Danaos Corp
NYSE:DAC
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Danaos Corp
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Omar Nokta - Clarksons Securities
Randy Giveans - Jefferies
Good day and welcome to the Danaos Corporation Conference Call to discuss the financial results for the first three months ended June 30, 2021. 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 Dr. Chatzis will be making some introductory comments and we'll open the call to question-and-answer session. Please note, this event is being recorded.
At this time, I would now like to turn the conference over to Mr. Chatzis. Please proceed.
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. Factors that might affect future results are discussed in our filings with the SEC. And we encourage you to review these detailed Safe Harbor risk factor disclosures. Please also note that when 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. 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 results for second quarter 2021.
The containership market has maintained its positive momentum, which is reflected in increasing rates for both containers and vessel charters. Danaos is continuing to secure charters for its vessels for periods between three and five years. It is noteworthy that some of these charters do not even begin until the middle of 2022. The market appears to be in short supply until at least the end of next year and we have strong leverage to this dynamic.
The pandemic is continuing to cause inefficiencies in the transportation chain, and there is no obvious indication that condition will normalize in the near term. Travel bans or restrictions are continuing to impede our efforts to normalize crew changes. Despite considerable difficulty in joining and repatriation, our vessels schedule have not been affected.
Our liquidity was enhanced in the second quarter by total 152 million from the redemption of Zim and HMM bonds and the disposition of 2 million shares of Zim stock. In the aggregate, our cash balance at the end of the quarter was 294.4 million.
Financially, Danaos is in a very strong position with cash and marketable securities totaling over 600 million, 1.75 billion backlog of charters extended out over an average of 3.4 years and a very manageable debt repayment schedule. We're also generating significant free cash flow on the back of exceptionally strong market conditions. This gives us the capacity and the confidence to grow our core business when opportunities appear. To that end, we exercise our option to purchase 51% of Gemini, our joint venture, taking full ownership of the entity and its assets. This added approximately 116 units contracted revenue and approximately 170 million of contracted EBITDA for backlog. While these vessels are expected to contribute 31 million of EBITDA over the next 12 months. The effective date of the transaction was July 1, '21 meaning it will be immediately accreted in the third quarter. Further resourcing opportunity to buy ships model equity design 5462 vessels built in 2014 and 2015 at a significant discount to their charter free values. These vessels are tied to below market those still profitable charters expiring from May 22 to May 24. We are of similar specification to rebuilding designs offered today and we expect to charter them at levels significantly higher than their existing charter.
We were able to fund these growth opportunities using cash on our balance sheet. And we will evaluate whether we will increase our leverage with respect to these acquisitions moving forward.
Once again, the market dynamics are in our favor as we will continue to deliver the best results possible for our shareholders. With that, I will 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 and thank you for joining us today. I will briefly review the results for the quarter and then give the call participants the opportunity to ask questions.
We are reporting adjusted EPS for the second quarter of 2021 of $3.34 per share, or adjusted net income of 68.9 million, which is compared to adjusted EPS of $1.71 per share, or for the 2.5 million for the second quarter of 2020. This increase between the two quarters is mainly the result of a 29.6 million increase in operating revenues, a 3.8 million improvement in finance costs and 0.5 million improvement in the operating performance of Gemini partially offset by higher total operating expenses, mainly due to the increase in the average size of our fleet by three vessels between the two quarters.
More specifically, operating revenues increased by 29.6 million to 146.4 million in the current quarter, compared to 116.8 million in the second quarter of 2020. This increase is attributed to 23.6 million increase in revenues as a result of higher charter rates and improved fleet utilization and 6 million incremental revenues as a result of the vessel additions to our fleet between the two quarters.
Vessel operating expenses increased by 4.3 million to 32.9 million in the current quarter, compared to 28.6 million in the second quarter of 2020, mainly as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating costs increased to $6,241 per day for the current quarter, from $5,787 per day in the second quarter of 2020, mainly due to COVID-19 related increase, including generation and still remains as one of the most competitive daily OpEx figures in the industry.
G&A expenses increased by 1.1 million to 7.1 million in the current quarter compared to 6 billion in the second quarter of 2020, mainly due to the increased management fees due to the increased size of our fleet and other corporate admin expenses. Interest expense excluding finance cost, amortization and accruals increased by 4.5 million to 14.3 million in the current quarter compared to 9.8 million in the second quarter of 2020. The increase in interest expense is a combined result of a 2.2 million improvement in interest expense because of a decrease in our average indebtedness between the two quarters by approximately 7 million, together with a decrease in our average debt service cost by approximately 0.36%. This was partially offset by reduced positive recognition through our income statement of accumulated accrued interest of 6.7 million that had been accrued in 2018 in relation to two of our credit facilities that were refinanced on in April of 2021.
As a result of this refinancing, the recognition of such accumulated interest has decreased. Adjusted EBITDA increased by 29.5%, or 23.6 million to 103.7 million in the current quarter from 80.1 million in the second quarter of 2020, for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation that has already been posted on our website and a few of the highlights within that presentation are; asset values have improved significantly with the charter attach value of our free to-date at 3.7 billion on the basis of end Q2 2021 Charter 3 valuations provided by independent brokers and calculation of charter premium where applicable in accordance with our finance agreements. And on this basis, we currently calculate our net asset value at 2.97 billion, or $144 per share.
On the operating side over the past few months, we have forwarded several vessels of higher than current charter rate. And our investor presentation has an analytical disclosure on contracts on our contracted Charter book, and the set step ups in charter rates. As a result of these improved fixtures and including the Gemini vessels that from July 1 onwards will be fully consolidated. Our contract backlog stands at 1.75 billion in total, and our contracted revenues for 2021 alone currently stands at 605 million already 143 million or 31% higher than total operating revenues of 2020, which were 462 million.
Our revenue weighted charter coverage stands at 99% for 2021 and 81% for 2022, with contracted 2022 revenues currently standing at $596 million.
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.
We will now begin the question-and-answer session. [Operator Instructions] And our first question comes Omar Nokta of Clarkson Securities.
Yes. I just wanted to ask about the recent deal for those six ecodesigned ships you acquired, obviously 260 million is a good price, and then probably looks at least 100 million below what they'd be worth that they came charter free. So nice way to invest in modernizing the fleet, expanding it without really putting yourself out there capital wise. That's my first question. Just on that transaction, how repeatable is that you think? Are there other opportunities like that? And do you have an interest in doing another one of similar nature?
Well, these are interesting opportunities, we're definitely there to look at them. What is really important is that we are much more geared exactly towards modern vessels, rather than, let's say, just investing in older units, which they may have, of course, at a higher short-term benefit. But, they don't address really the kind of the future development of the company. And what is interesting about the ships is that practically, if we were going today to the yard to build that size vessel, we would get more or less the same specs.
Yes. So definitely good ships. And they are in that sweet spot, if I recall, a couple of earnings calls ago, you mentioned that 4000 to 6000 TEU size range, something that's attractive to Danaos. Is that still the case where you want to be deploying capital within this range?
So, we always in general, we like the larger vessels, but I think that these vessels are 5.5000 TEU. They are actually, at the best kind of, let's say, sweet spot for future opportunities.
Yes, got it. And just on those future opportunities, just a follow up then on these vessels that you acquired, it looks like a couple of them come up for charter, redeployment, looks like ones in March of ‘22, the other ones in July. If given charters are now fixing forward by several months, and quarters, when do you think you'll start to have discussions on redeploying these ships, at least the first two that come open next year?
To be honest, we were already approached by the charter serve these vessels about possible extension. We are going to start to take the delivery of these vessels from mid-August until end September. So definitely, we'll wait first for this process to let's say, to start rolling over and probably within September, we will have much more firm discussions about that.
Okay. That's fair enough. John, thanks for that. And congrats, again, on a very strong development here for the company.
And our next question comes from Randy Giveans of Jefferies.
Couple of questions here. Obviously, the average containership rates have increased for, I don't know, 60 consecutive weeks now. What do you think will maybe caused that to end? And when will that happen? And then in the meantime, will you continue to just forward fix tonnage that comes available in 2022? Or you kind of open a waiting until expiry to book some maybe short-term charters at even higher rates?
Well, our business model has always been to look for the longer term charters to secure our cash flows. And we believe that in a market like this, definitely, locking in charter rates at the current levels is definitely beneficial. So we're looking mostly at charters between three to five years for the ships that are opening up. And definitely charters are there to look at them pretty healthy rates. We are not speculators. And we prefer with -- in accordance with our business model to ensure the long-term earnings of the company.
Yes. I will take that. That's pretty fair. And then, you mentioned some acquisition opportunities. You've already done a couple here in the last month with the JV and then the 5500 or so TEU vessels. But I guess in other kind of uses of cash, repurchases dividend, possibly diversifying into other shipping sub sectors. Any comments on those three, it just seems with DAC shares trading at, I don't know, 50% of your estimated NAV and that maybe 4x EBITDA, it seems like that's a pretty sweet deal on a much better use of cash and maybe buying ships at NAV. So what are your thoughts on that?
Yes. On the other hand, we have come a very long way to first of all, to enhance the liquidity of the stock. And, of course, here we did, let's say the significant stock repurchases at the levels around $7 which will very beneficial overall to the company. At presently, that’s definitely there is considerable upside. On the other hand, the price of the top of the stock is not just a question of NAV, it has to do with the liquidity. So we may well go out and buy stock but then liquidity goes down and that lack of liquidity also will not create let's say long-term value for the company and ability in the future to access the stock market -- it will require.
In terms of the dividends, as we said, yes, definitely an increase in dividends will happen. However, we just started our dividend a quarter ago, this is the second quarter, we're giving dividends. We will be seriously of course, considering the dividend increase from next year.
All right. That's fair. Certainly a lot of liquidity now. But I understand what you're saying on the minimal share that trade. I guess last quick question. The extended lockup for your Zim shares expires in, I think, exactly a month now. Any updated thoughts on the timing of future shares around Zim?
Well, nothing at the present, we have already, I think that the strategy that we had about Zim shares is to sell, just 2 million shares out of the 10.2 that we have. That was really to help also liquidity in Zim shares, and it's exactly through this process that we expect the liquidity to be able to absorb for those maybe share sales that might be done.
Yes. All right. Well, hey, thanks so much for the time. Keep up the good work.
[Operator Instructions] The next question coming from [George Berman] [ph] of CL Securities.
Concerning the liquidity, I agree with you that the share count is pretty minimal. Would you consider issuing the remaining Zim shares as a dividend through your existing shareholders rather than selling them in the market?
Well, I think I'm not sure we've had this question before in the previous quarter, I'm not sure if it was from you or someone else. And we said that the actual Zim shares are part, let's say of the company portfolio and they will be essential when we see fit. And that will trickle through the regular dividends that we are going to distribute. There is no at present any plan for in such distribution.
Okay. But it could be considered on your part, which would probably help the existing Danaos shareholders, you could -- the 8 million shares you have left, you could do several distributions of 10 shares, probably 100 vessel over a time?
So this is not part of the strategy. We've said before that our Zim equity stake is a is clearly a non-operating asset. It doesn't fit into our business model. We are not a holding company holding stocks of our customers. So, these will come -- the plan is that this will convert into cash. Gradually, we will of course, seek to maximize value as we divest. And then we will use this capital to the best interest of the company growing the fleet and of course, we will also consider other capital -- all the palate of the capital allocation decisions. We will grow the dividend but we will not -- it is not our intention at present to distribute this stock to shareholders.
Okay. You recently did a whole refinancing of all your debt. What is the current blended interest rate for your debt at the moment?
The majority of the debt runs up, liable plus 250. And we also have some lease agreements that run at fixed rates, which are a bit higher than that. So I think the blended cost of delivery is in the region of 5%.
Okay. Lastly, I just want to applaud you for not to going in there, all guns blazing and buying additional ships at this apparent high level in the marketplace. I think it's a very good strategy to kind of wait and pick your opportunities as an if they arise.
Thank you.
[Operator Instructions] Your next question comes from [indiscernible] Capital.
Congratulations on a very good quarter. Couple quick questions. So first is on the six vessels that you acquired? So if you were to recontract at current rates, what I guess, what type of uptick in EBITDA could we potentially see from kind of where the contracts are right now? And then, the second question is, regarding liquidity, so you got 290 of cash, right, so between Gemini and six vessels, I think it's around 350 of cash outlay. So, kind of there's a 60 million, I guess, GAAP -- funding GAAP there, I guess, operating cash flow sounds like about 100 million per quarter but depending on timing. So how are you bridging that funding GAAP? Is it via selling more shares of Zim?
And, yes, it's actually we are generating significant amounts of free cash flow. And we will be able really to fund all that to our own cash until the year end. There was an agreement with Gemini to let's say, for the payment to be done at the company's option until year end. And so there is plenty of, let's say, leeway to either, we use our own cash generation, or maybe we'll see if we're going to put in leveraging the new vessels.
And then, on the new acquisitions, it of course, largely depends on what recharging assumptions you make. But we believe that in the near term, with the first couple of ships opening up next year, as it was mentioned earlier, our EBITDA coming from these assets to be north of 40 million annualized and as ships open up even further down the road in 2023 and 2024, this is two, three years out of course, but provided you make certain conservative return assumptions EBITDA could be as high as 50 million.
It appears that we have no further questions at this time, I would now like to turn the floor.
Okay, thank you all for joining this conference call and for your continued interest in our story. Look forward to hosting you in our next earnings call. Have a nice day.