Danaos Q3 2024 Earnings Call Transcript

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November 12, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the 3 Months Ended September 30, 2024. As a reminder, today's call is being recorded. Hosting the call today is Doctor. John Coustas, Chief Executive Officer of Danaos Corporation and Mr. Vangelos Hattis, Chief Financial Officer of Danaos Corporation.

Operator

Doctor. Coustas and Mr. Hachis will be making some introductory comments, and then we will open the call to a question and answer session. You may begin.

Speaker 1

Thank you, operator, and good morning to 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 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, adjusted net income, time charter equivalent revenues and time charter equivalent dollars per day to evaluate our business.

Speaker 1

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 Doctor. John Coustas, who will provide the broad overview of the quarter. John?

Speaker 2

Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for Q3 2024. The container market remained very strong in the Q3 of 2024, allowing us to add over $300,000,000 to our contracted charter backlog, which presently stands at $3,300,000,000 dollars Importantly, all 14 of our new buildings in order are fixed for 5 years, except for 2 that are fixed for 2 years. We have excellent earnings visibility as we have covered 100% of our container vessel fleet operating days for 2024, 94% for 2025 and 73% for 2026. The drybulk market has been uncharacteristically soft lately, which can be attributed to disruption of seasonal patterns throughout the year as well as a decrease in Chinese steel production.

Speaker 2

Our drybulk fleet performed reasonably well during the quarter, and we're expecting freight rates to gradually improve as we move into 2025. Due to the certainty provided by the chartered backlog in our container segment, the analysis insulated from the unstable and unpredictable nature of the current global backdrop. The recent U. S. Presidential election has introduced new uncertainty about future policy making and its effect in the shipping market.

Speaker 2

Most notably, President Trump has openly declared his intention to implement or increase trade tariffs that have the potential to decrease container movements or at least reshuffle trade lanes. Additionally, it's likely that energy transition initiatives will take place at a slower rate, and we don't know to what extent existing IMO initiatives will be supported by the new administration. The announced remaining in a fortunate and enviable position in addition to our charter coverage. Our balance sheet is a significant strength. I'm proud of the efforts we have undertaken, efforts that have been acknowledged by Moody's, who upgraded Danaos to BA1.

Speaker 2

Together with the S and P credit rating at BB plus Danaos now holds the highest grade assigned to a pure play shipping company. Our credit worthiness will allow us to explore fully the U. S. Bond market, creating opportunity to raise competitively priced capital to continue to pursue growth opportunities. Our continued strong financial performance and a company strengthening of our balance sheet has enabled us to increase our quarterly dividend to $0.85 a share, in line with the commitment we have made to our shareholders.

Speaker 2

We're also continuing to return value through our share buyback program. We have now cumulatively bought back stock worth $123,000,000 and have $77,000,000 remaining under our authorized share repurchase program. We are continuing our efforts to increase the value of the company, while remaining vigilant about geopolitical risks to ensure the long term prosperity of Danaos for the benefit of our shareholders. With that, I'll hand the call back over to Evangelos, who will take you through the financials for the quarter. Evangelos?

Speaker 1

Thank you, John, and again, good morning to everyone. I will briefly review the results for the quarter and then open the call to Q and A. We are reporting adjusted EPS for this quarter of $6.5 per share or adjusted net income of $126,800,000 and that compares to adjusted EPS of $7.26 per share or adjusted net income of $143,000,000 for the Q3 of 2023. The decrease of $16,200,000 in adjusted net income between the two quarters is a result of a $31,100,000 increase in total operating expenses mainly due to the recognition during the current quarter of voyage costs related to voyage charters of our drybulk Capesize fleet and the $3,300,000 increase in net finance costs and those were partially offset by a $17,000,000 increase in net operating revenues and the $1,200,000 improvement on income from investments. Vessel OpEx increased by $10,400,000 to $49,900,000 in the current quarter from $39,500,000 in the corresponding Q3 of 2023 as a result of the increase in the average number of vessels in our fleet, while at the same time our daily OpEx cost increased to $6,860 per day for this quarter compared to $6,500 per day for the Q3 of 2023.

Speaker 1

Our operating costs continue to remain among the most competitive in the industry. G and A expenses increased by $3,900,000 to $11,000,000 in the current quarter compared to $7,100,000 in the Q3 of 2023, mainly due to an increase in stock based non cash costs. Interest expense excluding amortization of finance costs increased by $3,600,000 to $7,400,000 in the current quarter compared to $3,800,000 in the corresponding Q3 of 2023. The increase in interest expense is a combined result of a $4,200,000 increase in interest expense due to an increase in our average indebtedness by more than $200,000,000 between the two periods, partially offset by a reduction in the cost of debt service by approximately 26 basis points, mainly as a result of a decrease in our financing margin cost between the two periods. This was offset by $600,000 decrease in interest expense due to increased capitalized interest between the two periods on vessels that are under construction.

Speaker 1

At the same time, interest income for the quarter came in at $3,100,000 Adjusted EBITDA increased slightly by 0.5% or approximately $1,000,000 to $178,900,000 in the current quarter from $178,000,000 in the corresponding Q3 of 2023 for reasons that have already been outlined earlier on this call. We also encourage you to review our updated investor presentation that is posted on our website as well as subsequent events disclosures. Some of the highlights are that since the date of our prior earnings release, as was earlier mentioned by John, we have added $308,000,000 to our contracted revenue backlog. And as a result, our contracted revenue backlog remains strong and has now increased to $3,300,000,000 with a 3.4 year average charter duration. Our investor presentation has analytical disclosure on our contracted charter book.

Speaker 1

Additionally, as of September 30, 2024, our net debt stood at 305,000,000 dollars and in the current interest rate environment this position shields us from high interest costs. Additionally, the company's net debt to EBITDA ratio stood at 0.4 times while 53 out of our 82 vessels are currently unencumbered and debt free. Finally, at the end of the Q3, cash was at 384,000,000 dollars while total liquidity including availability under our revolving credit facility and marketable securities stood at $785,000,000 giving us ample flexibility to pursue accretive capital deployment opportunities. 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 and A.

Operator

We will now begin the question and answer session. The first question comes from Omar Khachta with Jefferies. Please go ahead.

Speaker 3

Thank you. Hi, John and Evangelos. Good afternoon.

Speaker 2

Hi, Amit.

Speaker 3

Yes, hi. Just a couple of questions from my side. I want to ask you, clearly, as you outlined in the release and the presentation and in the discussion, you've taken quite you've taken advantage of this very strong and resurgent container market really to fix out shifts longer term. You've ordered some new ships in the past, which are now obviously all contracted. Last quarter, you mentioned that you're looking to take a bit of a step back from the newbuilding market.

Speaker 3

So we've really, I guess, we have continued to see the interest on the part of liners to remain relatively elevated for newbuildings. So I just wanted to ask, how do you think about where Danaus is on the newbuilding front? Are you still on the sidelines? Or do you see an opportunity to come back into the ordering side?

Speaker 2

Things are progressing. We are fixing more and more. Actually, we have even increased further our contracted revenue since getting this release out quite substantially. It's not that we do not believe that the market

Speaker 1

will hold.

Speaker 2

It's just that today, we want to see where really where the ball is going, how can I say, to sit? And the biggest issue that we have is really because when you're talking about new buildings, you have always to take into account the future environmental legislations. And what is for sure is that the new U. S. Administration is not going to follow what the previous one is doing, which means I'm not sure really what kind of influence we are going to have on what the IMO is currently discussing about this carbon tax, carbon levy, whatever you're going to call it.

Speaker 2

And this is going really the way that this is going to be enacted. We will influence significantly the decarbonization path. On the other hand, newbuilding prices are really on the way up. And in general, for most of the ships that we have ordered, prices are on the average between 15% 20% more. So it's we're going to wait for, let's say, for this kind of to cool down.

Speaker 2

And the reason is because when we order, we do not order just purely on a back to back with a charter because, as I've said already in the past, deals like that are kind of mid single digit equity returns. And we're not prepared really to go down that path. And when you're actually taking the risk yourself, the price of the asset is extremely important. So this is really the reason that we are kind of temporizing. If we see prices coming back again, retracting, we will definitely be there to take advantage.

Speaker 3

Okay. Thanks, John. That's fairly clear. And just to summarize that simply, given the uncertainty on the new administration, what that means for environmental just going forward, That uncertainty, plus the fact that new building prices are high and you don't know where this container market is going, you're content with how things are and you'd rather, when you order, do it opportunistically to give yourself a better ROE and given that, it makes sense to just wait? Yes, exactly.

Speaker 3

Okay. And then just a second question, I know we've talked about this before on separate calls before. Just in terms of the dry bulk investment, you bought into dry bulk at the market lows, I think starting last year. It strengthened a bit, but it's come off here over the past few months, although I guess you could say recently there's another bounce. But in general, it feels like the sectors may be softened a bit relative to what we were seeing previously.

Speaker 3

How are you thinking about dry bulk in terms of where we are sort of fundamentally and where do you see the NOS going with this segment?

Speaker 2

As I said, we've built a fleet of 10 ships. And as the Capesize is a new segment for us, we are currently in an experienced building phase. We are operating the ships. We want to see exactly where do we see benefits, which are the qualities of the ships that make sense and they are cost effective. And we will follow the market closely and that this market is much more liquid compared to the container market.

Speaker 2

There are opportunities out. And if we see really that there is an opportunity, we will jump on it. On the other hand, as you said, as the drybulk market is mainly China driven, the situation in China, also again with the new U. S. Administration is also relatively unclear.

Speaker 2

And this will act will affect quite a lot the dry bulk movement, especially on Capesizes where iron ore makes a very big proportion.

Speaker 3

Right. Yes. Thank you. And then just sorry to follow-up just and press maybe just one bit further on just the comment you made on, if you see an opportunity, you would jump on it. Is that in relation to an opportunity to acquire assets or to sell?

Speaker 3

Or are you talking to say both?

Speaker 2

No, to acquire more assets or whatever.

Speaker 3

Okay. Good. All right. Well, thanks. That's it for me.

Speaker 2

Great. Thank you, Amar.

Operator

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

Speaker 2

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

Operator

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

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Earnings Conference Call
Danaos Q3 2024
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