Danaos Corp (DAC) 2013 Q1 法說會逐字稿

Thank you for standing by, ladies and gentlemen and welcome to the Danaos Corporation Conference Call on the first quarter 2013 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, Tuesday April the 30th, 2013

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

Thank you, operator, good morning, everyone, and thank you for joining us this morning. 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. We encourage you to review these details, 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 the broad overview for the quarter.

Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for first quarter of 2013. The fundamentals of the container ship market still remain weak as the Far East, Europe trade volumes remain flat, having difficulty supporting the inflowed of large containerships.

It is also evident by lower freight rates in these groups compared to one year ago. While liner companies are making yet another attempt to restore rates at healthy levels with announced general rate increases in May.

But Pacific [plains] saw a better picture which is in effect -- the effect of the recovery in the US economy. Non main lane trade growth remains healthy and helps absorb capacity that has cascaded down from the main labels but this adds pressure to the charter market, particularly on midsized containerships.

As we enter into the season, we expect some improve on the market fundamentals, but all in all, we do not anticipate spectacular changes.

Despite this challenge in the container market environment, we are reporting yet another slid quarter, adjusted net income for this quarter came at $13.9 million or $0.15 a share, $3 million lower than the first quarter of 2012 due to weaker charter market today when compared to one year ago.

However, as our vessels on the spot market are currently running and operating breakeven levels, an improving market going forward is the one where you option improving our results.

Adjusted EBITDA increased 12.7% to $108.6 million in the current quarter, compared to $96.4 million in the first quarter of 2012, as a result of our fleet expansion program that was completed in 2012.

Out of the seven vessels we had in cold lay-up at the end of 2012, we only had two vessels on lay-up at the end of the first quarter. During this quarter we reactivated one vessel while we sold four of our older vessels and we intend to use the same proceeds to make accretive acquisitions with younger containerships.

We have a strong 98% contract coverage and only 2% of our current revenue stream at stake through the charter and over the next 12 months. We are largely insulated on the effects of the weak charter markets while expect our EBITDA and free cash flow generation to be safe guarded.

At the same time, we continue to be one of the most competitive operators in the market with our daily operating expenses being consistently below $6,000 a day. We will continue to monitor our fleet sufficiently while in 2013 we will focus on rapidly deleveraging the Company and creating value for our shareholders.

With that, I'll hand over the call back to Evangelos who will take you through the financials for the quarter.

Thank you and good morning again to everyone. I will briefly review the results for the quarter and then open the call to the participants to place questions.

During the first quarter of 2013, we had an average of 63.1 containerships, compared to 60.1 containerships for the first quarter of 2012. While during the first quarter we sold three of the oldest vessels in our fleet, the Henry, the Independence and the Pride for a net sale consideration of $18.8 million. Recently, we have also agreed to sell the Honor for a net sale consideration of $8.7 million and expect to deliver the investment to her buyers within the first half of May. All of these old vessels have been on cold lay-up.

In accordance with an agreement with our lenders, we intend to redeploy those proceeds that total $27.5 million to make accretive acquisitions for younger containerships.

As mentioned in our earnings release, we have the option to sell a further five of our older vessels that come off charter within the course of the next two quarters and potentially utilize the sale proceeds towards acquisitions of younger containerships as long as we consummate the purchases by the end of this year, otherwise any such proceeds will flow towards reducing our indebtedness.

Following the already consummated four vessel sales and the reactivation of [Messa Longe] during the current quarter, we currently have only two vessels on cold lay-up, compared to seven vessels at the end of the previous quarter. Given the state of the market, we currently do not anticipate to reactivate the two laid up vessels in the near future.

Our adjusted net income was $13.9 million or $0.13 per share for the quarter. Down by $3 million or $0.02 per share when compared to the adjusted net income of $16.9 million or $0.15 per share for the first quarter of 2012.

Although the increase in the average number of vessels in our fleet by three new building deliveries over the course of the last year, was actually accretive to the bottom line, this $3 million decrease in our adjusted net income between the two quarters is attributed to the relative softening of the charter market between the two periods that affected the vessels on short term charters.

As we do not expect a charter market improvement in the near term, it is likely that these pressures will persist throughout the year. The good news is, that from this point onwards our earnings are largely insulated from the weak charter market and 98% of our current revenue stream is contracted for the next 12 months and the vessels on short term charters are already running at operating breakeven levels.

It is worth, at this point, to also note that besides a re-chartering risk which is manageable, the most important driver in our earnings today is related to the hedging we have in place to interest rate swaps. Indicatively our adjusted net income for the current quarter that currently stands at $13.9 million would have been $50.5 million if the current interest rate swaps were not in place.

These swaps start expiring from the fourth quarter of next year through the end of 2015 and at that point, we expect a significant improvement in earnings, given the market expectations for persisting globe interest rates with average charter duration at 9.5 years, well exceeding the 2.5 years remaining duration of the swaps, we believe we will be able to take advantage of the anticipated low labor environment on the back of solid contracted income generation.

Operating revenues increased by 8.9% or $11.9 million to $146.1 million in this quarter from $134.2 million in the first quarter of 2012 as a result of the increase in the average number of vessels in our fleet and an increase by 10.6% in the average daily charter rate that our operating fleet has earned, up to $28,700 a day in the current quarter from $26,000 a day in the first quarter of 2012.

Vessel operating expenses decreased by 2.7% or $0.8 million to $29.3 million in the current quarter from $30.1 million in the first quarter of 2012.

The daily operating costs for the current quarter was $5,912 per vessel per day, slightly lower than the $5,945 average daily operating costs for the first quarter of 2012. Indicative of our determination and focus to control costs as these operating expenses figures are one of the most competitive in the industry.

G&A expenses increased by $0.1 million to $4.1 million -- $4.9 million in the current quarter from $4.8 million in the first quarter of 2012 as a result of the increased average number of vessels in our fleet.

Interest expense increased by 24.5% or $4.5 million to $22.9 million in the current quarter from $18.4 million in the first quarter of 2012, the change in interest. The change in interest expense was mainly due to the increase in our average indebtedness by $263.7 million to $3.39 billion in the current quarter from $3.12 billion in the first quarter of 2012.

Additionally, since our new building program has been concluding, knowing this was capitalized in the current quarter to $2.6 million of interest capitalized in the first quarter of 2012.

Realized losses on interest rate swaps increased by $1.2 million to $36.6 million in this quarter, compared to $35.4 million in the first quarter of 2012. This increase between the two quarters is attributed to the fact that no realized losses have been deferred in the current quarter following the delivery of our new buildings where as $4.8 million of realized losses have been deferred to other comprehensive income in the first quarter of 2012. We are both partially offset by reduced notional swap amounts between the two quarters as some swaps have expired during the last 12 months.

It is worth noting here that that is as a result of the swap expirations, the Company is no longer in another hedging position from this quarter onwards.

Finally, it is worth noting that as a result of the growth of our fleet, adjusted EBITDA increased by $12.1 million or 12.7% to $108.6 million in the quarter from $96.4 million in the first quarter of 2012.

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?

Thank you. (Operator Instructions). And your first question today comes from the line of Urs Dur, Clarkson Capital Markets. Please, go ahead.

Good morning, good afternoon.

Hi, Urs.

Hey. You really detailed the market pretty well and the over hedging is coming off, so that's all good, so things are getting cleaner, easier to understand and your idle ships seem pretty manageable. We are seeing -- sort of commentary on the market. How competitive can Danaos be going forward as we see a number of the large liner companies refleeting such as even China Shipping we saw this week, how competitive do you think you can be as to possibly get involved in some of the growth there, given that your financial situation continues to brighten? Do you have partners with banks? Is there other equity out there that you might be able to raise in a JV? Where do you feel you stand in this marketplace?

Urs, you know, we are following the markets. There are a number -- not a big umber to be well- the good thing is that it's not a big number of projects out there.

Right.

The one for China Shipping now, I'm not sure if really that is something that is going to be outsourced or not. In general, China shipping had the strategy to keep the larger vessels for their own account lately. So, I don't really think that this project will come out in the market and -- there are a number of other parties that were talking and they are on let's say, standby, if something really comes up. But honestly, there is nothing really in the new building front that makes sense. And for the time being, we are concentrating on the second hand market in order to make some acquisitions of good quality older vessels and maximize the returns on the swap we are doing with the older fleet.

Great. And can you describe the size range -- and forgive me if you had mentioned it, I just have overlooked, the size ranges you might be looking at in the second hand market and the age ranges and what kind of -- what kind of charter backs do you think you might be able to -- to get in this market to today?

Well, you know, today this exercise is let's say a positioning exercise.

Right.

I mean from -- let's say when we show let's say 3,000 [key new] ships, which were built '86, we're looking to buy vessels which are post '98. So we're going to have the minimum of 12 year let's say better characteristics of the same kind of sizes, geared or gearless, and for the time being these vessels are very near OpEx. So we don't expect really these vessels to make let's say any substantial contribution over the next let's say 12 months. But this is an exercise that really positions us to take advantage of the upturn, what it's going to come in the future.

Okay, and not really to put words in your mouth, but I guess it sounds like that this is a market where it -- some patience is needed. That there might be some opportunistic deals out there, but it for the most part, this is a year where Danaos income statement and balance sheet just continues to steadily improve in a market that should improve over the next couple of years, given that demand should exceed growth, should exceed supply growth, is that the right way to look at it?

Yes, well exactly, the good thing you know with our company is that time is in our favor. Because our biggest burden is the swaps and when these swaps goes, our profitability becomes -- goes into a completely different league.

Yes, all right. Well, I mean that's very helpful and Evangelos, if you can give us a call just to make sure we're thinking about the swap -- swaps coming up correctly in our model, give me a call later. That would be great.

Sure.

Thank you.

Thanks very much, Urs.

Guys.

Thank you. Your next question comes from the line of Mark Suarez from Euro Capital. Please, go ahead.

Good morning, guys.

Mark.

Hi, Mark.

Thanks for taking -- thanks for taking my questions here. Just to go back on what you were talking about, you were thinking about post finalized vessels, buying them out and -- in a market that looks fairly attractive. Now, just going back into the sort of the timing as to when do you think you might sell those five vessels, would it be -- am I -- am I -- is it a fair assumption to think that you're going to be selling the remaining five vessels now that you have this selling agreement with your lenders? And what sort of -- and what sort of return measures are you looking for?

Mark, these high vessels come off charter within the next two quarters, it's actually the next five ships that come off charter. We have the option to sell the ships, we have not yet made a firm decision. We will see -- we will evaluate employment opportunities when the time comes and see if it makes sense to settle them. So, nothing definitely yet.

Got you.

Apart from the four ships that have already been sold.

And is there an opportunity to maybe -- if you do in fact sell those vessels to may be go way beyond your debt amortization schedule? In other words, to continue to pay down debt at a higher level at what you're currently planning for 2013?

The -- the underlying assumption is that we sell the ships, up to nine ships. Right?

Yes.

We use the proceeds -- or part of the proceeds, to purchase younger assets until the end of the year and whatever residual is there -- whatever we have not utilized, will go towards reduction of indebtedness. I would expect a small portion of it to ultimately end up reducing debt, but the main theme here is to reinvest and purchase younger assets.

Okay, that's very helpful, okay for modeling purposes.

Now -- now I think you mention also the two laid up vessels. I don't think I -- I got maybe you were cutting off a bit, but can you sort of explain this strategy if there was two laid up vessels, is there a possibility to sell them off before year end or any chance of reactivation in the second half?

Well, actually, just to be clear, the two vessels that we have laid up are not within the full of the ships we expect to sell, or we may sell.

Sure, yes.

So, I do not have clarity on a firm reactivation date. We just -- we do not expect to reactivate them in the near future. They would have to get rates that justify the reactivation and the investment required. Otherwise, it makes no sense, both from a cash flow perspective and from a bottom line perspective.

Got you. Okay. That's all I got for now, thank you guys.

Thank you, Mark.

Thank you.

Thank you. (Operator Instructions).

We do not appear to have any further questions at this time.

Well, thank you very much everyone for your interest in our story and for joining us on the call and have a nice day and we'll expect you for our next earnings release. Thank you.

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