Danaos Corporation (NYSE:DAC) Q4 2022 Earnings Call Transcript
Danaos Corporation (NYSE:DAC) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Good day and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the 3 months ended December 31, 2022. 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 up to a question-and-answer session. Gentlemen, you have the floor.
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'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 would 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 a broad overview of the quarter.
John Coustas: Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for the fourth quarter of 2022. This past year marked the peak of the container market and the exceptionally strong market conditions we saw over the last 2 years are behind us. The decline in box rates to pre-pandemic levels across all sailing routes for shadows difficult times ahead. The liner companies are projecting 2023 earnings materially lower when compared to 2022 and we are still waiting to see the full effect of the looming recession. Charter rates have fallen significantly, but remains higher than pre-pandemic levels. However, charter durations rarely exceeds 12 months. Fortunately, we are insulated from current market conditions as 93% of our available days are already contracted for 2023, providing us with excellent visibility for the year ahead.
Given our limited near-term downside risk and our minimal debt obligations, we have amplifier power to opportunistically take advantage of the forthcoming downturn. We are closely following the developments in the liner space and the dismantling of the 2M alliance will definitely be positive for the non-operating co-owners as there will be less efficiency in the networks. Additionally, the effects of decarbonization have not been factored in the forecast for effective fleet supply reductions through the anticipated reduction in service speeds. Liner companies are just now beginning to study the carbon intensity indicator, or CII, on their owned and chartered vessels and due to widespread criticism of the current structure of the index and the expectation that will most likely be modified, no concrete action is being taken to redesign networks with a view to conform to the index.
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Danaos is actively investigating various decarbonization strategies for our existing fleet and is actively involved in the optimization of the 6 environmentally friendly new buildings that are being delivered to us next year. We remain committed to our strategy of accretive growth and delivering superior results for our shareholders. With that, I will hand over the call back to Evangelos who will take you through the financials for the quarter.
Evangelos Chatzis: Thank you, John and good morning to everyone and thanks again for joining us today. I will briefly review the results for the quarter and then open the call to Q&A. We are reporting adjusted EPS for the current quarter of $6.99 per share or adjusted net income of $141.6 million compared to adjusted EPS of $6.10 per share or $125.8 million for the fourth quarter of 2021. This increase of $15.8 million in adjusted net income between the two periods is a result of $37.5 million increase in operating revenues, a $5.5 million improvement in net finance expenses, partially offset by a decrease of $16 million in ZIM dividends whose shares we have now sold and an $11 million increase in total operating expenses. More specifically, operating revenues increased, as I said, by $37.5 million to $252.5 million in the current quarter compared to $215 million in the fourth quarter of 2021.
This increase is attributed to a $72.9 million increase in revenues as a result of higher charter rates partially offset by $1.6 million lower revenues due to the sale of 2 vessels during the fourth quarter of 2022 and a $7.9 million decrease in recognition of assumed charter liabilities, which is the amortization of recent vessel acquisitions. Finally, we also had a $25.9 million decrease in revenues due to lower non-cash revenue recognition in accordance with U.S. GAAP. Vessel operating expenses increased by $2.8 million to $40 million in the current quarter from $37.2 million in the fourth quarter of 2021, mainly as a result of the increase in the average daily operating cost that increased to $6,417 per day for this quarter, up from $5,860 per day in the fourth quarter of 2021, mainly due to COVID-19 related increase in crude remuneration and increase in travel expenses as well as increased insurance premiums and general inflationary pressures.
However, our daily running cost remains as one of the most competitive in the industry. G&A expenses decreased by $3.7 million to $14.9 million in the current quarter compared to $18.6 million in the fourth quarter of 2021, mainly as a result of lower stock-based compensation between the two periods. Interest expense, excluding finance cost amortization, decreased by $3.2 million to $10.9 million in the current quarter compared to $14.1 million in the fourth quarter of 2021. And this is a combined result of a $1.7 million decrease in interest expense because of a decrease in our average indebtedness by approximately $590 million between the two periods, partially offset by an increase in cost of debt service by 238 basis points as a result of rise in floating interest rates.
We also had a $3 million decrease in interest expense due to capitalization of interest for the vessels that we have under construction. And all that was partially offset by reduced positive recognition through our income statement of accumulated accrued interest of $1.5 million that had been accrued for credit facilities that have now been fully repaid. Adjusted EBITDA increased by 10.8% or $17.2 million to $176.4 million in the current quarter from $159.2 million in the fourth quarter of 2021 for the reasons 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. I'll just make a quick note of certain highlights. As of the end of the year, our contracted cash revenue backlog stood at $2.1 billion with a 3.4 years average charter duration while contract coverage is at 93% for 2023 and 63% for 2024.
Our investor presentation has analytical disclosure on our contracted charter book. Finally, as reported in our earnings release, the company's net debt to adjusted EBITDA ratio stood at 0.3x as of year-end while 42 out of our 68 vessels are currently unencumbered and debt-free. Last, to also note that as of year-end, our total liquidity, including undrawn available commitments was approximately $650 million. 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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