Danaos Corp
NYSE:DAC
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Danaos Corp
Earnings Call Analysis
Q2-2024 Analysis
Danaos Corp
In the recent earnings call, the leadership of Danaos Corporation painted a picture of resilience in the face of market disruptions, including challenges in regions like the Red Sea and ongoing situations in Ukraine. Despite these headwinds, the company has successfully navigated its strategic goals, including securing charter extensions and ramping up its newbuilding program to 20 vessels. The executives expressed optimism about the future, indicating that they are well-positioned to capitalize on opportunities in a tightening market.
Danaos reported an adjusted earnings per share (EPS) of $6.78 for the second quarter of 2024, a slight decline from $7.14 in the same period last year. This translated to an adjusted net income of $132.3 million, down $11.1 million year-over-year. The decrease was primarily attributed to a $19.9 million increase in operating expenses related to voyage costs, which was mitigated somewhat by a $4.8 million increase in net operating revenues and lower finance costs. Importantly, the company managed to keep its adjusted EBITDA stable at $176.8 million, only slightly down from $177.3 million a year prior.
A significant highlight from the call was the company's robust contracted revenue backlog, which has climbed to $3.2 billion, up by approximately $900 million over the past two months. This backlog has a favorable average charter duration of 3.4 years, with contract coverage standing at an impressive 99% for 2024 and 80% for 2025. This visibility in revenue expectations provides a solid foundation for the company’s financial health moving forward.
The company reported an increase in vessel operating expenses, which rose from $41.9 million to $47.1 million, attributed to a higher average number of vessels in its fleet. However, average daily operating costs remained remarkably stable, at $6,961 per day, only slightly down from $6,970. General and administrative expenses also saw an increase but were effectively managed considering the context of the growing fleet, reflecting the company’s commitment to operational efficiency.
Danaos maintains a commendable financial structure with net debt standing at $205 million, which results in a low net debt-to-adjusted EBITDA ratio of 0.29x. During the call, management emphasized their strength with 53 out of 80 vessels debt-free. The total cash reserves were recorded at $372 million, and overall liquidity, which includes available credit facilities, totaled $787 million, allowing ample flexibility for future investments.
The company is focused on its newbuilding program, having secured multiyear charters with an average duration of approximately 4.5 years for new vessels. The plan includes delivering 20 newbuild ships to diversify and fortify revenue streams. Although there are discussions about further investments being prudent and conservative, management displayed a readiness to explore future opportunities given the favorable market backdrop.
Looking ahead, Danaos is optimistic. With contracted charter coverage of 99% for 2024 and 80% for 2025, the company is well-positioned to achieve consistent revenue streams. The executives reiterated their focus on maintaining a balanced financial approach while pursuing smart growth within the context of evolving market conditions. Going forward, they expect to maintain similar 60% loan-to-value financing on future newbuilds, projecting total financing around $1.2 billion for the new vessels.
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Good day, and welcome to the Danaos Corporation Conference Call to discuss the financial results for the three months ended in June 30, 2024. 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, operator, and good morning to everyone, and thank you for joining today's call. 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, adjusted net income, time charter equivalent revenues and time charter equivalent dollars per day to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the accompanying materials.
With that, let me now turn the call over to Dr. John Coustas, who will provide a broader 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 2024. In the last few months brought continued market disruption as conditions in the Red Sea remained challenged and the Ukraine were persisted. Panama Canal Crossings, however, returned to normal levels, eliminating that source of disruption to now.
Market conditions have led liner companies to reassess their capacity requirement and last to secure tonnage, including tonnage with forward deliveries. The forthcoming environmental legislation has further incentivized liner companies to secure modern newbuilding tonnage for medium-term requirements without making long-term commitments in the majority of cases.
In this environment, we have secured charter extensions for a number of our existing ships. And further, we extended our newbuilding program to a total of 20 vessels, three of which were delivered in the second quarter. We have secured multiyear charters with an average charter duration of approximately 4.5 years, weighted by aggregate contracted charter hire for all of our newbuildings and we are very well positioned for the future.
As a result, the company's total contracted cash operating revenues are $3.2 billion. Contracted charter coverage for our container vessel fleet including newbuildings is currently 99% for 2024 and 80% for 2025, providing us with excellent revenue visibility. With respect to our activities in the dry bulk sector, we've recently taken delivery of all 10 capesize vessels.
We have been gearing up our operations to ensure the integration within our fleet during this building phase before we continue to explore opportunities to further our reach in this sector. Our revenues from the dry bulk sector has been steadily increasing, and we look forward to further diversifying our revenues and creating upside through the spot market exposure offered by the sector.
Despite our recent fleet growth, renewal and diversification activities, our balance sheet remained very strong with a low net debt position. We'll continue to work tirelessly to ensure accretive performance of our assets and deliver industry-leading returns to our shareholders over the long term.
With that, I'll hand the call back over to Evangelos, who will take you through the financials for the quarter. Evangelos?
Thank you, John, and again, good morning to everyone, and thanks again for joining. I will briefly review the results for the quarter, and then we will open up the conference call to Q&A. .
We are reporting adjusted EPS for the second quarter of 2024 or $6.78 per share or adjusted net income of $132.3 million compared to adjusted EPS of $7.14 per share or $143.4 million for the second quarter of 2023.
This $11.1 million decrease in adjusted net income between the 2 quarters is a result of a $19.9 million increase in total operating expenses mainly due to the recognition during the current quarter of voyage costs related to voyage charters of our viable Capesize fleet, partially offset by a $4.8 million increase in net operating revenues, a $3.7 million improvement on investments and the $0.3 million improvement in net finance costs.
Vessel operating expenses increased by $5.2 million to $47.1 million in the current quarter from $41.9 million in the second quarter of 2023 as a result of the increase in the average number of vessels in our fleet while our daily operating costs remained stable at $6,961 per day for the current quarter compared to $6,970 per day for the second quarter of 2023.
Our operating costs continue to remain among the most competitive in the industry. G&A expenses increased by $4.1 million to $11.3 million in the current quarter compared to $7.2 million in the second quarter of 2023, mainly due to an increase in stock-based noncash costs. Interest expense, excluding finance cost amortization, decreased by $0.7 million to $4.6 million in the current quarter compared to $5.3 million for the second quarter of 2023.
The decrease in interest expense is a combined result of a $1.2 million increase in interest expense due to the increase in our average indebtedness of $52 million between the 2 periods and the increase in the cost of debt service by approximately 14 basis points as a result of higher SOFR rates between the two periods. We also had a $1.9 million decrease in interest expense due to increased capitalized interest on our vessels under construction. At the same time, interest income came in at $2.9 million.
Adjusted EBITDA remained stable, decreasing slightly by 0.3% or $0.5 million to $176.8 million for the current quarter from $177.3 million in the second quarter of 2023 for regions 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 event disclosures.
A few of the highlights follow. Over the past two months, we have added approximately $900 million to our contracted revenue backlog. As a result, our contracted revenue backlog remains very strong and has increased to USD 3.2 billion with a 3.4-year average charter duration while contract coverage is at 99% for 2024 and 80% for 2025.
Our investor presentation has analytical disclosure on our contracted charter book. As of June 30, 2024, our net debt stood at $205 million. In the current interest environment, this position [indiscernible] from high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio stood at 0.29x while 53 out of our 80 vessels are currently unencumbered and debt-free.
Finally, as of the end of the second quarter, cash was at $372 million, while total liquidity, including availability under our revolving credit facility and marketable securities stood at $787 million 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&A.
[Operator Instructions] Our first question will come from Omar Nokta with [indiscernible] Securities.
Just wanted to ask you have expanded the backlog here nicely, that's just since the last update a month ago. It's interesting, you took the 78250 TEU newbuildings from 3-year charters to 5 years. I just wanted to ask how did that come about? Was that an option at the charter exercise? Was it a renegotiation? And also, is there any change in day rates.
Well, the charter, yes, they had an option to be declared between three and five years, and they chose the 5-year option at a slightly less charter rate. The other ships were fixed to [ three ] to Five years from the beginning.
Okay. And you added a fifth 9,200 TEU newbuilding. So you got that one contract in for five years. You now have 20 new buildings. And as you mentioned, three delivered in the second quarter. Kind of thinking big picture, what's your appetite here for more orders? Are there still opportunities you think in this market set up? Or do you think the analysis reached a positive point.
We are talking now for deliveries, which at the earliest are 28-plus. I don't think we are there at this moment to go really so far ahead. We practically there out of all these ships is just the last one, which is going to be 28 delivery. And we will pause for the time being to see the world situation is not really at its best. The good thing is that we are completely covered and practically without debt. So yes, we will keep, let's say, our mission for any opportunities that are going to appear in the future.
Understood. And maybe just kind of on the final question follow-up. Your point about being so underlevered. You have plenty of cash building, you've got plenty of financial flexibility going forward. In general, what kind of financing evangelist are you guys expecting to put on the newbuilding? Or I guess, how much debt do you think you intend to put on the vessels as they deliver? .
Well, we already have the financing for the first 8 ships out of the 20. We have reported that, and that is $450 million. This is close to 60% LTV. We anticipate putting in place something similar for the remaining 12 ships. So in total, on a pro forma basis because we haven't arranged the second chunk yet. I would see that for the newbuilds in the region of $1.2 billion.
Okay. Got it. So about 60% of...
Yes, but it's still early because the second chunk of ships comes online from between 26 and 28. We will be prudent. We will seek to arrange debt financing, but this is sort of the ballpark number.
At this time, it appears there are no further questions. I'd like to turn the call back over to Dr. Coustas for any further comments or closing remarks. .
Yes. 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.
This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.