FLEX LNG Ltd.

Good day and thank you for standing by and welcome to the Flex LNG Q2 2021 earnings presentation conference call. Currently, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press R1 on your telephone. And right now, I would like to hand the conference to our first speaker today, our CEO, Oystein Kalaklev. Please go ahead, sir.

Thank you, and welcome to today's FlexLNG webcast, where we will be presenting our second quarter results. I am Øystein Kalleklev, the CEO of FlexLNG Management, and I will be joined today by our CFO, Knut Roholt, who will walk and talk you through the numbers a bit later in the presentation before we conclude with the Q&A session. If you like to ask a question, you can either then ask by teleconference or use the chat function. On the cover page today, we have a picture of a recent addition to the fleet, Flex Vigilance, which is our 13th and last ship for delivery. She was delivered according to plan on May 31st and immediately commenced a time charter with Chenier with a minimum period of three years, and I will return to that shortly. So, disclaimer, before we start the presentation, I will remind you, of the disclaimer with regards to, among others, forward-looking statement, non-gap measures, and completeness of detail. We also recommend that the presentation is read together with the earnings report, which we also released today. So, let's go. Slide number three, highlights. The LNG market is booming, and if anything, we actually think the LNG prices are, at the moment, a bit too hot. The Asian spot LNG price, JKM, is at about $17 per million BTU. This is the highest seasonal price in nearly a decade and implies oil energy equivalent price of above $100. And keep in mind Brent oil price averaged $99 per barrel back in 2014 when we saw these kind of LNG prices. So LNG prices are currently at a big premium to oil. Meanwhile, the European gas prices are trading at all-time high levels, with the European gas prices, ETF, above $15, driven by high carbon and coal prices as well as very low gas inventory levels. Low gas inventories are something we have pointed to in the past would be a supported driver of the gas market this year. Hence with cargo prices at about 60 to 70 million dollars there is ample room to pay premium rates for freight which I will revert to in the market section. The second quarter is however traditionally the weakest quarter in the year and not surprisingly also the case this year. This is due to our combination that we are coming out of the winter and gas demand is generally at its lowest level in Q2 when there is less heating demand and it's too early in the season for cooling demand. At the same time, we generally see more new building deliveries at the start of the year as these tend to be skewed towards the start of the year, which is also the case this year. We have taken delivery of our last three new buildings, and the last new building, Vigilance, was, as I mentioned, delivered on May 31st. We have thus completed our approximately $2.5 billion investment program, and now have 13 state-of-the-art LNG carriers on the water, all generating revenues. As we presented in our first quarter presentation in May, We have utilized a strong freight market to execute on a strategy of securing a higher degree of employment visibility and thus de-risking the company's freight exposure. We have recently secured attractive term contracts for six, possibly seven or four vessels with about 20 years of minimum fixed hire employment for the six ships. Despite the challenges imposed by the COVID-19 pandemic when it comes to crew changes, inspection and services, we have continued to operate our ships with excellent safety and operational performance. The Delta variant have created further complication to our operations, particularly in Asia where vaccination levels lags US and Europe, and this means crew change is still difficult to carry out in this region. However, I'm pleased to say we are working diligently on minimizing crew which is overdue on their contracts and we have been able to maintain 98% of our crew on time and with no personnel now being more than 30 days overdue. So a great thanks to our seafarers and onshore personnel for a very good job done despite these obstacles. In terms of financial, I am pleased to say that we deliver revenues of 65.8 million for the second quarter, in line with the guidance of approximately 65 million. Our time charter equivalent earnings, or TCE, in Q2 was 57,800, and the year-to-date number is 66,300, which translates into healthy earnings. In Q2, our adjusted net income, this is the number adjusted for change in value or for interest rate derivatives, which tend to fluctuate, was 15.7 million, or 29 cents. This brings the adjusted net income for the first half of the year to about 50 million. With normal gap earnings, the number is actually 10 million higher, and this is a result which we are reasonably satisfied with. Despite raising our dividend to 40 cents in Q1, taking delivery of a new building and buying back some stocks in the quarter, our cash pile grew by 5 million to 144 million at quarter end. 144 million dollars of cash is a liquidity position which we consider very comfortable, particularly given how we have de-risked our business through building profitable backlogs. Hence, the board has decided to pay a dividend of 40 cents for Q2. This provides an attractive yield of slightly above 11% on an annualized basis, as the stock price has traded quite a bit down today for reasons I don't really comprehend, given that we are delivering numbers in line with our guidance. As our stock is continuing to trade below both book value and particularly replacement value of our fleet, Despite all ships being on the water with attractive financing and considerable backlog, we therefore find it attractive to continue to buy back our stock. So far, we have bought back 900,000 shares at an average price of $9.2 per share since we announced the buyback program last November. Given recent improved outlook and backlog, the board has decided to raise the buyback threshold from $14 to $15 per share. So let's review our contract portfolio on slide four. Today we have three ships on variable higher contracts. This means the earnings are linked to the general spot market earnings. This is Flex Artemis which is on a long term TCP with Gunver until Q3 2025 with options for another five years. Then we have Flex Enterprise and Flex Amber, also on variable higher contracts, where Flex Amber was recently extended by another year, with early three delivery now being fourth quarter next year. Moving on to the chips under fixed higher time charters, Flex Freedom is on a shorter term TC, which expires in Q1 next year, but where we have fixed the chips on a time charter to a portfolio player with a minimum period of either three or five years. The firm minimum period, i.e. three or five years, will be declared shortly. Flex Constellation was booked to a trader in May on a time charter with a minimum period of three years. Then we have Flex Endeavor, Flex Vigilant, and Flex Ranger, which have been fixed to Chenier for a minimum period ranging from three to 3.8 years. All these ships have now been delivered to Chenier, and Chenier will also take one more ship, on a three and a half year time charter in third quarter next year. Chenier also has the option of adding one more ship next year, bringing the total to five ships. In this overview, we have for illustrative purposes assumed Flex Courageous and Flex Aurora as Chenier vessel four and five. But we have the option of nominating performing vessels, which provide us with some flexibility in our portfolio. Flex Courageous was fixed on an 11-month short-term time charter in April, and we expect to get her back at the end of Q1 next year. Flex Aurora and Flex Resolute were recently extended by six months, and the charter hires for these optional periods are substantially higher than the initial firm period, which commenced in connection with delivery of these ships last year. Then we have Flex Rainbow, which was fixed on a 12-month Time Charter commencing in Q1 this year, where the Charter has the option to extend this vessel by another year. Finally, we have Flex Volunteer, which are trading in the spot market, which is a market which we think will be very attractive, as I will explain a bit later in the presentation. With this contract portfolio, our Charter cover for the year is 96%. But as mentioned, earnings for four of our ships are tied to the spot market. Hence, our earnings in the second half of the year will be partly determined by how the spot market develops in this period. As you can also see from the graph, charter coverage is also healthy the next couple of years, thus providing us with more stable earnings than in the past. Slide 5 is revenue guidance. It's very similar to our last presentation, where the variation is depending on the earnings for the four shifts linked to the spot market, as mentioned. However, we have accommodated the analysts in adding grid lines to the graph, as it seems some of them prefer this rather than using a ruler to estimate the range in the revenue guidance. So we do hope these grid lines make the analyst's job a bit easier, even if the visual expression is somewhat adversely impacted. As we mentioned in the Q1 presentation in May, we expected revenues of about $65 million down from $81.3 million in the first quarter, and the actual number we ended up with was $65.8 million. Time charter equivalent income of $64.9 million after deducting $980,000 in voyage-related expenses. As mentioned in the highlights, and as you can see from the graph, Second quarter tend to be the softest quarter, and we expect revenues to bounce back in third quarter, with revenues expected to be around similar levels as in Q1, i.e. around $80 million. Q4 revenues have slightly higher variability, as it's difficult to accurately predict how high spot rates will go when we are getting into the winter market. In any case, we do expect Q4 to be the strongest quarter, which tends to be the case in LNG shipping, except for Q1 this year, where a long and cold winter resulted in us generating slightly higher TCE numbers in Q1 than Q4. In Q4-1, we also benefited from having more ships on the water, resulting in a jump in revenues, as you can see. Keep in mind our costs are fixed. with an industry-low cash break-even level of around $45,000 per day. With all ships on the water now, a dollar increase in revenue is basically a dollar increase in our free cash flow, and thus our dividend capacity, given our ample liquidity position. As a back-of-envelope calculation, a $1,000 increase in charter rates increases our annual cash flow by close to $5 million. Slide number six, the dividend, speaking of it, And let's discuss our dividend philosophy. As mentioned, our investment program is now completed. We might invest in new ships in the future, but at the moment we have no plans to do so. During the last three and a half years, we have been in an investment phase taking delivery of 13 ultramodern large LNG carriers. This has been a major investment of close to $2.5 billion, and our focus in this period have primarily been to secure financing for the ships and attractive contracts for our ships, while building the software with an experienced top management and in-house technical management for all our ships. As we are now moving into the next phase, we have incrementally increased our dividend in line with our cash flow generation. Last November, we became increasingly upbeat about the prospect given less COVID-19 concerns and a rebound in the LNG demand. We therefore decided to reinstate our $0.10 dividend, while also announcing a share buyback scheme. Our assessment of the outlook turned out pretty accurate, and we generated serious cash flow in Q4 with $0.45 of adjusted X, thus enabling us to hike the dividend to $0.30. In Q1, we generated 64 cents of adjusted EPS and we hiked the dividend again to 40 cents. This is our level we have decided to maintain for Q2. Hence the dividend, coupled with the buyback, represents a payout ratio of 96% in this 12-month period. Keep in mind that we, during these four quarters, have taken delivery of seven new buildings with associated capex in connection with delivery. Despite this, our cash balance has kept on growing throughout this period, and today stands at $144 million, which is an all-time high cash balance for us. As we have guided, revenues are expected to grow in the second half of the year, and as our costs are more or less fixed, this will increase our free cash flow considerably and thus dividend capacity, as I explained on the previous slide. We do not have a formal dividend policy with, for example, 50% of EPS to be paid as dividend or some sort of minimum level of dividend. Our dividend philosophy is similar to what we have in our affiliated shipping companies, Frontline, Golden Ocean, and SFL, which have all a very good track record in the capital markets. Let me explain a bit in more detail how we think about this. When we consider the dividend level, are several factors we consider when we determine the appropriate level earnings is of course the most self-explanatory factor and our adjusted earnings are a very good proxy on free cash flow although there can be working capital adjustment from quarter to quarter however that said in general our working capital needs are very limited our charters pay charter higher in advance as we trade on the time charter, and this actually results in us having negative working capital, which is different from what a shipping company which trades its ships on voyage charters typically have. As mentioned in relation to Q3 last year, market outlook also influence our dividend level. This relates to how we assess the outlook and our confidence level with this assessment. Having a higher level of backlog makes prediction about the future easier. And as we currently have 96% of the year booked and a significant backlog for the next couple of years, this also plays a major part when considering our dividends. When assessing the dividend level, we also take into consideration our financial position, such as liquidity position, which I have already mentioned is at all-time high, and more than twice the requirement under the financial covenant in our bank loans. In general, our financial covenants are easy to comprehend. We are required to maintain book equity level of above 25% of total assets, and this is currently about 34%. Under our bank loans, we need to have a liquidity position above 25 million and 5% of net debt, while under our leases, cash requirement is no higher than 25 million. Hence, we are passing liquidity and covenants tests with flying colors. Given the fact we have taken delivery of all our new buildings and we have secured long-term debt for all our ships, debt maturities and capex is no concern for us, particularly since we have issued no bonds. Other consideration is a bucket list of items for big events which can create risk and uncertainty. Think Black Monday, 9-11, Lehman Brothers and COVID-19. The Delta variant and other possible mutations of COVID-19 is the main reason for this light not being dark green at the moment. So just like Matthew McConaughey writes in his new book Green Light, which is by the way a surprisingly readable book, we are also chasing green lights. Nearly all our lights have now turned green, and we do expect that improved revenues and earnings in the second half of the year, coupled with further rollouts of vaccine, will turn all parameters dark green. Although vaccine rollouts are out of our hands, so rest assured, we have a well-taught approach to dividends, and we are fully aligned with shareholders. In our view, the free cash flow belongs to our shareholders and will certainly not be used by management in empire building. With that, I think it's a convenient time for you, Knut, to discuss the financial in more detail, and I will revert with a short market update afterwards.

Thank you, Øystein, and let's turn to slide seven. In the second quarter last year, or since second quarter last year, we have more than doubled the fleet with the new building program, which is now completed. As Fletch Vigilant was delivered at the end of May, she had 30 days available during the second quarter, so we had earnings from 12.3 vessels in Q2. Therefore, Q3 will be the first quarter where we will have the earnings capacity from the full 13-vessel fleet. And turning to slide 8. As Øystein already has mentioned, our TCE earnings for Q2 was $57,800 per day. This is down from the $75,400 per day in Q1, and the lower TCE is explained by the normal seasonality, where Q2 is a low quarter. This impacts our earnings from the vessels trading spots and the vessels on variable higher contracts. As we from Q3 and onwards will phase in more of the long-term contracts agreed in Q2, the seasonality effect as experienced in Q2 will be reduced going forward. The TCE for the first half of the year was solid at $66,340 per day, a substantial increase compared to the same period last year. Our operating expenses were impacted by extra costs related to COVID-19 and in particular related to crude changes in Asia. If we look at the first six months with an OPEX of $13,600 per day in OPEX, that's about $500 per day, which is related to COVID. Hence, the underlying operating expenses remains within the guided level of $13,000 per day. As mentioned by Øystein, we do continue to face challenging crude changes, in particular in Asia, higher lube oil prices and general supply chain challenges for delivery of spare parts. Hence, we expect that the operating expenses continue to be a bit bumpy in the coming quarters, as long as the travel restrictions and quarantines are affecting our operations. Gross revenues for the quarter came in at 65.8 million, in line with our guidance for the quarter of 65. Adjusted EBTA was 47 million, an adjusted net income of 15.7 million, and adjusted earnings per share at 29 cents per share. The numbers are adjusted for a 2.8 million loss on interest rate derivatives, which includes an unrealized loss of 1.1 million. Quarter by quarter, our numbers are down due to the explained seasonality in the second quarter compared with the very strong first quarter. The first half figures shows the financial impacts of the increase in the fleet size as shown in the previous slide. and the earnings potential in the fleet. On the financing, interest expenses are slightly up, reflecting a full quarter on the interest on the debt drawn for Flex Freedom and the drawdown of the loan related to delivery of Flex Vigilant. Then moving to our balance sheet, which is quite straightforward after the delivery of the last new building. On the asset side, We have cash of $144 million and Russell just shy of $2.4 billion. Development in cash will be explained on the next slide, and the increase of book value is explained by the delivery of Flex Vigilant in May. On the liability side, we have about $1.6 billion of long-term debt from international banks and financial institutions. The increase in debt is related to the aforementioned drawdown of the bank loan related to delivery of flex vigilance. And then we have book equity of 152 million, which is about 100 million higher than the market cap, despite us having the ship at much lower prices than the new billing prices today. Let's turn to slide nine. Despite a seasonal low quarter, we ended up with a positive cash flow of $5 million during the quarter. This is driven by approximately $30 million from operations and $17.6 million from working capital adjustments. As we are mainly operating on a time charter basis only, we received charter hay in advance, which is advantageous from a working capital perspective. Debt amortizations were $13.2, and you will see that Q2 and Q4 have lower amortizations as our ECA financing has semi-annual repayment profile. During the quarter, we paid $21.3 million in dividends and spent about $400,000 on buybacks of our share under share buyback program. In total, we bought back 27,344 shares during second quarter. That leaves us with a solid cash position of $144 million at the end of the quarter. Then we turn to slide 10, and this is a familiar slide, which we have shown several quarters, but it's still relevant. as we have financed our buses with attractive long-term financing, and we have no maturity before Q2 2024. The debt is a diversified mix of bank loans, ECA, revolving credit facilities, and leases, which leaves us in a very comfortable funding position. And with that, I hand the word back to Einstein, who will give an update on the markets.