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spk12: Corporation conference call to discuss the financial results for the three months ended March 31st, 2022. As a reminder, today's call is being recorded. Hosting the call today is Dr. Don Kustas, Chief Executive Officer of Danos Corporation and Mr. Evangelos Hatzis, Chief Financial Officer of Danos Corporation. Dr. Kustas and Mr. Hatzis will be making some introductory comments and then we will open the call to a question and answer session.
spk10: Thank you, operator, and good morning to everyone, and thank you for joining us this morning. 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.
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spk11: Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the first quarter of 2022. The first quarter of 2022 was another exceptional one for Danaus. Having already seeded the future with 2.7 billion of contracted revenue, we're operating from a position of strength and confidence. This allowed us to invest in the future by ordering six vessels in the 7,000 to 8,000 TU range, to be delivered between March and September 2024, ready to be converted to run on green methanol when such fuel is widely available. Our position in ZIM continues to generate solid returns, including 110 million in net dividends declared in the first quarter. The broader market has been affected by geopolitical events, high energy prices, inflation, and interest rate outlook and China's zero-COVID policy. Although box freight rates and charter rates have not been significantly affected, sentiment has changed and market participants have adopted a more conservative short-term attitude. On the other hand, supply chain inefficiencies continue unabated and there is little likelihood that conditions improve this year. This has led to record profits for the liner companies and, most importantly, higher contract levels. Also, fuel oil prices are reaching levels not seen for more than a decade, at the same time as supply chain disruptions have resulted in an increase in average sailing speed. Over time, the global container network will normalize as new vessels are delivered and sailing speeds are reduced to enable the industry to comply with decarbonization timelines. In the midst of an uncertain backdrop, Danhouse is well positioned to continue to execute our strategy. We are continuously pursuing fleet growth, returning value to shareholders, and further enhancing our balance sheet. Most recently, we have accelerated the leveraging to minimize the impact of rising interest rates. During the second quarter of 2022, we have already repaid early 364 million in debt and lease obligations, while another 73 million for which we have issued early prepayment notices will also be repaid early through the end of the second quarter. As a result of this overall leverage reduction of 437 million, 13 vessels in our fleet will become an encumbered.
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spk11: Liquidity also stands very strong. At the end of the first quarter, we had $708 million in cash on marketable securities, while during the second quarter, we received $239 million of charter hard prepayment related to charter contracts for 15 of our vessels, representing a partial prepayment of charter hire payable during the period from May 22 through January 27. As a result of our actions, Danaos has the strongest balance sheet in the industry, which will enable us to continue to pursue attractive opportunities when they arise for the benefit of our shareholders. With that, I'll hand over the call back to Evangelos, who will take you through the financials for the quarter.
spk10: 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. This quarter we are reporting adjusted EPS of $11.36 per share or adjusted net income of $235.3 million compared to adjusted EPS of $2.83 per share or $58 million for the first quarter of 2021. This increase of $177.3 million in adjusted net income between the two quarters is the result of a $97.8 million increase in operating revenues and $110 million of net dividend booked in relation to our ZIN equity holding, partially offset by higher total operating expenses of $22.9 million mainly due to the increase in the average size of our fleet by 11 vessels between the two quarters, a 5.8 million increase in net finance expenses, and a 1.8 million decrease in income from Gemini that was fully consolidated in the third quarter of last year. More specifically, operating revenues increased 97.8 million to 229.9 million in the current quarter, compared to 132.1 million in the first quarter of 2021. This increase is attributed to a 48.9 million increase in revenues as a result of higher charter rates and a further 20.8 million revenues as a result of the vessel additions to our fleet between the two quarters. Revenues also increased by 11.4 million due to straight line revenue recognition accounting. And the further $16.7 million being the amortization of assumed charter liabilities that came with recent vessel acquisitions. Vessel operating expenses increased by $8.1 million to $39.2 million in the current quarter from $31.1 million in the first quarter of 2021. as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating cost increased to $6,300 per day for the current quarter from $5,954 per day for the first quarter of last year, mainly due to COVID-19 related increases in crew remuneration and increased insurance expenses due to the higher insured values of the vessels in our fleet. However, our daily operating cost remains as one of the most competitive in the industry. GMA expenses decreased by 3.5 million to 7.4 million in the current quarter, compared to 10.9 million in the first quarter of 2021, mainly due to decreased non-cash stock-based compensation of 4.8 million between the two quarters. And that was partially upset by increased management fees that are included in GNA due to the increased size of our fleet. Interest expense, excluding finance cost amortization and accruals, increased by 3.5 million to 13.7 million in the current quarter, compared to 10.2 million in the first quarter of 2021. This increase in interest expense is a combined result of a 2.1 million decrease in debt service cost because of the decrease in our average indebtedness between the two quarters by approximately $266 million, partially offset by an increase in overall cost of debt service by 20 basis points. We also have reduced positive recognition through our income statement of accumulated accrued interest of 5.6 million that had been accrued in 2018 in relation to certain credit facilities that were refinanced last year. And as a result of the refinancing, the recognition of such accumulated interest has fallen. Adjusted EBITDA increased by almost 180% or $173.2 million to $269.5 million in the current quarter from $96.3 million in the first quarter of 2021 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation that is posted on our website as well as subsequent events and a few of the highlights are during the second quarter, as it was mentioned earlier, we substantially reduced leverage by early debt and lease repayments of $437 million, which combined with normal course scheduled debt repayments and included a new credit facility of $130 million that we expect to have in place within the second quarter. We are expected to reduce the corporate net debt to EBITDA ratio below one. As a result of these repayments, we will have a pool of 13 unencumbered vessels at the end of the second quarter, which will increase to 15 vessels after scheduled lease repayments that will happen during Q3. As of the end of the first quarter, our contracted revenue backlog stood at $2.7 billion, with a 3.8-year average remaining charter duration, while contract coverage is almost 100% for this year, 78% for 2023, while even for 2024, we are already at 57%. Our investor presentation has analytical disclosures on our contracted charter book. 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 for Q&A.
spk12: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
spk03: Our first question will come from Chris Weatherby with Citigroup. You may now go ahead. Hey, thanks for taking the question, guys. Appreciate it.
spk09: Maybe we could start with, I think you made a comment that the market has a more conservative short-term attitude to it. I want to get a sense of sort of what exactly you mean by that. What are you seeing in terms of your ability to sort of renew or sign new charters as it stands right now? Is there something that, you know, has the potential to drag on a little bit longer? I guess, generally speaking, what's your sense from talking to your customers?
spk11: Well, Chris, it's just that today, I mean, And for us, for example, the earliest ship that we're going to have, let's say for rechartering, it's somewhere mid-23. And, you know, and charterers with what is happening all around in the world, they are really a bit reluctant at this moment to start discussions that far ahead, which maybe at the beginning of the year or, you know, early on the last December, they might be there to discuss. We haven't seen any let's say, significant reduction in charter rates, especially because there are no big ships to be fixed. Some of the smaller ones, they are still getting very good charter rates. Maybe, and we're talking about ships of 2,000 Tu and below, where we have seen, let's say, some kind of, let's say, weakening, not so much of the rates, but, for example, of the periods. When you could get, let's say, a 40,000-day rate for three years, now you may get it only for two. So that's the type of, let's say, that we are sensing.
spk09: Okay, that's helpful. And I guess when you think about your backlog into 2023, when do you think charters would be willing to engage? Do you think it's at the end of the year? Do you have the ability to sort of start tying up some of that capacity a little bit earlier? I just want to get a sense of when you think you'll be able to begin to move on that open capacity.
spk11: Yeah, I mean, there is no kind of urgency at this moment from anyone. And yeah, I believe that, I mean, now we're going into the summer. Everybody is waiting to see also how China is going really to develop with their COVID situation. I think that's, you know, something that is probably more important than the war situation in Ukraine in terms of, let's say the trading patterns. And so it's a kind of a wait and see, but I believe that practically, let's say we should start discussing these positions. I mean, from already from the next quarter, we're already, you know, some discussions, you know, with various charters, but, you know, when you're looking about, let's say, one year ahead, in general, you know, everyone feels pretty relaxed, both from the charterer's side and also from the owner's side.
spk09: Okay. Okay. That makes sense. Let's talk a little bit about leverage. You've done a great job bringing the leverage down. You're sub two times now. What's the right leverage level for you guys going forward?
spk11: Well, the right leverage. Leverage is not something, let's say, static. And because leverage has to be seen in the context of the cycles, It all depends on what kind of assumptions you are going to do on companies, let's say EBITDA, at the bottom of the cycle. It has also to do quite a lot with the age of the fleet. i mean typically a company uh what we had also let's say committed to to the rating agencies was to have at let's say the bottom of the cycle something between three and four and that is what we really maintain And, of course, looking at where we are today and where we are heading at leverage is going to be close to one or even below. That seems, of course, considerably low. But we have to take into account that the company will need significant investments for the future in terms of, let's say, eco-friendly tonnage and tonnage that is going really to be required for the industry's decarbonization. And that's why we want to make sure that we will be able to participate in that cycle because anyone who does not really enter into this new area It's going to be the same thing like what happened with sailboats when the steam engine came along.
spk09: That's a great analogy. I appreciate that. It does sound like where EBITDA might go in more of a down cycle Leverage is getting close to the right level for you in that context, but maybe there's more work to be done there. That's helpful. Maybe last question, just quick detail one on dry docking. Can you just give us a sense of what to expect, you know, 2Q, 3Q, 4Q?
spk10: For the remainder of the year, we do not have, I think we have three or four ships to dry dock this year. But I can give you more specific guidance offline. Yeah, but it's nothing too significant. The only CAPEX, I mean, in terms of CAPEX, we have progress payments for the new buildings we have placed on order. We've already paid, I think, around 80 million in Q2, and we're going to pay another... 90 or 95 million through the end of the year. So that's for the next, that's Q2 and Q3, right? So we will close the year with a total of around 180 million in progress payments for the new buildings. So that's much more significant item that the odd dry docking here and there.
spk09: Okay. That's helpful. Thanks so much for the time. I really appreciate it.
spk10: Thanks, Chris.
spk11: Thank you, Chris.
spk12: Our next question will come from Chris Robertson with Jefferies. You may now go ahead.
spk11: Hi, Chris.
spk12: Pardon me, Chris Robertson. Your line may be muted.
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spk12: It appears that there's no audio coming from his line. So for that, we will be moving on to the next question. Mr. Robertson, if you're still on the line, please join the queue again. Our next question will be Jay Mintzmeier with Value Investor Edge. Please go ahead.
spk08: Hey, good morning, gentlemen. Congrats on a fantastic operational quarter.
spk10: Thank you, Jay. Thank you, Jay.
spk08: Yeah, it's exciting to see that free cash flow shooting up. I wanted to start on a very positive note. I noticed the extension on the CMA-CGM shift, the ad market with the must, it was 152,000 a day. I've also noticed you had a couple more coming up in the next few months. Any indication on where those sort of rates are at right now? What sort of benchmark should investors look at?
spk11: Well, you know, that rate, as you understand, is for a kind of a short-term investment. let's say extension, that was a 6 to 12 month charter. In general, you know, especially the liner companies, when they can, they try to avoid, let's say, such high short charters, and they prefer to take the vessel on a longer period at a lower rate. So that's let's say, was a bit of an exception. And we have another three ships which are under the same, let's say, arrangement with CMA, which is that, you know, they are paying us for six months, whatever is the charter rate that the brokers or the market, whatever the market rate for the six-month period. And we believe that, you know, it's going to be more or less the same for, you know, when we're going to enter these discussions, which is going to be around the fall.
spk08: Yeah, I mean, that's fantastic. Even though it's just for six months, those rates are unbelievable. So you mentioned, of course, the leveraging and you mentioned the future growth. I wanted to ask about your new build strategy. Right now you have the set of shifts. Is there a target leverage that you're looking to employ on those vessels? And what's the timeframe where you're looking to get a charter attached? Because my understanding is those are all charter free at this point.
spk11: You know, our basic strategy is to exactly because of our very strong balance sheet, which means that actually we could take delivery of these vessels without debt if we wanted to. We prefer really to be more, let's say, opportunistic, which means to wait and fix the vessels, you know, as closer to delivery as possible to the liner companies that have not, let's say, made any commitment in a specific size, and they would like really to employ such vessels. And there are a number of them. who have not invested in, let's say, this segment, and we know that they will need the ships, and we prefer, let's say, to wait to fix them when it is opportune. The strategy of, let's say, signing, let's say, an LOI for the yard and then going shopping around to the liner companies to see which one is going to give you a charter to confirm the LOI. Yes, it's a strategy of course that one can do, but then returns are considerably lower because liner companies know that you need their charter in order to order the ships. That's why returns are considerably lower. And on the other hand, for these projects then to make sense, you need a considerably higher leverage, which of course you can obtain on the basis of, let's say, the longer term duration of the charter that you're getting. But in the end, you end up with the same or even less equity returns, but at a much higher leverage level.
spk08: Yes, it certainly makes sense. There's a lot to think about. You know, I wish you the best of luck with fixing those, and hopefully the leverage will be as high as you can possibly make it, at least on a new build. I had a question on your repurchase. I'd be remiss. not to bring this up. I'm sure you were equally unhappy with the share price performance over the past year. Your shares are extremely undervalued by any metric you want to use. But I didn't see a repurchase authorization. I was just curious on the thought process behind that. I know you want to de-lever, but is it possible to do kind of all of the above?
spk11: Well, as you said, our priority has been to secure the delivering and, on the other hand, also to secure some of our growth with the new shifts that we have ordered. As I said, the question of share buyback is always, let's say, on our radar screen, but the Board has decided that the priority at this moment is exactly on the front which I've told you. It's always the issue. As you know, we have increased our dividend recently by 50%, which means that we are mindful about the returns to our shareholders. And I think with the environment, the overall as it is today. We prefer to be, let's say, on the conservative side rather than just, let's say, spending the cash. I mean, we want Danaos to be associated, let's say, as a kind of a triple A risk, although There is no AAA in shipping, but I'm pretty sure that with all our actions and our results, we are going to be upgraded by the ratings agencies, and this will give us
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spk08: Yeah, certainly we've been very pleased with the operational results. You know, it's just frustrating to see you deliver multi-billion dollars in backlog, considerably leveraging, nice growth, and to see the share, I mean, you strip out Zim, your Zim holdings from your share price, your shares are actually down about 20% year over year, which is shocking. But I know you're doing your best operationally, and that's one of the main things you can ask for. Final question, I really appreciate your time. What's the remaining strategy for those Zim shares? You still have about 5 million of them. What's the strategy with those?
spk11: As I said, we don't really have any... As we said, we've already said before, this is not the kind of a long-term holding, but we do not have also any intention to get out of Zim for the time being. We believe that Zim, in line with all the other liner companies, is going to make fantastic results for 2022. And it's going to deliver a significant dividend like the one that we've received this year. So for the time being, you know, we are in a kind of a hold position.
spk08: Yeah, it certainly makes sense. Thank you, John. Thank you, Evangelo. Keep up the great work.
spk11: Thank you. Thank you, Jay.
spk12: Again, if you have a question, please press star then 1. It appears there are no further questions at this time. I would like to turn the call back over to Dr. Kustas for any further comments or closing remarks.
spk11: Thank you all for joining this conference call and your continued interest in our story. Look forward to hosting you on our next earnings call. Have a nice day.
spk12: Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.
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