Danaos (DAC) Q2 2021 Earnings Call Transcript

Danaos (DAC -0.56%)
Q2 2021 Earnings Call
Aug 03, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the first three months ended June 30, 2021. As a reminder, today's call is being recorded. With us on 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 Dr. Chatzis will be making some introductory comments, and we'll open the call to question-and-answer session.

Please note, this event is being recorded. At this time, I would now like to turn the conference over to Mr. Chatzis. Please proceed.

Evangelos Chatzis -- Chief Financial Officer & Secretary

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 may 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 the broad overview of the quarter.

John?

John Coustas -- President, Chief Executive Officer & Director

Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for second-quarter 2021. The containership market has maintained its positive momentum, which is reflected in increasing rates for both containers and vessel charters. Danaos is continuing to secure charters for its vessels for periods between three and five years.

It is noteworthy that some of these charters do not even begin until the middle of 2022. The market appears to be in short supply until at least the end of next year, and we have strong leverage to this dynamic. The pandemic is continuing to cause inefficiencies in the transportation chain, and there is no obvious indication that conditions will normalize in the near future. Travel bans or restrictions are continuing to impede our efforts to normalize crew changes.

Despite considerable difficulty in journey and repatriation, our vessel schedule has not been affected. Our liquidity was enhanced in the second quarter by a total of $162 million from the redemption of the Zim and HMM bonds and a disposition of 2 million shares of Zim stock. In the aggregate, our cash balance at the end of the quarter was $294.4 million. Financially, Danaos is in a very strong position with cash and marketable securities totaling over 600 million, a 1.75 billion backlog of charters extended out over an average of 3.4 years and a very manageable debt repayment schedule.

We are also generating significant free cash flow on the back of exceptionally strong market conditions. This gives us the capacity and the confidence to grow our core business when opportunities appear. To that end, we exercised our option to purchase 51% of Gemini, our joint venture, taking full ownership of the entity and its assets. This added approximately 160 million of contracted revenue and approximately 170 million -- 17 million of contracted EBITDA for our backlog, while these vessels are expected to contribute 31 million of EBITDA over the next 12 months.

The effective date of the transaction was July 1, 2021, meaning it will be immediately accretive in the third quarter. Further, we sourced an opportunity to buy six modern eco design 5,466 TEU vessels built in 2014 and 2015 at a significant discount to their charter-free value. These vessels are tied to below market, though still profitable charter, expiring from mid-'22 to mid-'24. They are of similar specification to new building designs offered today, and we expect to recharter them at levels significantly higher than their existing charges.

We were able to fund these growth opportunities using cash on our balance sheet, and we will evaluate whether we will increase our leverage with respect to these acquisitions moving forward. Once again, the market dynamics are in our favor, and we will continue to deliver the best results possible for our shareholders. With that, I'll hand over the call back to Angela, who will take you through the financials for the quarter. Evangelos?

Evangelos Chatzis -- Chief Financial Officer & Secretary

Thank you, John, and good morning again to everyone, and thank you for joining us today. I will briefly review the results for the quarter and then give the call participants the opportunity to ask questions. We are reporting adjusted EPS for the second quarter of 2021 of $3.34 per share or adjusted net income of 68.9 million, which is compared to adjusted EPS of $1.71 per share or 42.5 million for the second quarter of 2020. This increase between the two quarters is mainly the result of a 29.6 million increase in operating revenues, a 3.8 million improvement in finance costs, and a 0.5 million improvement in the operating performance of Gemini, partially offset by higher total operating expenses mainly due to the increase in the average size of our fleet by three vessels between the two quarters.

More specifically, operating revenues increased by 29.6 million to 146.4 million in the current quarter, compared to 116.8 million in the second quarter of 2020. This increase is attributed to a 23.6 million increase in revenues as a result of higher charter rates and improved fleet utilization and 6 million incremental revenues as a result of the vessel additions to our fleet between the two quarters. Vessel operating expenses increased by 4.3 million to 32.9 million in the current quarter, compared to 28.6 million in the second quarter of 2020, mainly as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating cost increased to $6,241 per day for the current quarter from $5,787 per day in the second quarter of 2020, mainly due to COVID-19 related increase in crude and generation and still remains as one of the most competitive daily opex figures in the industry. G&A expenses increased by 1.1 million to 7.1 million in the current quarter, compared to 6 million in the second quarter of 2020, mainly due to the increased management fees due to the increased size of our fleet and other corporate admin expenses.

Interest expense, excluding finance cost amortization and accruals increased by 4.5 million to 14.3 million in the current quarter, compared to 9.8 million in the second quarter of 2020. The increase in interest expense is a combined result of a 2.2 million improvement in interest expense because of a decrease in our average indebtedness between the two quarters by approximately 70 million. Together with a decrease in our average debt service cost by approximately 0.36%. This was partially offset by reduced positively -- reduced positive recognition through our income statement of accumulated accrued interest of 6.7 million that had been accrued in 2018 in relation to two of our credit facilities that were refinanced in April of 2021.

As a result of this refinancing, the recognition of such accumulated interest has decreased. Adjusted EBITDA increased by 29.5% or 23.6 million to 103.7 million in the current quarter from 80.1 million in the second quarter of 2020 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation that has already been posted on our website. And a few of the highlights within that presentation are: asset values have improved significantly with the charter attach tax value of our fleet today at 3.7 billion on the basis of end Q2 2021 charter-free valuations provided by independent brokers and calculation of charter premium, when applicable, in accordance with our finance agreements.

And on this basis, we currently calculate our net asset value at 2.97 billion or $144 per share. On the operating side, over the past few months, we have forward fixed several vessels at higher than current charter rates, and our investor presentation has a typical disclosure on contract on our contracted charter book and the step-ups in charter rates. As a result of these improved fixtures and including the Gemini vessels that from July 1 onwards will be fully consolidated, our contract backlog stands at 1.75 billion in total, and our contracted revenues for 2021 alone currently stands at 605 million, already 143 million or 31% higher than total operating revenues of 2020, which were 462 million. Our revenue weighted charter coverage stands at 99% for 2021 and 81% for 2022, with contracted 2022 revenues currently standing at 596 million.

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 & Answers:

Operator

[Operator instructions] Our first question comes from Omar Nokta of Clarkson Securities. Please proceed.

Omar Nokta -- Clarksons Platou Securities -- Analyst

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

John Coustas -- President, Chief Executive Officer & Director

Hi, Omar.

Omar Nokta -- Clarksons Platou Securities -- Analyst

I just wanted to ask about the recent deal for those six eco-design ships you acquired. Obviously, 260 million is a good price and it probably looks at least 100 million below what they'd be worth if they came charter-free. So a nice way to invest in modernizing the fleet, expanding it without really putting yourself out there capital-wise. I guess, my first question, just on that transaction, how repeatable is that you think? Are there other opportunities like that? And do you have an interest in doing another one of similar nature?

John Coustas -- President, Chief Executive Officer & Director

Well, these are interesting opportunities. We are definitely there to look at them. What is really important is that we are much more geared exactly toward modern vessels rather than, let's say, just investing in older units, which may have, of course, let's say, a higher short term benefit, but they don't address really the kind of the future development of the company. And what is interesting about these ships is that practically, if we were going to get to the yards to build that size of vessel, we would get more or less the same specs.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yes. So good, definitely good ships. And they're in that sweet spot, if I recall, a couple of earnings calls ago, you mentioned that 4,000 to 6,000 TEU size range is something that's attractive to Danaos. Is that still the case where you want to be deploying capital within this range?

John Coustas -- President, Chief Executive Officer & Director

Well, as you know, we always -- in general, we like the larger vessels. But I mean, I think that these vessels at 5,500 TEU, they are actually at the best kind of, let's say, sweet spot for future opportunities.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yes. Got it. And just on those future opportunities, just a follow-up then on these vessels that you acquired. It looks like a couple of them come up for charter redeployment.

Looks like one is in March of '22, the other one is in July. Given charters are now fixing forward by several months and quarters, when do you think you'll start to have discussions on redeploying these ships, at least, say, the first two that come open next year?

John Coustas -- President, Chief Executive Officer & Director

To be honest, we were already approached by the charterers of these vessels about possible extension. We are going to start taking delivery of these vessels from mid-August until end September. So definitely, we'll wait first for this process to, let's say, to start rolling over. And probably within September, we will have much more firm discussions about that.

Omar Nokta -- Clarksons Platou Securities -- Analyst

OK. That's fair enough. John, and congrats again on a very strong development here for the company.

John Coustas -- President, Chief Executive Officer & Director

Thank you. Thank you, Omar.

Operator

And our next question comes from Randy Giveans of Jefferies.  Please proceed.

Randy Giveans -- Jefferies -- Analyst

Hey, John, Evangelos. How's it going?

John Coustas -- President, Chief Executive Officer & Director

Hi, Randy. How are you?

Randy Giveans -- Jefferies -- Analyst

A couple of questions here. Obviously, the average container ship rates have increased for around 60 consecutive weeks now. What do you think will maybe cause that to end? And when will that happen? And then in the meantime, will you continue to just forward fixed tonnage that comes available in 2022? Or are you kind of open to waiting until expiry to book some maybe short-term charters at even higher rates?

Evangelos Chatzis -- Chief Financial Officer & Secretary

Well, our business model has always been to look for the longer-term charters to secure our cash flows. And we believe that in a market like this, definitely locking in charter rates at the current levels is definitely beneficial. So we are looking mostly at charters between three to five years for the ships that are opening up. And definitely, charters are there to look at them at pretty healthy rates.

We are not speculators. And we prefer -- in accordance with our business model to ensure the long-term earnings of the company.

Randy Giveans -- Jefferies -- Analyst

I think that's prudent. That's fair. And then you mentioned some acquisition opportunities. You've already done a couple here in the last month with the JV, and then the six 5,500 or so TEU vessels.

But I guess, any other kind of uses of cash? Repurchases, dividends, possibly diversifying into other shipping subsectors. Any comments on those three? It just seems with DAC shares trading at, I don't know, 50% of your estimated NAV and at maybe four times EBITDA, it seems like that's a pretty sweet deal and a much better use of cash than maybe buying ships at NAV. So what are your thoughts on that?

John Coustas -- President, Chief Executive Officer & Director

Yeah. On the other hand, we have come a very long way to, first of all, to enhance the liquidity of the stock. And of course, we did, let's say, the significant stock repurchases at the levels at around $7, which was very beneficial overall to the company. At present, yes, definitely, there is considerable upside.

On the other hand, the price of the stock is not just a question of NAV. It has to do with the liquidity. So we may well go out and buy stock, but then liquidity goes down and that lack of liquidity also will not create, let's say, long-term value for the company and ability in the future to access the stock market if we require. In terms of the dividends, as we said, yes, definitely an increase in dividends will happen.

However, we just started our dividend quarter growth. This is the second quarter we're giving dividends. We will be seriously, of course, considering a dividend increase from next year.

Randy Giveans -- Jefferies -- Analyst

Sure. All right. That's fair. Certainly, a lot of liquidity now, but I understand what you're saying on the minimal share, debt free.

I guess, last quick question. The extended lockup for your Zim shares expires in, I think, exactly a month now. Any updated thoughts on the timing of future shares around Zim.

John Coustas -- President, Chief Executive Officer & Director

Well, nothing at present. We have already, I think, that the strategy, that we had about Zim shares is to sell just 2 million shares out of the 10.2 million that we have. That was really to help also liquidity in Zim shares. And it's exactly through this process that we expect liquidity to be able to absorb further maybe share sales that might be done.

Randy Giveans -- Jefferies -- Analyst

Yeah. All right. Well, hey, thanks so much for the time.  Keep up the good work.

John Coustas -- President, Chief Executive Officer & Director

Great. Thank you. Thank you.

Operator

[Operator instructions] Our next question comes from George Burmann of CL Securities.

George Burmann -- CL Securities -- Analyst

Good morning, gentlemen. Kalimera. And Thank you very much for taking my call.

John Coustas -- President, Chief Executive Officer & Director

Yes. Good morning to you.

George Burmann -- CL Securities -- Analyst

OK. Concerning the liquidity, I agree with you that the share count is pretty minimal. Would you consider issuing the remaining Zim shares as a dividend to your existing shareholders rather than selling them in the market?

John Coustas -- President, Chief Executive Officer & Director

Well, I think I'm not sure. We had this question before in the previous quarter. I'm not sure if it was from you or someone else. And we said that the actual Zim shares are part, let's say, of the company portfolio, and they will be, let's say, sold when we see fit.

And that will trickle through the regular dividends that we are going to distribute. There is no at present any plan for any such distribution.

George Burmann -- CL Securities -- Analyst

OK. But it could be considered in -- on your part, which would probably help the existing Danaos shareholders. You could -- the 8 million shares you have left, you could do several distributions of 10 shares for every 100-or-so over time.

Evangelos Chatzis -- Chief Financial Officer & Secretary

No, this is not part of the strategy. We've said before that our Zim equity stake is clearly a non-operating asset. It doesn't fit into our business model. We are not a holding company, holding stocks of our customers.

So the plan is that this will convert into cash. Gradually, we will, of course, seek to maximize value as we divest. And then we will use this capital to the best interest of the company, growing the fleet. And of course, we will also consider other capital -- all the pallet of the capital allocation decisions.

We will grow the dividend, but we will not -- it is not our intention at present to distribute the stock to shareholders.

George Burmann -- CL Securities -- Analyst

OK. You recently did a whole refinancing of all your debt. What is the current blended interest rate for your debt at the moment?

Evangelos Chatzis -- Chief Financial Officer & Secretary

The majority of the debt runs at reliable class 250. And we also have some lease agreements that run at fixed rates which are a bit higher than that. So I think the blended cost of interest is in the region of 5%.

George Burmann -- CL Securities -- Analyst

OK. Lastly, I just want to applaud you for not going in there all guns blazing and buying additional ships at this apparent high level in the marketplace. I think it's a very good strategy to kind of wait and pick your opportunities as and if they arise.

John Coustas -- President, Chief Executive Officer & Director

Thank you.

George Burmann -- CL Securities -- Analyst

Thank you.

Operator

[Operator instructions] Our next question comes from Chen Mui of Arkham Capital.

Unknown speaker

Hi, management. Sorry, can you hear me?

John Coustas -- President, Chief Executive Officer & Director

Yes. Yeah, sure. Good morning. 

Unknown speaker

Congratulations on a good quarter. A couple of quick questions. So first is on the six vessels that you acquired. So if you were to recontract them at current rates, what -- I guess, what type of uptick in EBITDA could we potentially see from kind of where the contracts are right now? And then the second question is regarding liquidity.

So you got 290 of cash, right? So between Gemini and six vessels, I think is around 350 of cash outlay. So there's a 60 million, I guess, gap, funding gap there. I guess, operating cash flow sounds like about 100 million per quarter but depending on timing. So how are you bridging that funding gap? Is it via selling more shares of Zim?

John Coustas -- President, Chief Executive Officer & Director

Actually, we are generating significant amount of free cash flow and we will be able really to fund all that to our own cash until the year-end. There was an agreement with Gemini to let's say, for the payment to be done at the company's option until year-end. And so, there is plenty of, let's say, leeway to either use our own cash generation or maybe we will see if we're going to put a leverage on the new vessels.  Yeah --

Unknown speaker

OK.

John Coustas -- President, Chief Executive Officer & Director

Yeah. So on the new acquisitions, it, of course, largely depends on what rechartering assumptions you make. But we believe that in the near term, with the first couple of ships opening up next year, as it was mentioned earlier, our EBITDA -- the EBITDA coming from these assets would be north of 40 million annualized. And as ships open up even further down the road in 2023 and 2024.

This is two, three years out, of course. But provided you made certain conservative rechartering assumptions, EBITDA could be as high as 50 million.

Unknown speaker

OK, great. That's good color. Thank you. congrats.

Operator

It appears that we have no further questions at this time. I would now like to turn this [inaudible].

John Coustas -- President, Chief Executive Officer & Director

OK. 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

[Operator signoff]

Duration: 30 minutes

Call participants:

Evangelos Chatzis -- Chief Financial Officer & Secretary

John Coustas -- President, Chief Executive Officer & Director

Omar Nokta -- Clarksons Platou Securities -- Analyst

Randy Giveans -- Jefferies -- Analyst

George Burmann -- CL Securities -- Analyst

Unknown speaker

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