Nov 2, 2014
Executives
Evangelos Chatzis – CFO John Coustas – President and CEO
Analysts
Mark Suarez – Euro Pacific Capital
Operator
Thank you for standing by, ladies and gentlemen, and welcome to the Danaos Corporation Conference Call on the Third Quarter 2014 Financial Results. We have with us Dr.
John Coustas, President and Chief Executive Officer and Mr. Evangelos Chatzis, Chief Financial Officer of the company.
At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session.
(Operator Instructions). I must advise you this conference is being recorded today, Thursday, October 30, 2014.
We now pass the floor to one of your speakers today, Mr. Chatzis.
Please go ahead, sir.
Evangelos Chatzis
Thank you, operator. Good morning, everyone, and thank you for joining us this morning.
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 speak 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 this detailed Safe Harbor and risk factors 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. Now, let me turn the call over to Dr.
Coustas, who will provide a broad overview for the quarter.
John Coustas
Thank you, Evangelos. Good morning and thank you for joining today’s call to discuss our results for third quarter 2014.
Danaos reported a solid third quarter with adjusted income of $18 million or $0.16 a share, which is higher by $4.6 million or $0.34 when compared to $15.4 million or $0.12 a share of adjusted net income for the third quarter of 2013. The company’s profitability improved between the two quarters through $9.4 million improvement in financing costs together with $4.1 million improvement in operating costs despite a decrease in operating revenues.
The decline in operating revenues between the two quarters mainly reflects, $4.7 million related to softer charter market conditions and the lower average number vessels in our fleet and $4.2 million attributable to the reduced charter hire on six of our vessels following the previously announced restructuring of Zim. The reduction in finance costs is expected to continue in the coming quarters as we reduce leverage and benefit from the expiration of expensive interest rate swaps.
Total debt repayments in 2014 will reach $221.5 million and swap expiration will exceed $1 billion in notional terms. Executing on our fleet renewal program, during the first half of the year we sold three 4,814 TEU vessels and two 4,651 TEU vessels with an average age of 23 years, while on October 14, 2014 we entered into an agreement for the purchase of two 6,402 TEU containerships built in 2002.
The container market demand supply fundamentals have remained weak and all metrics inevitably lead us to the conclusion that 2014 will be a sluggish year. As the super post Panamaxes continue to be delivered and deployed in the Europe.
Far East route, the capacity being cascaded inevitably creates over-capacity in the remaining routes, adversely affecting box freight rates and charter rates. Demand is not helping either as world GDP growth recent downward revisions will further delay recovery in the container trade.
On the other hand, the Panamax sector which has suffered the most in this prolonged soft market, has seen signs of recovery during the third quarter mainly as a result of the increased scrapping of vessels between 3,000-teu to 5,000-teu that has been taking place over the last 18 to 24 months. Despite the soft charter market, with 98% charter coverage for the next 12 months in terms of operating revenues we are substantially insulated from market volatility and the timing of any recovery.
Additionally, our $5,611 daily operating cost for the 3rd quarter clearly positions us as one of the most efficient operators in the industry. We will continue our efforts to de-lever our balance sheet, manage our fleet efficiently and capitalize on the resilience of our business model towards creating value 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
Thank you and good morning again to everyone. I will briefly review the results for the third quarter and then we will open up the call to questions.
During the third quarter of 2014, we had an average of 54 containerships, compared to 61 containerships during the third quarter of 2013. As previously mentioned on this call, we expect to add two 6,402 TEU containerships in our fleet during the fourth quarter, following a recent agreement to acquire these vessels by utilizing a substantial portion of the sales proceeds of the five vessels that we sold earlier in the year.
We currently do not have any vessels on lay-up. Our adjusted net income was $18 million or $0.16 per share for the quarter higher by $4.6 million or 34% when compared to the $13.4 million or $0.12 per share of adjusted net income for the third quarter of 2013.
This improvement is largely attributed to a $9.4 million improvement in financing costs together with $4.1 million improvement in operating costs, despite an $8.9 million decrease in operating revenues between the two quarters due to the softer charter market, the lower average number of vessels in our fleet and the effect of the Zim restructuring. The trend of improving financing costs is said to improve further in the coming quarters, as we continue to deliver and expensive interest rate swaps continue to expire.
As a measure of this, we would like to note that our adjusted net income for the current quarter that currently stands at $18 million would have been $48.8 million or $0.45 per share, if the current interest rate swaps were not in place. These swaps gradually start expiring this year through the end of 2015 and as it is up, we expect a gradual consistent improvement in our financing cost over the next quarters, given the market expectations for persisting low LIBOR U.S.
dollar interest rates. With an, average start-up duration of 8.2 years, well exceeding the one and 1.5 years remaining duration of the swaps, we believe that we will be able to take advantage of the anticipated low LIBOR environment on the back of solid contracted income generation.
Operating revenue decreased by 6% or $8.9 million to $139.5 million in the third quarter of 2014 compared to $149.4 million in the third quarter of 2013. As already discussed, $4.2 million of this decrease relates to the Zim restructuring, while the remainder consists of $2.8 million decrease related to lower rechartering for certain of our vessels due to the continuing soft charter market and $1.9 million in lower revenues as a result of the lower average number of vessels in our fleet between the two quarters.
Vessel operating expenses decreased by 12.7% or $3.9 million to $26.8 million in the third quarter of this year compared to $30.7 million in the third quarter of 2013. The daily operating cost for the current quarter was $5,611 per day, 4.2% lower than the $5,856 daily operating cost for the third quarter of 2013 and still remain one of the most competitive daily operating expense figures in the industry.
G&A expenses increased by $0.3 million to $5.2 million in the current quarter from $4.9 million in the third quarter of 2013, mainly as a result of $0.2 million in higher management fees between the two quarters due to an increase in the per day fee payable to our manager which has been effective since January 1, 2014. Interest expense decreased by 14% or $3.2 million to $19.7 million in the current quarter compared to $22.9 million in the third quarter of 2013.
The decrease in interest expense was mainly due to lower average indebtedness between the two quarters of $200 million with our average debt being $3.1 billion in the current quarter from $3.3 billion in the third quarter of 2013, as well as a decrease in the cost of debt servicing between the two quarters, attributed to the accelerated amortization of our fixed rate debt, which bears a higher cost when compared to our floating rate debt. Realized losses on interest rate swaps decreased by $6 million to $31.8 million in the current quarter compared to $37.8 million in the third quarter of 2013.
This decrease is attributed to the lower average notional amount of swaps between the two quarters as a result of $700 million in notional swap expirations between the two quarters. As we are rapidly de-leveraging the company’s balance sheet with effectively all of the generated free cash flow, we expect finance costs to continuously improve in the coming quarters in combination with continuing swap expirations.
Concluding, adjusted EBITDA decreased by 4.9% or $5.4 million to $104.1 million in the current quarter, from $109.5 million in the third quarter of 2013. This decrease is mainly comprised of $8.9 million reduction of operating revenues analyzed previously on this call partially offset by $3.5 million improvements in total operating costs.
With that, I would like to thank you for listening to this first part of our call. Dr.
Coustas and I will now take your questions. Operator, we are ready to open the call to Q&A.
Operator
(Operator Instructions). Thank you.
Your first question comes from the line of Mark Suarez from Euro Pacific Capital. Please ask your question, sir.
Mark Suarez – Euro Pacific Capital
Good morning guys.
John Coustas
Hi Mark.
Mark Suarez – Euro Pacific Capital
Yes, hi. Just maybe, we can maybe start with the purchasing agreement here for 2002 built vessels.
I’m wondering are these charter attached vessels and in what sort of rate do you think you can get in today’s market and for how long?
John Coustas
Well, actually we chartered these vessels for relatively short period of let’s say between three and five months. At market rates, we wouldn’t like Zim (ph) to disclose but these were in accordance with let’s say last done deals.
Mark Suarez – Euro Pacific Capital
Got it. And is the strategy here to continue to charter them on a short-term basis or what’s your employment strategy to these two vessels you’re going forward?
John Coustas
In general, first of all as these ships are new to our fleet worldwide to, first of all to put them into the system to make sure that we know them – know the ships well. And we are able to see what kind of optimizations we will be able to do on them.
And also, what we were interested was the hardware, let’s say the difficult winter season where a number of ships are actually let’s say put on lay-up also from the line of services, as they are all announcing kind of service suspension during winter. So these, is placing us into a very good window and let’s say between March and May, where all the line of companies will have let’s say fresh requirements.
And it will make their plan for the year. In order to be able to fix let’s say longer periods at accretive rates.
Mark Suarez – Euro Pacific Capital
Okay, okay that makes sense. Now, if we can maybe turn on to the daily vessel operating expenses.
I guess it came in below or what’s generally expected again sort of similar to last quarter. I’m wondering what was behind the decrease this quarter and should we expect sort of a similar run-rate as we head into 2015?
Evangelos Chatzis
No Mark, not really. This is largely a result of the sale of the older ships in our fleet that on average we’re running at a higher daily operating cost than the company average.
So, by taking them out, you see a decrease, of course there are operating efficiencies. But I wouldn’t expect this to go down much further, this sort of flat-off.
John Coustas
Yes, we’re already scrapping the barrel.
Mark Suarez – Euro Pacific Capital
Well, that’s very helpful. And now, you talked about if you could maybe go back to the balance sheet, you talked about your debt repayments for 2014.
I think you were adding about $221 million. Are you still expecting to pay-down anything north of $220 million by 2015, how should we think about those said repayments over the next two, at least over the next 12 months and maybe we can speak to the your interest expense as we head into 2015?
Evangelos Chatzis
We do expect to re-paying north of $220 million in 2015. As was mentioned previously, we effectively utilized all of our free cash flow to deliver.
And as the interest expense and the swaps expenses, we significant fall next year. We will use the excess cash to pay down debt.
We have a presentation posted on our website where we do give guidance on the financing costs and how this we improve next year. Giving you rough numbers, our financing cost for 2014 is roughly $200 million it’s expected to come in at roughly $200 million whereas for 2015, it’s anticipated to be around $125 million to $130 million.
So, there you have $70 million improvement in the cost do debt servicing which is coming of course mainly from swap expirations and of course the de-leveraging that is happening. And that is why you show these good results have already starting to show as of this quarter.
And the trend will continue in the coming quarters.
Mark Suarez – Euro Pacific Capital
Okay. So that’s basically what I was saying at your sort of guidance how soon we can change between that presentation is that right?
Evangelos Chatzis
No, it hasn’t materially changed. But just for your information, we repost later on today a revised presentation which embeds the Q3 numbers as we have reported.
Then sure will give an update. But the bottom line is the same.
Mark Suarez – Euro Pacific Capital
Great. And just a final from me, John, I think in your opening remarks, you may referenced it second hand tonnage market in the Panamax segment, we’re beginning to see how numbers are scrapping.
On one thing, we’re beginning to see that sort of similar trend in the sub-Panamax segment where you’re beginning to see pretty much we’re scrapping in that as well? What’s your sense in that market?
John Coustas
Well, there is scrapping in, all let’s say, also in the sub-Panamax segment. We have seen, I mean, for example, I mean, ships over sub-Panamaxes, built 95-96, going down to the scrap-yard.
So, this is already happening.
Evangelos Chatzis
Right.
Mark Suarez – Euro Pacific Capital
Okay. That’s though of my sense as well.
Well, thanks, thanks for your time again guys.
John Coustas
Thank you.
Evangelos Chatzis
Thank you, Mark.
Operator
Thank you. (Operator Instructions).
As there are no more questions, we now pass the floor back to Dr. John Coustas and Mr.
Chatzis for closing remarks.
John Coustas
Well, thank you all for joining this conference and your continued interest in our story. We look forward to hosting our next earning call.
Thank you.