SFL Corporation Ltd

Good day and thank you for standing by. Welcome to the second quarter 2022 SFL Corporation Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation there will be the question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ole Bjarte Hjertaker. Please go ahead.

Thank you and welcome everyone to our 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 then the call will be concluded with opening up for questions. Our Chief Operating Officer Trym Sjølie will also be present for the Q&A session. 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 or 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 on our risks and uncertainties, which may have a direct bearing on our operating results and our financial condition. The total charter revenues in the quarter were $165 million, with the vast majority from vessels on long-term charters and only 17% from vessels employed on short-term charters or in the spot market. The EBTA equivalent cash flow in the quarter was approximately $124 million, and over the last 12 months the EBTA equivalent has been approximately $476 million. The net income came in at around $57 million in the quarter, or 45 cents per share. This includes a gain on sale of vessels of $13 million in the quarter, and also positive marks to market on interest rates, swaps, and equity in Sweden. The announced dividend of 23 cents per share is an increase of 4.5% over last quarter's dividend, and represents a dividend yield of around 8.7% based on closing price yesterday. This is our 74th quarterly dividend, and over the years we have paid more than $28 per share in dividends, or nearly $2.5 billion in total. And we have an increasing fixed rate charter backlog, supporting continued dividend capacity going forward. Our fixed rate backlog has increased significantly over the last year and stands at approximately 3.6 billion from owned and managed vessels after recent acquisitions and charters, providing continued cash flow visibility going forward. The backlog figures excludes revenues from the vessels traded in the short-term market and also exclude any contribution from future profit share optionality. Today we announced the acquisition of four modern eco-designed Suezmax tankers. Purchase price is agreed to $222.5 million and we expect to take delivery of the vessels very shortly and within the next two months. Concurrently, we have agreed to charter the vessels to a subsidiary of Koch Industries, an investment-grade US-based industrial conglomerate. The transaction is adding $250 million to our fixed rate charter backlog and we are pleased to further expand our presence in the tanker market at what we believe is an attractive point in the cycle with historic low order book in the segment. The transaction also demonstrates our standing in the market as a high quality provider of transportation services including technical management, vessel operations and vetting for industry leading customers. We expect full cash flow effect from the vessels early in the fourth quarter with an estimated annual EBITDA contribution of approximately $30 million. The sale of the last two VLCCs on Charter to Frontline marks the end of an era and demonstrates the transformation SFLA have gone through over the last few years. Initially, Frontline was our only customer and the fleet consisted of nearly 50 crude oil tankers, but all have been sold and the proceeds have been used to reinvest in newer and more efficient assets. We also sold the 19 year old 1700 TU container vessel MSC Alice early in the quarter. and in total the sales generated net cash proceeds of $48.5 million after repayment of associated debt and we recorded a gain of more than $30 million in the quarter relating to these sales. We had a strong cash position of $224 million at the end of the second quarter and we have increased liquidity through refinancing of some assets where we have secured new strong charters but the debt was amortized to low levels. This enables us to move swiftly on transactions like the Forest Viewers Maxis we announced today, and we are continuously looking for further opportunities to build our portfolio with our creative assets. We also own two harsh environment drilling rigs, Linus and Hercules, which have been chartered to subsidiaries of Seadrill for a number of years. In connection with Seadrill's emergence from Chapter 11 in the first quarter, it was agreed that the long-term drilling contract for Linus with ConocoPhillips will be assigned from CEDRIL to an SFL subsidiary. This represents a backlog of more than $450 million at today's charter rate, and the change will be effective as soon as customary Norwegian regulatory approvals have been obtained. Oddfjellet Technology is managing this for us, and the process is going very smoothly. We therefore expect it to be completed before the end of this quarter. The harsh environment, semi-submersible, and Hercules will remain on Charter to Sea Drill while it is finalizing a drilling contract with an oil major before re-delivery to SFL in Norway, currently estimated in the fourth quarter. The rig is marketed for new charter opportunities in 2023 following completion of its special periodic survey expected in the first quarter of 2023. This rig will be managed by Oddfeld Drilling and there is good progress on new charter opportunities. The rig is one of only a handful rigs fully equipped to drill in the harshest Arctic environment and market analysts are positive to market prospects with several new tenders expected in the near term, particularly in Norway. We will of course follow the market very closely and will announce future employment in due course. Including today's transaction, our backlog from owned and managed shipping assets stands at 3.7 billion dollars Up from 3.6 billion dollars in the previous quarter. Over the years we have changed both fleet composition and structure and we now have 75 merited assets in our portfolio. As I mentioned earlier, 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 time the mix of assets and charter backlog has varied from 100% tankers to nearly 60% offshore 10 years ago to container vessels now being the largest segment with 54% of the backlog. Most of the vessels are on long-term charters and in the quarter only 17% of charter hire was from vessels in the spot market. Also we have nearly 90% of charter revenues from our shipping assets on time charter contracts and only 10% In addition to fixed rate charter revenues, we have had significant contribution to cash flow from profit share over the time, both relating to charter rates and fuel savings. The aggregate profit share was $24 million last 12 months and $5.2 million in the second quarter. We do not have a set mix in the portfolio, focuses on evaluating deal opportunities across the segments and try to do the right transaction 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 vessels. The strength of our counterparties and diversification is key when we assess our portfolio and quality of our contracted backlog. and the list speaks for itself with market leading operators like Maersk, Hapag-Lloyd, ConocoPhillips, P66, Koch and Volkswagen to name a few. Relatively few of our customers 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 to repeat business with Maersk, MSC, Evergreen and Trafigura for example. Our strategy has therefore 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. With full control over vessel maintenance and performance, including energy efficiency and emission-minimising 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 their stakeholders. For bare boat deals, this value is usually retained by the charterer through fixed price purchase options. And with that, I will give the word over to our CDFO, Aksel Olesen, who will take us through the financial highlights for the quarter.

Thank you, Mr. Hjertaker. On this slide, we have shown or performed illustrations 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 a net of extraordinary and non-cash items. In the second quarter, the liner fleet generated gross charter hire of approximately 89 million, including approximately 3.8 million in profit share contribution related to fuel savings on some of our large container vessels. At the end of the second quarter, SFL's liner fleet backlog was approximately 2.4 billion, with an average remaining charter term of approximately 4.9 or 7.5 years if weighted by charter hire. In the second quarter, SFL had a fleet of 16 crude oil products and chemical tankers, with a majority employed on long-term charters. The tanker fleet generated approximately 35 million in gross charter hydro in the quarter, compared to 30 million in the previous quarter, as several Trafegura vessels had their first full quarter of revenue, as well as two Susmex tankers and two smaller chemical tankers trading in the spot and short-term charter markets. The net charter hire from these vessels was approximately 6.6 million in the second quarter, compared to approximately 3.5 million in the first quarter. Furthermore, the company expects the recently announced USMAX tankers on charters to cost to have full cash flow effect from early in the fourth quarter, with an estimated EBITDA contribution of 7.5 million per quarter. The company has 15 dryball carriers of which 10 were employed on long-term charters during the quarter. SFL generated approximately 31 million in gross charter hire from the drywall suite in the second quarter, including 1.4 million of profit share. Five SFLs were employed in the spot and short-term market and contributed approximately 13.4 million in net charter hire during the second quarter, compared to approximately 8 million in the previous quarter. Aswell owns two drilling rigs, which have been chartered out as subsidiaries of Serial on bearable terms. In the second quarter, the company received a charter hire of approximately 10 million from the rigs. This summarizes an adjusted EBITDA of approximately 124 million for the second quarter, compared to 119 million in the first quarter. We then move on to the profit and loss statement, as reported on the US GA. 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. Therefore, a significant portion of our charter revenues are excluded from US GAAP operating revenues. This includes repayment of investments in sales types, direct financing leases and leaseback assets, and revenues from entities classified as investments in sole states for accounting purposes. For the second quarter, we report total operating revenues according to US GAAP of approximately 153 million, which is less than the approximately 165 million of charter hire actually received for the reasons just mentioned. The company recorded a gain of approximately 13.2 million following the sale of the feeder container vessel MC Alice and the two front-end vessels during the quarter. Also, the company recorded profit share income of approximately 1.4 million from our eight cave-sized dry bulk vessels, in addition to approximately 3.8 million from fuel saving arrangements on some of our large container vessels. Furthermore, the company recorded a 3.7 million gain related to positive mark-to-mark market effects At quarter end, approximately 75% of our debt was swapped or fixed. Based on our assumptions, we estimate that a 1% increase in interest rates from current levels equals approximately 2 cents per share in lower distributable cash flow per quarter, and vice versa. The majority of our corporate debt is fixed, and when evaluating new investment opportunities, We take a conservative approach when assuming the interest rate cost during the life of the project. We generally seek to fix the interest rate back to back with the fixed charter duration or include an interest rate adjustment in the charter rate. Also, the company recorded a 1.2 million gain related to positive market-to-market effects related to equity and debt investments, a gain from redemption of bonds of 1.4 million, and a decrease of 900,000 in credit loss provisions. So overall, and according to US GAF, the company reported a net profit of approximately 57.4 million, or 45 cents per share. Moving on to the balance sheet. At quarter end, SSL had approximately 224 million of cash and cash equivalents. In addition, we also expect to free up approximately 50 million from the refinancing of 10 dry fuel vessels during the third quarter. Furthermore, the company had marketable securities of approximately 21 million based on market prices at the end of the quarter. The company had four debt-free vessels at quarter-end with a combined charter-free value of approximately 74.5 million with an average broker appraisal. The approximately 240 million of remaining capex on our four car carriers under construction is expected to be financed by senior debt facilities, similar to SFL's other assets through long-term charters, and we expect the senior bank financing for the recently announced Susmax tankers and Charters and subsidiaries of Koch Industries, who were concluded during the fourth quarter. Based on Q2 numbers, the company had a book equity ratio of approximately 29.1%. The Board has declared a cash dividend of 23 cents per share for the quarter. The fourth consecutive dividend increase and over the past 12 months the dividend has been increased by more than 50%. The recent sale of the two last VLCs started at the front line represents a milestone for the company as this was our first and sole customer and all our vessels were crude oil tankers. Today we have a diversified fleet of modern assets or long-term tractors to multiple industry leading counterparties. Through recent acquisitions, we have established new business relationships with exclusive customers such as Trafigura, Hapag Lloyds, Kunco Phillips, and most recently Koch Industries. The recent transactions also confirm our commitment to continuously improve the quality of the fleet by disposing of older, less economical assets, and reinvest in modern and more fuel-efficient assets. Following our recent investments and chart arrangements this year, we have added more than 1.3 billion to the fixed chart rate backlog, which now stands at 3.7 billion, providing us with strong visibility on future cash flow, debt service, and continued distribution capacity. And with a strong balance sheet and significant investment capacity, SFL is very well positioned to execute on new equity investments as we continue to create shareholder value. Finally, we have seen a strong recovery in the offshore drilling market since the beginning of this year, and our two harsh environment drilling rigs are well positioned to benefit from the increased activity level in the sector. One rig is employed on a long-term market at just a charter rate, while the other rig is available for new contracts in 2023. With that, I give the word back to the operator, who will open the line for questions.