SFL Corporation Ltd

Welcome to SFL's fourth quarter 2023 conference call. My name is Sander Borgli, and I'm an analyst in SFL. Our CEO, Ole Gjertaker, will kick off the call with an overview of the fourth quarter highlights. Then, our Chief Operating Officer, Trym Kjøli, will comment on vessel performance matters, followed by our CFO, Axel Olsson, who will take us through the financials. The conference call will be concluded by opening up for questions, and I will explain the procedure to do so prior to 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 risks and uncertainties that could cause future activities and results 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 Artakir, with highlights for the fourth quarter.

Thank you, Sander. We are now celebrating our 80th dividend and have a unique profile as a maritime infrastructure company with a diversified fleet. The total charter revenues were $209 million in the quarter, and EBITDA was $132 million, which were in line with the third quarter. Over the last 12 months, the EBITDA equivalent has been $481 million. The net income came in at around $31 million in the quarter, or 25 cents per share. The net income was impacted by some one-off items in the quarter, including negative mark-to-market on hedging instruments and accounting effects on Hercules, which our CFO, Axel Olesen, will explain in more details later in the presentation. In line with the improved results and commitment to return value to our shareholders, we are again increasing our quarterly dividend, this time to 26 cents per share. We are now paid dividends every quarter since our inception in 2004, and this has accumulated to more than $30 per share, or nearly $2.7 billion in total. Our fixed rate backlog stands at approximately $3.2 billion. And importantly, this backlog is concentrated around long-term charters to very strong end users. And 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. And with that, I will give a word over to our Chief Operating Officer, Trim Shirling.

Thank you, Ola. We have 73 maritime assets in our portfolio and our backlog from owned and managed shipping assets stand at $3.2 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 six are on the water and one still under construction in China. The latest new building is scheduled for delivery in March 24. 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 backlog. Most of our vessels are long-term chargers, but we have over the last 8-10 years completely transformed the company's operating model and have moved away from financing type bare boat chargers and instead assumed full operating exposure, which makes us relevant for large industrial end-users like Maersk, K-Line, Hapag-Lloyd and others. In the fourth quarter, 95% of charter revenues from all assets came from time charter contracts and only 5% 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 fuels. Out of the Current 73 vessels, we have 13 on bare boat type contracts and 60 on time 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 on 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. In Q4, we had a total of over 6,400 operating days, defined as calendar day, less technical or fire, and dry dockings. Two vessels have been in dry dock in the quarter. Our overall utilization across the shipping fleet was 99.7 in Q4 and 99% for the drilling rigs. The chart revenue from our fleet was $209 million in Q4 and OPEX for the fleet was $76 million. Among 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. As part of our fleet rejuvenation program, we are working with our main container charters, Maersk and Hapag-Loyd, to increase energy efficiency of our container fleet. For the six Hapag-Loyd vessels, we are investing in energy-saving devices, improved hull form with new bulbous bow, new propellers and fittings, supreme anti-fouling paint, and exhaust gas scrubbers. Furthermore, we are boosting the cargo intake up to normally 15,400 TEU by increased dead weight and modifications to lashing bridges and lashing gears. We estimate that fuel consumption and emissions per TEU carried is down by approximately 20%. We have also had similar work done on vessels to Maersk, where the energy saving is in the same region or better. 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.

Thank you, Trim. On this slide, we're showing 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 US GAAP and also net of extraordinary and non-cash items. The company generated gross charter hire of approximately 209 million in the fourth quarter, with approximately 93% of the revenue coming from a fixed charter rate backlog, which currently stands at 3.2 billion, providing us with strong visibility on the cash flow going forward. In the fourth quarter, the container fleet generated gross charter hire for approximately 92 million, including approximately 3.4 million in profit share related to fuel savings on seven of our large container vessels. With five car carriers on charter following the delivery of our second dual-fuel LNG car carrier in November, gross charter hire increased to approximately 22 million in the fourth quarter compared to approximately 9 million in the third quarter. But tankers or 15 tankers or long-term charters generated approximately 30 million in gross charter hire during the fourth quarter in line with the previous quarter. The company has 15 dry bulk carriers, of which eight were employed in long-term charters. The vessel generated approximately 21 million in gross charter hire in the fourth quarter. Seven of these vessels were employed in the spot and short-term market and contributed approximately 7.3 million in net charter hire, compared to approximately 6.2 million in the previous quarter. SFL owns two modern harsh environment ridden rigs, the large stack-up rig Linus and the semi-submersible ultra-deepwater rig Hercules. During the fourth quarter, the rigs generated approximately 44.9 million in contract revenues compared to approximately 64.1 million in the third quarter. Linus is under long-term contract with Konica Philips on a greater ecofisk field in Norway until the end of 2028. During the quarter, the line's revenue was approximately 19 million compared to approximately 16.6 million in the previous quarter. Hercules completed a drilling contract with ExxonMobil in Canada in September and commenced a contract with Galp Energia in Namibia in mid-November after a short stay in Las Palmas for preparations. During the quarter, Hercules' revenue was approximately 25.9 million compared to approximately 47.5 million in the previous quarter. The reduction in contract revenue for the Hercules relates to fewer contract days in the quarter, as the rig spent about half of the quarter in mobilization mode. The US GAAP mobilization revenue and costs are deferred and recorded over estimated contract duration. Accordingly, we expect to record additional net mobilization revenue for approximately 3.6 million in the first quarter, in addition to ordinary operating revenue under the contract. Our operating and DNA expenses for the quarter was 80 million compared to 86 million in the third quarter, as well as fewer dry dockings and lower rig operating expenses in the quarter. This summarizes an adjusted EBITDA of approximately 132 million in the fourth quarter compared to 130 million in the previous quarter. Then we want the profit and loss statements. For the fourth quarter, report total operating revenues according to US GAAP of approximately 209.6 million, which is in line with the 209.5 million of chart hire actually received. During the quarter, the company recorded profit share income of approximately 3.4 million from fuel savings for some of the large container vessels and the car carrier. The increase in operating revenue is primarily driven by revenue from commencement of new charters for car carriers. Also, we booked an extra 8.3 million of accrued income on two car carriers as the vessel's charter extensions and the US cap are subject to averaging the previous charter rate and the higher charter rate until the end of the extensions. We expect an additional positive effect of approximately 1.1 million in the first quarter. Before, we will record approximately 800,000 lower earnings versus actual received higher per quarter until the end of the extended charter. On the financial items, we had negative non-cash market-to-market effects from derivatives of approximately 5.1 million. Negative market effects from equity investments were approximately 1.4 million, and an increase of approximately 300,000 on credit loss provisions. So overall, and according to US GAAP, the company reported a net profit of approximately 31.4 million, or 25 cents per share, compared to approximately 29.3 million, or 23 cents per share in the previous quarter. Moving on to the balance sheets. at quarter end, as well as approximately 165 million of cash and cash equivalents. Furthermore, the company and multiple securities are approximately 5.1 million, in addition to eight debt-free vessels with an estimated market value of more than 100 million, following the debt repayment of approximately 20 million related to our five SupraMax dry bulk vessels. In terms of capex commitments, we have 77 million of remaining capex at quarter end on two car carriers under construction. The vessels are fully financed by individual Yolko financing arrangements, and the combined net cash proceeds upon delivery from DR is estimated to approximately 45 million. Furthermore, our harsh environment Jack of Brick Linus is scheduled to undergo its 10-year special periodic survey in the second quarter of 2024, with an estimated net capital expenditure of approximately 30 million, which will be funded with cash at hand. Based on the Q4 numbers, the company had a book equity ratio of approximately 28%. Then to conclude. The company has delivered another strong quarter and the board has declared the 80th consecutive cash dividend, which has been increased to 26 cents per share. Our fixed short rate backlog currently stands at 3.2 billion, which provides us with strong visibility on the cash flow going forward. The company has a strong balance sheet and a liquidity position with 165 million of cash at quarter end and a significant investment capacity. And finally, with the Hercules on back-to-back contracts with Galp and Equinor in 2024 and delivery for new building car carriers together with new contracts for our existing vessels, this is strong revenue generations in the quarters to come. And with that, we conclude the presentation and move on to the Q&A session.

Thank you, Axel. We will now open up for a Q&A session. For those of you who are following this presentation through Zoom, please use the raise hand function to ask a question. When a name is called out, please unmute your speaker to ask your question. Thank you.

Our first question from Chris Weatherby. Please unmute your speaker to ask your question.

Okay, thanks. Good afternoon, guys. Appreciate the time here. I guess I wanted to first start off with, across the portfolio, as you're looking out to 2024, where do you see the opportunities here? I guess, where would you be thinking about potentially deploying incremental capital to across the portfolio?

Thank you. We are looking pretty broad at the market opportunities in several segments. I would say many of the segments are fundamentally undersupplied, so there could be good growth opportunities. We have done quite a few deals on the tanker side. We'll be happy to do more there. Very low order books. We believe there is long-term sustainable growth opportunities there. We have done several car carriers recently with the deliveries of new dual fuel vessels. Also a market with good underlying growth, a long gap with very few new buildings for a period of around 10 years, structurally undersupplied, and with significant growth, particularly out of China, and where you have industrial counterparties who are willing to then look at longer charters Same thing also on the liner side, generally on containers. Yes, there is a significant order book on some of the larger sizes. But as we have seen, the liner companies are very focused on efficiency. And you could look at, you know, so even though there is a good order book, they could still be very interested in adding new capacity, both with the new fuels and with improved cargo capacity. So, we are turning all the stones, I would say. Last year was a little slow, generally. I mean, for two reasons. One, we saw an increase in new building prices, or you could call it replacement costs for assets. and also a combination with interest rates coming upwards. And as we are discussing, of course, when we look at the project opportunities, we also look at the cost of it, operating costs, the funding of it, et cetera. It takes a little time when you have underlying fundamental factors moving upwards for that to filter into, you know, call it our chartering counterparties, you know, in this decision mode. We think that is changing now. We think, you know, our discussions partners are, you know, taking in that it's more of a long-term development and not a short-term sort of spike. Therefore, it could be more open to do more business also at the levels that we see now. We are optimistic on 2024, looking at multiple opportunities, but can, of course, not comment on any of those until they are concluded.

Understood. Maybe I could follow up on the container side. So I guess maybe a two-part question here. So you noted maybe some interest on the chartering there. Could you maybe talk a little bit about what you're seeing? A little surprising there, but I guess maybe there is the potential for some duration or bid in that market. And I guess maybe in connection with that, as you think about operational changes that you may be seeing from the liner companies in terms of how they're handling some of the disruptions that are out there whether it be you know Red Sea Suez Canal um diversions or if it's Panama Canal low water levels and even sort of East Coast potential labor issues later in the fall I don't know if you're seeing specific changes from the way that these companies want to operate the vessels that could potentially lead to you know incremental capacity being put to work yeah

Some of the companies out there on the liner side saw this exceptional windfall profits, particularly in 2021 and 2022, and we've seen the market normalize more. Generally, I would say that the liner business has more similarities to the airline industry than the general shipping markets like tankers and bulkers. It's all about efficiency. It's all about cost per produced unit. And that is why now when we also see longer transportation legs, post-buy, it could be canal issues and other factors. It's all down to using the most fuel-efficient per produced box for the liner company, because they're also measured on emissions in addition to the costs it is to transport this. So the modifications we did to some of our existing vessels is a good example. They are very modern vessels, electronic engine, they were all designed after the financial So there are so-called wide beam designs. And we can, with a relatively modest investment, make them, I would say, effectively as good as a brand new vessel that you would construct today with that engine configuration type. Of course, for liner companies, it's also all about making sure that they are positioned for new fuels. So that's also something that we would be very interested in looking at. But be mindful that when we do that, we want some charter duration, as it's not set in stone quite yet, what will be the long term, call it fuel for the future. So we would be happy to look at, you know, we have some dual fuel energy vessels in our fleet, we would be happy to look at methanol and other fuel fuel types if we can work in cooperation with our customers. We have very strong vessel operations. I think what we hear from our customers is that they like our mindset. They like the way we focus on efficiencies every single day. And we try to make sure that we facilitate our customers with good long-term logistics assets.

Thank you, Ole.

Our next question comes from Gregory Lewis. Please unmute to ask your question.

Hey, good afternoon, everybody, and thanks for taking my question. I did want to talk a little bit about the asset portfolio. I'm always asking about the rigs, but I guess I first wanted to ask about dry bulk fleet i mean it's a handful of vessels um you know asset prices seem firm um you know it's difficult it seems like it's difficult to find multi-year charters you know just kind of curious on your views on how that how that how the dry bulk assets fit into the portfolio and and how you're thinking about those assets longer term thank you uh

As you rightly say, for the super markets and the council markets, there isn't really a lot of interesting long-term short-term opportunities. That's why these vessels are being traded in the short-term market. We believe we have a robust setup to get maximum results out of that. And they've been trading... you know okay and quite well we think um for a company like sfl it would be perhaps wrong to say that these are strategic assets um we when we're looking at new projects it's very difficult to make sort of that kind of ships work in our model due to the lack of long-term charters available at least at the moment so um Regarding how long they will be in our portfolio, I think that depends on the market going forward. As we've shown before, we will, if the right market conditions prevail, we will sell them. But right now, I think on balance, it makes more sense to keep them. But of course, if we see a strong dry block market coming, then we might want to change our mind on that.

And as part of the thought process, just as I try to work through this, I mean, clearly, the assets are fine, are doing fine in generating a return. Is part of the issue finding an opportunity to recycle that cash? Is that kind of what we need to be thinking about as kind of the trigger to monetize those assets?

Yeah, absolutely. I mean, for now, as Trim said, I mean, they're performing quite well. Most of these vessels are debt-free and they're generating quite good cash flow, even in today's, you know, not too exciting market. So, of course, we enjoy that. But longer term, our mindset, and as we have seen in the past, we've turned over, I mean, over the 20 years, you know, the company has been in business. We have continuously sort of effectively recycled vessels by selling them, you know, after end of long-term charter periods or when we feel that they are not so easy to find long-term charters for, and then reinvested in other vessels where we can find, you know, call it that, the dynamics. So our core focus is obviously on the modern vessels. We can put on long-term charters to very strong counterparties. And then we manage the other vessels and try to optimize the return on those. So whether we continue to charter them and enjoy the cash flow, or we dispose of them at some stage at the right price, that all depends on our market view at the time. But These vessels are a relatively small proportion of our fleet, both in terms of numbers, but certainly in terms of implied values and cash flow. So over time, we've always had, I would say, between 10% to 20% of our fleet effectively in the short-term market. And I think right now, we are maybe on the lower end of that percentage.

Thank you, Ole.

Our next question comes from Arif Hamid.

Please unmute to ask your question.

Yes, hello. Thank you for taking my question. First of all, another good quarter. Thank you very much. And thank you for the good prospects going forward. I wanted to ask about a geopolitical issue. Recently, there were problems in and around the Red Sea, and I'm wondering what effect that has on SFL's business. Do you see, for example, an increase in demand for more fuel-efficient boats, or could you go into a little detail on that, please?

Oh, yes. Thank you. Yes. I mean, we have seen, you know, quite changing market dynamics, you know, relating to that. And I would say also relating to the Panama Canal, where you have seen restrictions and reduction in capacity going through the canal due to draft issues, you know, in that region. So first of all, I mean, our vessels are on long-term charters. So our customers are paying their daily hire, I would say, irrespective of where the vessel goes, whether it goes, you know, whether it used to go through the Suez Canal or whether, you know, these vessels went around Africa. And for our customers, you know, that was also a question of economics and logistics. Taking a vessel through the Suez Canal, you know, had some significant costs in canal use. I mean, just to be mindful of that, I mean, we talk about our ship. If you look at the country Egypt, I mean, they used to have around $10 billion in canal fees as part of their revenue stream. And now that, of course, has dramatically reduced as a consequence of the turmoils and the deviation of the assets. But for our customers, they spend more days at sea burning more fuel, and you are absolutely correct. For them, it's all about having the most fuel-efficient vessels as they now trade these vessels longer. But we hope, of course, that that noise will subside and that we can return to a more normalized bullet transition level through that region. But I would say in the near term, we don't see so much direct impact on our numbers because we don't really have many vessels in the spot market that would normally trade through those areas.

Okay, thank you. Thank you.

For those of you who are following this presentation through Zoom, please use the raise sound function, which can be found on the reactions in the toolbar to ask a question.

As there are no further questions from the audience, I would like to thank everyone for participating in this conference call. If you have any follow-up questions to management, there are contact details in the press release, or you can get in touch with us through the contact pages on our webpage, www.sflcorp.com. Thank you.