Danaos Corporation

Good day and welcome to the Denao's Corporation conference call to discuss the financial results for the three months ended June 30th, 2023. As a reminder, today's call is being recorded. Hosting the call today is Dr. John Kustis, Chief Executive Officer of Denao's Corporation and Mr. Yvon Galas-Hattis, Chief Financial Officer of Denao's Corporation. Dr. Katous and Mr. Hatice will be making some introductory comments, and then we'll open the call for questions and answers. 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. John Koustas, who will provide the broad overview of the quarter. John?

Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the second quarter of 2023. The world economy stagnated in the second quarter of 2023, resulting in a gradual easing of the container market. Danao's active strategy in the current market condition is made possible by the prudent approach we have taken to manage our balance sheet to conservative levels, as well as our successful chartering strategy. The latter is reflected in our operating revenues of 241 million, which is near to previous records despite a charter market drop that is more than 50% lower than a year ago. We continue to be active in the charter market, highlighting the resilience of our business model, and secure nearly half a billion in new charter contracts during the quarter. Our total charter backlog increased to 2.5 billion as of the end of the quarter. And contracted charter coverage currently stands at 99% for 2023 and 86% for 2024. In the second quarter of 2023, Danaos received the gold first place awards in the governance and environment categories in the inaugural ESG Shipping Awards. These accolades, which we're proud of, acknowledge the company's exemplary efforts in promoting sustainable practices social responsibility and strong governance and reaffirm our position as a leader in responsible maritime operations. The timing of the awards is notable as the IMO recently reiterated and strengthened its commitment to decarbonize shipping by targeting net zero by around 2050. Danaos continues to advance its decarbonization strategy in multiple ways. We are constantly optimizing and retrofitting our existing fleet and have committed to upgrade around 20 vessels with new propellers, fuel-saving appendages, and low-friction paints. We have also expanded our new building program with the order of four additional new building vessels. These vessels, two of which are 6,000 TEU and two of which are 8,200 TEU, will be delivered methanol-ready, ensuring the longevity of our investments. In total, we have 10 vessels with a total capacity of approximately 75,000 TEU on order. All of these will be able to utilize alternative fuels, and importantly, six of these vessels are already chartered for multi-year periods beginning on their delivery dates in 2024. We also deployed capital opportunistically after identifying weakness in the dry bulk market, a market we are very familiar with. We believe the long-term fundamentals in the dry bulk market are very positive. In particular, the order book is at historically low levels, and fleet supply growth is projected to decline significantly over the next several years against the backdrop of rebounding demand. Shorter market sentiment is not as strong, and we were able to make investments at attractive prices. As has been previously reported, the announced suppliers a significant stake in Igloo Bulk Shipping, a New York Stock Exchange listed dry bulk company. Additionally, we acquired five cape-sized bulkers in the second-hand market. With respect to Igloo, we were able to purchase shares in a company we believed had best-in-class corporate governance practices at a significant discount to our perception of the company's net asset value. Shortly following our investment, The board of EGLE unilaterally implemented a poison pill and repurchased Oak Tree Capital's 28% stake in the company at nearly a 35% premium to EGLE's 45-day average share prices and a 32% premium to our cost basis. These transactions, which were done by EGLE's board, fundamentally alter our view of EGLE's corporate governance. We are concerned with these developments and are seeking clarification from the Board of Directors of Eagle. As Eagle Park's current larger shareholder, we have a strong vested interest in seeing the company enhance long-term shareholder value and believe that we have a duty to speak up when we think the board and or management may be acting outside the best interests of all shareholders. Accordingly, we are committed to working constructively with the board to identify balance well-considered and effective methods to enhance shareholder value on behalf of all shareholders. With respect to our interest in the dry bulk market in general, Danao has significant experience in the dry bulk market as an owner and operator. We exited the segment years ago, which was a well-timed decision in his sight, and now we again see opportunity. Given the strength of our balance sheet, we are uniquely positioned deploy capital in various ways to grow our revenue base and earnings. Our fleet of container vessels, which are contracted and multi-year charters, provide strong revenue and cash flow visibility. While we will continue to grow and future-proof our core fleet by adding next-generation vessels to it, our ultimate goal is to generate value for our shareholders, and we will consistently pursue the best opportunities to do so. As I've said before, our healthy balance sheet allows us to opportunistically deploy our capital in various ways. During the quarter, we continued our buyback program and have now spent $65.5 million of our $100 million buyback program to retire more than 1 million shares. Finally, we remain committed to returning capital to shareholders, as evidenced by our 0.75 per share dividend announced this morning. We will continue to implement our strategy to ensure the long-term growth and profitability of the company and are consistently focused on creating value for our shareholders. With that, I'll hand over the call back to Evangelos, who will take you through the financials for the quarter. Evangelos?

Thank you, John, and good morning again to everyone, and thanks 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 2023 of $7.14 per share or adjusted net income of $143.4 million compared to adjusted EPS of $7.59 per share or $157.1 million for the corresponding quarter of 2022. This decrease of $13.7 million in adjusted net income between the two quarters is primarily the result of the $13.9 million ZIM dividend that had been recognized in the second quarter of 2022, which is no longer applicable during this quarter as we have now sold all of our ZIM shares. Otherwise, our adjusted net income improved slightly, mainly as a result of a $5.5 million increase in operating revenues due to better rechartering rates for our fleet, a 10.2 million decrease in net finance expenses, mainly driven by the significant deleveraging of our balance sheet, and a 0.1 million improvement in total operating expenses, partially offset by a 5.4 million decrease in operating revenues due to veteran disposals, a 9.5 million decrease in operating revenues as a result of revenue recognition accounting, and a $0.7 million loss on our CTT equity investment that is incurring research and development costs to explore decarbonization technologies for the shipping industry. Vessel operating expenses increased by $1.3 million to $41.9 million in the current quarter compared to $40.6 million in the second quarter of 2022 as a result of the increase in the average daily vessel operating costs that increased to $6,970 per day for the current quarter, from $6,463 per day in the second quarter of 2022, mainly due to inflationary pressures that affected repairs and maintenance costs between the two periods, as well as increased insurance premiums. Still, our operating costs continue to remain among the most competitive in the industry. G&A expenses remained stable to $7.2 million in the current quarter compared to $7.1 million in the second quarter of 2022. Interest expense, excluding finance costs amortization, decreased by $7.6 million to $5.3 million in the current quarter compared to $12.9 million in the second quarter of 2022. The decrease in interest expense is a combined result of a 5.3 million decrease in interest expense due to the reduction in our average indebtedness by almost 700 million between the two periods, partially offset by an increase in the cost of debt service by approximately 2.9% as a result of rising interest rates. We also had a 3 million decrease in interest expense due to capitalized interest on vessels under construction. and reduced positive recognition through our income statement of accumulated accrued interest of 0.7 million that had been previously accrued in relation to two of our credit facilities that have now been fully repaid. At the same time, interest income came in at 3.6 million, effectively covering almost two-thirds of our interest expense for the current quarter. Adjusted EBITDA decreased by 7.7%, or 14.8 million, to 177.3 million in the current quarter, from 192.1 million in the second quarter of 2022, primarily due to the 13.9 million ZIM dividend that had been recognized in the second quarter of 2022, as previously discussed. The other EBITDA drivers have already been 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 are, over the past three months, we have secured $469 million of contracted revenue through the arrangement of new charters for 12 container ships in our fleet. The new fixtures notably include additional contracted revenues of $177 million for three 13,000 TEU vessels that were forward fixed on new three-year charters and 227 million for five 8,500 TEU vessels that were extended forward for an additional 3.6 years. As a result, our contracted cash revenue backlog has now improved to $2.5 billion with a 3.3-year average charter duration while contract coverage is at 99% for 2023 and 86% for 2024. Our investor presentation has analytical disclosure on our contracted charter book. During the second quarter, we also prepaid early the remaining lease obligations for two vessels, but at the end of the first quarter stood at 66.3 million. and we now no longer have any lease obligations on our balance sheet. As of June 30, 2023, our net debt is down to $131 million. In the current interest rate environment, this position shields us from high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio stood at 0.2 times, and 44 out of our 68 vessels are currently unencumbered and debt-free. Finally, as at the end of the second quarter, cash was 293 million, while total liquidity, including availability under our remodeling credit facility, stood at 653 million in total, giving us ample flexibility to pursue accretive capital deployment opportunities. 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'll now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause the momentarily to assemble the roster. First question will be from Omar Latta of Jefferies. Please go ahead.

Hi, thank you. Hi, I'm Jon Evangelos. Good afternoon. You guys have been very active here recently. You've added some backlog. You've ordered the two container ships, bought back some stock, bought Eagle or bought into Eagle and acquired the five capes. Just wanted to ask, you know, maybe just kind of if you could frame it, you know, what's changed here to give you the confidence to start deploying capital so perhaps aggressively relative to the more restrained outlook you had earlier this year?

Well, as we said, we are deploying capital where we can see, let's say, that there are going to be interesting returns. And the basic, in terms of capital allocation, investing in new ships that will be able to utilize green fuels is definitely part of our strategy, but also a requirement for the longevity of the company. And as I've said, the IMO today is committed to force shipping into a greener environment. And anyone who doesn't really get it and believes that it's going to be business as usual is going to be for a surprise within the next few years. So we definitely need to invest in that part. Secondly, in terms of our investment in the dry bulk market, as we've already said, Fundamentals look good, and we believe that in the future we can enlarge our source of income through this market as well.

Thanks, John. And yeah, I did want to ask, obviously, on DryBulk, you spent the past maybe 15 years or so almost exclusively as a container ship company. You've now got the stake in Eagle. gives you exposure to the mid-sized dry bulk classes. You've now got the five capes on hand. You mentioned, you know, having a bigger piece of earnings coming from dry bulk. Is this, when we think about the now going forward, is it really to become a two-pronged story, one leg that's containers, one leg that's dry bulk? Or is this more of an opportunistic investment at this point in the cycle, given where sentiment is in dry bulk?

Well, as we said, I cannot really say exactly where we will go because I mean the dry bulk market has an interest if we are able to deploy capital at attractive prices. It's not that we're going to invest in dry bulk at just whatever price in order to diversify our income. So we will definitely be cautious in how we deploy capital. And if there are opportunities, yes, we are going to grow. But in the dry bulk market, there is our experience, there is one secret. In order to make money, you have to buy cheaply. If you buy at the top of the market, you will very rarely recover your investment.

Yeah, that's true. And then maybe then just one final one, just in terms of how you intend to operate the dry bolt, you know, the five caves and potential acquisitions down the line. How do you envision the now trading these commercially? Is it you put these vessels out on charter, deploy them on the spot market? That's maybe perhaps one question, but then the other is, do you intend to sort of try to build out a trading platform where you're starting to do TCNs and FFAs and hedging and whatnot, or is it simply own the assets and then put them out on charter, whether the spot or TC?

Well, first of all, we will do everything in-house. If we feel that we require... to hedge in the market, yes, you know, we have the ability to use FFAs as well. This is not necessarily, let's say, something one has to do. It depends, you know, if you want to speculate on both physical and the paper market. So it's a question of what strategy we're going to have, but we will start by operating these vessels ourselves. in the spot market and we will see how it goes.

Omar, if I may add, this is obviously opportunistic and it's small scale compared to the container ship business, which will continue to be the dominant business. I mean, we are now first half, we have EBITDA, we are on track for 700 million plus EBITDA for the full year. 356 million for the first six months. And the contribution of the dry bulk where rates are is going to be very small. And the investment in dry bulk versus the fleet value of containers is again small, right? So to your point, still this is going to be a small part of the business that we will seek to maximize, of course, returns. But containers will continue to be the dominant

Thank you. Understood, Evangelos. Thanks for that. Thanks for the color there. And John, thank you also. I'll turn it over.

Thank you. Thank you.

Thank you. Again, if you have a question, please press star then one. Our next question will be from Chris Weatherby of Citigroup. Please go ahead. Hey, thanks for taking the question. see what your thoughts are now. So what would be your intention going forward with Eagle from here?

Well, Chris, for us, we were interested in building, let's say, a sizable investment. We were blocked. You know, there is nothing really we're waiting for, let's say, management's next actions to see what they can do about the actual operations, which are going to be very challenging in the next couple of quarters at least. And, you know, we'll take it from there.

Okay, so the position is static, or would you add to your equity position, or do you have the ability to add to the equity position?

Well, you know, we cannot add because we are already, you know, above the 15% poison pill level, so we cannot add.

Okay, okay, that's helpful. I appreciate that. And then I guess in terms of the... Your thoughts on where you think incremental capital is deployed most effectively. Are there opportunities on the container side still that could be interesting? I certainly understand the counter-cyclicality of investing in dry bulk, and that certainly makes sense to us. I want to get a sense of how you think about where that incremental dollar should go from here. Is it dry bulk or is it container, or would there be potential opportunities for other avenues?

We do not see any interesting opportunities in the container market. There are opportunities about older ships, but I believe that we need to look at the future and look only at very modern tonnage and possibly buildings, and that's the reason also. that we have placed these additional four ships for deliveries in the next two, three years.

Okay, so then dry bulk would be the place where the incremental dollar would go?

For the time being, yes. The only thing is that, as I said, dry bulk, we are very sensitive to cost. So we're not just going to change the market up to build volume.

Okay. Okay. Thank you.

Yeah, sorry. Go ahead.

No, please continue.

Okay. Thank you.

All right. Thanks for the time, guys. I appreciate it.

Thank you. We have no further questions at this time. Now I'd like to turn the call back over to Dr. Katous for any further comments or closing remarks.

Okay, thank you all for joining this conference call and your potential interest in our story. Look forward to hosting you on our next earnings call. Thank you. Thank you.

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