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, 2019. 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.
Thank you, and good morning, 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 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.
With that, let me now turn the call over to Dr. John Coustas, who will provide the growth overview of the quarter. John?
Thank you, Evangelos. Good morning and thank you all for joining today’s call to discuss our results for the second quarter of 2019. The company’s adjusted net income of $34.3 million or $2.24 a share for the second quarter of 2019, increased by $5.1 million or 17.5% when compared to the second quarter of 2018.
This improvement was primarily the result of a $4.4 million decrease in net finance expenses and a $2 million decrease in total operating costs, partially offset by a $1.1 million decrease in operating revenues mainly due to re-chartering of certain of our vessels that completed long-term charters over the last 12 months and where we deployed that lower rates during the quarter. Adjusted EBITDA for the second quarter of 2019 was $75.6 million, $2.7 million lower than the second quarter of 2018.
The charter market for 5,500 and larger vessels remained strong over the last three months, and the market for Panamax vessels is presently improving due to the lack of availability of larger vessels. Rates on smaller vessels remain stable albeit at relatively low levels. We anticipate that the implementation of IMO 2020 sulphur emissions regulations will result in a healthy charter market for the larger vessels through 2020 due to downtime related to scrubber retrofits and reduced sailing speeds that a high fuel price environment are expected to bring about.
Escalations in trade tensions between the U.S. and China persist, and uncertainty on the outcome and the impact on trade flows has discouraged market participants from placing newbuilding orders. Collectively, these factors are expected to result in positive vessel supply side effects, which should support the strengthening of the charter market going forward.
Our total contracted revenues as of June 30, 2019 were $1.5 billion, and we maintain our high charter contract coverage of 87% in terms of operating revenues and 71% in terms of operating days over the next 12 months. This insulates us from near-term market weakness.
Danaos continues to be a leader in the container shipping industry on the back of a solid track record of operational excellence and technological innovation that allows us to continually deliver high quality service to our customers. At the same time, the recently concluded refinancing transaction further enhances our ability to pursue growth opportunities and our goal of delivering 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, John, and good morning again to everyone. I will briefly review the results for the quarter and then open the call to Q&A.
Adjusted net income of $34.3 million for the second quarter of 2019 is higher by $5.1 million when compared to adjusted net income of $29.2 million for the second quarter of 2018. We have adjusted our net income this quarter for deferred finance fees amortization of $4.1 million.
Operating revenues decreased overall by 1% or $1.1 million to $112.3 million in the current quarter compared to $113.4 million in the second quarter of 2018. A $3 million increase in operating revenues due to higher fleet utilization was offset by $4.1 million decrease in revenues, mainly due to the re-chartering of three vessels that concluded 12-year charters over the last 12 months and were then redeployed that lower spot rates.
Vessel operating expenses increased by 2.2% or $600,000 to $27.3 million in the current quarter from $26.7 million in the second quarter of 2018, while the average daily vessel operating cost was $5,884 per day for the current quarter and still remains as one of the most competitive in the industry.
G&A expenses increased by $700,000 to $6.5 million in the current quarter compared to $5.8 million in the second quarter of 2018, and this was mainly due to recognition to the income statement of non-cash stock-based compensation.
Interest expense, excluding finance costs, amortization and accruals, decreased by $5.6 million to $14.9 million in the current quarter compared to $25.5 million in the second quarter of 2018. In accordance with U.S. GAAP, at the time of consummation of the refinancing, we recognized in our income statement in advance all anticipated future interest expense for two of our credit facilities through their maturity.
As a result, $11.5 million of interest expense for the current quarter did not flow through interest expense line, as it has already been charged in the income statement. This decrease was partially offset by a $5.8 million increase in interest expense as a result of higher debt service costs, while our average debt between the two periods decreased considerably by almost $644 million.
Finally adjusted EBITDA decreased by 3.4% or $2.7 million to $75.6 million in the current quarter from $78.3 million in the second quarter of 2018 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.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from Randy Giveans from Jefferies. Please go ahead.
Hi, gentlemen. How is it going?
Good. Thanks.
All right. Hey, looking at your fleet charter cable, so you've extended charters on about 14 vessels, four of them for about a year each, the Derby D, ANL Tongala, Dimitra C and Express Argentina. So what are the new one-year time charter rates in these four vessels? And are they higher or lower than previous year?
Randy, the rates really are relatively stable. I mean, it was something like between the 9.5, some kind of recent fixtures are going even higher around 10, 10.5, but that's about it.
Okay. So for all four of those an average that maybe $10,000 a day?
Yes, exactly.
Okay. And then in April, you concluded this $145 million or so sale leaseback transaction for those two 13,000 TUV vessels.
Correct.
Is this financing available for some of your other large container ships? Do you think you'll do maybe a few more of these sale leaseback transactions, increased liquidity a little bit?
Well to be honest, we are not really looking into any such transactions at present. The actually reset in sale leaseback transactions was kind of contemplated as you know doing the restructuring, like we have done in all the refinancing deal was assuming that these two ships would leave, let's say I mean the security of some of the existing lenders. So I don't really see any thing. We may enter into such transactions in case of new acquisitions, but not as far as the existing fleet is concerned.
Got it. Okay. And then just one more, I guess touching on U.S., China, I know you mentioned it very briefly in your prepared remarks. With the trade war making new headlines, new tariffs, currency devaluation and all these things, how do you see the container ship market being impacted by these recent news events?
Well it’s not easy to change a certain supply chain and I mean definitely the people will try to show some of the goods in some of the neighboring Asian countries, which in terms of transport work. It’s is the same if not more than the existing one. But I don't really see that we're going to have any [immediate] effect.
I think we had an effect with people stocking the goods which happened during the preview – last year when people didn't really know what was going to happen and they were trying to transporting goods earlier probably before the year end kind of peak of sales. I don't see that this is happening this year and I don't really see any dramatic impact, a 10% increase in cost.
I mean, if you combine it with, let say evaluation of the one of at least 5% to 7% which was happened within the last year is practically offsetting one another. So I don't really see that this is going to have a profound effect. I mean it might have a larger effect. For example, let’s say in the dry bulk market when the Chinese are not buying, let's say U.S. agricultural products.
But then again also, I mean, if someone requires to import, I don't know soybeans as they did before they were sourcing it from Brazil rather than the rest of the U.S. were exporting its soybeans to Brazil. So lots of things are happening and I think that the trade war is much more negative in terms of sentiment rather than in terms of measurable flows.
Okay. Thank you for the color on that.
Okay.
[Operator Instructions] 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.
Thank you all for joining this conference and for your continued interest in our story. We look forward to hosting you in our next earning call. Have a nice day and a nice summer. Thank you.
Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.