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Danaos(NYSE: DAC)
Q1 2022 Earnings Call
May 17, 2022, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Danaos Corporation conference call to discuss the financial results for the three months ended March 31st, 2022. 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 -- Chief Financial Officer
Thank you, operator, and good morning to everyone, and thank you for joining us this morning. 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 whether 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 a broad overview of the quarter.
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John Coustas -- Chief Executive Officer
Thank you, Evangelos. Good morning, and thank you all for joining today's call to discuss our results for the first quarter of 2022. The first quarter of 2022 was another exceptional one for Danaos, having already seeded the future with 2.7 billion contracted revenue while operating from a position of strength and confidence. This allowed us to invest in the future by ordering six vessels in the 7,000 to 8000 TEU range to be delivered between March and September 2024, ready to be converted to run on green methanol when such fuel is widely available.
Our position in ZIM continues to generate solid returns, including $110 million in net dividends declared in the first quarter. The broader market has been affected by geopolitical events, high energy prices, inflation, and interest rate outlook, and China's zero-COVID policy. Although box freight rates and charter rates have not been significantly affected, sentiment has changed, and market participants have adopted a more conservative short-term attitude. On the other hand, supply chain inefficiencies continue unabated, and there is little likelihood that conditions improve this year.
This has led to record profits for the liner companies and most importantly, higher contract levels. Also, fuel oil prices are reaching levels not seen for more than a decade at the same time as supply chain disruptions have resulted in an increase in average sailing speed. Over time, the global container network with normalize as new vessels are delivered and sailing speeds are used to enable the industry to comply with decarbonization timelines. In the midst of an uncertain backdrop, Danaos is well-positioned to continue to execute our strategy.
We are simultaneously pursuing fleet growth, returning value to shareholders, and further enhancing our balance sheet. Most recently, we have accelerated deleveraging to minimize the impact of rising interest rates. During the second quarter of 2022, we have already repaid early $364 million in debt and lease obligations while another $73 million, for which we have issued early prepayment notices, will also be repaid early through the end of the second quarter. As a result of this overall leverage reduction of $437 million, 13 vessels in our fleet will become unencumbered.
Liquidity also stands very strong. At the end of the first quarter, we had $708 million in cash and marketable securities, while during the second quarter we received $239 million of charter hire prepayment related to charter contracts for 15 of our vessels, representing a partial prepayment of charter hire payable during the period from May 2022 through January 2027. As a result of our actions, Danaos has the strongest balance sheet in the industry, which will enable us to continue to pursue attractive opportunities when they arise for the benefit of our shareholders. With that, I'll hand over the call back to Evangelos, who will take you through the financials for the quarter.
Evangelos?
Evangelos Chatzis -- Chief Financial Officer
Thank you, and good morning again to everyone, and thank you for joining us today. I will briefly review the results for the quarter and then open the call to Q&A. This quarter, we are reporting adjusted EPS of $11.36 per share or adjusted net income of $235.3 million, compared to adjusted EPS of $2.83 per share, or $58 million for the first quarter of 2021. This increase of $177.3 million in adjusted net income between the two quarters is the result of a $97.8 million increase in operating revenues and the $110 million of net dividend booked in relation to our ZIM equity holding partially offset by higher total operating expenses of $22.9 million, mainly due to the increase in the average size of our fleet by 11 vessels between the two quarters and 5.8 million increase in net finance expenses and a 1.8 million decrease in income from Gemini that was fully consolidated in the third quarter of last year.
More specifically, operating revenues increased $97.8 million to $229.9 million in the current quarter, compared with $132.1 million in the first quarter of 2021. This increase is attributed to a $48.9 million increase in revenues as a result of higher charter rates and a further $20.8 million revenues as a result of the vessel additions to our fleet between the two quarters. Revenues also increased by $11.4 million due to a straight-line revenue recognition accounting and a further $16.7 million being the amortization of assumed charter liabilities that came with recent vessel acquisitions. Vessel operating expenses increased by $8.1 million to $39.2 million in the current quarter from $31.1 million in the first quarter of 2021 as a result of the increase in the average number of vessels in our fleet, while the average daily vessel operating costs increased to $6,300 per day for the current quarter from $5,954 per day for the first quarter of last year, mainly due to COVID-19-related increases in crew remuneration and increased insurance expenses due to the higher insured values of the vessels in our fleet.
However, our daily operating cost remains as one of the most competitive in the industry. G&A expenses decreased by $3.5 million to $7.4 million in the current quarter, compared to $10.9 million in the first quarter of 2021, mainly due to decreased non-cash stock-based compensation of $4.8 million between the two quarters. And that was partially offset by increased management fees that are included in G&A due to the increased size of our fleet. Interest expense, excluding finance cost, amortization, and accruals increased by $3.5 million to $13.7 million in the current quarter, compared to 10.2 million in the first quarter of 2021.
This increase in interest expense is a combined result of a $2.1 million decrease in debt service cost because of the decrease in our average indebtedness between the two quarters by approximately $266 million, partially offset by an increase in overall cost of debt service by 20 basis points. We also have a reduced positive recognition through our income statement of accumulated accrued interest of $5.6 million that had been accrued in 2018 in relation to certain credit facilities that were refinanced last year. And as a result of the refinancing, the recognition of such accumulated interest has fallen. Adjusted EBITDA increased by almost 180% or $173.2 million to $269.5 million in the current quarter to $96.3 million in the first quarter of 2021 for the reasons 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 events disclosures. And a few of the highlights are: during the second quarter, as it was mentioned earlier, we substantially reduced leverage by early debt and lease repayments of $437 million, which combined with normal course scheduled debt repayments and included the new credit facility of $130 million that we expect to have in place within the second quarter, we are expected to reduce the corporate net debt to EBITDA ratio below one. As a result of these repayments, we will have a pool of 13 unencumbered vessels at the end of the second quarter, which will increase to 15 vessels after scheduled lease repayments that'll happen during Q3. As of the end of the first quarter, our contracted revenue backlog stood at $2.7 billion, with a 3.8-year average remaining charter duration.
While contract coverage is almost 100% for this year, 78% for 2023, while even for 2024, we are already at 57%. Our investor presentation has analytical disclosures on our contracted charter book. 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 for Q&A.
Questions & Answers:
Operator
[Operator instructions] Our first question will come from Chris Wetherbee with Citigroup. You may now go ahead.
Chris Wetherbee -- Citi -- Analyst
Yes. Hey. Thanks for taking the question, guys. Appreciate it.
Maybe we could start with -- I think you made a comment that the market has a more conservative short-term attitude to it. I want to get a sense of sort of what exactly you mean by that? What are you seeing in terms of your ability to sort of renew or sign new charterers in stands right now? Is there something that is -- has the potential to drag on a little bit longer? I guess, generally speaking, what's your sense from talking to your customers?
John Coustas -- Chief Executive Officer
Well, Chris, it's just that today, I mean, for us, for example, the earliest ship that we're going to have, let's say, for rechartering, it's somewhere mid-2023. And charterers, with what is happening all around in the world, they are really a bit reluctant at this moment to start discussions that far ahead, which maybe at the beginning of the year or earlier in the last December, they might be there to discuss.We haven't seen any let's say, significant reduction in charter rates, especially before -- because there are no big ships to be fixed. Some of the smaller ones, they are still getting very good charter rates. Maybe -- and we're talking about ships of 2,000 TEU and below, where we have seen, let's say, some kind of, let's say, weakening, not so much of the rates, but for example, of the period, when you could get, let's say, $40,000 day rate for three years.
Now you may get it only for two. So that's the type of, let's say, that we are sensing.
Chris Wetherbee -- Citi -- Analyst
OK. That's helpful. And I guess when you think about your backlog into 2023, when do you think charterers would be willing to engage. Do you think it's at the end of the year? Do you need to -- do you have the ability to sort of start tying up some of that capacity a little bit earlier.
Just want to get a sense of when you think you'll be able to begin to move on that open capacity.
John Coustas -- Chief Executive Officer
Yes. I mean there is no kind of urgency at this moment from anyone. And yes, I believe that, I mean, now we are going into the summer -- everybody is waiting to see also how China is going really to develop with their COVID situation. I think that's something that is probably more important than the war situation in Ukraine in terms of, let's say, the trading patterns.
And -- so it's kind of a wait and see, but I believe that practically, let's say, we should start discussing these positions, I mean, from already from the next quarter. We're already into some discussions with various charters. But when you're looking about, let's say, one year ahead, in general everyone feels pretty relaxed both from the charter side and also from the owner side.
Chris Wetherbee -- Citi -- Analyst
OK. OK. That makes sense. Let's talk a little bit about leverage.
You've done a great job bringing the leverage down. You're sub two times now. What's the right leverage level for you guys going forward?
John Coustas -- Chief Executive Officer
Well, the right leverage is not something, let's say, static -- and because leverage is -- has to be seen in the context of the cycles. It all depends on what kind of assumptions you are going to do on the -- on companies, let's say, EBITDA at the bottom of the cycle. It has also to do quite a lot with the age of the fleet. So I mean, typically, a company what we had also let's say, committed to the rating agencies was to have at, let's say, the bottom of the cycle, something between three and four.
And that is what we really maintain. And of course, looking at where we are today and where we are heading at leverage is going to be close to 1% or even below. That seems, of course, considerably low. But we have to take into account that the company will need significant investments for the future in terms of, let's say, eco-friendly tonnage and tonnage that is going really to be required for the industry's decarbonization.
And that's why we want to make sure that we will be able to participate in that cycle, because anyone who does not really enter into this new area, it's going to be the same thing like what happened with sailboats when the steam engine came along.
Chris Wetherbee -- Citi -- Analyst
Yes. That's it. It's a great analogy. I appreciate that.
OK. So it does sound like where EBITDA might go in more of a down cycle, leverage getting close to the right level for you in that context, but maybe there's more work to be done there. That's helpful. Maybe last question, just quick detail one on drydocking.
Can you just give us a sense of what to expect to Q3, Q4 year?
John Coustas -- Chief Executive Officer
For the remainder of the year, we do not have, I think we have three or four ships to dry dock this year. But I can give you more specific guidance offline. It's -- yeah, but it's nothing too significant. The only capex -- I mean, in terms of capex, we have progress payments for the new buildings we have placed on order.
We've already paid I think, around $80 million in Q2, and we're going to pay another $90 million or $95 million through the end of the year. So that's for the next Q2 and Q3, right? So we will have -- we will close the year with a total of around $180 million in progress payments for the new buildings. So that's much more significant item that the old dry docking here and there.
Chris Wetherbee -- Citi -- Analyst
OK. That's helpful. Thanks so much for the time. I really appreciate it.
John Coustas -- Chief Executive Officer
Thanks, Chris.
Evangelos Chatzis -- Chief Financial Officer
Thank you, Chris.
Operator
Our next question will come from Chris Robertson with Jefferies. You may now go ahead.
John Coustas -- Chief Executive Officer
Hi, Chris.
Operator
Pardon me, Chris Robertson, your line may be muted. It appears that there is no audio coming from his line. So for that, we will be moving on to the next question. Mr.
Robertson, if you are still on the line, please join the queue again. Our next question will be J Mintzmyer with Value Investor's Edge.
J Mintzmyer -- Value Investor's Edge -- Analyst
Hey. Good morning, gentlemen. Congrats on a fantastic operational quarter.
John Coustas -- Chief Executive Officer
Thank you, J.
Evangelos Chatzis -- Chief Financial Officer
Thank you, J.
J Mintzmyer -- Value Investor's Edge -- Analyst
Yeah. It's exciting to see that free cash flow shooting up. I wanted to start on a very positive note. I noticed, the extension on the CMA CGM ship, the ad market with the most it was 152,000 a day.
I've also noticed you had a couple more coming up in the next few months. Any indication on where those sort of rates are at right now, what sort of benchmark should investors look at?
John Coustas -- Chief Executive Officer
Well, that rate, as you understand, is for kind of a short-term let's say, extension that was 6 to 12 month charter. In general, especially the liner companies when they can, they try to avoid, let's say, such high short charters, and they prefer to take the vessel on a longer period at a lower rate. So if that's, let's say, was a bit of an exception. And -- we have another three ships which are under the same, let's say, arrangement with CMA, which is that -- they are paying us for six months.
Whatever is the charter rate that the brokers or the market, whatever the market rate for the six-month period. And we believe that, it's going to be more or less the same for when we're going to enter these discussions, which is going to be around the fall.
J Mintzmyer -- Value Investor's Edge -- Analyst
Yes. That's -- I mean that's fantastic. Even though it's just for six months, those rates are unbelievable. So you mentioned that, of course, the deleveraging and you mentioned the future growth.
I wanted to ask about your new build strategy. Right now, you have the set of ships. Is there a target leverage that you're looking to employ on those vessels? And what's the timeframe where you're looking to get a charter attached because my understanding is those are all charter for you at this point?
John Coustas -- Chief Executive Officer
Our basic strategy is to exactly because of our very strong balance sheet, which means that actually, we could take delivery of these vessels without debt if we wanted to. We prefer really to be more, let's say, opportunistic, which means to wait and fix the vessels as closer to delivery as possible, to the liner companies that have not, let's say, made any commitment in the specific size. And they would like really to employ such vessels. And there are a number of them who have not invested in, let's say, this segment, and we know that they will need of ships.
And we prefer, let's say, to wait to fix them when it is opportunity. The strategy of, let's say, signing, let's say, an LOI for the yard and then going shopping around to the liner companies to see which one is going to give you a charter to confirm the LOI. Yes, it's a strategy, of course, that one can do, but then returns are considerably lower because liner companies know that you need their charter in order to order the ships. That's why returns are considerably lower.
And on the other hand for these project rent make sense. You need a considerably higher leverage, which, of course, you can obtain on the basis of, let's say, the longer-term duration of the charter that you are getting. But in the end, you end up with the same or even less equity returns, but at a much higher leverage level.
J Mintzmyer -- Value Investor's Edge -- Analyst
Yes. It certainly makes sense. There's a lot to think about. I wish you the best of luck with fixing those and hopefully, the -- deleverage will be as high as you can possibly make it, at least on a new build.
I had a question on your repurchase. I'd be remiss not to bring this up. I'm sure you are equally unhappy with the share price performance over the past year. Your shares are extremely undervalued by any metric you want to use.
But I didn't see a repurchase authorization. I was just curious on the thought process behind that. I know you want to delever, but is it possible to do kind of all of the above?
John Coustas -- Chief Executive Officer
Well, as you said, our priority has been to secure the delivering, and on the other hand also to secure some of our growth with the new ships that we have ordered. As I said, the question of share buyback is always, let's say, on our radar screen. But the board has decided that the priority at this moment is exactly on the front which I've told you. It's always the issue.
As you know, we have increased our dividend recently by 50%, which means that we are mindful about the returns to our shareholders. And I think with the environment overall as it is today, we prefer to be, let's say, on the conservative side rather than just, let's say, spending the cash.I mean, we want Danaos to be associated, let's say, as a kind of AAA risk, although there is no AAA in shipping. But I'm pretty sure that with all our actions and our results, we are going to be upgraded by the rating agencies and this will give us even more tools for more solid growth. And when we are talking about also the credit markets, which are very important for the growth of the company, the number one theme is consistency.
And we have been consistently doing what we have said. There have been no surprises, and the company will not make any kind of surprises. So that everybody is fully aware of the story and our commitments.
J Mintzmyer -- Value Investor's Edge -- Analyst
Yeah. Certainly, we've been very pleased with the operational results. It's just frustrating to see you deliver multi-billion dollars in backlog, considerable deleveraging nice growth, and to see the share -- I mean, if you strip out ZIM, your ZIM holdings from your share price, your shares are actually down about 20% year over year, which is stocking. But I know you're doing your best operationally, and that's one of the main things you can ask for.
A final question, I really appreciate the time, what's the remaining strategy for those ZIM shares? You still have about $5 million of them? What's the strategy with those?
John Coustas -- Chief Executive Officer
As I said, we don't really have any -- as we said, we've already said before, this is not a long-term holding. But we do not have also any intention to get out of ZIM for the time being. We believe that ZIM in line with all the other liner companies is going to make fantastic results for 2022. And it's going to deliver a significant dividend like the one that we've received this year.
So for the time being, we are in a kind of a hold position.
J Mintzmyer -- Value Investor's Edge -- Analyst
Yeah. Certainly makes sense. Thank you, John. Thank you, Evangelos.
Keep up the great work.
John Coustas -- Chief Executive Officer
Thank you. Thank you, J.
Evangelos Chatzis -- Chief Financial Officer
Thank you, J.
Operator
[Operator instructions] It appears there are no further questions at this time. I would like to turn the call back over to Dr. Coustas for any further comments or closing remarks.
John Coustas -- Chief Executive Officer
Yeah. Thank you all for joining this conference call and your continued interest in our story. We look forward to hosting you on our next earnings call. Have a nice day.
Operator
[Operator signoff]
Duration: 33 minutes
Call participants:
Evangelos Chatzis -- Chief Financial Officer
John Coustas -- Chief Executive Officer
Chris Wetherbee -- Citi -- Analyst
J Mintzmyer -- Value Investor's Edge -- Analyst
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