Danaos Corporation (NYSE:DAC) Q2 2023 Earnings Call Transcript
Danaos Corporation (NYSE:DAC) Q2 2023 Earnings Call Transcript August 7, 2023
Operator: Good day and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the 3 months ended June 30, 2023. 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'll open the call for questions and answers. Please go ahead.
Evangelos Chatzis: Thank you, operator and good morning to everyone and thank you for joining us today. Before we begin, I quickly want to remind everyone that management remarks this morning may contain certain forward-looking statements and that actual results could differ materially from those projected today. These forward-looking statements are made as of today and we undertake no obligation to update them. Factors that might affect future results are discussed in our filings with the SEC and we encourage you to review these detailed Safe Harbor and Risk Factor disclosures. Please also note that where we feel appropriate, we will continue to refer to non-GAAP financial measures such as EBITDA, adjusted EBITDA and adjusted net income to evaluate our business.
Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and accompanying materials. With that, let me now turn the call over to Dr. John Coustas, who will provide the broad overview of the quarter. John?
John Coustas: Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for the second quarter of 2023. The world economy has stagnated in the second quarter of 2023, resulting in a gradual easing of the container market. Danaos' active strategy in the current market condition is made possible by the prudent approach we have taken to manage our balance sheet to conservative levels as well as our successful chartering strategy. The latter is reflected in our operating revenues of $241 million which is near to previous record despite a charter market drop that is more than 50% lower than a year ago. We continue to be active in the charter market, highlighting the resilience of our business model and secured nearly $0.5 billion in new charter contracts during the quarter.
Our total charter backlog increased to $2.5 billion as of the end of the quarter and contracted charter coverage currently stands at 99% for 2023 and 86% for 2024. In the second quarter of 2023, Danaos received the Gold, first place awards in the Governance and Environment categories the inaugural ESG Shipping Awards. These accolades which we are proud of, acknowledge the company's exemplary efforts in promoting sustainable practices, social responsibility and strong governance and reaffirm our position as a leader in responsible maritime operations. The timing of the awards is notable as the IMO recently reiterated and strengthen its commitment to decarbonize shipping by targeting net 0 by around 2050. Danaos continues to advance its decarbonization strategy in multiple ways.
We are constantly optimizing and retrofitting our existing fleet and have committed to upgrade around 20 vessels with new propellers, fuel saving appendages and low friction paints. We have also expanded our new building program with the order of 4 additional newbuilding vessels. These vessels, 2 of which are 6,000 TEU and 2 of which are 8,200 TEU, will be delivered methanol-ready, ensuring the longevity of our investment. In total, we have 10 vessels, with a total capacity of approximately 75,000 TEU, on order. All of these will be able to utilize alternative fuels and importantly, 6 of these vessels are already chartered for multiyear periods beginning on their delivery dates in 2024. We also deployed capital opportunistically after identifying weakness in the dry bulk market, a market we are very familiar with.
We believe the long-term fundamentals in the dry bulk market are very positive. In particular, the order book is at historically low levels and fleet supply growth is projected to decline significantly over the next several years against a backdrop of rebounding demand. Short-term market sentiment is not as strong and we were able to make investments at attractive prices. As has been previously reported, Danaos acquired a significant stake in Eagle Bulk Shipping, a New York Stock Exchange listed dry bulk company. Additionally, we acquired 5 Capesize bulkers in the secondhand market. With respect to Eagle, we were able to purchase shares in a company we believe had best-in-class corporate governance practices at a significant discount to our perception of the company's net asset value.
Shortly following our investment, the Board of Eagle unilaterally implemented a poison pill and repurchased Oaktree Capital's 28% stake in the company at nearly a 35% premium to Eagle's 45-day average share prices and a 32% premium to our cost basis. These transactions which were done by Eagle's Board, fundamentally alter our view of Eagle's corporate governance. We are concerned with these developments and are taking clarification on the Board of Directors of Eagle. As Eagle Bulk's current largest shareholder, we have a strong vested interest in seeing the company enhanced long-term shareholder value and believe that we have a duty to speak up when we think the Board and our management may be acting outside the best interest of all shareholders.
Accordingly, we are committed to working constructively with the Board to identify balanced, well-considered and effective methods to enhance shareholder value on behalf of all shareholders. With respect to our interest in the dry bulk market in general, Danaos has significant experience in the dry bulk market as an owner and operator. We exited the segment years ago which was a well-timed decision in hindsight and now we again see opportunity. Given the strength of our balance sheet, we are uniquely positioned to deploy capital in various ways to grow our revenue base and earnings. Our fleet of container vessels which are contracted in multi-year charters, provide strong revenue and cash flow visibility. While we will continue to grow and future-proof our core fleet by adding next-generation vessels to it, our ultimate goal is to generate value for our shareholders and we will consistently pursue the best opportunities to do so.
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As I've said before, our healthy balance sheet allows us to opportunistically deploy our capital in various ways. During the quarter, we continued our buyback program and have now spent $65.5 million of our $100 million buyback program to retire more than 1 million shares. Finally, we remain committed to returning capital to shareholders, as evidenced by our $0.75 per share dividend announced this morning. We will continue to implement our strategy to ensure the long-term growth and profitability of the company and are consistently focused on creating value for our shareholders. With that, I'll hand over the call back to Evangelos, who will take you through the financials for the quarter. Evangelos?
Evangelos Chatzis: Thank you, John and good morning again to everyone and thanks for joining us this morning. 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 second quarter of 2023 of $7.14 per share or adjusted net income of $143.4 million compared to adjusted EPS of $7.59 per share or $157.1 million for the corresponding quarter of 2022. This decrease of $13.7 million in adjusted net income between the 2 quarters is primarily the result of the $13.9 million in dividend that have been recognized in the second quarter of 2022 which is no longer applicable during this quarter as we have now sold all of our ZIM shares. Otherwise, our adjusted net income improved slightly, mainly as a result of a $5.5 million increase in operating revenues due to better rechartering rates for our fleet, a $10.2 million decrease in net finance expenses mainly driven by the significant deleveraging of our balance sheet and $0.1 million improvement in total operating expenses, partially offset by $5.4 million decrease in operating revenues due to better disposals and $9.5 million decrease in operating revenues as a result of revenue recognition accounting and a $0.7 million loss on our CTT equity investment that is incurring research and development costs to explore decarbonization technologies for the shipping industry.
Vessel operating expenses increased by $1.3 million to $41.9 million in the current quarter compared to $40.6 million in the second quarter of 2022 and as a result of the increase in the average daily vessel operating cost that increased to $6,970 per day for the current quarter from $6,463 per day in the second quarter of 2022, mainly due to inflationary pressures that affected repairs and maintenance costs between the 2 periods as well as increased insurance premiums. Still, our operating costs continue to remain among the most competitive in the industry. G&A expenses remained stable to $7.2 million in the current quarter compared to $7.1 million in the second quarter of 2022. Interest expense, excluding finance cost amortization, decreased by $7.6 million to $5.3 million in the current quarter compared to $12.9 million in the second quarter of 2022.
The decrease in interest expense is a combined result of a $5.3 million decrease in interest expense due to the reduction in our average indebtedness by almost $700 million between the 2 periods, partially offset by an increase in the cost of debt service by approximately 2.9% as a result of rising interest rates. We also had a $3 million decrease in interest expense due to capitalized interest on vessels under construction and reduced positive recognition through our income statement of accumulated accrued interest of $0.7 million that have been previously accrued in relation to 2 of our credit facilities that have now been fully repaid. At the same time, interest income came in at $3.6 million, effectively covering almost 2/3 of our interest expense for the current quarter.
Adjusted EBITDA decreased by 7.7% or $14.8 million to $177.3 million in the current quarter from $192.1 million in the second quarter of 2022, primarily due to the $13.9 million ZIM dividend that have been recognized in the second quarter of 2022, as previously discussed. The other EBITDA drivers have already been outlined earlier on this call. We also encourage you to review our updated investor presentation which is posted on our website, as well as subsequent events disclosures. A few of the highlights are: Over the past 3 months, we have secured $469 million of contracted revenue to the arrangement of new charters for 12 container ships in our fleet. The new fixtures notably include additional contracted revenues of $177 million for 3 13,000 TEU vessels that were forward fixed on new 3-year charters and $227 million for 5 8,500 TEU vessels but were extended forward for an additional 3.6 years.
As a result, our contracted cash revenue flow has now improved to $2.5 billion with a 3.3-year average charter duration, while contract coverage is up 99% for 2023 and 86% for 2024. Our investor presentation has analytical disclosure on our contracted charter book. During the second quarter, we also prepaid early the remaining lease obligation for 2 vessels, that at the end of the first quarter stood at $66.3 million and we now no longer have any lease obligations on our balance sheet. As of June 30, 2023, our net debt is down to $131 million. In the current interest rate environment, this position shields from high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio stood at 0.2x and 44 out of our 68 vessels are currently unencumbered and debt-free.
Finally, as of the end of the second quarter, cash was $293 million, while total liquidity, including availability under our Revolving Credit Facility, stood at $653 million in total, giving us ample flexibility to pursue accretive capital deployment opportunities. 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.
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