SFL Corporation Ltd

Welcome to SFL's second quarter 2024 conference call. My name is Sande Borgli. I'm Vice President for Investor Relations in SFL. Our CEO, Ole Gjertaker, will start the call with an overview of the second quarter highlights. Then, our Chief Operating Officer, Trym Kjøhli, will comment on vessel performance matters, followed by our CFO, Axur Olsen, to 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 with the meaning of the U.S. 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 a more detailed discussion of risks and uncertainties, which may have a direct bearing on operating results and our financial condition. Then I will leave the word over to our CEO, Ole Atakir, with the highlights for his second quarter.

Thank you, Sande. We are now announcing our 82nd dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. We had full cash flow effect from our car carrier new builds this quarter, but charter revenues from drilling rigs were lower, partly due to US GAAP accounting rules, where mobilization fees received for the transit of Canada and corresponding costs will be recognized in the third quarter. We also coincidentally had liners out of service most of the quarter in connection with a scheduled periodic survey. We reported revenues of nearly 200 million dollars this quarter, and the EBTA equivalent cash flow in the quarter was approximately 131 million dollars. Over the last 12 months, the EBTA equivalent has been 545 million dollars. The net income came in at around 21 million dollars in the quarter, or 16 cents per share. We had a positive contribution relating to profit share on Cape size bulkers of 1.6 million dollars and fuels cost savings of 2.8 million dollars in the quarter. And in line with our commitment to return value to shareholders, we are paying a quarterly dividend of 27 cents per share, or around 9% dividend yield. Our fixed rate backlog stands at approximately 4.9 billion dollars, and importantly, the backlog is concentrated around long term charters to very strong end users. And this backlog figure excludes revenues from the vessels trading in the short term market and also excludes revenue on the new dual fuel chemical carrier 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. Most of our vessels are on long term charters, and we have over the last 10 years completed transformed the company's operating model, making us relevant for large end users like Merck, Volkswagen Group and Vittor. And we continue to build the asset portfolio and have taken delivery of four vessels so far this year and expect to take delivery of another three vessels by October. And most of these new vessels have dual fuel propulsion. We have also added massively to the backlog through multiple charter extensions on existing vessels and recently through the ordering of five large container ships in combination with 10 year charters. Our CEO, Trim Shirley, will talk more about this later. And in order to fuel further growth and build long term distributable cash flow per share, we raised 100 million dollars in a public offering a few weeks ago. And with that, I will give the word over to our Chief Operating Officer, Trim Shirley.

Thank you, Ole. Including vessels to be delivered, we have 81 maritime assets in our portfolio and our backlog from owned and managed shipping assets stands at 4.9 billion dollars. The current fleet is made up of 15 dry bulk vessels, 39 container ship, 18 tankers, 2 drilling rigs and 7 car carriers. We have a diversified fleet of assets charted out to first class charters on mostly long term charters. Container vessels is now our largest segment with just under 50% of the backlog. We have over the last 10 years completely transformed the company's operating model from bare boat leases to time charters and the majority of our customer base is large industrial end users. In the second quarter, 95% of charter revenues from all assets. Came from time charter contracts and only about 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. In Q2, profits based arrangements have contributed 4.3 million dollars. Out of the 81 vessels and rigs, we have 11 container ships on bare boat type contracts and the rest on time charter. As for trading in Q2, we had a total of 6400 operating days defined as calendar day, less technical or fire and dry dockings. 2 vessels and 1 rig have been in dry dock in the quarter. Our overall utilization across the fleet in Q2 was .6% mainly due to these dry dockings. The charter revenue from our fleet was 199 million dollars in Q2, which is down from Q1 mainly due to reduced revenues from our 2 drilling rigs. Hercules left Namibia mid May and commenced operations in Canada in mid July. Due to US GAAP accounting rules, mobilization fees from the Canada campaign and associated costs are deferred and amortized over the drilling period. Therefore, we will accordingly record high revenues and costs In the third quarter from Hercules. Linus went in for its 10 year special periodic survey in mid May and spent about 10 weeks in dock for the class survey. The rig was back on rate end of July. In the third quarter, we expect revenues to be materially higher than in the second quarter from both drilling rigs. In July, a judgment was made in the high court case against all sees. Ref the green, a's charter for 27.4Million US dollars in favor of. Subsequent to this judgment, the all sees guarantor has become subject to administration, which means. There are challenging prospects for recovery of the awarded judgments. As a fellow are currently considering next steps. Our philosophy is to continuously invest in our fleet to optimize the vessels performance and maintain a high level of service to our customers. This includes investing to minimize or fire as well as making investments to increase cargo carrying capacity and reducing energy consumption. Such investments and cooperation with our chart is important as a way to grow our relationship and increase backlog from existing vessels. So far this year, we have increased the backlog to Merse with the new 5 year charters for 7 of our large container vessels. Which is a result of close relationship and cooperation on vessel upgrades and performance enhancements. On the back of our container experience, we have also recently placed orders for 5, 16,000 to dual fuel container ships in China. These ships will be charted out on 10 year time charters to a leading line company. On the chart is the 1st, 2 upgraded container ships have been delivered already. And the 3rd is scheduled for delivery from the yard. This month on the tanker side, we have delivered the 1st of 3, 2 new buildings to be told. From the yard in China, the 2nd vessel is scheduled for delivery in about 1 week time. And we are also pleased to announce that we have just this morning taken delivery of the 33,000 Tom that weight. Chemical tanker, as well, for deployment in the store. We further aim to take the review of the sister vessel by the end of the month for delivery to stalled under an 8 year time chart. I'll now give the word over to our CFO, who will take us through the financial highlights of the quarter.

Thank you, on this slide, we are showing a performance illustration of cash flows for a 2nd quarter. We snap that this is on the guideline to assess the company's performance and is not in accordance with us kept and also net of extraordinary and non cash items. The company generated gross chart higher of approximately 199Million during the 2nd quarter, with approximately 90Million coming from our container fleet. This includes approximately 2.8Million in profit share related to fuel savings on 7 of a large container vessels. The car carrier feed generated approximately 26Million of charter hire. And the tanker feed generated approximately 30Million in charter hire in line with the previous quarter. SFL has 15 drivable carriers, so which 8 are employed on long term charters. The vessels generated approximately 23Million in gross charter hire in the 2nd quarter, including approximately 1.6Million profit share generated from our 8 Cape size vessels on long term charters to Golden Ocean. The 7 vessels employed in the spot and short term market contributed with approximately 8.2Million in charter revenue compared to approximately 6.5Million in the 1st quarter. In the 2nd quarter, our energy assets generated approximately 29Million in contract revenues compared to approximately 66Million in the previous quarter. Linus is under long term contract with Konker Philips in Norway until the end of 2028. During the quarter, revenues from the rig were 10Million compared to 19.6Million in the previous quarter as the rig underwent its 10 year special survey. The rig was back on contract rate at the end of July after an additional repair scope, which extended the SPS and docking scope by an additional 5 weeks. Hercules finalized the contract with Galp Energia in Namibia in mid-May. And then spent approximately half of the quarter in mobilization mode, recording approximately 19.4Million of revenues compared to 46.9Million in the 1st quarter. The rig commenced the contract with Equinor in Canada in mid-July. And on the US gap, mobilization fees and costs are deferred and amortized over the course of the contract. SFL has accordingly recorded lower income and costs on Hercules in the 2nd quarter. Our operating and DNA expenses for the quarter was approximately 70Million compared to 85Million in the 1st quarter. Mainly due to deferred operating costs of the Hercules as per the US gap accounting treatment just mentioned. This summarizes an adjusted EBITDA of approximately 131Million compared to 152Million in the previous quarter. Then we move on to the Profit and Loss Statement as reported on the US gap. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. Our master business strategy focuses on long-term charter contracts. Some parts of our activities are classified as capital leasing. Therefore, a portion of our charter revenues are excluded from US gap operating revenues. This includes repayment of investment in sales type direct financing leases and leaseback assets. And revenues from entities classified as investment in associates for accounting purposes. So for the 2nd quarter report, total operating revenues according to US gap of approximately 190Million. Which is less than approximately 199Million of charter hire actually received for reasons just mentioned. During the quarter, the company recorded profit sharing income of approximately 4.4Million. From fuel savings on some of our large container vessels, our car carrier, our 8-capes size vessels on charter to Golden Ocean. Our revenue from our vessels were in line with the 1st quarter. Both revenues and operating expenses from our energy assets were slower during the quarter for reasons previously mentioned. So overall and according to US gap, the company reported a net profit of approximately 20.6Million. For 16 cents per share compared to approximately 45Million for 36 cents per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately 186Million of cash and cash equivalents. During the quarter, the company arranged a 37Million YOLCO financing for previously debt-free container vessel Merck's Paquette. At very attractive terms and maturity matching the long-term charter. In terms of capex commitments, we have recently acquired 5 tankers with a total capex of approximately 340Million. Of which approximately 244Million will be financed with senior bank financing. Two of the vessels have already been delivered, the three remaining vessels expected to be delivered during the 3rd and 4th quarter. In addition, our harsh environment trackup Riglinus recently underwent its tenure as ES, with an estimated net remaining capital expenditure of approximately 30Million. Due to an additional repair scope, the capex scope increased from with approximately 10Million to a total of approximately 40Million. Subsequently, quarter end, the company entered into agreements to build 5 16810 container vessels with scheduled delivery in 2028 at an aggregate construction cost of approximately 1Million. The vessels are expected to be funded by combination of cash at hand and conventional pre and post delivery vessel financings. Furthermore, SFL has recently secured financing commitments for a combined amount of approximately 700Million, effectively covering most secured debt financing commitments maturing over the next 12 months. And finally, the company raised 100Million in net proceeds from a US public offering by issuing 8Million common shares in July. Based on the Q2 numbers, the company had a book equity ratio of approximately 27%. Then to conclude, the board has declared the 82nd consecutive cash dividend of 37 cents per share, which represents a dividend yield of approximately 9%. Following recent investments and chart renewals, our fixed chart rate backlog currently stands at 4.9Billion, providing us with strong visibility on our cash flow going forward. The company has a strong balance sheet and liquidity position, and we recently raised 100Million of gross proceeds in a public offering, and have secured more than 1Billion in senior secured financing this year to address refinancing of existing vessels and new acquisitions. 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 under reactions in the toolbar to ask a question. When your name is called out, please unmute your speaker to ask your question. Thank you. We will have our first question from Sheriff Anmugrabi. Please unmute your speaker to ask your question.

Hi, thanks for taking my question. So, first on the Hercules, that rig is now getting a little bit closer to the end of its existing contracts. And given recent consolidation within the offshore space, are operators becoming more interested in the rig, or would you say that the company is now more interested in the rig? And is it still being focused on light within their own backlog at the moment?

Yeah, thank you. The rig is working now in Canada for Equinor, doing a really good job there. Made a big find in Namibia for Gulp. So, you know, there's clearly a decent market for rigs of this caliber. But these are specialized assets. We have not concluded any follow-on work from the rig. The rig is expected to come off charter sometime during the fourth quarter. It all depends on, call it, both the drilling efficiency and the scope of work that Equinor wants to do in Canada. So, we are in dialogue with various oil companies and potential charters, but have not concluded anything so far. And cannot make any specific comments on that until we have something, you know, in place. In terms of M&A, what we have seen has been more relating to listed companies and consolidation with a primary focus, I would think, on drill ships. And not so much on semi-submersibles, which is the type of assets that the Hercules is. But we are, of course, following it closely. We see that charter rates are edging up, particularly for ultra-deepwater units. And have seen some quite strong charters and charter rates over the last few months. So, we still believe strongly in the long-term story in this segment. But, you know, we cannot be specific on when we will announce a new charter for the Hercules quite yet.

Thank you. For those of you who are following this presentation through Zoom, please use the raise sound function 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 the management, there are contact details in the press release or you can get in touch with us through the contact pages on our webpage, .sflcorp.com. Thank you.