a large ship with a larger one and then with another larger one. So, yes, this exercise at some stage has a certain kind of limit.

On the other hand, because we see also the oil price going up and up, the cost per TEU of fuel is also increasing and makes this cascading, this upsizing, let's say, of various services economically justified.

Great, and one last question. Going back to the current vessels in lay-up in your fleet, can you just provide the would-be operating expense on those vessels per day?

On average, they would be around $7,000, something like that.

Okay. Great. Thanks for your time, guys.

Ken Hoexter, Merrill Lynch.

Hi, good morning, guys. It's Scott Weber in for Ken. You mentioned different levels of stress in trading lanes where you might have had a lot of European exposure and a macro slowdown there; or even thinking across the different vessel segments, you have pressure from new deliveries. But I guess it has been a little surprising to see rates decline across vessel sizes.

The decline has almost been universal. So I am just wondering why, even among the smallest feeder sizes, you haven't had any segments that have maintained pricing power, where there has been less supply pressure.

Well, the problem is that because in general, when you have larger ships being introduced, they are used for cascading in other services which means that all kind of smaller sizes are, let's say, pressed down and they just work on breakeven. So if, for example, let's say there is a trade that someone has, let's say a 2,000 TEU ship, and he is able practically to get a 4,000 TEU at the same amount of money, more or less at their OpEx level, and he is able really to fill it up by joining forces with somebody else, that is going to happen.

Got it.

And then the pressure still goes down to the small, to the 2,000 TEU ship. But because then the 4,000 TEU again has been displaced by a larger ship, we get the pressure on all segments. That is why, we believe, that we will see the market start strengthening from the large sizes again, as it did all the time in the past.

Okay, that's helpful. The other question; on the last call I think you said that you expected lay-ups to be shorter term in nature. It sounds like that is still your view, because you mentioned some strengthening in the summer.

But I am wondering if fundamentally you think that has changed at all and if we can expect significant idle capacity now for a really extended period of time, and if these inter-liner agreements are -- basically exacerbate that. Because by working together there is just -- they are idling more.

Well, you know, I think that the agreements don't really change the actual demand, because that is in the end what is determining the market. The agreements between the liner companies are mainly in order to provide better service, to compete with each other in terms of providing, for example, in the Europe-Far East daily service like what Maersk announced first.

And then we go into the, let's say, capacity issues, which of course larger ships give better economies of scale. But I don't think at present that there is anything else at play.

Okay, got it. Well, thanks for the color. That's all I had.

(Operator Instructions) We seem to have no further questions. I would now like to hand the floor back to Dr. Coustas and Mr. Chatzis for any closing comments. Thank you.

Thanks very much, everyone, for joining this conference call. We appreciate your time and continued interest in our story.

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

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