SFL Corporation Ltd

Welcome to SFL's second quarter 2024 conference call. My name is Sander 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 Kjøli will comment on Vessel Performance Matters, followed by our CFO Axel Olsson 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 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 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 Gertrude, with the highlights for the second quarter.

Thank you, Sander. 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 carry new bills this quarter, but charter revenues from drilling rigs were lower, partly due to US GAAP accounting rules, where mobilization fees received for the transit to 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 equivalent cash flow in the quarter was approximately 131 million dollars. Over the last 12 months, the equivalent has been 545 million dollars. The net income came in at around 21 million dollars in a quarter or 16 cents per share. We had a positive contribution relating to profit share on Cape size bulkers of 1.6M dollars and fuels cost savings of 2.8M 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 for around 9% dividend yield. Our fixed rate backlog stands at approximately $4.9 billion, 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 completely transformed the company's operating model making us relevant for large end users like maersk volkswagen group and vital 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 COO, 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 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. The current fleet is made up of 15 dry bulk vessels, 39 container ships, 18 tankers, two drilling rigs, and seven car carriers. We have a diversified fleet of assets charted out to first-class charters on mostly long-term charges. 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 bear boat leases to time chargers, 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 bear boats or dry leases. In addition to fixed rate charter revenues, we've had significant contribution to cashflow from profit share arrangements over time, both relating to charter rates and cost savings on fuel. In Q2, profit split arrangements have contributed $4.3 million. Out of the 81 vessels and rigs, we have 11 container ships on bare boat type contracts and the rest on time charter and spot trading. In Q2, we had a total of 6,400 operating days, defined as calendar day, less technical or fire and dry dockings. Two vessels and one rig have been in dry dock in the quarter. Our overall utilization across the fleet in Q2 was 97.6%, mainly due to these dry dockings. The charter revenue from our fleet was $199 million in Q2, which is down from Q1, mainly due to reduced revenues from our two 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 rate 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 Allseas ref the Green Ace Charter for 27.4 million US dollars in favor of SFO. Subsequent to this judgment, the Allseas guarantor has become subject to administration, which means there are challenging prospects for recovery of the awarded judgment. SFL are currently considering next steps. 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 making investments to increase cargo carrying capacity and reducing energy consumption. Such investments and cooperation with our charterers is important as a way to grow our ship and increase backlog from existing vessels. So far this year, we have increased the backlog to Maersk with new five-year charges for seven 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 five 16,000 TEU dual-fuel LNG container ships in China. These ships will be chartered out on 10-year time charters to a leading liner company. On the Hapa-Gloy charters, the first two upgraded container ships have been delivered already, and the third is scheduled for delivery from the yard this month. On the tanker side, we have delivered the first of three LR2 new buildings to Vito from the yard in China. The second vessel is scheduled for delivery in about one week time. And we are also pleased to announce that we have just this morning taken delivery of the 33,000 ton deadweight chemical tanker SFL Aruba for deployment in the Stolt tanker's pool. We further aim to take delivery of the sister vessel by the end of the month for delivery to Stolt under an eight-year time charger. I will now 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 are showing a performance illustration of cash flows for the second 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 199 million during the second quarter, with approximately 90 million coming from our container fleet. This includes approximately 2.8 million in profit share related to fuel savings on seven of our large container vessels. The car carrier fleet generated approximately 26 million of charter hire, and our tanker fleet generated approximately 30 million in charter hire in line with the previous quarter. SFL has 15 drivable carriers, of which eight are employed on long-term charters. The vessels generated approximately 23 million in gross charter hire in the second quarter, including approximately 1.6 million profit share generated from our eight CapeSats vessels on long-term charters to Golden Ocean. The seven vessels employed in the spot and short-term market contributed with approximately 8.2 million in charter revenue, compared to approximately 6.5 million in the first quarter. In the second quarter, our energy assets generated approximately 29 million in contract revenues compared to approximately 66 million in the previous quarter. Linus is under a long-term contract with ConcoPhillips in Norway until the end of 2028. During the quarter, revenues from the RIG were 10 million compared to 19.6 million 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 SPS and docking scope by an additional five 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 19.4 million of revenues compared to 46.9 million in the first quarter. They recommenced the contract with Equinor in Canada in mid-July. And on the US GAAP, 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 second quarter. Our operating and G&A expenses for the quarter was approximately 70 million compared to 85 million in the first quarter, mainly due to deferred operating costs of the Hercules, as per the U.S. GAAP accounting treatment just mentioned. This summarizes to an adjusted EBITDA of approximately 131 million compared to 152 million in the previous quarter. Then we move on to the profit and loss statement as reported on the U.S. GAAP. As described in previous earnings goals, 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 GAAP 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 second quarter, we report total operating revenues, according to US GAAP, of approximately 190 million, which is less than approximately 199 million of charter hire actually received for reasons just mentioned. During the quarter, the company recorded profit-sharing income of approximately 4.4 million from fuel savings on some of its large container vessels. Our car carrier are eight cape-sized vessels on charter to Golden Ocean. Our revenue from our vessels were in line with the first 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 GAAP, the company reported a net profit of approximately 20.6 million, or 16 cents per share, compared to approximately 45 million, or 36 cents per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately 186 million of cash and cash equivalents. During the quarter, the company arranged a 37 million Jolko financing for a previously debt-free container vessel, Mursk Paket, at very attractive terms and maturity matching the long-term charter. In terms of capex commitments, we have recently acquired five tankers with a total capex of approximately 340 million, of which approximately 244 million will be financed with senior bank financing. Two of the vessels have already been delivered, with the three remaining vessels expected to be delivered during the third and fourth quarter. In addition, our harsh environment jackup, Riglinus, recently underwent its 10-year SPS, and the estimated net remaining capital expenditure of approximately 30 million. Due to an additional repair scope, the CAPEX scope increased from with approximately 10 million to a total of approximately 40 million. Subsequent to court rent, the company entered into agreements to build five 16,800 TU container vessels with scheduled delivery in 2028 at an aggregate construction cost of approximately 1 billion. 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 700 million, effectively covering most secured debt financing commitments maturing over the next 12 months. And finally, the company raised 100 million in net proceeds from a US public offering by issuing 8 million 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 10.7 cents per share, which represents a dividend yield of approximately 9%. Following recent investments and short renewals, our fixed short rate backlog currently stands at 4.9 billion, 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 100 million of gross proceeds in a public offering, and have secured more than 1 billion 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 on the reactions in the toolbar bar 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 Sherif Al-Maghrabi. 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 they're still focused on white 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, you know, 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 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 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 we'll 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 hand 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, www.sflcorp.com. Thank you.