Danaos Corporation

Good day, and welcome to the Denauss Corporation conference call to discuss the financial results for the three months ended March 31st, 2021. As a reminder, today's call is being recorded. Hosting the call today is Dr. John Kustis, Chief Executive Officer of Denauss Corporation, and Mr. Evangelos Hadfis, Chief Financial Officer of Denauss Corporation. Dr. Kustis and Mr. Hadfis will 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 call over to Mr. Evangelos Hotfis to begin the call.

Thank you, operator. 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 factors . 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. Koustas, who will provide the broad overview for the quarter. John?

Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the first quarter of 2021. The dramatic turnaround and strength of the market, which we experienced in the beginning of the year, continues unabated, if not stronger. The continuation of the pandemic and the ensuing slowdown in the terminal operations has exacerbated demand, and the liner sector is at the limit of its capacity. The blockage of the Suez Canal further contributed to the disruption in the supply chain, and conditions will likely not normalize before the end of the year, possibly after the peak season. Liner companies are reporting record profits, and more importantly, are signing multi-year contracts at significantly higher levels, which will keep their profitability at elevated levels. On the non-operating owners front, charter rates have skyrocketed to levels not seen for at least 10 years, and what is more important, duration has been significantly increased so that vessels over 4,000 TU can secure four plus years employment at very healthy levels. This euphoria, due to the sharp increase in rates and confidence that the market will remain strong, has led to a dramatic increase in new building ordering. As a result, the order book now stands at 17% of the existing fleet, which is higher compared to the 9% that year at the end of 2020, but still much lower than the 50% it reached in 2008. Fortunately, the lack of shipyard capacity and the hesitance of many market participants to order vessels with conventional pure propulsion both are inhibiting factors for new orders and are keeping a lead on excessive ordering. In any event, the recently ordered vessels will not deliver until at least 2023, and the next two years should be lean in terms of fleet supply growth. We believe that the expected strong demand growth post-pandemic will comfortably absorb the existing order book. As far as the analysis is concerned, we are currently in the best-ever position in reaping the benefits of the current market environment. On April 12th, We completed our financing on very competitive terms and also positioned the company successfully in the U.S. bond market, giving us access to a very significant pool of capital. The amortization profile of our debt is resulting in significant free cash flow for growth opportunities. The stellar performance of the liner sector had a number of significant consequences for us. First, our shareholding in Zimb is today valued at around $400 million. Secondly, the dramatic cash flow generation of Siemens H&M induced them to redeem early the bonds which they were holding, so we'll have 75 million cash injection in the second quarter of 2021. Thirdly, liner sector performance eliminates counterparty risk for the foreseeable future. From the chartering front, every picture we concluded was done at a new record level. These pictures are beginning to take effect and we expect to see improved metrics for every single quarter for this year. Our strong financial standing and optimistic view of the future has led the board to decide to reinstate a fixed quarterly dividend of $0.50 a share. Danaos has been repositioned as a growth company and has handsomely rewarded its shareholders through a dramatic share appreciation of more than 1,000% since our November 2019 equity offering. We believe that our new fixed dividend will both expand our shareholder base to a new group of yield-driven institutional investors and also enhance liquidity of the stock. All the right steps that the company has undertaken in the last couple of years have been greatly appreciated by the market and will continue along the same path in the future. With that, I'll hand the call over back to Evangelo, who will take you through the financials for the quarter. Evangelo.

Thank you, John, and good morning again to everyone. I will briefly review the results for the quarter, and then we will open the call to Q&A. Today, we are reporting adjusted EPS for the first quarter of 2021 of $2.83 per share, or adjusted meticum of $58 million, compared to adjusted EPS of $1.34 per share, or $33.3 million for the first quarter of 2020. This increase between the two quarters is mainly the result of a $25.9 million increase in operating revenues, a $2.5 million improvement in finance costs, and a $3.9 million gain from partial collection of our Hanjin claim. partially upset by higher total operating expenses mainly due to the increase in the average size of our fleet between the two quarters. More specifically, operating revenues increased by 25.9 million to 132.1 million in the current quarter compared to 106.2 million in the first quarter of 2020. This increase is attributed to a 15.4 million increase in revenues as a result of higher charter rates and improved fleet utilization and $10.5 million of incremental revenues as a result of the vessel additions in our fleet between the two quarters. Vessel operating expenses increased by 5.1 million to 31.1 million in the current quarter from 26 million in the first quarter of 2020. as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating cost increased to $5,954 per day for the current quarter from $5,522 per day in the first quarter of 2020. And this increase is mainly attributed to COVID-19 related increase in crew remuneration However, our daily OPEX cost still remains as one of the most competitive in the industry. G&A expenses increased by 5.1 million to 10.9 million in the current quarter compared to 5.8 million in the first quarter of 2020, mainly due to $4.6 million recognition of non-cash stock-based compensation and increased management fees due to the increased size of our fleet. Interest expense, excluding finance costs, amortization, and accruals, decreased by 2 million to 10.2 million in the current quarter, compared to 12.2 million in the first quarter of 2020. This improvement is mainly attributed to a reduction of our debt service costs by approximately 1.5% between the two periods. Adjusted EBITDA increased by 33.9%. or 24.4 million to 96.3 million in the current quarter from 71.9 million in the first quarter of 2020 for the reasons outlined earlier on this call. We would like to note additionally that results for the first quarter of 2021 that are reported today, although improved across the board versus the first quarter of 2020, 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, which we encourage you to review. A few of the highlights are, asset values have improved with the chapter attached value of our fleet today at 2.68 billion on the basis of Q1 2021 vessel valuations provided by independent brokers and include charter premium wherever applicable in accordance with our finance agreements. Our ZIM equity position is valued today at around 400 million, while at the same time, the valuation of the ZIM and HMM bonds has also improved and we expect most of it to convert into cash within the second quarter of 2021. We have been notified to this effect by both HMM and ZIN that they will proceed with early redemptions ahead of the 2023 and 2024 maturities of these notes, and we expect a cash inflow of 76.2 million due to come in over the next couple of months. and within the second quarter of the year. On the back of the stronger asset values, the net asset value of Gemini currently stands at $154.6 million, which translates to a value of our 49% participation of $75.8 million. On the basis of all the above, we currently calculate our net asset value at $1.87 billion, or $90 On the operating side, over the past six months, we have fixed 33 vessels at significantly higher rates than previously. And within our investor presentation, we analytically lay out the improved charter arrangements for all 33 vessels, some of which have already come into effect, while some others will gradually start coming into effect within the second and the third quarter As a result of these improved fixtures, our contract backlog stands at $1.2 billion, and our contracted revenues for 2021 alone currently stand at $575 million, already $113 million, or 25% higher than total operating revenues of 2020, which were $462 million. We still only have 3.7%. of our operating days open for this year. And we expect the overall improvement in revenues to exceed the 122 million in 2021 versus 2020 on the back of the contracts. Additionally, since there is no marginal cost associated with this increase in our top line, such improvement should be expected to also trickle down to our 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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, 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, then 2. The first question today will come from Randy Givians with Jefferies. Please go ahead.

Howdy, John and Evangelos. How's it going?

Hi, Randy. How are you? Hi, Randy.

Doing well, doing well. Yeah, first, congrats on the dividend announcement. I know that's been a goal for a while now, something we haven't seen since 2008. So it's good to see the dividend back. With that, can you provide some more color on maybe how you decided on that 50 cents per share or $2 per year? And do you plan on growing it in the coming quarters or years?

You know, we did not really have any kind of, let's say, specific yield target. We looked more or less to... what is currently, let's say, the dividend on our peers. And we just formulated, you know, the board decided on this kind of number, which, as I said, you know, we don't want to position Danaos as a yield company because what we have delivered to our shareholders was really growth. And growth It's growth in profits. It doesn't necessarily always growth have to be growth by adding assets. It's very good to have growth in profits without adding assets by exploiting the assets best. And this is, I'd say, to a significant part, the strategy that we have been following.

Got it. And yeah, it's certainly... still a very small component, right, of your annual EBITDA. We're talking 40 million bucks or so on annual EBITDA of 400 to 500, right? So, I guess, is there plans for growth in the coming quarters and years? It's just kind of a, let's just stick it at $2, have a base dividend, and then use the rest for, you know, other return of capital or acquisitions.

Definitely. Our, let's say, strategy relies on growth of the company, and we believe that there are going to be significant investments that will be done in the future. What we are doing at this moment is really building a war chest in order really to whatever growth we're going to have, it's going to be pretty secured with significant, let's say, equity component and not just loading up on debt.

Got it. That's wise. And then I guess with that segwaying, you've monetized the ZIM and HMM bonds already, refinanced your debt. clearly substantial cash flow with all these contracts that you've been signing. You've also reduced your leverage pretty dramatically here over the last quarters and years. So I guess what are your plans for that excess cash going forward? Do you have a target net debt or leverage goal? Or is additional growth via second-hand acquisitions the top priority?

I think... As I said, at this moment, we are really in a position that we're making a lot of money. The market is overheated. There is no point in spending, let's say, the money today on very expensive vessels because then we wouldn't have done anything. we are going, as I said, to evaluate the situation. We're going to have much more clarity on the actual environmental direction of shipping towards the end of the year. And this is going really to drive the investment that we're going to do. Until then, as I said, we will be building a war chest.

Got it. Lastly, on the chartering front, you still have a few vessels coming available in the next few months. How do you balance that in terms of maybe maximizing the one-year rate versus getting some more duration for two years, three years, four years, What are you seeing in kind of a normal duration for some of these charters on the vessels coming available?

Well, the only thing I can tell you is that, you know, from the vessels that we are currently discussing and negotiating above 4,000 TEU, we are discussing at four-year-plus durations. Wow. The smaller ones... will go between, let's say, probably two to three years. We're not looking really to just maximize the next 12 months. We want to have, let's say, greater visibility in our earnings. Although, as I said, actually 2022, it's going to be a very lean year in terms of deliveries. Actually, considerably less than 2021. And then, of course, 2023, it's picking up. So, let's say the shortage in the charter market is going to continue for some time.

Yeah, we tend to agree. Thanks so much. Congrats again.

Thank you. Thank you. On the next question today, we'll come from Chris Weatherby with Citigroup. Please go ahead.

Hey, good morning, guys. James on for Chris. I just wanted to touch on the comment you made about growth and sort of preparing a war chest. The context is basically the dividend and growing it, and just wanted to understand how you were sort of balancing that versus deleveraging across it, and if it was really sort of, when you're thinking about comparing the work, war chest as it were, if you're thinking about deleveraging or sort of building up a cash position, just trying to understand more specifically what you had meant about that specific comment.

Yeah, at present, I don't think there is any, let's say, deleveraging pressure, because I think that our leverage is pretty low and it's continuously let's say being reduced because of the amortization which we're going to have. The war chest I was describing is practically we will be looking let's say to monetize on our non-operating assets. One of those were the bonds which they are getting, let's say, redeemed. The other one is the Zim shareholding. I mean, at some stage, That will form part of our war chest.

If I may add, as we continue to monetize, as John mentioned, the non-operating assets and the cash starts building up, we already have a dividend in place. That capital allocation decision has been made for the time being. We will have to face capital allocation decisions going forward. The priority is going to be growth on assets that are at the forefront of the environmental new vessels of the future. And at some point, it will have to be, we will continuously evaluate capital allocation, and if we consider that certain of the cash can go towards the leveraging to further lighten up the bed load, it may be a decision we're going to take then. But we cannot say at this point exactly what the strategy is going to be unless we see how the growth spectrum develops.

Got it. So I think one of the things that's sort of embedded in that comment is more sort of thinking about newer vessels and sort of newer technology around propulsion versus secondhand, is that like a fair assessment based on like your view about where you would sort of put that war chest like they just made?

You know, as I said, at the moment, there is no clarity as to what exactly the environmental regulations will look like we have two fronts one is the imo where we have all this exi discussion that this discussion on its own will lead to a reduction in ship speed so the existing fleet to a greater or smaller extent will need to slow down to achieve these targets, which is a plus, of course, for the actually effective supply. And on the other hand, we have the European community wanting to impose the ETS on shipping. And we have yet no clue as to how this is going to look like and how it is going to affect, let's say, the old versus new vessel and what type of technology is going to practically try to push towards We have seen, for example, that the LNG has been, I mean, in the European Union, LNG is not considered as a kind of transitory fuel anymore, and that's why the EU has stopped funding of LNG kind of related projects. On the other hand, the World Bank really said that it doesn't make sense to make all the infrastructure to go to LNG, which is a carbon-based fuel. And we should try to concentrate on other fully decarbonized solutions. So it's really, there is, as I said, there is no clarity. And when there is no clarity, the best strategy is really to make a war chest and be ready to fight and face whatever situation arises.

Got it. And so, not to belabor the point, but just to be clear, it does seem like there is, and as you pointed out, cash flow is improving and you will be building up a fair amount of cash, but it doesn't necessarily seem like you have the, I guess, the definitive plan for deploying it until you actually see an opportunity, which I guess may leave essentially more, a substantial dividend increase or a substantial compromise or something else on the table. It's just a matter of like what opportunity presents itself and being opportunistic as it were.

Yeah, exactly. I mean, today the company is heading and will continue to have significant growth in terms of, let's say, income, purely by exploiting the market and the vessels in the best possible manner. When the time is right, we will try and exploit also new technology in order to put the company really in the growth era on the basis of a decarbonized future, which is really what everyone is seeking to do.

Got it. I got some more. Near-term question, OPEX per day was a bit higher than we thought. You'd called out some one-time-like items around COVID crews, and there's probably some vessel mix in the quarter as well. But how should we think about essentially your OPEX on a per-day basis for your fleet on a more normalized basis? Any sort of color or context you could describe would be great. Thank you.

Yeah, let me just give you some context. There's two issues around the OPEX increase. One is the granting of bonuses to our crews in relation to the COVID-19 saga that they've had to endure, having to spend way more time than they usually did on board the ships and with great difficulties in changing crews and so on and so forth. And to the extent that this situation continues to be difficult, this is going to be an additional cost item on the OPEX. And we also have something else, which is typical for every Q1, let's say, of most normal years. There is a lot of bulk ordering in the first quarter, which inflates, if you wish, for OPEX. And this then normalizes throughout the remaining quarters of the year. So as a ballpark figure at this point, I would say that $5,800 a day as a fleet average for the year is sort of our target and our budget. Got it. All right.

Well, thank you. And the next question will come from Omar Nocta with Clarkson's Plateau Securities. Please go ahead. Thank you.

Hi, John and Evangelos. Good afternoon.

How are you?

Good, good. Well, nice to see things shaping up so nicely. So for Denalison, you guys have plenty of different sources of incoming cash and you made it pretty clear you're building up a war chest and wanted to just maybe ask, I know not to belabor the point too much, but you have the 75 million cash coming in in the second quarter from the redemption of those two bonds and then potentially the monetizing of them. When you think about the war chest, is there any possibility that maybe some of that cash is set aside for a special dividend?

To be honest, as I said, we are giving the dividend purely because we want to enlarge our shareholder base to investors who really require a dividend in order to own a certain stock. We believe that we are very well positioned to invest this war chest and that's why the reason that we are building it. So there is no intention of just distributing and take the money out. Otherwise, it's not a war chest. Otherwise, we are talking about dividend distribution.

Yeah, that's clear. Thanks for that. I just wanted to ask it. And maybe just in terms then of, you know, you discussed the order book and how it's risen, obviously, to higher levels. And the nice thing, of course, is that the vast majority of these orders have come with long-term contracts to the liners. So that speculation and that speculative order book is very, very minimal. You know, on the last call you mentioned not really being that interested in ordering vessels against long-term contracts, but it sounds like maybe, am I reading you right, that maybe you are reassessing that? Do you think that the returns make sense or are starting to make sense vis-a-vis, you know, if we take into account the environmental change and the fuel propulsion? Are there opportunities you see in the new building front to order vessels with the right equipment that give you long-term visibility and a good return?

Well, you know, today, liner companies are awash with cash. And, you know, if you're going to do a long-term deal with a liner company, it has to be more competitive from, let's say, the line of company using cash of its own. We have participated in the last, let's say, six, eight months in a couple of tenders around, which in the end resulted the line of companies doing, let's say, the ordering directly. And to be honest, I'm not there to commit on single-digit equity returns, you know, for 10 years or so in an environment that, you know, in 10 years, if you think where we are in 2010 and where we are in 2020, a hell of a lot of things can happen in between.

Yeah. No, I agree. And maybe just one final one, as you think about the war chest that's being built, you talked about the monetizing of the non-operating assets. How do you feel about, especially as you mentioned, asset prices have gone much higher and it's expensive. How do you feel about monetizing some of your older operating assets, especially the sub 3000 TEU vessels? Can those be also a source of cash for a war chest?

But you know, of course, this is always something that we've examined. The problem is that today, I mean, by the value that someone is paying for these ships is less than the actual present value of the charter plus scrap. of the ship on the basis of the available charter rates and durations today. So what's the point?

Just hold and yeah, it's a nice source of incoming cash, fully depreciated asset.

Exactly. I mean, people who are doing, who are selling are people who would like maybe to invest in other sectors, some private entities. And on the other hand, maybe there are funds who want to get out, who do not really have an operating presence. They've made a good return on their investment, and they just want to get out. And they are selling. But for ourselves, it doesn't really make sense.

Okay, John, that's clear. Thank you very much.

Thank you.

And the next question will come from Andre Kite with Jefferies.

Please go ahead. Hi, here from the credit side. I mean, first of all, yeah, just chime in and say congrats on the results. Truly fantastic. And I hate to be a broken record, but, you know, got a lot of questions around this war chest and what to do. and in the context of you having just issued a bond and refied the structure, I mean, I think the takeaway from bond investors at that point was that the funding mix was going to improve over time, more unsecured versus secured. You have a natural deleveraging with paying down the secured. I think I've heard you multiple times talk about that current ship valuations are way overvalued, underwriting in single-digit equity returns. So just trying to understand take that and then understand the need to build this war chest against that and just have it on the balance sheet because i guess with the debt profile that you have you have a very flexible setup where you could prepay secure debt and or say half of those excess cash proceeds and then when the market actually turns and you see opportunities then go and kind of re-leverage back rather than paying an average interest cost of X and then having the cash sit on balance sheet. So I just want to try and understand a little bit more how you think about that.

Andre, if I may, John, very quickly address this. We are not at this point committing to future capital allocation decisions. And obviously having a big pile of cash sitting on your balance sheet is not the most productive use of capital if this happens for a long time, right? And all we're saying is that in the palette of our capital allocation decisions, growth is at the forefront, as it should be, we believe. And then if we can use excess cash to further deliver, improve the credit profile of the company, and the credit ratings for that matter, which will further improve our pricing on accessing the bond market, we may very well do so. We will have the options open. We have set our priorities, and deleveraging is one of them. But if we can source projects that produce returns, that meet our return threshold criteria, that at the end of the day make the company more profitable and we enter into a creative project, we will do so as a matter of priority, always with a focus on maintaining a low leverage as we have stated before.

Okay, that's helpful. I mean, if I may follow up on that, I realize it's tough against growth opportunities, but if we just say cross the cycle, Do you have a view what you think is the right leverage for this business?

I think we have set a target between three to four times. We are at this point with our last 12 months EBITDA, we are at four times. On the basis of our 2021 run rate EBITDA, which is 95% contracted, so we know what it is. We are below 3.3 times. And by year end, and with the world just building up, on a net debt to EBITDA basis, it's gonna be way below three times. So we said that a leverage level between three to four is within the comfort area of what we consider a safe and sound capital structure. And I think we have every ability to pursue. In the interim, it may come down, but then once we pursue growth, it may go up three or three and a half times or whatever.

Yeah, but that makes sense if you can underwrite that double digit on leverage returns. Okay, thank you.

And the next question will come from George Berman with Cabot Lodge. Please go ahead.

Calamera, gentlemen, and congratulations to a great quarter.

Thank you.

Thank you, George. I'm somewhat new to the company. I recently became a shareholder. The question I had on the position in ZimShares, that obviously is working out quite well for you, have you considered or would you consider – maybe spinning those shares off to your shareholders as a distribution?

As we said, there is no, let's say, special dividend out. We want, let's say, all these non-operating assets of the company in the end to be used for the growth of the company, and eventually investors will be rewarded by growth of the company, not by the liquidation of the company.

Fair enough. If you were to monetize the position, what kind of tax consequences would there be on the company? Obviously, you'll carry a huge gain.

Yeah, there are no tax consequences in the company.

Okay, great. And I wanted to say congratulations. You're the first company in the shipping scenario in general that has stated basically publicly today on the conference hall that you're not looking to buy additional ships. I think that is a very good position to be in, especially with the changing environmental situation here that you take the wait-and-see attitude.

Yeah, well... I said the market is over-seated. Shipping is always and will always be a cyclical business. And we have made our investments in the low part of the cycle. Now it's the time just to reap rewards.

Yeah. Do you, as an owner of a large fleet of container ships, do you have any insights into when the stacking up of ships, for example, at the Los Angeles port of Los Angeles, when that is going to normalize?

That's nothing really that we are involved in. You should really ask the Los Angeles port authorities there.

Okay. I look forward to a further bright future for you. Thanks for taking my call today.

Thank you.

At this time, it appears we have no further questions, and I would like to turn the conference back over to Dr. Kustis for any further comments or closing remarks.

Well, thank you very much for your interest in Danaos. After this kind of great quarter, we'll continue to work towards delivering improved returns for our shareholders. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and have a wonderful afternoon.