Danaos Corporation

Good day and welcome to the Denialis Corporation conference call to discuss the financial results for three months ended September 30th, 2020. As a reminder, today's call is being recorded. Hosting the call today is Dr. John Kustis, Chief Executive Officer of Denialis Corporation, Mr. Evangelos Hatzis, Chief Financial Officer of Denialis Corporation. Dr. Kustis and Mr. Hatzis will be making some introductory comments and then we will open the call to a question and answer session.

Thank you operator. Good morning 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 the 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. Now let me turn the call over to Dr. Koussas 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 third quarter 2020. We are pleased to report improved performance in the company's profitability during this quarter. Container trade has staged a remarkable recovery since the end of May when 11.5% of the vessels in the global fleet stood idle. Time charter rates have increased across all vessel sizes, and the time charter market is at all close to multi-year highs for all vessel sizes. The ability of the Lionel companies to consistently manage capacity addressed the swift drop in volumes at the onset of the pandemic, which alleviated pressure on our customers' cash flows and stabilized trade rates. All our customers have reported strong profitability, which significantly mitigates our counterparty risk. Volumes have consistently improved, particularly in Trans-Pacific, Eastbound, Intra-Asia and North-South trade lanes. Edge volumes have recovered faster than expected. Notably, the increase in rates has been most pronounced in smaller vessel types. Danaos has the greatest amount of leverage to this segment of the market as our larger vessels are contracted on multi-year time charters. From that perspective, the short-term chartering market has been quite dynamic. Although significant market uncertainty remains, particularly as many countries see increasing spread of COVID-19 cases, global GDP has rebounded swiftly and IMF has recently revised its 2020 GDP estimates upwards. For 2021, the IMF forecast global GDP growth of 5.2%, which effectively equals growth of 0.6% compared to 2019 or pre-pandemic levels. The recovery has thus far been primarily concentrated in goods via land services, which has benefited containerized trade. We continue to execute our strategy and we are well insulated for near term volatility due to our high charter coverage of 87% in terms of operating revenue and 64% in terms of operating days over the next 12 months. This provides significant visibility into our cash flow during this period. We also have some leverage to the presently strong market through our smaller vessels. We're also cautiously optimistic about the medium-term market outlook. The order book is currently in single digits as a percentage of the world fleet for the first time in 20 years. Combined with an anticipated reduction in speeds due to the various environmental initiatives, the supply-side outlook is healthy. Tighter supply will help to maintain momentum in the container market or help to bring about a swift recovery if conditions deteriorate. Consistent with our growth strategy, we've agreed to purchase two 9,000 TEU vessels built in 2009, which were both contracted on two-year charters with a major liner company. These vessels are expected to be delivered to us between December 2020 and January 2021, and will be funded with a combination of cash and new credit facilities. With these new deliveries, our fleet, for the first time, will exceed the 400,000 TEU mark. In the meantime, we're generating strong cash flow from our 1.1 billion charge of backlog and have a healthy liquidity position. This enabled us to opportunistically repurchase 4,339,000 shares or 17.5% of the company's outstanding shares for an aggregate price of 31.1 million in privately negotiated transactions, practically tripling our 10 million original buyback programs. Given the holding nature of the prior owners of these shares, these repurchases increase our per share results and valuation metrics without impacting trading liquidity. In light of the continued uncertainty about the duration of the coronavirus pandemic and the ensuing economic recovery, we remain focused on maintaining a conservative financial profile and making thoughtful capital allocation decisions that align with our strategy and market expectations deliver value to our shareholders. We now hand the call over back to Evangelos who will take you through the financial for the quarter. Evangelos.

Thank you and good morning again to everyone and thank you for joining us today. I will briefly review the results for the quarter and then open the call to Q&A. Adjusted net income of 47.3 million for the current quarter is higher by 9.4 million when compared to adjusted net income of 37.9 million for the third quarter of 2019. We have adjusted our net income this quarter for deferred finance fees amortization of 4.5 million. The increase between the two quarters is the result of a 7.1 million increase in operating revenues, a 6.8 million decrease in net finance expenses, and a $0.9 million increase in the operating performance of our equity investment in Gemini, partially offset by a $5.4 million increase in total operating expenses. More specifically, operating increase by $7.1 million to $118.9 million in the current quarter, compared to $111.8 million in the third quarter of 2019. which increases attributed to a $17 million increase in revenues as a result of contractual step-ups in charter rates following the installation of scrubbers and the addition of three vessels to our fleet, partially offset by a $4.3 million decrease in revenues attributed to lower rechartering of certain vessels that concluded long-term charters over the past 12 months and a non-cash 5.6 million decrease in revenues due to lower revenue recognition under U.S. GAAP accounting. Vessel operating expenses increased by 2.8 billion to 27.7 million in the current quarter from 24.9 million in the third quarter of 2019 as a result of the increase in the average number of vessels in our fleet while the average daily operating cost increased to $5,467 per day for the current quarter from $5,298 per day in the third quarter of 2019 and still remains as one of the most competitive in the industry. G&A expenses decreased by $0.4 million to $6 million in the current quarter compared to $6.4 million in the third quarter of 2019 mainly due to decreased non-cash recognition of stock-based compensation. Interest expense excluding finance cost amortization then accruals decreased by $6.8 million to $7.5 million in the current quarter compared to 14.3 million in the first quarter of 2019. This improvement is attributed to an 84.6 million decrease in our average indebtedness and a reduction of our debt service costs by approximately 2.3% between the two periods. Adjusted EBITDA increased by 5% or 4 million to 83.3 million in the current quarter from 79.3 million in the third quarter of 2019 for the reasons outlined earlier on this call. We would also like to note that our current outstanding share count has been reduced to 20.45 million shares following the previously announced 31.1 million share buyback that was consummated on October 9, 2020. Pro forma for this share buyback, the adjusted earnings per share of $1.91 as reported for this quarter would increase by 40 cents to $2.31 per share on a pro forma basis. 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.

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press the star then 1 on your touchtone phone. If you're using a speakerphone, please correct your handset before pressing the keys. To withdraw your question, please press the star then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Randy Gibbons with Jefferies.

Howdy, gentlemen. How's it going?

Hi, Randy. How are you?

Doing well, doing well. Yeah, so obviously, first and foremost, congrats on the 31 million share repurchase. You know, DAX the way we like it. So clearly, this is larger than any token dividend would be for multiple years. That said, you know, what are your thoughts on an eventual dividend, maybe timing of that? And then on the other side, what about further share repurchases from either Cerberus or HSH or Syncs?

Well, exactly as you said, I mean, we have, with that kind of share purchase, we have delivered a lot of value to our shareholders for maybe a number of years. As far as dividend is concerned, as I said, it's not really, I think up to the time being, the way that we've created value through the share in purchases. There is no specific, let's say, thought at this moment. It's always, of course, in the back of our minds about reinstating the dividend. However, as has been always our strategy, we're going to be kind of conservative And the important thing is to deliver value through growth to our shareholders. And we believe that we are doing pretty well in this front.

Sure. Is there a remaining share repurchase authorization or is that down to zero now?

No. I mean, at present, we are not contemplating any further purchases. I think we did the purchases at pretty good price levels. Since that, I mean, the share price is almost 30% up from where we did the share buyback. And despite, of course, the fact that we're still way out from, let's say, the NAV which we're calculating, for the time being, we have temporized any further share buyback.

Got it. And that's fair. You know, you give us an answer, we ask for a mile, but the $31 million is pretty meaningful.

Go ahead, Evangelos. Just to add to that, we are now investing in the business, right? I mean, we announced the acquisition of two 9,000 AU container ships, which is a pretty significant event.

Yeah, and I was going to ask that next. If you can add some more color around that announcement, why were these vessels kind of the ones you went with or made them so attractive? and then following the delivery in January, how do you view your fleet from there? Are sales an option or are you gonna keep looking to acquire more, combination of both?

Well, if there are any further opportunities, we might be out in the market. However, we believe that we bought these vessels kind of prior ship prices kind of picking up and already now first of all there are no ships available for sale because really the cash flow that you know are generated by the ships today are pretty substantial and you know there are very few ships available. As we saw also in the news, one of the major liners, MSC, went out and bought similar ships from the ones that we bought in the 8,500 TU, 9,000 TU class, which confirms really our belief that this type of size and tonnage has also longer strategic value for all these liners as the kind of in-between the big post-Panamaxes and the intermediate sector.

Got it. All right. And then I guess one more question for me, you know, just looking at the market, right, obviously very strong. So how has that record setting container rates impacted container ship time charter rates? You know, have you been able to secure some higher rates for extended periods of time? Or is this strength only seen in maybe three to six month time charter rates? You know, I see you have 64% of operating fixed

days you know over the operating date fixed over the next 12 months so will this increase materially in the into your end well definitely the the charter rates today that you know we are getting each one reported in the market are phenomenal and these are rates that we have not seen since So this is pretty optimistic. In terms of duration, we see really liners committing for a minimum 12 months. So most of the charters that we are doing are for 12 months and some for 18 months. which means that practically we're going to, you know, with all these new charters, which are discussed now, we're going to lock in most of 2021 at very healthy levels.

Got it. And a lot of those fixtures, you know, I know you have some expiries near term and even into early 21. Do you expect to, you know, fix a lot of those here in the next few weeks and months prior to expiration? Or how much in advance do you usually normally fix one of these vessels?

Well, exactly because we are today in a kind of a rising market, you know, fixtures that we had done, I mean, let's say much in advance, were really not as good as if we had waited. That's why I mean now we are kind of waiting more closer with delivery of the ships in order to charter them. And I think that this strategy has worked pretty well. Charters are keeping the vessels until the maximum window which is allowed under their charter parties because they were fixed at lower rates which means that we are going to have I mean some of the vessels that had an earlier maturity in Q4 are going to go probably up to Q1 of 2020 So we're going to have a lot of activity until then. We have already chartered about seven ships for a year or more.

And Randy, it's important to note here, these are ships that are coming off charters, let's call it in the range of $8,000 to $10,000 a day. and they're being chartered in the range between $16,000 and $20,000 plus a day, depending on size and all these things. So we're talking about material improvement in recharterings.

Got it. Good deal. Well, it looks like the best is yet to come. So thanks so much.

Okay, thank you.

Thank you. And the next question comes from Chris Weatherby with Citigroup.

Hey, guys. James on for Chris. Good morning. I actually wanted to follow up on the acquisition of the 29,000 TU vessels you had mentioned previously. I just kind of wanted to dive a little bit deeper into your comment about vessel prices and sort of understanding that the market's tightening. Do you see any opportunities for more deals, or is this really, has the market reached the point where sort of additional transactions wouldn't necessarily be attractive? Just kind of wanted to get your outlook for additional transactions and sort of like where the market is per se.

Well, the thing is that exactly because, as I said, rates are going continuously up, the expectations, sales price expectations have gone considerably up. And not only going up, but actually people have pulled vessels from the market. So, you know, we see prices going up easily by something like, you know, 20, 25, 30%. And we are not prepared really to follow, to chase ships upwards. We have already a substantial fleet. We want to be conservative in the way forward. And we will just concentrate in making money from the recharterings of our existing vessels.

All right. Got it. Makes sense. And then also wanted to touch on another point that was brought up. When you think about sort of the coming pre-chartering period and balancing sort of rate with tenor, have we gotten to the point where charters are – or it sounds like we haven't gotten to the point where charters are open to multi-year charters, but when do you think that will occur? And, like, as you go through sort of the upcoming pre-chartering period, are you going to be focusing on pushing for term or rape?

Well, first of all, at this moment, all that is happening was quite unexpected. And no one really knows how all this demand is going to keep up. In this respect, Charters, of course, they want to keep their business. They want to maintain their clients and offer them space. Because, you know, if you are unable to service a client, you will leave and go somewhere else. So, that's why they are trying to secure as many vessels in the market. That's why they are paying to acquire vessels. At some stage, of course, if rates keep on going up, it means that there is a genuine long-term shortage of tonnage. It's exactly at that moment that charters will decide either to go and build which is of course a major kind of decision and involves a lot of money, or they will try to offer multi-year charters at lower rates, charter rates on the stock market, so that they can justify, let's say, running the services. And that's kind of how the balance is going to work out.

All right. Makes sense. And then a real quick one, just understanding the disruptions that happened last quarter. Was there any amount of optics in the third quarter that was sort of catch up or sort of that we shouldn't expect to reoccur in the fourth quarter?

There wasn't really anything. You know, of course, we have a significant problems in moving the crews around and that is generating some increasing costs because for example we have kind of provided an incentive salary increase of 10% for the people that exceed their terms and were unable due to COVID to move them from from the ships, but this is not really anything that, you know, will make any significant difference. Otherwise, things are working normally.

All right, that's it for me. Thank you.

Thank you. Thank you. And the next question comes from Clement Barnes with Value Investor's Edge.

Good morning, this is Clement Molins. I hope all is well and thank you for taking my questions. Congratulations for this very solid quarter and the share of purchases. My first question is a follow-up on the vessel acquisitions. What kind of financing do you expect to get for those? Could you provide some comment regarding the loan-to-value you are looking at or you expect to get?

Well, these ships, in general, financed at 50% to 55% of purchase price, typically. All right.

All right. Thank you. And my second question, I mean, asset values for mid-size containers are currently very low. And I was wondering if those were to rise, you'd be willing to sell a couple of assets?

I think that we can make more money by running the vessels in a high market. Although, of course, you know, vessel prices have risen, it's, you know, the thing is, we will not be able to replace all these assets. And on the other hand, you know, the container industry is not so much of an opportunistic a business like, for example, bulkers, etc. Here, we have our position and we are able to get premium from the charters and also secure multi-year charters because we service our customers, the liner companies. So, container shipping has never been an asset plate.

All right. All right. Thank you. That's all for me. Thank you.

Thank you. And that does conclude the question and answer session. I would like to send a call back over to Dr. Kustis for any further comments or closing remarks.

Well, thank you all for joining this conference call and your continued interest in our story. We look forward to hosting you on our next earnings call. Have a nice day.

Thank you.

This concludes today's teleconference.

We would like to thank everyone for their participation. Have a wonderful afternoon.