Danaos upbeat over market conditions as 2020 nears

Coustas

Danaos, one of the world’s largest independent owners of containerships, reported unaudited results for the period ended September 30, 2019.

Highlights for the Third Quarter and Nine Months Ended September 30, 2019:

  • Adjusted net income1 of $37.9 million, or $2.46 per share2, for the three months ended September 30, 2019 compared to $37.5 million, or $3.17 per share2, for the three months ended September 30, 2018, an increase of 1.1%. Adjusted net income1 of $110.7 million, or $7.23 per share2, for the nine months ended September 30, 2019 compared to $94.6 million, or $10.30 per share2, for the nine months ended September 30, 2018, an increase of 17.0%.
  • Operating revenues of $111.8 million for the three months ended September 30, 2019 compared to $117.8 million for the three months ended September 30, 2018, a decrease of 5.1%. Operating revenues of $337.0 million for the nine months ended September 30, 2019 compared to $343.1 million for the nine months ended September 30, 2018, a decrease of 1.8%.
  • Adjusted EBITDA1 of $79.3 million for the three months ended September 30, 2019 compared to $82.7 million for the three months ended September 30, 2018, a decrease of 4.1%. Adjusted EBITDA1 of $232.4 million for the nine months ended September 30, 2019 compared to $237.7 million for the nine months ended September 30, 2018, a decrease of 2.2%.
  • Total contracted operating revenues were $1.4 billion as of September 30, 2019, with charters extending through 2028 and remaining average contracted charter duration of 4.3 years, weighted by aggregate contracted charter hire.
  • Charter coverage of 89% for the next 12 months based on current operating revenues and 75% in terms of contracted operating days.

Three and Nine Months Ended September 30, 2019

Financial Summary – Unaudited

(Expressed in thousands of United States dollars, except per share amounts)

Three months
ended

Three months
ended

Nine months
ended

Nine months
ended

September
30,

September
30,

September
30,

September
30,

2019

2018

2019

2018

Operating revenues

$111,830

$117,781

$337,040

$343,101

Net income

$33,855

$127,217

$97,436

$148,047

Adjusted net income1

$37,882

$37,452

$110,706

$94,581

Earnings per share, diluted2

$2.20

$10.76

$6.36

$16.12

Adjusted earnings per share, diluted1,2

$2.46

$3.17

$7.23

$10.30

Diluted weighted average number of shares (in thousands)2

15,373

11,828

15,309

9,186

Adjusted EBITDA1

$79,328

$82,745

$232,447

$237,677

1 

Adjusted net income, adjusted earnings per share and adjusted EBITDA are non-GAAP measures. Refer to the reconciliation of net income to adjusted net income and net income to adjusted EBITDA.

Earnings per share and weighted average number of shares give retroactive effect to the reverse stock split of 1-for-14 implemented on May 2, 2019, for all periods presented.

Danaos’ CEO Dr. John Coustas commented:

“The Company’s adjusted net income of $37.9 million for the third quarter of 2019 increased by $0.4 million, or 1.1%, when compared to the third quarter of 2018. This improvement was primarily the result of a $4.6 million decrease in total operating costs and a $1.9 million decrease in net finance expenses, partially offset by a $6 million decrease in operating revenues mainly due to the re-chartering of certain of our vessels that concluded long-term above market charters over the last 12 months and were re-deployed at market rates during the quarter. Adjusted EBITDA for the third quarter of 2019 was $79.3 million, a decrease of $3.4 million compared to the third quarter of 2018.

The charter market has strengthened considerably during the last six months particularly for vessels larger than 5,500 TEU, although we have also seen an improvement in charter rates for Panamax vessels. This may be partially due to a decrease in fleet capacity as vessels are being temporarily removed from the fleet to be retrofitted with scrubbers in preparation for IMO 2020 sulphur emissions regulations. Larger vessel classes have seen the greatest downtime, and we expect this to continue through 2020 and help contribute to a healthy charter market. This coincides with improving underlying market demand supply fundamentals.

For 2020, we are aligned with the shipping analyst reports and our expectation is that container trade demand growth will outpace supply growth for the first time in almost 10 years. The IMF currently forecasts world GDP growth of 3.5% for 2020, and we expect that the multiplier of containerized trade growth vs GDP growth will slightly exceed 1x and that containerized trade will grow by up to 4% in 2020. On the supply side, capacity growth is not expected to exceed 3% in 2020.  Market participants, mainly liner companies, have generally remained reluctant to place newbuilding orders until the U.S. – China trade talks are settled and the IMO regulations come into effect, also taking the opportunity from the favorable demand / supply balance to gain pricing power on freight rates. The combined result of these factors should support the strengthening of the charter market going forward.

Our total contracted revenues as of September 30, 2019 were $1.4 billion, and we maintain our high charter contract coverage of 89% in terms of operating revenues and 75% in terms of operating days over the next 12 months. Our larger vessels remain employed on multi-year charters, and improving market conditions provide upside for the balance of our fleet. We remain committed to operational excellence and technological innovation, which allows us to continually deliver a high quality service to our customers. We are also well-positioned to pursue growth opportunities and deliver value to our shareholders due to our significantly improved financial position.” 

Three months ended September 30, 2019 compared to the three months ended September 30, 2018

During the three months ended September 30, 2019 and September 30, 2018, Danaos had an average of 55 containerships. Our fleet utilization for the three months ended September 30, 2019 was 98.7% compared to 97.4% for the three months ended September 30, 2018.

Our adjusted net income amounted to $37.9 million, or $2.46 per share, for the three months ended September 30, 2019 compared to $37.5 million, or $3.17 per share, for the three months ended September 30, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14 implemented on May 2, 2019). We have adjusted our net income in the three months ended September 30, 2019 for non-cash fees amortization and accrued financing fees of $4.0 million. Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The increase of $0.4 million in adjusted net income for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 is attributable mainly to a $4.6 million decrease in total operating expenses and a $1.9 million decrease in net finance expenses, which were partially offset by a $6.0 million decrease in operating revenues and a $0.1 million decrease in the operating performance of our equity investment in Gemini.

On a non-adjusted basis, our net income amounted to $33.9 million, or $2.20 earnings per diluted share, for the three months ended September 30, 2019 compared to net income of $127.2 million (including gain on debt extinguishment and refinancing-related professional fees described below), or $10.76 earnings per diluted share, for the three months ended September 30, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14).

Operating Revenues
Operating revenues decreased by 5.1%, or $6.0 million, to $111.8 million in the three months ended September 30, 2019 from $117.8 million in the three months ended September 30, 2018.

Operating revenues for the three months ended September 30, 2019 reflects a $6.0 million decrease in revenues due to the re-chartering of certain of our vessels that concluded long-term charters over the last twelve months and were re-deployed at lower spot rates in the three months ended September 30, 2019.

Vessel Operating Expenses
Vessel operating expenses decreased by 2.4%, or $0.6 million, to $24.9 million in the three months ended September 30, 2019 from $25.5 million in the three months ended September 30, 2018. The average daily operating cost per vessel for vessels on time charter was $5,298 per day for the three months ended September 30, 2019 compared to $5,427 per day for the three months ended September 30, 2018. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

Depreciation & Amortization
Depreciation & Amortization includes Depreciation and Amortization of Deferred Dry-docking and Special Survey Costs.

Depreciation
Depreciation expense decreased by 10.0%, or $2.7 million, to $24.3 million in the three months ended September 30, 2019 from $27.0 million in the three months ended September 30, 2018 mainly due to decreased depreciation expense for 10 vessels for which we recorded an impairment charge on December 31, 2018.

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs decreased by $0.3 million, to $2.3 million in the three months ended September 30, 2019 from $2.6 million in the three months ended September 30, 2018. The decrease was mainly due to a decreased number of vessels dry-docked.

General and Administrative Expenses
General and administrative expenses decreased by $1.0 million, to $6.4 million in the three months ended September 30, 2019, from $7.4 million in the three months ended September 30, 2018. The decrease was mainly due to decreased remuneration expenses.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses.

Voyage Expenses
Voyage expenses decreased by $0.1 million, to $2.8 million in the three months ended September 30, 2019 from $2.9 million in the three months ended September 30, 2018.

Interest Expense and Interest Income
Interest expense decreased by 11.2%, or $2.3 million, to $18.2 million in the three months ended September 30, 2019 from $20.5 million in the three months ended September 30, 2018. The decrease in interest expense is attributable to:

(i) a $4.9 million decrease in interest expense on two of our credit facilities for which we recognized an interest expense accrual in the third quarter of 2018, which has been classified on our balance sheet under “Accumulated accrued interest” and represents future interest expense for the relevant facilities that has been recognized in advance as a result of the application of Troubled Debt Restructuring (“TDR”) accounting in connection with our 2018 debt refinancing;

(ii) a $3.1 million increase in interest expense due to an increase in debt service cost by approximately 1.7%, partially offset by a $347.7 million decrease in our average debt (including leaseback obligations), to $1,603.1 million in the three months ended September 30, 2019, compared to $1,950.8 million in the three months ended September 30, 2018; and

(iii) a $0.5 million decrease in the amortization of deferred finance costs and debt discount related to our 2018 debt refinancing.

As of September 30, 2019, our bank debt outstanding, gross of deferred finance costs, was $1,450.0 million and leaseback obligation was $141.4 million compared to bank debt of $1,694.5 million outstanding as of September 30, 2018.

Interest income increased by $0.1 million to $1.6 million in the three months ended September 30, 2019 compared to $1.5 million in the three months ended September 30, 2018.

Other finance costs, net
Other finance costs, net decreased by $0.4 million to $0.3 million in the three months ended September 30, 2019 compared to $0.7 million in the three months ended September 30, 2018 mainly due to decreased exit fees expenses.

Equity income on investments
Equity income on investments decreased by $0.1 million to $0.6 million in the three months ended September 30, 2019 compared to $0.7 million in the three months ended September 30, 2018 and relates to the operating performance of Gemini Shipholdings Corporation (“Gemini”), in which the Company has a 49% shareholding interest.

Gain on debt extinguishment
The gain on debt extinguishment of $116.4 million in the three months ended September 30, 2018 related to our 2018 debt refinancing and consisted of debt principal reduction net of refinancing related fees.

Loss on derivatives
Amortization of deferred realized losses on interest rate swaps remained stable at $0.9 million in each of the three month periods ended September 30, 2019 and 2018.

Other income/(expenses), net
Other income/(expenses), net was nil in the three months ended September 30, 2019 compared to $21.6 million in expenses in the three months ended September 30, 2018 mainly due to $21.8 million of refinancing-related professional fees in the prior period.

Adjusted EBITDA
Adjusted EBITDA decreased by 4.1%, or $3.4 million, to $79.3 million in the three months ended September 30, 2019 from $82.7 million in the three months ended September 30, 2018. As described above, the decrease is mainly attributable to a $6.0 million decrease in operating revenues and a $0.1 million decrease in operating performance on our equity investments, which were partially offset by a $2.7 million decrease in total operating expenses. Adjusted EBITDA for the three months ended September 30, 2019 is adjusted for stock based compensation of $1.2 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018

During the nine months ended September 30, 2019 and September 30, 2018, Danaos had an average of 55 containerships. Our fleet utilization for the nine months ended September 30, 2019 was 98.8% compared to 96.4% for the nine months ended September 30, 2018.

Our adjusted net income amounted to $110.7 million, or $7.23 per share, for the nine months ended September 30, 2019 compared to $94.6 million, or $10.30 per share, for the nine months ended September 30, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14 implemented on May 2, 2019). We have adjusted our net income in the nine months ended September 30, 2019 for non-cash fees amortization and accrued financing fees of $13.3 million. Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The increase of $16.1 million in adjusted net income for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 is attributable to a $14.0 million decrease in net finance expenses and a $8.6 million decrease in total operating expenses, which were partially offset by a $6.1 million decrease in the operating revenue and a $0.4 million decrease in the operating performance of our equity investment in Gemini.

On a non-adjusted basis, our net income amounted to $97.4 million, or $6.36 per diluted share, for the nine months ended September 30, 2019 compared to net income of $148.0 million (including gain on debt extinguishment and refinancing-related professional fees described below), or $16.12 per diluted share, for the nine months ended September 30, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14).

Operating Revenues
Operating revenues decreased by $6.1 million, to $337.0 million in the nine months ended September 30, 2019 from $343.1 million in the nine months ended September 30, 2018.

Operating revenues for the nine months ended September 30, 2019 reflect:

  • a $10.0 million decrease in revenues in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, mainly due to the re-chartering of certain of our vessels that concluded long-term charters over the last twelve months and were re-deployed at lower spot rates in the nine months ended September 30, 2019; and
  • a $3.9 million increase in revenues due to higher fleet utilization of our vessels in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Vessel Operating Expenses
Vessel operating expenses decreased by 1.4%, or $1.1 million, to $78.0 million in the nine months ended September 30, 2019 from $79.1 million in the nine months ended September 30, 2018. The average daily operating cost per vessel for vessels on time charter was $5,605 per day for the nine months ended September 30, 2019 compared to $5,678 per day for the nine months ended September 30, 2018. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

Depreciation & Amortization
Depreciation & Amortization includes Depreciation and Amortization of Deferred Dry-docking and Special Survey Costs.

Depreciation
Depreciation expense decreased by 10.7%, or $8.6 million, to $72.1 million in the nine months ended September 30, 2019 from $80.7 million in the nine months ended September 30, 2018 mainly due to decreased depreciation expense for 10 vessels for which we recorded an impairment charge on December 31, 2018.

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs decreased by $0.4 million, to $6.5 million in the nine months ended September 30, 2019 compared to $6.9 million in the nine months ended September 30, 2018. The decrease was mainly due to a decreased number of vessels dry-docked.

General and Administrative Expenses
General and administrative expenses increased by $1.4 million, to $19.8 million in the nine months ended September 30, 2019, from $18.4 million in the nine months ended September 30, 2018. The increase was mainly due to increased share based compensation costs.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses.

Voyage Expenses
Voyage expenses decreased by $0.4 million, to $8.8 million in the nine months ended September 30, 2019 from $9.2 million in the nine months ended September 30, 2018.

Interest Expense and Interest Income
Interest expense decreased by 17.3%, or $11.5 million, to $54.9 million in the nine months ended September 30, 2019 from $66.4 million in the nine months ended September 30, 2018. The decrease in interest expense is attributable to:

(i)  a $27.8 million decrease in interest expense on two of our credit facilities for which we recognized an interest expense accrual in the third quarter of 2018, which has been classified on our balance sheet under “Accumulated accrued interest” and represents future interest expense for the relevant facilities that has been recognized in advance as a result of the application of TDR accounting in connection with our 2018 debt refinancing;

(ii)  a $12.9 million increase in interest expense due to an increase in debt service cost of approximately 2.3%, partially offset by a $544.7 million decrease in our average debt (including leaseback obligations), to $1,629.8 million in the nine months ended September 30, 2019, compared to $2,174.5 million in the nine months ended September 30, 2018; and

(iii) a $3.4 million increase in the amortization of deferred finance costs and debt discount related to our 2018 debt refinancing.

As of September 30, 2019, our bank debt outstanding, gross of deferred finance costs, was $1,450.0 million and leaseback obligation was $141.4 million compared to bank debt of $1,694.5 million outstanding as of September 30, 2018.

Interest income increased by $0.5 million to $4.8 million in the nine months ended September 30, 2019 compared to $4.3 million in the nine months ended September 30, 2018.

Other finance costs, net
Other finance costs, net decreased by $0.2 million, to $2.4 million in the nine months ended September 30, 2019 from $2.6 million in the nine months ended September 30, 2018.

Equity income on investments
Equity income on investments decreased by $0.4 million to $0.5 million in the nine months ended September 30, 2019 compared to $0.9 million in the nine months ended September 30, 2018 and relates to the operating performance of Gemini, in which the Company has a 49% shareholding interest.

Gain on debt extinguishment
The gain on debt extinguishment of $116.4 million in the nine months ended September 30, 2018 related to our 2018 debt refinancing and consists of debt principal reduction net of refinancing related fees.

Loss on derivatives
Amortization of deferred realized losses on interest rate swaps remained stable at $2.7 million in each of the nine months ended September 30, 2019 and 2018.

Other income/(expenses), net
Other income/(expenses), net was $0.4 million in income in the nine months ended September 30, 2019 compared to $50.6 million in expenses in the nine months ended September 30, 2018 mainly due to $51.5 million of refinancing-related professional fees in the prior period.

Adjusted EBITDA
Adjusted EBITDA decreased by 2.2%, or $5.3 million, to $232.4 million in the nine months ended September 30, 2019 from $237.7 million in the nine months ended September 30, 2018. As described above, this decrease is mainly attributable to a $6.1 million decrease in operating revenue, a $1.3 million increase in other finance costs and a $0.4 million decrease in operating performance on our equity investments, which were partially offset by a $2.5 million decrease in total operating expenses. Adjusted EBITDA for the nine months ended September 30, 2019 is adjusted for stock based compensation of $3.1 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Recent Developments
On October 2, 2019, we entered into an agreement to acquire a 8,500 TEU container vessel built in 2005 for a gross purchase price of $25.0 million. This vessel is expected to be delivered to us prior to the end of May 2020.

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