FLEX LNG Ltd.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FlexLNG Q3 2020 Earnings Presentation Conference Call. At this time, all participants will be on a listen-only note. After the speaker presentation, there will be a question and answer session, at which time, if you wish to ask a question, you will need to press star and well in the telephone keypad. I must advise you that this conference is being recorded today, and I would now like to honor the conference over to your first speaker, Mr. Olsen Kaleklov. Thank you. Please go ahead.

Okay, thank you, and welcome to FlexLNG's 2020 third quarter presentation. My name is Øystein Kalleklev, and I am the CEO of FlexLNG Management. I will be joined today by our CFO, Harald Gurvin, who will go through the numbers as well as providing a financial update. A replay of the webcast will also be available at flexlng.com. So slide number two is a disclaimer with regards to, among others, forward-looking statements, non-gap measures, and completeness of details. The full disclaimer is available in the presentation, and we recommend that the presentation is read together with the earnings report, as well as our 20F annual report. So slide number three, the highlights. Not surprisingly, the spot markets stayed weak during the spring and summer, due to the fallout from the COVID-19 pandemic. This adversely affected demand for natural gas, resulting in record low prices and thereby incentivizing a flurry of cancellation of flexible U.S. cargoes. Nevertheless, the market started to improve by August as restrictions were eased and economic activity picked up. The improvement in the freight market was, however, somewhat derailed and delayed by the most active hurricane season on record in the U.S. resulting in temporary shutdowns of LNG export plants in the Gulf of Mexico. The tropical storm Iota recently became the third named tropical storm, breaking the record of 27 named tropical storms from 2005 when Hurricane Katrina devastated New Orleans. However, the supply disruptions in the U.S., as well as other places like Australia and Norway, together with the seasonal increased gas demand, spurred a big rally in global gas prices during the autumn, with ETF and JKM going from summer lows of $1 and about $2 per million BTU to about $5 and $7 respectively today. The gas rally has thus improved economics markedly for the industry. The strong prompt prices for LNG has resulted in floating storing being more or less liquidated at a time when floating storage typically tend to build up. Hence, our expectation that we would see a lot of floating storage this year due to the strong contangling gas prices during the summer vanished due to this incredibly strong gas price rally. The strong gas prices have resulted in cargo cancellations, tapering off, and this together with significantly more pull from Asia, which has pushed freight rates above $100,000 again by October. I'm pleased to say that despite the many challenges caused by the pandemic, we have continued to operate our ships with 100% uptime and excellent safety records. Cargoes have been delivered without disruption or delays to our customers. We have also taken delivery of four new LNG carriers from Yars in South Korea on budget as planned during July to October. And I will provide a bit more color on the operations shortly. In Q2, we delivered average time charter equivalent earnings or TCE of $47,000 per day. At our Q2 presentation in August, we guided that revenues would be higher in Q3 compared to Q2 as our fleet have been growing with the additional new builds. Revenues does grow from about 26 million to 33 million. We also guided that TCE for Q3 was expected to be similar to Q2, despite the cost associated with mobilizing the three new buildings we took delivery in third quarter. This estimate was indeed very accurate as our TCE in Q3 was exactly the same as in previous quarter at $47,000 per day. This means that we have been able to navigate through very tough market conditions caused by the pandemic in Q2 and Q3 without depleting any cash. In Q3 our adjusted profit was $1.2 million. Net income was higher at 3.8 million due to favorable changes in the valuation of our portfolio of interest rate derivatives, which is utilized to hedge our interest expenses. These financial instruments fluctuate with the interest rate level in the U.S., and interest rates have recently picked up a bit. The overall adjusted profit for Q2 and Q3 was thus about $500,000. Given the fact that we have been through the worst downturn since the Great Depression, This illustrates how robust our business is, as we have certainly not received any financial support or handouts from governments to cope with the economic consequences of the pandemic. In Q1, prior to the virus going viral on a global scale, we delivered fairly good trading results with TCE of $68,000. With the guidance of $70,000 to $75,000 for Q4, we are thus generating pretty good results, in the two winter quarters this year. Overall for the year, we should end up at around $60,000 per day, which is well above our cash break-even level of about $47,000 per day, despite the headwinds we have faced this year. This also illustrates how well we can do in a market where we are enjoying tailwinds. As we have taken delivery of three ships in the quarter, our remaining capex have now been reduced to $512 million, or reduced to about 380 million following the Amber delivery in October, subsequent to quarter end. We actually have 533 million in available debt for this CapEx, as we paid approximately 18 million in prepayments for Flex Amber as part of an agreement to move the delivery of her from end of August to mid-October. This in order to fit her into the schedule under the variable time charter, which we have secured for her. Given the fact we financed Flex Amber under a $156.4 million Chinese lease, our cash balance of $76 million at quarter end improved by about $26 million in connection with this delivery. Hence, we have a very healthy cash position, which we will continue to build up during Q4 as we expect to generate substantial cash flow given the guidance provided today. We are also pleased that we have been able to utilize a strong freight market to book significant portion of the first quarter next year. In first quarter, we expect to add two ships to our fleet, Flex Freedom in January, which was on the front page of our presentation, and Flex Volunteer in February. Hence, we have thus more ships available, but nevertheless, we have already booked about two-thirds of our available days, which includes these two new buildings. As we have several ships on variable hire, it's too early to guide on TCE numbers for Q1 next year, but we will be able to provide more color on this during our Q4 presentation in February next year. Hence, with strong cash position, a fully financed fleet consisting entirely of the next generation ships, coupled with good earnings visibility and the industry's lowest cash break-even levels, as well as light in the tunnel when it comes to COVID-19, given recent progress when it comes to vaccines. The board has therefore decided to reinstate the dividend. We have suspended the dividend for the last two quarters, given the risk and uncertainty created by the COVID-19 pandemic. Now, we have demonstrated that we can manage this risk very well, and we are thus pleased to again reinstate the dividend, which the board for Q3 has set at 10 cents per share. Moving on to slide 4, which provides an overview of our fleet composition. As of today, we have three ships on fixed TCs. This is Flex Ranger, which commenced a new TC with Spanish Utility Endesa at the end of May. In July and September, we took delivery of Flex Aurora and Flex Resolute, and both these two ships were fixed on shorter term TCs of 8 and 11 months, respectively. The Flex Aurora time charter has recently been extended to 11 months in total, similar to Flex Resolute. Today, we also have in total three ships currently operating under variable higher TCs. These variable higher TCs provide us with what could be described as utilization insurance in soft markets, while we maintain exposure to the overall freight market. As we've been bullish on considerably higher rates in Q4, we are just benefiting from increased earnings on these ships now. The ships serving such contracts are Flex Enterprise, Flex Artemis, which was delivered under a long-term variable TC to Gunvor in August, as well as Flex Amber, which we took delivery of in October, subsequent to quarter end. With improved spot market, we are also pleased to have four ships operating in the spot market, The ships currently trading spot are Flex Endeavour, Flex Rainbow, Flex Constellation, and Flex Courageous. For our spot ships, we do try to find a balance between maximizing rates and periods, as we do have three additional ships for delivery next year, and thus like to also add earnings visibility. We are thus pleased that we have already booked two-thirds of available days in first quarter next year, as mentioned. We have agreed with Teilhard to slip Flex Freedom into next year, and thus making her our 21 vintage. She was originally scheduled for delivery end of November this year. By postponing her to January 21, we are spreading out our dry docks, with 4 ships being 18 vintage, 2 ships 19 vintage, 4 ships 20 vintage, and the remaining 3 ships being 21 vintage. We expect to take delivery of Flex Freedom early January and we are now actively marketing her for potential clients. Flex Volunteer have already carried out her sea and gas trials and she can also be available early next year, but her scheduled delivery slot is end February. Our last new building will be Flex Vigilant, which is scheduled for delivery end of May. With Flex Vigilant on the water, Our new building program is complete with 13 large ultra-modern LNG carriers on the water by second quarter next year. Our earnings capacity will thus increase by 30% early next year compared to fourth quarter this year. And finally, all our invested equity will start generating income in contrast to 2018, 2019 and 2020, when a very large portion of our equity have been tied up in new buildings, which generate zero income. and thus dragging down our return on equity numbers for those who pay a lot of attention to those. So slide five, before handing over to Harald for a financial review, I want to touch upon a very important matter, which is always on the top of our agenda, but even more so this year due to the COVID-19 situation with all its implications. With the outbreak of the COVID-19, countries have locked down and put up a lot of travel restrictions and impediments for crew changes and repatriation of seafarers. This has resulted in what can only be described as a humanitarian crisis with significant concern for the safety of seafarers. According to an IMU report from September, there were 400,000 seafarers overdue on their contracts and another 400,000 seafarers at home unable to join their ships. 400,000 is one-third of the 1.2 million seafarers, a staggering and depressing number. While domestic employees in the transportation sector, as well as in international aviation, have been shielded from the restrictions, as they have been deemed essential workers in order to ensure that food, medicines and other goods is flowing, this has not been the case for seafarers. Close to 90% of goods are being transported at sea on about 60,000 cargo ships. While we are not transporting the last mile to consumers, the last mile transportation can't take place unless the goods on ships are being offloaded at ports. And by the way, port workers have also been deemed essential workers. So there is a large discrepancy here, and it's tempting to use another D word in this context to categorize these double standards. That said, it's positive to see that more countries are realizing that seafarers are essential to shipping and that shipping makes the world go round. So how have we in FLEX coped with the situation given these limitations? Let's just say we have been very busy. We have implemented strict standard operating procedures for joining and off-signing crew in order to safeguard crew, our operations and the society we serve. The standard operating procedure includes controlled quarantine and a PCR testing regime with a minimum of three negative tests, as tests can sometimes be unreliable in reference to Elon Musk's recent COVID tests. We have also developed an outbreak management plan, which we have shared with key clients, and the response has been very positive. The outbreak management plan has also been stress tested through third parties involved in our emergency drills. These procedures have been critical in avoiding any outbreak on our ships. As COVID-19 has impeded our ability to regularly visit ships, we have carried out regular video conference meetings with senior officers on board to make sure they receive the attention needed to coordinate crew changes and ensure morale on board. We have been ultra-focused on seeking every possible opportunity to carry out crew changes to minimize overdue contracts. I think our results in this regard are impressive. In the six-month period during May to October, we carried out 32 successful crew change operations. I would very much like to take the opportunity to thank our crew and also personnel for their dedication, patience, and hard work in organizing these crew changes, which I can assure you have not been straightforward. I'm happy to say that 93% of our crew is on time, i.e. they are not overdue on their contracts. That leaves us with 7% of our crew overdue on their contracts. This is unfortunate and something which could be avoided if groups were different. However, As mentioned, we are very focused on minimizing overdue states, and I'm pleased to say that 20% of these 7% is overdue by less than 30 days, while the remaining is less than 60 days. So we have no crew staying more than 60 days overdue. With some countries now easing restrictions on seafarers, we do hope to bring these numbers down to zero as fast as possible. Another issue created by the travel restrictions is conducting a regular ship inspection report program, or what we call SEIRE. We are required to carry out these inspections regularly, at least every six months, usually in connection with discharge. With travel limitations, it's been extremely difficult to carry out these inspections. But this has not stopped us from finding new smart ways to work, as society has made more progress on remote working the last year than the last decade. even in a conservative business like shipping. So far, we have carried out two remote CIRES in order to keep the certificates up to date. We have also carried out two remote change of management of our ships during this period, as well as two remote annual class surveys. So it's impressive to see that the technical personnel are able to get work done despite all the obstacles thrown at them. Our new building team have also faced logistical challenges in relation to delivery and manning of our new buildings. Despite obstacles, our ships have been crewed, mobilized and delivered according to budget and plans, so I would like to also extend my gratitude to our new building team before handing over to Harald for our financial review.

Thank you, Øystein. Looking at the income statement on slide 6, revenues for the quarter came in at 33.1 million, up from 25.8 million in the previous quarter. The time charter accrual and rate for both quarters was 47,000 per day, and the increase is due to delivery of three vessels during the quarter, increasing the number of vessel days. Adjusted EBITDA for the quarter was 21.9 million, up from 17.4 in the previous quarter. The result for the quarter includes a gain on derivatives of 2.1 million relating to our interest rate swaps, which includes an unrealized non-cash gain of 3.5 million. This compares to a loss of 6.6 million in the previous quarter, of which 6.2 million was unrealized. At quarter end, we had entered into interest rate swaps totaling 710 million at an average interest rate of approximately 1.2%. The gain on interest rate swaps was a result of the increase in longer-term interest rates during the quarter, following a significant drop during the first half of 2020 due to the COVID-19 pandemic. Net income for the quarter was 3.8 million, up from a net loss of 6.7 million in the previous quarter. Adjusted net income for the quarter was 1.2 million, or 2 cents per share, compared to an adjusted net loss of 700,000, or 1 cent per share, in the previous quarter. Then moving on to our balance sheet as per September 30th on slide seven. Following delivery of the three new buildings, our assets at quarter end consisted of nine vessels on the water with an aggregate book value of 1.7 billion. In addition, we have booked vessel purchase repayments of 218 million relating to the four new buildings still to be delivered at quarter end. This represents the advance payment on these, including the 17.8 million we prepaid on FlexAmber in July to postpone delivery to October. In connection with the vessel deliveries, the first three tranches totaling 387 million were drawn under the 629 million ECA facility we entered into in February, increasing the total debt by quarter end to 1.1 billion, of which approximately 54 million is due over the next 12 months and thus classified as current liabilities. Total equity as per quarter end was 816 million, giving a strong equity ratio of 41%. Looking at our cash flow on slide 8, cash flow from operations was close to 20 million in the third quarter. This includes positive working capital adjustments of 9.6 million, mainly due to an increase in prepaid hire following the stronger market in the fourth quarter compared to the third quarter. Scheduled loan installments were 9.3 million, and in addition, we had financing costs of 6 million mainly relating to upfront and commitment fees on the 629 million ECA facility and also the new 125 million facility for Flex Volunteer. Total new building capex for the three new buildings delivered during the quarter was 415 million. This was part financed by a drawdown of 397 million under the 629 million ECA facility with the remaining 27 million funded from our liquidity. In addition, as mentioned, we prepaid 17.8 million under the purchase agreement for FlexAmber in July. This brings total net payments towards new buildings and financing fees during the quarter to 51 million, which is the main reason for the 40 million decrease in cash to 76 million at quarter end. As mentioned, FlexAmber was delivered early October, whereby the 156.4 million sale and leaseback was executed. The 17.8 million prepared in July was deducted from the final amount payable on delivery, giving a positive net cash effect from the financing of 25.7 million, thus boosting the liquidity to just over 100 million post-quarter end. Moving on to slide 9, we have now secured attractive financing for all our vessels, including the four newly buildings still to be delivered at quarter end. Following the delivery of three vessels in the third quarter and the repayment on Pax Amber, The remaining capex at quarter end was 512 million, compared to secured financing of 533 million, giving a positive net cash contribution of approximately 20 million for the remaining four new buildings at quarter end. We have a very comfortable debt maturity profile, with the first maturity due in July 2024. Our diversified sources of funding, split between bank loans, ETA financing and lease financing, also gives a staggered debt maturity profile, mitigating refinancing risk. We have not only diversified our financing sources, but also our pool of lenders, which now includes 15 different financial institutions, demonstrating our ability to raise attractive funding in a challenging capital market. And with that, I hand the word back to Øystein, who will give an update on the market.