Danaos Corp (DAC) 2013 Q4 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Danaos Corporation Conference Call on The Fourth Quarter and Full Year 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'll be a presentation followed by a question and answer session.

(Operator Instructions)

I must advise you that the conference is being recorded today, Tuesday, February 11, 2014. 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 not that when 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 the accompanying materials. Now, let me turn the call over to Dr. Coustas, who will provide the overview for the quarter.

Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for fourth quarter 2014. Danaos is reporting a solid fourth quarter, with adjusted net income of $15 million or $0.14 a share, which is $3.3 million higher than the $11.7 million adjusted net income for the fourth quarter of 2012.

This improvement is mainly a result of reduced financing costs due to the rapid deleveraging of the company's balance sheet. During 2013, we utilized 90 % of our free cash flow generation to reduce indebtedness by $171 million, while we will reduce debt by at least a further $200 million in 2014. Executing on our fleet renewal program, during the fourth quarter we sold four vessels, the Hope, Kalamata, Lotus and Commodore, while we acquire two, 2001-built year container ships, the two and half thousand TEU Danae C and the three and a half thousand TEU Dimitri C.

In January '14, our charter, Zim, reached an in-principal agreement with its creditors, including Danaos Corporation, to restructure its balance sheet, which is currently in the process of recommendation. This agreement, which includes an equity capital injection of $200 million by Zim's parent Israel corporation, resolves Zim's long-standing capital structure problems, but as a result of this restructuring we're recording this quarter an impairment loss of $19 million, on the receivable we had accumulated on our balance sheet related to credit previously provided to Zim.

The container ship market remains very challenging, but there are indications of recovery. Mainline trade volumes in 2013 expanded by 2.8 % on average, compared to 1% in 2012. While the Asia-Europe trade grew by almost 3 and a half percent, an improvement when considering the 4.9% contraction in 2012. On the supply-side, the container ship fleet grew by almost 7% in 2013, outpacing demand growth that came in at around 4.8%. This imbalance is anticipated to subside during 2014, with the growth forecast at around 6%, and high growth at -- around 5%.

Increased (inaudible) is an additional factor, anticipated to mitigate the supply-demand imbalance going forward. Amidst the soft charterm market, we maintain our strong 93% contract coverage, [needing] further downside growing (inaudible) parts market. We continue to be one of the most cost competitive operators in the industry, with our daily vessel operating expenses averaging at just below $6,000 a day for the full year of 2013.

With our resilient business model, both of an operating and a financial standpoint, we will continue to manage our fleet efficiently, while in 2014 we will focus on further deleveraging the company and creating value for our shareholders. With that, I hand over the call back to Evangelos, who will take you through the financials for the quarter. Evangelos?

Thank you and good morning again to everyone. And thank you for joining us today. I will briefly review the results for the fourth quarter, and then open the call to -- participants for questions.

During the fourth quarter of 2013, we had an average of 59 container ships, compared to 64 container ships for the fourth quarter of 2012. Implementing our fleet renewal program, during the year we concluded the sale of nine of our oldest vessels, while we purchased three, two and a half thousand TEU ships, and one three and a half thousand TEU, all of them geared container ships. Following the already consummated sale --- the activation of (inaudible) during the first quarter of the year, we currently have two vessels on cog lay up, the Marathonas and the Duka.

Our adjusted net income was $15 million or $0.14 per share for the quarter, up by $3.3 million, or $0.03 per share when compared to the adjusted net income of $11.7 million, or $0.11 per share for the fourth quarter of 2012. This increase, as mentioned earlier, was mainly the result of reduced financing costs due to the deleveraging of our balance sheet. We would, again, like to note here that besides the chartering risk, which is manageable due to the high count contract covers that we have, the most important driver in our earnings today is related to the hedging that we have in place through interstate swaps.

Indicatively, our adjusted net income for the fourth quarter of 2013 that stands at $15 million, would have been $51.7 million if the current interest rate swaps were not in place. These swaps gradually start expiring this year, through the end of 2015, and as a result we expect a gradual and consistent improvement in our financing costs over the next quarters, given the market expectations for persisting low interest rates. With our average charter duration at nine years, well in excess of the two years remaining duration of the swaps, we believe 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 3.2% or $4.8 million, to a $147 million in the current quarter, compared to a $151.8 million in the fourth quarter of 2012. This decrease is mainly attributable to the softer charter market between the two periods, and the vessel sales, partially offset by the incremental revenue contribution of the new ships that joined the fleet. Vessel operating expenses were $30.5 million, both for the fourth quarter of this year, and the fourth quarter of 2012.

However, on a daily basis, the daily operating cost was $6,019 per day for Q4 of 2013, slightly higher than the $5,857 per day for the previous quarter. As a testament to our operational efficiency, these daily operating expense figures are one of the most competitive in the industry.

G&A expenses decreased by $0.3 million to $4.9 million in the current quarter, from $5.2 million in the fourth quarter of 2012, mainly -- a result of the decrease in the average number of vessels in our fleet, between the two quarters. Interest expense decreased by 5.2%, or $1.2 million, to $22.1 million in the current quarter, to $23.3 million in the fourth quarter of 2012.

The decrease in interest expense was mainly due to lower average indebtedness between the two periods of $152 million to $3.25 billion in the current quarter, from $3.4 billion in the fourth quarter of 2012, as well as the margin of decrease in the cost of debt servicing between the two quarters, driven by lower LIBOR rates.

As we are rapidly deleveraging the company 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 swaps decreased also by $2 million, to $36.7 million in the current quarter, compared to $38.7 million in the fourth quarter of 2012, and this attributable to swap expirations.

Finally, adjusted EBITDA decreased by $3.6 million to a $108.8 million in the current quarter from $120.4 million in the fourth quarter of 2012, mainly as a result of the softer charter market between the two periods as 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). Please stand by and I'll compile the Q& A roster for you. Thank you, and you have a question from Euro-Pacific from the line of Mark Sevas. Please ask your question.

Yes, good morning, guys.

Morning.

Morning, Mark.

Just to go back to obviously the selling of your ships, now that we're past 2013, you sold the last four remaining ships under the selling option agreement, I mean. Do you have a sense of how active you'd like to be adding more vessels to your fleet going forward? In other words, over the next 12 months? And also do you envision adding more of those 2,500 class TEU year container ships to your fleet?

Well, you know, we are contemplating to — maybe extend this agreement. We are in discussion with another, let's say, three older ships we have on our fleet, but that's about it. I think that we are, all the older ships have already gone, and it's maximum three ships that we might, let's say, do the scrap and replace program during this year.

Got you. And do you feel you have enough capacity in your balance sheet, or do we need to tap into the capital markets in the near future, to sort of farm for that renewal?

Well, it's for -- the secondhand renewal, if we do something, we'll do it from our own, let's say, funds. If we are, of course, you know, to do anything on the new building front that will definitely require access to the markets.

Okay, and just to go on to the two lay up vessels you mentioned, what are the prospects of reactivating these vessels in the current market as it stands, you know, in the next six months if you will?

You know, these vessels, let's say, the similar vessels that we have operating are practically at break-even.

Right.

So, it doesn't really make sense to reactivate them in order to run at break-even. So, there is potentially employment, but as I said, that -- at the levels that do not really justify the whole cost and risks associated with reactivating them.

Okay. And just to turn back and -- look at the macro picture at a high level for a second, you know, what -- is your sense of the demand for secondhand tonnage given credit availability out there, and -- have you seen any material changes in the demand for particular vessel segments, by that I mean secondhand, over the last quarter or so, since your last earnings call?

Well, there hasn't been a lot of activity in the secondhand market. There is a number of geared ships that have changed hands, and few, you know, modern Panamaxes, but we have not really seen any kind of flurry of activity.

And that's because, really, people are a bit -- on a wait and see attitude, in terms of the development of the Panamax market, because here, you know, we have really a case on one hand of scrapping older vessels, practically nothing in terms of new buildings, but a continuous supplying to that segment from the cascading effects. So, you know, all values are very kind of delicate balance, and people are just waiting to see the direction.

So, you really haven't seen an increased activity of deals presented to you from distressed financials -- financial firms, I mean, or banks, if you will? Is that, would that be a fair assessment?

No. No, nothing, let's say. We have seen, you know, a few vessels here and there, but still we do not really see the banks, you know, willing to take any losses on these ships, and we're still in a kicking the can down the road mode.

Okay. Got you. Well, that's all I have for now. Thanks for the time, as always, guys.

Thank you.

Thank you sir. (Operator Instructions). As there appear to be no further questions, I shall pass the floor back for closing remarks.

Well, thank you all for joining the conference call and for your continued interest in our story. Look forward to host you on the next earnings call. Have a nice day. Thank you, operator.

Thank you very much, and many thanks to our speakers today. That does conclude our conference. Thank you for participating. You may now all disconnect. Thank you, gentlemen.