Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the three months ended September 30, 2021. 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. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference call over to Dr. John Coustas. Doctor, the floor is yours, sir.
Thank you, operator, and good morning to everyone. This is Evangelos Chatzis, CFO. Good morning, everyone. Thank you for joining. Before we begin, I quickly want to remind everyone that 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 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 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, now let me turn the call over to Dr. John Coustas, who will provide the broad overview of the quarter.
Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the third quarter 2021. We are certain that everyone is aware of the well-documented disruptions to the global supply chain that continue unabated. This situation, despite its negative effect on world growth, had extremely positive effects in our market, which continues from strength to strength. Despite efforts by all participants to alleviate the disruptions to the global supply chain, there are no signs that conditions are improving. The main contributing factors are an increase in demand, lack of available vessels to satisfy such demand, and low levels of productivity in the ports and other land-based infrastructure. Additionally, as new vessel deliveries in 2022 are actually expected to be lower than in 2021, we do not expect any respite, at least from the vessel supply front, in the near term.
In 2023, increased deliveries are forecasted, although there will be an offsetting effect from new environmental regulations that will likely tighten the effective supply of vessels due to the anticipated reduction in speed. Overall, we do not expect a dramatic difference, provided demand remains healthy. During the third quarter, we consummated the acquisition of Gemini and acquired six more than 5,500 TEU vessels, all with existing cash resources. On the back of these moves, we have achieved record EBITDA and net income. We have also expanded our charter coverage, and now we have in excess of $2 billion of chartered backlog. Our share ownership in ZIM, although adjusted as per our usual practice, will also contribute around half a billion dollars to our earnings for 2021, which is outstanding.
Our liquidity in terms of cash and marketable securities is still close to $0.5 billion, and we are closely monitoring our options and strategy for next year to deliver even better results for the company and our shareholders. In the meantime, liner companies are announcing record results, which is extremely positive for Danaos, as the strong credit quality of our customers continues to improve. The continued strong performance of Danaos is ensured by existing charters, with an average charter duration of 3.3 years, and new charters that lock in current rates for several years. We expect strong market conditions to persist in the near term, which will support a strong rechartering environment into next year and should ensure our stellar performance for the next three years. Once again, the market dynamics are in our favor, and we'll continue to deliver best results possible for our shareholders.
With that, I'll hand the call over back to Evangelos, who will take you through the financials for the quarter.
Thank you, John, and good morning again to everyone. I will briefly review the results for the quarter and then give call participants the opportunity to ask questions. We are reporting adjusted EPS for the third quarter of 2021 of $5.32 per share, or adjusted net income of $109.5 million, compared to adjusted EPS of $1.91 per share, or $47.3 million, for the third quarter of 2020.
This increase between the two quarters is mainly the result of a $77 million increase in operating revenues and a $12.3 million dividend collected from ZIM during the current quarter, partially offset by higher total operating expenses of $17.3 million due to the increase in the average size of our fleet by 8 vessels between the two quarters and a $8.3 million increase in net finance expenses. More specifically, operating revenues increased by $77 million to $195.9 million in the current quarter compared to $118.9 million in the third quarter of 2020. This increase is attributed to a $30.6 million increase in revenues as a result of higher charter rates and $15.6 million of incremental revenues as a result of the vessel additions to our fleet between the two quarters.
Revenues also increased by $21.5 million, mainly due to straight-line revenue recognition accounting, then further increased by $9.3 million being the amortization of the assumed charter liabilities of the recent vessel acquisitions. Vessel operating expenses increased by $7 million to $34.7 million in the current quarter from $27.7 million in the third quarter of 2020, mainly as a result of the increase in the average number of vessels in our fleet. While the average daily vessel operating cost increased to $5,918 per day for the current quarter from $5,467 per day in the third quarter of 2020. And that was mainly due to COVID-19 related increase in expenses and crew remuneration. However, our daily operating cost still remains as one of the most competitive in the industry.
G&A expenses increased by $1.3 million to $7.3 million in the current quarter compared to $6 million in the third quarter of 2020, mainly due to increased management fees due to the aforementioned increase in the size of our fleet. Interest expense excluding finance cost amortization and accruals increased by $7 million to $14.5 million in the current quarter compared to $7.5 million in the third quarter of 2020.
The increase in interest expense is a combined result of a $0.7 million increase in interest expense because of an increase in the cost of debt service by approximately 0.4%, partially offset by a decrease in our average indebtedness by approximately $80 million between the two periods and reduced positive recognition through our income statement of accumulated accrued interest of $6.3 million that had been accrued in 2018 in relation to two of our credit facilities that were refinanced this April. As a result of such refinancing, the recognition of such accumulated interest has been significantly decreased.
Adjusted EBITDA increased by 79.6% or $66.3 million to $149.6 million in the current quarter from $83.3 million in the third quarter of 2020, for the reasons outlined earlier on this call. We also encourage you to review our updated investor presentation that has already been uploaded on our website. A few of the highlights are, on the operating side, over the past few months, we have forward fixed several vessels at higher, significantly higher than current charter rates. Our investor presentation has analytical disclosure on our contracted charter book and the step ups in the charter rates.
As a result of these improved fixtures, and including the Gemini vessels that were fully consolidated on July 1, 2021 and the acquisition of the six 5,500 TEU wide-beam container ships, our contract backlog now stands at $2.1 billion with a 3.3-year average charter duration, while contract coverage in terms of operating days is already at 100% for this year and 90% for 2022. 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.
Yes, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time a question has been addressed and you'd like to withdraw your question, please press star then two. Again, it is star then one to ask a question. At this time, we'll just pause momentarily to assemble our roster. The first question we have will come from Randy Giveans of Jefferies. Please go ahead.
Howdy, gentlemen. How's it going?
Hi, Randy. How are you?
Well, doing well. I guess my first question is, you know, you stated in the press release you have about 90% of days already covered in 2022, and likely that number is higher, right, when you assume the options get exercised.So, I guess two-part question there for next year, how many vessels become open in 2022, and when do you expect to fix those? Adn then secondly, can you give some kind of EBITDA guidance for next year? It seems like $650 million is a possibility.
Yeah. Thank you, Randy. Starting from the last part, we obviously do not formally provide EBITDA guidance. However, you have the current this quarter's EBITDA, which is $150 million. Given that over the next quarters when the new charter is kicking, it's obvious that this number is gonna go up. The current, let's say, annualized Q3 points to 600 points, and I can tell you with a great degree of certainty that it's gonna be north of that. Also we have disclosed our contracted revenue for next year, and people can do their math around EBITDA margins and so on and so forth. So that's how it relates to EBITDA.
The other thing is that, because this is part of earnings, that in this quarter we had a dividend from ZIM. Next year it is also anticipated that ZIM will pay out further dividends, and that will be part of our earnings although it's a quote, unquote, "non-operating item", if you wish. It's not earnings from the ships themselves. This ought to be taken into consideration when looking out for EBITDA and earnings for next year. And on your question on rechartering, yes, 10% of our days we have, stated also in our presentation are open, which would point, let's say, to seven ships for the full year. It's a slightly higher number than seven because ships open up gradually within the year.
I don't have the exact number at this point, but it's maybe 12 or 14 ships or something like that. As you rightly pointed out, we calculate this on the back of minimum contract durations. There are options that charterers have on several of these ships that one would expect will be exercised because they will remain below market. But we cannot make such assessments when publicly showing the contract coverage numbers. In our 6-K, for your benefit and for all investors or analysts that want to review this, there is a very analytical table with all the charter arrangements and the options, so people can make up their minds themselves on what they believe may or may not be exercised.
Got it. Okay. That's fair. Now on the kind of balance sheet side, looks like you still have about 7.2 million shares of ZIM, worth, you know, I don't know, $350+ million. So, I guess with that, any updates on timing of the sale of those? I know you trimmed one million here in the last few weeks or so. On the other side of that, you clearly have, to use your term, war chest of cash now, and it's growing. What are you likely to do with that kind of excess liquidity here in the coming quarters?
Before John answers the question on the strategy around ZIM, I'd like to point out that, you know, we have already spent in Q3 the Gemini acquisition was 75 odd million in net cash outflow plus $260 million for the six new ships. We have invested our cash, therefore, and I wouldn't call it a war chest, but the cash balance that has been built up was put to use very effectively, I'd say. Of course, it will again build up going forward. Where we are today, we believe we have utilized capital appropriately, so far. I'll let John take the ZIM question.
Yeah. You know, we believe that, you know, the ZIM shares are actually undervalued, okay? We wanted to sell, you know, some shares because if eventually we would like, let's say, to exit, we need, you know, to assist a bit in the liquidity of ZIM shares. I think for the time being we are done with our sales. We are going to wait also to see ZIM results. But when practically, you know, from the guidance which they are giving, you have a market cap which is equivalent to, you know, 2021 EBITDA, it's obviously, you know, a very cheap stock.
Sure.
So, yeah, we are not in a hurry at this moment. We believe that there is significant appreciation of the stock. And you know, as Evangelos said, we've already done significant investments. We are monitoring, let's say, if there are any exceptional opportunities to invest. Nothing like that at this moment visible. So, we will continue, first of all, to optimize our debt to you know, of course, definitely we're going to increase the dividend. We are committed to that.
Great.
So, I believe that we will plan a cautious, really path to solid growth both for the company and the dividend.
Perfect. Yeah, no, that's fair. I think just to reiterate, ZIM is still cheap. Clearly, Danaos is still cheap. Good to hear that the dividend is gonna be increased. We'll be watching for that. Thanks so much, and keep up the great work.
Thank you. Thanks, Randy.
Again, if you'd like to participate in today's Q&A, please press star then one on your touchtone phone. The next question we have will come from Chris Wetherbee of Citi.
Hi, this is Eli Winski sitting in for Chris Wetherbee. Congrats on the quarter, and thanks for taking the call. My first one for you guys is more of a conceptual one, right? So, given the higher congestion that we're seeing broadly, the upward pressure it's putting on the rate environment, what is your visibility in terms of the new builds? Do we find that some are holding off on new builds until we have more clearance on what the congestion environment might be looking like in the future?
Well, you know, the congestion environment is you know, not going to be solved by just more ships. So, you know, that is exactly why we have seen in general a pause in new buildings. Of course, there are lots of ships in the pipeline, but for the time being, everybody really has kind of pushed a bit of a hold both because new building prices have gone up, but also because we're talking about late 2024 or 2025 deliveries when no one will know exactly what the demand supply balance is going to be.
On the, you know, on the other front, you've probably been following what's going on on COP26, that shipping really is committed to have zero carbon shipping by 2050. But you know, we need much more clarity about that from the governments who are going to provide the fuel for that. Also what is important, everybody understands that, you know, this creates a kind of a limit into the new buildings you order today, whether they are, let's say conventional or LNG, because, you know, these are both, I mean, fossil fuel propulsion. And these ships which are going to be delivered 2025 will last well into 2050 and beyond.
Every such decision today is definitely not a plus for a decarbonization horizon.
That makes sense. Thank you. I mean, just going off of that a little bit more, given the age of the current fleet right now, do you feel that you might have more of a propensity to lean towards a more eco-focused fleet, quicker than maybe some of the other peers in the marketplace might be able to? Or do you expect just to try to capitalize on the higher rate environment with the current fleet and just try to hold off as long as possible on making additional investments into the eco category?
Look, as I said, the issue, I mean, we are definitely amongst, let's say, our peers, we definitely have the largest kind of, let's say, resources if we want, assuming, let's say also that we dispose the ZIM shares in order to, let's say, proceed into a significant new building program. The thing is, we don't want to order, let's say, new buildings unless we are sure that these ships will not suffer technological obsolescence within the next 15 to 20 years. That is why we are extremely careful with all these decisions.
On the other hand, you know, I have been into various conferences lately, and it's been recognized that overall, from an environmental point of view, it makes much more sense to extend, let's say, the life of an existing ship for another five to six years, to give, let's say, the appropriate timeline for research towards more zero carbon vessels becoming available. Rather than just rushing to order new ships today, but practically you will need to have them on the water for the next 25 to 30 years in order really to amortize their cost.
That makes sense. Thank you. It'll be interesting to see how this plays out in the coming years. I think I have three quick ones for you. In terms of the longer and improving fixtures, do you see customers asking to front load any of those contracts, given lower visibility in the longer term?
There are customers who are not a lot. It's just a couple of them who have asked that. This is mainly from their point of view. It's probably for their own tax considerations. You know, they have very high income, you know, either, you know, during this year, 2021 and 2022. They would prefer to front load the rate and then to have, let's say, a lower rate going forward when people expect that from 2023, probably we're going to see a better normalization of the TEU rates.
Thank you. Can you just provide a little bit of color on off-hire days and scheduled dry docks moving forward? You know, I don't ask you to crystal ball it, but just any color that we can see here on the 137 off-hire days. Was that just due to a broader labor shortage? Any information there would be helpful and maybe how to think about it moving forward.
I mean, we typically.
That's Evangelos. We typically have, let's say, out of the 65 days in the year, on average, the ships would operate 360 days, right? Those five days take into account unforeseen off-hires, which are very small, the way we run our ships, and also dry dockings. That's a blended average for 10 years, so it's a pretty reliable number. Now, you of course have unforeseen off-hires. You may have an incident. You know, you may have a machine failure, engine failure, whatever that may be, and those, of course, cannot be predicted. So for Q3, we did have such an incident with one of our ships, which was actually off-hire for the full quarter.
We don't expect that this is replicated in the coming quarters, or at least we hope it's not replicated in the coming quarters. On a normalized run rate basis, 360 days is something that one can work with.
That makes sense. Thank you all very much.
Thank you.
Next we have J Mintzmyer of Value Investor's Edge.
Hey, good morning, gentlemen. Congrats on a fantastic quarter. Excellent result.
Hi, J.
Hi, J.
The one thing I wanted to dial in on, and Randy sort of started addressing it, but you have that one million share sale in ZIM. The question I had on that is, you mentioned that you're done selling for now, you think ZIM's cheap. I'm a little curious because the lockup ended at the start of September. The shares were $55, $60, $61 all September, and then they didn't drop until after into October. They dropped to $44. It seems like you sold them at the very bottom and now they're higher. Was that timing just bad luck or was it some sort of plan to sell after the quarter ended? What happened there? Because if you wanted to sell a million or two million shares, why not sell at $60?
You know, we have to admit, yes, we didn't time properly that kind of sale. It would have been much better to do it, let's say when it was at $60. You know, that's why we said we're going to be much more, let's say cautious the way that we're going to do that. As you know, with sale of shares, you know, nobody has a crystal ball. We just hope we're gonna be kind of more proactive and luckier when disposing the rest of the shares.
Yeah, that's fair. I mean, there's a lot of hindsight. The reason I ask is there's a lot of rumors swirling around that, you know, you saw rates dropping or you panicked or you didn't like ZIM anymore and you decided to sell. It sounds like it was a pre-planned timing and sale and you just got kind of unlucky. Is that fair to say?
Well, it's exactly. Actually, we had already started a process about these one million shares. You know, then we had the lockup, and then we wanted to do a process for these shares. We wanted to institute, let's say, a beauty contest between, let's say, two investment banks. We gave them 0.5 million each to see, you know, which one is gonna sell best. That process a bit got delayed. You know, the stock dropped. It was just and in the end, we decided that, you know, it was more important for us to see, you know, how this process kind of works once we started it, rather than, you know, just try to time what's the top of the shares.
Yeah. It certainly makes sense. There's just a little bit of bad luck in timing, and it's too bad you weren't able.
Yeah.
To release those shares earlier.
J, definitely we did not panic because we are in the market. We see how strong the market is from the seat, so to say, inside, right? I mean, yes, the equity capital markets were concerned during that period of time, but we were not concerned. It was a matter of unfortunate timing. Again, this was not a big chunk of shares compared to the overall position. I think, we're hopeful that our average, when we complete the disposal, will be much, much better.
Yeah. I think that makes sense. I think everybody you communicated very clearly that eventually you're gonna trim a little bit of your position. I think everybody expects you to sell one million or two million shares. It's just a little surprising to see the price, but I think your explanation makes sense. The other question I wanna ask is looking at repurchases. Your net asset value, it's debatable, right? It depends on how much of a charter discount you attach. I have around $140. I've seen a couple other analysts that have similar numbers around $140 a share. You used to have a number in your slide that would show your calculation of NAV. I noticed that's not in this presentation. Do you have...
Part question one is, do you have any sort of internal calculation that you're willing to share? Question two is, at what point does the value disconnect get so huge that you have to go back to repurchases? At what point does the disconnect just get too huge?
Well, as you can see, although we used to report, actually our NAV on the basis of, let's say, relatively objective numbers, we decided to discontinue that, because, really, continuing on the basis which we're doing it was actually producing, some figures, which were considerably higher than the figures which you mentioned. We did not want really to create a kind of a, let's say, expectations for a situation of the market, you know, which, actually, was assuming a, practically a sale, of, all the vessels spot at this moment. It's very difficult, you know, to be able, you know, to adjust all that on the basis of the charters you have and all that, because there's been, you know.
I mean, that kind of calculation was done in a more normal kind of market where you had fluctuations of 15, 20, 30% in the prices, 40%. When you're having, you know, like an appreciation of 500%, I mean, I think you get more confusion rather than objectivity of where things really are.
Yeah. Definitely a quickly moving metric, right? It was fascinating. It depends on what charter discount you attach. But clearly there's a significant value disconnect here when your stock price or your entire enterprise value is less than even the value of your charters plus them shares plus scrap. Right? I mean, the company's trading a ridiculous valuation. At what point do you start to step in and say, "Okay, we have to repurchase here," versus just kind of holding on to this cash?
You know, that's a decision that we will need to visit with the board. We are closely monitoring that. We agree with you that the shares are undervalued. You know, we don't have, at this moment, any specific, let's say, discussion about repurchasing of shares. Definitely, you know, the more that we grow, let's say, our cash in the company, I mean, the more this problem, you know, will become more important and revisited.
Yes. Because I mean, at this point, just to add to what John said, we have used cash at hand, significant cash at hand to reinvest in the business. So at this particular point, we do not have the excess liquidity that we would otherwise have. Of course, as it builds up within Q1 and Q2, this will. The more the cash balance builds up, the more such capital allocation decisions become relevant.
All right. Sounds like a moving target, but congrats on the fantastic quarter, and we're really looking forward to the next one.
Thank you very much. Thank you, Jay.
Next, we have Omar Nokta of Clarksons Platou Securities.
Hey, guys. Good afternoon. I just wanted to ask. I noticed, and sorry if you already addressed this, but I wanted to ask. In looking in your fleet list, you're a bit opportunistic with one of your vessels, the 6,500 TEU . I forget the name of it, but it had rolled off of its long-term contract of $34,000 a day, and it was re-upped at $110,000 for six months. So clearly very, very strong rate. Wanted to ask you know, in terms of liquidity in the chartering markets today, is there you know, because there seems to have been somewhat of a pause, and there's a lot of disagreement as to whether this pause has to do with people's questions on the outlook or if it's just simply a lack of available tonnage.
If you were looking in the market today for that vessel and then its sister ships that roll off, what does the liquidity look like for, say, doing another six months in this 100,000 plus, and also what does it look like to do, say, a three-five year contract?
First of all, I'd like to explain that, you know, it's not in general our policy to do, let's say, just short-term charters. We rather prefer to lock in lower rates longer term. About this specific ship, which actually holds also for another four sister ships that we have. We had an agreement with the charterer that these last six months of the charter were going to be at index. So practically, we took the index from, you know, one of the brokers, and that was the rate. The same thing is going to happen with the sister ships which are opening sometime in 2022. What the index is going to be, I don't know.
That's really behind the, you know, the story behind that kind of rate. In general, you know, there is pretty strong demand for ships, especially also because in 2022 we have lower deliveries than in 2021. On the other hand, you know, charterers do not want to commit, let's say the more you go forward, the less they are eager to commit, but still, you know, at pretty good rates. I mean, we have, you know, just yesterday chartered one 2001-built 2,500 TEU for three years at a which is opening this one next April. We've chartered that ship for three years at a gross rate in excess of $28,000 a day.
I mean, these are really fantastic rates. Maybe the same ship may have got for six months, I don't know, $60,000 or $70,000 or either, I don't know. You know, historically, I mean, these rates are really phenomenal.
Yeah, definitely. Thanks, John. Just one follow-up. The six eco vessels you acquired that come with the low market charters, any updates on the forward fixing on any of those ships, especially the ones that come up here for renewal, I think around midyear of 2022?
We are in discussions with a number of parties. You know, we're not in a rush. We're not in a rush exactly specifically for these vessels, because these vessels, I mean, compete with new buildings practically. They don't compete with the older ships. I mean, today, if you go to the yard to build a new 5,500 TEU , that's pretty much what you're gonna have. You know, we understand that the more we're staying towards their opening date, the better deal we're going to have. We are in discussions, but there is no hurry to really fix them.
Okay. All right. Well, thank you. I'll pass it on.
Thank you.
Well, it appears that we have no further questions at this time. I would like to turn the conference call back over to Dr. Coustas for any further comments or closing remarks. Sir?
Thank you, operator. Thank you all for joining the conference call and your continued interest in our story. We look forward to hosting you on our next earnings call. Thank you.
We thank you, sir, also for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care, and have a great day.