Earnings Call Transcript - DAC Q3 2020

Operator, Operator

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.

Evangelos Chatzis, CFO

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.

Dr. John Coustas, CEO

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 an increasing spread of COVID-19 cases, global GDP has rebounded swiftly, and the 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 back to Evangelos, who will take you through financials for the quarter.

Evangelos Chatzis, CFO

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 charter 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 vessels that concluded long-term charters 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 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 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 these 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.

Operator, Operator

Yes. Thank you. And the first question comes from Randy Giveans with Jefferies.

Randy Giveans, Analyst

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?

Dr. John Coustas, CEO

I appreciate your comments. With our share repurchase, we have provided significant value to our shareholders over the years. Regarding dividends, while we are considering them, our current focus has been on generating value through share repurchases, and we don’t have any specific plans for a dividend at this time. It is something we keep in mind, but our strategy remains conservative. Our priority is to deliver growth and value to our shareholders, and we believe we are doing well in that regard.

Randy Giveans, Analyst

Is there a remaining share repurchase authorization or is that down to zero now?

Dr. John Coustas, CEO

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 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.

Randy Giveans, Analyst

Got it. You mentioned that the $31 million is quite significant.

Evangelos Chatzis, CFO

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 a pretty significant event.

Randy Giveans, Analyst

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?

Dr. John Coustas, CEO

If there are any further opportunities, we might be active in the market. However, we believe that we purchased these vessels prior to a rise in ship prices. Currently, there are many ships available for sale as the cash flows generated by the ships are quite substantial. Additionally, there are very few ships available; for instance, one of the major liners, MSC, recently acquired similar ships from the same category within the 8,500 TEU to 9,000 TEU range. This confirms our belief that this size and tonnage have longer strategic value for these liners, as they sit between the large post-Panamaxes and the intermediate sector.

Randy Giveans, Analyst

I have one more question regarding the market, which is obviously very strong. How have the record-setting container rates affected containership time charter rates? Have you managed to secure higher rates for longer periods, or is this strength limited to three to six-month time charter rates? I see that 64% of your operating days are fixed over the next 12 months. Will this increase significantly by the end of the year?

Dr. John Coustas, CEO

The charter rates we are currently receiving in the market are exceptional, the best we have seen since 2011, which is quite encouraging. In terms of duration, we observe most liners committing primarily to 12-month agreements. Therefore, the majority of our charters are for 12 months, with some extending to 18 months, indicating that with all these new charters being discussed, we will likely maintain very healthy levels throughout most of 2021.

Randy Giveans, Analyst

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?

Dr. John Coustas, CEO

We are currently in a rising market, and the fixtures we arranged earlier did not compare favorably to what we could have secured if we had waited. Therefore, we are now timing our charters closer to the delivery of the ships. This strategy has proven effective, as charters are extending their use of vessels until the maximum duration allowed by their agreements, since they anticipate securing lower rates. Consequently, some of our vessels that were set to mature in Q4 may extend into Q1 of 2021, resulting in considerable activity during that period. We have already chartered about seven ships for a year or more.

Evangelos Chatzis, CFO

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 chartered 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.

Operator, Operator

And the next question comes from Chris Wetherbee with Citigroup.

James Monigan, Analyst

Hey, everyone. James is here in place of Chris. I wanted to revisit the acquisition regarding the two 9,000 TEU vessels that you mentioned before. I'm interested in understanding more about your comments on vessel prices. Given that the market is tightening, do you see potential for more deals, or has the market reached a point where additional transactions might not be appealing? I’m looking to get your perspective on future transactions and the current state of the market.

Dr. John Coustas, CEO

Well, the thing is that exactly because, as I said, rates are going continuously up, the expectation, sales price expectations have grown considerably, 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.

James Monigan, Analyst

I understand, that makes sense. I also wanted to discuss another issue that was raised. Considering the upcoming rechartering period and the need to balance rates with tenders, have we reached a stage where charterers are showing willingness for multiyear charters? It seems we haven't quite reached that point yet. What are your thoughts on when that might happen? As you approach the upcoming recharterings, is the primary focus on securing terms or rates?

Dr. John Coustas, CEO

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 shortage of tonnage. It’s exactly at that moment that charterers will decide, I mean, either to go and build, which is, of course, 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 running the services. And that’s kind of how the balance is going to work out.

James Monigan, Analyst

Makes sense. I have a quick question regarding the disruptions from last quarter. Was there any operational expense in the third quarter that was a catch-up or that we shouldn't expect to happen again in the fourth quarter?

Dr. John Coustas, CEO

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 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.

Operator, Operator

Thank you. And the next question comes from Climent Molins of Value Investor’s Edge.

Climent Molins, Analyst

Congratulations for the very solid quarter and the share repurchases. My first question is a follow-up on 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’re looking at, or you expect to get?

Dr. John Coustas, CEO

These ships in general finance 50% to 55% of the purchase price, typically.

Climent Molins, Analyst

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?

Dr. John Coustas, CEO

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, etc. Here, we have our position, and we are able to get a 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.

Operator, Operator

And that does conclude the question-and-answer session. I would like to turn the call back over to Dr. Coustas for any further comments or closing remarks.

Dr. John Coustas, CEO

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.

Operator, Operator

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