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Danaos Corporation (NYSE:DAC)

Q4 2013 Earnings Conference Call

February 11, 2014 9:00 AM ET

Executives

Evangelos Chatzis – Chief Financial Officer, Secretary and Head-Investor Relations

Dr. John Coustas – Chairman, President and Chief Executive Officer

Analysts

Mark Suarez – Euro Pacific Capital, Inc.

Operator

Thank you for standing by ladies and gentlemen, and welcome to the Danaos Corporation Conference Call on the Fourth Quarter and Full Year 2013 Financial Results.

We have with us Dr. John Coustas, President and Chief Executive Officer; and Mr. Evangelos Chatzis, Chief Financial Officer of the Company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you the conference is being recorded today, Tuesday, February 11, 2014.

We now pass the floor to one of your speakers today, Mr. Chatzis. Please go ahead, sir.

Evangelos Chatzis

Good morning everyone and thank you for joining us today. Before we begin, I quickly want to remind everyone that managements’ remarks this morning may contain certain forward-looking statements and that actual results could differ materially from those projected today. These forward-looking statements speak as of today and we undertake no obligation to update that. Factors that might affect future results are discussed in our filings with the SEC and we encourage you to review this detailed Safe Harbor and risk factors 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.

Now, let me turn the call over to Dr. Coustas, who will provide the overview for the quarter.

Dr. John Coustas

Thank you, Evangelos. Good morning and thank you all for joining today’s call to discuss our results for fourth quarter 2014.

Danaos is reporting a solid fourth quarter with adjusted net income of $15 million, or $0.14 a share, which is $3.3 million higher than the $11.7 million adjusted net income for the fourth quarter of 2012. This improvement is mainly a result of reduced financing costs due to the rapid de-leveraging of the Company’s balance sheet. During 2013 we utilized 90% of our free cash flow generation to reduce indebtedness by $171 million, while we will reduce debt by at least a further $200 million in 2014.

Executing on our fleet renewal program, during the fourth quarter we sold four vessels, the Hope, Kalamata, Lotus, and Komodo, while we acquired two 2001 built geared containerships, the 2,500 TEU Danae C, and the 3,500 TEU Dimitris C.

In January 2014, our charterer Zim reached an in principle agreement with its creditors, including Danaos Corporation, to restructure its balance sheet, which is currently in the process of documentation. This agreement, which includes an equity capital injection of $200 million by Zim’s parent, Israel Corporation, resolves Zim’s long standing capital structure problems. But as a result of this restructuring we recorded in this quarter an impairment loss of $19 million on the receivable we had accumulated on our balance sheet related to credit previously provided to Zim.

The containership market remains very challenging, but there are indications of recovery. Mainlane trade volumes in 2013 expanded by 2.8% on average, compared to 1% in 2012, while the Asia-Europe trade grew by almost 3.5%, an improvement when considering the 4.9% contraction of 2012. On the supply side, the containership fleet grew by almost 7% in 2013, outpacing demand growth that came in at around 4.8%. This imbalance is anticipated to subside during 2014 with the growth forecasts of around 6% and supply growth estimated at around 5%.

Increased scrapping activity is an additional factor anticipated to mitigate the supply demand imbalance going forward. Amidst a soft charter market, we maintain our strong 93% contract coverage, limiting further downside from a prolonged weak spot charter market. We continue to be one of the most cost competitive operators in the industry with our daily vessel operating expenses averaging at just below $6,000 a day for the full year of 2013.

With a resilient business model both from an operating and financial standpoint, we will continue to manage our fleet efficiently, while in 2014 we will focus on further de-leveraging the company and 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?

Evangelos Chatzis

Thank you and good morning again to everyone and thank you for joining us today. And I will briefly review the results for the fourth quarter and then open the call to participants for questions.

During the fourth quarter of 2013 we had an average of 59 containerships, compared to 64 containerships for the fourth quarter of 2012. Implementing our fleet renewal program during the year, we concluded the sale of nine of our oldest vessels, while we purchased three, 2,500 TEU ships and one, 3,500 TEU all of them geared containerships. Following the already consummated sales and the reactivation of Messologi during the first quarter of the year, we currently have two vessels on cold lay-up, the Marathonas and the Duka.

Our adjusted net income was $15 million or $0.14 per share for the quarter up by $3.3 million, or $0.03 per share when compared to the adjusted net income of $11.7 million or $0.11 per share for the fourth quarter of 2012. This increase as mentioned earlier was mainly the result of reduced financing costs, due to the de-leveraging of our balance sheet. We would again like to note here that beside the re-chartering risk which is manageable due to the high contract coverage that we have. The most important driver in our earnings today is related to the hedging that we have in place through interest rate swaps.

Indicatively our adjusted net income for the fourth quarter of 2013 that stand at $15 million would have been $51.7 million if the current interest rate swaps were not in place. These swaps gradually start expiring this year through the end of 2015 and as a result, we expect a gradual and consistent improvement in our financing costs over the next quarters given the market expectations for persisting low interest rates, with our average charter duration of nine years well in excess of the two years remaining duration of the swaps, we believe we will be able to take advantage of the anticipated low LIBOR environment on the back of solid contracted income generation.

Operating revenues decreased by 3.2% or $4.8 million to a $147 million in the current quarter, compared to a $151.8 million in the fourth quarter of 2012. This decrease is mainly attributable to the softer charter market between the two periods and the vessel sales partially offset by the incremental revenue contribution of the new ships that joined the fleet.

Vessel operating expenses were $30.5 million both for the fourth quarter of this year and the fourth quarter of 2012. However, on a daily basis, the daily operating costs were $6,019 per day for Q4 of 2013 slightly higher than the $5,857 per day for the previous quarter. As a testament to our operational efficiency these daily operating expense figures are one of the most competitive in the industry.

G&A expenses decreased by $0.3 million to $4.9 million in the current quarter from $5.2 million in the fourth quarter of 2012, mainly as a result of the decrease in the average number of vessels in our fleet between the two quarters. Interest expense decreased by 5.2%, or $1.2 million to $22.1 million in the current quarter compared to $23.3 million in the fourth quarter of 2012.

The decrease in interest expense was mainly due to lower average indebtedness between the two periods of a $152 million to $3.25 billion in the current quarter from $3.4 billion in the fourth quarter of 2012, as well as the marginal decrease in the cost of debt servicing between the two quarters driven by lower LIBOR rates.

As we are rapidly de-leveraging the company’s balance sheet with effectively all of the generated free cash flow, we expect finance costs to continuously improve in the coming quarters in combination with swap expirations as mentioned earlier.

Realized losses on swaps decreased also by $2 million to $36.7 million in the current quarter, compared to $38.7 million in the fourth quarter of 2012, and this is attributable to swap expirations. Finally, adjusted EBITDA decreased by $3.6 million to a $108.8 million in the current quarter from $112.4 in the fourth quarter of 2012, mainly as a result of the softer charter market between the two periods that was discussed earlier.

With that I would like to thank you for listening to this first part of our call. Dr. Coustas and I will now take your questions. Operator?

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator Instructions) Thank you. And you have a question from Euro Pacific from the line of Mark Suarez. Please ask your question.

Mark Suarez – Euro Pacific Capital, Inc.

Yes. Good morning guys.

Dr. John Coustas

Good morning.

Evangelos Chatzis

Good morning, Mark.

Mark Suarez – Euro Pacific Capital, Inc.

Just to go back to obviously the selling of your ships, you know that we’ve passed 2013, you sold the last four remaining ships under the selling option agreement I mean. Do you have a sense of how active you like to be in adding more vessels to your fleet going forward, in other words over the next 12 months. And also do you envision adding more of those 2,500 plus TEU geared containerships to your fleet?

Evangelos Chatzis

Well, we are contemplating, let’s say to maybe to extend this agreement, we are in discussion with another, let’s say three older ships we have on our fleet. But that’s about it. I think that we are, all the older ships have already gone and its maximum three ships that we might, let’s say do these scrap and replace program during this year.

Mark Suarez – Euro Pacific Capital, Inc.

Gotcha. And do you feel that you have enough capacity in your balance sheet, or we need to tap into the capital markets in the near future, if you were to sort of fund for that renewal?

Evangelos Chatzis

Well, its for the second hand renewal, if we do something, we’ll do it from our old, let’s say funds, if we are of course do to anything on the new building front that will definitely require access to the markets.

Mark Suarez – Euro Pacific Capital, Inc.

Okay, and just to go on to the two lay-up vessels you mentioned, what are the prospects of reactivating these vessels in the current market as it stands in the next six months if you will?

Evangelos Chatzis

Well, these vessels, let’s say the similar vessels that we have operating are practically at breakeven.

Mark Suarez – Euro Pacific Capital, Inc.

Right.

Evangelos Chatzis

So it doesn’t really make sense to reactivate them, in order to run a breakeven. So there is potential employment, but as I said that as a level to that do not really justify the whole cost and risks associated with reactivating them.

Mark Suarez – Euro Pacific Capital, Inc.

Okay, and just to turn back and look at the macro picture on a high level for a second, what is your sense of the demand for second hand tonnage given credit availability out there, and have you seen any material changes in demand for particular vessel segments, by that I mean second hand over the last quarter or so since your last earnings call?

Evangelos Chatzis

Well, there hasn’t been a lot of activity in the second hand market, there is a number of geared ships that have changed hands and few modern Panamaxes that we have not really seen any kinds of flurry of activity and that’s because really people are a bit on a wait and see attitude in terms of the development of the Panamax market because here we have really a case on one hand of scrapping older vessels, practically nothing in terms of new buildings, but a continuous supply into that segment from the cascading effect. So old values are very kind of delicate balance and people are just waiting to see the direction.

Mark Suarez – Euro Pacific Capital, Inc.

So you really haven’t seen an increased activity of deals presented to you from this trade financials, financial firms I mean or banks if you will, is that, would that be a fair assessment?

Evangelos Chatzis

No, no nothing let’s say we’ve seen few vessels here and there, but still we do not really see the banks willing to take any losses on these ships and we’re still in a kicking the can down the road mode.

Mark Suarez – Euro Pacific Capital, Inc.

Okay, gotcha. Well, that’s all I have for now, thanks for the time as always.

Evangelos Chatzis

Thank you.

Operator

Thank you, sir. (Operator Instructions) As there appear to be no further questions. I should now pass the floor back for closing remarks.

Dr. John Coustas

Thank you, all for joining the conference call and for your continued interest in our story. We look forward to host you on the next earnings call. Have a nice day. Thank you, operator.

Operator

Thank you, very much as many thanks to our speakers today. That does conclude our conference. Thank you for participating. You may now all disconnect. Thank you, gentlemen.

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