Danaos Corp (DAC) 2013 Q2 法說會逐字稿

Welcome to the Danaos Corporation conference call on the second-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 the conference is being recorded today, Tuesday, July 30, 2013. We now pass the floor to one of your speakers today, Mr. Chatzis. Please go ahead, sir.

Thank you, operator, and 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.

Thank you, Evangelos. Good morning, everyone, and thank you for joining today's call to discuss our results for second quarter of 2013. Despite the ongoing challenging state of the containership market we are reporting yet another solid quarter with adjusted net income of $11.8 million or $0.11 a share and adjusted EBITDA of $107.4 million for the second quarter of the year.

Our adjusted net income was lower by $4.4 million when compared to the second quarter of 2012 as a result of a softening of the charter market between the two periods. However, as the vessels have been re-chartered at current low rates deployed and our shorter charters are currently running at operating breakeven levels, an improvement in the charter market is a one-way option to the improvement of our results.

Effectively over the next 12 months 97% of revenues are contracted with only 3% at stake through re-chartering. We currently have two vessels on cold lay-up compared to seven vessels laid up in the beginning of the year.

As previously reported, we are executing a fleet modernization program based on which during the first half of the year we sold five of the older vessels, an average age of 25 years, for $32.8 million, while we've already utilized $17 million of these sales proceeds for the purchase of two 2,500 TEU container ships -- geared container ships with an average age of 13.4 years. These two new vessels have already been chartered for one year and operate in niche markets.

We have already commenced the rapid deleveraging of the Company through our free cash flow generation. During the first half of the year will reduced debt by $75.7 million while we anticipate to pay down debt by approximately a further $100 million until the end of the year.

On the market front the situation is stagnant. While the liner companies are struggling to absorb the influx of the mega container ships amidst a weak demand environment in the main trade lanes, particularly in Europe, Far East trade with GDP in the euro zone expected to marginally contract in 2013 and the growth figures in China not being as robust as initially anticipated.

The US economy seems to be rebounding, but this is not in itself enough to drive a market improvement. The peripheral trades are doing much better and at the moment this is the only bright side of the market. The order book is currently at only 20% of the current fleet but it is clear that the surplus and shipyard capacity and the low new building prices being offered pose a risk to the timing of the recovery of the market.

Liner companies are once again taking initiatives to mitigate losses such as announcements for general rate increases and the success of these measures remains to be seen. A significant initiative in this direction is the recent announcement for the formation of the P3 network by the world's three largest carriers, Maersk, MSC and CMA CGM, which will be operating from the second quarter of 2014.

Such a network will undoubtedly optimize the operating performance from the anticipated 255 vessels or 2.6 million TEU that participate in the scheme and offer the lowest operating costs in the market. On the other hand, the necessary cascading of tonnage will continue exerting pressure on the charter market for the Panamax vessels ranging between 3,000 to 5,000 TEU.

We will continue our efforts to manage the fleet efficiently and focus on rapidly deleveraging the Company and creating value for our shareholders. With that I am handing over the call back to Evangelos who will take you through the financials for the quarter. Thank you.

Thank you and good morning, everyone. And thanks again to all of you for joining us today. I will briefly review the results for the quarter and then give the chance to the participants of the call to place questions.

During the second quarter of 2013 we had an average of 60.9 container ships compared to 62.2 container ships for the second quarter of 2012, while during the current quarter we sold two of the older vessels in our fleet, the Honour and the Elbe, for a net sale consideration of $14 million. The Honour had been on cold lay-up while the Elbe was sold after being delivered to us following termination of its charter.

Implementing our fleet renewal program during the first half of the year we have sold five of our oldest vessels while we have purchased, as mentioned earlier, two 2,500 geared -- 2,500 TEU geared containerships that have been chartered for a year. Following the already consummated sales and the reactivation of Melisande during the first quarter of the year we currently have two vessels on cold lay-up. Given the state of the market we currently do not anticipate to reactivate these two vessels before the second quarter of next year.

Our adjusted net income was $11.8 million or $0.11 per share for the quarter, down by $4.4 million or $0.04 per share when compared to the adjusted net income of $16.2 million or $0.15 per share for the second quarter of 2012. This decrease is attributed to the softening of the charter market during the last 12 months that led to the cold lay-up of certain vessels and to the re-chartering at lower rates of certain other vessels that currently run at operating breakeven levels while they had a positive contribution to operating income during the second quarter of 2012 as well as, of course, as to the two vessel sales in the current quarter.

It is worth at this point to note that besides re-chartering risk, which is manageable, as 97% of our revenues is contracted for the next 12 months, the most important driver in our earnings today is related to the hedging that we have in place through the interstate swaps. Indicatively our adjusted net income for the second quarter of 2013 currently that stands at $11.8 million would have been $48 million if the current interest rate swaps were not in place.

These swaps start expiring from the fourth quarter of 2014 through the end of 2015 and at that point we expect a significant improvement in earnings given the market expectations for persistent low interest rates. With our average charter duration at 9.3 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 liable environment on the back of solid contracted income generation.

Operating revenues effectively remained the same between the two quarters as a decrease in revenues due to lower re-charterings or lay-ups was offset by the incremental revenues of the three 13,000 TEU container ships that were added to our fleet during the course of the second quarter of last year and they were fully utilized during the current quarter.

Vessel operating expenses increased by 0.6% or $0.2 million to $31.6 million in the current quarter from $31.4 million in the second quarter of 2012. The daily operating cost in the current quarter was $6,160 per vessel per day, slightly higher than the almost $6,000 average daily operating cost from the second quarter of last year, and this is attributed to slightly higher scheduled repairs and maintenance expenses. Still these daily operating expenses are one of the most competitive in the industry.

G&A expenses decreased by $500,000 to $4.7 million in the current quarter from $5.2 million in the second quarter of 2012 mainly as a result of the decrease in the average number of vessels in our fleet between the two quarters.

Interest expense increased by 8.4% or $1.8 million to $23.3 million in the current quarter from $21.5 million in the second quarter of 2012. The change in interest expense was mainly due to the higher average indebtedness between the two quarters, which were by $68 million, actually to $3.35 billion in the current quarter from $3.28 billion in the second quarter of 2012.

Additionally, since our new building program has been concluded no interest was capitalized in the current quarter compared to $1.2 million of interest capitalized in the second quarter of last year. As we are rapidly deleveraging the Company's balance sheet with effectively all of the generated free cash flow, we expect finance costs to continuously improve in the coming quarters.

Realized losses or interest rate swaps decreased by $1.4 million to $37.2 million in this quarter compared to $38.6 million in the second quarter of 2012. This decrease is attributable to the lower average notional amount of swaps between the two quarters as a result of swap expirations partially offset by the $2.2 million of realized losses that had been capitalized last year in association with our new buildings while there was no capitalization or swap expenses during the current quarter. It is worth noting here that as a result of these swap expirations the Company is no longer in an over hedging position.

To conclude, adjusted EBITDA increased by $0.7 million to $107.4 million in the current quarter from $106.7 million in the second quarter of 2012. With that I would like to thank you for listening to this first part of our call. We will now take your questions. Operator?

(Operator Instructions). Global Hunter Securities, Omar Nokta.

I just wanted to -- congratulations on the purchase of those geared container ships. And I was just wondering, could you provide us a sense of what you are seeing in the marketplace right now for charter rates for say 12 months on a geared 2,500 TEU ship versus a gearless vessel?

Well, rates really are not going to be any better. It is just that the employment prospects of a geared vessel are probably better. I mean for the time being all these ships are -- I mean geared ships are maybe at a slight premium to let's say a gearless vessel of the same size. But in any case we are taking at numbers which are pretty close to operating costs.

The only difference is, as I say, that the geared vessels are not so much affected by the cascading because of the trades which they operate. They may be affected by let's say other changes in the structure of the trade but not by the cascading in itself. And that is why we think that also on the basis that nothing really is practical being built in this sector we may have, let's say, a more healthy market in a couple of years.

Okay. And would you -- presumably I guess in this market as you look to deploy more of the capital you've currently raised ahead of sales, would you be looking more into geared ships of similar size so that even though you are paying small -- small upfront payments just due to the fact that they are priced pretty much at scrap, that you would be looking for geared ships just at least to get employment in the near term?

Yes, I think we will look for geared ships. Of course that is on one hand because we believe that these ships will have let's say relatively better prospects. But on the other hand, one, let's say, important consideration is that this is a segment that we do not have any exposure and we would like really to take the opportunity to have a presence also in this area.

Okay. And just also I wanted to ask one final question. You have some of your oldest ships built in 1989, 1991, those I think are rolling off contract this quarter. What do see -- do you see yourself also looking to sell those either for scrap or just selling them in the open market? And then taking those proceeds also and maybe deploying them in the secondhand market today?

Yes, we have earmarked a number of vessels let's say as potential for -- let's say for disposal. We will see how the market develops. But, yes, it's likely that, yes, some of them may be disposed (inaudible) this second half.

Okay. And then just sorry, one more. I just wanted to double check -- in the comments earlier you had mentioned the two vessels that are currently in lay-up, you don't expect to bring those back online prior to 2Q 2014, did I get that right?

Well, no, I mean we have requests to reactivate the vessels, but it is pointless to reactivate them at a relatively low premium to OpEx. If let's say it's -- let's say there is a meaningful really profit to make out of the charter we will do it. Otherwise it is pointless just to go through all the risks of reactivating a vessel, and also we are contributing in a negative way to the market this way.

That makes sense. All right, well, thank you very much.

Euro [State] Pacific Capital, Mark Suarez.

Just to go back on the two year vessels you talked about. What was the source of that deal? Was it from brokers, lenders or operators? I just want to get a sense as to how you managed to purchase those two vessels?

No, these vessels were purchased let's say practically from the open market.

Got you. And can you talk a little bit about what sort of charters you manage to lock them in at? are they at a premium to OpEx levels or breakeven? What sort of charters do you manage to get for them?

They are pretty much because these were reported also, there is nothing really big secret about that. These are around in the region of $7,500 a day which is at a slight premium to OpEx.

And is the idea here to continue to lock them as one-year charters or is there a possibility of doing maybe shorter charters to sort of take advantage of the upturn in the market coming next year?

Yes. Practically in containers you very rarely get, let's say -- I mean you know two, three, four month charters. I mean that is really the exception. So if someone needs the ships he will take it for a year or so. So it is not really a question of our choice to give it. But in general the strategy, yes, is to keep it as short as possible.

Okay. And just to go back to the five remaining mortgage vessels that you have earmarked, I know you mentioned your intention to sell them off, if I hear you correctly. Do you have a sense of the timing as to when that is going to happen? Could that happen all in the second half or do you think that could overlap into 2014?

I think that practically we will try to really to decide within this year what we will do with the ships.

Okay. And do you have a target as to how many new vessels you want to purchase assuming or obviously that you get -- you complete all of the remaining selling of the vessels there? Or do you have like a target in mind in terms of how many -- you mentioned gearshifts, you are actually interested in that segment. Do you have a number in mind, if you will, of how many vessels you want to acquire?

Well, first of all we need to find, let's say, suitable candidates. And once we do we -- probably the intention is really to utilize as much as possible from these proceeds.

Okay and then a final question which relates to be laid up vessels. Is there any chance of maybe selling them off? I mean if you can't reactivate them at a reasonable time or a time that you think makes sense from a cash flow perspective maybe just selling it off will make more sense or is that not something you are thinking about?

I don't think really. I mean these are the ships that we have really that we are keeping today in cold lay-up are vessels which we believe they have the potential to compete in a better market. So they are not really candidates for scrapping.

Okay. I think that is all I have for now. Thanks for your time.

(Operator Instructions). Credit Suisse, Greg Lewis.

John, I apologize if you addressed this earlier on the call. But I mean clearly a few of your competitors have opted to partner with larger private equity firms at this stage in the game forming JVs. Is that something Danaos is exploring? And I guess my question is if it is not, given the potential for private equity alternative investments, whatever we want to call them, it seems like there is a real appetite from that side of the equation to want to make investments and partner up with shipping companies such as yourself.

It is true that we are really we are discussing with a number of firms about possible cooperation. The thing is that because really, at least as far as let's say the Danaos Corporation is concerned, due to the capital restrictions I mean that we had through the restructuring, such kind of joint venture deals are not very let's say very simple to, I mean, to manage as they require a number of approvals from the banks and it is a bit -- as you know, banks do not move very quickly today.

So they would require consents from all our banks so that is a bit of a deterrent. We are looking at some alternative schemes, to be honest, that the vessels, let's say, are acquired privately with -- let's say with the option of the public entity to acquire them at a later stage. But we don't really -- to be honest, we don't see any kind of deals that have -- how can I say -- any returns which are appealing.

On the other hand, because of the low prices, there has been a considerable number of speculative ordering on ships of -- let's say of large ships or ships of let's say 9,000 TEU. And although we are talking about something more than 20 ships on speculation on this segment, charterers at present are a bit let's say reluctant to go and commit into charter contracts because they are trying mainly to concentrate on the existing ships that have been built on speculation and they believe that they can get a better deal through the people who have already let's say committed.

Okay, perfect. Thank you for the time, John. Have a great summer.

Thank you, sir. And at this point there are no further questions. So I now pass the floor back for closing remarks to Dr. John Coustas.

Thank you, operator. Thanks, everyone, for joining this conference call and your continued interest in our story. We look forward to our next earning calls and wish you a nice summer. Thank you.

And with many thanks to both our speakers today, that does conclude our conference. Thank you for participating. You may now all disconnect.