SFL Corporation Ltd

Ladies and gentlemen, thank you for standing by and welcome to the SFL Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. I must advise you the conference is being recorded today. I would now like to hand the conference over to your speaker today, Ole Bjarte Hjertaker. Please go ahead, sir.

Thank you and welcome all to SFL's second quarter conference call. I will start the call by briefly going through the highlights of the quarter, and following that, our CFO, Aksel Olesen, will take us through the financials, and the call will be concluded by opening up for questions. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ includes conditions in the shipping, offshore, and credit markets. For further information, please refer to SFL's reports and filings with the Securities and Exchange Commission. The announced dividend of 25 cents per share represents a dividend yield of around 10.5% based on closing price yesterday, and this is our 66th quarter with dividends. Over the years, we have paid more than $27 per share in dividends, or $2.3 billion in total, and we have a significant fixed rate charter backlog supporting continued dividend capacity going forward. The total charter revenues of $158 million was in line with the first quarter with more than 90% of this from vessels on long-term charters and less than 10% from vessels employed on short-term charters and in the spot market. All customers are current on the charter payments and we have good cash flow visibility into the current quarter. The EBITDA equivalent cash flow in the quarter was approximately $121 million, and last 12 months, the EBITDA equivalent cash flow has been approximately $481 million, demonstrating the stability. With a very large proportion of long-term charters, and the fact that all customers are current with charter payments, the underlying business remained robust, and cash position was more than $150 million, After repayment of a bond loan in June. In addition, we had $35 million in marketable securities at quarter end. Our fixed rate backlog stands at approximately $3.4 billion after recent vessels acquisitions, charter extensions, and vessel sales, providing cash flow visibility going forward. We have been cautious in the light of the uncertainty caused by the COVID-19 outbreak But in May, we acquired a new-built VLCC with long-term charter. The net purchase price was $65 million, which is significantly below current broker estimates for VLCC resales, effectively providing SFL with a very attractive risk profile. Our chartering counterparty, the Landbridge Group, has secured a three-year sub-charter to an oil major, providing good cash flow visibility. There are purchase options for the charter during the charter period. First time after three years, and at the end of the charter, there is a purchase obligation. The net contribution after debt service during the first three years is estimated to more than $4 million on average, with full cash flow effect from this quarter. We have been active extending charters on our existing fleet, and so far this year, we have added $172 million to our charter backlog on existing vessels. $38 million was linked to an extension agreed in the second quarter for seven container vessels we extended by another 4.5 years. And with a large fleet of assets, there will always be acquisitions and disposals, and two of the vessels uncharted to the Hunter Group has been repurchased by them. The Hunter deal was designed to give us a very high return on low risk profile in exchange for flexibility on Hunter's part. This is a good example of a cost of capital arbitrage where we could utilize our premium access to low-cost funding and at the same time give flexibility that Hunter was willing to pay for. Delivery took place earlier today and now cash to us is $23 million after repayment of the associated financing and there is one vessel remaining with Hunter in our fleet after that. We have also been active in the financing market over the last months and have addressed most of the financing maturities this year. Terms have been attractive, and we have seen lower all-in-interest costs than ever before, despite the general market volatility. We believe part of the reason for this is the consistent performance of SFL the last 16 years, and our ability to source capital from a much wider market than most other maritime companies. During the second quarter, we refinanced four large container vessels at historic low-interest costs, we sourced $50 million of non-recourse financing, The COVID-19 pandemic has caused massive disruptions in most transportation markets and offshore assets. As early as January, we implemented a robust emergency management plan with the goal of ensuring the health and safety of our crew on board the vessels and onshore while maintaining our business operations as efficiently as possible. In addition to our own requirements, all crewing managers are following the guidance issued by the World Health Organization and the International Chamber of Shipping to ensure that the proper protocols are in place on board the vessels. We are hosting regular meetings with all crewing managers in all our sectors to discuss and handle any issues, in particular challenging, facing your crew and safe operations as they arise. While we have good and strong protocols in place on board our vessels during the normal ship and port operations, our biggest concern is with crew changes. The logistics challenges of testing and moving people across borders safely without infection are enormous, and in many countries and ports such movements are not even allowed. This means that we have had to postpone crew changes and extend the contracts of many of our CFRs Over this period after the outbreak. While they have shown great understanding of the situation, there are many individuals who have suffered due to this, and we acknowledge their vital contribution in these challenging times. In addition to crew transfers, we have also experienced some delays at shipyards in connection with dry dockings and scrubber ready fitting of vessels. Of the 85 vessels, currently only three are idle, and we have seen some improvements in the market in several of the segments recently. After all, the vessels more exposed to near-term market developments represent less than 10% of our charter revenues, and the 90% fixed rate revenues are more insulated to short-term market movements caused by effects that we could not predict. Despite the impact of COVID-19 on global trade, all our counterparties are current and charter higher payments with good visibility for the current quarter as mentioned before. But we will of course continue to closely monitor developments in our customers and markets in order to be able to react quickly to any potential business disruptions. Following the recent charter extensions, our charter backlog now stands at approximately 3.4 billion, and of this, more than $420 million has been added the last 12 months. Over the years, we have changed both fleet composition and structure, and we now have 85 assets in our portfolio, and no vessels remaining from the initial fleet in 2004. We have gone from a single asset class chartered to one single customer to a diversified fleet and multiple counterparties. And over time, the mix of the charter backlog has varied from 100% tankers to nearly 60% offshore at one stage to container being the larger segment now with 55% of the backlog. We do not have a set mix in the portfolio. focuses on evaluating deal opportunities across the segments and try to do the rightest actions from a risk-reward perspective. Over time, we believe this will balance itself out, but we try to be careful and conservative in our investments and not just invest because money is burning in our pockets. With the exceptions of two car carriers that are currently idle in the shipping space, all other assets are generating cash flow. Some segments, like the dry book market and container ship market, That's also improved over the last few months. The offshore market, however, remains very challenging. We have three rigs on charter to sea drill, and two of the rigs are harsh environment units working in the North Sea. West Linus is sub-chartered to ConocoPhillips on a very long charter until the end of 2028, and West Hercules, a semi-subversible, is sub-chartered to Equinor until next year. In addition, there are some options for Equinor for extended employment. The third rig, Vast Taurus, is idle and laid up in Norway. Seadrill is paying the agreed charter hire on all three rigs, and we continue reducing the debt on the rigs as per schedule. This means that we have reduced debt by nearly 30% since Seadrill filed for Chapter 11 in 2017. CEDRIL has disclosed that it is currently engaged in discussions with its lenders to provide operational flexibility and additional near-term liquidity. We believe it will be in all stakeholders' interest to have a financially stronger counterparty, and we are in a constructive dialogue with CEDRIL. I can unfortunately not comment any more on this right now. But given our fleet composition, most of our cash flow comes from shipping assets. and unlike most other companies with a financing profile in the maritime world, nearly two-thirds of our cash flow comes from vessels on time charter and only a third from beer boat chartered assets. Our strategy has been to maintain a strong technical and commercial operating platform in cooperation with our sister companies in the Sea Tankers Group. This gives us the ability to offer a wider range of services to our customers from structured financing to full service time charters. But more importantly, we also believe it gives us unique access to deal flow in our core segments. And with that, I will give the word over to our CFO, Mr. Willissen, who will take us through the financial highlights for the quarter.

Thank you, Mr. Hjertaker. On this slide, we have shown a performance illustration of cash flows for the second quarter. Please note that this is only a guideline to assess the company's performance, and it's not in accordance with US GAAP. and also net of extraordinary and non-cash items. The company generated gross charter hire of approximately 158 million in the second quarter, with more than 90% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.3 billion, providing us with strong visibility on our cash flow going forward. The Lion FD generated gross charter hire of approximately 80 million, And of this amount, approximately 97% was derived from our vessels on long-term charters. At the end of the quarter, SFL's liner fleet backlog was approximately 1.8 billion, with an average remaining charter term of approximately 5 years, or approximately 8 years if weighted by charter revenue. Approximately 84% of the liner backlog is to the world's largest liner operators, Merz Klein and MSC. And during the quarter, SFL extended the charters for seven 4100 TU container vessels with MEC until the third quarter of 2025. The extension added approximately 38 million to SFL's fixed charter rate backlog. Our tanker fleet generated approximately 27 million in gross charter hire, including 4.5 million in profit split contribution from our two villages on charter to front line. The two VFCs earned approximately $72,000 on average per trading day in the second quarter, and during the quarter the vessel commenced new time charters on which the vessels would trade until the fourth quarter at similar rates, ensuring visibility on quarterly profit-spread contribution also for the next two quarters. As for Azusa Max tankers, revenue was down for the quarter, as one of the vessels underwent special survey, and Skrøber Retrofit installations during the quarter. Furthermore, the company acquired the 2020-built Skrøber fitted B2C Landrys system in combination with a seven-year variable charter to the Landrys Group. The vessel was delivered in May and has been subchartered for three years to an oil major on a time-chartered basis. The acquisition cost of 65 million was financed by 50 million on recourse debt facility. and the transaction will have full earnings effect in the third quarter. And today, on August 18, 2020, the company re-delivered two VFCCs to the Hunter Group as a declaration of purchase options. The transaction increases SFL's cash balance by approximately 23 million. During the second quarter, our dry bulk fleet generated approximately 26 million. Of this amount, Approximately 84% was derived from our vessels on long-term charters, and approximately 16% was derived from vessels on short-term charters. There was no profit split contribution from our K-side vessels on charter to Golden Ocean during the quarter, as the COVID-19 pandemic negatively impacted dry bulk demand by creating logistical issues, including port closures and quarantine restrictions. The soft tribal market also impacted their revenue under 10 vessels trading in a short-term market. At the end of the second quarter, SSL owned three drilling rigs. All of our drilling rigs are long-term variable charters to fully guaranteed affiliates, nearly limited, and generated approximately 25 million in charter hire. The highest environment jack-of-brick with Linus is sub-chartered to ConocoPhillips until the end of 2028. Well, the Haarst Environment semi-submersible rig Vestauris is employed in consecutive shorter-term subcontracts directly north in the North Sea. The semi-submersible rig Vestauris is currently in lay-up in Norway. This summarizes an adjusted EBITDA of approximately 121 million per second quarter, or $1.11 per share, which is in line with the previous quarter. We then move on to the profit and loss statement as reported under US GAAP. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing. As a result, a significant portion of our charter revenues are excluded from US GAAP operating revenues, and instead looked at revenues classified as repayment of investments in finance leases and vessel loans, results in a sole-sit and long-term investments, and interest income from a sole-sit. So for the second quarter, we report total operating revenues according to US GAAP of approximately 118.5 million, which is a smaller number than the 158 million of charter hire actually received for the reasons just mentioned. Furthermore, the company recorded non-recurring and or non-cash items, including negative market-to-market effects relating to interest hedging, currency swaps and equity investments of 7.3 million, prepayment of interest under swaps of 4.5 million, amortization of deferred charges of 2.6 million, and credit loss provisions of 1.4 million. Adjusted for these items, the company's net income would have been 27.8 million So overall, and according to US GAAP, the company reported a net profit of 11.8 million, or 11 cents per share. Moving on to the balance sheet, in terms of liquidity, the company continues to have a solid cash position, with approximately 152 million in cash and cash equivalents, excluding approximately 15 million held in fully owned, non-consolidated subsidiaries, In addition, the company also had 8 million in restricted cash related to equity securities. At quarter end, the company had marketable securities of approximately 19 million net, and adjusted for purchase obligations on securities. This includes 1.4 million shares in frontline limited, and financial investments in secured bonds and other securities. During the second quarter, SFL sold approximately 2 million shares in frontline, explaining the drop in the book value of marketable securities on the previous quarter. And of the approximately 300 million of short-term debt, approximately 200 million is related to senior bank financing on vessels through SFL and Secure Charter extensions until 2024 and 2025 at attractive terms. This includes three 8,700 TU container vessels on chart to Maersk. and seven 4100 TU vessels on charter to MSE. The balance of approximately 100 million is related to ordinary scheduled loan amortization and a 16 million purchase obligation on the frontline shares. At quarter end, SFL has five debt-free vessels with a combined shard-free value of approximately 30 million based on average broker repraisals. So based on Q2 2020 figures, The company has a big equity ratio of approximately 25%. Then to summarize. The Board has declared a cash dividend of 25 cents for the quarter, which represents a dividend yield of approximately 10.5% based on the closing share price yesterday. This is the 66th consecutive quarterly dividend, and since inception of the company in 2004, More than $27 per share, or $2.3 billion in aggregate, has been returned to shareholders through dividends. And while we continue to collect revenue from a $3.4 billion fixed chart rate backlog, we also have upstarted from profit split arrangements from our VTCs, in addition to profit split arrangements related to fuel savings on some of our large container vessels. Despite a relatively volatile market in 2020, We have already added approximately 230 million per fixed chart rate backlog, and we continue to explore new business opportunities. And while risk premiums on energy and shipping investments have increased with the recent volatility in financial markets, SFL has at the same time raised new fleet financing at all-time low cost of debt, and has continued to expand its group of lending banks. SFL's business model has continuously been tested throughout its 16 years of existence, and has previously been highly successful in navigating periods of volatility. And with that, I give the word back to the operator, who will open the line for questions.