Danaos Corporation

Good day, and welcome to the Donaus Corporation conference call to discuss the financial results for the three months ended December 31st, 2020. Should you need assistance during today's call, please signal a conference specialist by pressing the star key followed by zero. As a reminder, today's call is being recorded. Hosting the call today is Dr. John Kustis, Chief Executive Officer of Donaus Corporation, and Mr. Evangelos Hatzis, Chief Financial Officer of Danos Corporation. Dr. Koustas and Mr. Hatzis will 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. To withdraw the question, please press star and then two. I would now like to turn the conference over to Mr. Hatzis. Please go ahead.

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 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. Kustas, who will provide the broad overview of the quarter. John?

Thank you, Vangelos. Good morning, everyone. In the fourth quarter of 2020, we witnessed the most outstanding turnaround in the container industry for as long as I can remember. Market participants were caught by surprise as the chronic underinvestment in capacity coupled with a sudden resurgence of demand, created a spike that drove container box rates to all-time highs. This led to a massive increase in our customers' profitability and significantly diminished counterparty risk that was so prevalent at the end of the first quarter of 2020. The charter market, in turn, rapidly strengthened resulting in decayed high charter rates across almost all vessel types. Now everyone is focused on whether the current market strength is sustainable and for how long. Fortunately, incremental vessel supply will remain low for the time being. Although there have been new orders placed, current order book is at historically low levels. Since there is a two-year lead time for new orders to hit the water, Supply growth should be moderate for the next couple of years. What will happen next depends a lot on the environmental initiatives, regulations, and, of course, demand. As far as the analysis is concerned, we experienced a strong quarter, completed delivery of all contracted vessels, realized significant gains, displayed exceptional rechartering performance, and entered into agreements for very important refinancing. This quarter, we saw an improvement in adjusted EBITDA and adjusted net income compared to the same quarter in the prior year. This improvement should be even more pronounced in the coming quarters as new contracted charters at significantly higher rates start to contribute to our top line. We have concluded 27 recharterings over the past three months for a period of 12 to 24 months, trades between two and three times the rates of the expiring charters. In doing so, we've practically covered 91% of our 2021 operating days and a significant portion of our 2022 operating days. We currently expect revenue in 2021 to exceed 2020 revenue by at least $100 million. The recent performance of both Zing and HMM has resulted in a $23.8 million increase in the recorded value of our bond holdings in these two companies, which increased in value to approximately $63 million as of the end of 2020. Zim IPO has also provided a mark-to-market value of our 10.2 million shares in Zim, which have a value now exceeding $200 million based on Zim's closing share price of $20.12 a share on February 12, 2021. These shares were valued at $75,000 in our books as of the end of 2020. We've also recently concluded a $300 million bond offering, which was over three times oversubscribed, an extraordinary accomplishment for a first-time issuer. These funds, together with another $950 million of bank and lease financing, will be used to refinance most of our existing credit facilities and form the basis of our new strategy, and we will not have any maturities until sometime in 2025. We are happy that the market has acknowledged our accomplishments, leading to a dramatic outperformance of our share price as compared to our peers. We are well positioned and committed to continue to take actions to create value for our shareholders. And now I will turn the call over back to Evangelos to guide you through some of the financials. Evangelos.

Thank you, John, and good morning again to everyone. I will briefly review the results for the fourth quarter, and then we will open the call to Q&A. We are reporting adjusted EPS for the fourth quarter of $2.29 per share or adjusted net income of $47.8 million compared to adjusted EPS of $2.01 per share or $38 million for the fourth quarter of 2019. This almost $10 million increase between the two quarters is mainly the result of a $9.4 million increase in operating revenues and half a million improvement in the operating performance of our equity investment in Gemini, while a $6 million improvement in finance costs was offset by higher total operating expenses mainly due to the increase in the average size of our fleet by four vessels between the two quarters as a result of recent acquisitions. More specifically, operating revenues increased by $9.4 million to $119.6 million in the current quarter compared to $110.2 million in the fourth quarter of 2019. This increase is attributed to a $13.7 million increase in revenues as a result of higher charter rates and the addition of four vessels to our fleet, a $2.1 million increase in revenue due to higher fleet utilization, partially offset by a $6.4 million decrease in revenues due to lower non-cash revenue recognition under U.S. GAAP accountings. Vessel operating expenses increased by $4.2 million to $28.7 million in the current quarter from $24.5 million in the fourth quarter of 2019, as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating costs increased to $5,571 per day for the current quarter from $5,215 per day in the fourth quarter of 2019 and still remains as one of the most competitive in the industry. G&A expenses decreased by $0.6 million to $6.4 million in the current quarter, compared to $7 million in the fourth quarter of 2019, mainly due to decreased non-cash recognition of stock-based compensation. Interest expense excluding finance costs, amortization, and accruals decreased by $6 million to $7.1 million in the current quarter compared to $13.1 million in the fourth quarter of 2019. This improvement is attributed to a $92.6 million decrease in our average indebtedness over the two quarters and a reduction of our debt service costs by 2% between the two periods. Adjusted EBITDA increased by 6.3%, or 4.9 million, to 83 million in the current quarter, from 78.1 million in the fourth quarter of 2019, for the reasons outlined earlier on this call. We would like to note that results for the fourth quarter and full year 2020 reported today, although improved across the board versus 2019, do not fully capture the significant improvement in the market fundamentals that were outlined by our CEO earlier on this call. This is all analytically laid out in the investor presentation that has already been posted on our website, and we encourage you to review it. A few of the highlights of what is ahead of us are asset values have improved with the charter attached value of our fleet today at $2.2 billion on the basis of year-end 2020 charter-free valuations provided by independent brokers and calculation of charter premium, wherever applicable, in accordance with our finance agreements. We also now have visibility, as it was mentioned before, on the value of our shareholding in ZIM, since ZIM shares are now traded on the New York Stock Exchange. This shareholding today is valued at $205 million, while at the same time the valuation of the ZIM and HMM bonds has also improved. On the back of stronger asset values, the net asset value of Gemini currently stands at $85.9 million, which translates to a value of our 49% participation of $42.1 million. On the basis of all the above, we currently calculate our net asset value at $1,050,000,000 or $51.60 per share. On the operating side, over the past three months, we have fixed 27 vessels at significantly higher rates than previously. And within our investor presentation, we analytically lay out we improved charter arrangements for each one of them. As a result of these improved fixtures, our contract backlog today stands at 1.2 billion, and our contracted revenues for 2021 alone currently stand at 543 million, which is already 81 million higher than total revenues of 2020. We still have 9% of our operating days open for 2021, and we expect overall improvement in revenues to exceed $100 million in 2021 versus 2020. Needless to say, since there is no marginal cost associated with this increase in our top line, such improvement is expected to also trickle down to EBITDA. 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.

We will now begin the question and answer session. To ask a question, you may press star and then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Chris Weatherby with Citigroup. Please go ahead. Hey, good morning, guys.

Gene is on for Chris. Just wanted to get your view on the rate environment post-Chinese New Year. What indications are you seeing in the charting market? Any indication that it will soften? Also, if you could provide a little bit more color on what you're seeing in the Panamax market, I think that would also be helpful.

Thanks. Chris... For the time being, the market is still strengthening. The only thing I can tell you that even today, every new fixture that we are doing is at higher levels than the previous one. Practically, the whole industry is kind of sold out. There is demand, but there are no vessels to match. I cannot really tell you you know what will happen let's say in a year's time but definitely for this year it looks that the market is going to continue to be strong because now we are entering also what's supposed to be also the strong period in the spring onwards and you know I'm personally very optimistic.

Got it. Now, given that and essentially where vessel values are, do you still think that it's an attractive opportunity to be active in the S&P market in 2021, or is that something where you might essentially think of a different use of capital?

Well, to be honest, we don't like chasing the market up. I mean, it's pretty hard now to go in the market and pay almost double the price for the ships that we've bought in the last year or so. So we will keep on looking, of course, for any interesting off-market opportunities. But to be honest, I think... This is more of a period of time to beef up your cash reserves and to be ready for the next move.

Got it. Also wanted to touch on capital structure and the issuance of the $300 million in unsecured. Just wanted to understand how you are thinking about balancing bonds with bank debt. And now you're thinking about sort of the capital structure moving forward, and if you're going to move more towards one and away from the other. Just kind of wanted to get your thoughts on the long-term capital structure and that issuance.

Yeah. I mean, what we have seen is that, you know, bank capital really is getting harder and harder to find. And not only that, but also... the actual amounts that each bank is preparing, the limits of the clients are going down because banks are getting more and more conservative with shipping. And if one wants really to have a reliable source of debt, then the bond market is really the one to look at it. As you know, our existing facilities were due until the end of 2023, so we had a lot of leeway. But we decided to make this move in order to be well positioned. I think that with our performance in the bond markets, we will be able to lower significantly our borrowing costs going forward. And this will give us really the strength and the competitive advantage to do kind of large deals and not to depend on the banking market, which of course will always be there. It will always form a part of our capital structure. But I don't think it can really be the only one.

Got it. So are you saying that we should expect unsecured bonds essentially to be a greater portion of your capital structure and you'll expect sort of a fairly routine amount of maturities to be issued and sort of less bank debt, more bonds with sort of a smoother maturity schedule? Is that kind of the way to think about where you're sort of targeting on moving over time?

We will do... Yeah, we do whatever we have to do to optimize the cost of capital, right? And as we are first-time issuers, this was a very successful bond issuance. As time goes by and we become sort of a seasoned issuer and the market starts knowing us better, we expect the cost to start going down. We expect with our performance, which most of it, as I said before, is contractual, we will be upgraded and this will sort of gradually get us to a better place and there will always be a mix between secured and unsecured because secured debt is very competitively priced but again all these decisions will be made on the basis of optimizing cost and profile of debt because how your debt is profiled is also important because it relates to what free cash flow you have available to deploy and pursue growth opportunities.

Got it. And so given that there is sort of a gradual improvement just on the cost of debt side, just wanted to also understand how you're thinking about the dividend given that and how you're balancing buybacks versus the dividend, and then that'll be all for me.

Well, as far as dividend is concerned, this is the first thing that the board will discuss as soon as we have consummated the refinancing transaction, which we expect in April. So a decision about the dividend will be by the board on our next earnings call. where we would have completed our financing and we will have a very clear path ahead. Got it. Thank you. Okay. Thank you, Chris.

The next question comes from Randy Jivians with Jefferies. Please go ahead.

Howdy, gentlemen. How's it going?

Hi, Randy. How are you?

Hi, Randy. Hey, good. A little snowed in here in Houston, but doing all right. So, yeah, obviously your turnaround has been quite remarkable here since this time last year, a lot of that being market-driven, but also a lot doing to pretty prudent management decisions, smart chartering, the share repurchases, obviously overhauling the balance sheet. So congrats first on a pretty stellar year there. Now, kind of looking ahead, a couple questions. With the stronger balance sheet and the comprehensive refinancing package and obviously now the substantial cash flow, I think you mentioned over $100 million in revenue more in 21 than 20. So where do you kind of grow from here? You know, obviously one competitor is focusing on much older, smaller tonnage, where another is focusing on kind of much larger, new LNG-powered new buildings, right? So was Denao looking at either of those transactions? Why or why not?

Well, you know, we have looked at both these transactions. The transactions on the very large ships, you know, produce extremely small equity returns. There are, you know, we have participated also in another major liner company, Pender, And in the end, the liner company decided to do it themselves because they felt it was even more competitive. And although we had really used, you know, razor thin margins. On the other strategy of buying, let's say, older vessels, you know, practically to have, you know, practically to start a let's say gambling on vessels when they're going to be 25 years old it's you know after let's say the whatever the options are going to be it's a bit uh you know it's a bit too much you know we prefer if we want to gamble like that to do it with uh younger vessels, as we have done with the vessels that we have bought, so that we're between, let's say, 10, 12, maximum 14 years old when we bought them. As I said, shipping is a cyclical industry. It doesn't make sense to continue investing no matter where the cycle is. What you know, at this moment we are concentrating is to beef up our balance sheet. As you know, apart from the free cash flow that we are going to generate through the new facilities and at the same time with all the assets what we have in our books, like the shares and bonds, you know, we could very well be sitting in, let's say, kind of liquid assets in excess of 400 million by year end. So, you know, we prefer to sit back and and see what is happening. We are doing a lot of work and research on the environmental issues and where we are going to head. So, yeah, for sure, you know, we're not just going to keep on, you know, buying vessels through the market cycle.

Got it. Okay, I've got a next question kind of alluding to what you were saying going there around your short-term kind of available liquidity and other kind of assets you have now. How are you viewing the HMM notes, the ZIM notes, and the ZIM shares here, right? When will you collect cash on the notes? And what are your plans on extracting some value out of the ZIM shares?

Well, as I said, first of all, as far as the bonds are concerned, I think Zim with the massive liquidity that they have at present, they will most probably retire the bonds within this year or H&M We have the bonds. If we want, at a very small discount, we could also sell these bonds if we want to in liquidity. As far as the shares are concerned, we will consider our options after the lock-up period. We are not natural holders of liner companies' shares. These shares were given to us during the Zimbia structure in 2014. So, you know, we will think about it at the time. If we need, let's say, if we have any projects and we need, you know, to realize part of the shares in cash, there are no decisions taken. We'll wait for that until the lock-up period ends, and then we will reevaluate our options.

Sure. That makes sense. All right. And I guess last question, you mentioned kind of dividend timing, likely following 1Q results, maybe some announcement on the 1Q call in May. Is there an amount you are targeting either in terms of dollars return or kind of percent yield at that time? How should we think about that? And would it be like fixed or floating? What would your –

In general, we are going to have fixed dividends. That has been definitely going to be the strategy. About the levels, this is something that the board will need to decide. On the other hand, as you have seen, we are not a yield play. We are a growth play. We have proven that you know, with whatever we have done. And it's, of course, the dividend will, of course, reward our shareholders to a certain extent, but will also increase the universe of our possible shareholders because there are a number of institutions that do not hold equities, that do not pay dividends.

Right.

So, you know, about the level, I think the board will decide what it's going to be.

Got it. No, that's fair. And I know some nitpicky questions there. The stock's gone from 3 to 37. So whatever you're doing, keep up the good work.

Thank you very much. Thank you.

As a reminder, if you have a question, please press star and then one. The next question comes from Omar Nocta with Clarkson Securities. Please go ahead.

Hi, thank you.

I also echo Randy's comments. Congratulations on such a real turnaround and moving the company in the right direction. You guys bided your time quite patiently, and it's nice to see things work out. I did want to ask, you talked about in your opening comments, the refinancing that you've just recently done forms the basis for Denal's new strategy. And you've touched on that in the Q&A. Can you expand on that just a bit more? You mentioned, obviously, beefing up the balance sheet, collecting the free cash, and then also you're evaluating the dividend come April. Is there a way you're leaning at the moment? Do you see yourselves maybe going back to your roots of of quote-unquote roots, I'd say, of having new buildings contracted long-term. Do you see that being a direction of company going into? I know you mentioned that equity returns being too low at the moment. Are there opportunities potentially coming in that direction, or do you prefer to stay a bit more nimble and sticking with, say, the S&P market when there's opportunities?

Yes. Well, Omar, as I said today, we are in a situation that liner companies have pretty strong balance sheets. They're making a hell of a lot of money. And if they want any new buildings, they could very well go and build them themselves. or if they decide to go to an autonomous provider, then exactly because they are benchmarking that with their own, let's say, cost of capital, that, in general, is pretty low. On the other hand, to be able to do, let's say, these deals at some kind, let's say, of a reasonable you need to go to extreme amounts of leverage, 90% or even more. You know, it's a completely different strategy going that way.

And Omar, if I may add, it may not just be new buildings. And of course, you know, there's going to be at some point, and, you know, we hope it's not very soon, but, you know, people will start ordering, right? And, you know, the order book is very low and there will be orders going forward, but even if it's not for new buildings, liners may want some cash to order the big ships themselves, which is what they usually do, right? What they consider to be core assets on the higher end of the size spectrum, they build them themselves. And there may be opportunities of saving leads back for relatively young assets so that they can unlock cash on their balance sheets. So we do expect transactions to present themselves. It's just that we will enter into projects provided we meet our return threshold. We're not going to grow for the sake of growing, I guess, is the message. We're mindful of returns and equally mindful of managing residual value risk. We're not going to acquire a ship that offers good short-term cash-on-cash returns and then get stuck with a high value on the other end of the charter, which would impair the equity. So that's how we view, I think, growth. Yeah.

And also, Omar, we are in a very transitional phase that we have new regulations coming up. And on the other hand, we have a pretty old mid-sized fleet. And the flow into this mid-sized fleet has been up to now purely from the larger vessels cascading. But on the other hand, depending on how all these regulatory environment will move, that might not be enough in the future. So it's very important to see who is going to build We require a mid-sized fleet today that will be environmentally friendly and where charterers are not so much willing to invest because they prefer to direct their investment in the larger vessels.

Thanks for that. So it sounds like potentially if there were to be some opportunities where you may be jumping, isn't that mid-size, call it what, 3,000 to 8,000 TEU? Yep. Good, good. All right. And follow-up also, just looking on your slides, you note the 27 vessels that have been rechartered over the past three months. There's quite a good amount of those new charters that really just get you into the fourth quarter, early 2022, which is where things are now looks very appetizing when you think about that what's the charter appetite at the moment for fixing those vessels forward at the moment are they approaching you and and also you mentioned also the liners are preferring to own their ships outright is their interest on them just simply buying the vessels from you there is we have demands of the selling vessels

in general for us it doesn't make any sense to sell a vessel when for example the price we can sell it's equivalent to the PV of the charters we can fix today plus their scrap value we are at the same position and we have an option when the market is higher to make even more money Of course, that would be different for someone who just needed, let's say, the cash now, because it's a different proposition. But where we are with our cash generation, we can fix the ships today forward for a number of years if we can, that will bring the ships practically down to scrap.

Yeah. And then just final question on that. Could you give us a sense of if you were to put a vessel today on, say, a one-year charter and that same ship, if it were offered a three-year charter, what would be the difference or the discount to go longer term?

I think that it depends, of course, on the ship type. If we were talking about, let's say, larger vessels of 8,000, 8,500 kg, I think that you could have, let's say, for a one-year charter, at least, let's say, 30%, if not 40% more than what you could get for a three-year charter.

Got it.

Okay, thank you. I appreciate that and congratulations again. I'll turn it over.

Thank you.

Thank you.

This concludes our question and answer session. I would now like to turn the call back over to Dr. Kustas for any comments or closing remarks.

Thank you everyone for attending our calls. We thank you for your continued interest in our company and will continue our best for our shareholders. Thank you.

This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.