Danaos Corp
NYSE:DAC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
67.13
97.07
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Danaos Corp
You don't have any saved screeners yet
Good day, and welcome to the Danaos Corporation Conference Call to discuss the financial results for the three months ended December 31, 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. Please proceed, Mr. Chatzis.
Thank you, Operator. And good morning, everyone, and thank you for joining us this morning. 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 a broad overview of the quarter. John?
Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for fourth quarter 2019. We're pleased to report improved earnings for the year ended 2019. The company's adjusted net income of $148.7 million for 2019 increased by $17.5 million or 13.3% compared to adjusted net income of $131.2 million for 2018. This improvement was primarily the result of a $13.7 million decrease in total operating costs and a $15.1 million decrease in net finance expenses partially offset by $11.5 million decrease in operating revenues. Adjusted EBITDA for 2019 was $310.6 million, a slight decrease from $317.8 million for 2018.
The container market, particularly for vessels larger than 5,500 TEU, strengthened throughout the course of 2019 as containers volumes across main trade lanes increased. Notwithstanding any near-term headwinds related to the rapidly evolving situation in China, long-term fundamentals remain intact and the market will continue to rebalance itself through a combination of moderate trade growth, slowing fleet growth and a reduction in vessel speeds due to new and ongoing environmental initiatives.
Estimate for world GDP and trade growth are in flux due to the uncertainty around the impacts of the spread of the coronavirus in China. The current dropping demand is addressed by canceled sailings by liner companies. However, we expect this dynamic to be short term in nature and result in a demand surge when supply chains resume. In the meantime, work stoppage and slowdowns at shipyards in China will lead to delays in newbuilding deliveries, scrubber installations and dry-docking schedules.
With respect to the new IMO 2020 sulfur limits that went into effect on January 1, 2020, the current price differential between high and low sulfur fuel continues to support the investment rationale for scrubbers. We have already completed installation of scrubbers on 4 out of 11 vessels, and we will benefit from these scrubber installations through fixed premiums and charter rates for 3- to 4-year fixtures that enhance cash flows and contract coverage. We are well insulated from temporary market disruptions with high charter coverage of 86% in terms of operating revenues and 68% in terms of operating days over the next 12 months, which protects our strong cash flows.
Danaos also is well positioned to benefit from a rising market in the medium term. While our larger vessels remain on multiyear charters with some charters extending through 2025, a large number of our small to mid-sized vessels will be coming off existing charges over the next 2 years, creating potential for incremental cash generation. Additionally, our successful equity offering in November 2019 puts us in a strong position to opportunistically pursue growth initiatives and we have already acquired 2 8,500 TEU container vessels since completing the offering. These vessels have both been fixed on 2-year charters and are expected to contribute an incremental $12 million of EBITDA on an annualized basis, ensuring an accretive return on our investment. Bank financing for this acquisition has already been arranged.
Danaos has consistently remained committed to investing in operational excellence and technological innovation, which allows us to be forerunners in preparing for environmental requirements that will shape our industry in the coming decade. Our commitment has enabled us to maintain our leadership position in the container shipping industry throughout multiple market cycles. These are the attributes that will enhance shareholder value far and above the street value of our fleet.
With that, I hand over the call back to Evangelos, who will take you through the financials for the quarter.
Thank you, John. And good morning again to everyone, and thank you for joining our earnings call. I will briefly review the results for the quarter and then give the call participants the opportunity to ask questions. Adjusted net income of $38 million for the fourth quarter of 2019 is higher by $1.4 million when compared to adjusted net income of $36.6 million for the fourth quarter of 2018. We have adjusted our net income this quarter for deferred finance fees amortization of $4.2 million. This $1.4 million improvement is the result of a $5.2 million decrease in total operating expenses, a $1 million decrease in net finance costs and a $0.6 million improvement in the operating performance of our equity investment in Gemini, partially offset by $5.4 million decrease in operating revenues.
Operating revenues decreased overall by 4.7% or $5.4 million to $110 million in the current quarter compared to $115.6 million in the fourth quarter of 2018. This is mainly attributed to a $5.3 million decrease in revenues of 4 Panamax vessels that concluded 12-year charters over the last 12 months and were redeployed at current market rates while they were previously deployed at above-market charter rates.
Lower fleet utilization for this quarter translating to $1.8 million of lower revenues mainly due to scrubber installation-related off hires was largely offset by $1.7 million increase in operating revenues due to better rechartering for the rest of our fleet. Vessel operating expenses decreased by 4.3% or $1.1 million to $24.5 million in the current quarter from $25.6 million in the fourth quarter of 2018, while the average daily vessel operating cost was $5,215 per day for the current quarter and remains as one of the most competitive in the industry.
G&A expenses decreased by $0.9 million to $7 million in the current quarter compared to $7.9 million in the fourth quarter of 2018 due to decreased remuneration expenses. Interest expense, excluding finance cost, amortization and accruals decreased by $0.8 million to $13.1 million in the current quarter compared to $13.9 million in the fourth quarter of 2018. This improvement is attributed to a $109.6 million decrease in our average indebtedness between the 2 periods that was partially offset by a marginal increase in debt service costs.
Finally, adjusted EBITDA decreased by 26% or $2.1 million to $78.1 million in the current quarter from $80.2 million in the fourth 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 ready to open the call to Q&A.
[Operator Instructions]. Today's first question comes from Randy Giveans at Jefferies.
Yes, I have a few quick questions. First, obviously, congrats on the recent acquisitions. Charters seems to be pretty good deals on both of the containerships. Now you mentioned that bank financing for the acquisitions has been arranged. How much in debt are you putting against the $53 million in assets? And what are the terms there?
I'll take that. It's 60% LTV. And I'm not sure we are disclosing more specific terms about the exact pricing and things like that. So we'll see what we have to disclose in our filings. But it's a 5-year loan at 60% LTV.
Five years, 60%. All right. Second question. Obviously, following the successful equity offering, you're now permitted to reinstate dividends. So with that, what is kind of the timing or thoughts around that first dividend payment? And what amount do you plan on maybe proposing to the Board? Is it $0.10, $0.15, $0.20 a quarter? And then how do you plan on kind of deciding that amount?
John, do you want to take this? Randy, please give us a moment because I think we lost John, who might want to answer this.
That is understandable. All right. We will wait for John.
Yes, Randy. Yes, sorry. I wasn't -- I forgot I was on mute. It was actually on the Board agenda to discuss about the dividend restatement. However, we deferred any kind of decision due to the uncertainty that was created by the coronavirus. It was a completely uncalculated event. So we prefer to defer that decision for the next Board meeting.
Okay. When is that next Board meeting? Just so we have some concept around timing.
Yes, approximately three months.
Randy, it would be in conjunction with Q1 earnings.
Perfect. Okay. Good. Even a $0.80 annual dividend kind of on the high end there is only a $20 million payment on your 25 million shares. You're having EBITDA of $300 million. So it seems like you have a lot of room there for some dividend payments going forward. Would you concur with that?
Randy, it's a capital allocation decision -- if I may take this, John. And it has to be a yield which is -- which makes sense, right? Maybe the absolute number is not a big number any way you count it, but it has to be reasonable. Otherwise, it's much better to deploy such capital elsewhere and create value, right? But yes, we have cash flow flexibility to reinstate the dividend. It was -- it's a matter of timing, as John mentioned, related to the unforeseen situation in China.
Understandable. Okay. All right. Kind of another question here. Just -- there's been some concern surrounding CMA CGM's balance sheet, their liquidity. They've been in the press recently. Obviously, they're your largest counterparty. Have there been any discussions with amendments to those charters or any risks to those contracts?
None at all, Randy. I think that actually the market has been overreacting to all that. And in terms of what they consider debt, actually the majority of this increase in debt was caused by the new IFRS rules and not by actually a new indenture by the company. So we are not really concerned with that. And payments have been very, very timely, and there has been no discussion at all about any charter party alterations.
Okay. Excellent. And then if you don't mind, I'm not sure if there's anyone else in the call, but I have a few more questions. Just looking at the scrubbers real quick, you have 4 down, 7 to go. Any timing on that and when you expect those to be completed? And are any of those vessels currently at the yard, experiencing delays? Or are they scheduled for later dates?
Well, we expect all of them to be completed by the second quarter. There are definitely delays in the yards because of -- I mean there were delays even before, let's say, the virus outbreak. Of course, delays now are going to be larger. It's -- we have -- I mean it's not that [indiscernible] work has resumed after the Chinese New Year. It's just that the pace has not reached really the appropriate one. So yes, we're going to have definitely some more days out, which as I said before, that's not just for us, it's for the whole industry. And that to a certain extent is going to alleviate also a bit of oversupply in the market.
And if I may add on -- because I know that's on Randy's mind. Out of the 7 ships that we have to install scrubbers, 7 to go, 4 of them are not affected in terms of high revenue from the off hire. So it's the agreement that we have with the charterer to pay the hire, regardless of how many days it's going to take for the scrubber to be fitted. It's only on the three ships that we're not earning hire effectively until the scrubber is installed. So the delays -- and given that we've already installed scrubbers on 4 ships, the effect on our income statement Q1 onwards is manageable.
Sure. You read my mind. That was my next question. So good. All right. Last question for me. Of the 5 13,100 TEU containerships, the rates were reduced in August 2016, I believe, until this past December. Did those rate step-ups happen as planned last month? And if so, are those new rates in that 58,000, I believe, range?
Yes, they've gone up. It's 59.5, I think, the rate. The actual -- the specific rates are disclosed in our filings. If you look at our Q3 filing, we have a charter list with all the rates. And we have no issues with rate step-up.
Our next question comes from [indiscernible].
I had two questions. I'm primarily trying to understand the impact of the market volatility post the coronavirus episode in China. Just wanted to understand what percentage of your revenues are at risk from the market volatility. In other words, how much of your charters are coming due this year or expiring this year? And how much of your fleet is may be exposed to the spot rates? And the second question was what is the amount of correction that you have seen in the rates post January?
If I may answer the first leg, John?
Yes.
In our earnings release, we quote a charter coverage of 86% for the next 12 months. In terms of operating revenues, what this effectively means is that out of every dollar that we earn today, $0.86 is coming from long-term charters that will be there for this year and the next year and so on and so forth. So 12% of our revenue is coming from spot charters. Therefore, if you had a sensitivity on that 12% -- for example, if rates, let's say, dropped by 10%, that would be 1.2% fall in revenue. So it's pretty limited at least for 2020 the effect of potentially lower charter rates in the market. And John, you may want to take the second question related to how charter rates have been affected.
Yes. Yes. To be honest, we have seen, let's say, a kind of weakness, but there haven't been any kind of fixtures representative to show -- to give a definite trend. Definitely, there is a downwards trend for the short term. However, everyone is just in a wait-and-see attitude because China will not shut down. Mainly, there are problems with the transportation of containers to and from the ports and that is going to lead to a backlog, which at some stage will need to be clear. And that is going to create actually a peak in demand post virus. So as I said, the situation is still pretty vague. There is uncertainty, but no one is prepared, let's say, to take long-term decisions.
Sure. That's clear. I just had another follow-up question. How much of debt are you -- is due for repayment this year and next year?
Let me check my notes because that is within the contractual obligations through the end of 2021 that I have of hand because it's in our presentation. We're due to repay debt contractually at a minimum of $300 million. So there is -- there may be more debt repayments so you may want to average this out between the 2 years. There may be more debt paydown as a result of excess cash flows that will have to be allocated to debt amortization, but this is the contractual minimum.
Sure. And just to close, I'd like to recall what the earlier participant said. I think reinstating a dividend even if it's not a very large amount would certainly be something that investors would look forward to and bring the stock into the scans of a lot of people.
[Operator Instructions]. Today's next question comes from Chris Wetherbee at Citigroup.
James Monigan on for Chris. I wanted to follow up on that previous question about the charter coverage. Does that high degree of charter coverage limit your participate -- or would it likely limit your participation in any sort of post-virus peak or rebound in rates?
Well, we have not seen at this moment, as I said, any decrease in our chartering. We had -- I mean all the vessels that were due for rechartering were rechartered. We have some vessels which are opening, a couple of vessels in March for which, to be honest, yes, there is a bit of a weakness, but nothing, let's say, dramatic that will throw away any, let's say, of our projections.
And downside -- the protected downside sort of caps the upside, if that's the question, right?
Right. But I was just wondering if essentially the vessel -- if there are any vessels coming off closer to the end of the year that might give you protection but give you more leverage to essentially a rebound since it'd be back half weighted likely.
We have ships opening up throughout the year on a staggered basis. I don't have the exact schedule month by month. Actually, at the back of our release, you see which month charters are expected to expire. That is when firm periods end. There is a list. And obviously, the high degree of charter coverage caps the upside if the market really strengthens, but it can still provide a very good uptick in income. The other thing that will show up on our income statement for 2020 is an increase in revenues as a result of contracted step-ups in charter rates in the scrubber-associated transactions. So this is -- and this is not market related. This is -- these contracts have already been inked, and the revenue is going to be coming in.
Got it. And then also wanted to follow up on that dry docking question. Just more specifically, across the first half of the year, how many days are you actually expecting for those three vessels in terms of off hire?
We expect them for these three ships but -- for which we are incurring actual off hire, we expect them to be -- installations to be completed within Q1. And we expect something like 130 to 140 days for all three of them.
And then a bit more sort of higher level. You have -- you do have these contractual step-ups and you have long-term charters that have a fair amount of value in them. Would you entertain potentially taking upfront payments to buy those out and deleveraging? Or is there a hurdle? Or is there something else that we should be thinking about as a way to -- as a source of that for value creation?
You mean the charterer coming to us and making us a big upfront payment to effectively buy out the charter?
Yes, or reduce -- yes.
It's all a matter of economics, right? But I'm not sure that any of our customers would be willing to come forward with such a proposition. And if they would, it would be at -- probably at levels that will make sense for us. But in a hypothetical -- and John can also contribute. It's not something that is ruled out, but the numbers would need to make sense.
Yes. Yes. Well, there is -- yes, there was a deal by one of our peers that they have done about, let's say, the line of company buying out some of the charters. But that had to do more with the fact that these people actually did not had a use of these ships anymore in their services. I mean here all the ships that we've chartered out are at the rating in the services of our charterers. And no one has indicated that he wants to withdraw these shares from the trade.
[Operator Instructions]. Today's next question comes from Kerem Aksoy of Glacier Pass Partners.
I wanted to follow up on the first two participants' questions around the dividend. Maybe I'll ask it another way though. Ex any impact from the coronavirus, I was wondering how much capital you believe the company had to deploy this year ex debt repayments. And how you were thinking about different options available to the company? And what kind of returns you're seeing with those?
Additionally, if we hadn't seen the coronavirus, I was wondering how you were thinking about the dividend. What would you have proposed to the Board? Were you targeting a payout ratio or an absolute amount? And how does that compare to the other options available to the company? I know it's a long-winded question, but I appreciate it.
The idea -- I mean the proposal to the Board would have been for a fixed kind of dividend. And basically, what is our target is to reinstate a fixed dividend that we have the ability to grow continuously over the years. And it's -- we don't want to link that to a kind of a payout ratio because I think that investors prefer more the stability. And as our model actually gives this kind of stability with the contracted cash flow that we have, we believe that such a strategy would be much more beneficial. We would be targeting, of course, at a yield that would be, let's say, in line with our peers, maybe slightly higher. And we hope that actually, consistency in our strategy is what is going to reward the share price and our investors.
That's helpful. That provides a lot of color. And then maybe just kind of the first part of the question. Ex kind of debt repayments, how much capital do you think the company has to deploy this year? And then I guess there's some leftover proceeds from the November offering as well.
Well, we have already deployed part of the capital for the acquisition of the 2 vessels. We are -- also, we have the -- to complete the investment in the scrubbers. And we are looking also into additional scrubber-related deals with our charterers. So we don't really have a target to deploy capital. We will deploy capital as and when we have accretive projects that make sense.
And just to give you some guidance, and we cannot provide you with forward-looking data. But for 2019, our free cash flow positive service was $60 million. We deployed half of it in the scrubber investments and another chunk of it on nonrecurring finance expenses that are related to our 2018 refinancing and for -- so that's what the picture is.
For the current year, we expect this to be slightly improved in 2020. We are already -- we've already allocated equity for the two ships. We have more scrubber investments to pay for in 2020. Together with dry docks, it's a bill of around $30 million. And we, of course, also have the dry powder from the recent equity offering. I think that's as far as we can go in terms of guidance.
It appears we have no further questions at this time. I'd 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. 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 your participation. Have a wonderful afternoon.