Danaos Corporation (NYSE:DAC) Q1 2023 Earnings Call Transcript May 16, 2023
Operator: Good day and welcome to the Danaos Corporation Conference Call to discuss the Financial Results for Three Months Ended March 31st, 2023. 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.
Evangelos Chatzis: 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 this 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. Coustas, who will provide the broad overview of the quarter.
John Coustas: Thank you, Evangelos. Good morning and I thank all of you for joining today’s call to discuss results for first quarter of 2023. Danaos reported yet another solid quarter, despite the continuing geopolitical uncertainty and the turmoil in the financial markets. Box rates strengthened after the Chinese New Year due to the blank sailings and discipline on the part of liner companies. In addition, the charter market improved due to the very limited supply of charter-free vessels, as well as the impact of speed reduction as charterers seek to comply with CII regulations. Danaos has continued its successful chartering and asset management strategy, driving steady and predictable performance and laying the groundwork for continued growth, while also pursuing environmentally sound policies.
Our chartering strategy delivered another strong quarter, and we have operating days charter coverage of 97% for 2023 and 73% of 2024. Our strong chartering capabilities and our business strategy continue to drive solid performance. In the first quarter, we successfully secured more than $380 million of contracted revenue through multi-year charters, including $262 million for all six new buildings that will be delivered to us in 2024. In addition, we have placed an order for two additional 6,000 TEU vessels of the latest eco design to be delivered in the fourth quarter of 2024 and second quarter of 2025. Our modernization efforts are key to the future of the company, and highlight our commitment to maintaining a high quality fleet, while supporting the ongoing decarbonization of the industry.
We’re very well positioned to navigate the operating environment with a new regulatory requirements that are becoming very demanding and complex. Our very strong operating platform provides us significant competitive advantage in complying with upcoming regulations, while strengthening our value proposition and ties with our customers, as the industry focuses on achieving environmental goals and closer cooperation between owners and charterers becomes increasingly important. We appreciate the ongoing support of our customers and employees, and we’ll continue to work diligently for the benefit of our shareholders. With that, I’ll hand the call back over to Evangelos, who will take you through the financials for the quarter.
Evangelos Chatzis: Thank you, John. Good morning, again to everyone and thanks, again for joining us today. I will briefly review the results for the quarter and then open the call to Q&A. We are reporting adjusted EPS for this quarter of $7.14 per share or $145.3 million of adjusted net income compared to adjusted EPS of $11.36 per share or $235.3 million for the first quarter of 2022. This $90 million decrease in adjusted net income between the two quarters is primarily the result of the $110 million ZIM dividends that have been recognized in the first quarter of 2022 and is no longer applicable as we have now disposed of all of our ZIM shares. Otherwise, our adjusted net income improved by more than $20 million, mainly as a result of a $13.7 million improvement in operating revenues and a $10 million decrease in net finance expenses.
More specifically, operating revenues increased by $13.7 million to $243.6 million in the current quarter, compared to $229.9 million in the first quarter of 2022. This increase is attributed to a $30.4 million increase in revenues as a result of higher charter rates. And that was partially offset by $3.3 million of lower revenues due to the sale of three vessels over the past six months. And a $10.1 million decrease in recognition of assumed charter liabilities amortization related to prior vessel acquisitions. Finally, we also had a $3.3 million decrease in revenues due to lower non-cash revenue recognition in accordance with US GAAP. Vessel operating expenses increased by $1.4 million to $40.6 million in the current quarter, compared to $39.2 million in the first quarter of 2022, mainly as a result of the increase in the average daily OpEx cost that increased to $6,800 per day in the current quarter from $6,300 per day in the first quarter of 2022.
And this increase is mainly due to COVID-19 related increase in crew remuneration, increased travel expenses, insurance premiums and generally inflationary pressures that have prevailed between the two periods. However, our daily OpEx figure still remains as one of the most competitive in the industry. G&A expenses decreased by $0.6 million to $6.8 million in the current quarter compared to $7.4 million in the first quarter of 2022, mainly as a result of the lower number of vessels in our fleet, and lower stock-based compensation recognition between the two periods. Interest expense, excluding amortization of finance costs, decreased by $7.7 million to $6 million in the current quarter, compared to $13.7 million in the first quarter of 2022.
The decrease in interest expense is a combined result of a $5.7 million decrease in interest expense, because of a reduction in average indebtedness by almost $850 million between the two periods as a result of the rapid deleveraging of the company. And that was, of course, partially offset by an increase in cost of debt service by approximately 3% as a result of rising interest rates. We also had a $3.4 million decrease in interest expense due to capitalized interest on vessels under construction. And at the same time, we should note that, interest income came in at $2.7 million this quarter, effectively covering almost half of interest expense. Adjusted EBITDA decreased by 33.6% or $90.5 million to $179 million in the current quarter from $269.5 million in the first quarter of 2022.
And this is, again, primarily driven by the $110 million ZIM dividend that have been recognized in the first quarter of last year. And it’s no longer applicable as we have sold all the ZIM shares. The other positive EBITDA divers have already been outlined earlier on this call. Now, we also encourage you to review our updated investor presentation that’s posted on our website, as well as subsequent events disclosures. A few highlights are as follows: Over the past three months, we have secured $380 million of contracted revenue, significantly improving our charter backlog, including $262 million of contracted revenue for six of our new buildings that are to be delivered in 2024. And these are all three-year charters. As of the date of this release, the contracted cash revenue backlog stood at $2.3 billion, with an average charter duration of 3.2 years, while contract coverage is up 97% for this year and 73% for next year.
Analytical disclosure on charter arrangements can be found in our investor presentation. We have prepaid early on May 12th, the remaining lease obligations for two vessels that at the end of the first quarter have [$16.3 million] [sic – $66.3 million] of lease outstanding. And at this point, we no longer have any lease obligations on our balance sheet. As of March 31st, 2023, our net debt was $138 million, and we expect to be net debt-free within a matter of two or three months. In the current interest environment, this position shields us obviously from high interest costs. As at the end of the first quarter, again, cash was at $360 million, while total liquidity, including availability under our revolving credit facility stood at $731 million, giving us ample flexibility to pursue accretive capital deployment opportunities.
The company’s net debt to adjusted EBITDA ratio stood at 0.2 times as at the end of the first quarter, and 44 out of our 68 vessel fleets in the water are currently unencumbered and debt-free. With that, I would like to thank you all for listening to this first part of our call. And, operator, we are now ready to open the call to Q&A.
Q&A Session
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Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Omar Nokta with Jefferies. You may now go ahead.
Operator: [Operator Instructions] Our next question will come from Climent Molins with Value Investor’s Edge. You may now go ahead.
Operator: [Operator Instructions] And at this time, I’m showing – one moment, please. One moment, please. Showing no further questions. This will conclude the question-and-answer session. I’d like to turn the conference back over to management for closing remarks.
John Coustas: Thank you, all for joining this conference call and your continued interest in our story. We look forward to hosting you in our next earnings call. Have a nice day.
Operator: The conference has now concluded. We thank you for attending today’s presentation. You may now disconnect.
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