SFL Corporation Ltd

Good day and thank you for standing by. Welcome to the Q4 2021 SFL Corporation Earnings Conference Call. At this time, all participants are in 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 star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Julie Gjertaker. Please go ahead.

Thank you and welcome to SFL's fourth 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 U.S. 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. Forward-looking statements are not guarantees of future performance. These statements are based on our current plans and expectations and are inherently subject to 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 include but are not limited to conditions in the shipping, offshore and credit markets. You should therefore not place undue reliance on these forward-looking statements. Please refer to our filings with the Securities and Exchange Commission for more detailed discussions over risks and uncertainties which may have a direct bearing on our operating results and our financial condition. The announced dividend of 20 cents per share is an increase of 11% over last quarter's dividend and represents a dividend yield of around 9% based on closing price yesterday. This is our 72nd quarterly dividend and over the years we have paid more than $28 per share in dividends or $2.4 billion in total. and we have an increasing fixed rate charter backlog supporting continued dividend capacity going forward. The total charter revenues was $166 million in the quarter with around 75% of this from vessels and long-term charters and around 25% for vessels employed on short-term charters and in the spot market. This includes or included the seven handy-sized bulkers we have sold So going forward, we expect a higher relative share from long-term charters. The EBTA equivalent cash flow in the quarter was approximately $121 million, or 10% higher than the previous quarter. Over the last 12 months, the EBTA equivalent has been approximately $434 million. And the net income came in at around $80 million in the quarter, or 63 cents per share. We had a gain relating to the sale of the bulkers of $39 million, and otherwise there were only minor one-offs in the quarter, including a negative mark-to-market effect on interest hedging instruments. There were also around $1.1 million higher operating costs in the quarter due to additional crew rotation costs linked to COVID restrictions. We expect a similar effect also in this quarter, but hope that the restrictions will ease soon. And virtually all our crew are now vaccinated already. Our fixed rate backlog has increased and stands at approximately $2.8 billion from owned and managed vessels after recent acquisitions and disposals, providing continued cash flow visibility going forward. The backlog figure excludes revenues from the vessels traded in the short-term market and also excludes future profit share optionality. In addition, we have excluded charter hire relating to the drilling rigs to be conservative in light of the ongoing financial restructuring in CDRIL. We continue building the portfolio with modern assets on long-term charters and have recently agreed to acquire four modern LR2 product tankers in combination with time charters to Trafigura. The structure is similar to the three Suez Maxes we announced last quarter and the deal includes some interesting optionality features if the market should strengthen during the charter period where a sale can be triggered with a profit split. And if not, The long-term charter amortizes the vessels down to a comfortable low level with a good base return, supported by the $160 million charter backlog linked to these vessels. In the quarter, we also finalized the sale of the seven handy-sized vessels for an aggregate net sales price of around $98 million. In addition to the sales price, there was around $15 million net cash flow from trading the vessels at high rates until delivery. So they had a very nice contribution for us, you know, in 2021. We have also sourced multiple new financings at attractive terms and see loan margins creeping downwards. And we fully redeemed the remaining $145 million convertible note in cash during the quarter. During the fourth quarter, we took delivery of three of the seven tankers we chartered to Trafigura, and we have already taken delivery of three more leaving only one Suez Max vessel to be delivered, expected later this month. Excluding the drilling rigs, the backlog from owned and managed vessels was 2.8 billion at the end of the quarter. Over the years, we have changed both fleet composition and structure, and we now have 75 shipping assets in our portfolio. In addition to the long-term chartered vessels, we have eight vessels trading in the short-term market currently, and four to five coming off their long-term charters later this year. We have also had significant contributions to cash flow from profit share over time, both relating to charter rates and fuel savings. The aggregate profit share was around $20 million last year and $7.5 million in the fourth quarter alone. We do not have a set mix in the portfolio. Focus is on evaluating deal opportunities across the segments and try to do the right transactions 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, with a focus on technology and transition over time to more fuel-efficient technology for propulsion. The two drilling rigs are not included in our reported Chartered Backlog figures, and with respect to seed drill and the ongoing financial restructuring, we cannot give more details than what we have disclosed in our press releases or is otherwise publicly available. After Seedrill's plan of reorganization was approved by the Court, they estimate emergence from Chapter 11 within the first quarter this year. We received more than 70% of the lease hire under the existing Charter Arrangement for West Linus and West Hercules during Seedrill's Chapter 11 proceedings. Both rigs are active and working for old companies, and the charter rate is sufficient to cover our debt service relating to the rigs. And we are of course pleased to see strengthening drilling markets on the back of the very firm oil price. We have entered into a new agreement relating to the harsh environment semi-sub, West Hercules. Under this new agreement with Seadrill, the West Hercules is contracted to be employed with oil major Equinor in Norway and Canada until September-October and thereafter re-delivered to SFL in Norway. SFL continues to receive a bare-boot hire of around $60,000 per day while the rig is employed under a contract and generating revenues for Seadrill and approximately $40,000 per day in all other modes. including when the rig is idle and mobilized to and from Canada for the Equinor work. The rig is now on its way to shore for some upgrades required for this job and is expected to move to Canada in the second quarter. With regards to the Vaslinus, which is on a subcharter to an oil major in the North Sea until the end of 2028, we continue to have a contractive dialogue with Seadrill and the end user for the continued operations of the rig under the contract. We have not yet agreed final terms with CEDRIL, but this is expected before their emergence for Chapter 11. Given the ongoing discussions, we can unfortunately not comment any more on this for the time being. Over the years, we have gone from a single asset class chartered to one single customer to a diversified fleet and multiple counterparties. And over the time, the mix of assets and charter backlog has varied from 100% tankers at the beginning to nearly 60% offshore 10 years ago, to container vessels now being the largest segment with nearly 60% of the backlog. If we look at the counterparties, it is known mainly to end users and market leaders in their respective segments, and relatively few are intermediaries where we have less visibility on the use of the assets and quality of operations. Strategically, this also gives us access to more deal flow opportunities, such as the repeat business with Maersk, MSC, Evergreen and Trafigura as examples. Our strategy has therefore been to maintain a strong tactical and commercial operating platform in cooperation with our sister companies and the wider Sea Tankers Group. This gives us the ability to offer a wider range of services to our customers from structured financing effectively to full service time charters. And with full control over vessel maintenance and performance, including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels through the life of the assets, and not only be passively owning vessels employed on beer boats where the customer may not always have an incentive to make such improvements. In addition, we can retain more of the residual value in the assets when we charter out on time charter basis, and in the current environment with rising raw material costs and inflation driving replacement costs for vessels, this value is for the benefit of SFL and our stakeholders. For bare boat deals, this value is usually retained by the charters through fixed price purchase options. This is illustrated by the recent sale of seven handy sized bulkers where our operating platform has enabled us to trade the vessels in the spot market during a soft market and when the market values doubled the last year, we could sell the vessels with a significant profit. And with that, I will leave the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter. Aksel Olesen Thank you, Mr. Hjertaker.

On this slide, we have shown a formal illustration of cash flows for the fourth quarter. Please note that this is only a guideline to assess the company's performance and is not in accordance with the US GAAP. and also net of extraordinary and non-cash items. The company generated gross charter hire of approximately 166 million in the fourth quarter, including 7.5 million of profit splits, with approximately 75% of the revenue coming from a fixed charter rate backlog, which currently stands at 2.8 billion, providing us with strong visibility on our cash flow going forward. In the fourth quarter, the liner fleet generated gross charter hire of approximately 90 million, including approximately 3.1 million in profit split contribution related to fuel savings on some of our large container vessels. Of this amount, more than 90% was derived from our vessels on long-term charters. Following the company's recent acquisitions, SFL's liner fleet backlog currently stands at approximately 2 billion, with an average remaining charter term of approximately 4.4 years or approximately 7.3 years if weighted by charter hire. Including recently announced transactions, SFL has 16 crude oil, product and chemical tankers with the majority employed on long-term charters. Our tanker fleet generated approximately 17.5 million in gross charter hire during the quarter. Of the net charter hire received, More than 75% was derived from our vessels on long-term charters, among others Frontline and Phillips 66. The net charter rate from the company's two SUSEMAX tankers employed in the short-term market was approximately 3.1 compared to 1.7 million in the previous quarter. Late in the fourth quarter, SFL took delivery of one SUSEMAX tanker and two LR Crew product tankers, with five-year charters to traffic Europe. The remaining two SUSEMAX tankers and two LR2 product tankers will be delivered during the first quarter, with full quarterly earnings effect from the second quarter. Our drywall fleet generated approximately 46.3 million in gross charter hire in the fourth quarter, including 4.5 million in profit share contribution from archivist side vessels on charter to Golden Ocean. During the quarter, the company had a fleet of 22 drywall vessels, of which 11 vessels are employed on long-term charters and the other 11 are trading in the short-term and spot market. The 11 vessels trading in the spot or short-term market generated approximately 21.2 million in net charter hire during the quarter compared to approximately 20.7 in the previous quarter. During the quarter, the company completed the sale and delivery of seven smaller handy-sized dry bulk vessels to a nation buyer and the sale generated net sales proceeds of approximately $98 million in addition to strong spot earnings during the fourth quarter prior to delivery. SFL owns two drilling rigs which have been charged out on subsidiaries to seed drill on bearable terms. In the fourth quarter, we received approximately $12.3 million in charter hire from the rigs. This summarizes an adjusted EBITDA for approximately $121 million for the fourth quarter compared to $112 million In the third 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 booked us revenues classified as repayment of investment in finance, leases and investor loans, which results in a sole sales and long-term investments and interest income from a sole sales. So for the fourth quarter, report total operating revenue according to US GAAP of approximately 152 million, which is less than approximately 166 million of charter hire actually received for the reasons just mentioned. During the quarter, the company recorded profit split income of approximately 4.5 million from our cave-sized dry bulk vessels on charter to Golden Ocean, in addition to approximately 3.1 million from fuel savings arrangements on some of our large container vessels. The company also recorded a 39.3 million gain relating to the sale of our seven smaller handy-sized dry bulk vessels, which all were delivered to the new buyer before year-end. The operating expenses of our fleet is up compared to the previous quarter, due to a combination of new vessels entering the fleet, and expenses relating to COVID-19 measures, among others due to our efforts to maintain a normalised cruise change cycle for our seafarers, despite challenging travelling restrictions around the globe. In addition, we also saw an increase in depreciation due to the new additions to our fleet, and also the consolidation of the best turquoise during the third quarter. Overall, and according to US GAAP, the company reported a net profit of approximately 80 million, or 63 cents per share. Moving on to the balance sheet. At quarter end, SFL had approximately 146 million of cash and cash equivalents. Additionally, the company had marketable securities of approximately 25 million, with market prices at the end of the quarter. Furthermore, the company had seven debt-free vessels with a combined chart-free market value of approximately 170 million, including two LR2 product tankers, which the company took delivery of before the end of the quarter and was paid with approximately 80 million dollars of cash. We expect to draw down financing for all LR2 product tankers during the first quarter. The approximately 430 million of remaining capex of recently accounted acquisitions is expected to be financed by debt facilities, 200 SFLs, or other assets with long-term charters. During the quarter, approximately 145 million was used to repay the balance of the convertible note, which was due in October. Furthermore, the company received approximately 98 million in cash proceeds from the sale of its seven hand-sized tribal vessels during the fourth quarter. So based on Q4 numbers, the company has a book equity ratio of approximately 28.4%. Then to summarize, the board has declared a cash dividend of 20 cents per share for the quarter, an increase of approximately 11% compared to the previous quarter. This represents a dividend yield of approximately 9% based on the closing share price yesterday. This is the 72nd consecutive quarter dividend, and since inception of the company in 2004, more than $28 per share, or more than $2.4 billion in total, has been returned to our shareholders through dividends. SFL has successfully committed more than $1 billion to its recent acquisitions in 2021. In the process, we have expanded our relationship with some of our key clients by investing in modern eco-designed container ships and tankers, and at the same time dispose of older, less efficient assets. Demonstrating our commitment to further improve our carbon footprint pursuant to our ESG strategy. Following the recent investments, our backlog from our shipping assets now stands at 2.8 billion, providing strong visibility on future cash flow, debt service and continued distribution capacity. With a strong operational platform and our access to attractively priced capital, SFL is well positioned to execute some new, accretive investments in the quarters to come. And with that, I give the word back to the operator who will open the line for questions.