Danaos Corp
NYSE:DAC
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Danaos Corp
Earnings Call Analysis
Q4-2023 Analysis
Danaos Corp
Danaos Corporation sustained strong results in the last quarter of 2023 despite the global shipping markets being shaken by geopolitical turbulence, particularly rising tensions in the Middle East which led to changes in naval routes, notably avoiding the Suez Canal. The increased distances vessels had to travel ramped up ton mile demand, causing box rates to surge as much as 300%. In this challenging environment, Danaos successfully secured additional charters at attractive rates and completed the delivery of all seven Capesize vessels planned for 2023. Furthermore, two more such vessels are slated for acquisition after the conclusion of the year.
The company reported an adjusted earnings per share (EPS) of $6.99 for the quarter, identical to the EPS for the same quarter of the previous year. However, adjusted net income slid marginally by $5.7 million, ending at $136 million, compared to $141.7 million for the last quarter of 2022. The dip in profit is predominantly a consequence of soaring operating costs totaling $9.6 million, linked chiefly to the voyage charters of the dry bulk Capesize fleet. Conversely, Danaos experienced a beneficial decrease in net finance costs of $6.9 million due to a significant reduction in debt.
Vessel operating expenses have remained steady at $40.1 million, while daily operating costs declined to $6,188 from $6,417 year-over-year. The company prides itself on maintaining one of the most competitive operating cost structures in the industry. A combination of deleveraging and rising interest rates shifted the net finance costs, resulting in a $5.4 million saving in interest expenses. Danaos has reduced its average debt by nearly $400 million, showcasing a strong commitment to financial discipline and boosting its resilience against interest rate hikes.
Danaos boasts a robust contracted cash revenue backlog of $2.3 billion, with 95.8% coverage for 2024 and 62% for 2025 regarding operating days. The three-year average charter duration fortifies the company's earnings visibility, while a net debt reduction to $138.7 million contributes to a healthy net debt to adjusted EBITDA ratio of 0.2x. The company's strong cash position and liquidity, with $272 million in cash and a total liquidity pool of $609 million, empower it to seek accretive capital investments and uphold its shareholder return initiatives through dividends and share repurchases.
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Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the 3 months ended December 31, 2023. As a reminder, today's call is being recorded.
Hosting the call today is Dr. John Coustas, Chief Financial 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. 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, adjusted net income, time charter equivalent revenues and time charter equivalent dollar income per day 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 a 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 fourth quarter of 2023. Danaos continued to deliver strong results in the fourth quarter of 2023 as geopolitical events continue to impact global shipping markets.
Mostly recently, the conflict in the Middle East expanded to the seas with attacks on vessels in the Red Sea area. These dramatically altered trade routes and the performance of liner companies as most major companies decided to reroute their vessels away from the Suez Canal, sailing longer distances around the Cape of Good Hope to reach Europe. This, in turn, increased ton mile demand, leading to capacity shortage that drove box rates significantly higher up, up to 300%, while it's expected that box rates will remain elevated as long as the disruption continues. Against this backdrop, we have some secured additional charters for our vessels at very healthy levels.
In the fourth quarter of 2023, Danaos completed delivery of all 7 Capesize vessels that we had agreed to acquire earlier in 2023. Subsequent to the end of the year, we entered into agreements to acquire 2 additional Capesize vessels as we continue to diversify our revenues and look to capture upside from a healthy dry bulk market. The market for Capesize vessels is showing unusual season of strength as Brazilian iron ore exports increased, coal trade remains elevated, demand for minor bulks like bauxite and agricultural commodities is following global recovery. Recent stimulus measures in China aimed at supporting construction, infrastructure projects, and consumer demand is expected to keep demand steady as fleet growth begins to slow over the next 2 years. We continue to explore interesting opportunities in the dry bulk sector.
Danaos has also recently ordered 2 more 8,258 TEU vessels at Yangzijiang shipyard, and we have now a total of 4 vessels under construction at that yard with delivery scheduled for second half of 2026 and the first quarter of 2027. All 12 vessels in our newbuilding program are methanol ready and are designed with the latest eco characteristics. Demand for shipyard delivery slots is very high as the industry is quickly moving to reduce carbon emissions by operating green vessels.
As we continue to execute our strategy, we remain focused on taking actions that will ultimately benefit our shareholders. Danaos is well positioned with a very strong balance sheet and significant revenue visibility into 2025. This provides us with the flexibility to return value to our shareholders through dividends and share repurchases and also pursue opportunities to ensure the long-term resilience of the company.
With that, I'll hand over the call back to Evangelos, who will take you through the financials for the quarter. Evangelos?
Thank you, and good morning again to everyone. I will briefly review the results for the quarter, and then we will open up the call to Q&A.
We are reporting adjusted EPS for the current quarter of $6.99 per share or $136 million compared to $6.99 per share of EPS for the fourth quarter of 2022 or $141.7 million. This decrease of $5.7 million in adjusted net income between the 2 quarters is primarily the result of a $9.6 million increase in total operating costs, mainly due to the recognition during the current quarter of voyage costs related to voyage charters of our dry bulk Capesize fleet and a $3.2 million reduction in operating revenues mainly due to vessel disposals and noncash revenue recognition accounting, all that being partially offset by a $6.9 million improvement in net finance costs driven by the significant deleveraging of our balance sheet.
Vessel operating expenses remained almost the same to $40.1 million in the current quarter compared to 4 -- $40 million in the fourth quarter of 2022 -- and while our daily operating cost decreased to $6,188 per day compared to $6,417 per day for the fourth quarter of 2022. OpEx increased due to the increase in the average number of vessels in our fleet. Our operating costs continue to remain among the most competitive in the industry.
G&A expenses increased in Q4 by $7.5 million, mainly due to increase in stock-based noncash costs, and they came in at $22.4 million in the current quarter compared to $14.9 million in the fourth quarter of 2022. Interest expense, excluding amortization of finance costs decreased by $7.8 million to $3.1 million in the current quarter compared to $10.9 million in the fourth quarter of 2022. The decrease in interest expense is a combined result of a $5.4 million decrease in interest costs because of deleveraging. Our average indebtedness review was lower by almost $400 million between the 2 periods. And all that was partially offset by an increase in the cost of debt service by approximately 130 basis points as a result of rising interest rates. And we also had a $2.4 million decrease in interest expense due to capitalization of interest on our vessels under construction. At the same time, interest income came in at $2.7 million, effectively covering almost 90% of our interest expense for the current quarter, and this effectively reflects the almost net debt 0 position that we have today.
Adjusted EBITDA decreased by 2.2% or $3.8 million to $172.6 million in the current quarter from $176.4 million in the fourth quarter of 2022 for regions that have been already 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 disclosure.
I will mention a few of the highlights. Our contracted cash revenue backlog remained strong at $2.3 billion with a 3-year average charter duration, while contract coverage is at 95.8% for 2024 and 62% for 2025 in terms of operating days coverage. Our investor presentation has analytical disclosure on our contracted charter book that you can refer to.
As of December 31, 2023, our net debt is down to $138.7 million. And in the current interest rate environment, this low net debt position shields us from high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio stood at 0.2x, while 51 out of our 75 vessels are currently unencumbered and debt free.
Finally, as of the end of the fourth quarter, cash was at $272 million, while total liquidity, including availability under our revolving credit facility stood at $609 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] The first question today comes from Omar Nokta with Jefferies.
Just have a couple of questions for you. You've obviously added the 5 charters on those 5,000 to 6,000 TEU ships at better rates and terms, and I think a lot of it is expected coming into the year, especially given where the market was at the end of '23. It looks like each of those has gotten about a year or so of duration. I wanted to ask, what's the liner appetite looking like right now? You mentioned freight rates being elevated and they'll continue to be so as long as the Red Sea diversions are in place. How is the appetite now for further chartering? Is there a specific vessel class that you see liners targeting at this point?
Well, Omar, it's -- we do not really -- of course, due to the shortage at present, everybody is interested in prompt vessels. And we have practically nothing until year-end, maybe 1 or 2 ships in the second half. So really -- I cannot really tell you. What is definite is that there is significant demand from all liner companies for modern vessels for -- even for future '25 or '26 deliveries, but that's for the very modern vessels. And there is significant demand for the -- let's say, the other and 6 newbuildings that we do not have, let's say, presently committed, and we are in negotiations for all of them.
And then maybe just a follow-up. Obviously, you've been expanding kind of opportunistically within the dry bulk segment. You've got the 9 capes now. It looks like containers are still the core business. You do have plenty of liquidity and flexibility. Just wanted to get a sense of any thoughts on where you see the cape fleet going from here in terms of size. Is there a certain critical mass you're trying to get that segment up to?
It's -- as we said, we are going into this segment in order to -- let's say, to build it up. Of course, as I've already said a number of times, the dry bulk market is quite cost sensitive, and we're not going to chase the market up. Already -- I mean, the prices in the market at least for the first, let's say, 7 ships that we got is at least, let's say, 15%, maybe 20% up in some instances. So -- we are pretty careful. Of course, it's a segment that we want to grow, but we will do it in a kind of a measured way. There is no hurry for that. Our main business will continue to be, let's say, the container segment where we have our competitive edge. And we will move cautiously as we have always done.
Makes sense. Yes. And one final one, and I know it's a bit sensitive, but just wanted to ask in terms of the Eagle Bulk Holding you have, it's gone up nicely in value since you took the stake. Anything you're willing to say about the planned merger with Star Bulk? And do you see this holding as sort of a core long-term investment? Or is this more of an opportunistic trade?
We have not really decided really how we're going to handle that. For the time being, we do not have any -- let's say, any reason to get out of this investment, and we will see how it develops.
The next question is from Climent Molins with Value Investors.
I wanted to start by asking about the Capesizes you have added over the past few months. Utilization during the quarter was at a lower than expected. Could you provide some commentary on the drivers behind that? Was it due to the delivery of the vessels? And secondly, could you give us some insight on the utilization you expect to realize in the first quarter?
Yes. Let me take that. We -- first of all, we took delivery of the vessels during Q4, right? And upon taking delivery, we performed certain repairs on the vessels to bring them up to our standards. So there were certain scheduled days that the vessels were off-hire. Hence, the 82 almost percent utilization that you see now is not indicative of how the vessels will be utilized. There are -- the vessels are scheduled to -- some of them to go to dry dock in Q1 and Q2 and Q3 of this year. So there, we may -- you may expect to have 2 or 3 weeks of downtime. But other than that, we expect them to be fully utilized.
I also wanted to ask about the newbuilds -- the 2 newbuilds you've added recently and the ones that remain on fixed. Should we expect a charter announcement in the foreseeable future? Or do you plan on waiting until closer to delivery before securing a charter?
We are already in discussions. So -- yes, we may very well announce something, but we don't have for us -- most companies in -- are -- in order to contract the vessels wanted to have a charter beforehand. I mean for us, with the strength of our balance sheet that practically -- we can practically buy the vessels with existing liquidity, and we don't need financing. We can wait as long as we want if we do not find the rates that make sense to us. So we can always wait. Modern vessels are definitely scarce, and we believe that our strategy is going to make much more sense rather than ordering the back of the long-term charter where your return rates are pretty squeezed.
It appears we have no further questions at this time. I would like to turn the call back over to Dr. Coustas for any closing remarks.
Yes. Thank you all for joining us for 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.