Q3 2021 Danaos Corp Earnings Call
Good day and welcome to the denounced Corporation conference call to discuss the financial results for the three months ended September 30th 2021.
As a reminder, today's call is being recorded.
Hosting the call today is Dr. John Cousteau's, Chief Executive Officer, I've been out <unk> Corporation and Mr. Ivan de looks at this.
He finance officer.
<unk> Corporation.
Dr <unk> and Mr. Heartsease, we'll be making some introductory comments and then we will open the call to a question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
What do I have your question. Please press Star then two.
Please note. This event is being recorded I would now.
I'd like to turn the conference call over to Dr. John Cousteau's.
Sir the floor is yours Sir.
Yeah.
Thank you operator, and good morning to everyone.
Had these CFO.
Good morning, everyone. Thank you for joining us before we begin.
I think we want to remind everyone that my remarks this morning.
They 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 weeks 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.
Conciliations over 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 <unk>, who will provide the broad overview of the quarter.
Thank you Michael.
Good morning, and thank you all for joining today's call to discuss our results for the third quarter 2021.
We have chosen that everyone is aware of the well documented disruptions to the global supply chain.
Kidney unabated.
They situation despite the negative effects of world growth had extremely positive effect in a market, which continues from strength to strength.
Despite efforts by all participants alleviate the disruption to the global supply chain.
There are no signs of conditions are improving.
The main contributing factors are an increase in demand lack of available vessels to satisfy its actually land and low levels of productivity in the ports and other land based infrastructure.
Additionally, as new vessels delivering in 2022 are actually expect to be lower than in 2021.
We do not expect any rich side 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.
Although we do not expect a dramatic difference provided demand remains healthy.
During the third quarter, we consummated the acquisition of Gemini and acquired six more than five and a half thousand 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 chocolate cataract and now we have an excess of $2 billion of chocolate backlog.
Our share ownership in Zimmer.
Although adjusted.
Per our usual practice, we will also contribute around half a billion dollar swap earnings for 2021, which is outstanding.
Our liquidity in terms of cash and marketable securities still close to half a billion and we're closely monitoring our options and strategy for next year to deliver even better results for the company and all.
In the meantime liner companies are announcing record result, which is extremely positive for dinos has a strong credit quality of our customers continues to improve.
The continued strong performance of the analysis is insured by existing charters with an average charter duration of three three years and new charters that lock in current rates for several years.
We expect strong market conditions to persist in the near term, which will support a strong re chartering environment into next year and should ensure our stellar performance for the next three years.
Once again the market dynamics are in our favor I will continue to deliver best results possible for our shareholders with that I'll hand, the call back to <unk>, 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, and a $5 effective <unk> 32 per share.
Or adjusted net income of nine 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 at 1.3 million dividend collected from Zim during the current quarter, partially offset by higher total operating expenses of $17 3 million due to the increase in the average size of our fleet by eight vessels between the two quarters.
And then $8 3 million increase in net finance expenses.
More specifically operating revenues increased by $77 million.
Well I haven't been $95 9 million in the current quarter compared $418 9 million in the first quarter of 2020.
This increase is attributed to a $34 6 million increase in revenues as a result of higher charter rates.
And $15 6 million of incremental revenues as a result of the vessel additions to our fleet.
Queen the two quarters.
Revenues 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 charter liabilities over the recent vessel acquisitions.
Vessel operating expenses increased by 7 million to $34 7 million in the current quarter from 27 7 million in the third quarter of a friend for 'twenty, mainly as a result of an increase in the average number of vessels in our fleet.
While the average daily vessel operating cost increased to $5918 per day for the current quarter from $5467 per day in the third quarter of 2020.
And that was mainly due to COVID-19 related increase in expenses, including remuneration.
However, our daily operating costs exceeded 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 increasing the size of our fleet interest expense excluding <unk>.
Finance cost amortization and accruals increased by $7 million for 14, and a half maybe even in the current quarter compared to seven and a half million dollars in the third quarter of 2020, the increase in interest expense as a combined result of.
And North point 7 million increase in interest expense because of an increase in the coastal with debt service by approximately 0.4%.
Partially offset by a decrease you know average indebtedness by approximately $80 million between the two periods.
Reduced positive recognition through our income statement of accumulated the accrued interest of $6 3 million.
That had been accrued in 2008 feet in relation to two of our credit facilities that were refinanced.
This April and as a result of such refinancing as the recognition of subject and related interest has been significantly decreased.
Adjusted EBITDA increased by 79, 6%.
Or six to $6 3 million.
Other than $49 6 million in the current quarter from $83 3 million in the first quarter of 2020 for the reasons outlined earlier on this call.
We also encourage you to review our updated investor present.
That has already been uploaded on our website.
A few of the highlights are on.
On the operating side over the past few months, we have forward fixed several vessels at higher significantly higher than current.
Charter rates.
Our investor presentation.
Is it kind of disclosure on contracted on our contracted charter book and the step ups in the chocolate eggs.
As a result of these improved fixtures.
And including the Gemini vessels that were fully consolidated in the first <unk>.
July of 2021, and the acquisition of the six five and a half hours and pay you wide beam container ships our contract backlog now stands at $2 1 billion.
With a three year average charter duration, while contract coverage in terms of opening these days he 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.
In April we are now ready to open the call to Q&A.
Yes, Sir we will now.
I'll begin the question and answer session to.
To ask a question you May press Star then one on a touchtone phone.
If he was in your speakerphone, please pick up your handset before pressing the keys.
My question has been addressed you'd like to withdraw your question. Please press Star then two.
Again. It is star then one to ask a question at this time, we'll just pause momentarily to assemble our roster.
And the first question, we have will come from Randy Gibbons of Jefferies. Please go ahead.
Howdy gentlemen has gone.
Hi, Randy how are you.
Well so I guess my first question is you know you stated in the press release, you have about 90% of days already covered in 2022 and likely that number's higher right. When you assume the options get exercised so I guess two part question there for next year how many.
Those 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 Andy.
Starting from the last part.
Obviously did not formally provided the EBITDA guidance.
However.
You have the comment.
This quarter's EBITDA, which is a $150 million.
And given that over the next quarter is when the new charters kick in which all views that this number is going to go up so the current let's say.
Your line is two three points to 600 and I can tell you with a great degree of certainty that it's going to be north of that.
Also we have disclosed.
Disclose our contracted revenue for next year.
And people can.
I can do the math.
EBITDA margins in the peninsula.
So that's the that's as it relates to EBITDA.
Hum.
The other thing is that because this is part of earnings.
That and this quarter, we had a dividend from zim.
Next year. It is also anticipated that zain will pay out further dividends and that's going to be part of.
Our earnings although he said quote unquote nonoperating item, if you wish smoke, earning trying to ships themselves.
But these are 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.
Have a stated also in our presentation are open which would point, let's say to <unk>.
Seven ships for the full year, it's a slightly higher number than seven because ships opening up gradually within the year I don't have the exact number at this point, but maybe.
12, or 14 ships or something like that but as you rightly pointed out we calculate this on the back of minimum contract durations that are options that charters have on several of these ships that one would expect will be exercise because they will remain below.
Market.
But we cannot make such assessments when publicly showing oh contract coverage numbers.
In our 6K.
For your benefit and for all the investors and analysts to review. This there is a very analytical testing 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.
Got it okay.
No that's fair and then now on the balance sheet side. It looks like you still have about seven 2 million shares of Jam a worse you know I don't know 350 plus million dollars. So I guess with that any updates on timing of the sale of those I know you trimmed a million here in Alaska.
Few weeks or so and then on the other side that you clearly have a to use your term war chest of cash now so and it is growing what are you likely to do with that kind of excess liquidity here in the coming quarters.
Before John answers the question on on the thought on the strategy around Zim.
I'd like to point out that we have already spent in Q3.
The Gemini acquisition.
Is 75 million in net.
The cash outflow plus.
$260 million for the six new ships. So we have invested our cash therefore.
And I wouldn't call it a war chest, but the cash balance that had been built up was put to use very effectively I would 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.
<unk>.
Yeah.
You know, we believe that our.
Zimmer shares are actually undervalued okay.
We wanted.
I wanted to sell.
Some chairs.
Because if eventually we would like let's say to exit.
We need to compete in the liquidity.
Of our shares.
I think for the time being we are done with our shale.
We are going to wait to osha to seize them.
Results.
But when practically.
From a guidance, which they are giving you have a market cap, which is equivalent to a two.
2021 EBITDA.
It's obviously.
You know a very cheap.
Stock.
Uh huh.
So yeah, we are not in a hurry.
At this moment, we believe that there is significant our appreciation of the stock.
And.
But you know as irregular shed.
Already down significantly divestments.
We are monitoring work, let's say if there are any exceptional opportunities to invest.
Nothing like that.
At this moment are visible. So we will continue first of all to.
Optimize our debt.
To you know of course definitely is going to incur.
Increasing the dividend.
We are committed to that.
So I believe that we will plan a CRO shoes.
Really past two solid growth both for the company and the dividend.
Correct.
Yeah, No. That's fair I think just to reiterate Zen is still cheap clearly to analysis still cheap and good to hear that the the dividend's going to be increased so well, we'll be watching for that thanks, so much and keep up the great work.
Thank you thanks Randy.
If you'd like to participate in today's Q&A. Please press Star then one on a touchtone phone. The next question, we have will come from Chris Wetherbee.
City.
Hi, This is Ely wenski sitting on for Chris Wetherbee, Congrats on the quarter. Thanks for taking the call.
My first one for you guys is is more of a conceptual one right. So given the higher congestion that were seeing broadly the upward pressure, it's putting on the rate environment. What is your visibility in terms of the new builds do we do we find that some are holding off on new builds until we have more more clearance on what.
The congestion environment might be looking like in the future.
And well you know.
The congestion environment.
That is.
And you know he's not going to be solved by just more ships.
So.
You know and that is exactly why.
We have seen in general a pause.
In our new buildings of course lots of ships in the pipeline.
But for the time being everybody.
It really has kind of pushed a bit of a hole.
Both because our new building prices have gone up but also because we're talking about.
In late 2024, or 2025 deliveries when no one will know exactly.
What the demand supply balance is going to beep.
Ah so.
Uh huh.
On the other.
Front.
You've probably been following what's going on on <unk> 26.
That are shipping.
Yeah. It really is is committed to.
To have a zero carbon.
Shipping.
By 2050.
But.
Okay.
We need a much more clarity.
About that from the government, who are going to provide the fuel for that but also what is important.
Everybody understands that.
Uh huh.
This creates a kind of a limit into the new buildings you order today.
Whether they are.
Let's say conventional or LNG because you know these are both full schild fuel propulsion and these ships will which are going to be delivered 2025 will last well into 2015 and beyond.
So.
Every touch decision to date.
Definitely not a plus.
For a decarbonization the 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.
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 with the current fleet and just try to hold off as long as possible.
Additional investments in CEO.
Category.
As I said the issue I mean, we are definitely.
Amongst let's say our peers.
We definitely have the largest kind of let's say resources, if we want.
Assuming let's say ultra or that we disposed of Zimmer shares in order to.
Let's.
Let's say proceed into it.
Significant new building program. The thing is we don't want to order, let's say new buildings, unless we are sure.
That.
These ships will not suffer.
No logical.
Absorptions within the next let's say 15 to 20 years.
That is why we are extremely careful with all.
These decisions.
On the other hand.
And you know I have been into various conferences lately and it's being recognized that overall.
From an environmental point of view it makes much more sense.
To extend let's say the life of an existing ships for another five six.
Yes.
To give a let's say the appropriate timeline for research.
Towards.
More zero carbon vessels, becoming available.
Rather than just rushing to order new ships today that 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'll be it'll be interesting to see how this plays out in the coming years.
Thank God I have three quick ones for you in terms of the.
Longer and improving fixtures do you see customers asking to frontload any of those contracts are given lower visibility in the longer term.
Yeah.
There are customers who are.
Yeah, not a lot is just yeah, a couple of them who have asked that.
But this is mainly from their point of view.
Ah, it's probably for their own tax considerations you know they have very high.
Our income during these years 'twenty one 'twenty two.
Would prefer to front load.
Ah the rate and then to have a let's say a lower rate going forward when.
People expect that from 2023, probably we're going to see a doctor and normalization of our the Teu rates.
Thank you and then can you just provide a little bit of color on the off hire days and scheduled dry docks moving forward.
Don't ask you to Crystal ball it but just any color that you can see here on the 137 off hire days was that just due to a broader labor shortage any any information there would be helpful and maybe how to think about it moving forward.
I mean, we typically are.
We typically have.
Let's say.
Out of the 65 days in the year.
On average the ships would operate 360 days right.
Those five 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 off hires you may have an incident.
Hum you may have a machine.
Earlier engine failure or 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 off hire for the full quarter.
We don't expect that this is replicated in the coming quarters.
Or at least we hope it's going to replicate it in the coming quarters. So yeah on a normalized run rate basis through 60 days is something that one kind of work.
Okay.
That makes sense. Thank you all very much.
Thank you.
Next we have Jeremy Metz Meyer of value investor's edge.
Hey, good morning, gentlemen, and congrats on a fantastic quarter excellent result.
Hi, Jay hygiene.
So the one thing I wanted to dial in on it and Randy sort of started addressing it but you had that 1 million share sale and Jim and the question I had on that is you mentioned that you're done selling for now you think cheap, but I'm a little curious because the lockup ended at the start of September the shares for $55 60 to $61 All September.
And then they didn't drop until after into October.
Dropped to 44, it seems like you sold them at the very bottom and now they're higher so 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 million or 2 million shares why not sell at 60.
Okay.
You know we have to admit yes, we didn't at.
Time.
Properly.
That kind of a.
Shale.
It would have been much better to do it let's say when he was at 60.
And.
Yeah.
That's why we said we're going to be.
Much more.
Let's say cautious to the way that we're going to do that as you know with the.
Sale of shares.
Nobody has a crystal ball.
And.
We just hope we're going to be kind of more proactive or luckier.
Well disposing the rest of the shares.
Yeah, that's fair I mean, theres a lot of hindsight did the reason I ask is there's a lot of rumors swirling around that you know you saw rates dropping or where you're panicked or you didn't like them anymore, and you decided to sell but it sounds like it was a preplanned timing in sale and you just got to kind of unlucky is that fair to say.
Well its exactly we had planned to actually we had already started to approach us about these.
1 million shares.
And then we had the low cap and then we wanted to do.
About a.
A process for the shares we wanted to Institute.
Hey, a beauty contest between let's say two investment banks, we gave you that half a million each to see.
Which one is going to shell burst.
And that process a bit got delayed.
Yeah.
Dropped.
So it was just an easy and we decided that it was more important for us to see.
You know how this process kind of works once we started it.
Rather than just try to tie in work at the top.
The shares.
Yes.
It makes sense to just a little bit of bad luck and timing and it's too bad you pointed out the shares earlier and Jay definitely we did not panic.
Because we are in the market, we see how strong the market is from the.
Short term say inside right. So we have I mean, yes, the market was a bit.
Equity capital markets were concerned during that period of time, but we were not concerned.
It was a matter of unfortunate timing.
But again it was this was not a big chunk of shares compared to the overall position. So I think.
We are hopeful that our average when.
When we complete the disposal will be much much better.
Yeah, I think that makes sense I think everybody you've communicated very clearly that eventually youre going to trim a little bit of your position I think everybody expects you to sell a million or 2 million shares or just a little surprising to see the price, but I think your explanation makes sense. The other question I want to ask it is looking at repurchases.
Your net asset value, it's debatable right. It depends on how much of a charter discount you attach I have around 140 years I've seen a couple of other analysts that have similar numbers around 140, a share used to have a number in your slide that would show you. Our calculation of now I noticed that's not in this presentation do you have for two part question. One is do you have any sort of <unk>.
Arnold calculation that youre willing to share and question two is at what point does the value disconnect is so huge that you have to go back to repurchases at what point does the disconnect just get two huge.
Well, yeah, and as you can see.
Although we used to report our actually our AAV all the basis of.
Let's say related really objective numbers, we decided to discontinue that.
Yeah.
Because that really a continuing of the bases, which we're doing it was actually producing.
Some figures.
Which were considerably higher than the figures, which you mentioned.
And we.
We did not want really to create.
Kind of a let's see.
<unk> expectations.
For a situation of the market.
<unk>.
I actually.
I was assuming.
A practically a shale.
Of.
All the vessels spot at this moment.
So it's very difficult.
You know to be able.
<unk>.
<unk> all that that was the basis of the charters you have and all that.
Yeah.
Because there's been you know I mean that kind of calculation was done.
In a more normal kind of market, where you had fluctuations of 15 20, 30%.
And the price is 40% when you're having you know like an appreciation of 500%.
I think you'll get more confusion rather than objectivity.
Or where things really are.
Yes definitely.
Quickly moving metric Friday fast moving and it depends on what charter discount you attached but clearly there is a significant value snack here when your stock price or your entire enterprise down less.
Less than EBITDA value your charters, plus insurers plus scrap right I mean, the company is trading at ridiculous valuation. So at what point do you start to step back and say, okay. We have to repurchase here versus just kind of holding onto this cash.
Yeah.
Uh huh.
You know that's a decision that we will needs 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.
More than we grow.
Lets say our ER the cash of the company.
The more of these problem you know will become a.
More important than revisited, yes, because.
At this point just to add to what John said.
We have.
Huge.
Cash at hand.
Significant cash on hand.
First to reinvest in the business. So at this particular point.
Do not have the excess liquidity that we would otherwise have of course as it builds up within Q1 and Q2. This week that the more of a cash balance builds up the more such capital allocation decisions become.
Relevant.
Yeah.
Alright, it sounds like a moving target, but congrats on a fantastic quarter and we're really looking forward to the next one.
Thank you very much thank you Jay.
And next we have or knockdown of Clarksons securities.
Hey, guys.
Good afternoon, I, just wanted to ask I noticed and sorry, if you already addressed this but I wanted to ask in looking in your fleet list you were a bit opportunistic with one of your vessels.
The 6500 Teu.
I forget the name of it but it had rolled off of its long term contract of 34000, a day and it was re upped at 110 for six months, so clearly very very strong rate.
Wanted to ask you.
In terms of liquidity and the chartering markets today.
Is there cause there.
They have been somewhat of a pause and theres 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 that roll off what does the liquidity look like for say doing another six months and this 100000 plus.
And also what does it look like to do say, a three to five year contract.
Yeah.
Yeah.
First of all I would like to explain that.
It's not in general our policy.
To do.
Let's say just short term.
Charters, we are rather prefer to lock in.
Lower rates longer term.
But about the specific ship.
Which actually holds also.
Another four sister ships that we have we.
We had an agreement with the charterer that there was going to be.
That's the last this last six months over the charter.
We're going to be.
At index.
So practically we.
The index from you know.
One of the brokers and that goes away.
And the same thing is going to happen with the sister ships, which are opening some time in the 'twenty.
2022 what the index is going to be.
I don't know.
But that's really.
Behind our.
You know the story behind that kind of rate.
Uh huh.
In general.
There is pretty strong demand.
Four ships.
Especially also because in 2022, we have lower deliveries that in 2021.
Okay.
And.
On the other hand.
Our charterers do not want to commit.
Let's say the more you go forward.
The less they are eager to compete but still.
You know at pretty good rates.
I mean, we have.
Just yesterday the charter of the <unk>.
<unk>.
2001 built to 5000 Teu.
For three years.
At <unk>, which is opening this one next April.
And with charter that ship for three years at a gross rate.
<unk> of $28000 a day.
I mean these are really fantastic.
Fantastic rate and maybe the same ship.
<unk> made good for six months.
I don't know 60, or 70000 or I don't know.
But.
Historically I mean these rates.
Are really phenomenal.
Yeah definitely thanks, John and just one follow up.
The the the six eco vessels you acquired them that come with below market charters are any update on the fort worth fixing on any other ships, especially the ones that come up here for renewal I think around mid year 'twenty two.
Yeah, well, we have we are in discussions with a number of parties.
We're not in a rush.
Well not in a rush exactly.
Specifically for these vessels because these vessels I mean compete with new buildings practically don't compete with the older ships.
I mean today, if you go to the yard to build the new five 5000, Teu, that's pretty much what youre going to him.
And so you know, we we I understand that the more we are staying forward sure. They are opening date.
Better deal, we're going to have so we are in discussions, but there's no hurry.
Two are 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. Christmas, where any further comments or closing remarks Sir.
Yeah.
Thank you operator, thank you all for joining our conference call and your continued interest in our story and 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 has now concluded at this time you may disconnect. Your lines. Thank you everyone take care and have a great day.
Okay.
Yeah.
Yeah.
[music].