Danaos Corp (DAC) 2015 Q3 法說會逐字稿

Good day and welcome to the Danaos Corporation conference call to discuss the financial results for the three months ended September 30, 2015. As a reminder, today's call is being recorded.

Hosting the call today is Dr. John Coustas, Chief Executive Officer of Danaos Corporation, and Mr. Evangelos Chatzis, Chief Financial Officer of Danaos Corporation. Mr. Coustas and Mr. Chatzis will be making some introductory comments and then we will open the call to a question-and-answer session.

Thank you, operator. 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 and are made 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.

With that, let me now turn the call over to Dr. Coustas, who will provide you with a broad overview of the quarter.

Thank you, Evangelos. Good morning and thank you for joining today's call to discuss our results for third quarter of 2015. We are pleased to report yet another strong quarter, with adjusted net income of $43.8 million or $0.40 per share, representing an improvement of 143% compared to the adjusted net income of $18 million or $0.16 per share reported for the third quarter of 2014.

The main drivers of the improvement in the Company's profitability between the two quarters were a $21.8 million decrease in net financing costs, together with a $5 million increase in operating revenues. Our financing costs will continue to decrease and, as a result, earnings will continue to increase as we continue to execute our comprehensive debt reduction plan and benefit from the expiration of expensive interest rate swap over the next two quarters.

During the third quarter of the year, the industry witnessed the deterioration in the fundamentals of the container market, both in terms of freight rates and charter rates. Idle tonnage has now surpassed the 1 million TEU mark, which represents approximately 5% of the world fleet. This was mainly driven by slower than expected demand growth in Northern Europe, the emerging markets, a trend verified by downward revisions of GDP growth projections recently published by the IMF.

The silver lining is that newbuilding ordering has effectively come to halt while we also expect to see increased scrapping activity over the next 12 months. The combination of supply moderation and the eventual resumption of stronger demand growth will drive the containership sector recovery, which we see beginning in spring of 2016 and strengthening into 2017.

Undeniably, the current market offers many attractive opportunities to acquire assets, particularly in the secondhand market for Post Panamax vessels. During the third quarter, we established Gemini Shipholdings Corporation, a joint venture in which Danaos Corporation holds 49% equity interest, to act against these opportunities. Gemini has already acquired two 5,500 TEU vessels and one 6,500 TEU vessel, all built in 2001, 2002, and recently agreed to acquire on subjects another 6,500 TEU containership built in 2002.

Our investment in Gemini allows us to resume our growth strategy, as weakness in the containership market presents compelling value. It is important to stress that we are doing this without diluting our shareholders and an alignment with the interest of our larger shareholder.

Our charter coverage continues to be at a strong 95% in terms of operating revenue for the next 12 months, which insulates us from market weakness. At the same time, our $5,700 daily operating cost clearly positions us as one of the most efficient operators in the industry. We will continue our strategy of deleveraging our balance sheet and managing our fleet efficiently.

Additionally, as the market presents accretive acquisition opportunities, we will leverage the strength of our platform and our relationships in the financial community to deliver value to our shareholders. With that, I'll 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 this morning's call. I will briefly review the results for the quarter and then give the participants the chance to ask questions. During the third quarter of 2015, we had an average of 56 containerships compared to 54 containerships in the third quarter of 2014. Additionally, as previously mentioned, Danaos holds a 49% interest in Gemini Shipholdings Corp., an entity formed last August that has already acquired two 5,500 TEU and one 6,500 TEU containerships, while it has agreed to acquire a further 6,500 TEU containership anticipated to be delivered in February of 2016.

Our adjusted net income for the quarter was $43.8 million or $0.40 per share, higher by $25.8 million or 143%, when compared to $18 million or $0.16 per share adjusted net income for the third quarter of 2014. This improvement is mainly attributed to a $21.8 million decrease in net financing costs, together with a $5 million increase in operating revenues between the two periods. Our financing costs will continue to improve in the coming quarters as we continue to delever our balance sheet and expensive interest rate swaps continue to expire through the first quarter of next year. As a result, we expect a consistent improvement in financing costs over the next quarters given the market's expectations for low interest rates to persist.

Operating revenues increased by 3.6% or $5 million to $144.5 million in the current quarter compared to $139.5 million in the third quarter of 2014. This increase is mainly attributed to a $3.4 million incremental revenues due to the higher number of vessels in our fleet between the two periods; $1 million of higher revenues due to improved re-chartering of certain vessels at higher rates; and $300,000 of higher revenues attributed to better fleet utilization.

Vessel operating expenses increased by 5.2% or $1.4 million to $28.2 million in the third quarter of 2015 compared to $26.8 million in the third quarter of 2014. This increase is mainly attributed to incremental operating expenses of $1.1 million for vessels Priority and Performance that were acquired during the fourth quarter of last year. The average daily operating cost per vessel slightly increased by 1% to $5,669 per day for the current quarter from $5,611 per day for the third quarter of 2014, and management believes that our daily operating cost ranks as one of the most competitive in the industry.

G&A expenses increased by $0.3 million to $5.5 million in the current quarter from $5.2 million in the third quarter of 2014, mainly as a result of the higher average number of vessels in our fleet between the two periods. Interest expense decreased by 10.7% or $2.1 million to $17.6 million in the current quarter compared to $19.7 million in the third quarter of 2014. The decrease in interest expense was mainly due to lower average indebtedness between the two quarters of $217.4 million, amounting to $2.9 billion of average indebtedness for the current quarter, from $3.1 billion in the third quarter of 2014. As well as a decrease in the cost of debt servicing between the two quarters, mainly attributed to the accelerated amortization of our fixed-rate debt, which bears a higher cost compared to our floating-rate debt.

Realized losses on interest rate swaps decreased by $19.6 million to $12.2 million in the current quarter, a decrease of 62% when compared to $31.8 million of losses in the third quarter of 2014. This decrease, as mentioned earlier, is attributed to more than $1.6 billion of lower average notional amount of swaps between the two quarters as a result of swap expirations.

Finally, adjusted EBITDA increased by 2.6% or $2.7 million to $106.8 million in the current quarter from $104.1 million in the third quarter of 2014, for the reasons outlined earlier on this call. 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?

(Operator Instructions). Mark Suarez, Euro Pacific Capital.

Maybe we can start with the JV formation, Gemini. John, I wonder what the growth strategy through this vehicle is. Is the intention here -- I think you mentioned in the past that you could be looking at secondhand vessels sort of in a 10 to 15 year range, I'm assuming closer to scrap value. Or will you also consider, as your most recent transaction, a [charter in, charter out under verbal] strategy that require your lower cash equity deposit. I'm wondering what the strategy is in terms of growth through that JV vehicle.

Well, you know, the strategy is, on one hand, of course to acquire assets at the lowest possible value at historic lows or below historic lows. And then the issue of financing, let's say comes -- is a different kind of subject. We are discussing the financing as a completely independent part. It's -- of course, the optimization of equities is part of that, but mainly we are looking for financing which is competitive purely on costs. And that is exactly what we're trying to achieve.

Okay. But just following that train of thought, is your preference here to find charter free opportunity or charter attached? I'm wondering if you have a preference. And also do you have any investment budget target in mind as to how much DAC could potentially aim at investing through Gemini here?

Well, we don't have any specific kind of target that we have to spend any amount of money. We definitely have significant more firepower. The thing is to try and find really good and accretive deals. Now, in terms of charter-free or charter-attached deals, we are open to both. In general, we are not paying extra for the charter. We're trying to get charters mainly on a merit basis through our relationships and to companies that know us and appreciate our operational performance. And when we buy of course a ship on a charter-free basis, we are definitely factoring in that maybe that ship, under current circumstances, might be in lay up for a few months.

Right, okay. And so, with that so far in fourth quarter, are you still seeing some good targets in the secondhand market out there? Considering especially in the liquidity and extra firepower now that you have on your balance sheet, I'm wondering if you are still seeing some -- plenty of opportunities out there in that -- in some of the older range secondhand markets that you can go after?

Well, there are plenty of ships. The thing is, with our experience, we need to source also the ships that -- I want to say that are the best in class for their age, of course. And there are lots of ships out there which might be out for sale, but which would be maybe expensive to run, would be high on fuel. So we are very selective unto the type of ships that we invest in.

Okay. And then on the most recent announcement here on the potential to acquire a 6,500 TEU container vessel here, I'm wondering if you can give us some more detail as to whether this vessel already has a charter or was this a purchase outright? Or what are you thinking in terms of -- if you give us some sense of asset values or maybe employment strategy for that particular vessel, that would be great.

Yes. Well, in general we are not disclosing numbers, as you know. But definitely we are working on the shipment -- we are working in parallel for the charter. So, the intention is really to get the ship, what we are working on a three-year charter.

Got you. Okay. That's great. That's all I have for now. Thanks, guys, for the time.

Charles Rupinski, Seaport Global.

Congratulations on the good quarter and good morning. I just had a quick question to follow up maybe on the macro environment. I wanted to get your views on a couple things. First is that there had been -- that you had mentioned earlier in the year a trend toward not using the land bridge in North America and more ships on the water. Clearly rates have pulled back for Panamax vessels, but is this something that you think could potentially come back where people are no longer using the land bridge in terms of the North American voyages?

And the second is there are some new expedited services like APL. And I'm just wondering if that could have an effect on vessel speeds going forward for the industry. Thanks.

Well, in general, we have not seen any significant increase in speeds due to the drop in the oil price. And I think that with the current market situation, people do not have really any intention just to -- let's say to lay up more ships. And because we are still -- even at this kind of oil price, we are still at the borderline of increasing the speed.

And the reason -- yes. And the reason, actually, is that if you look on how the optimum works, the optimum of course speed goes higher when the oil price gets lower. But on the other hand, when the actual charter price gets lower, then actually that brings the optimum speed down and not up. So the combined effect does not really give any significant incentive for liner companies to speed up the ships.

Okay, that's very good color. I appreciate that. And do you have any view on customers earlier in the year with the port strike -- even after the port strike, there's a hesitance to go into the West Coast? Is it basically back to business as usual in terms of the way the customers are perceiving the US West Coast ports?

There is already, from what we have seen some statistics, there is already a kind of a permanent shift of a number of cargoes to the East Coast by direct services. Mainly direct services from Southeast Asia to the US's coast via Suez.

Great. Well, that's a very good color. I appreciate it as always and thank you.

(Operator Instructions) Robert Perri, AXIA Capital Markets.

I just wanted to touch a little bit on the market. I was looking at your presentation, and I know you talked about it a bit in the -- during the prepared remarks. If you look at supply and demand, it looks like the market has finally, least on the smaller sizes, is getting a bit back in balance coming next year. If you look at the order book, obviously it's skewed towards the largest sizes and you are starting to see let's say more vessels -- the larger sizes being laid up.

There's always been the talk about the cascading, but do you think we finally hit the point where the larger sizes have just -- they've hit their limit on where they could go into the smaller routes? And it looks like from now on you are going to see the larger vessels, that are on the mainline routes that are under more pressure, coming to -- continue to be under pressure while the smaller sizes might enjoy a slightly better market?

Well, as I said, in container shipping the whole game is a game of scale. Wherever you can put a larger ship, you will do it. The thing is to put a larger ship requires, on one hand, a certain demand on one hand, and what kind of traffic one liner company can generate. And then the alliance structure -- because the overall demand will be -- the alliances were made exactly in order to be able to use larger ships and enjoy economies of scale.

So, this is the game and this is the trade-off. So, whenever people can they will use larger ships. And that's why historically all the pressure was always building up in smaller sizes. Now, we have an influx of large ships coming at a period that there was minimal growth, and the whole process was derailed. But the long-term fundamentals are there, and it's only a matter of time when growth will resume for people to try and make up for slot costs by utilizing larger vessels wherever they can.

Okay, thank you for that. That's pretty much it from my end. Congratulations on a pretty good quarter.

Gregory Lewis, Credit Suisse.

Sorry, I unfortunately had to hop on late, so I apologize if this has already been discussed. But as we look to the major suppliers -- and I'm talking about the Korean shipyards, and to a lesser extent China -- it seems like there's big issues that the Korean shipbuilding industry is facing. The wage increases that they're -- had to pay looks like it's kind of canceling out the benefit of the won. As we think about how shipbuilding capacity for the container shipping market evolves over the next couple of years, do we think that stays static or do we think that we could actually start to see that come in a little bit? And just given Korea's position as a major builder of containerships, could we see the potential for some of this capacity that is slated and even on contract but potentially not coming online -- in line with those contracts?

Well, you know, first of all, one thing that is for sure is that Korean shipbuilding will be supported, as we have seen with the bailout of Daewoo by KDB. On the other hand, Korean yards were geared into offshore to a quite significant extent. The offshore industry is probably the one in worst states than all the rest. And all the projects are kind of standstill at present. Everybody just tries to postpone them, which means that Korean shipyards will shift their capacity towards conventional shipping.

And of course when we're talking about more high added value ships like the containerships, that's where they are targeting. So, I think that there is no issue of capacity. I think that overall we need capacity reduction, not capacity increase. We've seen, for example, that people like Japan, through Imabari, they are extending their docks in order to build the 20,000 TEU ships. The same thing is happening with SWS in China in order to build the ships order by China Shipping.

So practically, we will continue despite whatever is happening with -- let's say on the cost side. The supply will be largely greater than demand for conventional shipping over the next few years, and I don't see any price pressure in that front.

Great. So just as we see the shift back maybe to the shipyards doing more -- sticking I guess to their wheelhouse in terms of conventional assets, I imagine that starts to put pressure on newbuild prices.

Yes. I think that newbuild prices have not recovered. And since the blip, which was up about maybe a year, year and a half ago, when we had also the bulker ordering at the time, at the beginning 2014. Since then we had a continuous declining price scenario. And I think that we will continue towards that.

Okay, guys. Thank you very much, and hey, congratulations on a great quarter. You guys are doing a great job. Thanks.

Thank you.

It appears we have no further questions at this time. I would like to turn the call back over to Dr. Coustas for any further or closing remarks.

Thank you all for joining this conference call and for your continued interest in our story. We look forward to hosting you on our next earnings calls. Thank you.

Thank you. This does conclude today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.