Danaos Corp (DAC) 2022 Q3 法說會逐字稿

Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the 3 months ended September 30, 2022. 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. Dr. Coustas and Mr. Chatzis will be making some introductory comments, and then we will open the call to a question-and-answer session. I would now like to turn the conference over to Mr. Evangelos Chatzis. Please go ahead.

Thank you, operator, and good morning to 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 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. John Coustas, who will provide the broad overview of the quarter.

Thank you, Evangelos. Good morning, everyone. This quarter marked retreat of the container market for among sustainable stratospheric highs to more normalized levels, albeit well above 2019 levels. The liner market has experienced a combination of supply chain normalization and demand destruction due to various factors. These include, but not limited to rampant inflation and declining GDP growth, the uncertainties created by the war in Ukraine and an energy crisis. This has been compounded by high inventories in warehouses and delayed collection of containers, both in direct impacts of easing supply chain disruptions. The drop in demand for containerized freight has also significantly reduced vessel demand from opportunistic market participants who were aggressively contracting smaller vessels or extra loaders, which were used during the peak of demand last year. This has led to a significant correction in the sub-3,000 TEU segment as characters are on the sidelines waiting for the market to drop before they commit a vessel.

Charter periods have also been reduced as little as 6 months for smaller vessels as charterers are willing to see how the CII requirements will impact fleet scheduling and what additional slow steaming will be needed to meet the requirements. Danaos is well insulated from the current market environment and achieved record operating profit in the third quarter of 2022. Our commercial efforts earlier this year resulted in a number of new vessel fixtures for our vessels and ended up the quarter with a multi-year backlog of $2.2 billion contracted revenue. We have also continued to strengthen our balance sheet, and we have now fully liquidated our shareholding in ZIM, as we stated we would.

In addition, we have new commitments from our bank group to extend existing bank debt facilities until 2027. This means we have no significant capital requirements or refinancing until then further and then open the call to Q&A. This quarter, we are reporting adjusted EPS of $8.71 per share or adjusted net income of $176.9 million compared to adjusted EPS of $5.32 per share or $109.5 million, for the third quarter of 2021. This increase of $67.4 million in adjusted net income between the two quarters is a result of a $64.1 million increase in operating revenues and $11 million incremental net dividend booked in relation to our ZIM equity holding and a $2.5 million improvement in net finance expenses, partially offset by higher total operating expenses of $10.2 million, mainly due to the increase in the average size of our fleet by 5 vessels between the 2 quarters and inflationary pressures that resulted in incrementally higher daily operating expenses.

More specifically, operating revenues increased by $64.1 million to $160 million in the current quarter compared to $195.9 million in the third quarter of 2021. This increase is attributed to a $76.9 million increase in revenues as a result of higher charter rates, $11.1 million incremental revenues as a result of the vessel additions to our fleet between the two quarters and a $4.5 million increase in recognition of assumed charter liabilities of recent vessel acquisitions. Finally, we also had a $28.4 million reduction in revenues due to lower noncash revenue recognition in accordance with U.S. GAAP. Vessel operating expenses increased by $4.5 million to $39.2 million in the current quarter from $34.7 million in the third quarter of 2021, mainly as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating cost increased to 6,173 per day for the current quarter from $5,918 per day in the third quarter of 2021, mainly due to COVID-19 related increase in true remuneration and the increase in travel expenses as well as increased insurance premiums between the two periods.

However, our daily OpEx figure remains as one of the most competitive in the industry. G&A expenses decreased by $0.2 million to $7.1 million in the current quarter compared to $7.3 million in the third quarter of 2021. Interest expense, excluding finance costs, amortization decreased by $1.3 million to $13.1 million in the current quarter compared to $14.4 million in the third quarter of 2021. This decrease is in interest expense is a combined result of a $1.5 million decrease in interest expense because of lower average indebtedness by approximately $467 million between the two periods due to extensive deleveraging that we have done since then. And that was partially offset by an increase in cost of debt service by almost 1.5%, mainly as a result of rising floating interest rates.

We also had a $1.3 million decrease in interest expense due to capitalized interest on vessels under construction and we also have reduced positive recognition through our income statement of $1.5 million of accumulated accrued interest in relation to our 2018 refinancing that has since been fully repaid. Adjusted EBITDA increased by 42.4% or $63.5 million to $213.1 million in the current quarter from $149.6 million in the first quarter of 2021 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation posted on our website as well as subsequent events disclosures.

A couple of highlights follow below. As of the end of the third quarter, our contracted cash revenue backlog stood at $2.3 billion with a 3.5-year average charter duration while contract coverage is up 100% for 2022, 88.4% for 2023, while even for 2024, it is already at 62%. Our investor deck has analytical disclosure on our contracted charter book. Finally, as reported in our earnings release, the company is working to conclude a $437.75 million refinancing within Q4 that would extend maturities of bank debt to not before the 2027 at improved pricing terms, while most of this amount or $382.5 million will be in the form of a revolving credit facility that would provide the company with increased flexibility in managing capital allocation. Finally, pro forma for this refinancing transaction, more than 60% or 45 vessels out of 71 vessels of the company's fleet will be debt-free and unencumbered. With that, I would like to thank you for listening to this first part of our call. Operator, we are now ready to open the call to Q&A.

We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Omar Nokta from Jefferies.

I just wanted to follow up maybe (inaudible), now you just touched on the new facility, you're going to have 45 unencumbered ships from the 15 currently. I am just thinking about that 30 ship increased and debt-free capacity. Is that simply because you're not needing to put up 30 vessels as collateral for this new facility? Or is it simply that you're going to be paying down a big chunk of debt and not really draw on the revolver once it's completed?

No. Thank you for this question, Omar. Well, these vessels that were previously securing the debt that is now being refinanced. This was a facility that was put together in 2021. It was for $815 million and at that point, these vessels were part of the security package because they were required to be. Since then, we have significantly reduced the facility down to $438 odd million, so these securities are no longer required. And part of refinancing exercise was also to rationalize security allocation on debt facility, which is being achieved. And also, of course, the evolving feature gives us way more flexibility than we previously had.

Just to the extent you can say, how much do you think of the revolving portion of the facility you'll draw down from the get-go?

I don't expect we will draw down from the get-go any of it. It will be fully committed with 2 or 3 business days notice to draw funds whenever we want. All the securities will be in place, but we're not going to grow it unless we need it. And I don't expect we're going to require it in the near term at least this side of this year.

So maybe just kind of taking a big step back, clearly, you've taken advantage of a pretty robust market here over the past 2-plus years. You strengthened your cash position, you've lowered your debt, you've got the backlog at $2.3 billion. You sold the final piece of ZIM, and your cash balance is now pushing close towards that $600 million. Even in the past, you've sold ships, order ships, paid down debt, bought stock, paid out dividends. What do you think as we get into 2023, the priorities for use of cash? And generally, strategically, how are you thinking about the company should get into next year?

Well, Omar, as I said that we will continue with the buybacks and we'll have to wait and see when the opportunities come. As you know, shipping is a cyclical business and there is definitely going to be a downturn with all what's happening. I don't believe we have already seen really the extent of the drop because all the increase of interest rates, et cetera, has been pretty sudden. But I'm pretty sure that going forward, we will see the effects of all this type and inflation. And we will be there to take advantage of all the opportunities that are going to arise. We have 6 rebuilding vessels, which is in progress. And this is a very important step where these ships were the first kind of green vessels ordered by the company. And it's very important to be able to follow also that market. It is going to be important and how really the whole shipping industry is going to respond to the decarbonization requirements. The good thing is that with interest rates also going up, as we have said, we are totally insulated as we will live practically 0 net debt by year-end. We will really hope to be able to make accretive acquisitions within the next 1 to 2 years.

Definitely, it sounds like you guys have the liquidity, both in terms of cash and really $400 million plus of revolver capacity. That will be interesting to see.

The next question comes from Chris Wetherbee from Citigroup.

I guess maybe first detailed question. Can you give us a sense of what you expect for dry docking in the next couple of quarters?

I have to check my records, but to the best of my recollection, I think it's going to be 4 ships, something like $5 million or $6 million.

In terms of the vessels that you have rolling off charter in the next 6 months, where there isn't another charter or options, I'm curious about your sense is in terms of shipper demand. Obviously, the market is in a significant period of flux right now with spot rates dropping fairly drastically over the last several months, but there has been some expressed interest by shippers to make sure there is capacity and a chartered out as such. What do you get the sense in terms of the real-time conversations you have with shippers, what their expectation is and sort of what their position is going into rate negotiations? How aggressive do you think shippers are beginning to get.

Definitely, there are great negotiations from (inaudible) towards the line of company. There are no rate renegotiations between the line of companies and ourselves that has never been really the case. Now for the time being, the biggest difference we have is not that the number of ships has increased dramatically. What we have is on one hand that utilization of the vessels has dropped and this is exactly because utilization has dropped the pressure on container freight rates, has also dropped. But for the time being, as I said, there are no idle ships.

We had one ship that was opening towards year-end, a small one around 2,200, the smallest we had. And we charted it in line with the market for 6 months for around $15,000 a day. Prior 2019, it was earning somewhere between $8,000 and $10,000 a day. So as I said, we are still above that. What is really for the time being changed apart from the rate drop is that charterers are not willing to commit long term. We are talking about 6-month periods, whereas before for the same ships, for example, when with some system ships that we've chartered before we managed to get 2 years. I mean that's (inaudible) in the cards.

The expectation would be maybe agreements would end up being shorter term in nature from the liners?

Yes, it will be shorter term and of course, considerably lower than the peak that we have seen, in any case, we always knew that, that was never going to be forever.

I don't want to state the obvious here, but we're obviously insulated from such softening because we have tremendous contract coverage. I just want to mention it.

You guys have done a really good job in terms of vessel OpEx. Can you give us a sense of whether or not you're seeing inflationary pressures on the vessel OpEx as you move forward, any sense of how we should be thinking about that for the next couple of quarters?

Obviously, there are such inflationary pressures. If you look at our OpEx, not just for our company, but broadly for the sector, it's been more or less a flat line for the past many years. I don't expect that this will continue to be the case over the next few quarters. We will see increases, but I don't consider them to be spectacular or like maybe 2%, 3%. So obviously, it will not be flat as before, but it would not be something that will materially affect earnings.

I guess just last question, following up on the last one from around the lines of sort of new investments. You have 6 vessels coming in on 2024. Do you think that, that sort of it for the time being, would you be willing to put anything into the order beyond 2024? Just kind of curious what your appetite is for new building vessels.

With these new building vessels, we wanted, of course, to be the process also reviewing the fleet. It's very important also to show to our customers that we are minded about quality going forward and also to experiment on new vessels. As you know, new ships are ordered to be methanol ready. So at some stage, we will do kind of conversion. For the time being, there is no clarity as to what's going to happen with alternative fuels. And also as everything also is a factor of cost. You have seen, for example, that all the LNG power vessel today due to the price of LNG, they are running on fuel oil. So with this kind of energy crisis that we're going to have for a considerable amount of time, all the decarbonization attempts will need to be revisited. What is extremely important is that with the upcoming CII regulations, we are going to see a lot of new efforts in oil to reduce emissions by optimizing the vessels as much as we can, but also, which is very important, our charterers will need to adjust the speeds of the ships in order to reduce the carbon footprint.

The next question comes from (inaudible) from Value Investors.

Your cash balances have increased noticeably on a quarter-over-quarter basis, in line with very strong operating performance. Despite the strong cash generation, few repurchases have been conducted on top of the $25 million buyback, you announced in quarter 2 earnings. Was there any reason that made you curtailed buybacks during the second half of the quarter? And looking ahead, you provided some high-level commentary on capital allocation. And I was wondering if you could provide some more insight on how do you plan balancing potential vessel acquisitions with share repurchases and dividends.

Well, as I said, share purchases need to be tying accordingly. And for the time being, we are working towards maximizing the operational performance and operational income of the company. The buybacks will be at a time that we believe this opportunity. We don't have a specific problem and say we're going to buy so many shares every month. The market is fluctuating quite a lot. And we want really to optimize share purchase for the benefit of our long-term shareholders.

Looking at the new builds, you had previously mentioned potentially taking delivery of those on a levered basis. Is that the plan? And secondly, after recent weakness in rates, how should we think about associated charters are longer-term contracts still available? Or would we be looking at shorter term, says, 2 to 3 years? If you're talking about the existing fleet, for the time being, the contract for the smaller vessels are up to 6 months. The slightly larger ones you could do maybe a year or so, maybe even a bit more. As far as the new buildings are concerned, whatever we are discussing interest from various parties is, of course, from 5 years plus.

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 comments or closing remarks.

Well, thank you, everyone, for your interest in our story. We will work and continue to deliver the best possible results for our shareholders. Thank you.

This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.