SFL Corporation Ltd

Hello, everyone, and welcome to SFL's third quarter 2024 conference call. My name is Espen Jørsson. I'm vice president of investor relations in SFL. Our CEO, Ole Achtakko, will start the call with an overview of the third quarter highlights. Then our chief operating officer, Trim Sjöle, will comment on vessel performance matters, followed by our CFO, Axel Olesen, 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 of operations to be materially different from those set forth in the forward-looking statements. Important factors that can 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 Erdaka, with highlights for the third quarter.

Thank you, Espen. We are now announcing our 83rd dividend and continue building our unique profile as a maritime infrastructure company with a diversified fleet. We reported revenues of more than $260 million this quarter, and the EBITDA equivalent cash flow in the quarter was approximately $167 million, which is significantly up from the second quarter. Over the last 12 months, the EBITDA equivalent has been $580 million. The net income came in at around $45 million in the quarter, or $0.34 per share. And we had positive contributions relating to profit share on capes as bulkers and fuel cost savings of $4.2 million in the quarter, offset by approximately $5.6 million in negative non-cash mark-to-market and one-off items. Due to US GAAP accounting rules, the revenue and expense in the quarter for the drilling rig Hercules also includes the mobilization period that started in the second quarter. Our CFO, Axel Olesen, will give more details on this when he goes through the numbers for the quarter. Our fixed rate backlog stands at approximately $4.7 billion, and importantly, two-thirds of this is to customers with investment-grade rating, giving us a unique cash flow visibility. This backlog figure excludes revenues from the vessels trading in the short-term market and also excludes revenues on the new dual-fuel chemical carrier that will operate in a pool with stalled tankers. It also excludes future profit share optionality, which we have seen can contribute significantly to our net income. And in line with our commitment to return value to shareholders, we are paying a quarterly dividend of 27 cents per share, or around 10% dividend yield. 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 Vittal. We have been busy renewing and extending multiple existing charters, and have also recently ordered five large container vessels in combination with 10-year time charters, adding $1.2 billion in that transaction alone. In addition, we have taken delivery of seven new vessels so far this year, including four vessels during the third quarter. We are also in the process of upgrading several other vessels, and our chief operating officer, Trim Shirley, will talk more about this later. During the quarter, we raised another unsecured bond loan, the 16th in a row. This was issued as a floating rate note in Norwegian kronor, and we have swapped it to US dollars at approximately 6.45% fixed interest. This was primarily used to refinance a bond loan that was due to expire in early 2025. It has also been a busy quarter from a financing perspective, where we have effectively addressed virtually all short-term asset debt maturities, matching funding with charter tenors. And with that, I will give the word over to our COO, Trim Shirley.

Thank you, Ola. When including our new building program, as well as the six vessels delivered this year, we have 81 maritime assets in our portfolio. And our backlog from owned and managed shipping assets stands at $4.7 billion. The current fleet is made up of 15 dry bulk vessels, 39 container ships, 18 tankers, seven car carriers, and two drilling rigs. We have a diversified fleet of assets charted out to first-class charters on mostly long-term charters. Container vessels is a larger segment with almost 65% of the backlog. In the third quarter, 96% of charter revenues from all assets came from time charter contracts and only 4% from bare boats or dry leases. In addition to fixed rate charter revenues, we have had significant contribution to cash flow from profit share arrangements over time, both relating to charter rates and cost savings on fuel. In Q3, profit split arrangements have contributed about $4.3 million. Out of the 81 vessels and rigs, we have 11 container ships on bare boat type contracts and the rest of the fleet on time charter or spot trading. Our operation is quite complex with vessels across multiple sectors, and we have our own commercial operation out of Oslo and operational and technical management out of Singapore and Stavanger. In Q3, we had about 6,700 operating days, defined as calendar day, less technical or fire and dry dockings. Three vessels have been in dry dock in the quarter, and our overall utilization across the fleet in Q3 was about 99%. The charter revenue from our fleet was $263 million in Q3, which is up from Q2, mainly due to the drilling rig Linus being back in operation end of July after a special periodic survey. The drilling rig Hercules entered a contract in Canada end of October and is currently on a way across the Atlantic to the west coast of Norway. As part of our decarbonization and commercial strategy, we continue to invest in new vessels as well as upgrades to our existing fleet. Our fleet has lately been enhanced by 11 LNG dual fuel vessels and three LR2 tankers. As for new building, 7,000 CU car carriers have already been delivered to Chartreuse, Volkswagen and K-Line. And two 33,000 denway ton LNG dual fuel stainless steel chemical tankers have been delivered and are in service to Stoll tankers. Five 16,800 TU container vessel new builds are to be delivered in 2028. And by October, all three of our new building LR2s have been delivered to VTOL. Our investment in fleet upgrades continues, and in Q3, we had three vessels in dry dock where energy-saving devices and upgrade works were also carried out. Such investments and cooperation with our charters is important as a way to grow our relationship and increase backlog from existing vessels. Earlier this year, we increased the backlog to Maersk with new five-year charges for seven of our large container vessels, which is a result of our close relationship and cooperation on vessel upgrades and performance enhancements. The first four 8700 TEU vessels will dock from December onwards, and the upgrades include energy-saving devices and increased cargo intake, boosting cargo capacity to about 9500 TEU, while also reducing fuel consumption. Another three 11,000 TEU vessels will dock from Q2 next year, also with energy and cargo system upgrades to be carried out. On the Hapag-Lloyd charters, the remaining three vessels out of six will be completed in Q4 before delivery to Hapag-Lloyd on the new five-year time charters. A key tool in delivering on the various projects is a strong operations, technical and new building team who can work in close contact with our charters. Fleet renewal and upgrades improves energy and operational efficiency of our vessels. This is increasingly important in the new world of ever tightening environmental regulations, both regionally and globally. 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 pro forma illustration of cash flows for the third 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 263 million during the third quarter, with approximately 89 million coming from our container fleet. This includes approximately 2.4 million in profit share related to fuel savings on seven of our large container vessels. The car carrier fleet generated approximately 26 million of gross charter hire in the quarter, including profit share from fuel savings. And the tanker fleet generated approximately 37 million in gross charter hire, up from approximately 30 million in the previous quarter, following the delivery of three tanker vessels during the quarter. SFL has 15 dry bulk vessels, of which eight are employed on long-term charters. The vessels generated approximately 25 million in gross charter hire, including approximately 1.7 million profit share generated from our eight cape-sized vessels on long-term charters to Golden Orphan. The seven vessels employed in the spot and short-term market contributed with approximately 8.4 million in net charter hire, compared to approximately 8.2 in the second quarter. In the third quarter, our energy assets generated approximately 86 million in contract revenues, compared to approximately 29 million in the second quarter. Linus is under a long-term contract with ConocoPhillips in Norway until May 2029. During the quarter, revenues from the RIG was approximately 16 million compared to approximately 10 million in the second quarter, as the RIG resumed operations in late July after finalizing its 10-year special survey. As of November 1st, the RIG's contract rate has been adjusted upwards to approximately $224,000 per day under the market adjustment rate mechanism. During the third quarter, the Hercules commenced its drilling contract with Equinor in Canada. Revenue and costs associated with drilling contracts are recorded in accordance with US GAAP, which specifies that mobilization and demobilization fees and associated mobilization costs are to be recorded over a day spent drilling during a contract. For the third quarter, we recorded approximately 70 million in contract revenue compared to approximately 19 million in the second quarter. Operating costs increased approximately 32 million, or from approximately 11 million in the second quarter, as the rig recorded full operating costs from early July, plus amortized mobilization costs deferred from the second quarter as per the counting standards just mentioned. Our operating and G&A expenses for the quarter was approximately 99 million compared to approximately 70 million in the second quarter, mainly due to the Hercules being back on the contract for most of the quarter. This summarizes to an adjusted EBITDA of approximately 167 million compared to 131 million in the previous quarter. Then move on to the profit and loss statement as reported on the US GAAP. As we had described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. Another 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 sole states for accounting purposes. So for the third quarter, we report total operating revenues, according to USGAP, of approximately 255 million, which is less than approximately 263 million of charter hire actually received for reasons just mentioned. This includes profit share income of approximately 4.2 million from fuel savings from some of our large container vessels, our car carrier, and our eight cape-sized dry bulk vessels on charter to Golden Ocean. During the quarter, we had an increase in vessel operating expenses, mainly due to new vessel deliveries, scheduled dry dockings, and the Hercules being back on contract for most of the quarter. We also had an increase in depreciation and tax driven by new vessel deliveries and Hercules operations in Canada, respectively. So overall, and according to this gap, the company reported a net profit of approximately 44.5 million, or 34 cents per share, compared to approximately 20.6 million, or 16 cents per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately 164 million of cash and cash equivalents. The company also had multiple securities of approximately 4.6 million in addition to debt-free vessels with an estimated market value of approximately 90 million. In September, the company issued a new knock bond of 750 million in the Nordic credit market. The loan bears a coupon of three and a quarter above the three-month NIBR reference rate, and the term is five years. The cash flows are swapped approximately $71 million, and the interest rate is fixed at approximately 6.45%. In connection with the new offering, SFL exercised its option to redeem the NOC 600 million bond, which was due in January 2025. The company has recently concluded financing arrangements of approximately $1 billion, with approximately $700 million being drawn down during the quarter and the balance subsequent to quarter end. During the third quarter, the company paid the first jar installment of 10% relating to a new building order of five 16,800 TU container vessels with delivery in 2028. Now the 5% is estimated due at the end of the fourth quarter, and the balance is due closer to delivery. We expect this to be financed by pre-delivery and post-delivery loan facilities. And finally, in July, the company raised 100 million in gross proceeds from a U.S. public offering by issuing 8 million common shares. So, based on the Q3 numbers, the company had a book equity ratio of approximately 28%. Then to conclude, the board has declared the 83rd consecutive cash dividend of 27 cents per share, which represents a dividend yield of approximately 10%. Following recent investment and chart renewals, our fixed chart rate backlog currently stands at 4.7 billion, providing us with strong visibility on our cash flows going forward. They come as a strong balance sheet and liquidity position, and we recently raised 100 million of gross proceeds in a public equity offering, in addition to more than a billion of financing so far this year to address both 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 hand 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. And we have our first question from Sheriff El Maghrabi. Please unmute your speaker and ask your question.

Hi, thanks for taking my questions. Ola, historically, some container ships have done some sale and leasebacks to help with fleet management. Do you expect that to happen this year? And is that something that could be an opportunity for SFL?

Well, we have a significant number of container ships in our fleet. And from time to time, we have also acquired container ships directly from liner companies. We have gone more away from doing more financial, call it, salee specs, which is really a high-leveraged field. Financing in reality. So we have some legacy assets there. But I would say all the investments we've done over the last five, six years have been long term time charters. And we think those deals have worked out pretty well. And I think also. you know, having an operational platform like we have built up now, you know, makes us relevant for the likes of Maersk and Hapag-Lloyd and Volkswagen and others. So we, of course, wouldn't mind do more business in that segment as we also look for opportunities in all the sectors that we focus on.

Thanks. And with the Hercules mobilizing to Norway, had a contracting process prospects there shape up versus Canada or Namibia. And just, you know, any color you can provide on how conversations are going with potential charters.

Oh, yes. The rig recently finalized drilling for Equinor in Canada. It's been working there since July and it's now being moved to Norway. It's a pretty efficient location, you know, given the distance and, you know, you call it maritime traveling distance. That's why we take it to the North Sea. There are opportunities in the North Sea, and remember, this rig has previously worked during the wintertime up in the Barents Sea in an ultra-harsh environment, so it's a very capable rig, and it's managed by Oddfjell, who is, I would say, deemed to be you know among the top two or three uh you know operators of the most sophisticated drilling rigs out there so we are looking for opportunities both in the north sea and and in west africa primarily near term we don't see so many opportunities in canada but we expect that to come back you know, later next year or into 2026. So near term, we focus more on North Sea and West Africa. We cannot be specific on discussions and the opportunities we see, but we believe Oddfjell, who also announced their earnings today, they at least signal a positive outlook on the market segment.

Okay. Thanks very much for taking my questions. Thank you.

All right, we'll take our next question from Clement Mullins. Clement, go ahead.

Good afternoon. Thank you for taking my questions. I wanted to follow up on Sharif's question on the Hercules. And first of all, I was wondering, do you expect to recognize any revenue on Q4 from the contract with Equinor in Canada?

Oh, yeah, thank you. Yes, we have, I mean, the rig has been working now, you know, virtually to the end of, you know, October. So there's been a full month on hire, plus we're also compensated for moving the rig afterwards. So we are effectively covered for, say, two out of three months in the fourth quarter. And of course, while we wait for the next contract, we will, of course, adjust and trim expenses along with that. So there will be a decent contribution from the RIG also this quarter.

Makes sense. Thanks for the color. And this one is more from a modeling perspective, but should the asset remain open throughout part of 2025? Could you provide some commentary on the expenses you would expect, maybe on a daily basis?

Yeah. When the rig is working, as it has been both in Namibia and Canada now in two rounds, we have seen operating expenses in the region around $200,000 per day. That is, of course, with full marine crew, full operational crew, full drilling activities ongoing day and night with that rotation pattern. So in between contracts, we can reduce operating expenses a lot. And then it's really more down to, you know, how much of the equipment do we want and do we need to run all the time to make sure that it's ready to go, that it's hot and can go straight out and drill on a new contract. So from a model perspective, I think if you put in $75,000 to $100,000 per day, you should be pretty safe on the cost side. We will, of course, manage cost and limit that as much as we can. But our primary objective here is to get the rig out working again. So we generate positive cash flows from the rig in operations.

Makes sense. This was kind of like the worst case scenario. That's all for me. Thank you for taking my questions. Thank you.

We received a question on the side here. You've sold a 2005 built container vessel. What are your plans for the other older container vessels in the fleet?

Yes, thank you. It's correct. We recently sold a 2005 built feeder vessel, 1700 TU. That container ship has been on a contract with Maersk now for a period. And, you know, as we have seen over time now, we typically own vessels until we see that we cannot really charter these vessels longer term. And typically we sell them on vessels that are older than 20 years. So as this now is approaching the 20 year anniversary next year, we feel that this is an opportune time to dispose of the vessel with a nice profit. from that sale we also have some other legacy older container ships in the fleet we have seven 4100 to you container ships with msc that's really on a bare boat financing structure those vessels will there is there are purchase obligations on those vessels basically early second quarter next year so those vessels would also then effectively be phased out And then we have a sister vessel of the vessel we recently announced, we now are now sold. That's also coming off a charter again with Maersk during the second quarter. And we have to assess what we do with that vessel over time. We may recharter it or we may sell it, you know, similar as we did with the one we just announced now. So we are monitoring that market, of course, very closely. A positive side effect of doing this with these older vessels is that these are also, from a fuel efficiency perspective, the least efficient vessels in the portfolio. And if you look away from the seven 4100s and then all 1700 that's remaining, All the other vessels are modern eco-designed vessels built, you know, from 2013 onwards with eco-engines, etc. So, you know, the effect of that is that we will actually have an improvement in our fuel efficiency ratio. Thank you, Ola.

Okay, 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, their context details are in the press release, or you can get in touch with us through the contact page on our webpage, www.sflcorp.com. Thank you all.