Danaos Corp
NYSE:DAC
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Danaos Corp
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Good day and welcome to the Danaos Corporation conference call to discuss the financial results for the three months ended June 30, 2018. 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.
The floor is now yours.
Thank you and 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 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 the 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.
Now let me turn the call over to Dr. Coustas, who will provide the broad overview for the quarter.
Thank you, Evangelos. Good morning and thank you all for joining today’s call to discuss our results for the second quarter 2018. Following the successful completion of our debt refinancing, the company’s capital structure has been strengthened by significant debt reduction of approximately $551 million, while financial covenants have been amended and maturities extended by more than five years, until the end of 2023. We are currently fully compliant with all terms of our debt agreements and the company is now free to resume its pursuit of growth opportunities with the goal of creating value for its shareholders.
The company continued to achieve strong financial results in the second quarter of 2018. Adjusted net income of $29.2 million for the quarter was slightly higher when compared to $29 million for the second quarter of 2017.
The charter market showed signs of improvement in the second quarter but has softened since by about 10% to 15% on average across all segments since June. Larger vessels have recorded slightly higher percentage reductions as they had outpaced the market average. The market is very skeptical of trade developments and the recently announced new tariffs on Chinese imports. At the same time, uncertainty discourages new ordering, which is positive for the medium to long term health of the charter market as liner companies are refraining from making substantial commitments until the outlook becomes clearer. There is interest on the new regulations and the quest of scrubbers, and we expect this to play out over the next few months.
We are of course largely insulated from the softening charter market since we maintain high charter coverage of 87% for the next 12 months based on our current operating revenues and 77% in terms of contracted operating days. Danaos continues to be a leader in the container shipping industry as a result of our intense focus on continuously enhancing our operations and leveraging technical innovation to provide the highest quality service to our customers. Our industry has undergone significant changes during the past few years, and with the improved capital structure contemplated by our comprehensive refinancing agreement, we are well positioned to take advantage of the growth opportunities in the container sector and create value for our shareholders.
With that, I’ll hand the call back to Evangelos, who will take you through the financials for the quarter.
Thank you and good morning again. I will briefly review the results for the quarter and then give the opportunity for call participants to ask questions.
Adjusted net income of $29.2 million for the current quarter or $0.27 per share is slightly higher when compared to adjusted net income of $29 million or $0.26 per share for the second quarter of 2017. Operating revenues slightly decreased by 0.4% or $400,000 to $113.5 million in the current quarter, compared to $113.9 million for the second quarter of 2017, mainly due to more scheduled off-hires in this quarter compared to the previous one.
Vessel operating expenses decreased by 1.8% or $500,000 to $26.7 million in the current quarter from $27.2 million in the second quarter of 2017, while the average daily operating cost was $5,762 per day for the current quarter and remains as one of the most competitive in the industry. G&A expenses increased by $500,000 to $5.8 million compared to $5.3 million for the second quarter of 2017 due to increased professional fees. Interest expense excluding amortization of deferred finance costs increased by $1.9 million to $20.5 million in the current quarter compared to $18.6 million in the second quarter of 2017 mainly as a result of approximately 92 basis points of higher LIBOR rates between the two quarters. This increase in LIBOR was partially offset by our persistent efforts to de-lever our balance sheet during the last 12 months leading to June 30, 2018, we reduced our indebtedness by $134.5 million.
Finally, adjusted EBITDA increased by 0.3% or $200,000 to $78.3 million in the current quarter, from $78.1 million in the second quarter of 2017 for the reasons outlined earlier on this call.
With that, I would like to thank you all for listening to this first part of our call. Operator, we are now ready to open the call to Q&A.
[Operator instructions]
Our first question comes from Randy Giveans of Jefferies. Please go ahead.
Thanks Operator. Hey guys, congrats on the debt refinancing. So, two quick questions. Now you’re saying you’re able to pursue some fleet growth. Would that be kind of selling maybe some of the feeder-max or feeders, intermediate Panamaxes, and pursuing larger tonnage, or are you going to be focused on that medium class or the smaller vessels?
Well Randy, we will grow where really the market requires growth, and at this moment there is--there are some growth opportunities in the feeder sector. On the other hand, there are still, let’s say, requirements in the medium term for medium sized -- when I say medium sized, I’m talking 10,000 to 13,000, 14,000 TEU vessels, and this is also another sector that will be of interest and will be required in the next few years.
Okay, and would that growth come through new buildings or second hand purchases? Is there much of a second hand market in that tonnage class?
Well, it will all depend. I mean, we are looking at all kinds of options. In that kind of segment, there is very little in terms of second hand that we are talking, so mainly the growth will come through new buildings. However, that’s not going to be speculative, so we are really monitoring very closely the requirements of our customers.
Okay, and then I see now you’ve kind of reclassified the short term debt below $140 million. What is your expected debt repayment in the back half of this year and 2019?
Well, back half of this year, we expect in Q4 to pay approximately $33 million, $34 million of debt, and I don’t remember the number off the top of my head for 2019 - I’m going to have to get back to you, but it’s something in the region of $120 million.
Okay, that’s fair. Yes, you can get back to me. Last question, how are the discussions with charterers going in terms of possibly installing scrubbers? I know you are kind of working with them and letting them kind of decide on that obviously with them having the long term charters attached.
You know, there’s still a big debate on this issue. In general, the shipping community is, let’s say, against scrubbers, although they may make economic sense. On the other hand, there are at present a lot of discussions about a transition phase which has been actually presented to the IMO from various administrations, and we really have to wait and see how exactly this is going to play out before there is a final commitment about scrubbers.
As far as we are concerned, we have made extensive studies on our fleet of which vessels are eligible and it’s possible to install scrubbers, and we are ready at very short notice to go ahead and have them installed prior to 2020.
Okay, so no decisions yet, still kind of waiting with the charterers to see which vessels [indiscernible].
Yes. I mean, there are some charterers, or course, who are nibbling on the subject, but what is for sure is that scrubbers cannot be--it will be a solution for a very small part of the fleet, not the whole fleet. The fleet will need to rely on compliant fuels.
Sure, sure. That’s fair. Thanks again, and congrats on the debt refinancing.
Randy, before you go, because I checked the numbers, the amount for 2019 is $150 million.
Thank you. [Operator Instructions].
It appears we have no further questions at this time, so I’d like to turn the call back to Dr. Coustas for any final remarks.
Thank you all for joining this conference call and your continued interest in our story. We look forward to hosting you on our next earnings call. Have a nice day.
Thank you, sir. This concludes today’s teleconference. We would like to thank everyone for their participation and have a wonderful afternoon.