FLEX LNG Ltd.

Good day and thank you for standing by. Welcome to the Flex LNG Q3 2021 earnings presentation. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and the number one on your telephone. Please be advised that this conference is being recorded Tuesday, the 16th of November, 2021. For requiring any further assistance, please press star and zero. I would like to hand the conference over to the CEO for today, Mr. Einstein Kalleklev. Please go ahead, sir.

Hi, thank you, and hi, everyone, and welcome to FlexLNG's third quarter 2021 webcast. I'm Einstein Kalleklev, the CEO of FlexLNG Management, and I will be joined today by our CFO, Knut Roholt, who will walk and talk to you through the numbers a bit later in the presentation before we conclude with our Q&A sessions. If you'd like to ask a question in Q&A session, you can either ask a question through our teleconference, or you can use the chat function in this webcast. It's getting cold here in Norway, so I have a bit of a sore throat today. However, it's not COVID, but please bear with me. Slide two, disclaimer. Before we start the presentation, I will remind you of the disclaimer with regards to, among others, forward-looking statements, non-gap measures, and completeness of details. We also recommend that the presentation is read together with the earnings report, which we are also releasing today. Okay, so let's begin with the summary of the recent highlights. As we noted in our second quarter presentation in August, the LNG market was very tight with elevated prices, and we therefore highlighted the possibility of a blowout in the market. Even though we are just at the start of the winter season, the market has nevertheless already blow out with both LNG prices and freight rates booming. We argue that a tight LNG product market with very high cargo economics should create ample room for charters to pay premium rates. At the same time, we have argued that there's been a disconnect between spot rates and term rates and that the buoyant term market should create spillover effects for the spot market sentiment. This has certainly played out as we expected, with spot rates on a tear since the end of September and now hovering around at all-time high levels. We have put our money where our mouth is and maintained 30% exposure to the spot market, and this we are awarded handsomely for in the fourth quarter. At the same time, we have also continued to build premium backlog with the recent announcement of $2. New time charters will start up early next year, which I will cover shortly. Altogether, we have thus fixed eight ships on term charters since April. Most likely, the tally will be nine ships, as we expect Chenier to also declare its fifth optional ship. This means that we are today very well positioned with 13 state-of-the-art LNG carriers on the water after taking delivery of the last three ships during the first half of the year. Third quarter is thus the first quarter with all ships in full operation. Our LNG carrier fleet are fitted with the latest fuel-efficient engines, Maggie or XDF, and the average age of a fleet is only two years. COVID-19 issues are getting less attention in the news media these days, but continues to be a challenge in shipping. Approximately three out of four LNG cargoes are ending up in Asia, where restrictions are more prevalent. particularly when it comes to crew changes. Notwithstanding these challenges, we have continued to operate our ships with excellent performance, so once again thanks to our seafarer and technical team for a great job. In terms of financials, we are once again delivering according to our guidance. Revenues for the quarter were 82 million, in line with guidance of approximately 80 million. Our quarterly earnings were $33 million or $32 million if you adjust out approximately $1 million derivative gain, which we booked in the quarters. This translates into earnings per share of $0.62 or adjusted earnings of $0.60 per share. We are today also announcing a very attractive sale and leaseback for FlexVolunteer. The vessel was originally financed in the midst of the COVID-19 crisis last year, and we are now taking advantage of better credit markets and improved credit profile of FlexLNG in order to optimize our financing. Knut will cover the details of this financing in the finance section, but the long and short is that we raised $160 million of long-term financing for the ship at an all-in cost of about 4%, and this will add another $38 million to our cash pile, which already stood at $138 million. This will not be our last refinancing, as we aim to continue to optimize our balance sheet by opportunistically refinancing some of our existing loans at even better terms than we have today, with the aim of freeing up $100 million, which Knut will also explain in more detail. With a very comfortable liquidity situation, healthy earnings, strong outlook and improved earnings visibility, The board has thus decided to lift our dividend level from 40 cents per share to 75 cents per share. This gives our investors a yield of about 14%, which we think should be compelling in this low interest rate environment. Talking about strong outlook, with 30% spot exposure, we are benefiting from improved earnings in the spot market and are therefore revising our revenue guidance for the fourth quarter from $8,500 million to approximately $110 million. This means we are estimating about $30 million higher revenues in fourth quarter, and given our fixed cost base, our dollar increase in revenues are therefore expected to translate into a similar increase in our earnings. Hence, we think it makes sense to significantly lift our dividend level, given our charter coverage and the positive outlook I mentioned. Lastly, we do see that the new decarbonization rules for shipping is creating business opportunities for us. In 2023, the Energy Efficiency Existing Ship Index or EEXI and the Carbon Intensity Indicator will come into force and we do see that more charters are focused on chartering in the new ships when it comes to fleet renewal or growth projects. Our thesis that new ships will replace old ships are therefore coming to fruition And this, we think, will create additional opportunities for us to lock in further attractive contracts for our ships. Yes. So let's touch upon our recent charter announcement on slide four. On November 1st, we announced two new time charter contracts for Flex Courageous and Flex Resolute for a period of minimum three years, with option for two additional two-year periods, bringing the total to seven years. if both options are declared. The end user here is an energy major, and the ships will be delivered to the charter in direct continuation of their existing time charter, which is expected to end in February and March next year. Having worldwide delivery in direct continuation is a valuable benefit, particularly at this time of the year, as the spot market tends to soften around this time of the year. Week 11, i.e. middle of March, has historically been the low point of the spot market. This might result in idle time if you have ships re-delivered in this period, as there are also usually a lot of ships coming out of the yard at the start of the year. However, we avoid this risk altogether. With these two new charters, we thus have three ships going from shorter-term time charter to longer time charters in the end of Q1 next year, with Flex Freedom being the third ship which will commence a minimum five year charter at about the same time. The rate under the two new time charters reflects that the tour market has continued to be strong and we are therefore adding additional high margin backlog to our fleet. So with these recent fixtures we had to bring back the Flexicute slide Since the middle of April, we have thus announced eight new term contracts for our ships. As mentioned, we expect Chenier to declare the fifth ship, increasing this number to a total of nine ships. In April, we announced a big deal with Chenier, where they have already taken Flex Vigilant, Flex Endeavor, and Flex Ranger on time charters with a duration of 3 to 3.8 years. Flex Endeavour was originally three and a half years, but we later agreed early delivery of this ship with a longer firm period. In the third quarter next year, we will take one ship with the option for a fifth ship, as mentioned. We are now planning that the fourth and the fifth ship will be Flex Aurora and Flex Voluntair, as we have the option of nominating four forming ships for this contract, which have given us some flexibility in pursuing our chances. In May, we booked two ships, Flex Constellation for prompt delivery to a big trading house for a period of three years, with option for another three years, and Flex Freedom, as I mentioned, going to a portfolio player for a minimum five-year period during first quarter next year. And lastly, Flex Courageous, Flex Resolute, which we recently announced being fixed with an energy major for a minimum period of three years. Another slide which we had to bring back was the sold-out slide. This we previously used three years ago when we booked our fourth quarter at TCE of about $95,000. This is around the level where we also expect the TCE number to be for the fourth quarter this year, but we now managed to do so with 30% spot exposure versus 50% in Q4 2018. As you can see, the backlog is solid. When we started the year, we only had one ship on time charter with a longer duration than one year. But we have, as mentioned on previous slide, utilized a strong market to add significant backlog during the year. The contract for the first eight ships here, from Flex Freedom to Flex Resolute, I have already covered in the previous slide. What I would highlight is that Several of the ships are coming off shorter time charters and are commencing longer-term charters with higher earnings. So we are thus repricing our portfolio at better levels for longer periods, i.e. stronger for longer. Flex Rainbow is currently nearing end of her 12-month time charter, and the charter has the option to extend her for another 12 months at a rate substantially higher than the initial 12-month firm period. As highlighted already, we have kept 30% exposure to the spot market through four of our ships. This is Flex Volunteer, which is trading in the spot market and which is now booked to end of December or early January. We are now planning for Flex Volunteer to be the fifth ship under the 10-year contract, so we will trade her in the spot or potentially on a multi-month contract in the interim period. Additionally, we have three ships on variable hire contracts. This means the earnings are linked to the general spot market earnings. We have Flex Artemis, which is on a long-term variable higher contract with Gunvor until third quarter of 2025, with options for another five years. Flex Artemis was the only ship that we had fixed on longer-term charter prior to the contract presented on the previous slide, and she was fixed on a variable higher contract, while all our term contracts done this year have been on fixed higher contracts. Finally, we have Flex Enterprise and Flex Amber, which are also on variable higher contracts. In the past, we have received a lot of questions about how our variable higher contracts have been structured. But we do hope that the fourth quarter guidance demonstrates that we get substantial upside on our earnings under these contracts when the freight market is as hot as today. Slide six, earnings visibility. I have already covered our backlog Extensively, but slide six just illustrates how this looks the next couple of years with, as mentioned, 75% cover next year and not far off that level in 2023. Most of the backlog is now fixed higher, but we also have some variable higher backlog to spice up our earnings. The residual here is options or vessels which we can trade in the spot market. All in all, a balanced and comfortable mix We think our backlog stretches well beyond this three-year period, so we might have to revise this slide next time with a longer period. Dividend. We covered our dividend philosophy in great detail during our second quarter presentation, so I will not repeat all the factors and considerations. However, what I would like to point out is that we use a balanced and measured approach to conclude on an appropriate and sustainable dividend level with the aim of distributing the free cash flow over the cycle to our owners. Such distribution will primarily be through dividends, but we have also utilized share buybacks with about 1 million shares bought back during the last year at very accretive levels. As we mentioned in our second quarter presentation, We are chasing green lights and we expected more of the traffic lights to turn dark green by third quarter given the improved guidance. The only parameter not being dark green is other considerations. Despite recent progress on vaccine rollout in rich economies and successful trials of COVID-19 antiviral pills by Merck and Pfizer, the latter which has proven 89% successful, in preventing serious illnesses, there remains some uncertainty, which leaves us with a light green color for this factor for the time being. With that upbeat message, I think it's a convenient time for Knut to provide you with some upbeat financial numbers before I will revert with a market update afterwards.

Thank you, Øystein, and let's turn to slide 9 for the financial highlights. As already mentioned, our TC earnings for the quarter was $68,300 per day. The $10,500 per day increase is mainly driven by seasonal improvement in the market rates and the effect of placing in some of the long-term contracts announced in the first half of the year. On operating expenses, we are less impacted by COVID costs this quarter, and OPEX per day came in at $13,000 for the quarter and $13,400 per day for the nine months. That means the year to date about $500 per day directly related to COVID costs and we expect to maintain OPEX per day around the year to date level. We are pleased to see that the underlying operating expenses net of COVID costs remains below the guided level of $13,000 per day. Gross revenues for the quarter came in at 82 million, slightly above our guided level of 80 million, and revenue increase year on year demonstrated earnings potential of the 13 vessels fleet now fully operational. Adjusted EBTA was 65 million, adjusted net income 32 million, and adjusting earnings per share came in at 60 cents per share. The numbers are adjusted for about 1 million gain on interest rate derivatives, which includes unrealized gains of 2.7 million. On the financing, interest expenses are slightly up, reflecting a full quarter on interest on the debt drawn for flex vigilance earlier in Q2. Then moving to our balance sheet, which is now plain and straightforward. On the asset side, we have cash of 138 million and vessels booked just shy of 2.4 billion. The quarter-on-quarter cash development will be explained on the next slide. And the only material change since last quarter is the normal depreciation of the vessels. The increase in current assets is related to Charter payment of $2.5 million received on the 30th of September, however, recorded on our account on 1st of October. Consequently, it was not qualified as cash on account, but working capital. On the liability side, we have $1.6 billion of long-term debt from international banks and financial institutions. And as a reminder in times of increasing interest rates, we have an interest rate portfolio of $720 million with a weighted average interest of 1.13%. Including the existing fixed rate leases, the hedge ratio is 67. And adding the announced fixed rate refinancing for Voluntair, the hedge ratio will, during Q4, increase to 69%. of termination of interest rate swaps related to the existing volunteer financing. We are therefore well hedged against possibly higher long-term interest rates. Book equity is 861 million, which gives a solid book equity ratio of 34%. Then let's turn to slide number 10. cash flow for the quarter. During the quarter, we're generating about 50 million of free cash flow from operations. Working capital tend to fluctuate up and down depending on timing of charter hire. And all in all, however, we have a negative working capital, although 5.4 million less negative this quarter. During the quarter, we had 27 million in schedule amortizations. And please note that amortizations are higher in Q1 and Q3 due to our Korea export loan that has semi-annual installments. We also distributed 23.4 million to shareholders, where 2.2 million as share buybacks, and 21 million in cash dividend payments. That left us with a comfortable cash position of $138 million at the end of the quarter. After closing of the refinancing of the volunteer, which is expected mid-December, we will further boost our cash balance by approximately $38 million. So let's have a look at the volunteer refinancing. We announced today that we have signed the agreement for a $160 million sale and charterback transaction with an Asian-based lease provider. The lease has a duration of 10 years and further adding length to a debt maturity profile. The transaction is based on a market value from brokers of $215 million for volunteer, and the net amount of $160 million will be booked as long-term debt. After repayment of the existing financing, the transaction frees up $38 million in cash, as mentioned. At the maturity in year 10, the balloon is $80 million, and that reflects a 20-year repayment profile, and that results in an age-adjusted repayment profile of 21 years. The all-in fixed interest rate is for a 10-year transaction is attractive at 4%. We have signed the MOA and the bearable charter agreement, and the remaining is certain customary closing conditions. And as mentioned, we expect to conclude this by mid-December. And that takes us to the next slide and our $100 million dollar balance sheet optimization program. The FlexVolunteer is the first transaction under this program, and this is based on our solid backlog of attractive long-term contracts secured during the last nine months, which has increased the earnings visibility and de-risked the company. We therefore aim to optimize the debt funding with a series of refinancing to reflect the improved credit profile. The original debt funding of the company was done with the purpose of having a flexibility to trade the vessels in the spot market until the long-term contracts were secured. As now eight vessels, possibly nine, have been fixed on long-term contracts and three on variable higher contracts, there is room to further optimize the debt, both in terms of size and cost of debt. The target is to free up $100 million, reduce the cost of debt, and maintain our industry-leading cash break-even level. We have a number of debt facilities that will be considered under the program, and looking at our debt profile, on the right, it is likely that the debt maturities for 2024 will be addressed and therefore pushed even further out. The 2025 maturity is related to the commercial tranche under the 629 million ECA facility with Korea Exim, where the ECA tranches matured later. Hence, we envision that this facility will remain and the commercial trial to be refinanced due to the attractive long-term ECA commitment. All in all, we have a solid funding platform with a supportive lending group, and with no immediate maturities. And this gives us a room and flexibility to optimize the debt funding, which we aim to utilize under this program. So with that, back to you, Einstein.