May 5, 2016
Executives
Evangelos Chatzis – Chief Financial Officer John Coustas – Chief Executive Officer
Analysts
Mark Suarez – McQuilling Holdings
Operator
Good day, and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for the First Quarter 2016. 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.
[Operator Instructions] I would now like to turn the conference over to Mr. Evangelos Chatzis, Chief Financial Officer.
Please go ahead.
Evangelos Chatzis
Thank you 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 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 these 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 of the quarter.
John Coustas
Thank you, Evangelos. Good morning and thank you all for joining today's call to discuss our results for the first quarter of 2016.
We’re pleased to report another strong quarter with adjusted net income of $47.2 million, or $0.43 of share, an increase $16.6 million, or 54.2% from the adjusted net income of $30.6 million, or $0.28 of share, reported in the first quarter of 2015. This increase is mainly attributable to a reduction in net finance cost of $19.4 million resulting from the expiration of interest rate swaps and lower debt balances and is partially offset by a $3.3 million reduction of our EBITDA, as described further below.
As of the end of the first quarter of 2016, all of the expensive interest rate swaps we entered into in 2007 and 2008 have finally expired. The absence of such swaps going forward combined with today's low interest rate environment will contribute to our continued improving financing costs through 2016 and beyond.
The containership market is going through a very challenging period. We need only to look at basic industry data like record-low average box freight rates, falling volumes and declining load factors to see a situation similar to ones faced by the industry in late 2008 and 2009 during the financial crisis.
This environment has resulted in negative operating margins for the major liner companies, all of which are trying to manage through this downturn with further cost-cutting and idling of vessels. Several liner companies, including Hyundai Merchant Marine and Hanjin Shipping, two of our largest customers, have publicly announced their intentions to restructure their balance sheets and seek concessions from charter owners in an effort to reduce their operating costs.
These events are still unfolding and have not come to any resolution and we cannot speculate now how they will conclude. Needless to say, these developments have our full attention, and we are very focused on approaching these discussions with the goal of maintaining the value of our charter contracts.
We are fortunate however, that Danaos has very limited near-term exposure to the spot market, which is currently very weak. A small number of our vessels are under charters that expire within the next year, and we therefore have 95% charter cover in terms of operating revenues for the next 12 months.
As of the end of the first quarter of 2016, the average charter duration of our fleet was seven years, weighted by aggregate contracted charter hire, with our longest charters extending through 2028. We are also fortunate to have invested significant resources into operational efficiency and technological innovation.
This has helped us achieve daily operating costs of $5,985 a day for the first quarter, which clearly positions us as one of the most efficient operators in the industry and is particularly beneficial in today's environment. Meanwhile, market consolidation initiatives continue to develop.
We expect to see mergers between liner companies and a re-shaping of commercial alliances. There should be further clarity on the evolving landscape during the second half of 2016.
Additionally, new deliveries for 2016 are expected to be lower than 2015, newbuilding ordering has come to a halt and scrapping activity has accelerated, particularly on the panamax segment. The combination of the above, together with expectations for gradually improving demand growth fundamentals justify some measured optimism that the market will not deteriorate further in 2016 and will be better balanced in 2017.
Amidst this challenging economic environment, we will remain singularly focused on preserving value, de-levering our balance sheet, managing our fleet efficiently and capitalizing on the resilience of our business model. With that I will hand over the call back to Evangelos, who will take you through the financials for the quarter.
Evangelos Chatzis
Thank you and good morning again. I will briefly review the results for the quarter and then open the call to Q&A.
During the first quarter of 2016, we had an average of 55.1 containerships compared to 56 containerships during the first quarter of 2015. In early January of this year, we concluded the sale of the 1994-built 4,650 TEU vessel Federal for a gross sales price of $7.2 million.
Danaos Corp also holds a 49% interest in Gemini Shipholdings Corp an entity formed during the third quarter of 2015 that has acquired for containerships. Our adjusted net income was $47.2 million, or $0.43, for the quarter, an increase of 54% when compared to the $30.6 million, or $0.28 per share, of adjusted net income for the first quarter of 2015.
This improvement is attributed to a decrease – $19.4 million decrease in net financing costs partially offset by a $3.3 million decrease in EBITDA between the two periods. Operating revenues decreased by 0.8% or $1.1 million to $137.5 million in the current quarter, compared to $138.6 million in the first quarter of 2015.
This decrease is attributed to $0.6 million of lower revenues due to the sale of Federal and $0.5 million of lower revenues – due to lower fleet utilization between the two quarters. Vessel operating expenses increased by 5.9%, or $1.6 million, to $28.9 million in the current quarter, compared to $27.3 million in the first quarter of 2015, as a result of the increase in the daily operating cost per vessel to $5,985 per day this quarter from $5,622 per day in the first quarter of 2015.
G&A expenses decreased by $0.1 million to $5.2 million currently versus $5.3 million in the first quarter of 2015 as a result of the lower average number of vessels in our fleet between the two periods. Interest expense, excluding amortization of deferred finance costs, decreased by 7.1% or $1.3 million to $16.9 million in the current quarter compared to $18.2 million in the first quarter of 2015.
This decrease is attributed to lower average indebtedness between the two quarters of $245 million with an average that being currently $2.74 billion from – down from $2.98 billion in the first quarter of 2015. Our financing cost will continue to improve in the coming quarters as we continue to de-lever our balance sheet and take advantage of the low interest rate environment, which is expected to persist.
Realized losses on interest rate swaps decreased by $18 million to $3.1 million in the current quarter that is a decrease of 85% when compared to losses of $21.1 million in the first quarter of 2015. This decrease is attributed to approximately $1.1 billion of lower average notional swaps between the two quarters as a result of the aforementioned swap expirations.
Finally, adjusted EBITDA decreased by 3.2% or $3.3 million to $99.4 million in the current quarter from $102.7 million in the first quarter of 2015, for the reasons outlined earlier on this call. With that, I would like to thank you for listening to this first part of the call.
Operator, we are ready to open the call to Q&A.
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Suarez of McQuilling Holdings.
Please go ahead.
Mark Suarez
Hi, guys. Thanks for taking my question.
I appreciate it. Maybe we can start with the consolidation of liner companies.
I know we have seen a lot of consolidation the past, but every time we see sort of movements such as these, we see that the rate increases and freight rates have been very shortlist. I am wondering what’s your sense is at this time around as you see the restructuring taking place as well as some of the consolidations to align some of the trading routes into become more efficient?
John Coustas
Well, always consolidation brings better let’s say – reduces let’s say kind of competition. And it’s in general better for restoring profitability.
On the other hand, at this moment, we have a kind of backlog of capacity coming on stream. And the amount of rationalization that can really happen at least in the short-term is relatively small.
These scrapping will be centered on let’s say mainly the panamax segment, but today we have also an oversupply in the post-panamax segment, especially in the larger ships. So, yes, it’s – all these are steps in the right direction.
The question is when actually all these actions will [indiscernible].
Mark Suarez
Okay. And I think you touched on scrapping.
I know that ordering activity obviously over the past I would say 12 months was really significantly accelerated, especially on the small to mid sized segment. You touched on the panamax segment, but I am wondering as you run your models and you think about scrapping for 2016 and 2017, do you have a number in terms of tonnage that have to be scrapped in an effort to see more of a balanced supply and demand dynamic here?
John Coustas
Yes…
Mark Suarez
I see that accelerated…
John Coustas
Well, so the question of a number here because we have to see really actually the segments that needs to be scrapped. There is no doubt that pre-2000 panamax – panamax max vessels will be scrapped and in general you know pre-2000 built vessels – I mean panamaxes will have pretty difficult time.
Mark Suarez
Yes.
John Coustas
Now, we have seen also some scrapping of smaller post-panamaxes, but that is let’s say relatively limited, but that’s really where we see the biggest concentration.
Mark Suarez
Okay. And I know that you briefly mentioned the restructuring of HMM and Hanjin and I am wondering if they – I know they’re seeking concessions at this point and I am assuming you have had discussions with them.
How do you foresee that going as without sharing obviously the details, but I am wondering how do you see that impacting your current contracts?
John Coustas
Well, they are asking with – Hyundai, we have, let’s say, entered discussion. It was also publicly announced by Hyundai that they are seeking…
Mark Suarez
Right.
John Coustas
Let’s say concessions up to 30%. With Hanjin we have not reached the stage of discussing let’s say amounts or whatever structure of reductions.
Just they have announced the general notion of renegotiating charter rates, so there is nothing really more specific to report.
Mark Suarez
Okay. And I guess finally just going back to the income statement.
I know your daily op cost continues to be one of the most competitive in this space. I did notice though I guess higher than average increase year-over-year vis-à-vis the past two years that you guys have got.
I am wondering it does mostly a currency function here. What’s going on beyond that increase?
John Coustas
Well to be honest if we want to see the real operating cost, we should look at it on a yearly basis because normally in the first quarter, there is a lot of block ordering for the whole year in order to get better prices from various vendors. So, we may have a bit of distorted let’s say information in the first quarter that’s why a pure quarterly figure is not really indicative.
We should look at the full year number in order to get let’s say a fleering of direction volume increase.
Mark Suarez
Okay, well, fair enough. Thanks again for your time as always.
Evangelos Chatzis
Okay, thank you very much, Mark.
Operator
[Operator Instructions] 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
Thank you for joining this conference call and your continued interest in our story. We look forward to hosting you in our next earning calls.
Thank you.
Operator
Thank you. This concludes today’s teleconference.
We would like to thank everyone for the participation. Have a wonderful afternoon.