Danaos Corporation (DAC) Q1 2013 Earnings Report, Transcript and Summary

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Thank you, operator. Good morning everyone and thank you for joining us this morning. Before we begin I briefly want to remind that everyone at management 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 that. Factors that might affects future results that we just had in our filings with the SEC encourage you to review the details 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 the broad overview for the quarter.

Thank you Evangelos. Good morning and thank you all for joining today’s call to discuss our results for the first quarter of 2013. The fundamentals of the containership markets still remain weak as the Far East Europe trade volume remained flat having difficulties supporting inflow of the large containerships. This is also evidenced by lower freight rates in these routes compared to one year ago, while the liner companies are making yet another attempt to restore rates at healthier levels with announced General Rate Increases in May. The Pacific lanes show a better picture which is the effect of the recovery in the US economy. Non-mainlane trade growth remains healthy and helps absorb capacity that is cascaded down from the mainlane routes, but this adds pressure to the charter market, particularly on the mid-size containerships. As we enter into the peak season we expect some improvement in the market fundamentals, but all-in-all we do not anticipate spectacular changes. Despite this challenging the container market environment, we are reporting yet another solid quarter. Adjusted net income for this quarter came at $13.9 million or $0.15 a share, $3 million lower than the first quarter of 2012 due to the weaker charter market today when compared to 1 year ago. However, as our vessels on the spot market are currently running at operating breakeven levels, an improving market going forward is a one way option to improving our results. Adjusted EBITDA increased 12.7% to $108.6 million in the current quarter compared to $96.4 million in the first quarter of 2012 as a result of our fleet expansion program that was completed in 2012. Out of the 7 vessels we had on cold lay-up at the end of 2012, we only had 2 vessels on lay-up at the end of the first quarter. During this quarter, we re-activated one vessel, while we sold 4 of our older vessels and we intend to use the sale proceeds to make accretive acquisitions of younger containerships. With a strong 98% contract coverage and only 2% of our current revenue stream at stake through re-chartering over the next 12 months, we are largely insulated from the effects of the weak charter market while expect our EBITDA and free cash flow generation to be safeguarded. At the same time, we continue to be one of the most competitive operators in the market with our daily operating expenses being consistently below $6,000 a day. We will continue to manage our fleet efficiently, while in 2013 we will focus on rapidly de-leveraging the company and creating value for our shareholders. With that, I’ll hand over the call back to Evangelos who will take you through the financial for the quarter.

Thank you and good morning again to everyone. I will briefly review the results for the quarter and then open the call to the participants to place questions. During the first quarter of 2013, we had an average of 63.1 containerships compared to 60.1 containerships for the first quarter of 2012. While during the first quarter, we saw three of the oldest vessels in our fleet, the Henry, the Independence and the Pride for a net sale consideration of $18.8 million. Recently, we have also agreed to sell the Honour for a net sale consideration of $8.7 million and expect to deliver the vessel to the buyers within the first half of May. All of the sold vessels have been on cold lay-up. In accordance with an agreement with our lenders, we intend to re-deploy those proceeds that total $27.5 million to make accretive acquisitions of younger containerships. As mentioned in our earning release, we have the option to selling a further five of our older vessels that come off-charter, within the course of the next two quarters and potentially utilize the sale proceeds towards acquisitions of younger containerships as long as we consummate the purchases by the end of this year, otherwise any such proceeds will flow towards reducing our indebtedness. Following, we already consummated four vessel sales and there the acquisition of Messologi, during the current quarter, we currently have only two vessels on cold lay-up compared to seven vessels at the end of the previous quarter. Given the state of the market we currently do not anticipate to reactive the two laid-up vessels in the near future. Our adjusted net income was $13.9 million or $0.13 per share for the quarter, down by $3 million or $0.02 per share when compared to the adjusted net income of…

Thank you. (Operator Instructions) And your first question today comes from the line of Urs Dur, Clarksons Capital Markets. Please go ahead.

Good morning, good afternoon.

Hi Urs.

Hey you really detailed the market pretty well and the over hedging is coming off so that's all good so things are getting cleaner and easier to understand and your idle ship seem pretty manageable. We are seeing, I just first sort of commentary on the market how competitive can Danaos be going forward as we see a number of the large liner companies re-fleeting such as even China Shipping we saw this week, how competitive do you think you can be as to possibly get involved in some of the growth there given that your financial situation continues to brighten, do you have partners with banks is there other equity out there that you might be able to raise in a JV where do you feel do you stand in this market place?

Urs, we are following the market there are a number, not a big number could be well the good thing is that – it's not a big number of project out there.

Right.

So, one for China Shipping now I am not sure it's really that is something that is going to be outsourced or not. In general China Shipping had the strategy to keep the larger vessels for their own account lately, so I don’t really think that this project will come out in the market. And there are a number of other parties that, who are talking and they are and let’s say standby if something really comes up but honestly there is nothing really in the newbuilding front that makes sense and for the time being we are concentrating on the second hand market in order to make some in fact acquisitions of good quality older vessels and maximize the returns on the swap we are doing with the older fleet.

Great and can you describe on the size range and forgive if you had mentioned it I just have overlooked the size range as you might be looking at in the second hand market and eight ranges and what kind of charter backed do you think you might be able to get in this market today?

Today, these exercise let’s say positioning exercise.

Right.

I mean from let’s say show let’s say 3,000 TEU ships which were build a six, we are looking to buy vessels which are post 98. So we are going to have the minimum of 12 year let’s say better characteristics of the same kind of sizes. We are the earliest and for the time being these vessels are very near OpEx. So we don’t expect really these vessels to make let’s say any substantial contribution over the next let’s say 12 months but this is an exercise that really positions us to take advantage of the upturn when it’s going to come in the future.

Okay. And not really different words in your mouth that I guess it sounds like that this is a market where some patience is needed that there might be some opportunistic deals out there but for the most part this is a year where the nails income statement and balance sheet just continues to steadily improve in a market that should improve over the next couple of years given that demand should exceed growth should exceed the supply growth is that right way to look at it?

Yeah. Well, exactly the good thing with our company is that time is with in our favor because our biggest burden is the swaps and when the swaps goes our profitability becomes goes into a completely differently.

Yeah. Alright well I mean this is very helpful and Evangelos if you can give us a call just to make sure we are thinking about the swaps coming up correctly in our model. Give me a call later that would be great.

Sure.

Okay.

Okay. Thanks very much, Urs.

Got it.

Thank you. Your next question comes from the line of Mark Suarez of Euro Capital. Please go ahead.

Good morning guys.

Hi, Mark.

Hi, Mark.

Thanks for taking, thanks for taking my questions. Just to go back on where you are talking about you’re thinking of post kind of like vessels buying amount in a market that looks fairly attractive now just going buying into sort of the timing as to when do you think you might sell those five vessels would it be it that a first assumption to think that you are going to be selling the remaining five vessels now that you have to selling agreement with you lenders and what’s sort of a and what sort of remain metrics that you are looking for?

Mark these five vessels come off-charter within the next two quarters it’s actually the next five ships of (indiscernible) charter. We have the option to settle the ships. We have not getting a firm decision. We will see, we will evaluate employment opportunities when the time comes and see if it makes sense to settle them. So nothing definitely yet.

Gotcha.

Apart from the four ships have already been sold.

And is there an opportunity to may be if you do in fact sell those vessels to maybe go away beyond your debt amortization schedule in other words continue to pay down debt at a higher level what you are currently planning for 2013?

The underlying assumption is that we sell the ships up nine ships right.

Yeah.

We use the proceeds or part of the proceeds to purchase non-growth assets until the end of the year and whatever visual is there whatever we have not utilized and we’ll go to works with reduction of indebtedness. I would expect a small portion of it to ultimately end up reducing debt, but the main things here is to reinvest and sources younger assets.

Okay, that’s very helpful. Okay, for mainland purposes, now I think you mentioned also the two laid-up vessels I don’t think I – I got mail or cutting of a bit but can you like sort of explain the strategy as that was two laid-up is there a possibility to sell them off before year end or any chances of reactivation in the second half?

Well, actually just to be clear the two vessels that we have laid-up are not within the pool of the ships we expect to sell or we may sell.

Sorry, yes.

So, I do not have clarity on – on a self reactivation base it’s we do not expect to reactivate then in the near future. That would have to get rates that justify the reactivation and the investment required otherwise it makes no sense both from a cash-flow perspective and from a bottom-line perspective.

Got you. Okay, that’s all there for now thank you guys.

Thank you, Mark. Thank you.

Thank you. (Operator Instructions) We don’t have any further questions at this time.

Well, thank you very much everyone for your interest in our story and joining us on the call. And have a nice day and we’ll expect you for our next earnings release. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.