Danaos Corporation

Welcome to the Denauss Corporation conference call to discuss the financial results for the three months ended June 30, 2022. As a reminder, today's call is being recorded. Hosting the call today is Dr. John Kustas, Chief Executive Officer of Denauss Corporation, and Mr. Evangelos Hatzis, Chief Financial Officer of Denao's Corporation. Dr. Kustas and Mr. Hatzis will be making some introductory comments, and then we'll open the call to a question and answer session. I would now like to turn the conference over to Mr. Evangelos Hatzis, Chief Financial Officer. Please go ahead.

Thank you, Operator, and 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 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. John Kustas, 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 second quarter 2022. The announced business model continued to generate strong results in the second quarter, more than doubling our adjusted net income compared with a year ago. Given our fixed charge of coverage over the next 12 months, we expect these metrics to improve further. At the same time, however, closely follow economic conditions and the potential impacts to our industry. A confluence of factors, including high energy prices, inflation, and the effects of the war in Ukraine will likely result in slowing economic growth and negatively impact trade volumes. On the other hand, consistent inefficiencies on the store side and the supply chain and COVID resurgence in China are keeping vessel utilization high with increased waiting times in port. Additionally, the increase in fuel costs will likely prompt liner companies to reduce vessel sailing speed as soon as vessels are available. However, we do not expect that to happen until second quarter 2023 and onwards. Environmental regulations, particularly the CII compliance is leading line of companies to redesign their operating groups with lower speeds to ensure they do not breach requirements and to also assure their customers that they are actively reducing CO2 emissions. These mitigating factors point to a weakening rather than a collapse of the market that we expect will result in rates much higher than pre-pandemic levels. For the time being, charger rates are holding firm as available economies very start. The company is very well positioned with a strong liquidity position and a balance sheet that can sustain severe deterioration of economic conditions. This is reflected in upgrades by both S&P and Moody's to the highest level among public shipping companies, validating efforts to create a leader in our sector. We are also insulated from rising interest rates as we have reduced our floating rate debt to a nearly equal to our cash and marketable securities. We will continue to use our balance sheet opportunistically with a continued focus on state-of-the-art buildings with environmental profiles desired by our line of customers, which also gives us great confidence about the future of our already ordered six methanol-ready green new buildings. We're also continuing to return value to our shareholders through our dividend and our share buyback program, to reduce our number of outstanding shares by approximately 2% in the course of about one month. With that, I will hand the call over back to Evangelos, who will take you through the financials for the quarter.

Thank you, John, and good morning again to everyone, and thanks again for joining us this morning. I will briefly review the results for the quarter and then give call participants the opportunity to ask questions. We are reporting adjusted EPS for the second quarter of 2022 of $7.59 per share or adjusted net income of $157.1 million compared to adjusted EPS of $3.34 per share or $68.9 million for the second quarter of 2021. The increase of $88.2 million in adjusted net income between the two quarters is the result of an increase in operating revenues of 104.5 million and a 13.9 million net dividend booked in relation to our ZIM equity holding, partially offset by higher total operating expenses of 20.2 million, mainly due to the increase in the average size of our fleet by 11 vessels between the two quarters, a 7.8 million increase in net finance expenses, and a 2.2 million decrease in income from Gemini that was fully consolidated in the third quarter of 2021. More specifically, operating revenues increased by 104.5 million to 250.9 million in the current quarter, compared to 146.4 million in the second quarter of 2021. This increase is attributed to a $62 million increase in revenues as a result of higher charter rates and 23.9 million incremental revenues as a result of the vessel additions to our fleet between the two quarters. Revenue also increased by 2.9 million mainly due to straight line revenue recognition accounting and further increased by another 15.7 million being the amortization of assumed charter liabilities of recent vessel acquisitions. Vessel operating expenses increased by $7.7 million to $40.6 million in the current quarter, compared to $32.9 million in the second quarter of 2021, mainly as a result of the increase in the average number of vessels in our fleet, while the average daily operating cost increased to $6,463 per day for the current quarter compared to $6,241 per day in the second quarter of 2021. And that was due mainly to COVID related increase in crew remuneration and increased insurance premiums due to the tightening of the insurance market between the two periods. Our daily OPEX costs still remains one of the most competitive in the industry. G&A expenses remained stable at $7.1 million in both the current quarter and the second quarter of 2021. Interest expense, excluding the amortization of finance costs, decreased by $1.4 million to $12.9 million in the current quarter compared to 14.3 million in the second quarter of 2021. This is a combined result of a 2.2 million decrease in interest expense because of a reduction in our average indebtedness by approximately 311 million between the two periods, partially offset by an increase in debt service cost by approximately 44 basis points, mainly as a result of rising interest rates. We also had and 0.7 million decrease in interest expense due to capitalization of interest on vessels under construction. We also have reduced positive recognition through our income statement of accumulated accrued interest of one and a half million that have been accrued in 2018 in relation to the financing that was consummated. And as a result of arrangements were put in place in April of 2021, the recognition of such accumulated interest has been decreased. Adjusted EBITDA increased by 85.2% or 88.4 million to 192.1 million in the current quarter from 103.7 million in the second quarter of 2021 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation, which is posted on our website, as well as subsequent event disclosures. A few of the highlights follow. During the second quarter, we substantially reduced leverage by early debt and lead repayments of $434 million and realized a gain of $22.9 million in relation to this debt extinguishment. This early prepayment combined with scheduled debt repayments and including a new credit facility of 130 million that was put in place in the current quarter overall have led to the reduction of the corporate net debt to last 12 month adjusted EBITDA ratio to below one and more specifically to 0.9 times. Currently 15 of the company's vessels are debt free. And these early debt repayments will reduce debt and lease amortization to approximately 25 million run rate per quarter going forward. Through the end of July, we had repurchased 409,200 shares of our common stock in the open market for 25.1 million, executing under our 100 million share repurchase program. As at the end of the second quarter, our contracted cash revenue backlog stood at $2.3 billion with a 3.6-year average charter duration, while contract coverage is at 99% for 2022 and 80% for 2023, while even 2024 is already contracted at 55%. Our investor presentation has analytical disclosure on our contracted charter book and all the other matters that have been discussed. 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 one on your telephone keypad. If you are 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. Our first question comes from Omar Nocta with Jefferies. Please go ahead.

Thank you. Hey, guys. Good afternoon, John and Evangelos. Congrats again on a very strong quarter and really nice to see you guys taking advantage of the situation and really paying down debt and further strengthening that balance sheet. I wanted to ask about the 15 shifts that are unencumbered that, as you say, they're worth charter-free, $1.6 billion. If I recall, you've agreed to sell two of them previously. How should we think about the remaining 13? Are those sales candidates or are those – assets that are, you're holding onto with, with added flexibility. But how do you just generally view those, um, those ships in the, in the denounce framework going forward?

Um, well, first of all, Omar, welcome back. Uh, it's nice to have you covering us, uh, as being, you know, really one of the first analysts that covered us since 2006. So I think you've got probably the most extensive knowledge of the company from all analysts covering us. Yeah, well, as I said, these 15 ships are not held for sale. Of course, as we sold these ships, if we get a very interesting, let's say, purchase proposal, you know, we can never deny. But for the time being, no, these ships, you know, just are seated in the company and actually they provide, you know, terrific security to the unsecured, let's say, debtors, to the boat holders in our company, which makes really the,

the bond you know rock solid got it all right thanks john and uh you know thanks for for your your your words uh uh towards me it's been a pleasure following denounce for so long and it's come such as a long way here especially the past two years um and you know wanted to maybe the next question ask you know in in terms of as you highlighted your your methanol new buildings As you prepare for stricter regulations upcoming, if you think about strategically deploying capital today in anticipation of that, do you see more incremental capital going towards the new buildings, or do you try to find secondhand ships that are younger, eco, similar to the ships you acquired last summer?

Well, we are open to all, let's say, possibilities that make sense. For the time being, secondhand ships are pretty expensive and we do not want really to have a very high capital burden on all your vessels. If we make an investment, it will definitely need to be on green technology. because at some stage, the whole fleet, we are waiting to see how IMO will develop in terms of their commitment, because for the time being, it's, let's say, 50% reduction until 2050. With what's happening in the world today, there is decarbonization, there is a lot of pressure to amend that in net zero by 2050, which means that we need a much more aggressive investment strategy to green new buildings. And we are following that very closely so that we are really on top of the game.

Yeah, definitely. And John, one final question, just more market related. Obviously, we've seen you guys have been at the forefront of chartering your shifts on longer and longer-term contracts. How would you characterize the market today vis-à-vis this backdrop of easing freight rates and uncertainty ahead? How would you characterize liner's appetite today for forward-fixing shifts that come open, say, in 2023? How does that look today versus, say, maybe six months ago?

Well, there's no doubt that people are, in general, more conservative. There are requirements around. So the issue here is not that Linder companies do not have requirements. It's just that because we're talking about 2023, nobody feels, let's say, the urge to pay top of the market at this moment and hope that by waiting, they might be able to get the ship, let's say, cheaper. So it's not so much that there is no requirement, it's just that people are holding off in the hope that they will be able to commit the ships at a lower level. On the other hand, exactly because the owners are not in distress they are not prepared really to, let's say, to put their pants down as they did with the cases in the past in order just to get fixed at any rate. So, you know, we'll have to see how the world situation develops so that decisions about chartering will be made rather than, for example, a year as before actually the requirement as it was the change the case until six months ago maybe they will definitely to do it maybe six months or eight months before the requirement which is still longer than the kind of a two to three month period that was the case pre-pandemic

Got it. Thanks, John. Very helpful. I appreciate it. And congrats again. I'll turn it over.

Thank you. Thank you, Omar.

Thank you.

Again, if you'd like to ask a question, please press star then 1 at this time. Our next question comes from Chris Weatherby with Citigroup. Please go ahead.

Hey, hi. Thanks for taking the call. John, you talked about sort of normalization in the market. I think at higher levels than what we've seen in the past. I know this is a difficult question to answer, but I'm curious what you think that means. So where do we think that sort of the, you know, maybe 2023, 2024 normalization in the market, what does that look like in terms of the level of rates? You know, we know there are continuing to be constraints and obviously supply chain challenges, but in any sort of thoughts you have, just a magnitude of potential normalization would be very helpful.

Well, Chris, in general, let's say the long-term rates in the market are dictated by a combination of the actual new building costs and the financing costs. These two are really very much on the high side to do, which means that there is no, let's say, incentive for if someone, if a liner needs a ship for a longer period to commit, it needs really to pay on the basis of these two factors. Okay, the equity returns of the owner is, let's say, of course, another factor. But the decisive one is the price of the ship and the financial cost. I mean, these two things have shot up. That's why no one will go and build ships today if they are not really compensated. And on the other hand, this is keeping also an anchor in the second-hand market. Because the alternative of someone to have a long-term new ship is to take a relatively short-term, you know, for example, three-year period charter of an existing ship until the situation becomes clearer.

Okay. Okay. That's helpful. I appreciate that perspective. And maybe just thinking about sort of the balance sheet and what do we think, the right level of debt is. Obviously, from an EBITDA perspective, we're running at a pretty robust level here and maybe there's normalization coming. I don't know how much work you think you need to do from here in terms of paying down debt and how you balance that with share buybacks and obviously incremental investments in the fleet.

As you know, exactly because shipping is a cyclical industry, what you really need to see is how your debt to EBITDA moves through the cycles. Of course, now with a very strong market that we had a debt to EBITDA of... 0.9 and actually if we take into account also some of our other marketable securities it's even lower than that but this is really now that we are at the top of the cycle and at a moment that we have not done any significant expansion We believe that through the weakening of the market and our expansion, this could go somewhere as a maximum up to about three. That's really the level that we want to keep. We are very much aware that the rating that we get is directly influenced by these ratios. And we consider a very high rating as a key to our future by being able really to borrow cheaper than our competitors.

Okay, that's clear. That's helpful. I appreciate the time today. Thanks so much.

Okay, thank you. Thank you, Chris.

Our next question comes from Tal Yacco with Best Thoughts. Please go ahead.

Hello, everyone. I would like to first congratulate you for the recent quarter. The financial statement looks amazing and definitely you did a great job there i would like to ask a question i had the issue at the beginning of the call so maybe i missed it and you mentioned it before but regarding the buyback program you mentioned uh to the sec the program will will be around the 100 million dollars the recent financial statement uh mentioned that 25 of it i wonder if it there is going to be a continuous of the program or any change of it in case you're going to extend it or complete the plan as declared at the beginning. Thank you very much.

The plan remains in place. We have executed this share buyback at levels that we want to be accretive for shareholders and Additionally, this was done in a period of a pretty slow market during the summer since we have declared share buyback, which means that we could not really buy many more shares in that period of time because liquidity was not there.

yeah i totally get it uh so the pro the program remains the same and uh you will complete it to a 100 million eventually um if i may i mean that the program by nature is opportunistic right it is in place it's there is no expiration date and it's up to the board to decide

at whatever point if they want to discontinue it. So it's an open program which we will seek to execute in the best possible way for our shareholders, and the board reviews these matters periodically, so I cannot give you a perfect answer, but that's how it is.

I see. Thank you very much. Good luck.

Thank you.

Our next question comes from Clement Mullins with Value Investors Edge. Please go ahead.

Good morning, gentlemen. Thank you for taking my questions. Following up on the repurchase authorization, you've already used a quarter of that, but you continue to trade at a very significant discount to NAD. So all the repurchases are very attractive. What's your current view on the trade-off between increasing the dividend and additional repurchases?

Well, first of all, as far as we said before, the repurchase program remains in place. As I said, we are going to use it to the best interests that we see fit for our shareholders. Regarding the dividend, for the time being, it remains steady and stable. it's going to any re-evaluation of the dividend, it's going to be definitely not earlier than 12 months from the previous range.

All right, that's helpful. And your balance sheet is now very strong and will continue to strengthen going forward. Do you still believe current new building pricing is attractive, or do you prefer to take a wait-and-see approach going forward?

For the time being, we do not see any attractive opportunities. But as I said, this is the nature of shipping. It's cyclical. we are best positioned than anyone else to jump into any interesting opportunity that we're going to encounter.

Indeed, indeed. That's all from me. Thank you very much for taking my questions and congratulations for this quarter. Thank you.

It appears we have no further questions at this time. I would like to turn the call back over to Dr. Kustos for any further comments or closing remarks.

Thank you all for joining this conference call and for your continued interest in our story. Look forward to hosting you on our next hearing 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.