Earnings Call Transcript - DAC Q4 2022

Operator, Operator

Good day and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the 3 months ended December 31, 2022. 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 up to a question-and-answer session. Gentlemen, you have the floor.

Evangelos Chatzis, CFO

Thank you, operator, and good morning to everyone. Thank you for joining us today. Before we begin, I 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 a broad overview of the quarter.

John Coustas, CEO

Thank you, Evangelos. Good morning, and thank you all for joining today’s call to discuss our results for the fourth quarter of 2022. This past year marked the peak of the container market, and the exceptionally strong market conditions we saw over the last 2 years are behind us. The decline in box rates to pre-pandemic levels across all sailing routes foreshadows difficult times ahead. The liner companies are projecting 2023 earnings materially lower compared to 2022, and we are still waiting to see the full effect of the looming recession. Charter rates have fallen significantly but remain higher than pre-pandemic levels. However, charter durations rarely exceed 12 months. Fortunately, we are insulated from current market conditions as 93% of our available days are already contracted for 2023, providing us with excellent visibility for the year ahead. Given our limited near-term downside risk and our minimal debt obligations, we have the ability to opportunistically take advantage of the forthcoming downturn. We are closely following the developments in the liner space, and the dismantling of the 2M alliance will definitely be positive for the non-operating co-owners as there will be less efficiency in the networks. Additionally, the effects of decarbonization have not yet been factored into the forecast for effective fleet supply reductions through the anticipated reduction in service speeds. Liner companies are just now beginning to study the carbon intensity indicator, or CII, on their owned and chartered vessels, and due to widespread criticism of the current structure of the index and the expectation that it will most likely be modified, no concrete action is being taken to redesign networks with a view to conforming to the index. Danaos is actively investigating various decarbonization strategies for our existing fleet and is actively involved in the optimization of the six environmentally friendly new buildings that are being delivered to us next year. We remain committed to our strategy of accretive growth and delivering superior results for our shareholders. With that, I will hand over the call back to Evangelos, who will take you through the financials for the quarter.

Evangelos Chatzis, CFO

Thank you, John, and good morning to everyone. Thanks again for joining us today. I will briefly review the results for the quarter and then open the call to Q&A. We are reporting adjusted EPS for the current quarter of $6.99 per share or adjusted net income of $141.6 million compared to adjusted EPS of $6.10 per share or $125.8 million for the fourth quarter of 2021. This increase of $15.8 million in adjusted net income between the two periods is a result of a $37.5 million increase in operating revenues, a $5.5 million improvement in net finance expenses, partially offset by a decrease of $16 million in ZIM dividends whose shares we have now sold, and an $11 million increase in total operating expenses. More specifically, operating revenues increased, as I said, by $37.5 million to $252.5 million in the current quarter compared to $215 million in the fourth quarter of 2021. This increase is attributed to a $72.9 million increase in revenues due to higher charter rates, partially offset by $1.6 million lower revenues due to the sale of two vessels during the fourth quarter of 2022, and a $7.9 million decrease in recognition of assumed charter liabilities, which is the amortization of recent vessel acquisitions. Finally, we also had a $25.9 million decrease in revenues due to lower non-cash revenue recognition in accordance with U.S. GAAP. Vessel operating expenses increased by $2.8 million to $40 million in the current quarter from $37.2 million in the fourth quarter of 2021, mainly as a result of the increase in the average daily operating cost, which increased to $6,417 per day for this quarter, up from $5,860 per day in the fourth quarter of 2021, mainly due to COVID-19 related increases in remuneration, travel expenses, as well as increased insurance premiums and general inflationary pressures. However, our daily running cost remains one of the most competitive in the industry. G&A expenses decreased by $3.7 million to $14.9 million in the current quarter compared to $18.6 million in the fourth quarter of 2021, mainly due to lower stock-based compensation between the two periods. Interest expense, excluding finance cost amortization, decreased by $3.2 million to $10.9 million in the current quarter compared to $14.1 million in the fourth quarter of 2021. This is a combined result of a $1.7 million decrease in interest expense because of a decrease in our average indebtedness by approximately $590 million between the two periods, partially offset by an increase in the cost of debt service by 238 basis points because of the rise in floating interest rates. We also had a $3 million decrease in interest expense due to the capitalization of interest for the vessels that we have under construction, and all that was partially offset by reduced positive recognition through our income statement of accumulated accrued interest of $1.5 million that had been accrued for credit facilities that have now been fully repaid. Adjusted EBITDA increased by 10.8% or $17.2 million to $176.4 million in the current quarter from $159.2 million in the fourth quarter of 2021 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation, which is posted on our website, as well as subsequent events disclosures. I’ll just make a quick note of certain highlights. As of the end of the year, our contracted cash revenue backlog stood at $2.1 billion with a 3.4 years average charter duration, while contract coverage is at 93% for 2023 and 63% for 2024. Our investor presentation contains analytical disclosures on our contracted charter book. Finally, as reported in our earnings release, the company’s net debt to adjusted EBITDA ratio stood at 0.3x as of year-end, while 42 out of our 68 vessels are currently unencumbered and debt-free. Lastly, to also note that as of year-end, our total liquidity, including undrawn available commitments, was approximately $650 million. 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, Operator

And the first question will come from Omar Nokta with Jefferies. Please go ahead.

Omar Nokta, Analyst

Thank you. Hi, John. Hi, Evangelos. Good afternoon.

John Coustas, CEO

Hi, Omar.

Omar Nokta, Analyst

Hi. I just wanted to ask about the balance sheet. Obviously, 2022 was a transformational year, and you’re positioned quite well going into this market downturn. You’ve got a strong balance sheet. You’ve got the $2 billion plus backlog. And Evangelos, you just mentioned, you’ve got the cash and liquidity of $650 million as of year-end. You brought down your debt levels aggressively over the past year. How do you think about your financial position today kind of going into this uncertain outlook? And at some point, it seems that you may be getting into a net cash position. How soon do you think that’s realistic?

John Coustas, CEO

Well, on the basis of we will soon be at net zero debt, of course, this is not something that we intend to keep. On the other hand, shipping is a cyclical business. The container market has just entered the downturn, and we will be following exactly what is happening to see at which moment we think the time is right to make some acquisitions. It’s very difficult to give you a specific kind of timeline. Overall, there is a lot of uncertainty in the world. One thing that we need to realize is that we are moving after many years into a significantly higher interest rate environment, which makes, let’s say, breakeven calculations for assets quite different from what they were in the previous decade. So, people are not sure yet what will be the peak interest rate and how long it’s going to last. Therefore, we will be monitoring all these factors. And exactly because of our very strong position, we are not in a hurry to ensure that we make our call right.

Omar Nokta, Analyst

Thanks, John. Yes, it definitely feels as opposed to just about 15 years ago going into the last major downturn. You and I guess the industry overall is in a much stronger position, as we were just saying, you have strong liquidity, and it seems that being debt-free is very quickly on the horizon. Given the uncertain outlook and how it’s still playing out, we are in the beginnings of this downturn; who knows how long it lasts. It could be short, it could be longer. And then you’ve got the interest rate situation. If you were to develop into a net cash position, I know you just said you don’t know how long the timetable would be. But if we were to think about just the use of cash here over the next maybe few quarters, is it pay-down debt that remains, build up the cash position, and then just wait until maybe deploying capital later in the year? Does it shift into ‘24? Any kind of color you can give on that?

John Coustas, CEO

Well, it’s not that we are standing still to the extent that we are expecting six vessels next year. So, we already have a growth commitment. Further than that, as I said, we will need to see how the market develops. I don’t really expect that we will have visibility until later in the second half of this year.

Omar Nokta, Analyst

Yes. That makes sense, and it seems to be kind of the similar discussion from some of the liners as well that’s waiting until the second half to have a better sense. And then maybe just one final one, you mentioned that the six new buildings that come on next year. What are you thinking right now about those vessels? Clearly, those are, in terms of quality, the best out there when they deliver. You mentioned in the release that the time charter interest is still there, but it rarely goes beyond 12 months. How do you think about the employment, or what kind of discussions are you having now with charters on those new buildings in terms of stay duration?

John Coustas, CEO

No, for 12 months, we are talking about ships in the water. When we are talking about new buildings, we often discuss 3 to 5 years, even now. As I mentioned, we are not in a hurry because we don’t really need a charter in order to secure finance for the ships. We are funding these vessels from our own resources. So, we are fortunate that we are able to wait and see exactly what’s going to be the best employment for these ships.

Omar Nokta, Analyst

Okay. Alright. Thank you, John. I will turn it over.

Operator, Operator

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. Please go ahead.

John Coustas, CEO

Yes. 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. Thank you.

Operator, Operator

Thank you. This concludes today’s teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.