Danaos (DAC) Q4 2021 Earnings Call Transcript

Danaos (DAC 1.39%)
Q4 2021 Earnings Call
Feb 08, 2022, 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 December 31, 2021. As a reminder, 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.

Please go ahead.

Evangelos Chatzis -- Chief Financial Officer

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 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.

Coustas, who will provide a broad overview of the quarter.

John Coustas -- Chief Executive Officer

Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the fourth quarter of 2021. The amount of media and analyst coverage about the positive dynamics in the container market speak for themselves in echo our market view. We foresaw the ongoing disruption in the supply chains and tightening of the container market through 2022 many quarters ago.

Our outlook directed our growth and chartering strategy, both of which have maximized our returns. On the other hand, our investment in ZIM shares has surpassed all reasonable expectations and led to Danaos posting in excess of $1 billion in reported net income for 2021. As a result of these factors, our share price quadrupled in 2021, bringing the company's market capitalization close to $2 billion. What is equally important is that our chartering policy will generate even better cash flows in 2022, and overall, our $2.8 billion contracted revenue with average charter duration of four years provides certainty about the future.

As a result of our significant earnings visibility, we have decided to increase our quarterly dividend by 50% to $0.75 per share. The company's significant cash flows support the increased dividend and also provide us flexibility to pursue accretive growth opportunities, continue to reduce leverage and also begin to consider a share buyback. There have also been significant environmental initiatives that advanced in 2021, and already the path to the future decarbonization of the industry is becoming clearer. There is growing consensus that significant investments need to be made to reduce the carbon footprint of existing vessels.

These investments will accompany reductions in speed, which will further support the ongoing market strength. Green fuels are a long way of becoming widely available, which means that the industry will have to adapt to continue using fossil fuels. Further the EU commission rightly proposed in the latest EU Fit for 55 climate initiative to place the burden of absorbing carbon cost on vessel operators who are responsible for fuel procurement and speed determination rather than the vessel owners. To conclude, 2021 was phenomenal for the entire container industry and even more so for Danaos.

The element of counterparty risk that dominated the previous decade has completely disappeared. Long-term charters are also becoming the norm. Fortunately, liner companies are targeting their expansion in the inland air transportation and logistics front to vertically integrate their offering. In conjunction with uncertainty about future vessel propulsion standards, this has put a lid on newbuilding ordering, which I hope can be maintained.

Also, the German KG market, which was responsible for 70% of the ordering during the last shipbuilding boom, does not exist today. The future is bright, and Danaos is well-positioned to benefit from it and continue to reward its 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

Thank you, John, and good morning again to everyone, and thank you for joining us this morning. I will briefly review the results for the quarter and then open the call to Q&A. For the full year 2021, we are reporting a record-breaking net income in excess of $1 billion or $51.15 per share, while adjusted net income more than doubled in 2021 versus 2020, and is being reported at $362.3 million for this year or $17.60 per share versus $170.9 million or $7.18 per share in 2020. For the fourth quarter of 2021, we are reporting adjusted EPS of $6.01 per share, which corresponds to adjusted net income of $125.8 million, compared to adjusted EPS of $2.29 per share, or for $7.8 million for the fourth quarter of 2020.

The increase of $78 million in adjusted net income between the two quarters is the result of a $95.4 million increase in operating revenues combined with a $16.2 million dividend, which was collected from ZIM. These being partially offset by higher total operating expenses of $23.9 million, mainly due to the increase in the average size of our fleet by 13 vessels between the two quarters. We also had an $8.1 million increase in net finance expenses and a $1.6 million decrease in income from Gemini that was fully consolidated in the third quarter of 2021, while it was an equity investment in the fourth quarter of 2020.  Now, more specifically operating -- $95.4 million increase in operating revenues, which corresponds to $215 million operating revenues in the current quarter, compared to $119.6 million for the fourth quarter of 2020 is mainly attributed to a $38.3 million increase as a result of higher charter rates and $23.6 million incremental revenues as a result of the vessel additions to our fleet that were mentioned earlier. Revenues also increased by a further $15.2 million, mainly due to state line revenue recognition accounting and by further increased by another $18.3 million being the amortization of the assumed charter liabilities of recent vessel acquisitions.

Vessel operating expenses increased by $8.5 million to $37.2 million in the current quarter from $28.7 million in the fourth 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 $5,861 per day for Q4 of 2021 versus $5,571 per day for Q4 of 2020, mainly due to COVID-19 related increase in crew remuneration and still remains as one of the most competitive daily opex figures in the industry. G&A expenses increased by $12.1 million to $18.5 million in the current quarter compared to $6.4 million in the fourth quarter of 2020, mainly due to non-cash stock-based compensation of $8.6 million recorded this quarter together with increased management fees for the additional 13 vessels that have joined our fleet. Interest expense, excluding finance cost amortization and accruals increased by $7 million to $14.1 million in the current quarter compared to $7.1 million in the fourth quarter of 2020. And the increase in interest expense is a combined result of a $1.1 million increase in interest expense, because of an increase in debt service cost by approximately 50 basis points, partially offset by decrease in our average indebtedness by approximately $85 million between the two periods and reduced positive recognition through our income statement of accumulated accrued interest of $6 million that had been accrued in 2018 in relation to two of our credit facilities that had at that point been refinanced and they have since been refinanced in 2021.

And as a result of the refinancing, the recognition of such accumulated interest has been decreased. Adjusted EBITDA increased by 91.8% or $76.2 million to $159.2 million in the current quarter from $83 million in the fourth 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. A few highlights are that on the operating side.

Over the past few months, we have forward fixed several vessels at higher, considerably higher than current charter rates. Our investor presentation has analytical disclosure on contracted charter book and the step-ups in the charter rate as mentioned. As a result of these improved fixtures, our contracted revenue backlog now stands at $2.8 billion with a four-year average charter duration while contract coverage is at 95% for 2022, 77% for 2023, while even 2024 is already at 57%. 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 today comes from Randy Giveans with Jefferies. Please go ahead.

Randy Giveans -- Jefferies -- Analyst

Howdy, John and Evangelos, how's it going?

John Coustas -- Chief Executive Officer

Hi, Randy. All fine.

Randy Giveans -- Jefferies -- Analyst

I would expect more than fine, but that's fair. Congrats on, yeah, seriously, a great year, obviously. You wisely use the capital on some timely acquisitions. You clearly have a very strong balance sheet, cash balance, substantial cash flow visibility now.

So with all that, how was the new dividend amount decided on. And it's a 50% increase, which is meaningful. And then going forward, how do you plan on balancing further dividend increases with share buybacks, especially at these levels?

John Coustas -- Chief Executive Officer

Well, it's one thing at a time. I mean, first of all, we were committed for a dividend increase. We believe that the 50% dividend increase is pretty significant. And that is giving us really the ability to be able to further grow our dividend.

I mean, this is not a kind of a special one of dividend. We want to be pretty proactive in setting a dividend that can not only be maintained, but also is able to grow through time. Because, I mean, as ourselves, we are long-term investors in the company. We want the same type of mindset for our investors to know that our strategy is really on maintaining and increasing rather than just popping a number which in couple of years down the road might need to be readjusted.

We believe that for the type of business model that we have and the strategy of the company, this is the right way ahead. Now, in terms of the share repurchases, as you can see, we close the year with around, let's say, $130 million in cash. So it's not that we are sitting into $0.5 billion. Of course, this amount with all what is going on is growing rapidly within 2022.

And that is why we would like really to announce the share buyback moment that we have the money in the bank. Maybe some people when they look on the amount of cash and marketable securities, which is, I don't know, in excess of $0.5 billion, it's not that we're sitting on half $0.5 billion of cash. I mean, the vast majority of that is, let's say, ZIM shares. And to be honest, we believe that there is substantial upside in our ZIM shareholding.

So there is no point in kind of swapping the ZIM shareholding with the now shares at this moment.

Randy Giveans -- Jefferies -- Analyst

Got it. No, that makes sense. That's fair. And then looking at your fleet, you sold those two vessels recently for a very nice profit.

On your vessels coming available in, let's call it, early 2023. How will you balance additional vessel sales with maybe forward fixing for new long-term contracts?

John Coustas -- Chief Executive Officer

It's -- we are here to combine, let's say, asset play with operating profits. So if we have an opportunity mainly to sell older vessels, we might look at it, but in our mindset, it's always that we need to also to grow the company with newer vessels, and we are exploring opportunities, like, for example, the last one, the six vessels that we bought last year and which have proved to be a tremendous success, because practically the chartering only of the two of the vessels is covering close to half, let's say, the amount that we have spent.

Randy Giveans -- Jefferies -- Analyst

Got it. OK, that's fair. Well, hey, that's it for me. Really been great to see the vast improvement in the company and Danaos shares over the last 18 months.

So keep up the great work.

John Coustas -- Chief Executive Officer

Thank you very much. Thank you, Randy.

Operator

Our next question comes from Omar Nokta with Clarksons. Please go ahead.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Thank you. Hey, John and Evangelos. Yeah, congrats on another strong quarter and clearly more to come. I do have a couple of questions and maybe just touching on maybe Randy's last points, I mean Evangelos, you've discussed this a little bit in your opening remarks.

I wanted to ask about the five large ships that you have, or the largest ships you have the 13,000 TEUs. Those have been on long-term contract with HMM going back 10 years since their delivery, and key dynamic, I guess, for the market over the past year really has been the forward fixing. And it feels like we're forward fixing farther and farther ahead of time or well ahead of deployment. With those five vessels starting to come open here and in 2024, I know it's still, you'll call it two years away, but it's starting to approach what are you thinking in terms of redeploying those vessels? Anything you can give in terms of the type of duration we can expect for those ships?

John Coustas -- Chief Executive Officer

Well, I think that for charterers, once they have the vessels until that time, and also options, which they may exercise for another couple of years, three years, sorry, for another three years, which are of course at very profitable levels for the company. I don't really expect to have anything from them. I mean, if I was a charterer fine, I would, they can declare that option approximate six months prior, let's say, the expire date. So by mid-2023 we will know what are their intentions, but it's very, very early.

And also even the ships that we are fixing forward now are on maximum until, let's say, the first half opening in first half of 2023. Some of the larger ones, but not really the 2024 dates.

Omar Nokta -- Clarksons Platou Securities -- Analyst

OK, so just the -- OK, so there are some extension options that could be exceeded three years for those, the five biggest ones.

John Coustas -- Chief Executive Officer

Yeah.

Omar Nokta -- Clarksons Platou Securities -- Analyst

OK. All right. And then maybe then wanted to ask about the overall the way the market's been developing here, it seems like definitely last year there was a lot of focus on long-term contracts, primarily on the biggest ships, or at least the Panamax and above while the feeders were kind of more short-term in nature. How are you seeing that market here over the past? How has that market developed for feeders over the past four to six weeks compared to say, maybe call it in October? I know you only have 11 ships in that segments.

It's a small piece of your business, but generally, could you give us some sense of how -- what's the liner appetite now for the feeder market as compared to say a few months ago?

John Coustas -- Chief Executive Officer

I think that there is pretty strong interest in that kind of feeder market and exactly because -- I mean, these ships in general are short, shorter,  have shorter duration of employment usually. There is more kind of turnover in the fixing of these vessels. I mean the large vessels they're chartered for years, et cetera. I mean, these vessels we used -- they used to be at, let's say, six-month, maximum 12-month charters.

I mean, now there are some owners who are just holding out to get a huge, let's say, three-month charter or whatever, $80,000, $100,000 a day. But definitely the appetite is still there and out there to say it's increasing.

Omar Nokta -- Clarksons Platou Securities -- Analyst

OK. Would you say there's liquidity to fix the feeder ships out in the three years or five years at a time?

John Coustas -- Chief Executive Officer

Yeah, definitely three years. Today, from what I've seen, it's really kind of the minimum and depending on, let's say, you want to kind of a lower rate, you can definitely take feeder ship up to five.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Got it. Thank you. And one final one for me. I just wanted some color on the two vessel sales that you announced a few weeks ago for $130 million.

And as Randy highlighted, it's a -- it'll be a big profit. One thing I did notice is that the delivery isn't until November of this year. And so just wanted to ask about that is that that was maybe one, what drove you to sell those ships? I understand that they're 20 years old. And then are they being sold to a liner? Is that kind of what's behind this sale?

John Coustas -- Chief Executive Officer

As we said, there are confidentiality agreements and we cannot disclose the actual buyer.

Omar Nokta -- Clarksons Platou Securities -- Analyst

OK. Got it. Thanks for the color, John.

John Coustas -- Chief Executive Officer

Yeah. OK.

Operator

Our next question will come from Chris Wetherbee with Citigroup. Please go ahead.

Chris Wetherbee -- Citi -- Analyst

Yeah. Hey, thanks for taking the question. I guess maybe first starting kind of big picture on the industry, curious your take on the state of congestion in the container market, and I guess, any thoughts around how you would see that playing out. So obviously, asking you to kind of take a look into the crystal ball here a little bit, and give us a sense of maybe how you see some of the congestion dynamics playing out over the rest of this year.

Does it spill into 2023? What's your view?

John Coustas -- Chief Executive Officer

Well, to be honest, we have seen a kind of a steady situation in the ports. There is no worsening, but it's not getting better either. It's stabilized, let's say, to a certain situation waiting time especially in Asia with all the COVID restrictions, which are much more stringent, especially in China compared to the rest of the world, productivity overall is lower. And we need really if we don't see any, let's say, normalization in the opening of all these countries, I think that disruption will continue.

And I think that I mean, 2022 on one hand, it may see, let's say, some kind of better utilization of the vessels. On the other hand what we see in the whole world is that in order for companies to be able to withstand the supply chain disruptions, they have changed their policy into increasing their inventories substantially because they cannot just rely on just in time. And this creates an additional kind of pressure. There are no more ships coming.

I mean, in 2022 we will have less ships than were delivered in 2021. It's, let's say, the bottom of deliveries, of course, deliveries will start ramping up from 2023. But then from 2023 we have to see the effect of the environmental regulations and the effect they're going to have on the speed. So I'm pretty sure that 2022 is going to be a kind of a strong year for the liner industry.

And in 2023 we believe it's, it will continue to be a good year for the liner industry overall, because the liner companies themselves will be even healthier through the ability to sign long-term contract at least double the historical rates.

Chris Wetherbee -- Citi -- Analyst

OK. That's very helpful. I appreciate that. And then I guess maybe just, a specific follow-up, you mentioned the stock-based comp and we're looking at G&A for the quarter, fairly elevated, I guess when we think about 2022, can you give us a sense of maybe what the normalized level will be there? Obviously, a larger fleet that you have, but I want to get the sense maybe of how you think about G&A for 2022.

John Coustas -- Chief Executive Officer

Yeah. It's going to be about region $6 million a quarter. $6 million to $6.5 million a quarter, that's the run rate.

Chris Wetherbee -- Citi -- Analyst

Perfect. Great. Thanks very much for the time. Appreciate it. 

Operator

[Operator instructions] Our next question will come from J Mintzmyer with Value Investor's Edge. Please go ahead.

J Mintzmyer -- Value Investors Edge

Hi, good morning, gentlemen. Congrats on a excellent quarter.

John Coustas -- Chief Executive Officer

Thank you, J.

J Mintzmyer -- Value Investors Edge

So I wanted start off by first of all, congratulating you on a two vessel sales very, very firm pricing and afford delivery, just pretty impressive. I was curious if there's any other shifts in your fleets that would be, that you would be interested in selling maybe some other shifts that are older. You have two other 6,000 TEU ships that are 20 years old. One comes up off charter in about a year.

You got a couple feeders that are 24 years old. Are any of those ships up for sale as well?

John Coustas -- Chief Executive Officer

As I said, if there are any interesting opportunities for asset play we will, of course, look at them, as far as, let's say, these other 6,500, I think these ships, they are on charter longer term, and they have also some options, which take them further forward. So if these ships were, let's say, for actual delivery in 2022, they would be much more interesting as S&P candidates. The same stands for our smaller vessels, which all of them, they are chartered until for three years until almost 2025. So we have secured excellent revenue from those.

And...

J Mintzmyer -- Value Investors Edge

Yes, it certainly makes sense. It's just a very, very impressive ship sale. So just curious if there's any more candidates on the block. I wanted to circle back a little bit.

I know Randy asked about the share repurchase program. You had some clear language, in your report saying that it you're at the point where you would consider it. I was curious, what the catalyst would be. Is there an upcoming board meeting your way for, are you waiting for that ZIM dividend? What would be that catalyst to push you forward into a share purchase program?

John Coustas -- Chief Executive Officer

Well, the catalyst this has to be -- we'll have -- as I said, we'll have to build up, let's say, the cash. It's not that -- as I said, it's not that we are sitting into $0.5 billion of liquidity and we are just doing nothing about it. Of course, cash will start, let's say, building up in 2022. And we need actually the amount of cash, which is coming one part of it, of course, we're giving it to evidence.

We will need, let's say, one part we're using it for leveraging. And of course, there is another part that we need to use for growth, because everything is fine. But the assets are getting older and we need to be very mindful of the long-term, let's say, strategy of the company. We want to be there, 10 years down the road, not just, let's say, five or six, that we will just kind of squeeze everything out of our fleet.

And then we will be housed with an overaged fleet. So all this is a balancing exercise. And for anyone who has, let's say, any doubt about what we're doing, first of all, look at our track record of what we've done in the last, let's say, two, three years. And additionally, the fact that we are by far the largest shareholders and what we are doing really whatever decision we take, it primarily hurts or benefits ourselves.

So that's the best really assurance that we are on the same boat as long-term shareholders. I mean, short-term shareholders, of course, it's a different story because that, if someone wants to buy the stock now pop it and make money, three months down the road and go out, of course, this is also part of the game, but as far as we are concerned, we want really consistent, long-term returns for our long-term shareholders.

J Mintzmyer -- Value Investors Edge

Yes, that's certainly a logical response. I think the only other point on the repurchase is that, if you're looking at a extreme discount to NAV or a discount to forward cash flows, right, it might be more accretive to repurchase shares than to acquire new growth. But anyways, last question for you. Last one, we talked with your CFO a few weeks ago and we had brought up the topic of a share split.

Now, obviously, a share split doesn't change the fundamentals of the company, but it could improve the trading liquidity. It could improve the bid ask spread, it could make it more attractive. There's a lot of retail investors that look at share prices before they buy things. Have you considered share split, something like a four to one or five to one share split? And if so, when would that happen?

John Coustas -- Chief Executive Officer

J, yeah, you're definitely right. It's something that we are considering, but we would like to do that in conjunction with the announcement of the share buyback. I don't know if it makes sense, just to do the share split without announcing the share buyback but definitely these things are going to go hand in hand.

J Mintzmyer -- Value Investors Edge

That's going to be a very exciting press release looking forward to it. Thanks again for your time this morning.

John Coustas -- Chief Executive Officer

Great. Thank you, J.

Operator

Ladies and gentlemen, it appears we have no further questions at this time. I would like to turn the call back over to Dr. Coustas for any closing remarks.

John Coustas -- Chief Executive Officer

Well, I would like to thank everyone for listening to this call. We believe that we are doing the right thing for our shareholders and looking forward to present you with even better results for 2022. Thank you. Goodbye to all.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Evangelos Chatzis -- Chief Financial Officer

John Coustas -- Chief Executive Officer

Randy Giveans -- Jefferies -- Analyst

Omar Nokta -- Clarksons Platou Securities -- Analyst

Chris Wetherbee -- Citi -- Analyst

J Mintzmyer -- Value Investors Edge

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