SFL Corporation Ltd

Welcome to SFL's first quarter 2024 conference call. My name is Sande Borglind. I'm Vice President for Investor Relations in SFL. Our CEO, Ole Gjertakker, will start the call with an overview of the first 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, 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 operation to be materially different from these 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 Artakil, with highlights for the first quarter.

Thank you, Sondre. We are now announcing our 81st dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. The total charter revenues were $236 million in the quarter, which is up 13% from the previous quarter, primarily due to the delivery of our new car carriers and also increased revenues on the drilling rig Hercules. The EBITDA equivalent cash flow in the quarter was approximately $152 million, which was also significantly higher than the previous quarter. And over the last 12 months, the EBITDA equivalent has been $523 million. The net income came in at around $45 million in the quarter, or 36 cents per share. We had a positive contribution of 2.2 million relating to profit share on tape-sized bulkers, and 3.3 million relating to fuel cost savings, and also some minor one-off items, including 1.8 million mark-to-market gain on interest rate swaps. In line with the approved results and commitment to return value to our shareholders, we are again increasing our quarterly dividend and this time to 27 cents per share. We have paid dividends every quarter since our inception in 2004, and this has accumulated to more than $30 per share or more than $2.7 billion in total. And we have a robust and increasing charter backlog supporting continued dividend capacity going forward. Our fixed-rate backlog stands at approximately $3.6 billion, and importantly, the backlog is concentrated around long-term charters to very strong end-users. And I would note that the backlog figure excludes revenues from the vessels trading in the short-term market, and also excludes revenues on the new dual-fuel chemical carriers that will operate in a pool with Stolt Nielsen. And it also excludes future profit share optionality, which we have seen can contribute significantly to our net income. We have recently announced several new acquisitions and charters. In March, we announced the acquisition of three new 110,000 deadweight ton LR2 product tankers for an aggregate purchase price of approximately $230 million, in combination with long-term time charters to a world-leading energy and commodities company. The vessels are currently under construction in China and have conventional propulsion system with the latest eco-design features. We expect to take delivery of the vessels between June and October this year and the charter period will be minimum five years plus up to three years of extension options. This adds around $200 million to our fixed rate backlog, excluding the optional years. The Charter will have options to purchase the vessels after year five and eight, subject to a profit share mechanism with SFL. In April, we announced an agreement to acquire two 33,000 deadweight ton chemical carriers with LNG dual fuel propulsion system. The vessels are built in 2022 and 2023 and fitted with stainless steel cargo tanks, and the aggregate purchase price is approximately $114 million. We expect to take delivery of the vessels in July and have arranged long-term employment for the vessels with affiliates of Stolt Tankers, a subsidiary of the world-leading chemical logistics company Stolt Nielsen. Both vessels will be employed for a minimum of eight years when one vessel will be on a fixed rate time charter and one vessel will be employed in a pool with similar sized vessels. The fixed rate vessel has extension options of up to three years in addition to purchase options after year five and eight, subject to a profit share mechanism with SFL. We have a very close business relationship with Maersk Line and have 17 vessels on long-term charters to them now. We recently agreed to extend charters for three 10,600 TU vessels until 2030, and Maersk also exercised the one-year pre-agreed extension options on three other vessels ranging from 8,700 to 9,500 TU. In addition to this, we have also fixed our 1,700 feeder green ace on a short-term charter to Maersk until late 2024. In aggregate, this adds approximately $250 million to our charter backlog. And in addition, we have a profit share relating to scrubber benefits on some of the vessels that is expected to add additional revenues for us over time. In April, we raised a new $150 million senior unsecured sustainability-linked bond loan in the Nordic market. Maturity will be in the second quarter of 2028, and the coupon is 8.25%. Proceeds are for refinancing existing debt and for general corporate purposes. As part of the use of this facility, we have repaid a Norwegian kronor denominated bond loan due in June 2024, with the equivalent of $81 million outstanding at the end of the first quarter. And with that, I will give the word over to our Chief Operating Officer, Tim Shirley.

Thank you, Ola. Including vessels to be delivered this year, we have 76 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, 34 container ships, 18 tankers, two drilling rigs and seven car carriers. We have a diversified fleet of assets charted out to first-class charters or mostly long-term charters. Container vessels is now our largest segment. We're just under 50% of the backlog. We have over the last eight to 10 years completely transformed the company's operating model and have moved away from financing type bare-board charters and instead assumed full operating exposure. This makes us relevant for large industrial end users, both in the dry and wet segments. The two new dual-fuel chemical tankers on time-chartered to stalled and pooled with stalled tankers is a recent example of this. In the third quarter, 95% of charter revenues from all assets came from time-chartered 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 fuel. And in Q1, profit split arrangements have contributed about $5.5 million. Out of the 76 vessels, we have 11 on bare boat contracts and 65 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 and operational management out of Singapore and Stavanger. In Q1, we had a total of almost 6,500 operating days defined as calendar day, less technical or fire and dry dockings. One vessel has been in dry lock in the quarter. Our overall utilization across the fleet in Q1 was 99.5%. The charter revenue from our fleet was $236 million in Q1 and OPEX for the fleet was $81 million. 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. Such investments and cooperation with our charters is important as a way to grow our relationship and increase backlog from existing vessels. As part of our fleet upgrade program, we are working with our main container charters, Maersk and Hapag Lloyd, to increase energy efficiency of our container fleet. With Maersk, we are making investments across the long-term chartered fleet for various energy efficiency measures, including hull and propeller modifications when the vessels are in dry dock. These modifications ensure the vessels remain attractive to charters over time. And as Ole mentioned, we just entered into new five-year time charges of three 10,600 TU container ships with Maersk, in which energy efficiency was an important consideration. For the six sub-aggloid vessels, we are investing in energy-saving devices, improved hull form with new bulbous bow, new propellers and fittings, anti-fouling paint and exhaust gas scrubbers. Furthermore, we are boosting the cargo intake up to nominally 15,400 TU by increased dead weight and modification to lashing bridges and lashing gears. Two of the vessels have already been upgraded and delivered to Håpa Gløyd, and we estimate that fuel consumption and emissions per TU carried is down by approximately 20%. 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 have shown a performance illustration of cash flows for the first 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 236 million in the first quarter, with approximately 93% of revenue coming from our fixed chart rate backlog, which currently stands at 3.6 billion, providing us with strong visibility on the cash flow going forward. In the first quarter, the container fleet generated gross charter hire of approximately 90 million, including approximately 3 million in profit share related to fuel savings on some of our large container vessels. With seven car carriers on charter following the delivery of our two remaining dual-fuel LNG car carriers during the quarter, gross charter hire increased to approximately 25 million in the first quarter compared to approximately 22 million in the fourth quarter. Our tankers on long-term charters generated approximately 30 million in gross charter hire during the first quarter in line with the previous quarter. The company has 15 drivable car carriers, drivable carriers of which eight were employed on long-term charters. The vessels generated approximately 24 million in gross charter hire in the first quarter, including approximately 2 million profit share generated from our eight capes as vessels on charter to Golden Ocean. Seven of these vessels were employed in the spot and short-term market and contributed approximately 6.5 million in net charter hire compared to approximately 7.3 million in the previous quarter. SFL launched two modern harsh environment-driven rigs, the large stack-up Linus and the semi-submersible Alto Depot rig Hercules. During the first quarter, the rigs generated approximately 66.5 million in contract revenues compared to approximately 45 million in the fourth quarter. During the quarter, Lionel's revenue was approximately 19.6 million, compared to approximately 19 million in the previous quarter. The rig is currently at the yard in Norway for its 10-year special periodic survey, with an estimated net capital expenditure of approximately 13 million. In connection with the SPS, we expect the rig to be off-fire for approximately five weeks. In the first quarter, Hercules was under contract with Galp Energia in Namibia, recording approximately 47 million of revenue, compared to 26 million in the previous quarter, when half of the quarter was spent in mobilization mode. The rig is currently mobilizing to Canada for a contract with Equinor, and under US GAAP, mobilization fees and costs are deferred and amortized over the course of the contract. as the Fed is accordingly expecting to record lower income and costs on Hercules in the second quarter. Our operating and G&A expenses for the quarter was 85 million, compared to 80 million in the fourth quarter, as the Hercules won contract for the full quarter. This summarizes to an adjusted EBITDA of approximately 152 million, compared to 132 million in the previous 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. Therefore, a portion of our charter revenues are excluded from US GAAP operating revenues. This includes repayment of investment in sales type, direct financing leases and leaseback assets, and revenue from entities classified as investment in associates for accounting purposes. So the first quarter report total operating revenues according to US GAAP of approximately 229 million, which is less than approximately 236 million of charter hire actually received for reasons just mentioned. During the quarter, the company recorded a profit-sharing income of approximately 5.5 million from fuel savings from large container vessels, a car carrier, and our eight cape-sized drybook vessels on charter to Golden Ocean. On the financial items, we had positive non-cash mark-to-market effects from swaps of approximately 1.8 million. Negative mark-to-mark effects from equity investments of approximately 400,000 and an increase of approximately 100,000 on credit loss provisions. Furthermore, we had an increase in tax linked to operations of the Hurtless in Namibia. So overall, and according to USGAP, the company reported a net profit of approximately 45.3 million, or 36 cents per share, compared to approximately 31.4 million, or 25 cents per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately 168 million of cash and cash equivalents. Furthermore, the company had marketable securities of approximately 5.1 million, in addition to debt-free vessels with an estimated market value of more than 100 million. In terms of capex commitments, they recently acquired five tankers with total capex of approximately 340 million, of which we expect approximately 240 million to be financed with senior bank financing. In addition, our harsh environment, Jakob Rigg Linus, is scheduled to undergo its 10-year SPS with an estimated net capital expenditure of approximately 30 million. Subsequent to court rent, the company successfully placed a new sustainability-linked bond of 150 million, addressing the 2024 not bond maturity in addition to proceeds for general corporate purposes. Furthermore, the company has arranged a 37 million Yalco financing for a previously debt-free container vessel, Mersk Buket, at very attractive terms and maturity matching the long-term charter. So based on Q1 numbers, the company had a book-active ratio of approximately 28%. Then to conclude. The company has delivered another strong quarter with growth in both revenues and EBITDA. The board has declared the 81st consecutive cash dividend and has increased the dividend to 27 cents per share, which represents a dividend yield of approximately 8%. Our fixed short rate backlog currently stands at 3.6 billion, which provides us with strong visibility on the cash flow going forward. And with that, we conclude the presentation and move on to the Q&A session. Thank you, Axel.

We will now open for a question and answer session. For those of you who are following this presentation through Zoom, please use the raise sound function to ask a question. When your name is called out, please unmute your speaker to ask a question. Thank you. And we'll have our first question from Clement Mullins. Please unmute your speaker to ask a question.

Good afternoon, Ole and team. Thank you for taking my questions. I wanted to start by asking about the recent chemical tanker acquisitions. Adding a long-term contract on one of them is aligned with your usual structure, but could you provide some insight on the reasoning for employing one of them installed in Nielsen's pool?

Absolutely. Nielsen is the leader of chemical logistics. They are operating these vessels in the market, but they have a very high proportion of contract overfratements, i.e., call it volume contracts with their customers. There is therefore visibility on charter revenues relating to those vessels. And the reasoning for doing a combination of the two in reality is that we have then the support on the one vessel with a fixed rate. And then we have the market quality opportunity and exposure on the other vessel. And right now, The market or the near-term market based on the COA coverage is significantly higher than the fixed rate charter on the one vessel. So the balance looks to be very good in the near term. From time to time, you know, we have taken some market exposure, but if you look at it on an overall basis, you know, the vast proportion of the charter rates that we received are fixed rate. But on top of that, we also have profit share relating to earnings for some assets and also on fuel saving on other assets. So this is from a portfolio perspective, as we see it, you know, a good way to participate in this market. And we believe there are reasons to believe that this market will remain quite firm going forward, also based on the very low order book in this specific segment. Also, these vessels have a dual fuel LNG, dual fuel propulsion, which we believe will be an increasing, you know, make them increasingly attractive also for the large, you know, chemical companies that are the customers of Stolt Nielsen where these vessels will be employed.

Makes sense. Thanks for the call, Lord. Thank you. I also wanted to ask about the two offshores. Regarding the Hercules, could you provide some commentary on what's the bid for long-term contracts? And secondly, on the Linus, revenue increased quarter over quarter. Is that attributable to the index link component of the contract?

Yeah, I mean, to start with Hercules, Hercules is now mobilizing from Namibia on its way to Canada to start drilling for Equinor. So we expect that to start in Canada in early July. So it will be in transit. And, you know, in the meantime, it started to transit just a week or so ago. That contract runs until the fourth quarter. Exact timing is not 100% clear yet. This depends on when the rig drilling commences and also the scope of work that is needed and the time to drill the wells. But we believe during the fourth quarter is a realistic time when that rig will be released. From a period charter perspective, we are, of course, monitoring the market, looking at opportunities that are out there, but we cannot be specific on employment for the rig itself. you know, going forward. But we naturally look at all the opportunities that makes good sense for a rig of this caliber. You know, there are very few harsh environment deepwater rigs in the market. It's a relatively tight market. So we believe having this asset there could prove to be very interesting over time. If you look at the Linus, the charter rate there is now increasing. It's coming up from just over $200,000 per day and will now go to around $220,000 per day for us from May onwards. The charter is linked to index market index with an adjustment of 10%. This adjustment is really to balance the fact that this rig does not have any commercial off-fire between contracts that you normally see with rigs that go from contract to contract. In the second quarter, this rig will be in a dry dock for a 10-year special survey. It just arrived at the shipyard yesterday. We expect the work to take around five weeks, so we expect the rig to be back out again at the very end of the month. That rig has a long-term charter so it will then go back to the charter to ConocoPhillips that runs until the end of 2028. We also believe that there could be more work potential at the EcoFisk field. Conoco and their license partner had their license extended from 2028 to 2048, just over a year ago. And we hope that, you know, and we believe Linus will continue to do a good job for Conoco. And then that there could be opportunities for extended deployment beyond 2028. But we are still, you know, quite some time away from any commercial discussions around, you know, future deployment of that rig.

Thanks for the call. That's all from me. I'll pass it over. Thank you for taking my questions.

Thank you. Thank you. We will take our next question from Gregory Lewis. Please unmute your speaker to ask your question.

Hey, good afternoon, and thank you for taking my questions. I was hoping you could talk a little to how we should be thinking about the dividend and just returning cash to shareholders. I mean, I guess this is another increase. I think there's been three consecutive increases. Clearly, as we look at not even cash flows, but just net income, there's definitely room to increase that. the dividend even more. Just kind of curious how the board maybe is thinking about this, realizing that, you know, it was good to see, but, you know, just thinking and looking at something like backlog, you know, backlog looks like it was up, you know, more than, you know, roughly 10% sequentially. So just kind of, you know, any kind of colors you can give it, how you're thinking about the dividend, just realizing that it looks like, you know, that there is real depth in the long-term charter market for a lot of your assets.

Thank you, Greg. It's Axel here. Yeah, it's a good observation. It's a very solid quarter. Increased net income. So that's of course good. We have more contract backlog being added. I think from the board's perspective, taking a view quarter by quarter on something is long-term and sustainable over time. And been increasing the dividend now, as I say, I think at least three consecutive quarters, taking that step by step. So I think that's the approach for now, being somewhat conservative, realizing there's a lot of of capacity. I would say at the same time, there's also significant investment opportunities in the market to further grow the company and to increase the dividend over time. You have to see the totality of how much you increase the dividend quarter by quarter.

Okay. And then I was hoping for some, you know, more color on the Hercules. I mean, that rig is obviously moving to Canada. I believe there's some options on the back of the firm work. How do we how when does the customer have to exercise those options? And really what I'm wondering is, you know, I'm kind of curious on the time frame around that simply because, you know, there's there's going to be obviously multiple opportunities to fix that rig. for work and realizing customer windows for drilling rigs right now is becoming a little more urgent. So I'm kind of curious around that.

Yeah. So the drilling scope in Canada is two wells with some testing opportunity around it. The reason why we cannot be too specific on exact number of days is simply that, you know, it all depends on the drilling efficiency, which is a combination of, of course, you know, the way the rig is, you know, is handling the whole drilling operation up on the drilling floor, you could say, but also is linked to the rock down where the rig is actually drilling. So we have to be a little bit vague in terms of the exact scope and time it will take. We expect the rig to be employed definitely for the third quarter and probably for a good chunk into the fourth quarter, probably most of fourth quarter. But still, we cannot be 100% specific. That said, as you have pointed out, I mean, yes, there are other drilling opportunities. I mean, the rig has been, you know, was very successful when it was drilling in Canada for Exxon. It went to Namibia, drilled two wells for Gulp, was a major success for Gulp. I think they found more than, you know, they estimated to more than 10 billion barrels of oil. It's massive. So we of course are very happy with sort of being assisting and having the equipment that help them and then do that. And of course that we think will hopefully trigger more drilling activity also in that area. This rig has the capability to drill also in benign water, but we believe that given that it has the capacity to drill wells in sort of ultra harsh environment, very deep water, it's winterized. So it has a lot of features that we believe very few other rigs have and very few rigs that are available today. you know, from late 24 and into 2025. So we are naturally monitoring this market closely, but can only really comment and be specific when we have secured, you know, additional work for the rig.

Okay, great. And then I did want to squeeze another question in just around the... you know, around the acquisition opportunities that you were able to take advantage of in the tanker market, you know, earlier this year. It's interesting, right? Like we've kind of gone through a period where, you know, it seems like on the container market, there's always opportunities or maybe not always, but, More often than not, there are opportunities for long-term contracts. As the company looks at the landscape in the tanker market, which over the last couple of years has been more short-term in nature, are we really seeing increasing depth in the term charter market in tankers and really know i think the question that i'm getting from some investors is could we see is when these kind of one-offs or is is there is is there going to be would we should we be surprised if we continue to see you know and not necessarily from sfl but just real like long-term charters returning to the tanker market

If you look at the, call it regular, call it crude oil tanker market and product tanker market, that market is dominated by more sport-oriented players who do voyage charters. You know, you have players like Frontline on the crude oil side. You have Scorpio tankers on the product side and, you know, and other players in the various segments who are more active and who do more sort of day-to-day activities. movement of oil, picking up one oil here and another cargo there, typically. So what we have been looking for is opportunities to do more long-term employment with very strong counterparties and effectively contribute and be part of a logistics chain more than a tramp owner of an asset. um i think the chemical market is also a good example of this has more you know it has more resemblance really to a liner type market than you know a spot traded tanker market where you where where we have logistics operations and moving sometimes very complex mixes of cargos on board one vessel at a time going from various terminals and going more in a system so we're quite excited with that deal with it with salt also because there are market leaders in that segment. And we are, you know, in a way participating a bit also in the market there, given that we have one in a pool and with other similar type vessels. So it's a market we are definitely looking at. We are evaluating opportunities there. But we are segment agnostics. It's all about finding the right type of asset, the strong enough counterparty, and the right structure of the deal that makes sense for us and that we think can effectively contribute to boost the dividend capacity. because that's our ultimate objective here is how do we build long-term sustainable dividends? And we believe both these deals, those deals that we have announced is doing that. And of course, also very happy with the multiple extensions and also the long, really new charter with Maersk on vessels that have been on charter to Maersk for several years already at high rates that we believe are reflecting one, you know, that the market is quite robust. And two, these vessels are doing a really good service for us. And that is, you know, we pride ourselves of being someone we believe at premium operations on the vessels. We try to focus on, you know, optimizing fuel consumption, you know, which is helping both us in terms of reducing emissions and also helps the customer, of course, in both reducing emissions and reducing fuel costs in the logistics. So, you know, that's also something where we believe there could be further opportunities, you know, going forward.

Perfect. Super helpful. Thank you very much.

Thanks. Thank you. For those of you who are following this presentation through Zoom, please use the raise hand function under reactions 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.