Danaos (DAC) Q2 2022 Earnings Call Transcript

Danaos (DAC 0.10%)
Q2 2022 Earnings Call
Aug 02, 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 June 30, 2022. 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'll open the call to a question-and-answer session.

I would now like to turn the conference over to Mr. Evangelos Chatzis, chief financial officer. Please go ahead.

Evangelos Chatzis -- Chief Financial Officer

Thank you, operator, 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. John 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 second quarter 2022. The announced business model continued to generate strong results in the second quarter, more than doubling our adjusted net income compared with a year ago. Given our fixed charge coverage over the next 12 months, we expect these metrics to improve further.

At the same time, however, we closely follow our economic conditions and the potential impact to our industry. A confluence of factors, including high energy prices, inflation, and the effects of the war in Ukraine will likely result in slowing economic growth and negatively impact trade volumes. On the other hand, consistent inefficiencies on the store side and the supply chain and cop resurgence in China are keeping vessel utilization high with increased waiting times in port. Additionally, the increase in fuel costs will likely prompt liner companies to reduce vessel sailing speed as soon as vessels are available.

However, we do not expect that to happen until second quarter 2023 and onwards. Environmental regulations, particularly the CII compliance with leading liner companies to redesign their operating fleet with lower speeds to ensure we do not breach requirements, and we also assure their customers that they are actively reducing CO2 emissions. These mitigating factors point were weakening variable collapse of the market that we expect the result in rates much higher than pre-pandemic levels. For the time being, charter rates are holding firm as available [inaudible] is where we start.

The company is very well-positioned with a strong liquidity position and a balance sheet that can sustain severe deterioration of economic conditions. This is reflected upgrades by both S&P and Moody's to the highest level among public shipping companies, validating efforts to create a leader in our sector. We are also insulated from rising interest rates as we have reduced our float in rate debt to nearly equal to our cash and marketable securities. We will continue to use our balance sheet opportunistically with a continued focus on state-of-the-art buildings with environmental profiles discard by our liner customers, which also gives us great confidence about the future of our already ordered six methanol-ready green rebuilding.

We're also continuing to return value to our shareholders through our dividend and our share buyback program, which reduce our number of outstanding shares by approximately 2% in the course of about one month. With that, I will hand the call over 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 thanks again for joining us this morning. 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 second quarter of 2022 of $7.59 per share or adjusted net income of $157.1 million, compared to adjusted EPS of $3.34 per share or $68.9 million for the second quarter of 2021. The increase of $88.2 million in adjusted net income between the two quarters is the result of an increase in operating revenues of $104.5 million and a $13.9 million net dividend booked in relation to our Zim equity holding.

Partially offset by higher total operating expense of $20.2 million, mainly due to the increase in the average size of our fleet by 11 vessels between the two quarters, a $7.8 million increase in net finance expenses and a $2.2 million decrease in income from Gemini that was fully consolidated in the third quarter of 2021. More specifically, operating revenues increased by $104.5 million to $250.9 million in the current quarter, compared to $146.4 million in the second quarter of 2021. This increase is attributed to a $62 million increase in revenues as a result of higher charter rates and $23.9 million incremental revenues as a result of the vessel additions to our fleet between the two quarters. Revenue also increased by $2.9 million, mainly due to straight-line revenue recognition accounting and further increased and up by another $5.7 million being the amortization of assumed charter liabilities of recent vessel acquisitions.

Vessel operating expenses increased by $7.7 million to $40.6 million in the current quarter, compared to $32.9 million in the second quarter of 2021, mainly as a result of the increase in the average number of assets in our fleet, while the average daily operating cost increased to $6,463 per day for the current quarter, compared to $6,241 per day in the second quarter of 2021. And that was due mainly to COVID related increase in crude remuneration and increased insurance premiums due to the tightening of the insurance market between the two periods. Our daily opex cost still remains one of the most competitive in the industry. G&A expenses remained stable at $7.1 million in both the current quarter and the second quarter of 2021.

Interest expense, excluding the amortization of finance costs decreased by $1.4 million to $12.9 million in the current quarter, compared to $14.3 million in the second quarter of 2021. This is a combined result of a $2.2 million decrease in interest expense because of a reduction in our average indebtedness by approximately $311 million between the two periods, partially offset by an increase in debt service cost by approximately 44 basis points, mainly as a result of rising interest rates. We also have a $0.7 million decrease in interest expense due to capitalization of interest on vessels under construction. We also had reduced positive recognition through our income statement of accumulated accrued interest of $1.5 million that have been accrued in 2018 in relation to the financing that was consummated.

And as a result of financing arrangements we put in place in April of 2021, the recognition of such accumulated interest has been decreased. Adjusted EBITDA increased by 85.2% or $88.4 million to $192.1 million in the current quarter from $103.7 million in the second quarter of 2021 for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation, which is posted on our website, as well as subsequent event disclosures. A few of the highlights follow.

During the second quarter, we substantially reduced leverage by early debt and lease repayments of $434 million and realized a gain of $22.9 million in relation to this debt extinguishment. This early prepayment, combined with scheduled debt repayments and including a new credit facility of $130 million that was put in place in the current quarter overall have led to the reduction of the corporate net debt to last 12-month adjusted EBITDA ratio to below 1 and more specifically to 0.9 times. Currently, 15 of the company's vessels are debt-free. And these early debt repayments will reduce debt and lease amortization to approximately $25 million run rate per quarter going forward.

Through the end of July, we had repurchased 49,200 shares of our common stock in the open market for $25.1 million, executing under our $100 million share repurchase program. As of the end of the second quarter, our contracted cash revenue backlog stood at $2.3 billion, with a 3.6-year average charter duration while contract coverage is at 99% for 2022 and 80% for 2023, while even 2024 is already contracted at 55%. Our investor presentation has analytical disclosure on our contracted charter book and all the other matters that have been discussed. 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

Thank you. [Operator instructions] Our first question comes from Omar Nokta with Jefferies. Please go ahead.

Omar Nokta -- Jefferies -- Analyst

Thank you. Hey, guys. Good afternoon, John and Evangelos. Well, congrats again on a very strong quarter and really nice to see you guys taking advantage of the situation really paying down debt and further strengthening that balance sheet.

I wanted to ask about the 15 ships that are unencumbered that as you say, they're worth charter-free, $1.6 billion. If I recall, you've agreed to sell two of them previously. How should we think about the remaining 13? Are those sales candidates? Or are those assets that you're holding on to with added flexibility? But how do you just generally view those ships in the Danaos framework going forward?

John Coustas -- Chief Executive Officer

Well, first of all, Omar, welcome back. It's nice to have you covering us as being really one of the first analysts that covered us since 2006. So I think you've got probably the most extensive knowledge of the company from all analysts covering us. Yes.

Well, as I said, these 15 ships are not held for sale. Of course, as we sold the ships, if we get a very interesting, let's say, purchase proposal, we can never denied. But for the time being, no, these ships -- just our ship is in the company. And actually, they provide prolific security to the unsecured, let's say, debtors, that is the bond holders of our company, which makes really the bond rock-solid.

Omar Nokta -- Jefferies -- Analyst

John, thanks for your words toward me. It's been a pleasure following Danaos for so long, and it's come such a long way here, especially the past two years. And I wanted to maybe the next question ask in terms of -- as you highlighted, your methanol new buildings, as you prepare for stricter regulations upcoming. If you think about strategically deploying capital today in anticipation of that, do you see more incremental capital going toward the new buildings? Or do you try to find secondhand ships that are younger eco similar to the ones those ships you acquired last summer?

John Coustas -- Chief Executive Officer

Well, it's -- we are open to all, let's say, possibilities that make sense. For the time being, secondhand ships are pretty expensive. And we do not want really to have a very high capital burden on all your vessels. If we make an investment, we'll definitely need to be on grew technology.

Because at some stage, really the whole fleet, I mean, we are able to see how IMO will develop in terms of their commitment. Because for the time being, is, let's say, 50% reduction until 2050. With what's happened in the world today, there is decarbonization. There is a lot of pressure to amend that in next year by 2050, which means that we need a much more aggressive investment strategy to green new buildings.

And we are following that very closely showing that we are really on top of the game.

Omar Nokta -- Jefferies -- Analyst

Yes. Definitely. And John, one final question. Just more market related.

Obviously, we've seen -- you guys have been at the forefront of chartering your ships on longer and longer-term contracts. How would you characterize the market today vis-a-vis this backdrop of easing freight rates and uncertainty ahead, how would you characterize liner's appetite today for forward fixing ships that come open, say, in 2023? How does that look today versus, say, maybe six months ago?

John Coustas -- Chief Executive Officer

Well, there's no doubt that people are, in general, more conservative. And there are requirements around. So the issue here is not that liner companies do not have requirements. It's just that because we're talking about 2023, nobody feels, let's say, the urge to pay top of the market at this moment and hope that by rating, they might be able to get the ship, let's say, cheaper.

So it's not so much that there is no requirement. It's just that people are holding off in the home that they will be able to commit the ships at a lower level. On the other hand, exactly because the owners are not in distress. They are not prepared really to, let's say, to put their pens down as they did the changes in the past in order just to get fixed at any rate.

So we'll have to see how the world situation develops, so that decisions about chartering will be made rather than, for example, a year as before after the requirement as it was a change the case until six months ago. Maybe they will definitely to do it maybe six months or eight months before the requirement, which is still longer than the kind of a two-month to three-month period that was the case pre-pandemic.

Omar Nokta -- Jefferies -- Analyst

Got it. Thanks, John. Very helpful, appreciate it, and congrats again. I'll turn it over.

John Coustas -- Chief Executive Officer

Thank you, Omar. Thank you.

Operator

[Operator instructions] Our next question comes from Christian Wetherbee with Citigroup. Please go ahead.

Christian Wetherbee -- Citi -- Analyst

Hey, hi. Thanks for taking my call. John, you talked about sort of the normalization in the market. I think at higher levels than what we've seen in the past.

I know this is a difficult question to answer, but I'm curious what you think that means? So where do we think that sort of the maybe 2023, 2024, normalization in the market, what does that look like in terms of the level of rates? We know there are continuing to be constraints and obviously, supply chain challenges. But in any sort of thoughts you have just the magnitude of potential normalization would be very helpful.

John Coustas -- Chief Executive Officer

Yeah. Well, Chris, in general, let's say, the long-term rates in the market are dictated by a combination of the actual new building costs and the financing costs to are really very much in the high side to do, which means that there is no, let's say, incentive for -- if someone, if a liner of leadership for a longer period to commit, he needs really to pay on the basis of these two factors. OK, the equity returns of the owner is, let's say, of course, another factor. But the decisive one is the price of the ship and the financing costs.

I mean these two things have showed up. That's why no one will go and build ships today, if they are not really compensated. And on the other hand, this is keeping also an anchor in the secondhand market because the alternative of someone to have a long-term new ship is to take a major short term, for example, three-year period charter of an existing ship until the situation becomes clearer.

Christian Wetherbee -- Citi -- Analyst

OK, OK. That's helpful. I appreciate that perspective. And then maybe just thinking about sort of the balance sheet and what do we think the right level of debt is, obviously, from an EBITDA perspective, we're running at a pretty robust level here and maybe there's normalization coming.

So I don't know how much work you kind of think you need to do from here in terms of paying down debt and how you balance that with share buybacks and obviously, incremental investments in the fleet?

John Coustas -- Chief Executive Officer

Well, as you know, exactly because shipping is a cyclical industry. It's -- what you really need to see is how your debt to EBITDA moves through the cycles. Of course, now it's a very strong market that we had a debt to EBITDA of 0.9. And actually, if we take into account also some of our other marketable securities, it's even lower than that.

But this is really now that we are at the top of the cycle and at a moment that we have not done any significant expansion. We believe that, let's say, through the weakening of the market and our let's say, expansion. This could go somewhere as a maximum up to about 3%. And that's really the level that we want to keep because we are very much aware that the rating that we get is directly influenced by these ratios.

And we consider a very high rating as a key to our future by being able really to borrow cheaper than our competitors.

Christian Wetherbee -- Citi -- Analyst

OK, OK. That's clear. That's helpful. I appreciate the time today.

Thanks so much.

John Coustas -- Chief Executive Officer

OK. Thank you, Chris.

Operator

Our next question comes from Tal Yaakov with BestStocks. Please go ahead.

Tal Yaakov -- BestStocks -- Analyst

Hello, everyone. I would like to first congrats you for the recent quarter. The financial statement looks amazing and definitely, you did a great job there. I would like to ask a question I had the issue at the beginning of the call, so maybe I missed it and you mentioned it before.

But regarding the buyback program, you mentioned to the SEC, the program will be around the $100 million. The recent financial statement, mentioned that 25% of it. I wonder if there is going to be a continuous of the program or any change of it in case you're going to extend it? Or complete the plan has declared at the beginning? Thank you very much.

John Coustas -- Chief Executive Officer

Yes. No, no, the plan remains in place. We have executed this share buyback at levels that we want to be accretive for shareholders. And additionally, this was done in a period of pretty slow market during the summer since we have declared the share buyback, which means that we could not really buy many more shares in that period of time because liquidity was not there.

Tal Yaakov -- BestStocks -- Analyst

Yes. I totally get it. So the program remains the same, and you will complete it to $100 million eventually?

Evangelos Chatzis -- Chief Financial Officer

If I may, I mean, the program by nature is opportunistic, right? It is in place. There is no expiration date and it's a to the board to decide at whatever point if they want to discontinue it. So it's an open program, which we will seek to execute in the best possible way for our shareholders, and the board reviews these matters periodically. So I cannot give you a perfect answer, but that's how it is.

Tal Yaakov -- BestStocks -- Analyst

I see. Thank you very much. Good luck.

John Coustas -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Climent Molins with Value Investor's Edge. Please go ahead.

Climent Molins -- Value Investor's Edge -- Analyst

Good morning, gentlemen. Thank you for taking my questions. Following up on the repurchase authorization, you've already used a quarter of that, but you continue to trade at a very significant discount to NAV. So all the repurchases are very attractive, what is the current -- like what's your current view on the trade-off between increasing the dividend and additional repurchases?

John Coustas -- Chief Executive Officer

Well, first of all, as far as we said before, the repurchase program remains in place. As I said, we are going to use it to the best interest that we see fit for our shareholders. Regarding the dividend for the time being, it remains steady. And it's going to any reevaluation of the dividend, it's going to be definitely not earlier than 12 months from the previous range.

Climent Molins -- Value Investor's Edge -- Analyst

And your balance sheet is now very strong and will continue to strengthen going forward. Do you still believe current new building pricing is attractive? Or do you prefer to take a wait-and-see approach going forward?

John Coustas -- Chief Executive Officer

For the time being, we do not see any attractive opportunities. But as I said, this is a nature of shipping, it's cyclical. We are best positioned than everyone else to jump into any interesting opportunity that we're going to encounter.

Climent Molins -- Value Investor's Edge -- Analyst

That's all from me. Thank you very much for taking my question, and congratulations on this quarter.

John Coustas -- Chief Executive Officer

Thank you.

Operator

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 -- Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Evangelos Chatzis -- Chief Financial Officer

John Coustas -- Chief Executive Officer

Omar Nokta -- Jefferies -- Analyst

Christian Wetherbee -- Citi -- Analyst

Tal Yaakov -- BestStocks -- Analyst

Climent Molins -- Value Investor's Edge -- Analyst

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