SFL Corporation Ltd

Welcome to SFL's second quarter 2023 conference call. My name is Marius Froehli, and I'm vice president for investor relations in SFL. We have a new format for the conference call this time using Zoom, and I hope this will be both as informative as usual and easier to navigate afterwards for you. Our CEO will start the call by briefly going through the highlights of the quarter. Following that, our Chief Operating Officer Trim Shirley will comment on vessel performance matters before our CFO Axel Olsen will take us through the financials. The call will be concluded by opening up for questions, and I will explain the procedure to do this before 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 US Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intents, 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 within the Securities and Exchange Commission for more detailed discussion of our risks and uncertainties, which may have a direct bearing on our operating results and our financial condition. Then, I will leave the word over to our CEO, Ole Ertaker, with highlights for the second quarter.

Thank you, Marius. The total charter revenues were $174 million in the quarter, which were down from the previous quarter, primarily due to the sale of four spot-threaded tankers earlier this year. Over the last 10 years, we have changed the business model from a maritime leasing company to maritime infrastructure with long-term time charters to end users. Only around 9% of our charter revenues were from seven bulkers and the container vessels employed on short-term charters and in the spot market. The EBITDA equivalent cash flow in the quarter was approximately $109 million in line with the previous quarter. And over the last 12 months, the EBITDA equivalent has been $480 million. The net income came in at around $17 million in the quarter, or 13 cents per share. The net income continues to be impacted by the drilling rig Hercules, which had no revenues in the second quarter, but with full operating expenses while finalizing its comprehensive special survey, or SPS, and upgrades. The SPS was finalized in mid-June, and we then started the mobilization to Canada. We have been paid the mobilization fee from Exxon for the transit, but due to US GAAP accounting rules, all of this will be recognized in the third quarter together with the mobilization costs. There was also a $6 million gain in the quarter relating to sale of the last spot traded Suezmax tanker. This is our 78th quarterly dividend, and over the years we have paid more than $2.6 billion in total and closing in on $30 per share. And we have a robust charter backlog supporting continued dividend capacity going forward. The announced dividend of $0.24 per share is in line with the previous quarter and represents a very strong dividend yield at current share price levels. Our fixed rate backlog continued to increase and stands at approximately $3.6 billion from owned and managed vessels after recent charters. This provides continued cash flow visibility going forward with significant additional cash flow from the drilling rig Hercules and the new built car carriers from the third quarter onwards. And importantly, the back book figure excludes revenues from the vessels traded in the short-term market and also excludes future profit share optionality, which we have seen can contribute significantly to our net income. The SPS and upgrade work on a harsh environment, Sebi submersible Hercules, was completed in mid-June, and the rig then moved under its own power to Canada to commence a contract with ExxonMobil Canada to drill one well, which started mid-July. Duration is estimated to approximately 135 days, including mobilization to and from Canada, and the contract has an estimated value of $50 million, implying a day rate of approximately $375,000 per day for the period. Thereafter, the RIG will move to Namibia and commence a contract with a subsidiary of GALP and Egea for two wells plus an optional well testing. Excluding optional days, the duration will be approximately 115 days, including mobilization, with an estimated contract value of another $50 million, implying a day rate of approximately $435,000 per day for that period. After Namibia, the RIG will move back to Canada to commence the recently announced contract with a subsidiary of Equinor. The contract is from one well plus one optional well. The duration for the firm contract period is approximately 200 days, including transit to and from Canada, implying a day rate of approximately $520,000 per day for the period. The RIG will then be open for new contracts from the fourth quarter 2024 onwards. The secured backlog on the Hercules is now in excess of $200 million, and we estimate approximately $100 million EBITDA from the rig over the next 12 months. This rig is one of only a handful harsh environment ultra deep water semi-submersible rigs available, and market analysts are positive to market prospects based on recent tender activity and the tight supply-demand balance. The harsh market prospects into 2025 is particularly promising, and we now see day rates in excess of $500,000 per day, as evidenced by our recently announced contract with Equinor for next year. This is up 50% from last year, and most of that goes straight to the bottom line. And we continue to renew our fleet and divest the world of tankers. We sold four tankers traded in the spot market earlier this year, and we have now sold the Landbridge Wisdom, which is the only remaining bareboat charter tanker in our fleet. This is a view to see on a relatively low bear bought charter rate, and the charterer exercised a fixed price purchase option, you know, a short while ago, where we will sell the vessel back to them later in August. The net cash proceeds is estimated to approximately $10 million, and book gain in the third quarter is estimated to around $2 million. In May, the board of directors has authorized the repurchase of up to an aggregate of $100 million of SFL shares. So far, around 1.1 million shares have been repurchased at an average cost of $9.27 per share, or just over 10% of the authorized amount, and there is $90 million remaining. Further purchases may be made at your discretion in the form of open market repurchase programs, privately negotiated transactions, accelerated share repurchase programs, or a combination of these methods. The timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, alternative uses of capital, capital availability, and the company's determination that share repurchases are in the best interest of our shareholders and other factors. We see this as a tool in the shareholder value toolbox and would note that the company is not obligated under the terms of the program to repurchase any of our common shares. This fiber program is valid until June 30th, 2024. And with that, I will give the word over to our chief operating officer, Trim Shirley.

Thank you, Ola. Over the years, we have changed both fleet composition and structure, and we now have 73 maritime assets in our portfolio, and our backlog from owned and managed shipping assets stands at $3.6 billion. The current fleet is made up of 15 dry bulk vessels, 36 container ships, 13 tankers, two drilling rigs, and seven car carriers, where three are on the water and four are under construction in China. The new buildings are scheduled for delivery over the next 10 months, starting in September. We have evolved from having a single asset class chartered to one single customer to a diversified fleet and multiple counterparties. And the fleet composition has varied from originally 100% tankers via a majority of offshore assets 10 years ago to container vessels now being the largest segment with just under 50% of the backlog. We are now a maritime infrastructure company. Most of our vessels are on long-term charters, but we have over the last eight to ten years completely transformed the company's operating model and have moved away from financing type bare boat charters and instead assumed full operating exposure, which makes us relevant for large industrial end users like, for example, Volkswagen, Maersk, Exxon, and others. In the second quarter, 92% of charter revenues from all assets came from time charter contracts and only 8% from bare boats or dry leases. In addition to fixed rate chart revenues, we have had significant contribution to cash flow from profit share arrangements over time, both relating to charter rates and cost savings on fuel. Last 12 months, the aggregate profit share has been more than $25 million. Out of the current 73 vessels, we have 13 on variable contract and 60 on fund charter and spot trading. Our operation is quite complex with vessels across multiple sectors. We have our own commercial operation out of Oslo and operational management out of Singapore and Stavanger. Our OPEX philosophy is to continuously invest in our fleet to optimize the vessel's performance and maintain a high level of service to our customers. This includes investing to minimize oil fire, as well as investments to increase cargo carrying capacity and reducing energy consumption. This has become increasingly important with the implementation of IMO carbon intensity indicators, which will impact vessels' operational profile, including routing and speed. In Q2, we had a total of over 6,000 operating days defined as calendar days less technical or fire or a fire for dry docking. Our overall utilization across the fleet is 99.4% in Q2, a number we are continuously striving to maintain as high as possible. The charter revenue from our fleet was $174 million in Q2, and our OPEX in the quarter was $38 million. One of the key metrics for SFL is the reduction of carbon emissions by improving our fleet weighted average AER, or annual efficiency ratio. AER as a carbon intensity indicator is a measure of how carbon intensive our fleet is by calculating the emissions per actual capacity and distance sailed. By the Marple Convention, IMO have implemented requirements for reducing carbon intensity of all ships larger than 5,000 gross tons from 2023 onwards. The requirement to obtain an acceptable CII rating will be gradually stricter each year towards 2030. Such requirements can either be met by fleet renewal, increased efficiency of existing fleet, or a combination of both. Although CII compliance is certainly challenging, SFL is well positioned to manage IMO's trajectory towards 2030. As part of our fleet renewal program, we have four LNG dual fuel car carriers under construction in China that when entering into service will be among the most modern and efficient ships in the car carrier market. On the energy efficiency front, we have carried out an investment program for all vessels in our fleet, including energy-saving devices and technology to capture and analyze data from onboard sensors for real-time performance management and voyage optimization. Furthermore, we are cooperating closely with several of our key charters on further vessel upgrades. The scope includes exhaust gas scrubbers, cargo intake boost, hull modifications, new propellers and propeller fixtures, as well as enhanced anti-fouling systems. We also collaborate with key charters on data integration for more optimal weather routing and performance management. In addition to reducing carbon emissions, we believe these investments will make our vessels more attractive in the market when the vessels are either up for re-delivery or for potential charter extensions. And with that, I will give the word over to our CFO, Axel Olsson, who will take us through the financial highlights of the quarter.