Danaos Q1 2024 Earnings Call Transcript

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May 28, 2024

There are 4 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 March 31, 2024. As a reminder, today's call is being recorded. Hosting the call today is Doctor. John Coustas, Chief Executive Officer of Danaos Corporation and Mr. Evangelos Hatzis, Chief Financial Officer of Danaos Corporation.

Operator

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

Speaker 1

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, adjusted net income, time charter equivalent revenues and time charter equivalent dollars per day to evaluate our business.

Speaker 1

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 the broad overview of the quarter. John?

Speaker 2

Thank you, Evangelos. Good morning and thank you for joining today's call to discuss our results for Q1 of 2024. The container market continued to strengthen in the Q1 of 2024, a trend that has continued into the Q2. Both charter and box rates are gaining momentum, and we have completed all necessary re chartering activity in excess of our internal forecasts. The renewed optimism in the market extends to the longer term view of the charterers who are making charter commitments on newbuilding vessels with deliveries scheduled from 2025 through end of 2027.

Speaker 2

Following the recent placement of an order for an additional 28,250 TEU vessels for 2027 delivery, our newbuilding order book currently consists of 14 vessels totaling 108,000 TEU, 2 of which have already been delivered to us. More importantly, we have now secured multiyear chartering agreements for all our vessels on order, while we have also extended charters of certain existing vessels. As a result of this chartering activity over the past 3 months, we have added $423,000,000 to our contracted revenue backlog that today stands at $2,500,000,000 with an average charter duration of 2.9 years. All the vessels in our newbuilding order book are methanol ready, future proofing a portion of our fleet on green fuel usage. We have also arranged very conservative financing for the first 8 newbuildings at competitive rates to ensure that we are able to maintain a strong liquidity profile to support continued opportunistic fleet expansion.

Speaker 2

In our drybulk vessels segment, we've added an additional Capesize to our fleet, increasing our fleet to 10 vessels in total. We are continuing to explore ways to increase our exposure to this market. Of the economies around the world are performing relatively well and are displaying no signs of recession. The biggest risk to our market outlook comes from trade hurdles that various countries are putting in place in the form of tariffs and trade restrictions on energy as well as manufactured goods. Despite the positive short term impacts of these practices, we believe that will ultimately result in trade contraction in the longer term.

Speaker 2

In the meantime, our strategy has continued to result in consistent, solid results. We will continue to explore growth opportunities while ensuring the longevity of our investments for the benefit of our shareholders. With that, I'll hand the call over back to Evangelos who will take you through the financials for the quarter. Evangelos?

Speaker 1

Thank you, John, and again, good morning to everyone. I will briefly review the results for the quarter and then open the call to Q and A. This quarter, we are reporting adjusted EPS of $7.15 per share or adjusted net income of $140,000,000 compared to adjusted EPS of $7.14 per share or $145,300,000 for the Q1 of 2023. This $5,300,000 decrease in adjusted net income between the two quarters is the result of a $22,200,000 increase in total operating costs, mainly due to the recognition during the current quarter of voyage costs related to voyage charters of our drybulk Capesize fleet, partially offset by a $9,800,000 increase in operating revenues, a $3,700,000 improvement in net finance costs, mainly driven by the significant deleveraging of the balance sheet and a $3,400,000 net improvement on investments. Vessel operating costs increased by $2,500,000 to $43,100,000 in the current quarter from $40,600,000 in the Q1 of 2023 as a result of the increase in the average number of vessels in our fleet.

Speaker 1

While our daily operating costs decreased to $6,493 per day for the current quarter from $6,807 per day in the corresponding Q1 of 2023. Our operating costs continue to remain among the most competitive in the industry. G and A expenses increased by $3,400,000 to $10,200,000 in the current quarter compared to $6,800,000 in the Q1 of 2023, mainly due to an increase in stock based non cash costs. Interest expense, excluding finance costs amortization, decreased by $3,400,000 dollars to $2,600,000 in the current quarter compared to $6,000,000 in the Q1 of 2023. The decrease in interest expense is the combined result of a $1,000,000 decrease because of lower average indebtedness by approximately $100,000,000 between the two periods, partially offset by an increase in the cost of debt service by approximately 60 basis points as a result of rising interest rates.

Speaker 1

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 $2,900,000 which is higher than the $2,600,000 interest expense for the current quarter, excluding amortization of finance costs. Adjusted EBITDA decreased by 1% to $1,800,000 to $177,200,000 in the current quarter from $179,000,000 in the Q1 of 2023 for reasons that have already been outlined earlier on this call. We also encourage you to review our updated investor presentation that has been posted on our website as well as subsequent events disclosures. Let me summarize a few of the highlights.

Speaker 1

Following recent chartering activity, our contracted cash revenue backlog remains strong and actually has increased to 2,500,000,000 dollars with a 2.9 year average charter duration, while contract coverage is up 99% for 2024 69% for 2025. That is coverage in terms of operating days. Our investor presentations have analytical disclosures on our contracted charter book. As of March 31, our net debt is now down to $134,300,000 and obviously in the current interest rate environment this position shifts from high interest costs. Additionally, the company's net debt to adjusted EBITDA ratio came in at 0.19 times, while 50 out of our 76 vessels are currently unencumbered and debt free.

Speaker 1

Finally, as of the end of Q1, cash was at $324,000,000 while total liquidity including availability under our revolving credit facility and valuation of marketable securities stood at $748,000,000 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 and A.

Operator

The first question comes from Omar Khachta at Jefferies.

Speaker 3

Thank you. Hi, John and Evangelos. Good afternoon. Hi, Omar.

Speaker 2

Hi, Omar.

Speaker 3

Hi. Good. No, it looks like the business is coming along quite nicely here and quite a bit of a turnaround over the past several months. You obviously had the backlog and now it's gotten bigger. I think now that you've secured all 14 new buildings, including the latest orders from February March, you can the market's clearly gotten much stronger.

Speaker 3

You're now pretty much contracted for all of 24. You've got some open capacity in 2025. How would you characterize liner's interest today in securing those ships that open up in 'twenty five? Obviously, there's some forward fixing happening, especially as you've been able to fix the 27 delivery new buildings. But what about on the water ships?

Speaker 3

What's the appetite look like from your lens for ships that open up in 2025?

Speaker 2

Well, the appetite is pretty strong. We are already, let's say, negotiating 25 deliveries. I mean, ships that we have opened in 25. It's there is no doubt that part of the strength of the market has to do with the Suez Canal situation. This is not something that will last forever.

Speaker 2

But at least the way things look like, it will continue for, let's say, at least 2024. And overall, the whole combination of slowing speeds on some of the ships and the continued relative strength of trade and economies, they have led really to a situation of pretty solid demand.

Speaker 3

Yes. Thank you. And I guess with that backdrop and you mentioned it's definitely for 24, what's the interest from your side on additional new buildings given that you've been able to order ships and shortly thereafter get them contracted? And so what's your appetite for new buildings? And also maybe just kind of a perhaps qualitative question on those new buildings.

Speaker 3

Do you think it's more of the the methanol ready component that drove the charter interest in securing those well ahead of time or simply just a desire for liners to have ships that deep

Speaker 2

out? No, it's the methanol component is really irrelevant once there is no green methanol around. So and doesn't look it's going to be available before, let's say, 2,030, which is more or less the time horizon of, let's say, our charters. On the other hand, what is definitely important is that all these new vessels, which are Tier 3 and are much more economical than existing vessels is the main driving factor that will help charterers to meet environmental regulations and, on the other hand, reduce their costs through the lower fuel consumption.

Speaker 3

Yes. And maybe just thanks for that, John. Just a final one just on the dry bulk business. That investment has been very decent, I would say. You bought the 10 ks quite well.

Speaker 3

And just looking at sale and purchase values, you're up quite a bit nicely on that. What do you think is next for this business? You've got the 10 ships. Is it do you want to operate, harvest the cash flow, build it further or do you think monetizing it makes sense? Any sort of sense of how you think about that business?

Speaker 2

We definitely are here to stay in drybulk. We would like to have another, let's say, leg in the company. The only thing with drybulk is that it's a sector which is highly sensitive to cost. And if you go and commit today into very expensive new buildings, I'm not sure exactly how you're going to pay back. And I'm saying that because it's the fuel consumption on a Capesize today, let's say, the way that they are kind slow steaming is in the region of, let's say, around 30 tons per day, which is, of course, it's important, but it's nothing like the 70 or 80 tons that a medium sized container ship is consuming.

Speaker 2

So this gives, of course, to the container ship a much greater sensitivity to the cost of fuel and carbon eventually. In the bulk market, things are a bit more subdued, which, of course, is going to make a difference. But on the other hand, with high interest rates and high capital costs, it's hard to make let's say, to justify that.

Speaker 3

Yes. Thank you, John. Thanks, Evangelist. I'll turn it over.

Operator

This concludes the question and answer session. I would like to turn the call back over to Doctor. Coustas for any further comments or closing remarks.

Speaker 2

Great. Thank you all for joining this conference call and your continued interest in our story. We look forward to hosting you on our next earnings call.

Operator

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

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Key Takeaways

  • Container market strength: Charter and box rates gained momentum in Q1 2024, and Danaos completed re-chartering activity above its internal forecasts.
  • Newbuilding order book: Now comprises 14 Tier 3, methanol-ready vessels (108,000 TEU) with multiyear charters, raising contracted revenue backlog by $423 million to $2.5 billion at a 2.9-year average duration.
  • Strong balance sheet: Conservative financing for the first eight newbuilds helped reduce net debt to $134.3 million (0.19× net debt/EBITDA), with 50 of 76 vessels unencumbered and total liquidity of $748 million.
  • Stable earnings: Q1 adjusted EPS was $7.15 (adjusted net income $140 million), nearly flat year-over-year as higher operating costs were offset by increased revenues, lower finance costs, and better investment returns.
  • Dry bulk expansion: Added a tenth Capesize vessel, bringing the fleet to 10 ships, and plans to grow cautiously given high capital and fuel-cost sensitivity in that segment.
AI Generated. May Contain Errors.
Earnings Conference Call
Danaos Q1 2024
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