Danaos Corporation (DAC) Q3 2021 Earnings Report, Transcript and Summary

Good day and welcome to the Danaos Corporation Conference Call to discuss the financial results for the 3 months ended September 30th, 2021. 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. [Operator Instructions] please note this event is being recorded. I would now like to turn the conference call over to Dr. John Coustas. Doctor, the floor is yours sir.

Thank you, operator and good morning, everyone. This is Evangelos Chatzis, CFO. Good morning everyone, thank you for joining before we begin, I simply 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, now let me turn the call over to Dr. John Coustas who will provide the 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 third quarter 2021. We are certain that everyone is aware of the well-documented disruptions to the global supply chain that continue unabated. This situation, despite its negative effect [Indiscernible], had extremely positive effects in our market, which continues from strength to strength. Despite efforts by all participants to alleviate the disruptions to the global supply chain, there are no signs that conditions are improving. The main contributing factors are an increasing demand, lack of available vessels to satisfy such demand, and low levels of productivity in the ports and other land-based infrastructure. Additionally, as new vessel deliveries in 2022 are actually expected to be lower than in 2021, we do not expect any respite, at least from the vessel supply front in the near term. In 2023, increased deliveries are forecasted, although, there will be an offsetting effect from new environmental regulations that will likely tighten the effective supply of vessels due to the anticipated reduction in speed. Overall, we do not expect a dramatic difference provided demand remains healthy. During the third quarter, we consummated the acquisition of Gemini, and acquired 6million 550,000 TEU vessels. all with existing cash resources. On the back of these moves, we have achieved record EBITDA and net income. We have also expanded our charter catalogs and now we have in excess of $2 billion of chartered backlog. Our share ownership in Zim, although adjusted as per our usual practice, will also contribute around $0.5 billion to our earnings for 2021, which is outstanding. Our liquidity in terms of cash and marketable securities is still close to $ 0.5 billion, and we're closely monitoring our options and strategy for next year to deliver even better results for the Company and [Indiscernible] In the meantime, liner companies are announcing record results, which is extremely positive for Danaos, as the strong credit quality of our customers continues to improve. The continued strong performance of Danaos is insured by existing charters with an average charter duration of 3.3 years, and new charters that lock in current rates for several years. We expect slow market conditions to persist in the near term, which will support a strong rechartering environment into next year, and should ensure our stellar performance for the next 3 years. Once again, the market dynamics are in our favor, as we'll continue to deliver best results possible for our shareholders. With that, I'll hand the call over back to Evangelos, who will take you through the financials for the quarter.

Thank you, John. And good morning again to everyone. I will briefly review the results for the quarter and then give call participants the opportunity to ask questions. We are reporting adjusted EPS for the third quarter of 2021 of $5.32 per share, or adjusted net income of $109.5 million, compared to adjusted EPS of $1.91 per share, or $47.3 million for the third quarter of 2020. This increase between the two quarters is mainly the result of a $77 million increase in operating revenues and a $12.3 million dividend collected from Zim, during the [Indiscernible] quarter, partially offset by higher total operating expenses of $17.3 million due to the increase in the average size of our fleet by 8 vessels between the 2 quarters. And then $8.3 million increase in net finance expenses. Most specifically, operating revenues increased by $77 million to $195.9 million in the current quarter compared to a $118.9 million in the first quarter of 2020. This increase is attributed to a $30.6 million increase in revenues as a result of higher cap rates and $15.6 million of incremental revenues as a result of the vessel additions to our fleet between the 2 quarters. Revenue also increased by $21.5 million, mainly due to straight-line revenue recognition accounting. And further increased by $9.3 million, being the amortization of the assumed capital liabilities of the recent vessel acquisitions. Thus, elaborating expended increase by $7 million to $34.7 million in the current quarter, from $27.7 million in the third quarter of 2020, mainly as a result of increase in the average number of vessels in our fleet, while the average daily vessel operating costs increased to $5,918 per day for the current quarter from $5,467 per day in the third quarter of 2020. And that was mainly due to COVID-19 related increase in expenses and [Indiscernible] remuneration. However, our daily operating costs still remains as one of the most competitive in the industry. G&A expenses increased by $1.3 million to $7.3 million in the current quarter, compared to $6 million in the third quarter of 2020, mainly due to increased management fees due to the aforementioned increase in the size of our fleet. Interest expense, excluding finance costs, amortization, and accruals increased by $7 million to $14.5 million in the current quarter, compared to $7.5 million in the third quarter of 2020. The increase in interest expense is a combined results of a $0.7 million increase in interest expense because of an increase in the cost of debt service by approximately 0.4%, partially offset by a decrease in our average indebtedness by approximately $80 million between the 2 periods, and reduced positive recognition through our income statement of accumulated accrued interest of $6.3 million, that had been accrued in 2018 in relation to two of our credit facilities that were refinanced this April. And as a result of such refinancing, the recognition of such accumulated interest has been significantly decreased. Adjusted EBITDA increased by 79.6%, or $66.3 million, to $149.6 million in the current quarter, from $83.3 million in the third quarter of 2020 for the reasons outlined earlier on this call. We also encourage you to review our updated investor [Indiscernible] but has already been uploaded on our website. A few of the highlights are: on the operating side over the past few months, we have forward fixed several vessels at significantly higher than current companies. Our investor presentation has analytical disclosure on our contracted charter book and the step-ups in the companies. As a result of these improved fixtures, and including the Gemini vessels that were fully consolidated on the first of July of 2021, and the acquisition of the 6 5,500 thousand TEU wide-beam container ships. Our contract backlog now stands at $2.1 billion with a 3.3-year average charter duration, while contract coverage, in terms of operating days is already at 100% for this year and 90% for 2022. With that, I would like to thank you for listening to this first part of our call. Operator we're now ready to open the call to Q&A.

Yes, sir. We will now begin the question - and -answer session. [Operator Instructions] At this time, we will just pause momentarily to assemble our [Indiscernible]. And the first question we have will come from Randy Giveans of Jefferies. Please go ahead.

[Indiscernible], gentlemen. How's it going?

Hi, Randy. How are you?

Doing well. My first question is, you stated in the press release you have about 90% of days already covered in 2022, and likely that number's higher, when you assume the options get exercised. So, 2-part question there for next year, how many vessels become open in 2022, and when do you expect to fix those? And then secondly, can you give some kind of EBITDA guidance for next year? It seems like $650 million is a possibility?

Yeah. Thank you, Randy. Starting from the last part, we obviously did not formally provide EBITDA guidance. However, you have the current -- this quarter's EBITDA, which is $150 million. And given that over the next quarters when the new [Indiscernible] kick in, it's obvious that this number is going to go up. The current, let's say, annualized Q3 points to 600. And I can tell you with a great, great degree of certainty that it's going to be north of that. Actual, we have disclosed our contracted revenue for next year and people can do the math, EBITDA margins and financial report. That's the -- that's how it relates to EBITDA. The other thing is that, because this is part of earnings that in this quarter, we have a dividend from Zim. Next year it is also anticipated that Zim will pay out further dividends, and that will be part of our earnings although it's a, " non-operating item, " if you wish, it's not earnings from the ships themselves. But this ought to be taken into consideration when looking out for EBITDA and earnings for next year. And on your question on re - chartering, yes, 10% of our days, we have stated also in our presentation, are open, which would point, let's say, to 7 ships for the full year. It's a slightly higher number than 7 because ships open up gradually within the year. I don't have the exact number at this point, but it's maybe 12 or 14 ships or something like that. But as you -- as we pointed out, we calculate this on the back of minimum contract durations. There are options that charters have on several of these ships. but one would expect will be exercised because they will remain below market. But we cannot make such assessment when publicly showing the contract cover of numbers. In our 6-K, for your benefit and for all investors or analysts that want to review this, there is a very analytical taping with all the charter arrangements and the options. So, people can make up their minds themselves on what they believe may or may not be exercised.

That's fair. And then, now, on the Balance Sheet side, it looks like you still have about 7.2 million shares of Zim, worth $350 plus million. So, I guess, with that, any updates on timing of the sale of those? I know you trimmed a million here in the last few weeks or so. And then, on the other side of that, you clearly have a, to use your term, war chest of cash now. And it's growing. What are you likely to do with that excess liquidity here in the coming quarters?

Before John answers the question on the strategy around Zim, I'd like to point out that we have already spent in Q3 -- the Gemini acquisition was $75 million in net cash outflow plus $260 million for the 6 new ships. So, we have invested our cash [Indiscernible] and I wouldn't call it a [Indiscernible], but the cash bundles that have been built up was put to use very effectively, I'd say. Of course, it will again, build up going forward. But where we are today, we believe we have utilized capital appropriately so far. And I'll let John take the Zim question.

Yes. We believe that the Zim shares are actually undervalued. Okay? We wanted to sell some shares because if eventually we would like, let's say, to exit, we need to assist building the liquidity of Zim shares. I think, for the time being, we are done with our sales. We are going to wait also, to see Zim results. But when, practically, from the guidance which they are giving, you have market cap, which is equivalent to 2021 EBITDA. It's obviously a very cheaper stock. So, we're not in a hurry. At this moment, we believe that there's significant appreciation of the stock, and as Evangelos said, we've already done significant investments. We are monitoring, let's say, if there are any exceptional opportunities to invest. Nothing like that. At this moment, visible, so we will continue first of all, to optimize our debt to -- of course, definitely we are going to increase the dividend. We are committed to that so I believe that we will plan a cautious, ready path to solid growth both for the Company and the dividend.

Yes, that's fair. I think just to reiterate, Zim is still cheap. Clearly the analysis though cheap and good to hear that the dividend is going to be increased. So, we'll be watching for that. Thanks so much and keep up the great work.

Thank you. Thanks, Randy.

[Operator Instructions] The next question we have will come from Chris Wetherbee of Citi.

Hi, this is Eli Winski sitting on for Chris Wetherbee. Congrats on the quarter, and thanks for taking the call. My first one for you guys is more of a conceptual one. Given the higher congestion that we're seeing broadly, the upward pressure it's putting on a rate environment. what is your visibility in terms of the newbuilds? Do we find that some are holding off on new-builds until we have more clearance on what the congestion environment might be looking like in the future?

Well, the congestion environment is not going to be solved by just more ships. And that is exactly why we have seen, in general, and a pause in new buildings. Of course, there are lots of ships in the pipeline, but for the time being, everybody really has kind of a push, a bit of a hold, both because new building prices have gone up, but also because we're talking about late 2024, 2025 deliveries when no one will know exactly what the demand-supply balance is going to be. On the other front, you've probably been following what's going on COP26 that shipping really is committed to have 0 carbon shipping by 2050, but we -- need much more clarity about that from the governments who are going to provide fuel for that. But also, what is important, everybody understands that this creates a limit into the new buildings you order today. Whether they are, let's say, conventional or LNG because these are both fossil fuel propulsion. And these ships, which are going to be delivered 2025, will last well into 2050, and beyond. So, every chart decision today, it's definitely not a plus for a deglobalization horizon.

That makes sense. Thank you. I mean, just going off of that a little bit more, given the age of the current fleet right now, do you feel that you might have more of a propensity to lean towards a more eco -focused fleet quicker than maybe some of the other peers in the marketplace might be able to. Or do you expect just to try to capitalize on the higher rate environment with the current fleet and just try to hold off as long as possible on making additional investments into the eco -category.

As I said, the issue -- I mean, we are definitely amongst our peers. We definitely have the largest resources, if we want, assuming also that we dispose the Zim shares in order to proceed into a significant new building program. The thing is, we don't want to order new buildings unless we are sure that these ships will not suffer technological obsoletions within the next, let's say, 15 to 20 years, and that is why we are extremely careful with all these decisions. And on the other hand, and I have been into various conferences lately, and it's been recognized that overall, from an environmental point of view, it makes much more sense to extend the life of an existing ship for another 5, 6 years to give the appropriate timeline for research towards more zero-carbon vessels becoming available, rather than just rushing to order new ships today, but practically you will need to have them on the water for the next 25, 30 years in order, really, to amortize their cost.

That makes sense. Thank you. It will be -- it will be interesting to see how this plays out in the coming years. I think I have three quick one’s for you, in terms of the longer and improving fixtures, do you see customers asking to front-load any of those contracts given lower visibility in the longer-term?

There are customers who are -- not a lot, just a couple of them who has asked that. But this is mainly from their point of view. It's purely for their own tax considerations. They have very high income during this year '21 and '22, so they would prefer to front load the rate and then to have, let's say, a lower rate going forward when -- people expect that from 2023, probably we're going to see a better normalization of the TEU rates.

Thank you. And then can you just provide a little bit of color on off-hire days and scheduled dry-docks moving forward. I don't ask you to crystal ball it, but just any color that we can see here on the 137 off-hire days, was that just due to a broader labor shortage? Any information there would be helpful on maybe how to think about it moving forward.

I mean, we typically -- that's Evangelos. We typically have let's say out of the 365 days in the year on average the ships would operate 360 days. Those 5 days take into account unforeseen off-hires, which are very small the way we run our ships, and also dry - dockings. And that's a blended average for 10 years. So, it's a pretty reliable number. Now, you of course have unforeseen of hires. You may have an incident. You may have with machine failure, engine failure, whatever that may be and those of course cannot be predicted. So, for Q3, we did have such an incident with one of our ships, which was actually of hire for the full quarter. We don't expect that this is replicated in the coming quarters. Or at least we hope it's not replicated in the coming quarters. So yeah, on normalized run rate basis, 360 days is something that one can work with.

That makes sense. Thank you all very much.

Thank you.

Next, we have J Mintzmyer of Value Investor's Edge.

Good morning, gentlemen. Congrats on a fantastic quarter. Excellent results.

Hi, J.

Hi, J.

The one thing I wanted to dial in on, and Randy started addressing it, but you have that 1 million share sale in Zim. And the question I had on that is, you mentioned that you're done selling for now, you think Zim's cheap. I'm a little curious because the lockup ended at the start of September. The shares are $55, $60, $61, all September. And then they didn't drop until after into October, it had dropped to $44. It seems like you sold them at the very bottom and now they're higher. Was that timing just bad luck or was it some sort of plan to sell after the quarter ended? What happened there? Because if you wanted to sell a 1 million or 2 million shares, why not sell at $60?

We have to admit, yes, we didn't time properly that kind of sale. It would have been much better to do it when [Indiscernible] at $60 and that's why we said we're going to be much more, let's say, cautious the way that we're going to do that. As you know with sale of shares nobody has a crystal ball. And we just hope we're going to be kind of more proactive and luckier when disposing the rest of the shares.

Yes, that's fair. I mean, there's a lot of hindsight. The reason I ask is there's a lot of rumors swirling around that, you saw rates dropping or you panicked or you didn't like Zim anymore and you decided to sell, but it sounds like it was a pre -planned timing in sale and you just got kind of unlucky. Is that fair to say?

Well, it's exactly -- we had planned to -- actually, we had already started approaches about these 1 million shares, and then we had the lockup. And when we wanted to do -- about a process for these shares, we wanted to institute, let's say, a beauty contest between let's say, 2 investment banks. We gave them $0.5 million each to see which one is going to sell best. And that process a bit got delayed. The stock dropped. So, it was just -- in the end we decided that it was more important for us to see how this process works once we started it, rather than just try to time what's the top of the shares.

Yes, it certainly makes sense. There's some -- a little bit of bad luck in your timing, and it's too bad [Indiscernible] the shares earlier.

And J, definitely we did not panic because we are in the market, we see how strong the market is from the inside, right? So, we have -- yes, the market was a bit -- the equity capital markets were a concern during that period of time, but we were not concerned. It was a matter of unfortunate timing. But again, this was not a big chunk of shares compared to the overall position. So, I think, we're hopeful that our average, when we complete the disposal, will be much, much better.

I think that makes sense. I think everybody -- you communicated very clearly that eventually you're going to trim a little bit of your position. I think everybody expected you to sell 1 million or 2 million shares, they were just a little surprised when they see the price, but I think your explanation makes sense. The other question I want to ask is looking at repurchases. Your net asset value, it's debatable, it depends on how much of a charter discount you attach. I have around $140, I've seen a couple of other analysts that have similar numbers around $140 a share. You used to have a number in your slide that would show your calculation of now, I noticed that's not in this presentation. Do you have -- part -- question 1 is, do you have any sort of internal calculation that you're willing to share? And question 2 is, at what point does the value disconnect get so huge that you have to go back to repurchases? At what point does the disconnect just get too huge?

Well, as you can see, although we used to report absolute NAV on the basis of, let's say, relatively objective numbers, we decided to discontinue that because continuing on the basis which we were doing it, was actually producing some figures which were considerably higher than the figures which we mentioned. And we did not want to create kind of, let's say, expectations for a situation of the market, which actually, was assuming a -- practically a sale of all the vessels spot at this moment. It's very difficult to be able to adjust all that on the basis of the charters you have and all that because there's been -- that kind of calculation was done in a more normal market, where you had fluctuations of 15%, 20%, 30% in the prices, 40%. When you are having an appreciation of 500%, I think you get more confusion rather than objectivity of where things really are.

Yeah. It's definitely a quickly moving metric, right? It's fast moving. it depends on what charter discount you attach. But clearly there's a significant value you can't clear, when your stock price, or your entire enterprise value, is less than EBITDA value. Your charters, plus Zim shares, plus scrap, right? The Company's trading on those [Indiscernible] valuations, so at what point do you start to step in and say, okay, we have to repurchase here versus just holding onto this cash?

That's a decision that we will need to visit with the board, we are closely monitoring that. We agree with you that the shares are undervalued. We don't have at this moment any specific let's say discussion about repurchasing of shares, but definitely the more that we grow let's say our -- the cash in the Company, I mean, the more of these problem will become more important than revisited.

Yes, because at this point, just to add to what John said, we have used cash at hand -- significant cash on hand to invest -- to reinvest in the business, so at this particular point, we do not have the excess liquidity that we would otherwise have. Of course, as it builds up within Q1 and Q2 this will -- the more the cash balance builds up, the more such capital allocation decisions become relevant.

All right, sounds like a moving target, but congrats on the fantastic quarter and we're really looking forward to the next one.

Thank you very much. Thank you, J.

And next we have Omar Nokta of Clarkson Securities

Hey, guys. Good afternoon. I just wanted to ask, I noticed -- and sorry if you already addressed this, but I wanted to ask is, in looking in your fleet list, you were a bit opportunistic with 1 of your vessels, the 6500 TEU, I forget the name of it. But it had rolled off of its long-term contract of 34,000 a day and it was re-upped at 110 for 6 months, so clearly very, very strong rate. Wanted to ask you in terms of liquidity in the chartering markets today, is there -- because there seems to have been somewhat of a pause and there's a lot of disagreement as to whether this pause has to do with people's questions on the outlook or if it's just simply a lack of available tonnage. But if you are looking in the market today for that vessel, and its sister ships at roll-off, what does the liquidity look like for say, doing another 6 months in this 100,000-plus. And also, what does it look like to do, say a 3–5-year contract?

First of all, I'd like to explain that, it's not in general our policy to do just short-term charters. We are -- we rather prefer to lock-in lower rates, longer term. But about this specific ship, which actually holds also for another 4 sister ships that we have, we had an agreement with the charter, that it was going to be -- that the last -- these last 6 months of the charter, we're going to be at index. So practically, we took the index from one of the brokers and that was the rate. And the same thing is going to happen with the sister ships which are opening some time in 2022. What the index is going to be, I don't know, but that's really the story behind that kind of [Indiscernible]. In general, there is pretty strong demand for ships, especially also because in 2022 we have lower deliveries than in 2021. And on the other hand, charterers do not want to commit -- the more as you go forward, the less they are eager to commit, but still, at pretty good rates. I mean, we have just yesterday chartered one -- 2001 built 2,500 TEU for 3 years at -- which is opening this one next April. And we've chartered that ship for 3 years at a gross rate in excess of $28,000 a day. I mean, these are really fantastic rates. Maybe the same ship made his [Indiscernible] for 6 months, I don't know, $60,000 or $70,000, or I don't know. But historically, these rates are really phenomenal.

Yeah, definitely. Thanks, John. And just one follow-up, the 6 eco -vessels you acquired that come with the low market charters. Any updates on the forward fixing on any of those ships, especially the ones that come up here for renewal, I think, around midyear of '22?

We have -- we are in the discussions with a number of parties. We are not in a rush and we're not in a rush exactly specifically for these vessels because these vessels, I mean, compete with new build practically don't compete with the older ships. I mean, today, if you go into the yard to build the new 5,500 TEU that's pretty much what you're going to have. So, we understand that the more we're staying towards their opening date, the better deal we're going to have. So, we are in discussions. But there is no hurry to really to fix them.

Okay. Right, well, thank you. I'll pass it on.

Thank you.

Well, it appears that we have no further questions at this time. I would now like to turn the conference call back over to Dr. Coustas for any further comments or closing remarks. Sir?

Thank you, Operator. Thank you all for joining the conference call and your continued interest in our story. Look forward to hosting you in our next earnings call. Thank you.

And we thank you, sir, also, for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care and have a great day.