Danaos Corp
NYSE:DAC
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Danaos Corp
Earnings Call Analysis
Q3-2023 Analysis
Danaos Corp
The company reported an adjusted Earnings Per Share (EPS) of $7.26 for the quarter. However, this reflects a decrease from the previous period's $8.71 per share, mainly due to the absence of a $23.2 million ZIM dividend that had been included in the third quarter of 2022's earnings. The company has sold all its ZIM shares, foregoing future dividend income from this investment.
Reflecting a strong cash flow and desire to return value to shareholders, the company has increased the quarterly dividend to $0.80 per share and authorized an additional $100 million in share buybacks. This follows almost exhausting the initial $100 million authorization and highlights the company's commitment to shareholder returns, having already returned over $200 million in the last 18 months.
On the operations front, vessel operating expenses slightly increased by $300,000 to $39.5 million for the current quarter. This rise was due to inflationary pressures affecting repairs, maintenance costs, and insurance premiums. Despite the increases, the company maintains its competitive edge with operating costs. Interestingly, general and administrative expenses saw a slight decrease, while finance costs reduced by $9.3 million to $3.8 million due to significant balance sheet deleveraging and a reduction in average indebtedness.
The company boasted strong liquidity with cash reserves of $306 million and total liquidity, including availability under its revolving credit facility, at a robust $655 million. These funds provide the flexibility to pursue accretive capital deployment opportunities and withstand market uncertainties.
While the company has strategically ventured into the dry bulk segment, investing in companies and vessels, and secured charter rates exceeding expectations, it remains cautious in the face of declining charter rates and a quickly dropping market. However, the company reassures investors of its resilience and adaptability, with one executive stating they will continue working towards making the company more profitable in the future.
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Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the 3 months ended September 30, 2023. 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. Please go ahead.
Thank you, operator, and good morning to everyone. 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. John 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 results for the third quarter of 2023. The macroeconomic environment continued to deteriorate during the third quarter of 2023 and container transport stagnated in most areas due to continued inventory destocking and weak retail sales. As a result, profitability of liner companies has dramatically decreased and major operators have announced sweeping cost cutting measures. The chartering market continued to remain under pressure, particularly in the market for vessels special smaller than 3,000 TEU where charter rates returned to pre-pandemic levels.
In larger vessel segments, charter rates have remained relatively stable, given the scarcity of open tonnage for next year, a factor that has enabled us to forward fix all our vessels above 10,000 TEU on 3-year charters at profitable levels that will commence after expiring of existing charter contracts in 2024. As a result, our charter cover for 2024 has increased to 90%.
Separately, through the date of this release we have taken delivery of the first 4 capesize bulk carriers and we have achieved rates well ahead of our expectations. While we do not expect to sustain upwards momentum in charter rates in the near term, we will closely monitor the dry bulk market and opportunistically pursue opportunities to expand our presence in this market.
The resilience of our business model has been confirmed by the continuation of our solid results despite the significant fall in the charter market. Our strategy of delivering has also been effective and well timed as we have not been impacted by higher interest rates. Our charter backlog of $2.5 billion in contracted revenue also provides us with significant cash flow visibility and allows us to maintain flexibility in our capital allocation policy.
In this regard, we decided to increase our quarterly dividend to $0.80 per share and also to authorize an additional $100 million in share buybacks and our initial $100 million authorization has been almost exhausted.
Due to the prudent execution of our strategy, we have been able to return over $200 million to our shareholder over the last 18 months and simultaneously grow our fleet in the container segment by placing 10 new building orders and create exposure to the dry bulk segment through investments in companies and vessels. We will strive to continue to create value for all our shareholders, while ensuring the long-term prosperity of Danaos.
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 good morning again to everyone. I will briefly review the results for the quarter and then open the call to Q&A. This quarter, we are reporting adjusted EPS of $7.26 per share or adjusted net income of $143 million compared to adjusted EPS of $8.71 per share or $176.9 million for the third quarter of 2022. This $33.9 million decrease in adjusted net income between the 2 quarters is primarily the result of the $23.2 million ZIM dividend that had been recognized in our income statement during the third quarter of 2022, and it's no longer applicable as we have now sold all of ours ZIM shares. Otherwise, our adjusted net income was further affected by a $20.8 million drop in operating revenues, mainly due to noncash revenue recognition accounting and that was partly offset by a reduction of $10 million in our net finance expenses, which was driven by the significant deleveraging of our balance sheet.
Vessel operating expenses increased by $300,000 to $39.5 million in the current quarter compared to $39.2 million in the third quarter of 2022, as a result of the increase in the average daily vessel operating cost that increased to $6,500 per vessel per day for the current quarter from $6,173 per day for the corresponding quarter of 2022, and that is related to inflationary pressures that have affected repairs and maintenance costs as well as increased insurance premiums. Our operating costs continue, however, to remain among the most competitive in the industry.
G&A expenses decreased slightly to $7.1 million in this quarter compared to $7.2 million in the third quarter of 2023. Interest expense, excluding finance costs, amortization dropped by $9.3 million to $3.8 million in the current quarter compared to $13.1 million in the third quarter of 2022. The increase -- the decrease in interest expense is the combined result of a $5.8 million decrease because of a decrease in the average indebtedness by $549 million between the 2 periods, which was partially offset by an increase in the cost of debt service by approximately 2.2% as a result of rising interest rates.
Additionally, we had a $3.5 million decrease in interest expense due to capitalized interest on our vessels under construction, which is the 10 new buildings we have on order. At the same time, interest income came in at $3.1 million, effectively covering over 80% of our interest expense for the quarter. Adjusted EBITDA decreased by 16.5% or $35.1 million to $178 million in the current quarter from $213.1 million in the third quarter of 2022, primarily as previously discussed, due to the $23.2 million ZIM dividend that have been recognized and it's no longer applicable. The other EBITDA drivers 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 events disclosures.
A few of the highlights are the following. Over the past 3 months, we have secured $178 million of contracted revenue through the arrangement of new charters for 6 container ships in our fleet, and these new features notably include additional contracted revenues of $103 million for two 13,000 TEU vessels and 68 million for two 10,000 TEU vessels. As a result, our contracted revenue backlog currently stands at $2.5 billion, with a 3.2-year average charter duration while contract coverage is now at 100% for 2023 and 90% for 2024. Our investor presentation has analytical disclosure on our contracted charter book.
As of September 30, 2023, our net debt was down to $111 million. In the current interest rate environment, this position shields us from high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio stood at 0.16, while 48 out of our 72 vessels are currently unencumbered and debt-free.
Finally, as of the end of the third quarter, cash was at $306 million, while total liquidity, including availability under our revolving credit facility, stood at $655 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] Today's first question comes from Omar Nokta with Jefferies.
Nice quarter, definitely some good updates, especially those forward fixtures you just highlighted. And it looks like you guys are feeling quite confident with things, especially given that you've been active with the buyback. You just announced the new buyback. You have the backlog that's $2.5 billion. And it sounds like you obviously have quite a bit of flexibility going forward with the load debt you just outlined, Evangelos. In terms of how you see opportunities ahead clearly, there -- you have the firepower of the muscle to go out and do more. If you so choose, just want to get your sense at the moment if there's a preference as you think about the opportunities that are ahead what's attractive. Do you think there's more to do on the dry bulk side of things? Is that where you want to deploy more capital on an opportunistic basis? Or do you think there are some opportunities that are starting to showcase themselves in the container market?
Omar, we are -- as you said, we have ample fire power when we identify opportunities to pursue them. And we are actually pursuing opportunities, both in the container sector and in the dry bulk. In the dry bulk, as we already said, we have identified, let's say, our strategy that we like the Cape sector where we have invested. And also in the smaller sector rather than investing directly in ships, we have taken a significant position in Eagle Bulk. In terms of the containers, we are looking at both further opportunities in the new building front and also maybe some opportunities of -- in modern eco vessels in the secondhand front. And -- yes, we'll take it from there. We are not in a rush. In general, we see a lot of uncertainty going forward. And we must be sure really that we are at or near, let's say, the bottom of the market in order to start engaging in the larger scale.
Yes. Makes sense, John. And maybe just a follow-up just to that point regarding the opportunities you're looking at. You mentioned the new buildings and the modern eco vessels. I know in the past, especially maybe in the sort of period of downshift from a strong market to a softer one over the past maybe 1.5 years or so, there hasn't really been much in the -- or much liquidity in that modern eco side in terms of transactions. Are you seeing that pick up? Is there more activity? Or is there at least more maybe inquiry ahead versus maybe what we saw 6 months ago?
Well, we'll start seeing opportunities. There are companies that -- let's say, have bought vessels and kind of chartered them companies that have not been, let's say, long-term players in the market. And well now in 2024, they see that the charters are kind of expiring. And the environment is not going to be very good for the charter. They are looking to disengage from this sector. And there are a number of, say, opportunities floating around.
And one just final one for me. John, some of the things that we've started to see a bit more of, not a big scale, but as the liners coming to the shipowners and requesting relief perhaps or maybe just more amendments on the charters and basically the amend and extend approach. Are you seeing that coming your way? Did it look through -- than it seemed to be? Any sort of indication of that in your fleet list, but just wanted to get a sense from you. Are you seeing any amend in extend? And if so, how do you think that shakes out for Danaos in terms of, say, an NPV basis?
We have not really seen anything happening. It's very early. The drop has been relatively quick and liner companies are still very kind of cash reach. So -- yes. I cannot rule out things like that happening in the future. I mean that, to a certain extent, for companies like us that are practically debt-free to be able -- I mean, all these deals, we amend and extend are beneficial because they practically increase our earnings visibility for the future. While the actual, let's say, PV is not so important because in any case, it's going to be -- the cost is going to be priced in. It's just many companies may not be able to afford something like that, for example, to debt obligations.
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.
Yes. Thank you, operator. Thank you, everyone, for listening to our story. We will continue to work towards making Danaos better and more profitable in the future. Thank you.
Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.