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 September 30, 2018. As a reminder, today’s call is being recorded.
Hosting the call today are 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.
Please go ahead, sir.
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.
With that, let me now turn the call over to Dr. Coustas, who will provide the broad overview of the quarter.
Thank you, Evangelos. Good morning and thank you all for joining today’s call to discuss our results for the Third Quarter 2018.
Danaos completed a very significant refinancing transaction in the third quarter of 2018 that reduced our debt by 551 million, reset financial covenants and extended debt maturities to the end of 2023 on the back of a sustainable new amortization profile. This transaction has strengthened the company’s growth prospects over the next five years by removing all balloon payments and maturities of existing debt during that period.
Adjusted net income for the third quarter of 2018 was 37.5 million or $0.23 a share, 7.4 million or 24.6% higher when compared to third quarter of 2017. This improvement was primarily the result of a 4.2 million increase in operating revenues due to improved re-chartering rates. Adjusted EBITDA for the third quarter of 2018 was 82.7 million, 2.9 million or 3.6% higher when compared to third quarter of 2017.
Since our last earnings report, the charter market has remained consistently soft. Uncertainty about the potential impact of ongoing trade tensions, combined with higher newbuilding prices due to increasing steel prices and wages in China, have discouraged new ordering except for some feeder projects by some Asian liners.
This is positive for the medium-term market outlook. Instead, market participants have been focusing on the 2020 regulations and, in particular, investments on scrubbers for vessels from 6,500 TEU and upwards.
Danaos has been actively focused on positioning our fleet ahead of the implementation of the new regulations. Thus far, we have committed to install exhaust cleaning systems, or scrubbers, on six vessels, two of which are owned by our joint venture Gemini Shipholdings Corporation.
These vessels have been chartered out for periods of at least three years in duration and since these are all vessels that are currently on short-term charters, these transactions significantly improve income visibility.
Additionally, the charter rate fixtures provide a full payback of the investment over three years, and we also benefit from the enhancement in the value of the upgraded underlying assets. We are also currently in discussions to install scrubbers on a further five vessels.
We maintain our high charter coverage of 90% in terms of operating revenues and 78% in terms of operating days over the next 12 months. This insulates us from the near-term soft charter market.
Through the six charters described above on vessels with scrubbers and an additional two fixtures that have been secured for durations of three years, our charter coverage has improved, and our contracted revenue has increased by more than $160 million.
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 continuously 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 deliver 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?
Thanks and good morning again to everyone and thanks again to all of you for joining us today. I will briefly review the results for the quarter and then open the call to Q&A.
Adjusted net income of 37.5 million for the third quarter of 2018 is higher by 7.4 million when compared to adjusted net income of 30.1 million for the third quarter of 2017. This quarter, we have adjusted our net income for a one-off debt extinguishment gain of 116.4 million and 21.8 million of one-off professional fees related to our debt refinancing together with 4.8 million of deferred finance fees amortization.
Operating revenues increased by 3.7%, or 4.2 million, to 117.8 million in the current quarter compared to 113.6 million in the third quarter of 2017. Vessel operating expenses decreased by 2.3%, or $600,000, to 25.5 million in the current quarter from 26.1 million in the third quarter of 2017, while the average daily vessel operating cost was $5,427 per day for the current quarter and remains as one of the most competitive in the industry.
G&A expenses increased by 2 million to 7.4 million in the current quarter compared to 5.4 million in the third quarter of 2017, due to increased professional fees related to our recently concluded refinancing.
Interest expense, excluding the amortization of deferred finance costs, decreased by 3.2 million to 16.1 million in the current quarter compared to 19.3 million in the third quarter of 2017.
As analytically described in the earnings release, at the time of consummation of the refinancing agreement, we booked a 248.6 million future interest expense accrual for two of our credit facilities under the relevant debt restructuring U.S. GAAP accounting guidance.
As a result, 6.4 million of interest expense for the current quarter did not flow through the interest expense line as it has already been separately charged in the income statement and set off within the gain on debt extinguishment. This 6.4 million decrease was partially offset by an increase in debt service costs of approximately 1.35% mainly due to LIBOR rates between the two periods.
LIBOR in the current quarter was higher by slightly more than 1% compared to the third quarter of 2017, while our average indebtedness between the two periods decreased considerably by 435 million as a result of refinancing.
The combined effect of this refinancing together with debt amortization over the last 12 months resulted in our debt outstanding at the end of the third quarter of 2018 to be 1.7 billion, 680 million lower than the 2.38 billion debt outstanding at the end of the third quarter of 2017.
Finally, adjusted EBITDA increased by 3.6%, or 2.9 million, to 82.7 million in the current quarter from 79.8 million in the third 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.
Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. Your first question this morning will be from Randy Giveans of Jefferies. Please go ahead.
Hi, guys. Good morning. This is Chris Robertson on for Randy. Thanks for taking my call. In terms of the rates on the 4,000 TEU vessels, it looked to be around 10,000 to 11,000 per day. Could you comment on what the current one and three-year time charter rates are? How robust is that market?
Well, you’re right. The rates have softened to around 10,000 mark. They were up to maximum of 13,000 before the summer. It’s very difficult really to say where the rates are going to be. We do not – this is an asset class which is in abundant supply and ships will be – like that will be in demand probably in the Far East when we’re going to see some kind of bigger services being upgraded, which this of course will be also a result of growth in the trade – in the Intra-Asia trade.
At present, as I said, the one year time charter is around 10,000. No one has fixed longer periods; let’s say, three years to be able to give you a rate. But to be honest, I think there might be of course some upside from these numbers going forward. But definitely we do not anticipate numbers, let’s say, historical averages which are 20,000 or something.
Okay. So you commented earlier about the additional five scrubbers. Could you remind us the original number? And then also kind of give us some color around timing of the installations and the CapEx commitments over the next few years?
Well, the timing of the first one will be in end of February, beginning in March next year. And we will use – that is going to be the first installation in order ensure that everything works okay and all kind of tearing problems have been addressed. And then we will start practically from third quarter onwards the installation on the rest of the ships.
I have a couple modeling questions, if you don’t mind. So looking at the G&A increase in the quarter, it looks like it was driven by the rumination in professional fees. Is that an ongoing expense or how should we think about that on a go-forward basis?
No. Chris, it’s one-off.
Okay.
G&A has been pretty consistent in the past. So I think you should follow the track record for the run rate.
Okay. That makes sense. And then on the adjustment for the amortization of financing fees and the financing accrued, same type of question. Is that an ongoing adjustment? If so, how long will that be ongoing and what drives a change in that?
Well, it will not change really. There is a specific deferred fee amortization schedule which is what – the full number will be shown in the fourth quarter because this amortization is effective from August 10 when we concluded our refinancing. And then it’s going to be pretty much stable for the next five years, right, because all this is amortized over the life of the launch. And we have consistently adjusted such fees in the past in our net income and we will continue to do so.
Okay. And then kind of final market question. So you commented earlier on the increase in steel prices and the increasing wages in China, so kind of driving up the newbuild price. What’s the impact on the second-hand vessels? And would that drive any potential sales of some of your older intermediate Panamaxes or feeders with kind of the rising price environment?
We do not have any plans of disposing any vessels at the present. All our vessels are employed profitably. And if – let’s say, if someone is going to pay a certain price for a ship with the anticipation of making a profit from the operation, because of our kind of cost structure on one hand and the relations to the liners that give us access to good contracts, that means that we’ll be able to make money ourselves. So all our ships have been on regular – even the oldest ships that we have, they have been through dockings last year which means that we have five years to go until we can think again of whether we will expand the money for a special survey in docking rather than scrapping them.
Okay. Thank you for taking my questions.
Great. Thanks very much.
[Operator Instructions]. And 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, operator. 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 conference. We would like to thank everyone for their participation, and we wish you a wonderful day.