Danaos (DAC) Q3 2021 Earnings Call Transcript

Danaos (DAC -0.15%)
Q3 2021 Earnings Call
Nov 09, 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 three months ended September 30, 2021. As a remainder, 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. Dr. Coustas and Mr. Chatzis will be making some introductory comments and then we will open the call to a question-and-answer session.

[Operator instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Dr. John Coustas. Doctor, the floor is yours, sir.

Evangelos Chatzis -- Chief Financial Officer

Thank you, operator, and good morning to everyone. This is Evangelos Chatzis, CFO. Good morning, everyone. Thank you for joining.

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

John Coustas -- President and Chief Executive Officer

Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for the third quarter 2021. We are certain that everyone is aware of the well-documented disruption through the global supply chain that continue unabated. This situation, despite its negative effect in world growth, had extremely positive effects in our market, which continued from strength to strength.

Despite efforts by all participants to alleviate the disruptions to the global supply chain, there are no signs that conditions are improving. The main contributing factors are an increase in demand, lack of available vessels to satisfy such demand, and low levels of productivity in the ports and other land-based infrastructure. Additionally, as new vessels delivered in 2022 are actually expected to be lower than in 2021, we do not expect any respite at least from the vessel supply front in the near term. In 2023, increased deliveries are forecasted.

Although there will be an offsetting effect from new environmental regulations that will likely tighten the effective supply of vessels due to the anticipated reduction in speed. Overall, we do not expect a dramatic difference, provided demand remains healthy. During the third quarter, we consummated the acquisition of Gemini and acquired six more than 5,500 TEU vessels, all with existing cash resources. On the back of these moves, we have achieved record EBITDA and net income.

We have also expanded our charter coverage, and now we have in excess of $2 billion of charter backlog. Our share ownership in ZIM, although adjusted as per our usual practice, will also contribute around $0.5 billion to our earnings for 2021, which is outstanding. Our liquidity in terms of cash and marketable securities is still close to $0.5 billion, and we are closely monitoring our options and strategy for next year to deliver even better results for the company and our shareholders. In the meantime, liner companies are announcing record results, which is extremely positive for Danaos as the strong credit quality of our customers continues to improve.

The continued strong performance of Danaos is ensured by existing charters with an average charter duration of 3.3 years and new charters that lock in current rates for several years. We expect strong market conditions to persist in the near term, which will support a strong rechartering environment into next year and should ensure our stellar performance for the next three years. Once again, the market dynamics are in our favor, and we'll continue to deliver best results possible for our shareholders. With that, I'll hand the call over back to Evangelos, who will take you through the financials for the quarter. 

Evangelos Chatzis -- Chief Financial Officer

Thank you, John, and good morning again to everyone. I will briefly review the results for the quarter and then give call participants the opportunity to ask questions. We are reporting adjusted EPS for the third quarter of 2021 of $5.32 per share or adjusted net income of $109.5 million, compared to adjusted EPS of $1.91 per share or $47.3 million for the third quarter of 2020. This increase between the two quarters is mainly the result of a $77 million increase in operating revenues and a $12.3 million dividend collected from ZIM during the current quarter, partially offset by higher total operating expenses of $17.3 million due to the increase in the average size of our fleet by eight vessels between the two quarters and an $8.3 million increase in net finance expenses.

More specifically, operating revenues increased by $77 million to $195.9 million in the current quarter compared to $118.9 million in the third quarter of 2020. This increase is attributed to a $30.6 million increase in revenues as a result of higher charter rates and $15.6 million of incremental revenues as a result of the vessel additions to our fleet between the two quarters. Revenues also increased by $21.5 million, mainly due to state line revenue recognition accounting and further increased by $9.3 million being the amortization of the assumed charter liabilities of the recent vessel acquisitions. Vessel operating expenses increased by $7 million to $34.7 million in the current quarter from $27.7 million in the third 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 $5,918 per day for the current quarter from $5,467 per day in the third quarter of 2020.

And that was mainly due to COVID-19-related increase in expenses and crew remuneration. However, our daily operating cost still remains as one of the most competitive in the industry. G&A expenses increased by $1.3 million to $7.3 million in the current quarter compared to $6 million in the third quarter of 2020, mainly due to increased management fees due to the aforementioned increase in the size of our fleet. Interest expense, excluding finance cost amortization and accruals increased by $7 million to $14.5 million in the current quarter compared to $7.5 million in the third quarter of 2020.

The increase in interest expense is a combined result of a $0.7 million increase in interest expense because of an increase in the cost of debt service by approximately 0.4%, partially offset by a decrease in our average indebtedness by approximately $80 million between the two periods and reduced positive recognition through our income statement of accumulated accrued interest of $6.3 million that had been accrued in 2018 in relation to two of our credit facilities that were refinanced this April. And as a result of such refinancing the recognition of such accumulated interest has been significantly decreased. Adjusted EBITDA increased by 79.6% and or $66.3 million to $149.6 million in the current quarter from $83.3 million in the third 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 uploaded on our website.

A few of the highlights are: On the operating side, over the past few months, we have forward fixed several vessels at higher, significantly higher than current charter rates. Our investor presentation has an analytical disclosure on our contracted charter book and the step-ups in the charter rates. As a result of these improved pictures and including the Gemini vessels that were fully consolidated on the 1st of July of 2021 and the acquisition of the six 5,500 TEU wide-beam containerships, our contract backlog now stands at $2.1 billion with a 3.3-year average charter duration while contract coverage in terms of operating days is already at 100% for this year and 90% for 2022. 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

Yes, sir. [Operator instructions] And the first question we have will come from Randy Giveans of Jefferies. Please go ahead.

Randy Giveans -- Jefferies -- Analyst

So I guess my first question is, you stated in the press release you have about 90% of days already covered in 2022 and likely that number is higher, right, when you assume the options get exercised. So I guess two-part question there for next year. How many vessels become open in 2022? And when do you expect to fix those? And then secondly, can you give some kind of EBITDA guidance for next year? It seems like $650 million is a possibility.

Evangelos Chatzis -- Chief Financial Officer

Yes. Thank you, Randy. Starting from the last part. We obviously do not formally provide EBITDA guidance.

However, you have the comment this quarter's EBITDA which is $150 million. And given that over the next quarters when the new charters kick in, it's obvious that this number is going to go up. So the current, let's say, annualized Q3 points to 600. And I can tell you with a great, great degree of certainty, there's going to be north of that.

Also, we have disclosed our contracted revenue for next year and people can do their math around EBITDA margins and so forth. So that's how it relates to EBITDA. The other thing is that because this is part of earnings that -- and this quarter we had a dividend from ZIM. Next year, it is also anticipated that ZIM will pay out further dividends and that will be part of our earnings, although it's a "nonoperating item," if you wish.

It's not earnings trying to shift themselves. But this ought to be taken into consideration when looking out for EBITDA and earnings for next year. And on your question on the charterings, yes, 10% of our days we have stated also in our presentation, are open, which would point, let's say, to seven ships for the full year. It's a slightly higher number than seven because ships open up gradually within the year.

I don't have the exact number at this point, but it's maybe 12 or 14 ships or something like that. But as you rightly pointed out, we calculate this on the back of minimum contract durations. There are options that charters have on several of these ships, but one would expect will be exercised because they will remain below market. But we cannot make such assessments when publicly showing contract coverage numbers.

In our 6-K, for your benefit and for all investors and analysts that want to review this, there is a very analytical table with all the charter arrangements and the options so people can make up their minds themselves on what they believe may or may not be exercised.

Randy Giveans -- Jefferies -- Analyst

Got it. OK. That's fair. And then now on the kind of balance sheet side, it looks like you still have about 7.2 million shares of ZIM worth, I don't know, $350-plus million.

So I guess with that, any updates on timing of the sale of those? I know you trimmed $1 million here in the last few weeks or so. And then on the other side of that, you clearly have a -- to use your term, war chest of cash now and it's growing. What are you likely to do with that kind of excess liquidity here in the coming quarters?

Evangelos Chatzis -- Chief Financial Officer

Before John answers the question on the strategy around ZIM, I'd like to point out that we have already spent in Q3 -- the Gemini acquisition was $75-odd million in net cash outflow plus of $260 million for the six new ships. So we have invested our cash, therefore -- and I wouldn't call it a war chest, but the cash balance that has been built up was put to use very effectively, I'd say. Of course, it will again build up going forward. But where we are today, we believe we have utilized capital appropriately so far, and I'll let John take the ZIM question.

John Coustas -- President and Chief Executive Officer

Yes. We believe that the ZIM shares are actually undervalued, OK? We wanted to sell some shares because if eventually we would like, let's say, to exit, we need to assist a bit in the liquidity of ZIM shares. I think for the time being, we are done with our sales. We are going to wait also to see ZIM results.

But when practically from the guidance which we are giving, you have a market cap which is equivalent to 2021 EBITDA, it's obviously a very cheap stock. So yes, we are not in a hurry at this moment. We believe that there is significant appreciation of the stock. And as Evangelos said, we've already done significant investments.

We are monitoring, let's say, if there are any exceptional opportunities to invest, nothing like that at this moment visible. So we will continue, first of all, to optimize our debt to -- of course, definitely, we're going to increase the dividend. We are committed to that. So I believe that we will plan a cautious really path to solid growth both for the company and the dividend.

Randy Giveans -- Jefferies -- Analyst

Yes. No. That's fair. I think just to reiterate, ZIM is still cheap.

Clearly, Danaos is still cheap, and good to hear that the dividend is going to be increased. So we'll be watching for that. Keep up the great work. Thank you.

John Coustas -- President and Chief Executive Officer

Thanks, Randy.

Operator

[Operator instructions] The next question we have will come from Chris Wetherbee of Citi.

Eli Winski -- Citi -- Analyst

This is Eli Winski sitting on for Chris Wetherbee. Congrats on the quarter. My first one for you guys is more of a conceptual one, right? So given the higher congestion that we're seeing broadly, the upward pressure it's putting on the rate environment. What is your visibility in terms of the new builds? Do we find that some are holding off on new build until we have more clearance on what the congestion environment might be looking like in the future? 

John Coustas -- President and Chief Executive Officer

Well, the congestion environment is not going to be solved by just more ships and that is exactly why we have seen, in general, a pause in new buildings. Of course, there are lots of ships in the pipeline. But for the time being, everybody really has kind of pushed a bit as a whole, both because new building prices have gone up, but also because we are talking about late 2024 or 2025 deliveries when no one will know exactly what the demand/supply balance is going to be. So on the other front, you've probably been following what's going on COP26 that shipping really is committed to have zero carbon shipping by 2050.

But we need much more clarity about that from the governments who are going to provide the fuel for that. But also what is important everybody understands that this creates a kind of a limit into the new buildings you order today, whether they are, let's say, conventional or LNG because these are both, I mean, fossil fuel propulsion. And these ships will -- which are going to be delivered 2025 will last well into 2050 and beyond. So every such decision today is definitely not a plus for a decarbonization horizon.

Eli Winski -- Citi -- Analyst

That makes sense. Thank you. I mean, just going off of that a little bit more, given the age of the current fleet right now, do you feel that you might you have more of a propensity to lean toward a more eco-focused fleet quicker than maybe some of the other peers in the marketplace might be able to? Or do you expect just to try to capitalize on a higher rate environment with the current fleet and just try to hold off as long as possible on making additional investments into the eco category?

John Coustas -- President and Chief Executive Officer

As I said, the issue -- I mean, we are definitely among, let's say, our peers. We definitely have the largest kind of, let's say, resources if we want, assuming, let's say, also that we dispose the ZIM shares in order to, let's say, proceed into a significant newbuilding program. The thing is we don't want to order, let's say, new buildings unless we are sure that these ships will not suffer technological obsolescence within the next, let's say, 15 to 20 years. And that is why we are extremely careful with all these decisions.

And on the other hand, and I have been into various conferences lately, and it's been recognized that overall, from an environmental point of view, it makes much more sense to extend, let's say, the life of an existing ship for another 5, six years to give, let's say, the appropriate time line for research toward more 0 carbon vessels becoming available rather than just rushing to order new ships today, but practically, you will need to have them in the water for the next 25, 30 years in order really to amortize their cost.

Eli Winski -- Citi -- Analyst

That makes sense. Thank you. It will be interesting to see how this plays out in the coming years. I think I have three quick ones for you.

In terms of the longer and improving fixtures, do you see customers asking to front-load any of those contracts given lower visibility in the longer term?

John Coustas -- President and Chief Executive Officer

There are customers who are -- yes, not a lot, just yes, a couple of them who have asked that. But this is mainly from their point of view. It's probably for their own tax considerations. They have very high income during this year, '21 and '22.

So they would prefer to front load the rate and then to have, let's say, a lower rate going forward where people expect that from 2023, probably we're going to see a better normalization of the TEU rates.

Eli Winski -- Citi -- Analyst

Thank you. And then can you just provide a little bit of color on off-hire days and scheduled dry docks moving forward? I don't ask you to crystal ball it, but just any color that we can see here on the 137 off-hire days. Was that just due to a broader labor shortage? Any information there would be helpful and maybe how to think about it moving forward?

Evangelos Chatzis -- Chief Financial Officer

I mean, we typically -- this is Evangelos. We typically have, let's say, out of the 365 days in the year, on average, the ships would operate 360 days, right? Those five days take into account unforeseen off hires, which are very small, the way we run our ships and also dry dockings. And that's a blended average for 10 years, so it's a pretty reliable number. Now you, of course, have unforeseen of hires.

You may have an incident, you may have a machine failure, engine failure, whatever that may be. And those, of course, cannot be predicted. So for Q3, we did have such an incident with one of our ships, which was actually higher for the full quarter. We don't expect that this is replicated in the coming quarters, or at least we hope it's not replicated in the coming quarters.

So yes, on a normalized run rate basis, 360 days is something that one can work

Eli Winski -- Citi -- Analyst

Thank you all very much. 

Evangelos Chatzis -- Chief Financial Officer

Thank you. 

Operator

Next, we have Jay Mintzmyer of Value Investor's Edge.

Jay Mintzmyer -- Value Investor's Edge -- Analyst

Good morning, gentlemen. Congrats on a fantastic quarter. Excellent result. So the one thing I wanted to dial in on and Randy sort of started addressing it, but you have that one million share sale in ZIM.

And the question I had on that is, you mentioned that you're done selling for now, you think ZIM's cheap. I'm a little curious because the lockup ended at the start of September, the shares were $55, $60, $61, all September, and then they didn't drop until after into October, they dropped to $44. It seems like you sold them at the very bottom and now they're higher. So was that timing just bad luck? Or was it some sort of plan to sell after the quarter ended? What happened there? Because if you wanted to sell one million or two million shares, why not sell at $60?

John Coustas -- President and Chief Executive Officer

We have to admit, yes, we didn't time properly that kind of sale. It would have been much better to do it, let's say, when it was at $60. And that's why we said we're going to be much more, let's say, cautious the way that we're going to do that. As you know, with sale of shares, nobody has a crystal ball and we just hope we're going to be kind of more proactive and luckier when disposing the rest of the shares.

Jay Mintzmyer -- Value Investor's Edge -- Analyst

Yes. That's fair. I mean, there's a lot of hindsight. The reason I ask is there's a lot of rumors swirling around that, you saw rates dropping or you panicked or you didn't like ZIM anymore and you decided to sell.

But it sounds like it was a preplanned timing and sale and you just got kind of unlucky, is that fair to say? 

John Coustas -- President and Chief Executive Officer

Well, it's exactly. We had planned to -- actually, we had already started the process about these one million shares. And then we had the lock up and then we wanted to do about a process for these shares. We wanted to institute, let's say, a beauty contest between, let's say, two investment banks.

We gave 0.5 million each to see which one is going to sell best. And that process a bit got delayed, the stock dropped. So it was just -- and in the end, we decided that it was more important for us to see how this process kind of works once we've started it rather than just try to time what's on the top of the shares. 

Jay Mintzmyer -- Value Investor's Edge -- Analyst

Yes. Certainly makes sense. Just a little bit of bad luck in timing and it's too bad you went and released the shares earlier.

Evangelos Chatzis -- Chief Financial Officer

And Jay, definitely we did not panic because we are in the market. We see how strong the market is from the, say, inside, right? So we have -- I mean, yes, the market was a bit -- equity capital markets were concerned during that period of time, but we were not concerned. It was a matter of unfortunate timing. But again, this was not a big chunk of shares compared to the overall position.

So I think we're hopeful that our average when we complete the disposal will be much, much better.

Jay Mintzmyer -- Value Investor's Edge -- Analyst

Yes. I think that makes sense. I think everybody -- you communicated very clearly that eventually you're going to trim a little bit of your position. I think everybody expected you to sell one million or two million shares or -- just a little surprising to see the price, but I think your explanation makes sense.

The other question I want to ask is looking at repurchases, your net asset value, it's debatable, right? It depends on how much of a charter discount you attached. I have around $140. I've seen a couple of other analysts that have similar numbers around $140 a share. You used to have a number in your slide that would show your calculation of NAV.

I noticed that's not in this presentation. Do you have -- so part -- question 1 is, do you have any sort of internal calculation that you're willing to share? And question 2 is, at what point does the value disconnect get so huge that you have to go back to repurchases? At what point does the disconnect just gets too huge?

John Coustas -- President and Chief Executive Officer

Well, as you can see, although we used to report actually our NAV on the basis of, let's say, relatively objective numbers, we decided to discontinue that because really continuing on the basis which we are doing it was actually producing some figures, which were considerably higher than the figures which you mentioned. And we did not want really to create kind of, let's say, expectations for a situation of the market, which actually was assuming practically a sale of all the vessels spot at this moment. So it's very difficult to be able to adjust all that on the basis of the charters you have and all that because there's been -- I mean, that kind of calculation was done in a more normal kind of market where you had fluctuations of 15%, 20%, 30% in the prices, 40%. When you're having like an appreciation of 500%, I mean, I think you get more confusion rather than objectivity of where things really are.

Jay Mintzmyer -- Value Investor's Edge -- Analyst

Yes, definitely. Quickly moving that value fast, it depends on what charter discount you attached. But clearly, there's a significant value disconnect here when your stock price or your entire enterprise value is less than EBITDA value of your charters plus ZIM shares plus scrap, right? I mean, the company is trading at a weaker valuations. So at what point do you start to step in and say, OK, we have to repurchase here versus just kind of holding on to this cash?

John Coustas -- President and Chief Executive Officer

That's a decision that we will need to visit with the board. We are closely monitoring that. We agree with you that the shares are undervalued. We don't have, at this moment, any specific, let's say, discussion about repurchasing of shares.

But definitely, the more that we grow, let's say, our -- the cash in the company, I mean, the more this problem will become more important and revisited.

Evangelos Chatzis -- Chief Financial Officer

Yes, because -- I mean, at this point, just to add to what John said, we have used cash at hand, significant cash on hand to invest, to reinvest in the business. So at this particular point, we do not have the excess liquidity that we would otherwise have. Of course, as it builds up within Q1 and Q2, this will -- the more the cash balance builds up, the more such capital allocation decisions become relevant.

Jay Mintzmyer -- Value Investor's Edge -- Analyst

All right. It sounds like a moving target, but congrats on a fantastic quarter, and we're really looking forward to the next one.

John Coustas -- President and Chief Executive Officer

Thank you very much. Thank you, Jay.

Operator

And next, we have Omar Nokta of Clarksons Securities.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Hey guys. Good afternoon.I just wanted to ask, I noticed -- and sorry if you already addressed this. But I wanted to ask and looking in your fleet list, you were a bit opportunistic with one of your vessels, the 6,500 TEU, I forget the name of it. But it had rolled off of its long-term contract of $34,000 a day and it was reupped at $110,000 for six months.

So clearly, very, very strong rate. I wanted to ask you in terms of liquidity in the chartering markets today, is there -- because there seems to have been somewhat of a pause, and there's a lot of disagreement as to whether this pause has to do with people's questions on the outlook or if it's just simply a lack of available tonnage. But if you are looking in the market today for that vessel and its sister ships that roll off, what does the liquidity look like for, say, doing another six months in this $100,000-plus? And also what does it look like to do, say, a three to five-year contract?

John Coustas -- President and Chief Executive Officer

First of all, I'd like to explain that it's not in general, our policy to do, let's say, the short term charters. We are -- we rather prefer to lock in lower rates longer term. But about this specific ship which actually holds also another four sister ships that we have, we had an agreement with the charterer that there was going to be -- that the last six months of the charter, we're going to be at index. So practically, we took the index from one of the brokers, and that was the rate.

And the same thing is going to happen with the sister ships, which are opening some time in 2022. What the index is going to be? I don't know. But that's really behind -- the story behind that kind of rate. In general, there is pretty strong demand for ships, especially also because in 2022, we have lower deliveries than in 2021.

And on the other hand, charterers do not want to commit, let's say, the more you go forward, the less they are eager to commit, but still at pretty good rates. I mean, we have just yesterday chartered 2001 built 2,500 TEU for three years at a -- which is opening, this one next April. And we've chartered that ship for three years at a gross rate in excess of $28,000 a day. I mean, these are really fantastic rates.

And maybe the same ship may have got for six months, I don't know, $60,000 or $70,000 or I don't know. But historically, I mean, these rates are really phenomenal.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yes. Definitely. And just one follow-up. The six Eco vessels you acquired that come with below-market charters, any updates on the forward fixing on any of the ships, especially the ones that come up here for renewal, I think, around midyear of '22?

John Coustas -- President and Chief Executive Officer

We have -- we are in discussions with a number of parties. We are not in a rush and we're not in a rush exactly specifically for these vessels because these vessels, I mean, compete with new buildings practically, don't compete with the older ships. I mean, today, if you go to the yard to build a new 5,500 TEU, that's pretty much what you're going to have. So we understand that the more we're staying toward their opening date, the better deal we're going to have.

So we are in discussions, but there is no hurry really to fix them.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Well, thank you. I'll pass it on.

John Coustas -- President and Chief Executive Officer

Thank you.

Operator

Well, it appears that we have no further questions at this time. I would now like to turn the conference call back over to Dr. Coustas for any further comments or closing remarks. Sir?

John Coustas -- President and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Evangelos Chatzis -- Chief Financial Officer

John Coustas -- President and Chief Executive Officer

Randy Giveans -- Jefferies -- Analyst

Eli Winski -- Citi -- Analyst

Jay Mintzmyer -- Value Investor's Edge -- Analyst

Omar Nokta -- Clarksons Platou Securities -- Analyst

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