Nov 8, 2015
Executives
John Coustas - CEO Evangelos Chatzis - CFO
Analysts
Mark Suarez - Euro Pacific Capital Charles Rupinski - Seaport Global Robert Perri - Axia Capital Markets Gregory Lewis - Credit Suisse
Operator
Good day, and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the Three Months Ended September 30, 2015. 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. Mr.
Coustas and Mr. Chatzis will be making some introductory comments and then we will open the call to a question-and-answer session.
Evangelos Chatzis
Thank you, operator. 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 speak and 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 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. With that, let me now turn the call over to Dr.
Coustas, who will provide you with a broad overview of the quarter.
John Coustas
Thank you, Evangelos. Good morning and thank you for joining today's call to discuss our results for the third quarter of 2015.
We are pleased to report yet another strong quarter with adjusted net income of $43.8 million or $0.40 per share, representing an improvement of 143% compared with the adjusted net income of $18 million or $0.16 per share reported for the third quarter of 2014. The main drivers of the improvement in the company’s profitability between the quarters were $21.8 million decrease in net financing costs together with a $5 million increase in operating revenues.
Our financing costs will continue to decrease and as a result, earnings will continue to increase as we continue to execute our comprehensive debt reduction plan and benefit from the expiration of expensive interest rate swap over the next two quarters. During the third quarter of the year, the industry witnessed the deterioration in the fundamentals of the container market, both in terms of freight rates and charter rates.
Idle tonnage has now surpassed the 1 million TEU mark, which represents approximately 5% of the world’s fleet. This was mainly driven by slower than expected demand growth in Northern Europe and the emerging markets, a trend verified by downward revisions of GDP growth projections recently established by the IMF.
The silver lining is that newbuilding ordering has effectively come to a halt, while we also expect to see increased scrapping activity over the next 12 months. The combination of supply moderation and the eventual resumption, struggled demand growth will drive the containership sector recovery, which we see beginning in spring of 2016 and strengthening into 2017.
And deniably the current market offers many attractive opportunities to acquire assets, particularly in the second hand markets for Post Panamax vessels. During the third quarter, we established Gemini Shipholdings Corporation, the joint venture in which Danaos will provide a 49% equity interest to act against these opportunities.
Gemini has already acquired two 5,500 TEU vessels and one 6,500 TEU vessel all built in 2001/2002 and has recently agreed to acquire on subjects another 6,500 TEU containership built in 2002. Our investment in Gemini allows us to resume our growth strategy as weakness in the containership market presents compelling value.
It is important to strengthen as we are doing this without diluting our shareholders and in alignment with the interest of our larger shareholder. Our charter coverage continues to be at a strong 95% in terms of operating revenue for the next 12 months, which insulates us from market weakness.
At the same time, our 5700 daily operating cost clearly positions us as one of the most efficient operators in the industry. We will continue our strategy of deleveraging our balance sheet and managing our fleet efficiently.
Additionally as the market presents accretive acquisition opportunities, we will leverage the strength of our platform and our relationships with the financial community to deliver value to our shareholders. With that, I will hand over the call back to Evangelos, who will take you through the financials for the quarter.
Evangelos?
Evangelos Chatzis
Thank you, and good morning again, to everyone, and thank you for joining this morning’s call. I will briefly review the results for the quarter and then give the participants the chance to ask questions.
During the third quarter of 2015, we had an average of 56 containerships compared to 54 containerships in the third quarter of 2014. Additionally as previously mentioned, Danaos holds a 49% interest in Gemini Shipholdings Corp, and ended the forum last August that has already acquired two 5,500 TEU and one 6,500 TEU containerships while it has agreed to acquire a further 6,500 TEU containership anticipated to be delivered in February of 2016.
Our adjusted net income for the quarter was $43.8 million or $0.40 per share, higher by $25.8 million or 143% when compared to the $18 million or $0.16 per share adjusted net income for the third quarter of 2014. This improvement is mainly attributed to $21.8 million decrease in net financing costs, together with a $5 million increase in operating revenues between the two periods.
Our financing costs will continue to improve in the coming quarters as we continue to delever our balance sheet and expensive interest rate swaps continue to expire through the first quarter of next year. As a result, we expect a consistent improvement in financing costs over the next quarters given the market expectations for lower interest rates to persist.
Operating revenues increased by 3.6% or $5 million to $144.5 million in the current quarter compared to $139.5 million in the third quarter of 2014. This increase was mainly attributed to a $3.4 million incremental revenues due to the higher number of vessels in our fleet between the two periods, $1 million of higher revenues due to improved rechartering of certain vessels at higher rates and $300,000 of higher revenues attributed to better fleet utilization.
Vessel operating expenses increased by 5.2% or $1.4 million to $28.2 million in the third quarter of 2015 compared to $26.8 million in the third quarter of 2014. This increase is mainly attributed to incremental operating expenses of $1.1 million for vessels priority and performance that were acquired during the fourth quarter of last year.
The average daily operating cost per vessel slightly increased by 1% to $5,669 per day for the current quarter from $5,611 per day for the third quarter of 2014 and management believes that our daily operating cost ranks as one of the most competitive in the industry. G&A expenses increased by $0.3 million to $5.5 million in the current quarter from $5.2 million in the third quarter of 2014, mainly as a result of the higher average number of vessels in our fleet between the two periods.
Interest expense decreased by 10.7% to $2.1 million to $17.6 million in the current quarter, compared to $19.7 million in the third quarter of 2014. The decrease in interest expense was mainly due to lower average indebtedness between the two quarters of $217.4 million amounting to $2.9 billion of average indebtedness for the current quarter from $3.1 billion in the third quarter of 2014, as well as a decrease in the cost reduction between the two quarters mainly attributed to the accelerated amortization of our fixed rate debt, which bears a higher cost compared to our floating rate debt.
Realized losses on interest rate swaps decreased by $19.6 million to $12.2 million in the current quarter, a decrease of 62% when compared to $31.8 million of losses in the third quarter of 2014. This decrease as mentioned earlier is attributed to more than $1.6 billion of lower average notional amount of swaps between the two quarters as a result of swap expirations.
Finally, adjusted EBITDA increased by 2.6% or $2.7 million to $106.8 million in the current quarter from $104.1 million in the third quarter of 2014, for the reasons outlined earlier on this call. With that, I'd like to thank you for listening to this first half of our call, Dr.
Coustas and I will now take your questions. Operator?
Operator
[Operator Instructions] Our first question comes from Mark Suarez of Euro Pacific Capital. Please go ahead.
Mark Suarez
Good morning guys, and thanks for taking my question here. Maybe we could start with the JV formation of Gemini.
John, I wonder what the growth strategy to this vehicle is, its intention, I think you mentioned in the past that you could be looking at second-hand vessels sort of an intent to 15 year range. I’m assuming closer to scrap value or would you also consider as most the recent attraction a charter-in charter-out on a verbal strategy that sort of require your lower cash equity deposit.
I'm wondering what the strategy is in terms of growth of that JV vehicle?
John Coustas
Well, the strategy is in one hand, of course, to acquire assets at the lowest possible value at historic lows or below historic lows. And then the issue of financing let's say comes -- is a different kind of subject, we are let's say discussing the financing as let's say a completely independent lets a part.
Of course, the optimization of equities is part of that but mainly we are looking for financing which is competitive purely on cost and that is exactly what we are trying to achieve.
Mark Suarez
Okay, but just following the train of thought is your preference here to find charter free opportunities or charter attached. I mean I'm wondering if you have a preference and also do you have any investment budget targeting mine as to how much DAC potentially aim at investing through Gemini here?
John Coustas
We are definitely -- we don't let say any specific kind of target that we have to spend any amount of money. We definitely have significant more firepower.
The thing is try and find really good and accretive deals. Now, in terms of let’s say charter free or let’s say charter attached deals, we are open to both.
In general, we are not paying let's say extra for the charter. I mean, we're trying to get charters mainly on merit basis through our relationships and through companies that know us and appreciate our operational performance.
And when we buy, of course, a ship on charter free basis, we are definitely factoring in that maybe that ship under current circumstances might be let's say lay up for few months.
Mark Suarez
Right, okay. And so with that, so far in fourth quarter, are you still seeing some good targets in the second hand market out considering, especially including extra firepower now that you have in your balance sheet.
I'm wondering if you're still seeing some plenty of opportunities out there in some of the older wing second-hand market that you can go after?
John Coustas
Well, there are plenty of ships. The thing is with our experience, we need to source also the ships that, how am I going to say, that are the best-in-class for their age of course.
And there are lots of ships out there, which might be out for sale, but which would be maybe expensive to run, would be high on fuel, so we’re very selective to the type of ships that we invest.
Mark Suarez
Okay. And then I guess on the most recent announcement here on the potential to acquire 6500 TEU container vessel here, I'm wondering if you can give us some more detail as to whether this vessel is really a charter or was this a purchase outright or what are you thinking in terms of, if you can give us some sense of asset values or maybe employment strategy for that particular vessel, that will be great?
John Coustas
Well, we are -- in general, we are not disclosing numbers as you know, but definitely we are working on a ship and we are working in parallel for the charter. So I mean the intention is really to get the ship what we are working on a three-year charter.
Mark Suarez
Got you. Okay.
That's all I have for now. Thanks guys for the time.
John Coustas
Okay, thank you.
Operator
Our next question comes from Charles Rupinski of Seaport Global. Please go ahead.
Charles Rupinski
Congratulations on the good quarter and good morning. I just had a quick question to follow-up maybe on the macro environment, I wanted to get your views on a couple of things, first is there had been -- that you had mentioned earlier in the year a trend toward not using the Lam Bridge in North America and more ships on the water.
Clearly, rates have pulled back for Panamax vessels, but is it something that you think could potentially come back where people are no longer using the Lam Bridge in terms of North American voyages and the second is there are some new expedited services like APL and I'm just wondering if that could have an effect on vessels piece going forward for the industry. Thanks.
John Coustas
Well, in general, we have not seen any significant increase in speeds due to the drop in the oil price and I think that with current market situations, people do not have really any intention just to, let’s say, to lay up more ships and because we are still even at this kind of oil price, we are still at the borderline of the kind of increasing the speed. And the reason actually is if you look on how the optimum works, the optimum of course speed goes higher when the oil price gets lower, but on the other hand, when the actual charter price gets lower, then actually that brings the optimum speed down and not up, so the combined effect does not really give any significant incentive for liner companies to speed up the ships.
Charles Rupinski
Okay, that's very good color. I appreciate that and do you have any view on like customers, earlier in the year with the port strike, even after the port strike, there was a hesitance to go into the West Coast, is basically back to business as usual in terms of where the customers are perceiving the US West Coast ports?
John Coustas
There is already I mean, from what we have seen statistics, there is already a kind of a permanent shift of number of cargoes to the east coast by direct services, mainly direct services from Southeast Asia to the US East coast.
Charles Rupinski
Great. That's very good color.
I appreciate as always. Thank you.
Operator
[Operator Instructions] Our next question comes from Robert Perri of Axia Capital Markets. Please go ahead.
Robert Perri
Hi, gentlemen. Thanks for taking my call.
I just wanted to touch a little bit on the market, I was looking at your presentation and I know you talked about it a bit in the -- during the prepared remarks that if you look at supply and demand, it looks like the market is finally at least on the smaller sizes, it is getting a bit back in balance coming next year. I mean, if you look at the order book, obviously it’s skewed towards the larger sizes and you're starting to see, let's say, more vessels the larger sizes being laid up.
And there has always been the talk about the cascading, but do you think we finally hit the point where the larger sizes have just -- they’ve hit their limit on where they could go into the smaller routes and it looks like from now on, you're going to see the larger vessels that are on the main line routes that are under more pressure coming to continue to be under pressure while the smaller sizes might enjoy a slightly better market.
John Coustas
Well, as I said in container shipping, the whole game is a game of scale. Wherever you can put a larger ship, you will do it.
The thing is to put a larger ship requires in one hand a certain, let's say, demand on one hand on what kind of traffic one liner company can generate and then the alliance structures, because the overall demand will be, I mean, the alliances were made exactly in order to be able to use larger ships and enjoy economies of scale. So this is let’s say game, this is the trade-off.
So whenever people can, they will give larger ships. I mean, and that’s why historically all the pressure was always building up in the smaller sizes.
I mean, now we had an influx of large ships coming at the period that there was minimal growth and the whole process was derailed, but the long-term fundamentals are there and it’s only a matter of time when growth will resume for people to try and make up for slot costs my utilizing larger vessels wherever they can.
Robert Perri
Okay, thank you for that. That’s pretty much it from my end.
Congratulations on the pretty good quarter.
John Coustas
Thank you.
Operator
Our next question comes from Gregory Lewis of Credit Suisse. Please go ahead.
Gregory Lewis
Thanks. Good afternoon, John, how are you.
Sorry, unfortunately I had to hop on late, so I apologize if this has been already discussed, but as we look to the major suppliers and I am talking about the Korean shipyards, to a lesser extent China, it seems like there is a big issues that the Korean shipbuilding and industry is facing, the wage increases that they are having to pay, it looks like it is kind of cancelling out the benefit of the won. As we think about how shipbuilding capacity for the container shipping market evolves over the next couple of years, do we think that stay static or do we think that we could actually start to see that come in a little bit and just given Korea’s position as a major builder of container ships, could we see the potential for some of this capacity that is slated and even on contract, but potentially not coming online in line with those contracts?
John Coustas
Well, first of all, one thing that is for sure is that Korean shipbuilding will be supported as we have seen, let’s say, with bailout of dialog by KDB. On the other hand, Korean yards were geared into offshore to quite significant extent.
The offshore industry is probably the one in worst state than all the rest and all the projects are let’s say kind of standstill at present and everybody just tries to postpone them which means that Korean shipyards will shift their capacity towards conventional shipping. And of course when we are talking about more high added value ships like the container ships, that’s where we are targeting.
So I think that there is no issue of capacity. I think that overall we need, let’s say, capacity reduction not capacity increase.
We’ve seen for example that I mean people like, let’s say, Japan [indiscernible] they are extending their docks in order to build the 20,000 TEU ships. The same thing is happening with SWS in China in order to build the ships ordered China Shipping.
And so practically we will continue despite whatever is happening with, let’s say, on the cost side. The supply will be largely greater than demand for conventional shipping over the next few years and I don’t see any price pressure in that front.
Gregory Lewis
Great. So just as we see the shift back maybe to the shipyards doing more sticking I guess to their wheelhouse in terms of conventional assets, I imagine that starts to put pressure on newbuild prices?
John Coustas
Yeah, I think that newbuild prices have not, let’s say, recovered. And since the blip which was up about maybe a year, year and a half ago when we had also the bulk ordering at the time at the beginning of 2014, since then we had continuous, let’s say, declining price scenario.
And I think that we will continue to watch that.
Gregory Lewis
Okay, guys, thank you very much. Congratulations on a great quarter, you guys are doing a great job.
Thanks.
John Coustas
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 closing remarks.
John Coustas
Thank you all for joining this conference call and for your continued interest in our story. We look forward to hosting you in our next earnings calls.
Thank you.
Operator
Thank you. This does conclude today’s teleconference.
We would like to thank everyone for their participation. Have a wonderful afternoon.