Danaos Corporation (NYSE:DAC)
Q2 2016 Earnings Conference Call
August 2, 2016 9:00 a.m. ET
John Coustas – CEO
Evangelos Chatzis – CFO
Gregory Lewis - Credit Suisse
Andreas Brock - Coeli
Mark Suarez – McQuilling Holdings
Good day, and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the three months ended June 30, 2016. 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.
Mr. Chatzis …
Thank you. 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 speak and 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 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 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 2016. We’re pleased to report yet another strong quarter with adjusted net income of $47.7 million, or $0.43 a share, an increase $9.7 million, or 25.5% from the adjusted net income of $38 million, or $0.35 a share reported for second quarter 2015. This increase is mainly attributable to a reduction in net finance cost of $12.7 million resulting from the expiration of interest rate swaps and lower debt balances and is partially offset by a $3.2 million reduction of our EBITDA for reasons described in the discussion of our financial results.
The continued deleveraging of our balance sheet, combined with expiration of all the expensive legacy interest rates swaps, particularly given the current low interest rate environment, will result in continuously improving financing costs well in 2016 and beyond.
The containership market continues to be extremely challenging, but is now moving sideways, an indication that we have likely reached the bottom. The idle fleet now stands at approximately 6%, with global fleet utilization hovering around 75%. The charter market as well as asset values have fallen to historical lows as liner companies in an effort to contain costs are releasing surplus charters in capacity and seeking charter concessions and flexible hire periods from the vessel owners. We anticipate the market environment to remain unchanged for the remainder of the year. Although weak, we will also start to experience the effect of the expanded Panama Canal, which will shift demand from Panamax to post-Panamax vessels.
We are cautiously optimistic that market fundamentals will gradually begin to improve by the spring of 2017. A combination of anticipated improving world GDP growth and declining growth in the containership fleet, will naturally begin to balance the market. Additionally, there is an expectation that consolidation with the liner industry through alliances and otherwise, will create stability and encourage freight rate discipline which will hopefully put an end to the losses the liner companies had been reporting over the last quarter.
On July 15, 2016 the transaction through which existing shareholders of Hyundai Merchant Marine were affectively wiped out. We entered into an agreement with HMM to reduce its charter rates by 20% for the next 3 and a half years in exchange for $39 million in debt notes maturing in 2024 and $4.6 million in common shares in HMM that are expected to be fully tradeable on the stock market division of the Korean exchange. After the agreed 3 and a half year period, the original contracted rate will be restored. We believe this agreement has been structured in a manner that preserves the value of our charters and we are pleased to embrace an outcome that will strengthen the financial profile of one of our important counterparts.
Separately, Hanjin Shipping has publicly announced its intention to restructure its balance sheet and seek concessions from charter owners. Discussions are ongoing and we cannot speculate on timings or nature of the resolution.
Danaos continues to have minimal near term exposure to the weak spot market, with 95% charter cover in terms of operating revenues for the next 12 months. Additionally, our continued focus on cost containment has reduced our daily operative cost to $800 a day for the second quarter. This clearly positions us as one of the most efficient operators in the industry, which is particularly beneficial in today's environment.
Amidst this challenging economic environment, we remain singularly focused on preserving value, de-levering our balance sheet, managing our fleet efficiently and capitalizing on the resilience of our business model.
With that, I’ll hand over the call back to Evangelos who will take you through the financials for the quarter. Evangelos?
Thank you and good morning again to everyone. I will briefly review the results for the quarter and then open the call to Q&A. During the second quarter, we had an average of 55 container ships compared to 56 container ships during the second quarter of 2015. Danaos also holds a 49% interest in Gemini Shipholdings Corp and entity forms during the third quarter of 2015 Danaos acquired 4 container ships.
Our adjusted net income was $47.7 million or $0.43 per share for this quarter, an increase of 25% when compared to the $38 million or $0.35 per share of adjusted net income for the second quarter of 2015. The improvement is attributed to a $12.7 million decrease in net finance costs, partially offset by a $3.2 million decreasing in EBITDA between the 2 periods.
Operating revenues decreased by 3.2% or $4.5 million to $137 million in the current quarter compared to $141.5 million in the second quarter of 2015. This decrease is attributed to $0.6 million of low revenues due to the sale of Federal in the first quarter of 2016, $2.6 million of lower revenues due to re-chartering of certain vessels at lower rates compared to the second quarter of last year and $1.3 million of lower revenues due to lower fleet utilization between the two quarters.
Vessel operating expenses decreased by 5.4% or $1.6 million to $28 million in the current quarter compared to $29.6 million for the second quarter of 2015, as a result of the decrease in the daily operating cost per vessel to $5,800 a day this quarter from $6,018 per day in the second quarter of 2015.
G&A expenses remained stable at $5.4 million for both the current quarter and the second quarter of 2015. Interest expense, excluding amortization of deferred finance costs, decreased by $0.3 million to $17.4 million in the current quarter, compared to $17.7 million in the second quarter of 2015. The decrease in interest expense is due to lower average indebtedness between the 2 quarters of $0.2 billion to $2.7 billion in the current quarter from $2.9 billion in the second quarter of 2015. As mentioned earlier, our financing costs will continue to improve in the coming quarters as we continue to de-lever our balance sheet and take advantage of the low interest rate environment, which is expected to persist.
Realized losses on interest rates swaps decreased by $12.4 million to $2.1 million in the current quarter, a decrease of 85% when compared to losses of $14.5 million for the second quarter of 2015. And the decrease is attributed to approximately $600 million of lower average notional amount of interest rate swaps between the 2 quarters as a result of the aforementioned swap explanations.
Finally, adjusted EBITDA decreased by 3.1% or $3.2 million to $99.9 million in the current quarter from $103.1 million in the second quarter of 2015 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. Operator, we are ready to open the call to Q&A.
Absolutely. [Operator Instructions] Our first question comes from Gregory Lewis of Credit Suisse. Please go ahead.
Thank you and good afternoon. Hey guys. So it looks like we're moving forward on putting the HMM behind us. In the prepared press release, it talks about the shares being freely tradable. Is that -- once these, once you receive the stock, is there any restrictions on your ability to monetize those shares that you're receiving from HMM?
No, there is no restriction. There’s so no hold up period. So practically we will take a decision on what to do with these shares depending on how we see the trading of the shares in the market once they become freely available.
Okay, great and then just as I think about, I seem to remember this happening before with the Zim, where you received equity ownership in the company. Is that something that Danaos still owns? Is there any way to monetize the ownership that the company has in Zim?
Well, in Zim the whole idea in order for people to monetize their shares was to make an IPO. And that was actually the plan for last year, but given the dire situation of the market, there are no --- it was not possible to float the company. So this is still let’s say the plan, but it will probably have to wait until really the liner market recovers.
Okay. So really just on hold, but still something that the company is hopeful of achieving on. And then just one final one for me. As I think about -- we’ve seen a lot of, a lot more partnering of the liner companies, which I guess should give them more of a better pricing. As we’ve seen these, as we've seen liner companies merge or sort of form these alliances to work together. How should we think about how container shipping charter owner such as yourselves benefit in that market? The reason I ask is it just seems like they're going to be trying to do more with less.
Well, it's not a question of more with less. If you had a certain capacity I mean among the partners, if you want to carry among the partners 10,000 TEU a week, you will need a 10,000 TEU ship. Where you make alliances is the whole -- I mean the reason we do it is because you do not have let's say the sales power to fill up an 18,000 or 13,000, 14,000 TEU ship, and you need many more to fill up the ship, and at the same time provide a frequency to your customers which is acceptable. It is a different thing for one company to have [indiscernible] 10,000 TEU alone on their one weekly sailing. Quite different thing to offer let’s say with partners for -- Let’s say five weekly sailings by taking one pick per day.
So it doesn't really -- What really the alliances do is that they increase the size of let’s say the ships that are actually required and to a certain extent, the fact that Masco went for the larger ships, and the others of course had to follow to get the economies of scale, means that they need to have also larger alliances to fill up the ships.
Okay. Hey, perfect. Thanks. Thank you very much, John. Have a good rest of summer.
And our next question comes from Andreas Brock of Coeli. Please go ahead.
Thank you. Hi, this is Andreas Brock from Coeli in Stockholm, Sweden. I have a question first on the charter rig. If we look at new charters in the industry that have been negotiated in, let’s say the last 2, 3 months, are they showing an upward trajectory?
No. It’s just I think that rates today are practically flat at all-around OpEx levels, because container ships are not light, really light -- they’re [bulky]. We employ container ship in general you employ for a certain period of time, and otherwise you lay it up. So it's not like the bulk market that you may wait for a swing and you may get a couple of good months and recover. Container ship market, it's either you lay up the ships or raid up OpEx so if it doesn't make to operate let’s say OpEx let’s say 3, 6000 or let's say it's a panama vessel, you operate at 6000. You cannot operate a 3,000. You will lay up the ship.
And if your look around in the industry, there hasn't been any -- you’re basically saying the cost today is that we’re bottoming out now at this level, but have there been any signs that actually rates are picking up going forward?
I don't really see any significant no, either rates picking up, or just situation it’s stable at the bottom. There is kind of demand, but at very low levels, and I’ll also -- Yeah, and we have the Panama Canal, the New Panama Canal that is open, and we have to wait and see how this is going to affect mainly the whole Panamax and post-Panamax market from the smaller post-Panamxes.
Fair enough. If I think one 18 to 24 months out, so sooner or later, charter rates will pick up, business we can get stronger, and you’re saying that sometime early spring 2017 become much more of a balanced market. How do you think about your balance sheets? Debt is coming down very nicely. Thank you for that. Is Danaos is a company that could start resuming dividend payments in 18 to 24 months?
I cannot really speculate because as you see, apart from the market, we had also another let’s say event with our charterers that was not let's say within our plans. So we don't know for example how the handling situation will end up and in this respect, it's very difficult really to speculate on when and if we’ll be able to pay dividends.
And the final question for me, in this negotiation with Hyundai now, do you feel that you've been adequately compensated for the concession you’ve given?
It’s not a question of adequately. Here it's a situation that everybody wants Hyundai to remain with us. I think that it was the best under the circumstances.
Fair enough. As a shareholder, I'm very happy about that deal. So thank you very much and I'll get back in the queue. Thank you John.
[Operator Instructions] Our next question comes from Mark Suarez of McQuilling Holdings. Please go ahead.
Good morning gentlemen and thanks for taking my call. I just want to sort of pick up on the restructuring environment right now that we’re seeing from a lot of the liner companies, with obviously HMM and Hanjin. How do you see that playing out? Do you see -- as we see this space here, there’s other candidates that have fairly weak balance sheets and I’m expecting to see more of these restructuring cases announced over the next 6 to 12 months, maybe not among the larger ones but especially among the, maybe among the small to midsize liner company. Do you see that as well? Do you see that a situation where there might be a cascading effect where you see more of these announcements coming up over the next 6 to 12 months?
It’s very difficult really to speculate for the time being. We're looking at Hanjin. I don't really know what will happen after.
Okay and so given that you know we're beginning to see some financial distress, are you beginning to see maybe some interesting opportunities on the sale respect from liner companies where you can come in and maybe get some good value out of vessels on the medium to long term charters? Is that something you're beginning to see now and inbound calls from maybe distressed opportunities?
I don't really see. There are no kind of distressed opportunities today because mainly the financing costs of the owners in general are higher than the financing costs of the liner companies. So, it doesn't really make any sense. Only when the ECAs are enforced, then which are giving let’s say some kind of good rates, only in this situation maybe we then have let's say some kind of competition in re-buildings. And then again, there’s also a question of that’s why we haven't seen any deals floating around.
Got you. Understood. Then specifically on HMM, I know you mentioned it in your initial remarks, in the 20% for the next 2 and a half years. Should we think of this as a linear reduction year over year or is this going to be lumpy one year and then sort of flat in another?
No, it's not linear. It's just a step down 20% over the next 20% -- next 3 and a half years 20% and then stepping up again at the original rate.
Okay, I just wanted to be clear on that. Okay, and then …
But bear in mind, Mark, just to clarify, bear in mind that 8 out of the 13 HHM ships have charters that expire within the next 12 to 14 months. So the reduction there would not be for 3 and a half years simply because the charter expired.
It would be for less. Yeah.
And then I guess finally on the amort schedule, I guess you’re still in line with what you expected at the beginning of the year in terms of your schedule repayment. Nothing has changed in that regard. Is that a fair assumption?
The rescheduled repayments depend as we had kind of a cashless sweep mechanism. It will all depend off how all these -- I mean now we know with HMM where do we have a clarity. We’ll have to wait and see what will happen. We continue to have clarity on all the other repayment issues.
Okay, that's what I thought, but I just – Okay, thanks. I appreciate the time as always.
It appears that we have no further questions. I would like to turn the call back over to Dr. Coustas for any further comments or closing remarks.
Thank you all for joining this conference call and for your continued interest in our story. We look forward to hosting you on our next earning calls. Have a nice day.
Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.
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