Danaos Q2 2023 Earnings Call Transcript

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August 7, 2023

There are 4 speakers on the call.

Operator

Good day, and welcome to the Danaos Corporation Conference Call to discuss the financial results for 3 months ended June 30, 2023. As a reminder, today's call is being recorded. The company. Hosting the call today is Doctor. John Coustas, Chief Executive Officer of Danaos Corporation and Mr.

Operator

Rivangalos Huttis, Chief Financial Officer of Banales Corporation. Doctor. Katus and Mr. Huttis the fiscal year. We'll be making some introductory comments and then we'll open the call for questions and answers.

Operator

Please go ahead.

Speaker 1

The company. Thank you, operator, and good morning to everyone, and thank you for joining us today. Before we begin, I quickly want to remind everyone the company. That management's remarks this morning may contain certain forward looking statements and that actual results could differ materially from those projected today. The company.

Speaker 1

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 Factors disclosures. The company. 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 the company's financial results to evaluate our business. Reconciliations of non GAAP financial measures to GAAP financial measures are included in our earnings release the company's financial results.

Speaker 1

With that, let me now turn the call over to Doctor. John Coustas, who will provide the broad overview of the quarter. John?

Operator

The company. Thank you, Evangelos.

Speaker 2

Good morning and thank you all for joining today's call to discuss our results for the Q2 of 2023. The company. The world economy stagnated in the Q2 of 2023 resulting in a gradual easing of the container market. The company. Danao's active strategy in the current market condition is made possible by the prudent approach we have taken to manage our balance sheet the conservative levels as well as our successful chartering strategy.

Speaker 2

The latter is reflected in our operating revenues of the €241,000,000 which is near to previous record despite a charter market drop the quarter that is more than 50% lower than a year ago. We continue to be active in the charter market, the highlights of our business model and secure nearly $500,000,000 in new charter contracts during the quarter. The quarter. Our total charter backlog increased to $2,500,000,000 as of the end of the quarter, and contracted charter coverage currently stands the company at 99% for 2023 86% for 2024. The Q2 of 2023, Danaos received the Gold First Place Awards in the Governance and Environment categories the inaugural ESG Shipping Awards.

Speaker 2

These accolades, which we're proud of, acknowledge the company's exemplary efforts in promoting sustainable practices, social responsibility and strong governance the fiscal year 2019 and reaffirm our position as a leader in responsible maritime operations. The timing of the awards is notable as the IMO recently reiterated and strengthened its commitment to decarbonize shipping by targeting net 0 by around 2,050. The. Danaos continues to advance its deterministic strategy in multiple ways. We are constantly optimizing and retrofitting our existing fleet and have committed to upgrade around 20 vessels with new propellers, fuel saving appendages and low friction paints.

Speaker 2

We have also expanded our newbuilding program with the order of 4 additional newbuilding vessels. These vessels, 2 of which are 6000 TEU the Q1, and 2 of which are 8,200 TEU will be delivered methanol ready, ensuring the longevity of our investment. The. In total, we have 10 vessels with a total capacity of approximately 75,000 TEU on order. The year.

Speaker 2

All of these will be able to utilize alternative fuels and importantly 6 of these vessels are already chartered for multi year periods beginning of their delivery dates in 2024. We also deployed capital opportunistically the Q1 of 2019. We believe the long term fundamentals in the dry bulk market are very positive. The quarter. In particular, the order book is at historically low levels and fleet supply growth is projected to decline significantly over the next several years the company's financial results against the backdrop of rebounding demand.

Speaker 2

Shorter market sentiment is not as strong and we were able to make investments at attractive the prices. As has been previously reported, the announced supplier a significant stake in Eagle Bulk Shipping, the New York Stock Exchange listed drybulk company. Additionally, we acquired 5 Capesize Bulkers in the secondhand market. The company. With respect to Igloo, we were able to purchase shares in a company we believed had best in class corporate governance practices the company's net asset value.

Speaker 2

Shortly following our investment, the The Board of Eagle unilaterally implemented the poison pill and repurchased Oaktree Capital's 28% stake in the company the company's earnings at nearly a 35% premium to Eagle's 45 day average share prices and a 32% premium to our a cost basis. These transactions, which were done by Eagle's Board fundamentally alter our view of Eagle's corporate governance. The company. We are concerned with these developments and are seeking clarification from the Board of Directors of Israel. As Eagle Bulk's current largest shareholder, the We have a strong vested interest in seeing the company enhance long term shareholder value and believe that we have a duty to speak up when we think the Board the company and or management may be acting outside the best interest of all shareholders.

Speaker 2

Accordingly, we are committed to working constructively with the with the Board to identify, balance, well considered and effective methods to enhance shareholder value on behalf of all shareholders. The company. With respect to our interest in the drybulk market in general, Danaos has significant experience in the drybulk market as an owner and operator. The quarter. We exited the segment years ago, which was a well timed decision in hindsight, and now we again see opportunity.

Speaker 2

The quarter. Given the strength of our balance sheet, we are uniquely positioned to deploy capital in various ways to grow our revenue base and earnings. The quarter. Our fleet of container vessels, which are contracted in multiyear charters, provide strong revenue and cash flow visibility. While we will continue to grow the future proof our core fleet by adding next generation vessels to it.

Speaker 2

Our ultimate goal is to generate value for our shareholders the fiscal year. As I've said before, our healthy balance sheet allows us to the deploy our capital in various ways. During the quarter, we continued our buyback program and have now spent 60 the $5,500,000 of our $100,000,000 buyback program to retire more than 1,000,000 shares. Finally, we remain company. We are committed to returning capital to shareholders as evidenced by our $0.75 per share dividend announced this morning.

Speaker 2

We will continue to implement our strategy to ensure the long term growth and profitability of the company and are consistently focused on creating 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. Evangelos?

Speaker 1

The quarter. Thank you, John, and good morning again to everyone, and thanks for joining us this morning. I will briefly review the results for the quarter and then the Q2 of 20 the Q23 of $7.14 per share or adjusted net income of 143,400,000 the quarter compared to adjusted EPS of $7.59 per share or $157,100,000 for the corresponding quarter of 2022. This decrease of $13,700,000 in adjusted net income between the two quarters the company is primarily the result of the ZIL13.9 million dividend that have been recognized in the Q2 of 2022, the quarter, which is no longer applicable during this quarter as we have now sold all of our ZIM shares. Otherwise, our adjusted net income improved slightly, the quarter, mainly as a result of the $5,500,000 increase in operating revenues due to better re chartering rates for our fleet, a $10,200,000 decrease in net finance expenses, mainly driven by the significant deleveraging of our balance sheet the $100,000 improvement in total operating expenses, partially offset by $5,400,000 decrease in operating revenues due to the disposals, a $9,500,000 decrease in operating revenues as a result of revenue recognition accounting the quarter and $0.7 million loss on our CTT equity investment that is incurring research and development costs to explore decarbonization technologies for the shipping industry.

Speaker 1

Vessel operating expenses increased by 1,300,000 the $41,900,000 in the current quarter compared to $40,600,000 in the Q2 of 2022 as a result of the increase in the average daily vessel operating cost that increased to $6,970 per day for the current quarter from $6,463 per day in the Q2 of 2022, the quarter, mainly due to inflationary pressures that affected repairs and maintenance costs between the two periods as well as increased insurance premiums. Still, the company. Our operating costs continue to remain among the most competitive in the industry. G and A expenses remained stable to $7,200,000 in current quarter compared to $7,100,000 in the Q2 of 2022. Interest expense, the quarter, excluding finance cost amortization, decreased by $7,600,000 to $5,300,000 in the current quarter compared to $12,900,000 in the Q2 of 2022.

Speaker 1

The decrease in interest expense is a combined result the $5,300,000 decrease in interest expense due to the reduction in our average indebtedness the quarter by almost $700,000,000 between the two periods, partially offset by an increase in the cost of debt service the quarter by approximately 2.9% as a result of rising interest rates. We also had a $3,000,000 decrease in interest the company to capitalize interest on vessels under construction and reduce positive recognition through our income statement of accumulated accrued interest the $700,000 that have been previously accrued in relation to 2 of our credit facilities that have now been fully the prepaid. At the same time, interest income came in at $3,600,000 effectively covering almost 2 thirds of our interest expense for the current quarter. Adjusted EBITDA decreased by 7.7 percent or $14,800,000 to the $177,300,000 in the current quarter from $192,100,000 in the Q2 of 2022, primarily due to the ZYN13,900,000 ZYN dividend that have been recognized in the Q2 of 2022 as previously discussed. The company.

Speaker 1

The other EBITDA drivers have already been outlined earlier on this call. We also encourage you to review our updated investor presentation, which is posted on our website as well as subsequent events disclosures. A few of the highlights are: Over the past 3 months, we have secured the $469,000,000 of contracted revenue to the arrangement of new charters for 12 containerships in our fleet. The new fixtures notably include additional contracted revenues of $177,000,000 for 3 13,000 TEU vessels that were forward fixed on new 3 year charters and 227,000,000 for 5,8000 TEU vessels that were extended forward for an additional 3.6 years.

Speaker 2

The quarter. As a result, our contracted cash revenue backlog has now improved to $2,500,000,000

Speaker 1

with a 3.3 year the average charter duration, while contract coverage is up 99% for 2023 86% for 2024. Our investor presentation has analytical disclosure on our contracted charter book. The quarter. During the Q2, we also prepaid early the remaining lease obligations for 2 vessels, but at the end of the Q1 stood the fiscal year at $66,300,000 and we now no longer have any lease obligations on our balance sheet. The fiscal year.

Speaker 1

As of June 30, 2023, our net debt is down to $131,000,000 In the current interest rate environment, this position shields us from the high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio stood at 0.2 times the quarter and forty four out of our 68 vessels are currently unencumbered and debt free. Finally, as of the end of the second quarter, cash was $293,000,000 while total liquidity including availability under our revolving credit facility the quarter stood at $653,000,000 in total giving us ample flexibility to pursue accretive capital deployment opportunities. The company. With that, I would like to thank you for listening to this first part of our call.

Speaker 1

Operator, we are now ready to open the call to Q and A.

Operator

The first question will be from Omar Latta of Jefferies. Please go ahead.

Speaker 3

Hi, thank you. Hi, John and Evangelos. Good afternoon. The quarter. You guys have been very active here recently.

Speaker 3

You've added some backlog. You've ordered the 2 container ships, bought back some stock, the Eagle and or bought into Eagle and acquired the 5 Capes. Just wanted to ask maybe just kind of if you could frame it, what's changed here the Q1 to give you the confidence to start deploying capital so perhaps aggressively relative to the more restrained outlook you had earlier this

Speaker 2

year? The Well, as we said, we are deploying capital where the We can see, let's say, that there are going to be interesting returns. The and the basic in terms of capital allocation, investing in new ships the company is definitely part of our strategy, but also a requirement for the longevity of the company. The And as I've said, the IMO today is committed the forced shipping into a greener environment. And anyone the doesn't really get it and believes that it's going to be business as usual is going to be for a surprise within the next few years.

Speaker 2

So we definitely need to invest in that part. Secondly, the company. In terms of our investment in the drybulk market, as we've already said, the fundamentals look good. And we believe that the future, we can enlarge our source of income through this market as well. The quarter.

Speaker 3

Thanks, John. And yes, just I did want to ask obviously on drybulk, you spent the past maybe 15 years or so almost exclusively the as a containership company, you've now got the stake in Eagle, gives you exposure to the midsized dry bulk classes, the You've now got the 5 ks on hand. You mentioned having a bigger piece of earnings coming from drybulk. Is this the When we think about the Nautilus going forward, is it really to become a 2 pronged story, the one leg that's containers, one leg that's dry bulk or is this more of an opportunistic investment at this point in the cycle given where sentiment has the sentiment is in drybulk.

Speaker 2

Well, as we said, I cannot really say exactly where we will go because I mean the drybulk market has an interest. The If we are able to deploy capital at attractive prices, it's not that we're going to invest the drybulk at just whatever price in order to diversify our income. So we will definitely be cautious in how we deploy capital. The year. And if there are opportunities, yes, we're going to grow.

Speaker 2

But in the dry bulk market, there is the Our experience, there is one secret. You in order to make money, you have to buy cheaply. If you buy at the top of the market, you will very rarely travel your investment.

Speaker 3

The Yes, that's true. And then maybe then just one final one just in terms of how you intend to operate the dry bulk, the 5ks and potential acquisitions down the line. How do you envision Denaus trading these commercially? The is it you put these vessels out on charter, deploy them on the spot market? That's maybe perhaps one question.

Speaker 3

But then the other is, the do you intend to sort of try to build out a trading platform where you're starting to do TCNs and FFAs and hedging and whatnot? Or is it simply the owned assets and then put them out on charter, whether the spot or TC?

Speaker 2

The Well, first of all, we will do everything in house. If we feel that we require to hedge in the market, yes, we have the the ability to use FFAs as well. This is not necessarily, let's say, something one has to do. The It depends if you want to speculate on both physical and the paper market. So, it's a question of what strategy we're going to have, but we will start by operating these vessels ourselves in the spot market, And we will see how it goes.

Speaker 2

Okay. And

Speaker 1

Omar, if I may add, the This is obviously opportunistic and it's small scale compared to the containership business, right, which is which will continue to be the dominant business. I mean, we are now first half, we have EBITDA of we are on track for $700,000,000 plus of EBITDA for the the full year, dollars 356,000,000 for the 1st 6 months and the contribution of the dry bulk where rates are is going to be very small and the investment in dry bulk versus the fleet value of containers the quarter is again small, right? So to your point, still this is a small this is going to be a small part of the business that we will seek the quarter to maximize, of course, returns, but containers will continue to be the dominant ingredient.

Speaker 2

The quarter. Thank you.

Speaker 3

Understood, Evangelist. Thanks for that. Thanks for the color there. And John, thank you also. I'll turn it over.

Speaker 3

The

Operator

quarter. Thank you. The next question will be from Chris Wetherbee of Citigroup. Please go ahead. Hey, thanks for taking the question.

Operator

I wanted to touch on the Eagle investment and sort of see what your thoughts are now. So what would be your intention going forward with Eagle from here?

Speaker 2

The Well, Chris, for us, we were interested in building, let's say, a sizable investment. We were the block. So there is nothing really we're waiting for, the, let's say, management's next actions to see what they can do the about the actual operations, which are going to be very challenging in the next couple of quarters at least. The And we'll take it from there.

Operator

Okay. Are you so the position is static or would you add to your equity position or do you have the ability to add the equity position?

Speaker 2

We cannot add because we are already above the 15% poison pill level. So we cannot add.

Operator

The Okay. Okay. That's helpful. I appreciate that. And then I guess in terms of your thoughts on where you think incremental capital is deployed most effectively.

Operator

Is it are there opportunities on the container side still that could be interesting? I certainly understand the countercyclicality of investing in dry bulk and that certainly makes sense to us. I want to get a sense of how you think about where that incremental dollar should go from here? Is it dry bulk or is it container or would there be potentially opportunities for other avenues?

Speaker 2

The We do not see any interesting opportunities in the container sorry, in the container market. There are opportunities about older ships, but the I believe that we need to look at the future and look only at very modern tonnage the and possibly buildings and that's the reason also that we have placed these additional core ships for deliveries in the next 2, 3 years. The

Operator

Okay. So then drybulk would be the place where the incremental dollar would go?

Speaker 2

The For the time being, yes. The only thing is that, as I said, dry bulk, we are very sensitive to cost. So we're not just going to change the market up to build value.

Operator

The Okay. Okay. Thank

Speaker 1

you. As long as

Speaker 2

the Yes, sorry, go ahead. The quarter. Okay. Thank you.

Speaker 3

All right. Thanks for the

Operator

time guys. I appreciate it.

Speaker 2

Thank you.

Operator

The call. It appears we have no further questions at this time. Now I'd like to turn the call back over to Doctor. Cautious for any further comments or closing remarks.

Speaker 2

This. Okay. Thank you all for joining this conference call and your potential interest in our story. The Q and A. Thank you.

Operator

The quarter. Thank you. This concludes today's teleconference. We now like to thank everyone for their participation. Have a wonderful afternoon.

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Earnings Conference Call
Danaos Q2 2023
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