Danaos Corp. (NYSE:DAC), which owns containerships and charters them to liner companies, said it had adjusted net income of $34.3 million for the second quarter ended June 30, a 17.5% improvement over the $29.2 million earned in the same period in 2018.
John Coustas, the chief executive officer of Athens, Greece-based Danaos, said, “Escalations in trade tensions between the U.S. and China persist, and uncertainty on the outcome and the impact on trade flows has discouraged market participants from placing newbuilding orders. Collectively, these factors are expected to result in positive vessel supply side effects, which should support the strengthening of the charter market going forward.”
Danaos said adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the second quarter of 2019 was $75.6 million, a decrease from the $78.3 million recorded in the second quarter of 2018. The company said the decrease “is mainly attributable to a $1.4 million increase in net finance expenses, a $1.1 million decrease in operating revenues and a $0.2 million decrease in operating performance on our equity investments.”
Operating revenue was $112.3 million in the second quarter of 2019, compared with $113.5 million in the second quarter of 2018.
The improvement in earnings “was primarily the result of a $4.4 million decrease in net finance expenses and a $2 million decrease in total operating costs, partially offset by a $1.1 million decrease in operating revenues mainly due to the rechartering of certain of our vessels that concluded long-term charters over the last 12 months and were redeployed at lower rates during the quarter,” said Coustas.
Adjusted diluted earnings per share in the second quarter were $2.24, compared to $3.72 in the second quarter of 2018. That decrease reflects an increase in the diluted weighted average number of shares to 15.31 million in the second quarter of 2019, compared to 7.84 million in the second quarter of 2018. Danaos said it effected a 1:14 reverse stock split on May 2 that cured a previously announced NYSE deficiency caused by its stock trading below $1 per share.
“The charter market for 5,500+ vessels TEU remained strong over the last three months, and the market for Panamax vessels is improving due to the lack of availability of larger vessels. Rates on smaller vessels remain stable albeit at relatively low levels,” said Coustas. “We anticipate that the implementation of IMO 2020 sulfur emissions regulations will result in a healthy charter market for the larger vessels through 2020 due to downtime related to scrubber retrofits and reduced sailing speeds that a high fuel price environment are expected to bring about.”
Danaos has a fleet of 59 ships ranging in size from 2,200 to 13,100 TEUs, including four ships acquired by Gemini Shipholdings Corp. in which Danaos has a 49% equity interest. Customers include many of the major liner companies.
Asked during a call with securities analysts about President Trump’s announcement last week that he may impose a 10% tariff on imports of an additional $300 billion in Chinese goods, Coustas noted that it is difficult to change supply chains and if companies source from other Asian countries, that will have little effect on the container shipping market.
“In terms of transport work, it’s the same if not more,” he said. “But I don’t see that we are going to have any immediate effect.”
With last year’s tariffs resulting in some companies pulling forward shipments and increasing stocks, he said, “I don’t see this happening this year and don’t see any dramatic impact. A 10% increase in cost, if you combine it with the devaluation of the yuan of at least 5 to 7% in the last year, it’s practically offsetting one another.”
Coustas suggested the trade war may have a bigger effect in the dry bulk shipping markets if the Chinese don’t buy U.S. agricultural products, but he also noted that as China buys soybeans from Brazil, Brazil is increasing purchases of soybeans from the U.S. for domestic use.
In an interview with the South China Morning Post last month, Grant Kimberley of the Iowa Soybean Association compared developments in the soybean trade to “a big game of musical chairs, but it’s not something you would draw up in an economics class as a model of efficiency.”
But the additional ship movements could benefit owners of dry bulk ships.
“The trade war is much more negative in terms of sentiment than in terms of measurable flows,” said Coustas.