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, 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, operator, and 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 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.
With that, let me now turn the call over to Dr. Coustas, who will provide the growth 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 of 2019. The company's adjusted net income of $37.9 million for the third quarter of 2019 increased by $0.4 million, or 1.1%, when compared to the third quarter of 2018.
This improvement was primarily the result of a $4.6 million decrease in total operating costs and a $1.9 million decrease in net finance expenses, partially offset by a $6 million decrease in operating revenues mainly due to the re-chartering of certain of our vessels that concluded long-term above market charters over the last 12 months and were re-deployed at market rates during the quarter. Adjusted EBITDA for the third quarter of 2019 was $79.3 million, a decrease of $3.4 million compared to the third quarter of 2018.
The charter market has strengthened considerably during the last six months particularly for vessels larger than 5,500 TEU, although we have also seen an improvement in charter rates for Panamax vessels. This is partially due to a decrease in fleet capacity as vessels are being temporarily removed from the fleet to be retrofitted with scrubbers in preparation for IMO 2020 sulphur emissions regulations.
Larger vessel classes have seen the greatest downtime, and we expect this to continue through 2020 and help contribute to a healthy charter market. This coincides with improving underlying market demand supply fundamentals.
For 2020, we are aligned with the shipping analyst reports and our expectation is that container trade demand growth will outpace supply growth for the first time in almost 10 years. The IMF currently forecasts world GDP growth of 3.5% for 2020, and we expect that the multiplier of containerized trade growth versus GDP will slightly exceed one and that containerized trade will grow by up to 4% in 2020.
On the supply side, capacity growth is not expected to exceed 3% in 2020. Market participants, mainly liner companies, have generally remained reluctant to place newbuilding orders until the U.S., China trade talks are settled and the IMO regulations come into effect, also taking the opportunity from the favorable demand/supply balance to gain pricing power on freight rates. The combined result of these factors should support the strengthening of the charter market going forward.
Our total contracted revenues as of September 30, 2019 were $1.4 billion, and we maintain our high charter contract coverage of 89% in terms of operating revenues and 75% in terms of operating days over the next 12 months. Our larger vessels remain employed on multi-year charters, and improving market conditions provide upside for the balance of our fleet.
We remain committed to operational excellence and technological innovation, which allows us to continually deliver a high quality service to our customers. We are also well positioned to pursue growth opportunities and deliver value to our shareholders due to our significantly improved financial position.
With that, I’ll hand over the call back to Evangelos, who will take you through the financials for the quarter.
Thank you, John, and good morning again. I will briefly review the results for the quarter and then open up the call to Q&A.
Adjusted net income of $37.9 million for this quarter is higher by $0.4 million when compared to adjusted net income of $37.5 million for the third quarter of 2018. We have adjusted our net income this quarter for deferred finance fees amortization of $4 million.
Operating revenues decreased overall by 5.1% or $6 million to $111.8 million in the current quarter compared to $117.8 million in the third quarter of 2018. This was mainly due to the re-chartering of three vessels that concluded 12-year charters over the last 12 months and were redeployed at current market rates while they were previously running at above market charter rates.
Vessel operating expenses decreased by 2.4% or $0.6 million to $24.9 million in the current quarter from $25.5 million in the third quarter of 2018, while the average daily vessel operating cost was $5,298 per day for the current quarter and remains as one of the most competitive in the industry.
G&A expenses decreased by $1 million to $6.4 million in the current quarter compared to $7.4 million in the third quarter of 2018.
Interest expense, excluding finance costs, amortization and accruals, decreased by $1.8 million to $14.3 million in the current quarter compared to $16.1 million in the third quarter of 2018.
In accordance with U.S. GAAP, at the time of consummation of our refinancing, we recognized in our income statement in advance all anticipated future interest expense for two of our credit facilities through their maturity and that resulted in $4.9 million lower interest expense in the current quarter when compared to the third quarter of 2018. This decrease in interest expense was partially offset by $3.1 million increase as a result of higher debt service costs, while our average debt between the two periods was lower by almost $350 million as a result of the refinancing transaction.
Finally, adjusted EBITDA decreased by 4.1% or $3.4 million to $79.3 million in the current quarter from $82.7 million in the third quarter of 2018 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.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Randy Giveans with Jefferies. Please go ahead.
How are you gentlemen? How is it going?
Hi, Randy. How are you?
Doing well. So looking at your fleet charter table, about half of your vessels on short-term charters expiring between kind of now and the end of 2020 and we've heard about significant tightness in the market for the larger kind of Post-Panamax containership vessels fully about the smaller asset classes.
How strong is the current time charter market for the long-term charters for the sub-Panamax's or the feeder vessels? Are you looking to secure those long-term charters upon expiry or do you have an appetite to just keep them in the spot market for the next few quarters even years?
Well, in general although the – even for the smaller vessels currently, the market is not booming, but it's definitely reasonable. I mean we are fixing at a kind of reasonable levels. There is no appetite for long-term commitment from charters.
I mean unless, of course, you give rates, which are extremely low or if you make – in very few cases, a commitment to install, let's say a scrubber and you have a deal of sharing the benefit or something like that. Otherwise, there is no charterer out there, let's say willing to commit at more than 12 months on Panamax or sub-Panamax vessels.
Got it. Okay. So I guess main spot market for those. And then with regards to the acquired secondhand 8,500 TEU vessel, do you have a charter contract in place to begin in May, 2020 when it gets delivered or kind of what's the plan for this vessel?
And then in terms of acquisition, was that through debt financing or just entirely using cash on hand? And then with that, there appears to be a kind of secondhand market for the larger tonnage, but what about smaller asset classes? Are you able to possibly sell some of the older smaller vessels?
Well presently, we are in a kind of a growth mode, not in a selling mode. I mean even the smaller vessels in our fleet, they are making good money. So we do not have any intention either to sell them or scrap them, and in any case, anyone who's going to buy them. In general, operationally it's very difficult to do something better than let's say what we are doing. So nobody is going to pay us to pay kind of top dollar.
On the other hand regarding the larger ships, the 8,500, no, we have not yet fixed any charter. There is considerable interest around, but as we understand we are talking about something like five months down the road and we don't have any reason or pressure to do something unless, of course, we find an opportunity of one of our clients that wants to charter the vessel. And in terms of, let's say financing the ship, it's not been decided, but definitely will be a mixture of equity and debt. Yes, and we've got plenty of time to formulate all that.
Okay. And I guess just two more questions. So you earned, let's call it, $56 million kind of an operating cash flow this quarter well above your debt servicing I think more than double of that. Plus you have, like you said, I don't know, 90% of your operating days covered in 2020 in terms of revenue. So with that, you have been in talks with your lenders for either less restrictive covenants or even if it requires some more kind of accelerated debt repayments on your end?
I don't think really we need anything like that. We don't have a – there is nothing restrictive in our covenants. Our covenants are pretty well set. We have ample room within our covenants, and I don't really – there is anything to ask from our lenders in this respect. I mean it’s perfectly well working, let's say loan agreement, very serviceable, extremely well and with great certainty from our existing cash flows. So we're very happy the way it's going.
Okay. And I guess just last question for me. Can you give us an update on your scrubber program? How many have been completed? How many [all fire] days per vessel and kind of what is the timing for remaining scrubber retrofits? How many per quarter, for the next few quarters?
Yes. Well, we have completed one. We have two which are about to start next week, another three for December, and the rest spread in January through March.
And that's five in the first quarter of 2020?
I think four, I mean in terms of starting date.
Got it. Excellent. All right, well, that's it for me. Thanks so much. It's nice to see the stock responding pretty well over the past few months. So I guess keep it up.
Yes. Great. Thank you very much. Thank you, Randy.
[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.
Well, thank you all for joining this conference call and your continued interest in our story. Look forward to hosting you in our next earning calls. Thank you.
Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.