SFL Corporation Ltd

Welcome to SFL's third quarter 2023 conference call. My name is Sande Borgli and I'm an analyst in SFL. Our CEO Ole Gjertakke will start the call by briefly going through the highlights of the quarter. Following that, our Chief Operating Officer Trym Kjøli will comment on vessel performance matters before our CFO Aksel Olusen will take us through the financials. The call will be concluded by opening up for questions, and I will explain the procedure to do so 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, 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 risk 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 a more detailed discussion of 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 Hjertake, with highlights for the third quarter.

Thank you, Sondre. The charter revenues were $214 million in the quarter, which is up 23% from the previous quarter, primarily due to the drilling rig Hercules' no back-end service. The EBITDA equivalent cash flow in the quarter was approximately $130 million, which was also higher than the second quarter. And over the last 12 months, the EBITDA equivalent cash flow has been $485 million in total. The net income came in at around $29 million in the quarter, or 23 cents per share. The net income was impacted by some one-off items in the quarter, including gains on a vessel sale in the third quarter and some mark-to-market effects. This was offset by two tankers that were dry docked in the quarter and an unscheduled off-fire of around 14 days on the Jack of Brick Liners due to repair works on the top drive with associated higher upticks in the quarter. In line with the improved results and commitment to return value to our shareholders, we're also increasing our quarterly dividend to 25 cents per share. We have not paid dividends every quarter since our inception in 2004, and this has accumulated to $30 per share or more than $2.6 billion in total. And we have a robust charter backlog supporting continued dividend capacity going forward. Our fixed rate backlog stands at approximately $3.4 billion. And importantly, the backlog is concentrated around long-term charters to very strong end users. This transition has been gradual as we have changed the business model from a maritime leasing company to maritime infrastructure provider over the last 10 years. This includes switching from primarily bearable charters or financing arrangements to long-term time charters to end users. And I would note that the backlog 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. In September, we took delivery of the first of our four dual fuel car carrier new builds. The vessel named Emden will go on charter to Volkswagen Group for 10 years together with a sister vessel, and we will deliver the vessels to Volkswagen in Europe. The short-term market is red piping hot right now, and we have secured a very attractive interim charter from the shipyard in Asia to Europe, generating around $8.5 million in EBDA per vessel over a period of only two months. In addition to the new bills, we also have two existing vessels on charter to Volkswagen that have been extended for approximately three years, firm plus extension options, generating approximately $23.5 million in EBITDA per vessel per year. We have a very close business relationship with Maersk Line with 17 vessels and long-term charters. Maersk Line recently exercised an option to extend the time charter for a 9500 TEU vessel until mid 2025. This is at a higher rate than the current charter rate, adding $13 million to the charter backlog. In addition, we have a profit share relating to scrubber benefits on that vessel, where our share currently is 70%. In the third quarter, we also fully repaid a Norwegian Kroner denominated bond loan issued in 2018, where there was $48 million remaining at maturity. This was paid down from our cash balance. This loan was originally the equivalent of approximately $85 million, and the rest had already been repurchased opportunistically in the market. We have recently raised significant amounts in the new debt funding at very attractive terms in Asia and don't see a need to refinance the recently repaid bond loan with new financing in the near term. And after the extensive SPS and upgrade works to our harsh environment semi-submersible Hercules in the first half of 2023, the rig has been in Canada and drilled a well for ExxonMobil. This was finalized in September, and since then, the rig has mobilized to Namibia with a stopover in Las Palmas, and it's scheduled to start drilling for Gulf Energia in Namibia next week. This is for two wells plus an optional well testing, estimated to take around four months, including mobilization. When we calculate average day rates, we include mobilization of the rig from Las Palmas and back again, and this is compensated by the customer. This started in early October, and the estimated contract value is approximately $50 million, implying a day rate of approximately $435,000 per day for the period. After Namibia, the rig will move back to Canada to commence a contract with Equinor. The contract is for one well plus one optional well. And the duration for the firm contract period is six to seven months, 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. This rig is one of only a handful harsh environment ultra deep water semi-submersible rigs available, and market analysts are positive to long-term market prospects based on recent tender activity and a tighter supply-demand balance. And with that, I will give the word over to our Chief Operating Officer, Trum Sjöle.

Thank you, Ola. Over the years, we have changed both our fleet composition and structure, and we are now a maritime infrastructure company with 73 maritime assets in our portfolio. And our backlog from owned and managed shipping assets stands at $3.4 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 four are on the water and three are under construction in China. The remaining new buildings are scheduled for delivery over the next seven months, starting in November. 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 majority offshore assets 10 years ago to container vessels now being the largest segment with just under 50% of the backbone. Most of our vessels are in long-term charters, but we have over the last 10 years completely transformed the company's operating model and have moved away from financing type bare boat charters and instead assumed full operating exposure. This makes us relevant for large industrial end users like Volkswagen, Maersk, Hapag-Lloyd and others. In the third quarter, 94% of charter revenues from all assets came from time charter contracts and only 6% from bare boats or dry leases. In addition to fixed rate charter revenues, we've 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 $16 million. Out of the current 73 vessels, we have 13 on bare boat type contracts and 60 on time charter and spots. Our operation is quite complex with vessels across multiple sectors and we have our own commercial operation out of Oslo as well as 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 off-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 indicator, which will impact vessels operational profile, including routing and speed. EU ETS is also another hot issue becoming live from next year. In Q3, we had a total of over 6,300 operating days defined as calendar days less technical or fire and dry dockings. Three vessels have been dry docked in the quarter and our overall utilization across the shipping fleet was 99% in Q3 and 80.5% for the drilling rigs. For the rigs, as Ole explained, operating days are days on rate or in transit covered by mobilization fees, less days off hire and days spent in port, not on drilling rate. One of the key ESG targets for SFL is the reduction of carbon emissions on our fleet. Such reduction can either be met by fleet renewal in more efficient ships and with greener fuels, increased efficiency of existing fleet, or a combination of both. And as part of our fleet renewal program, we have four LNG dual fuel carriers under construction in China, of which one was delivered during the quarter, so three left. These vessels are among the most modern and efficient ships in the car carrier market. The hull has been improved and optimized with the new hull form with an S-BAU, as can be seen in the picture. And the LNG fuel system is of a high pressure type and the vessels are adapted for both ship-to-ship and port-to-ship LNG bunkering. In LNG mode, we expect a 25% lower carbon footprint per vehicle carried compared to a standard 6500 CEU conventional PCTC. The vessels are also fitted with the shore connection for zero emissions operation in port. And in addition to being able to carry EVs, the ships will also be able to carry hydrogen fuel cell vehicles. The first ship, Emden, is on her first voyage from Asia to Europe under Hyundai Glovis, and she will be delivered to Volkswagen in about one week's time. 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.