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, 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.
Thank you, operator. 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.
Now, let me 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 2020.
We are pleased to report improved performance in the Company’s profitability during this quarter. Container trade has staged a remarkable recovery since the end of May, when 11.5% of the vessels in the global fleet stood idle. Time charter rates have increased across all vessel sizes, and the time charter market is at or close to multiyear highs for all vessel sizes. The ability of the liner companies to consistently manage capacity addressed the swift drop in volumes at the onset of the pandemic, which alleviated pressure on our customers’ cash flows and stabilized freight rates. All our customers have reported strong profitability, which significantly mitigates our counterparty risk.
Volumes have consistently improved, particularly in Transpacific eastbound, intra-Asia and North-South trade lanes, as volumes have recovered faster than expected. Notably, the increase in rates has been most pronounced in smaller vessel types. Danaos has the greatest amount of leverage to this segment of the market as our larger vessels are contracted on multiyear time charters. From that perspective, the short-term chartering market has been quite dynamic.
Although significant market uncertainty remains, particularly as many countries see increasing spread of COVID-19 cases, global GDP has rebounded swiftly, and IMF has recently revised its 2020 GDP estimates upwards. For 2021, the IMF forecasts global GDP growth of 5.2%, which effectively equals growth of 0.6% compared to 2019, or pre-pandemic levels. The recovery has thus far been primarily concentrated in goods rather than services, which has benefited containerized trade.
We continue to execute our strategy and we are well insulated from near-term volatility due to our high charter coverage of 87% in terms of operating revenues and 64% in terms of operating days over the next 12 months. This provides significant visibility into our cash flows during this period. We also have some leverage to the presently strong market through our smaller vessels. We are also cautiously optimistic about the 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 maintain momentum in the container market or help to bring about a swift recovery if conditions deteriorate.
Consistent with our growth strategy, we have agreed to purchase two 9,000 TEU vessels built in 2009, which are both, contracted on two-year charters with a major liner company. These vessels are expected to be delivered to us between December 2020 and January 2021, and will be funded with a combination of cash and new credit facilities. With these new deliveries, our fleet for the first time will exceed the 400,000 TEU mark.
In the meantime, we are generating strong cash flows from our $1.1 billion charter backlog and have a healthy liquidity position. This enabled us to opportunistically repurchase 4,339,000 shares, or 17.5% of the Company’s outstanding shares, for an aggregate price of $31.1 million in privately negotiated transactions, practically tripling our $10 million original buyback program. Given the holding nature of the prior owners of these shares, these repurchases increase our per share results and valuation metrics without impacting trading liquidity.
In light of the continued uncertainty about the duration of the coronavirus pandemic and the ensuing economic recovery, we remain focused on maintaining a conservative financial profile and making thoughtful capital allocation decisions that align with our strategy and market expectations to deliver value to our shareholders.
With that I’ll hand the call over back to Evangelos, who will take you through financials for the quarter. Evangelos?
Thank you, and good morning again to everyone and thank 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 $47.3 million, for the current quarter is higher by $9.4 million when compared to adjusted net income of $37.9 million for the third quarter of 2019. We have adjusted our net income this quarter for deferred finance fees amortization of $4.5 million. The increase between the two quarters is the result of a $7.1 million increase in operating revenues, $6.8 million decrease in net finance expenses, and $0.9 million increase in the operating performance of our equity investment in Gemini, partially offset by a $5.4 million increase in total operating expenses.
Most specifically, operating revenues increased by $7.1 million to $118.9 million in the current quarter compared to $111.8 million in the third quarter of 2019. This increase is attributed to a $17 million increase in revenues as a result of contractual step-ups in chapter rates, following the installation of scrubbers, and the addition of three vessels to our fleet, partially offset by a $4.3 million decrease in revenues attributed to lower re-chartering of certain vessel that concluded long-term charter over the past 12 months and a noncash $5.6 million decrease in revenues due to lower revenue recognition under U.S. GAAP accounting.
Vessel operating expenses increased by $2.8 million to $27.7 million in the current quarter from $24.9 million in the third quarter of 2019, as a result of the increase in the average number of vessels in our fleet, while the average daily operating cost increased to $5,467 per day for the current quarter from $5,298 per day in the third quarter of 2019 and still remains as one of the most competitive in the industry.
G&A expenses decreased by $0.4 million to $6 million in the current quarter compared to $6.4 million in the third quarter of 2019, mainly due to decreased non-cash recognition of stock based compensation.
Interest expense, excluding finance cost, amortizations and accruals decreased by $6.8 million to $7.5 million in the current quarter, compared to $14.3 million in the third quarter of 2019. This improvement is attributed to an $84.6 million decrease in our average indebtedness and a reduction of our debt service cost by approximately 2.3% between the two periods.
Adjusted EBITDA increased by 5% or $4 million to $83.3 million in the current quarter from $79.3 million in the third quarter of 2019, for the reasons outlined earlier on this quarter. We would also like to note that our current outstanding share count has been reduced to 20.45 million shares, following the previously announced 31.1 million share buyback that was consummated on October 9, 2020. Pro forma for this share buybacks, the adjusted earnings per share of $1.91, as reported before this quarter, would increase by $0.40 to $2.31 per share on a pro forma basis.
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.
Yes. Thank you. [Operator Instructions] And the first question comes from Randy Giveans with Jefferies.
Yes. So, obviously, first and foremost, congrats on the 31 million share repurchase. DAC's the way we like it. So, clearly, this is larger than any token dividend would be for multiple years. That said, what are your thoughts on eventual dividend, maybe timing of that? And then, on the other side, what about further share repurchases from either [indiscernible]?
Exactly, as you said, I mean, we have with that kind of share purchase, we have delivered a lot of value to our shareholders for maybe a number of years. As far as dividend is concerned, as I said, it’s not really, I think, for the time being -- the way that we’ve created value through share repurchases, there is no specific, let’s say, thought at this moment. It’s always of course in the back of our minds about restating the dividend. However, it has been always our strategy. We are going to be kind of conservative. And the important thing is to deliver value through growth to our shareholders. And we believe that we’re doing pretty well at this moment.
Is there a remaining share repurchase authorization or is that down to zero now?
No, I mean at present, we are not contemplating any further purchases. I think, we did the purchases at pretty good price levels. Since that, I mean the share price is almost 30% up from where we did the share buyback. And despite the of course fact that we’re still way out from, let’s say, the NAV, which we’re calculating, for the time being, we have temporized any further share buyback.
Got it. And then, you gave us some [multiple speakers] we asked for a mile but the $31 million is pretty meaningful…
Just to add to that. We’re now investing in the business, right? I mean, we have the acquisition of two 9,000 TEU containerships, which is pretty significant event.
Yes. I was going to ask that next. If you can add some more color around that announcement, why were these vessels, kind of the ones you made them so attractive? And then, following the delivery in January? How do you view your fleet from there, are sales an option, or are you going to keep looking to acquire more, combination of both?
If there are any further opportunities, we might be out in the market. However, we believe that we bought these vessels kind of prior ship prices kind of picking up. And already now -- first of all, there are most ships available for sale, because really the cash flows are generated by the ships. They are pretty substantial. And there are very few ships available as we saw also in the news, one of the major liners MSC went out, and both similar ships from the one involved in the 8,500 TEU -- 9,000 TEU class, which confirms really our belief that this type of size and tonnage has also longer strategic value for all these liners as the kind of in between the big the Post Panamaxes and the intermediate sector.
And then, I guess one more question for me, just looking at the market, right, obviously very strong. So, how has that record-setting container rates impacted containership time charter rates? Have you been able to secure some higher rates for extended periods of time, or is this strength only seen in maybe three to six-month time charter rates? I see you have 64% of operating fixed days, over the -- operating days fixed over the next 12 months. So, will this increase materially into year-end?
Definitely, the charter rates today that we are getting, reporting in the market are phenomenal. And these are rates that we have not seen since 2011, which is pretty optimistic. In terms of duration, we see really liners committing for mainly 12 months. So, most of the charters that we are doing are for 12 months and some for 18 months, which means that practically we are going to -- with all these new charters, which are discussed now, we’re going to look in most of 2021 at very healthy levels.
And a lot of those fixtures, I know you have some expiries near-term and even into early ‘21. Do you expect to fix a lot of those here in the next few weeks and months right prior to expiration or how much in advance do you usually normally fix one of these vessels?
Well, exactly because we are today in the kind of rising market, fixtures that we had done, I mean, much in advance were really not as good as if we had waited. That’s why I mean now we are kind of waiting more closer the delivery of the ships in order to charter them. And I think that this strategy has worked pretty well. Charters are keeping the vessels until the maximum window which is realized under their charter parties, because they will fix at lower rates, which means that we are going to head -- and in some of the vessels that head an earlier maturity in Q4 are going to go probably up to Q1 of 2020. So, we’re going to have a lot of activity until then. We have already charted about seven ships for a year or more.
And Randy, it’s important to note here, these are ships that are coming off charter, let’s call it in the range of $8,000 to $10,000 a day, and they’re being charted in the range between $16,000 and $20,000 plus a day, depending on size and all these things. So, we’re talking about material improvement in recharterings.
And the next question comes from Chris Wetherbee with Citigroup.
Hey, guys. James on for Chris. I wanted to follow up on the acquisition, the two 9,000 TEU vessels you just -- you’ve mentioned previously. Just kind want to dive a little bit deeper into your comment about vessel prices. And sort of understanding that the market is tightening, do you see any opportunities for more deals, or is this really -- is the market reached a point where sort of additional transactions wouldn’t necessarily be attractive? Just trying to want to get your outlook for additional transactions and sort of where the market is per se?
Well, the thing is that exactly because as I said, rates are going continuously up, the expectation, sales price expectations have grown considerably up, and not only going up, but actually it has proved vessels from the market. So, we see prices going up easily by something like 20%, 25%, 30%. And, we are not prepared really to follow, to chase ships upwards. We have already a substantial fleet. We want to be conservative in the way forward. And we will just concentrate and make some money from the recharterings of our existing vessels.
Got it, makes sense. And then, also wanted to touch on another point that was brought up. When you think about sort of coming rechartering period and balancing sort of rate with tender, have we gotten to the point where charterers are -- or it sounds like we haven’t gotten to the point where charterers are open to multiyear charters. But what do you think that’ll occur? And like, as you go through sort of the upcoming re-chartering -- re-charterings is really focusing on pushing for term or rate?
Well, first of all, at this moment, all what is happening was quite unexpected. And no one really knows how all this demand is going to keep up. In this respect, charterers, of course, they want to keep their business, they want to maintain their clients and offer them space, because if you are unable to service a client, he will leave and go somewhere else. So, that’s why they are trying to secure as many vessels in the market and that’s why they are paying to acquire vessels. At some stage, of course, if rates keep going up, it means that there is a genuine, long-term, shortages of tonnage. It’s exactly at that moment that charterers will decide, I mean, either to go and build, which is, of course, it’s a major kind of procedure and it involves a lot of money, or they will try to offer multiyear charters at lower rates charter rates on the spot market, so that they can justify let’s say running the services. And that’s kind of how the balance is going to work out.
Makes sense. And then, a real quick one, just understanding the disruptions that happened last quarter, was there any amount of OpEx in the third quarter that was sort of catch up -- or sort of that we shouldn’t expect to reoccur in the fourth quarter?
There wasn’t really anything. Of course, we have significant problems in moving the crews around, and that is generating some increase in cost because, for example, we have kind of provided an incentive, salary increase of 10% for the people that exceed their terms and were unable due to COVID to move them from the ships. But, it is not really anything that will make any significant difference. Otherwise, things are working normally.
Thank you. And the next question comes from Climent Molins of Value Investor’s Edge.
Congratulations for the very solid quarter and the share repurchases. My first question is a follow-up the vessel acquisitions. What kind of financing do you expect to get for those? Could you provide some comment regarding the loan-to-value you you’re looking at, or you expect to get?
These ships in general finance 50% to 55% of purchase price, typically.
And my second question, I mean, asset values for midsized containers are currently very low. And I was wondering, if those were to rise, you’d be willing to sell couple of assets?
I think that we can make more money by running the vessels in the high market. And overall, of course, vessel prices have risen. The thing is, we will not be able to replace all these assets. And on the other hand, the container industry is not so much of an opportunistic business, like for example, bulkers, et cetera. Here, we have our position, and we are able to get premium from the charters and also secure multiyear charters, because we service our customers and liner companies. So, container shipping has never been an asset play.
And that does conclude the question-and-answer session. I would like to turn the call back over Dr. Coustas for any further comments or 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 would like to thank everyone for their participation. Have a wonderful afternoon.