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Danaos Corp  (NYSE:DAC)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day and welcome to the Danaos Corporation Conference Call to do discuss the Financial Results for the Three Months Ended December 31st, 2018. As a reminder, today's conference 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. Dr. Coustas and Mr. Chatzis will be making some introductory comments, and then we will open the call to a question-and-answer session. Thank you.

Evangelos Chatzis -- Chief Financial Officer

Thank you, and 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 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 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.

With that, let me now turn the call over to Dr. Coustas, who will provide a broad overview of the quarter.

John Coustas -- President & Chief Executive Officer

Thank you, Evangelos. Good morning, and thank you for joining today's call to discuss our results for fourth quarter 2018.

The fourth quarter 2018 is the full -- first full quarter following the completion of our recent debt refinancing, which reduced indebtedness by $551 million, reset financial covenants and extended maturities to end of 2023. As mentioned before, the refinancing has strengthened the Company's balance sheet and growth prospects by removing all balloon payments and maturities of existing debt over the next five years.

Adjusted net income for the fourth quarter of 2018 was $36.6 million or $0.18 a share. $5.4 million or 17.3% higher when compared to fourth quarter of 2017. This improvement was primarily result of a $5.8 million decrease in net finance expenses combined with a $1.4 million increase in operating revenues due to improved rechartering rates and partially offset by a $1.9 million increase in total operating costs. Adjusted EBITDA for the fourth quarter of 2018 was $80.2 million or $0.2 million higher than fourth quarter of 2017.

Additionally, in the context of prudently evaluating the assets on our balance sheet, we recorded an impairment loss of $210.7 million in relation to the market value of certain of our Panamax vessels. The charter market for vessels larger than 5,000 TEU has recently shown encouraging signs of recovery, and the market for smaller vessels remains stable albeit at relatively low levels.

Anticipated slow steaming and redesigning of liner networks ahead of the implementation of new restrictions on sulfur emissions in 2020 together with vessels exiting service to be fitted with scrubbers are all positive supply side developments that may lead to improved charter rates. There has also been a continued abstention of new ordering as the market is still waiting on the outcome of trade talks to determine the demand side effects. Overall, we believe that the combined effect of these factors will be positive for the market outlook in the medium term from the second half of the year on wards.

Our total contracted revenues, as of December 31, 2018 were $1.6 billion, and we maintain our high charter contract coverage of 88% in terms of operating revenues and 74% in terms of operating days over the next 12 months. This insulates us from near-term charter market.

Danaos continues to be a leader in the container shipping industry on the back of a solid track record of operational excellence and technological innovation that allows us to continuously deliver high quality service to our customers. At the same time, the recently concluded refinancing transaction further enhances our ability to pursue growth opportunities and deliver value to 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 -- Chief Financial Officer

Thanks, and good morning again to everyone. I will briefly review the results for the quarter and then open the call to Q&A.

Adjusted net income of $36.6 million for the fourth quarter is higher by $5.4 million when compared to adjusted net income of $31.2 million for the fourth quarter of 2017. The main adjustments to net income this quarter were to adjust for an impairment loss of $210.7 million, as previously mentioned and deferred finance fees amortization of $5.6 million.

Operating revenues increased by 1.2% or $1.4 million to $115.6 million in the current quarter compared to $114.2 million in the fourth quarter of 2017, as a result of improved rechartering rates for certain of our vessels. Vessel operating expenses decreased by 2.3% or $0.6 million to $25.6 million in the current quarter from $26.2 million in the fourth quarter of 2017. While the average daily vessel operating cost was $5,446 per day for the quarter and remains as one of the most competitive in the industry.

G&A expenses increased by $2.1 million to $7.9 million in the current quarter compared to $5.8 million in the fourth quarter of 2017 due to increased expenses of $2.6 million related to our recently concluded debt refinancing.

Interest expense, excluding amortization of deferred finance costs decreased by $5.7 million to $13.9 million in the current quarter compared to $19.6 million in the fourth quarter of 2017. In accordance with US GAAP, at the time of consummation of the refinancing, we recognized in our income statement in advance all anticipated future interest expense for two of our credit facilities through their maturity. As a result, $10.4 million of interest expense for the current quarter did not flow through interest expense, as it has already -- as it had already been charged in the income statement previously. This decrease was partially offset by a $4.8 million increase in interest expense, as a result of higher debt service costs, while our average debt between the two periods decreased considerably by almost $660 million, mainly as a result of the refinancing transaction.

Finally, adjusted EBITDA increased by 0.3% or $0.2 million to $80.2 million in the current quarter from $80 million in the fourth quarter of 2017 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 now ready to open the call to Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Randy Giveans with Jefferies. Please go ahead.

Randy Giveans -- Jefferies -- Analyst

Hey, good afternoon, gentlemen, how are you?

John Coustas -- President & Chief Executive Officer

Hi, Randy.

Randy Giveans -- Jefferies -- Analyst

Hey, yeah, just a few quick questions. First kind of looking at your fleet no new buildings remaining, what are kind of your fleet plans going forward? Obviously, you have some older intermediate Panamaxes, Feedermaxes that are rolling off charter here later this year, are those kind of candidates for sale?

John Coustas -- President & Chief Executive Officer

I don't think really. I think all the ships that we have given the level of quality of vessels, they can operate for a very long time. And no one from our charterers has ever declined a ship due to age. These ships are very well maintained. They are in a very efficient in -- each one in their own category. And actually in these kind of segments, there are no new buildings, so practically we don't expect really that there is going to be any reason to sell whatever or scrap these vessels.

Randy Giveans -- Jefferies -- Analyst

Sure. Okay. And then just kind of looking at some IMO 2020, compliance strategy, do you have any charterers especially on the larger containerships asking about installing scrubbers, maybe in exchange for a higher rate? And then on the other end of the spectrum, if you're just going to kind of stick with the VLSFO or the 0.5% blend, any concerns about maybe fuel availability at some of the bunkering ports for that?

John Coustas -- President & Chief Executive Officer

First of all, we have already said that we have concluded deals to fit scrubbers on 11 of our ships among the larger ones between 6,500 TEU and 13,000 TEU.

Randy Giveans -- Jefferies -- Analyst

Right. Are those on partner or those are the spot ones?

John Coustas -- President & Chief Executive Officer

They are all on charter. I mean the -- we have agreed, let's say, on a step-up kind of charter rate.

Randy Giveans -- Jefferies -- Analyst

Okay.

John Coustas -- President & Chief Executive Officer

Staying for all that. So practically, as far as we are concerned, we're not kind of speculating on what's going to happen price wise to fuel.

Now, regarding your second question, I think that there is going to be availability of compliant fuels, I mean, which means 0.5%. The debate here is really what will these characteristics, this fuel oil are going to be, and if there will be any special restrictions in the operation of the ships because the majority of this compliant fuels will be blend that are not really always very straight forward, in terms of compatibility and mixing about them or temperatures that you need to keep them and so on. So that's still a bit of an open question.

We'll have to see during the year a number of fuel suppliers are testing various blends, and we have also, I mean ourselves request from a number -- from charterers to try some of the fuels, 0.5% early on in the year to determine if everything is going to be OK. I mean as far as we're concerned, in the container market, the fuel is the responsibility of the charterer. So it's really up to the charterer to be able to source and supply the fuel oil.

Randy Giveans -- Jefferies -- Analyst

Sure. Okay. And then, I guess one last question on the balance sheet cash flow. Just trying to get some quarterly amort on the debt side for 2019 and 2020. Can you give some guidance there?

Evangelos Chatzis -- Chief Financial Officer

Yes. It's going to be to the tune of -- look we have certain contractual amort in place. Our loan agreements also have a variable portion. which has to be an estimate. But ballpark you may assume a $160 million of annual amort for your --

Randy Giveans -- Jefferies -- Analyst

And that's both 2019 and 2020.

Evangelos Chatzis -- Chief Financial Officer

Yes.

Randy Giveans -- Jefferies -- Analyst

Okay. All right. Well, I think that covers it for me. Thanks for the time.

John Coustas -- President & Chief Executive Officer

Okay. Thanks, Randy.

Operator

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

John Coustas -- President & Chief Executive Officer

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

Operator

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

Duration: 15 minutes

Call participants:

Evangelos Chatzis -- Chief Financial Officer

John Coustas -- President & Chief Executive Officer

Randy Giveans -- Jefferies -- Analyst

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