Danaos Corporation's (DAC) CEO John Coustas on Q4 2015 Results - Earnings Call Transcript

| About: Danaos Corporation (DAC)

Start Time: 09:00

End Time: 09:25

Danaos Corporation (NYSE:DAC)

Q4 2015 Earnings Conference Call

February 17, 2016, 09:00 AM ET

Executives

John Coustas - President and CEO

Evangelos Chatzis - CFO

Analysts

Gregory Lewis - Credit Suisse

Charles Rupinski - Seaport Global

Mark Suarez - McQuilling Holdings

Operator

Good day, and welcome to the Danaos Corporation Conference Call to Discuss the Financial Results for the Three Months Ended December 31, 2015. As a reminder, today's call is being recorded.

Hosting the call today is Dr. John Coustas, Chief Executive Officer of Danaos Corporation; and Mr. Evangelos Chatzis, Chief Financial Officer of Danaos Corporation. Mr. Coustas and Mr. Chatzis will be making some introductory comments and then we will open the call to a question-and-answer session. [Operator Instructions].

I would now like to turn the conference over to Mr. Evangelos Chatzis, Chief Financial Officer. Please go ahead, sir.

Evangelos Chatzis

Thank you, operator, and good morning to everyone. 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 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 a broad overview for the quarter. John?

John Coustas

Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for the fourth quarter of 2015. We’re pleased to report full year 2015 adjusted net income of 159.5 million or $1.45 a share, which represents an increase of 99.5 million or 165.8% when compared with adjusted net income of 60 million or $0.55 a share reported for 2014.

Likewise, adjusted net income of 47.2 million or $0.43 a share for the fourth quarter of 2015 more than doubled growing by 101% compared to adjusted net income of 23.5 million or $0.21 a share the fourth quarter of 2014. Notably, these are the best results we have ever achieved.

A substantial improvement in year-over-year earnings is attributable to an improvement of 78.7 million in net finance costs due to interest rate swap expirations and lower debt balances, a 14.3 million improvement in our EBITDA, as described further below, and a 5.8 million decrease in depreciation and amortization.

The majority of the expensive interest rate swaps we entered into in 2007 and 2008 have gradually expired over the course of the last 18 months. The absence of such swaps going forward combined with today’s low interest rate environment means that the trend of improving financing costs and, as a consequence, earnings, will continue through 2016 and beyond.

This is consistent with our stated strategy of rapidly deleveraging our balance sheet to unlock value to our shareholders. To that end, we reduced our outstanding debt by 85.4 million in the fourth quarter of 2015 and 243.2 million in 2015.

Further, we continue to prudently evaluate the assets on our balance sheet and recorded an impairment charge of 41.1 million in the fourth quarter of 2015 in relation to 12 older vessels in our fleet as well as one vessel held for sale as of December 31, 2015, which was subsequently sold last month. This charge is reflected in our adjusted net income reconciliation as described further in this earnings release.

The fundamentals of the container market remain very challenging. For the first time since 2009, the Asia to Europe route, the most important trade lane in terms of TEU miles, contracted by almost 3% in 2015. Moderate improvements in other trade lanes resulted in an increase in overall container trade growth of 2.5% in 2015.

Supply growth in excess of 7.5% clearly outpaced demand, resulting in a blended 30% decrease in average freight rates per TEU across the industry. The idle fleet is now edging above 7% reflecting the efforts of the industry to manage overcapacity.

Newbuilding orders have also come to a halt. TEU newbuilding capacity scheduled to be delivered in 2016 is expected to be lower than 2015, while scrapping activity, which was rather low in 2015, is anticipated to accelerate in 2016. As a result, we expect fleet growth to be in the region of 5% for 2016, which will help to correct the current imbalance.

Growth in the container trade very rarely trails global GDP growth and has historically grown at a multiple of global GDP growth. This past year was a bit of an anomaly as the 2.5% annual growth in container trade trailed global GDP growth of 3%. This was primarily due to macroeconomic reasons, including the impact of the sharp decline of commodity prices on emerging market economies, the considerable depreciation of the euro against the U.S. dollar and the Chinese Yuan and the impact of the Russian trade sanctions.

With global GDP growth currently projected at around 3.5%, we are reasonably optimistic that the container trade growth multiple will revert to levels above 1 and improve to the 1.4 level we saw in 2014. A more balanced demand-supply relationship for 2016 should keep the market flat for the next year until excess TEU capacity starts being absorbed in 2017, when the container market fundamentals are expected to begin to improve.

Danaos has very limited exposure to the current weakness in the market. As of the end of 2015, the average charter duration of our fleet was 7.2 years, weighted by aggregate contracted charter hire, with our longest charters extending through 2028. This equates to contracted operating revenues of 3.2 billion and charter coverage of 95.2% in terms of operating revenues in 2016, assuming continued performance by our charterers on existing contracted terms. We are also fortunate that our 5,571 daily operating cost for the fourth quarter clearly positions us as one of the most efficient operators in the industry.

During this period of market weakness, we continue to evaluate attractively priced acquisition opportunities, without diluting shareholders, through Gemini Shipholdings Corporation, a joint venture in which Danaos holds a 49% ownership interest. Gemini has acquired four vessels thus far, including a 6,500 TEU containership that was delivered on February 4, 2016 and commencing a three-year charter at an attractive rate.

Amidst this challenging economic environment, we will remain singularly focused on improving earnings, delevering our balance sheet, managing our fleet efficiently and capitalizing on the resilience of our business model in order to create 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, John, and good morning again, to everyone, and thanks again to all of you for joining us this morning. I will briefly review the results for the quarter and then open the call to questions.

During the fourth quarter, we had an average of 56 containerships compared to 55.2 containerships for the fourth quarter of 2014. As previously mentioned, Danaos also holds a 49% interest in Gemini Shipholdings Corp, and ended the forum during the third quarter of 2015 that has already acquired two 5,500 TEU and two 6,500 TEU containerships.

Our adjusted net income was 47.2 million or $0.43 per share for the quarter, more than double to the 23.5 million or $0.21 per share of adjusted net income for the fourth quarter of 2014. This improvement is mainly attributed to the 20.4 million decrease in net financing costs, together with a 2.6 million increase in operating revenues between the two periods.

Our financing costs will continue to improve in the coming quarters as we continue to delever our balance sheet and take advantage of the low interest rate environment, which is expected to persist.

Operating revenues have increased by 1.8% or 2.6 million to 143.3 million in the current quarter compared to 140.7 million in the fourth quarter of 2014. This increase is mainly attributed to 1.5 million of incremental revenues due to the higher number of vessels in our fleet between the two periods, and 1.3 million of higher revenues due to improved rechartering of certain vessels at higher rates than what they were previously earning.

Vessel operating expenses remained stable at 27.7 million in the current quarter compared to 27.8 million for the fourth quarter of 2014. The average daily operating cost per vessel decreased by 1.7% to $5,571 per day for the current quarter from $5,669 per day for the fourth quarter of 2014 remaining as one of the most competitive in the industry.

G&A expenses increased by 0.2 million to 5.7 million in the current quarter from 5.5 million in the fourth quarter of 2014, mainly as a result of the higher average number of vessels in our fleet between the two periods.

Interest expense decreased by 11.1% or 2.1 million to 16.9 million in the current quarter compared to 19 million in the fourth quarter of 2014. The decrease in interest expense was mainly due to lower average indebtedness between the two quarters of 228.2 million to 2.8 billion in total in the current quarter from 3 billion of average indebtedness in the fourth quarter of 2014, as well as a decrease in the cost of debt servicing between the two quarters mainly attributed to the accelerated amortization of our fixed rate debt, which bears a higher cost compared to our floating rate debt.

Realized losses on interest rate swaps decreased by 18.2 million to 8.3 million in the current quarter, a decrease of 68.7% when compared to losses of 26.5 million for the fourth quarter of 2014. This decrease is attributed to approximately 1.5 billion of lower average notional amount of swaps between the two quarters as a result of swap expirations.

Finally, adjusted EBITDA increased by 1.1% or 1.2 million to 105.7 million in the current quarter from 104.5 million in the fourth quarter of 2014, for the reasons outlined earlier on this call.

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, we are ready to open the call to Q&A.

Question-and-Answer Session

Operator

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Gregory Lewis of Credit Suisse.

Gregory Lewis

Thank you and good afternoon. Good morning, gentlemen.

John Coustas

Hi, Greg. How are you?

Gregory Lewis

Good. So, John, just to start off with – just looking at the write-down, you can kind of back into which vessels were written down. Just as we think about the opportunity for some of the – as we think about some of the opportunity for the early 2000 built vessels that are still in the fleet, could we see write-downs of those assets also? I guess I’m just kind of curious what really drove the write-down?

John Coustas

Well, the write-down wasn’t pre-2000 built vessels. Typically, a number of – mainly the eight smaller 2,200 TEU vessels, which were built around 1998. So that’s really the bulk of this kind of write-down. We think that the vessels will cross 2,000 vessels still have considerable value despite let’s say the recent weakness in the market. We don’t really anticipate any kind of scrapping on that part of the fleet.

Gregory Lewis

Okay, so those were Korean built vessels. Was that primarily a function of their age, where they’re being discriminated against, maybe not as good on the fuel side or was it more a function of their size?

John Coustas

I think it’s more of a function of their size and age, of course. Although to be honest that part of the market is under-built, however, because these vessels started with a relatively high book value, we wanted to be prudent in our, let’s say, assumptions. Also bear it in mind that these vessels have only, let’s say, less than two years of remaining charter. And we would like now to manage proactively our balance sheet.

Gregory Lewis

Okay, perfect. Great. And then as we think about the Gemini joint venture, it seems like a day doesn’t go by where we don’t peer or there’s not a press release about a German KG that’s looking at potentially unloading some of its tonnage whether – it is bulk but it is containerships as well. Are there potential acquisition opportunities of quality containership tonnage or is mainly a lot of the tonnage that’s coming for sale maybe we’ll call it Tier 2 and not Tier 1. I guess what I’m trying to figure out, are there Tier 1 acquisition opportunities or is it primarily – maybe there’s an issue with the building of the ship, maybe the yard is a little bit less of quality than maybe some of the more high quality yards in the industry are. If you could just sort of provide some color around that.

John Coustas

Actually you know what happens in a bad market, people try to sell their better assets because these are the ones that actually have a chance of getting sold. It’s during a good market that whatever junk that floats gets a high valuation and people are selling it. So in a bad market it’s much easier to become [indiscernible] all the tonnage that we have picked up through Gemini, all top Japanese bulk vessels.

Gregory Lewis

Okay. And so you expect – as the group thinks about with its joint venture with Gemini moving forward in 2016, that’s going to remain the focus?

John Coustas

Yes, for the time being that will be the focus of any growth if we find any interesting opportunities.

Gregory Lewis

Okay, gentlemen, thank you very much for the time.

John Coustas

Thank you, Greg.

Operator

Thank you. The next question comes from Charles Rupinski of Seaport Global.

Charles Rupinski

Hi, John and Evangelos. Good afternoon.

John Coustas

Hi, Chuck. How are you?

Charles Rupinski

Good, thank you. Congratulations on the quarter by the way and the beat. A question I had – just a couple of questions. First is, as far as the Gemini JV, I noticed that the vessels where you’re basically roughly 5,500 to 6,500 TEU type range. Is this amount just being opportunistic or is there a potential for you to maybe buy some smaller geared vessels or is it just really on a case-by-case basis in terms of the size of vessels you’ll be looking at?

John Coustas

It’s more on a case-by-case vessel. We definitely believe that these kind of smaller post-panamaxes they definitely have a niche in the future. What we do not touch is panamaxes because we never believed really that these ships have any significant value past, let’s say, where Panama Canal ability which actually is not going to be longer needed after I think the second half of the year.

Charles Rupinski

Right.

John Coustas

And really what we’re trying to do is to buy assets that we can manage properly the residual risk and that [indiscernible] for what we’re trying with Gemini, with charters that we are getting for these ships really is to bring significantly down any kind of residual risk they may have.

Charles Rupinski

Okay, great. Well, thanks for the explanation and once again, congratulations on the quarter.

John Coustas

Thanks, Charles.

Operator

Thank you. [Operator Instructions]. The next question comes from Mark Suarez with McQuilling Holdings.

Mark Suarez

Hi, John and Evangelos. Thanks for taking my questions here.

John Coustas

Good morning, Mark.

Mark Suarez

Maybe we can go back to your recent transactions to the Gemini joint venture. I know that you talked about bareboat agreements at one point and I think you have a couple of them and you’re straight at buyouts. I’m wondering if you can maybe talk about the NYK deal, the latest one you’ve done, what sort of arrangement do you have there? And what’s the rate above market levels and if maybe you can talk a little bit about that transaction?

John Coustas

Yes. First of all, this is let’s say a transaction which was done although it was let’s say kind of consummated very recently. It’s been agreed as early as last October. So, for us it’s a very accretive transaction, because we are getting the ship with a three-year charter at a rate that practically leaves very, very little residual risk and this is let’s say the core of the strategy we want to take. We want to get quality assets as lowest as possible and take advantage of the market upturn when it comes.

Mark Suarez

Okay. And as you go forward, I know one of the questions touched on this, but I just wanted to get more clarity. As you look at your strategy within these joint ventures and you look at the market today, are you seeing opportunities sort of in the 10 to 15-year range where you can go in and buy charter attached vessels at reasonable valuations? I’m wondering if you can maybe talk about which segments are you seeing the greatest opportunity right now given idle ships has actually gone up to maybe now 7% and how that dynamic has changed this last quarter?

John Coustas

There continues to be opportunities with that and we are continuously exploring opportunities with various parties. Despite what’s being said about, let’s say, the KG market, we have seen that still the banks are not there to sell the ships, let’s say, in distress. They still want, let’s say, relatively higher valuations in exchange of providing very soft finance. And that’s against our strategy because we are interested not in just creative financing but we’re interested in bottom line, let’s say, price. And in this respect we’re not prepared to pay an extra on the price for a ship purely because there is, let’s say, attractive financing because that really limits the upside potential that we have for these assets.

Mark Suarez

Okay, that’s fair enough. And I guess finally my question, as I look at daily operating expenses and we talked about this in the past, you seem to always be ahead of the curve and ahead of your competitors. And I’m wondering how much of that is currency driven, vis-à-vis solid cost control, and why is it that as we look at this space, you always seem to come significantly better than your competitors?

John Coustas

Well, that’s really our secret of our competitive advantage. That’s our experience. That’s the hands-on management that we have always possessed. And we believe that we have operation wise the best team in the market.

Mark Suarez

Okay. Guys, I appreciate your time as always. Thanks.

John Coustas

Thank you very much, Mark.

Operator

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

John Coustas

Okay. Thank you, operator. Thank you all for joining this conference call and your continued interest in our story. We look forward to hosting you in our next earning calls. Have a nice day.

Operator

Thank you. This concludes today’s conference. We would like to thank everyone for their participation. Have a wonderful afternoon.

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