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 3 months ended June 30, 2020. 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 question-and-answer session. Mr. Chatzis, please go ahead.
Thank you, operator, and good morning to everyone. 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.
Now, let me turn the call over to Dr. Coustas, who will provide the broad overview of the quarter. John?
Thank you, Evangelos. Good morning and thank you all for joining today’s call to discuss our result for the second quarter of 2020. We are pleased to report improved adjusted earnings for both the second quarter of 2020 and the first 6 months of the year.
The company’s adjusted net income of $42.5 million for the second quarter of 2020 increased by $8.2 million or 23.9% when compared to adjusted net income of $34.3 million for the second quarter of 2019.
Adjusted EBITDA also improved by $4.5 million or 6% to $80.1 million for the second quarter of 2020 compared to $75.6 million for the second quarter of 2019. Although economic activity has been subdued since the start of the coronavirus pandemic, we have seen increasing signs of confidence with liner companies in recent weeks, as a number of previously blanked sailings have been reinstated, implying the demand is gradually improving.
This is also translated into improving charter rates for vessels greater than 4,000 TEU in size. Recently reported financial results of the liner companies have also been encouraging since, as we had anticipated, prudent capacity management, reduced bunker prices and falling interest rates have more than compensated for the drop in volumes caused by the pandemic.
We are also cautiously optimistic about medium-term market outlook. The orderbook is currently in single-digits as a percentage of the world fleet for the first time in 20 years. Combined with an anticipated reduction in speeds due to the various environmental initiatives, the supply side outlook is healthy. Tighter supply will help to accelerate the recovery in the container market.
We continue to execute our strategy and we are well insulated from near-term volatility due to our high charter coverage of 85% in terms of operating revenues and 62% in terms of operating days over the next 12 months. This provides significant visibility into our cash flows during this period.
By now, we have concluded all scrubber installation investments and took delivery of 2 8,500 TEU vessels during the second quarter. Finally, we have ample liquidity and a $1.2 billion charter backlog, which provides us with flexibility to both manage our business and react to growth opportunities that may present themselves.
Given continued uncertainty about the duration of the coronavirus pandemic and the ensuing economic recovery, we are focused on maintaining a conservative financial profile and making thoughtful capital allocation decisions that align with our strategy and market expectations.
We also remain committed to operational excellence and technological innovation, which allows us to continuously deliver high-quality service to our customers. Our commitment has enabled us to maintain our leadership position in the container shipping industry throughout multiple market cycles and during the current challenging environment. We believe that our focus and strategy will ultimately enhance shareholder value far and above the steel value of our fleet.
And then, I’ll hand the call back over to Evangelos, who will take you through 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 give the call participants the opportunity to ask questions.
Adjusted net income of $42.5 million for the current quarter is higher by $8.2 million, when compared to adjusted net income of $34.3 million for the second quarter of 2019. We have adjusted our net income this quarter for deferred finance fees amortization of $4 million. This increase between the 2 quarters is the result of a $4.5 million increase in operating revenues, a $5.8 million decrease in net finance expenses, and a $1.7 million increase in the operating performance of our equity investment in Gemini, partially offset by a $3.8 million increase in total operating expenses.
More specifically, operating revenues increased by $4.5 million to $116.8 million in the current quarter, compared to $112.3 million in the second quarter of 2019. This increase is attributed to a $13.2 million increase in revenues as a result of contractual step-ups in charter rates following the installation of scrubbers and the addition of 3 vessels to our fleet, partially offset by a $3.4 million decrease in revenues attributed to lower re-chartering and fleet utilization given the softer market conditions and a $5.3 million decrease in revenues due to lower non-cash revenue recognition U.S. GAAP accounting.
Vessel operating expenses increased by $1.3 million to $28.6 million in the current quarter from $27.3 million in the second quarter of 2019, and that was a result of the increase in the average number of vessels in our fleet. While at the same time the average daily vessel operating costs decrease to $5,787 per day for the current quarter from $5,884 per day in the second quarter of 2019, and remains as one of the most competitive in the industry.
G&A expenses decreased by $0.5 million to $6 million in the current quarter compared to $6.5 million in the second quarter of 2019, mainly due to decrease non-cash recognition of stock-based compensation.
Interest expense excluding finance cost, amortization and accruals decreased by $5.1 million to $9.8 million in the current quarter compared to $14.9 million in the second quarter of 2019. This improvement is attributed to a $95.8 million decrease in our average indebtedness and the reduction of U.S. dollar LIBOR by 155 basis points between the 2 periods.
Finally, adjusted EBITDA increased by 6%, or $4.5 million to $80.1 million in the current quarter from $75.6 million in the second quarter of 2019. For the reasons outlined earlier on this call.
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.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Randy Giveans with Jefferies LLC. Please go ahead.
Howdy, gentlemen. How is it going?
Hi, Randy.
Yes, hi, Randy.
Hey. So, first and then foremost, obviously, great to see the new $10 million repurchase authorization. As I’ve been saying the current equity valuation is pretty cheap here. And although I’ve kind of advocated for dividends during this year, share repurchases at these levels certainly make the most sense.
So with that said, authorization is one thing, implementation is another. So based on the current trading volumes, it would probably take a while to repurchase $10 million worth of shares, right? But do you expect to do a tender offer or a privately negotiated transaction here during 3Q?
Yeah, well, it’s not – we don’t really have anything specific. What we wanted is practically for the Board to authorize the share purchases one way or the allocation of capital. And, it will – we would not have any specific, let’s say, kind of targets. We just wanted to have, let’s say, these two in place. And we will use it depending on circumstances and opportunities.
Got it, okay. So no specific plan now, just the opportunity, I guess, gives you the option for it.
Yeah, exactly, exactly.
All right. And then, now that you’ve taken delivery of the final 2 8,500 vessels, how do you view your fleet currently, right, do you expect some sales of maybe the smaller unchartered vessels, possible acquisitions, are you pretty content with your fleet as it stands today?
Well, if there are kind of opportunities as we said, we have ample liquidity and good cash flow. We have not really seen especially in the larger vessels that we are looking for, any interesting opportunities, any collapsing prices or anything like that. As I said, for the time being, I think we have a very good fleet and we will concentrate on the employment of the vessels and to be able to secure even longer term commitment so that we increase the visibility of our cash flows.
Okay, that makes sense. I guess 2 more quick questions. For the charter rates right for the containerships, obviously, it’s been of our second quarter. However, in recent weeks, the rates have been climbing, so it’s been encouraging.
Now, what kind of rates are you booking for some of your intermediate vessels on the short term, through the, call it, 6 month charters?
Well, and – first of all, if I can give you as an indication, how the baby Panamax [is fared] [ph], I mean, these vessels pre-pandemic, they were at something like maybe $13,000 a day. They dropped down to something like $7,000. And now, they’re back up to, whatever, $10,500 or so. Yeah, I mean, that’s more or less where we are on that kind of segment.
And that’s for like the 3,500 to 4,500?
Yeah, yeah.
Okay. Perfect. And then…
So we’re definitely well off the lows.
Right, right. That’s good. And then, I guess the last question, how is the contract business continue holding up? Right, you’ve mentioned, I think it’s 85% in your presentation, 95% of 2020s, pretty much contracted. Charters, still all on board in terms of payments and everything. We’ve seen some of your peers do some kind of reduction in extension for charters. But how do you feel about your counterparties and your current kind of charter backlog here?
Well, first of all, there are some – for some overhead there has been no requests for [high-tried] [ph] reductions. There were some discussions about, let’s say, extensions with kind of a small discount. Some companies have already reported that they have done similar deal. We are looking – if it makes sense to get a small discount and extend the charter for a couple of years.
This is part of our strategy into ensuring let’s say visibility. But the good thing is that all our customers are in very good financial shape. If you see one after the other, the results which we are actually publishing show a much stronger EBITDA than whatever they had budgeted at the beginning of the year even without the pandemic.
Sure, sure. Okay. Well, I think that’s it for me, but I’d certainly advocate for those share repurchases if and when you can. Obviously, the shares are trading very cheaply here. And $10 million is not a huge sum of cash with your substantial charter backlog. So great quarter and keep it up. Thank you.
Thank you. Thank you very much, Randy.
[Operator Instructions] Our next question comes from Chris Wetherbee with Citi. Please go ahead.
Hey, thanks. Good morning, guys.
Hi, Chris.
I guess, maybe a specific question about the quarter. Could you outline sort of how OpEx trends are related to the pandemic? I think we’ve heard operational challenges as a result of crew changes and other things over the course the quarter. Were there any costs that you guys incurred that you could specifically call out so we can get a kind of clean run rate from an OpEx perspective going forward?
There are not really any specific costs. I mean, what is happening, of course, is that we are unable to change crews, which, of course, has a positive and achieve part that we don’t incur traveling expenses. On the other hand, for the crew that we are managing to change, all the associated costs are higher. We’re not talking about mixing huge numbers, but we’re sure it’s above what was budgeted. It’s not – all these costs are not really, I mean financially make a bright situation. What is really much more important for us is to ensure that we manage properly all this process and the people that we have in board are in the proper and should condition to be able to continue their duty.
Okay. Okay. That’s helpful. And then when you think about your – when we think about sort of the facilities that are out there. Can you give us, is there anything more that needs to be done either from a refinancing perspective, if you have kind of a portfolio on the debt side of the house relatively sort of fixed where you want it to be, just want to get a sense of kind of where you are in that process?
Well, there are always – we are always looking at opportunities to, let’s say, to change our debt structure to be better. We do not have, of course, any pressure, I mean, our debt matures, and 2023, so we’ve got plenty of time ahead. But if there are, let’s say, going to be opportunities to either use the course, or to be able to change the profile or anything like that, we’re always looking at opportunities like that. But, as I said, this is purely an opportunity to build, so there’s no need for that. We are very fortunate not to have a need of any immediate refinancing.
Okay, okay. That’s helpful. And I guess maybe my last question is a bit more sort of conceptual, when you think about the liner industry and the incremental consolidation that we’ve seen over the course of the last few years, gotten to the point where there seems to be a bit more discipline from the big players. And like sailing capacity management has become more of a hallmark of the industry. As a capacity provider, how do you think the next couple of years play out in that respect? Would you still expect to see sort of the historical split between chartered in capacity and liner own capacity to hold, do you think that there could be potential any changes to that whether in favor of liner capacity or chartered-in capacity?
I think that the split will have to do a lot with the ability of the liner companies to themselves to finance the new buildings, which will help. I mean, here, as also deferred our business model is at least for the long-term deals, is competing with the Chinese region companies. And in this respect, liner companies have approach to these Chinese lessors to do most of their new buildings and rather than relying to us also, because we don’t have any more of the benefits of off balance sheet financing when the new accounting rules came into existence.
Okay. Okay. Well, thank you very much for the time. I appreciate it.
Thank you.
Our next question comes from Kerem Aksoy with Glacier Pass Partners. Please go ahead.
Hi, great job on the quarter, great to see the year-over-year increase in EBITDA. Thanks for taking my questions. I have 2. First, I was hoping you can talk about the economics of the recent boat which was purchased, Charleston. And maybe some color on the purchase price in charter strategy and how you’re thinking about the unlevered and levered returns for this investment?
Well, the market – I mean, we had made a relatively short-term charter for the ship. Because of all recovered issues to be able in the ship needs to go into dry bulk by end of September. And we believe that the market is already picking up and we’re going to secure a [DSO similar once] [ph] we had before the other systems when we took delivery.
Okay, I’ll keep an eye on that. They weren’t following the Randy’s question. Sorry. We – I didn’t mean to cut you off?
Then okay.
Okay, thanks. I just wanted to follow-up to Randy’s question earlier, kind of at the start of the year the company had an objective of paying a dividend. And I think, he recommended $0.80 per share per year. Obviously COVID had the company put that on hold, which made a lot of sense, though now the markets recovering. So I think the share repurchases is a nice move. And I hear the need to be opportunistic with it.
But I think what shareholders would like to hear, I’m curious what your thoughts are, it is, going back to that commitment to return capital to shareholders, whether it’s a buyback or a dividend. So is that how you guys are thinking about it, is it – you have this opportunistic buyback, but to the extent that opportunity is not available to shareholders expect that capillary returned to be a dividend. Just some color on the overall thought process would be really helpful. Thank you.
Yeah. That what we said the dividend is not actually an opportunistic think, a moment that you declare a dividend and you have a dividend strategy. It’s on the basis that we will be able to maintain. We are in – to date in a scope in – let’s say, strange circumstances. What is happening, I mean, today with the world economy has no precedent. So we cannot commit into these kind of long-term initiatives like the dividend. And at this moment, I’ve not seen many companies including dividend have seen companies cutting dividends or using them or some of them, keeping them, but no one initiating. And the other hand there may be also an opportunity for the share repurchase, tend to we have asked the board to add that kind of tool in all the management initiatives that we may have to enhance shareholder value.
Thanks. That makes sense. It is a pretty uncertain world. I guess, this is kind of we’ll continue to follow and see when there’s enough of market recovery to have that confidence. Thanks for walking me through that.
Yeah.
[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 closing 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. This concludes today’s teleconference. We’d like to thank everyone for their participation. Have a wonderful afternoon.