Danaos Q4 2023 Earnings Call Transcript

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February 14, 2024

Key Takeaways

  • The Red Sea conflict and rerouting around the Cape of Good Hope has increased ton-mile demand, driving box rates up by as much as 300% and allowing Danaos to secure additional charters at healthy levels.
  • Danaos completed delivery of all seven agreed Capesize vessels in Q4 2023 and agreed to acquire two more Capesizes while also ordering two additional 8,258 TEU methanol-ready container ships, signaling continued fleet diversification and growth.
  • Adjusted EPS remained steady at $6.99, but adjusted net income decreased by $5.7 million year-over-year, primarily due to a $9.6 million increase in voyage operating costs and a $3.2 million drop in operating revenues.
  • The company’s net debt declined to $138.7 million, with a net debt to adjusted EBITDA ratio of just 0.2x, and it holds $272 million in cash plus $609 million in total liquidity, providing strong financial flexibility.
  • Danaos’ contracted cash revenue backlog stands at $2.3 billion with 95.8% coverage for 2024 and 62% for 2025, offering solid revenue visibility into the next two years.
AI Generated. May Contain Errors.
Earnings Conference Call
Danaos Q4 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good day, and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the 3 Months Ended December 31, 2023. As a reminder, today's call is being recorded. Hosting the call today is Doctor. John Coustas, Chief Financial Officer of Danaos Corporation and Mr. Evangelos Hatzis, Chief Financial Officer of Danaos Corporation.

Operator

Doctor. Coustas and Mr. Hatzis will be making some introductory comments, And then we will open the call to a question and answer session.

Speaker 1

Thank you, operator. Good morning, 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 results are discussed in our filings with the SEC and we encourage you to review these detailed Safe Harbor and risk factor disclosures.

Speaker 1

Please also note that where we feel appropriate, we will continue to refer to non GAAP financial measures such as EBITDA, Adjusted EBITDA, adjusted net income, time charter equivalent revenues and time charter equivalent dollar income per day 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 Doctor. John Coustas, who will provide a broad overview of the quarter.

Speaker 2

Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for the Q4 of 2023. Danaos continues to deliver strong results in the Q4 of 2023 as geopolitical events continue to impact Global Shipping Markets. Mostly recently, the conflict in the Middle East expanded to the seas with attacks on vessels in the Red Sea area. These dramatically older trade routes and the performance of liner companies As most major companies decided to reroute their vessels away from the Suez Canal, sailing longer distances around the Cape of Good Hope to reach Europe.

Speaker 2

This in turn increased ton mile demand leading to capacity shortage that drove box rates significantly higher up to 300%, while it's expected that box rates will remain elevated as long as the disruption continues. Against this backdrop, we have some secured additional charters for our vessels at very healthy levels. In the Q4 of 2023, Danaos completed delivery of all 7 Capesize vessels that we had agreed to acquire earlier in 2023. Subsequent to the end of the year, we entered into agreements to acquire 2 additional tank size vessels As we continue to diversify our revenues and look to capture upside from a healthy dry bulk market, The market for Capesize vessels showed unusual season of strength as Brazilian iron ore exports increased, coal trade remains elevated, Demand for minor bulks like bauxite and agricultural commodities is following global recovery. Recent stimulus measures in China aimed at supporting construction, infrastructure projects and consumer demand is expected to keep demand steady as fleet growth begins to slow over the next 2 years.

Speaker 2

We continue to explore interesting opportunities in the dry bulk sector. Danaos has also recently ordered 2 more 8,258 TEU vessels at Yangtze Yangtzeberg And we have now a total of 4 vessels under construction at that yard with delivery schedule for second half of twenty twenty six and Q1 of 2027. All 12 vessels in our newbuilding program are methanol ready and are designed with the latest echo characteristics. Demand for shipyard delivery slots is very high as the industry is quickly moving to reduce carbon emissions by operating green vessels. As we continue to execute our strategy, we remain focused on taking actions that will ultimately benefit our shareholders.

Speaker 2

Nanos is well positioned with a very strong balance sheet and significant revenue visibility into 2025. This provides us with the flexibility to return value to our shareholders through dividends and share repurchases and also pursue opportunities to ensure the long term resilience of the company. With that, I'll hand over the call back to Evangelos who will take you through the financials for the quarter. Evangelos?

Speaker 1

Thank you and good morning again to everyone. I will briefly review the results for the quarter and then we will open up the call for Q and A. We are reporting adjusted EPS for the current quarter of $6.99 per share or $136,000,000 compared to $6.99 per share of EPS for the Q4 of 2022 or $141,700,000 This decrease of $5,700,000 in adjusted net income between the two quarters is primarily the result of a $9,600,000 increase in total operating costs mainly due to the recognition during current quarter of voyage costs related to voyage charters of our drybulk Capesize fleet and a 3 $200,000 reduction in operating revenues mainly due to vessel disposals and non cash revenue recognition accounting, All that being partially offset by a $6,900,000 improvement in net finance costs, driven by the significant deleveraging of our balance sheet. Vessel operating expenses remained almost the same to $40,100,000 in the current quarter compared to $40,000,000 in the Q4 of 2022. And while our daily operating costs decreased to $6,188 per day Compared to $6,417 per day for the Q4 of 2022, OpEx increased due to the increasing the average number of vessels in our fleet.

Speaker 1

Our operating costs continue to remain among the most competitive in the industry. G and A expenses increased in Q4 by €7,500,000 mainly due to increase in stock based non cash costs and they came in at $22,400,000 in the current quarter compared to $14,900,000 in the Q4 of 2022. Interest expense excluding amortization of finance costs decreased by $7,800,000 to $3,100,000 in the current quarter compared to $10,900,000 in the Q4 of 2022. The decrease in interest expense is a combined result of a $5,400,000 decrease in interest costs Because of deleveraging, our average indebtedness review was lower by almost $400,000,000 between the two periods. And all that was partially offset by an increase in the cost of debt service by approximately 130 basis points as a result of rising interest rates.

Speaker 1

And we also had a $2,400,000 decrease in interest expense due to capitalization of interest on our vessels under construction. At the same time, interest income came in at $2,700,000 effectively covering almost 90% of our interest expense for the current quarter and this effectively reflects the almost net debt zero position that we have today. Adjusted EBITDA decreased by 2.2 percent or $3,800,000 to $172,600,000 in the current quarter $176,400,000 in the Q4 of 2022 for regions that have been already outlined earlier on this call. We also encourage you to review our updated investor presentation that is posted on our website as well as subsequent events disclosures. I will mention a few of the highlights.

Speaker 1

Our contracted cash revenue backlog remains strong at $2,300,000,000 with a 3 year average charter duration, while contract coverage is at 95.8% for 2024 62% for 2025 in terms of operating days coverage. Our investor presentation has analytical disclosure on our contracted charter book that you can refer to. As of December 31, 2023, our net debt is down to 138,700,000 And in the current interest rate environment, this low net debt position shields us from high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio stood at 0.2 times while 51 out of our 75 vessels are currently unencumbered and debt free. Finally, as of the end of the Q4, cash was at $272,000,000 while total liquidity including availability under our revolving credit facility, stood at €609,000,000 giving us ample flexibility to pursue accretive capital deployment opportunities.

Speaker 1

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 and A.

Operator

Thank you very much. We will now begin the question and answer session. The first question today comes from Omar Khokta with Jefferies. Please go ahead.

Speaker 3

Thank you. Hi, John and Evangelos. Good afternoon. Just have a couple of questions for you. You've obviously added the 5 charters on those 5000 to 6000 TEU ships at better rates and terms and I think a lot of it's expected coming into the year, especially given where the market was at the end of 'twenty three, it looks like Each of those has gotten about a year or so of duration.

Speaker 3

I wanted to ask what's the liner appetite looking like right now? You mentioned freight rates being elevated and they'll continue to be so as long as the Red Sea diversions are in place. How is the appetite now for further chartering? Is there a specific vessel class that you see liners targeting at this point?

Speaker 2

Well, Omar, it's We do not really of course, due to the shortage at present, everybody is interested in prompt vessels, and we have practically nothing Until year end, maybe 1 or 2 ships in the second half. So really, I cannot really tell you. What is definite is that there is significant demand from all liner companies for modern vessels for even for future 25 or 26 deliveries, but that's for the very modern vessels. And there is significant demand for the, Let's say the other 6 new buildings that we do not have, let's say presently committed and we are in negotiations for all of them.

Speaker 3

Thank you. Thanks for that. And then maybe just a follow-up. Obviously, you've been expanding kind of opportunistically within the dry bulk segment. You've got the 9 Capes now.

Speaker 3

It looks like containers are still the core business. You do have plenty of liquidity and flexibility. Just wanted to get a sense of any thoughts on where you see the Cape Going from here in terms of size, is there a certain critical mass you're trying to get that segment up to?

Speaker 2

It's as we said, we are going into this segment In order to, let's say, to build it up, of course, as I've already said a number of times, The dry bulk market is quite cost sensitive and we're not going to chase the market up Already, I mean, the prices in the market at least for the first, Let's say 7 ships that we got is at least, let's say, 15%, maybe 20% up in some instances. So we are pretty careful. Of course, it's a segment that we want to grow, but we will do it in a kind of a measured way. There is no hurry for that. Our main business will continue to be, let's say, the container segment where we have our competitive edge.

Speaker 2

And we will move cautiously as we have always done.

Speaker 3

Makes sense. Yes, thank you. And one final one and I know it's a bit sensitive, but just wanted to ask in terms of the Eagle Bulk holding you have, it's gone up nicely in value since you took the stake. Anything you're willing to say about the planned merger With Star Bulk, do you see this holding as sort of a core long term investment or is this more of an opportunistic trade?

Speaker 2

We have not really decided really how we're going to handle that. For the time being, we do not have any, let's say, Any reason to get out of this investment and We will see how it develops.

Speaker 3

Okay. Thank you. That's clear enough. All right. Thank you, John.

Speaker 3

I'll turn it over.

Speaker 2

Thank you.

Operator

Thank you. The next question is from Clement Mullens with Value Investors. Please go ahead.

Speaker 4

Good morning. Thank you for taking my questions. I wanted to start by asking about the Capesizes you have added over the past few months. Utilization during the quarter was at that lower than expected. Could you provide some commentary on the drivers behind that?

Speaker 4

Was it due to the delivery of the vessels? And secondly, could you give us some insight on utilization you expect to realize in the Q1?

Speaker 1

Yes. Let me take that. We 1st of all, we took delivery of the vessels during Q4, right? And upon taking delivery, we performed certain repairs on the vessels to bring them up to our standards. So there were certain scheduled days that the vessels were off hire.

Speaker 1

Hence, The 82% almost percent utilization that you see now is not indicative of how the vessels will be utilized. There are the vessels are scheduled to some of them to go to dry dock in Q1 and Q2 and Q3 of this year. So there we may may expect to have 2 or 3 weeks of downtime, but other than that, we expect them to be fully utilized.

Speaker 4

Thanks for the color. I also wanted to ask about the new builds, the 2 new builds you filed recently and the ones that remain on fixed. Should we expect a charter announcement in the foreseeable future or do you plan on waiting until closer to delivery before securing a charter?

Speaker 2

We are already in discussions. So Yes. We may very well announce something, but we don't have for us Most companies in order to contract vessels wanted to have a charter beforehand. I mean for us and with the strength of our balance sheet that practically We can practically buy the vessels with existing liquidity and we don't need financing. We can wait as long as we want if we do not find the rates that makes sense to us.

Speaker 2

So we can always wait. Modern vessels are definitely scarce and we believe that our strategy on the back of the long term charter where your return rates are pretty squeezed.

Speaker 4

Makes sense. That's all for me. I'll pass it over. Thank you for taking my

Speaker 3

questions. Thank you.

Operator

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

Speaker 2

Yes. Thank you all for joining us on this conference call and your continued interest in our story. Look forward to hosting you on our next earnings call. Have a nice

Operator

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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