Danaos Corp (DAC) 2013 Q3 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Danaos Corporation Conference Call on the Third 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, on Wednesday, October the 30th, the year 2013. 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, 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 the broad overview of the quarter.

Thank you, Evangelos. Good morning, and thank you all for joining us for today's call to discuss our results for the third quarter of 2013.

Third quarter of 2013 has been an eventful one to the containership industry, as the overall fundamentals have remained weak. All metrics inevitably lead to the conclusion that 2013 will be a sluggish year.

Liner companies, in their attempt to manage for capacity on the Europe-Far East route, where they need to deploy the super-post-panamaxes being delivered, are cascading smaller post-panamaxes to North-South trades, thereby creating overcapacity in these routes that has led to a significant decrease in box rates. These also affect the charter market of the panamax segment because of the cascading effect.

The excess in shipbuilding capacity remains a risk factor on the supply side, partially mitigated by increased scrapping activity over the last 12 months. However, the fact is that the sustainable recovery in the containership market will ultimately be driven by the rationalization of liner networks and demand growth, with main determining factor in the medium term being the return of the Eurozone to positive GDP growth.

Danaos is reporting another solid quarter with adjusted net income of $13.4 million, or $0.12 per share, $2.2 million lower than the third quarter of 2012, due to the weaker charter market today when compared to one year ago.

However, the few vessels in our fleet deployed under short-term charters represent only 3% of our revenues and already operate close to break-even levels. This means that while we are insulated from a prolonged weak charter market with our 97% contract coverage, an improvement in the market fundamentals can only mean upside for our results.

Another visible upside driver of our results in the coming quarters is the anticipated reduction in finance costs as a result of the rapid deleveraging of the company in combination with the expiration of swap contracts. During the first nine months of the year, we have reduced debt by $120 million, while we anticipate paying down debt by approximately a further $50 million until the end of 2013.

We continue to execute our fleet modernization program, having sold eight of our older vessels with an average age of 25 years, for net proceeds of $52.3 million, and we're still scanning the market for accretive acquisitions opportunities of younger tonnage to complement the recent additions of two 2,500-TEU geared containerships to our fleet.

With a resilient business model, both from an operating and financial standpoint, we will continue to manage our fleet efficiently, while we will continue focusing on the rapid deleveraging of the company and the creation of 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. And thanks 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 third quarter of 2013, we had an average of 61 containerships compared to 64 containerships for the third quarter of 2012. Implementing our fleet renewal program, during the first nine months of the year, we concluded the sale of five of our oldest vessels, while we purchased two 2,500 geared containerships. During the fourth quarter, we have sold a further three containerships.

Following the [already consummated sales] and the reactivation of (inaudible) during the first quarter of this year, we currently have two vessels on cold lay-up, the Marathonas and the Duka. 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 $13.4 million, or $0.12 per share for the quarter, down by $2.2 million, or $0.02 per share, when compared to the adjusted net income of $15.6 million, or $0.14 per share, for the third quarter of 2012. This decrease was the result of decreased operating revenues due to the softening of the charter market during the course of the last 12 months.

We would like to note here that, besides the chartering risk, which at the end of the day is manageable with our strong contract coverage, the most important driver in our earnings today is related to the hedging we have in place through interest rate swaps. Indicatively, our adjusted net income for the third quarter (inaudible) $13.4 million would have been $51 million if the current interest rate swaps were not in place.

These swaps start expiring from the fourth quarter of this year through the end of 2015. And that's the results, we expect a gradual, consistent improvement in earnings over the next quarters, given the market expectations for persistently low LIBOR interest rates.

With our average charter duration at nine years, well exceeding the 2.5 years remaining duration of the swaps, we believe that we will be able to take advantage of the anticipated low LIBOR environment on the back of solid contracted income generation. Operating revenues decreased by 5.1%, or $7.9 million, to $148.4 million in the third quarter of 2013, compared to $156.3 million in the third quarter of 2012.

As mentioned before, this decrease is mainly attributable to the softer charter market between the two periods, as well as the vessel sales, partially offset by the incremental revenue contribution of the new ships that have joined our fleet.

Vessel operating expenses decreased by 1.9%, or $0.6 million, $30.7 million in the current quarter, from $31.3 million in the third quarter of 2012. The daily operating cost for the current quarter was $5,856 per vessel per day, effectively the same as in the third quarter of 2012. This is a testament to the operational efficiency of the company, as these daily OPEX figures are one of the most competitive in the industry.

General and administrative expenses decreased by $0.2 million to $4.9 million in the current quarter from $5.1 million in the third quarter of 2012, mainly as a result of the decrease in the average number of vessels in our fleet between the two quarters with the sale of the older vessels.

Interest expense decreased by 5.4%, or $1.3 million, to $22.9 million in the current quarter compared to $24.2 million in the third quarter of 2012. The decrease in interest expense was mainly due to the lower average indebtedness between the two quarters of $121.2 million down to $3.3 billion in total in the current quarter, from $3.42 billion in the third quarter of 2012, as well as a marginal decrease in the cost of debt servicing between the two quarters, mainly driven by lower LIBOR rates.

As we rapidly deleverage in 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 in combination with swap expirations as mentioned earlier.

Realized losses on interest rate swaps also decreased by $4 million to $37.7 million in the current quarter compared to $41.7 million in the third quarter of 2012. This decrease is due to the swap expirations and the lower average notional amount of swaps between the two quarters.

And finally, adjusted EBITDA decreased by $6.7 million to $109.5 million in the current quarter from $116.2 million in the third quarter of 2012, as a result of the softer charter market between the two periods that was discussed earlier.

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 very much, sir. (Operator Instructions). And your first question today comes from the line of [Omar Nachda] from [Global Anta Securities]. Please go ahead.

Thank you. Good afternoon, guys. I just wanted to - a couple of questions. First, just - maybe just a bit more color from your end on the expiring swaps that you've - you know, you've been talking about here the last few quarters. You talked about how that's obviously going to lead to improving earnings over the next several quarters and years.

Could you give a perspective on what that actually does, you know, balance sheet-wise? How does that impact, you know, your agreements with your lenders? How does that sort of put in position with respect to your covenants?

Yes, well, the effect of that is - it will all [trickle down] to the income statement and to the cash flow. On a pro forma basis, let's say, for 2013, our net income would exceed $200 million if the swaps were not there. And this is where we will get to once the swaps expire, provided, of course, that the LIBOR curve that is currently assumed holds up and we don't have a rapid increase in floating rates.

So this will, of course, more than almost triple free cash flow generation. All of that money is currently designated to reduce debt, as we have decided to utilize our free cash flow to delever the company. But I also believe that, come 2015, we will have much more flexibility with all this cash available and many more other options to explore with our banks. And we will definitely - the company will definitely be in a much better place.

Okay, thank you. And then just on the topic of selling assets, you've obviously sold eight ships out of the nine that you've targeted - already targeted earlier this year. You know, you mentioned you got over $50 million or so of cash in the door. You invested about 18 of that in these two secondhand ships or these two modern secondhand ships.

You know, we're coming up towards the end of the year with only two months to go. How comfortable do you feel that you'll be able to deploy some of this capital before year end? And if not - if you're unable to get that money invested before year end, do you think there's scope with your - with your lenders to be able to extend maybe the ability to put that money to work into next year? Or would you rather just go ahead and pay down debt with it?

Well, we believe, Omar, we'll be able to - let's say, to use much of it, so we are, you know, presently in closed negotiations for some more vessels. So I am sure that, you know, we will utilize most of it by another couple of vessels until year end.

Okay. And presumably these would also be geared ships, like the two you recently bought?

Yes, this is kind of a segment that we are concentrating. It's a segment that we do not have, let's say, any exposure at present. And it's a segment that we believe is more insulated from the cascading. And already we have, you know, a number of panamaxes. And, you know, we believe that, you know, this is a segment that we definitely, you know, have some kind of upside.

Yes. Great. Thank you. Thanks for the time.

Thank you. Thank you, Omar.

Thank you. And your next question comes from the line of Gregory Lewis from Credit Suisse. Please go ahead.

Thank you, and good afternoon.

Hi.

Hi, Greg.

John, could you touch a little bit more about what's going on in the panamax market? And the reason that I'm asking is, it seems - it seems as if every - once we're beyond the peak season, we start to see panamax vessels idled, that starts to move higher, and it looks like it's continuing - we're going to see a repeat of that over the next couple months.

When we think about the fleet - and clearly, you still have a handful of panamaxes, your two laid-up vessels or panamaxes, how concerned are you about your 4,000 class vessels over the next one to two years, in terms of, as these vessels continue to roll off contract, should we think about some more of these vessels potentially being laid up? Or is it - or is the timing of some of these vessel contract expirations in sort of Q1, Q2 of next year? Does that sort of just coincide with another recovery in - for the peak season?

Well, definitely there is, let's say, a kind of a winter lull in the container market. And we are definitely going to see some more activity from spring next year. There's no doubt, the panamax market is a difficult state because of the continuous influx of large ships and cascading.

The problem is that we don't really have any growth in the market. And that is why you cannot really absorb these vessels in the peripheral trades. So what we really need, you know, is to see a revival of growth. Unfortunately, we see that Asia is - really, the performance in Asia is not anything fantastic. Brazil, India are also, let's say, in a retrenchment mode. So, really, I think we have a larger problem on the demand side, which is the one that will pull out all the slack from the supply side.

Okay, so when we think about the panamaxes vessels, that - specifically, the early 1990s built ones in the fleet, should we think about those exiting the fleet in the next 12 months? Is there an appetite for some operators to purchase these? Or is the most likely scenario for panamaxes not necessarily in your fleet, but in the global fleet, in that sort of late '90s, early '90s built vessels? Is it reasonable to think that a lot of these assets get scrapped?

Well, you know, this is, let's say, a kind of a selective question, because there are, let's say, good and economic ships that were built during that time and ships which were built, you know, with higher kind of a consumption and which maybe will not have a kind of a future. It depends. There are ships that are able to slow steam, some other ones that, you know, are unable to slow steam.

So it's not, let's say, just purely an age issue. It has also to do with the condition, and we have seen ships being scrapped which were late '90s or even 2000s, you know, because these ships, you know, they had some kind of a problem.

I see. Okay, great. And then just one final question on new buildings. You know, we've seen more than a few new build orders of super-panamax vessels this year. Is this a trend that we should think about continuing for the next 12 months or from conversations you've had with some of the major liner companies?

Do you get a sense that a lot of these - a lot of the major liner companies kind of have their growth platforms in place and are not really looking to continue to go to yards and place new orders? Or should we expect to see some more orders being placed?

Well, the people who have already ordered ships, I think they are - they have already had enough. What happens in this case is that if there are some liner companies that are, let's say - that wants to participate in some alliance, they need to contribute some vessels. So these are the ones that may be the ones who have not ordered, that may decide, let's say, to approach the yards.

But with the overcapacity at present, I'm sure that, you know, people are having second thoughts about ordering, despite the fact that prices are very attractive. But on the other hand, you know, the price may be very attractive. On the other hand, if you are not able, really, to use the ship, it doesn't make any sense. The big guys, I know that they are really, you know, [full from] super-post-panamaxes, and there is no intention in - you know, continuing any kind of ordering, until, really, they see a very solid return to profitability.

Okay, perfect. Thank you for the time.

Thank you.

Thank you. And your next question comes from the line of Urs Dur from Clarkson. Please go ahead.

Good morning, good afternoon, guys.

Hi, Urs.

Hi, Urs.

Hi. I was wondering - I really wanted to talk more about the market, and you really touched on everything there with Greg. So can you remind in investors, you know, what your rechartering risk is in relationship to EBITDA? How much is exposed next year maybe on a percentage basis? I still think it's relatively small, if I'm not mistaken.

Yes. As we mentioned in our release, for the next 12 months, out of every $100 of revenue that we generate today, $97 will still be there, will be contracted. So 3% of our revenues is at stake, and it's a lower percentage in terms of EBITDA.

We effectively - and to touch upon the point raised earlier on the panamaxes, almost all of the ships that we have on spot charters, which are panamax sort of size, after the sale of the older panamaxes, are already earning rates that are close to break-even.

Right.

So, yes, the market may remain soft and challenged, and they may earn effectively zero, but, you know, we do not stand to take a big hit there. It's already factored. So whatever market improvements will reflect on our results positively.

Great. And can you - and as you talked about the next 12 months, can you give us a little bit of color for, say, '15 and '16? Because, you know, I'm of the belief that demand exceeds supply growth in the coming years, although we still have a lot of big ships delivering and it's certainly still a depressed market and takes a long time for it to come off, but that - in '15 and '16, you could see an improving rate environment, as well as an improving global economy.

And so, you know, what's the charter coverage looking like? Just reminding everybody where it is for, say, '15 and '16 on a similar exposure basis.

Yes. Charter coverage is north of 90% for 2015. And I don't remember the exact number of '16 off the top of my head. It's close to - it's again close to 90, high 80s, maybe, close to 90 for '16. So we don't have much tonnage coming off charter. We have the charter expirations from end of 2016 or 2017 onwards.

Beyond that, it's the ships that we currently have which we basically form our fleet today. We have eight ships that run on spot and two ships that are laid up. So this is actually the spot fleet. From the contracted ships, the next opening is at the end of 2016.

Okay, no, that is - that's very helpful. And thank you very much for your time, guys.

Thank you, Urs.

Yep.

Thank you. And your next question comes from the line of [Annet Soloman] from Neuberger Berman. Please go ahead.

Good afternoon, guys. Nice quarter. I wanted to - I wanted to ask you just one question. I noticed that you have had a [relax of] some of the covenants with your banks earlier with respect to selling and buying ships. And this is more with respect to your ability to pay a dividend, because we're looking at a stock that's stuck in a state of sort of a secular discount to peers in the market. And I think one major thing that can change that is if you are able to initiate even a small dividend.

So if you can just comment on your ability to - if you have been negotiating with the creditors - to go and establish - you know, I think even a dividend in the range of $40 million to $50 million a year would still enable you to pay down your debt, but if you trade to your comparables, that would mean that the stock can double from here, and that would be beneficial both for your shareholders, as well as for your creditors, who have an interest in the equity.

Yes. As you know, and you mentioned it, we have certain restrictions from the bank agreement that we have. And we are currently dedicating all of our free cash flow to reduce debt. I think that we will not be able to initiate a discussion on a dividend before 2015. You have to have certain conditions met. We need to bring down leverage beyond a certain - below a certain threshold, which we expect to happen in '15. The market will hopefully be better, and this will, of course, facilitate such a discussion.

And, of course, as mentioned previously, with all these expensive swaps expiring by then, our free cash flow will materially increase, and then I think we stand a good chance of getting to allocate some of our cash as a dividend. We do not foresee that we will be able, at least for next year, to have such a discussion with our banks. We hope to be in a position to do so from 2015 onwards.

Okay, thank you.

Thank you. (Operator Instructions). And your next question comes from the line of [Mark Sevas] from Euro Pacific Capital. Please go ahead.

Yes, good morning. Thanks for taking my call here and my questions. Just to go back to what you mentioned, you commented on maybe engaging in one or two more transactions before year end. And I'm wondering what is - what are the returns that [you're seeing in your containership] market vis-a-vis some of the panamax vessels?

I mean, obviously, you don't have the cascading effect as pronounced as panamax segment, if you will, but, I mean, they're trading at very near or at scrap in value. So I'm just wondering what you're seeing there that you're not seeing in the panamax segment.

You mean in the geared segment that we are investing?

Yes. Yes.

Well, at present, yes, okay, these ships are operating at - well, above OPEX, not, let's say, dramatically, but, you know, they have charter rates between $7,500 and $8,000 a day. OPEX for these ships is around six or something, so definitely there is a plus.

But the - you know, where we see, really, the benefit in this segment is that it's - you know, it's a segment that is, let's say, insulated to a large extent from cascading. It's a segment that doesn't have any building activity. And when the month picks up, there will be also a significant request from ships of smaller ships of 1,700 TEU to upgrade in the services to 2,500 TEUs. And there are a lot of trades with 1,700 TEUs, which will - once they get upgraded, the next size up is the 2,500, and that's where we see, really, demand being generated for these ships.

To build a new ship of 2,500 TEU today, you need definitely well in excess of $30 million. So, you know, [on the basis] of that kind of replacement cost, it will be very difficult, I mean, to justify a new building. Hence, the secondhand market is going to (inaudible).

Got you. But I was more asking the question of, if you compare the returns in the geared containership market or the vessel, you could go vis-a-vis secondhand panamax between 10 and 15 years, what - are the returns that different in your view, given that a lot of these panamax vessels are trading at very near scrap value at this point in the cycle?

Yes, well, as I say, it's a very - I mean, the panamax vessels will be much more difficult situation, because the supply over there is considerably more, and they suffer from cascading. So the larger ships push down smaller ones.

I still believe that the larger panamaxes will still find, let's say, some employment, but - some good employment, but only when growth returns, and services will need to be upgraded, especially intra-Asia.

Got it, okay. And now just to go back on the laid-up ships, you mentioned you still have the two laid-up Marathonas and the Duka. I know that there are - they were built in the early 1990s. Is there an opportunity here to maybe sell those assets away, as opposed to reactivating them, I think you said, potentially after the second quarter of next year?

We believe, you know, that these assets have potential. They're, you know, very good ships, and we operate also the sister ships very efficiently, so there is no intention of scrapping at this moment.

Great. That's all I have for now. Thanks. Thanks for your time, as always.

Okay, thank you.

Thank you. (Operator Instructions). Thank you. Well, I'd now like to pass the floor back to Dr. Coustas and Mr. Chatzis for any closing comments. Thank you.

Thanks, everyone, for joining this conference call and for your continued interest in our story. We look forward to host in our new next earnings call. Thank you.

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