Danaos - Q2 2024
August 6, 2024
Transcript
Operator (participant)
Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the three months ended June 30, 2024. 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 (CFO)
Thank you, operator, and good morning to everyone, and thank you for joining today's call. 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 the 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, adjusted net income, time charter equivalent revenues, and time charter equivalent dollars per day to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release and the 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?
John Coustas (CEO)
Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the second quarter of 2024. The last few months brought continued market disruption as conditions in the Red Sea remained challenged and the Ukraine war persisted. Panama Canal crossings, however, returned to normal levels, eliminating that source of disruption for now. Market conditions have led liner companies to reassess their capacity requirements and at last to secure tonnage, including tonnage with forward deliveries. The forthcoming environmental legislation has further incentivized liner companies to secure modern new building tonnage for medium-term requirements without making long-term commitments in the majority of cases. In this environment, we have secured charter extensions for a number of our existing ships, and further, we extended our new building program to a total of 20 vessels, three of which were delivered in the second quarter.
We have secured multi-year charters with an average charter duration of approximately four and a half years, weighted by aggregate contracted charter hire for all of our new buildings, and we are very well positioned for the future. As a result, the company's total contracted cash operating revenues are $3.2 billion. Contracted charter coverage for our container vessel fleet, including new buildings, is currently 99% for 2024 and 80% for 2025, providing us with excellent revenue visibility. With respect to our activities in the dry bulk sector, we've recently taken delivery of all 10 Capesize vessels. We have been gearing up our operations to ensure the integration within our fleet during this building phase before we continue to explore opportunities to further our reach in this sector.
Our revenues from the dry bulk sector have been steadily increasing, and we look forward to further diversifying our revenues and creating upside through the spot market exposure offered by the sector. Despite our recent fleet growth, renewal, and diversification activities, our balance sheet remains very strong, with a low net debt position. We'll continue to work tirelessly to ensure accretive performance of our assets and deliver industry-leading returns to our shareholders over the long term. With that, I'll hand the call back over to Evangelos, who will take you through the financials for the quarter. Evangelos?
Evangelos Chatzis (CFO)
Thank you, John, and again, good morning to everyone, and thanks again for joining. I will briefly review the results for the quarter, and then we will open up the conference call to Q&A. We are reporting adjusted EPS for the second quarter of 2024 of $6.78 per share or adjusted net income of $132.3 million, compared to adjusted EPS of $7.14 per share or $143.4 million for the second quarter of 2023.
This $11.1 million decrease in adjusted net income between the two quarters is a result of a $19.9 million increase in total operating expenses, mainly due to the recognition during the current quarter of voyage costs related to voyage charters of our dry bulk Capesize fleet, partially offset by a $4.8 million increase in net operating revenues, a $3.7 million improvement on investments, and a $0.3 million improvement in net finance costs.
Vessel operating expenses increased by $5.2 million-$47.1 million in the current quarter from $41.9 million in the second quarter of 2023 as a result of the increase in the average number of vessels in our fleet, while our daily operating costs remained stable at $6,961 per day for the current quarter, compared to $6,970 per day for the second quarter of 2023. Our operating costs continue to remain among the most competitive in the industry. G&A expenses increased by $4.1 million-$11.3 million in the current quarter, compared to $7.2 million in the second quarter of 2023, mainly due to an increase in stock-based non-cash costs.
Interest expense, excluding finance costs amortization, decreased by $0.7 million-$4.6 million in the current quarter, compared to $5.3 million for the second quarter of 2023. The decrease in interest expense is a combined result of a $1.2 million increase in interest expense due to the increase in our average indebtedness of $52 million between the two periods, and the increase in the cost of debt service by approximately 14 basis points as a result of higher SOFR rates between the two periods. We also had a $1.9 million decrease in interest expense due to increased capitalized interest on our vessels under construction. At the same time, interest income came in at $2.9 million.
Adjusted EBITDA remains stable, decreasing slightly by 0.3% or $500,000-$176.8 million for the current quarter, from $177.3 million in the second quarter of 2023, for reasons that have already been outlined earlier on this call. We also encourage you to review our updated investor presentation that is posted on our website, as well as subsequent event disclosures. A few of the highlights follow. Over the past two months, we have added approximately $900 million to our contracted revenue backlog. As a result, our contracted revenue backlog remains very strong and has increased to $3.2 billion, with a 3.4-year average charter duration, while contract coverage is at 99% for 2024 and 80% for 2025.
Our investor presentation has analytical disclosure on our contracted charter book. As of June 30, 2024, our net debt stood at $205 million. In the current interest rate environment, this position shields us from high interest costs. Additionally, the company's net debt to Adjusted EBITDA ratio stood at 0.29 times, while 53 out of our 80 vessels are currently unencumbered and debt-free. Finally, as of the end of the second quarter, cash was at $372 million, while total liquidity, including availability under our revolving credit facility and marketable securities, stood at $787 million, giving us ample flexibility to pursue accretive capital deployment opportunities. 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.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Omar Nokta with Clarksons Platou Securities. You may now go ahead.
Omar Nokta (Head of U.S. Securities)
Thank you. Hey, John and Evangelos, good update. Just wanted to ask you, you've expanded the backlog here nicely, definitely since the last update a month ago. It's interesting you took the seven 8,250 TEU newbuildings from three-year charters to five years. I just wanted to ask, how did that come about? Was that an option that the charter exercised? Was it a renegotiation? And also, was there any change in day rate?
John Coustas (CEO)
Well, yeah. Hi, Omar. Well, the charter, yes, they had an option to be declared between three and five years, and they chose the five-year option at a slightly less charter rate. The other ships were fixed straight for five years from the beginning.
Omar Nokta (Head of U.S. Securities)
Okay. Thanks, John. And you added a fifth, 9,200 TEU newbuilding. So you've got, you got that one contracted for five years. You now have 20 newbuildings, and as you mentioned, three delivered in the second quarter. You know, kind of thinking big picture, what's your appetite here for, for more orders? Are there still opportunities you think in the, in the, in this market setup? Or do you think you've, you know, Danaos has reached a pausing point?
John Coustas (CEO)
You know, we are talking now for deliveries which at the earliest are, you know, 28+. So, I don't think we are there at this moment, you know, to go really so far ahead. We practically the, out of all these ships, it's just the last one, which is going to be 28 delivery. And, you know, we will pause for the time being to see, the world situation is not really at its best. The good thing is that we are completely covered and, practically without debt. Yeah, we will keep, let's say, our ammunition for any opportunities that are going to appear in the future.
Omar Nokta (Head of U.S. Securities)
Understood. Thank you. And maybe just kind of on the final, final question follow-up, your point about, you know, the being so under-levered. You have plenty of cash in the building. You've got plenty, so of, of, of financial flexibility going forward. You know, in general, what kind of financing, Evangelos, are you, are you guys expecting to put on the new buildings? Or I guess, how much debt do you think you, you, you intend to put on, on the vessels as they deliver?
Evangelos Chatzis (CFO)
Well, we already have arranged the financing for the first eight ships out of the 20. We have reported that, and that is $450 million. This is close to 60% LTV. We anticipate putting in place something similar for the remaining 12 ships. So in total, on a pro forma basis, because we haven't arranged the second chunk yet, I would see debt for the new builds in the region of $1.2 billion.
Omar Nokta (Head of U.S. Securities)
Okay, got it. So about 60% LTV.
Evangelos Chatzis (CFO)
Yes. But it's still early because, you know, the second chunk of ships comes online from between 2026 and 2028. We will be prudent-
Omar Nokta (Head of U.S. Securities)
Yeah, still a bit early.
Evangelos Chatzis (CFO)
We will seek to arrange debt financing, but this is sort of the ballpark number.
Omar Nokta (Head of U.S. Securities)
Okay, understood. Thanks, Evangelos. Thanks, John. I'll turn it over.
John Coustas (CEO)
Thank you.
Operator (participant)
At this time, it appears there are no further questions. I'd like to turn the call back over to Dr. Coustas for any further comments or closing remarks.
John Coustas (CEO)
Yes. Thank you all for joining this conference call and your continued interest in our story. Look forward to hosting you on our next earnings call. Have a nice day.
Operator (participant)
Thank you. This concludes today's teleconference. We would like to thank everyone for their participation. Have a wonderful afternoon.