Q3 2022 Danaos Corp Earnings Call
Good day and welcome to the <unk> to announce Corporation conference call to discuss the financial results for the three months ended September 30th 2022.
As a reminder, today's call's being recorded hosting the call today is Dr. John Cousteau's, Chief Executive Officer of <unk> Corporation, and Mr. Evangelist Heartsease, Chief Financial Officer of <unk> Corporation Dr.
Dr who saw some Mr. Hatzius, we'll be making some introductory comments.
And then we will open the call to a question and answer session.
I would now like to turn the conference over to Mr. Evangelist Hatzius. Please go ahead.
Thank you operator, and good morning to everyone and thank you for joining US. This morning before we begin I quickly want to remind everyone.
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 <unk>, who will provide the broad overview of the quarter.
John .
Thank you.
Good morning, everyone.
This quarter marked the retreat of the container markets amongst sustainable stretch very ties to.
More normalized levels by well above <unk>.
The liner market has experienced a combination of supply chain normalization and demand destruction due to very sharply.
These include but not limited to lumber inflation and declining GDP growth.
The uncertainties created by the way in Ukraine.
And in energy prices.
He has been compounded by high inventories and warehouses and delayed collection of containers.
Total body weight.
Easing of supply chain disruptions.
The W. Martin Containerized freight is all contributed.
Each vessel demand.
Opportunistic market participants who are aggressively contracting smaller vessels will extra loaders, which will use during the peak of non last year.
This has led to a significant collection in the sub 3000 Teu segment.
As charterers are on the sidelines waiting for the market go up before they can move the vessel.
Charter periods have also been reduced whereas nickel is six months for smaller vessels.
As charterers are waiting to see how the CIA requirements will impact.
Fleet scheduling and what additional slow steaming will be needed to meet the requirements.
The analysis is well insulated from the current market environment and achieved record operating profit.
Third quarter of 2022.
Our commercial efforts earlier this year resulted in a number of new vessels fixtures for our vessels.
Andrew Gundlach portable with a multiyear backlog of $2 2 billion contracted revenue.
We have also continued to strengthen our balance sheet and we have now fully liquidated our shareholdings in <unk>.
As we stated we would.
In addition, we have new commitments from our Bank group.
Extend existing bank debt facilities until 2027.
This means we have no significant capital requirements always highlighting until then and we have the necessity of flexibility to pursue our strategy of growth share buybacks and acquisitions.
In fact, our net debt will be very close to zero by the end of the year, which protected analysis and the recent dramatic increase in interest rates.
We got fortress balance sheet, we are looking at the future with great optimism and evaluating the steps of the Sigma analysis at the forefront of the industry.
Now as a management team is fully aligned with our shareholders and we will continue working to enhance long term value of the company.
Thank goodness.
Thank you John and good morning, again to everyone I will briefly review the results for the quarter and then open the call to Q&A.
This quarter, we are reporting adjusted EPS of $8 71 per share.
Adjusted net income over how does that 7% to $6 9 million.
Compared to our adjusted EPS was <unk> 32 per share or $109 5 million.
For the third quarter of 2021.
This increase of $67 4 million in adjusted net income between the two quarters is there.
A result of a $64 1 million increase in operating revenues.
The 11 million incremental net dividend book in relation to our Zimbra.
Equity holding.
And the 205 million improvement in net finance expenses.
Partially offset by higher total operating expenses of $10 2 million, mainly due to the increase in the average size of our fleet by size vessels between the two quarters.
Inflationary pressures that result could be an incrementally higher daily.
<unk> expenses.
More specifically operating revenues increased by $64 1 million.
$160 million in the current quarter compared to 195 9 million.
In the third quarter of 2021 with.
This increase was attributed to a series of $6 1 million increase in revenues as a result of higher charter rates.
$11 1 million incremental revenue as a result of the vessel additions to our fleet between the two quarters.
The $45 million increase in recognition of assumed liabilities of recent vessel acquisitions. Finally, we also have the $28 4 million reduction in revenue due to lower noncash revenue recognition in accordance with U S. GAAP.
Restaurant operating expenses increased by $4 5 million.
$39 $2 million in the current quarter from $34 7 million in the third quarter of 2021, mainly as a result of the increase in the average number of vessels in our fleet.
While the average daily vessel operating cost increased to $6173 per day.
The current quarter from $5918 per day in the third quarter of 2021 mainly view too.
COVID-19 related increase improve remuneration and the increase in travel expenses as well as increased insurance premiums.
Between the two periods.
However, our daily Opex figure.
So I was one of the most competitive in the industry G&A expenses decreased by <unk> 2 million to $7 1 million in the current quarter compared to $7 3 million in the third quarter of 2021.
Interest expense, excluding finance costs amortization decreased by $1 3 million to $13 $1 million in the current quarter compared to $14 4 million in the third quarter of 2021.
This.
The decrease in interest expense as a combined result.
A lot of $5 million decrease in interest expense because of lower average indebtedness by approximately $467 million between the two periods due to extensive deleveraging that we have done since then.
And that was partially offset by an increase in cost in cost of debt service.
Almost one 5% mainly as a result of rising floating interest rates.
We also have the $1 $3 million decrease in interest expense due to capitalized interest on vessels under construction.
We also have reduced positive recognition through our income statement of $1 5 million of accumulated a crude interest.
In relation to our.
2018 refinancing that has since been fully repaid.
Adjusted EBITDA increased by 42, 4%.
Well six to $3 5 million to $213 1 million in the current quarter from $149 6 million in the first quarter of 2021.
For the reasons outlined earlier on this call.
We also encourage you to review our updated investor presentation posted on our website as well as subsequent events disclosures.
Couple of highlights.
Hello Hello.
The end of the second of the third quarter, our contracted cash revenue backlog stood at $2 3 billion with a three and a half year average charter duration, while contract coverage is up 100% for 2022.
The 88, 4% for 2023, while even for 2024 it is already up 62%.
Our investor deck has analytical disclosure on our contracted charter book.
Finally as reported in our earnings release.
The company is working to conclude.
437 $75 million refinancing within Q4.
That would extend maturities of bad debt to not before 2027.
Improved pricing terms.
While most of this amount or could it habits of $82 5 million will be in the form of our revolving credit facility.
Rob will provide the company with increased flexibility in managing capital allocation.
Finally pro forma for these refinancing transaction more than 60%.
Or 45 vessels out of 71 vessels of the company's fleet.
We'll be debt free and unencumbered.
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 for Q&A.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Omar <unk> from Jefferies. Please go ahead.
Thank you Hey, guys. Good afternoon, I did have a couple of higher units.
I'm good I'm. Good. Thank you just wanted to follow up maybe evangelists on your you just touched on the new facility.
Youre going to have 45 unencumbered ships from the 15 currently I'm just thinking about that.
That that 30 ship increase right in that free capacity is that simply because youre not needing to put up 30 vessels as collateral for this new facility or is it simply that you are going to be paying down a big chunk of that and not really draw on the revolver. Once it's completed.
No. Thank you for this question Omar.
These these vessels that were previously securing the debt that is now being refinanced.
This was.
Because that was put together in 2021.
It was for $850 million.
And at that point. These vessels were part of the security package because they were required to be.
Since then we have significantly reduced the facility down to $438 million.
So.
These securities are no longer required.
Part of this refinancing exercise was also to rationalize security allocation.
On debt facilities, which is being achieved.
And.
Also of course.
That evolving feature.
Give us more flexibility than we previously had.
Okay, Yes. Thank you and then just.
To the extent you can say how much do you think of the revolving.
And of the facility Youll.
Youll drawdown from the get go.
I don't expect we will drawdown from the get go any of it.
It will be fully committed.
With two or three business days notice to draw funds whenever we want all the securities will be in place.
But we're not going to draw it unless we needed.
I don't expect we're going to require it in the near term at least the size of this year.
Yeah.
Okay Alright.
That's that's that sounds great. So maybe just kind of taken a big step back you know clearly you have taken advantage of a pretty robust market here over the past two plus years, you've strengthened your cash position lower debt you've got the backlog at $2 3 billion well have you sold the final piece of them and your cash balance is now pushing club.
Towards that $600 million.
You know in the past you've sold ships spot ships order chips paid down debt.
Bought stock paid out dividends.
What do you think as we get into 2023 is the priorities for use of cash and generally strategically how are you thinking about the company as you get into next year.
Yeah.
John do you want to take that.
Yeah, well Omar.
Yes.
As I say, we'll wait.
We said.
And that we will.
Yes continue with.
Yeah.
Let's see the buybacks and.
We will have to.
Wait.
And see wedding deal opportunities come as you know.
Shifting.
This is a cyclical business.
And.
Yeah.
There is definitely.
Going to be a downturn with all what's happening I don't believe we have already seen.
Really the extent of the.
The drop.
Because all the increase of interest rates et cetera has been pre key.
Let's inside them.
But I'm pretty sure that going forward.
See the effects.
This type of thing and deflation.
And.
He will be there.
To take advantage of.
All the opportunities that are going to.
So our lives.
We are we have there.
Six new building vessels.
Which is.
Yeah.
Grass and.
He is a very important steps with these ships were at first.
Kind of green vessels ordered by the company.
And.
Yeah.
It's very important to be able to follow ultra that market.
This is going to be importantly, how.
Really.
We're going to use the whole shipping industry is going to respond.
The carbonization requirements.
The good thing is that with interest rates also going up as a viable it shed.
We have total Lynch related.
We will be practically.
Yeah.
Zero net debt by year end.
And.
Yes, we will.
Really hope to be able to.
Nate.
Yeah.
Mkay accretive.
Acquisitions within the next let's say one to two years.
Okay Yep definitely.
And it sounds like you guys have the liquidity both in terms of cash and really 400 million plus us.
Golfer capacity.
So it'll be interesting to see.
Thanks, John Thanks, Angela So I'll turn it over.
The next question comes thank you I'm sorry.
The next question comes from Chris Wetherbee from Citigroup. Please go ahead.
Hey, Thanks, good afternoon guys.
So.
Hi.
I guess, maybe first detailed question can you give us a sense of what you expect for dry docking in the next couple of quarters.
Okay.
Sure.
I'll have to check my records, but to the best of my recollection.
I think it's going to be.
Four ships.
So.
Yes, it's happening like five or $6 million.
Okay. Okay. That's helpful.
And then just.
In terms of the vessels that you have rolling off charter in the.
The next six months.
Where there isn't another charter or options.
<unk>.
I guess I guess I'm curious about what your sense is in terms of shipper demand. Obviously the market is in a significant period of flux right now with spot rates dropping fairly drastically over the last several months.
There has been some expressed interest by shippers to make sure there is capacity and have chartered out as such but what did you get the sense in terms of the real time conversations you have with shippers.
What their expectation is and sort of what their position is going into rate negotiations. How aggressive do you think shippers are beginning to get.
Ah well.
Definitely there are late.
Negotiation shifts from shippers.
Towards the liner company low wage renegotiations between the liner companies and ourselves that.
He has never been the case.
For the time being the biggest difference that we have with no debt.
The number of ships is.
Really the ideal ships shouldn't increase markedly.
What we have is on one end.
That.
Yeah, Jason over the vessels has dropped.
And this is exactly because utilization drop the pressure on.
Okay container freight rates.
It has also.
Drop.
But.
For the time being as I said there are no ships.
We had there.
One ship.
Open chords.
The opening towards year end.
The small one around 2200, the smallest in the Ed.
And we chartered it.
In line with the market for six months for a week.
$15000 a day.
I mean, we ship.
Prior.
Two.
Let's say the.
Prior to 2019.
It was earning somewhere between let's.
It looks like a.
Thousands of dollars today, so as I said.
We're still above that.
What is really you know for the time being.
Apart from the rate drop is that.
Charter rates are not willing to commit long term.
And this is it.
Basically we're talking.
Talking about six month period as well as before.
Okay.
I'm going to put the same ships for example, when we sell.
Some systems that we've charted before we managed to get three years.
That's no longer in the cards.
Okay. So the expectation would be maybe right maybe agreements would end up being shorter term in nature.
From the liners.
Yeah.
Yes, it will be shortly has been of course for the <unk>.
Peter will be lower.
The peaks that we have seen which in any case, we always knew that that was never going to be forever.
Yes.
Just to add Chris and I don't want to state the obvious here, but we're obviously insulated from such software right because you have to.
Tremendous contract coverage I'm just want to mention it.
Got it Okay. That's helpful and then.
Guys have done a really good job in terms of vessel Opex can you give us a sense of whether or not you're seeing inflationary pressures on the vessel Opex that you can move forward any sense of how we should be thinking about that for the next couple of quarters.
Well.
Jumping ahead to like the live here.
I mean, we obviously.
There are such inflationary pressures.
I believe that the.
If you look at our Opex not just.
For our company, but broadly for the sector.
More or less a flat line for the past many years.
Don't expect that this will continue to be the case over the next few quarters.
We see increases, but I don't consider them to be spectacular.
Or like.
Maybe 2% to 3%.
So.
Obviously, it will not be flat.
As before.
It would not be something that will materially affect earnings.
Okay. That's helpful. And then I guess just last question following up on the last one.
From a more around the lines of sort of new investments. So you have six vessels coming in.
2024.
<unk>.
Do you think that that sort of it for the time being would you be willing to put anything into the order book beyond 2020 for just kind of curious what your appetite is for new building vessels.
Yeah.
Yeah.
With these new building vessels, we won't do that.
Of course.
Two.
The process also reviewing the fleet.
It's very important in Osha to show to our customers that we are buying day about.
That's it.
Quality going forward and also.
Two.
The experiment on.
The vessel, which as you know these ships are ordered to be ready.
So.
At some stage it will do kind of the conversion.
Yes.
Yes for the time being.
Really.
There is no clarity.
What's going to happen.
With alternative fuels.
And.
Also.
As.
Everything also is.
It is a factor.
Yeah of course.
You have seen for example that all of the LNG vessels to date.
The LNG powered vessels today.
Due to the price of <unk>.
They are running on.
Chile.
So.
With this kind of energy crisis that we're going to have welcomed.
A considerable amount of time.
All the decarbonization.
Okay.
Let's say you're at 10.
We'll need to be revisited.
What is extremely important.
Is that the upcoming CIO regulations.
We are going to.
C.
A lot of efforts.
Efforts in order to use it.
Emissions.
By optimizing the vessels as much as we can but also.
Well it is very important.
Our charterers.
We'll move to adjust.
The speeds of the ships.
In order to reduce.
We use the carbon footprint.
Yeah.
Okay.
That's helpful. Thanks, very much for the time appreciate it guys.
Okay. Thank you krish.
The next question comes from Steven <unk> from value Investor's. Please go ahead.
Good morning, Thank you for taking my questions.
Our cash balances have increased modestly on a quarter over quarter basis in line with very strong operating performance.
Despite this strong cash generation jewelry purchases have been conducted on top of the $25 million buyback you announced alongside quarter two earnings.
Was there any reason that made you can still buy back during the second half of the border.
And looking ahead, you provided some high level commentary on capital allocation.
And I was wondering if you could provide some marine St. On how do you plan balancing potential vessel acquisitions with share repurchases and dividends.
Well as I said.
No.
Share purchases.
You don't need to be tying accordingly.
And.
Yeah.
Yes.
So the time being we are.
Working towards.
Let's say yet maximizing the.
Operational go for months and operation.
Some of the company.
And the buyback.
B.
Yeah.
And that we believe it's Oprah chip.
It's not that we don't have a specific.
Let's say a couple of months.
By so many chair assembly months.
The market has fluctuated quite a lot.
And.
We want.
But it really to optimize a fair relative to the balance sheet.
Our long term shareholders.
Alright Thats helpful.
Looking at the Newbuild you had previously mentioned potentially taking delivery of those on an unlevered basis is that still the plan.
Secondly, after a recent weakness in rates how should we think about associated centers are longer term contracts available or would we be looking at short term tenancy.
Two or three years.
Yeah.
If you are talking about.
Let's say the existing fleet.
For the time being.
The contract sort of a smaller vessels.
After six months.
Or is it the slightly larger ones.
You could.
Maybe a year or so.
Maybe even a bit more.
As far as any building sharp concern yeah, I mean, whatever we are discussing.
Interest from various parties.
Of course from five years plus.
Alright, that's helpful. That's all for me. Thank you for taking my questions and congratulations for the quarter.
Thank you.
It appears we have no further questions at this time I would like to turn the call back over to Dr. <unk> for any further.
Comments or closing remarks.
Yes.
Well. Thank you everyone for your interest in our story.
We will work will continue to deliver that.
Best possible results for our shareholders.
You.
Okay.
Thank you. This concludes today's teleconference, we would like to thank everyone for their participation have a wonderful afternoon.
Yeah.
[music].