SFL Corporation Ltd

Hello, everyone. Welcome to SFL's second quarter 2025 conference call. My name is Espen Jøsund, and I'm Vice President of Investor Relations in SFL. Our CEO, Ole Achtaker, will start the call with an overview of the second quarter highlights. Then, our Chief Operating Officer, Trim Sjöle, will comment on vessel performance matters, followed by our CFO, Axel Odesson, 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. Please note that 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 resource 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, Olle Ertago, with highlights for the second quarter.

Thank you, Espen. We are now announcing our 86th dividend and continue building our business as a maritime infrastructure company with a diversified fleet. We reported revenues of $194 million this quarter, and the EBITDA equivalent cash flow in the quarter was $112 million. Over the last 12 months, the EBITDA equivalent has been $526 million. The second quarter result was impacted by several one-off items, including a higher number of vessels in dry dock, and several of these with additional efficiency investments. Dry dockings are expensed when incurred, and the vessel's revenues were lower than when they're out of service. The drilling rig Hercules also remained idle in the quarter. We have in recent quarters taken decisive steps to strengthen our charter backlog by securing agreements with strong counterparties and deploying high quality assets. We have also made substantial investments in cargo handling and fuel efficiency upgrades across our existing fleet while divesting older, less efficient vessels. As part of this process, five 57,000 deadweight drybook vessels built between 2009 and 2012 have been sold recently. Four of the vessels have already been delivered to their new owners, and the last vessel is due to be delivered next month. The vessels were originally on long-term charters, but have been operated in the spot market the last several years. Due to a combination of age, design, and fuel efficiency, we have not been able to find new long-term charters for these vessels, and we have therefore decided to divest the vessels as part of our continuous fleet renewal process. Eight older capesized bulkers to Golden Ocean and seven 2002-built container ships to MSC have also been re-delivered in late June and early July, pursuing to the chartering agreements. As a result of this, and also vessel efficiency investments, operational efficiency and fuel consumption profile of the fleet has improved materially, delivering benefits to both SFS and our customers. We have also advanced our commitment to new technology with 11 vessels now capable of operating on LNG fuel, including five new buildings currently under construction. We are pleased to announce new five-year charters for three 9,500 TU container vessels on charter to Maersk. This adds $225 million to our backlog from 2026 onwards. And the vessels will be upgraded with both cargo and fuel efficiency features, similar to our other large container ships. Most of the upgrades will be compensated by the charterer through charter rate add-ons. The drilling rig Hercules has been idle since the fourth quarter in 2024, and the recent market turmoil and oil price volatility has delayed new employment opportunities for the rig, which is impacting on near-term financial results as we keep the rig warm stacked. We remain optimistic about finding new employment for the rig and continue to explore strategic opportunities for the rig in parallel, but it is difficult to give any guiding on timing for this. We have also recently re-delivered several vessels pursuant to pre-agreed purchase options and sold vessels employed in the spot market. And while this is increasing our available capital for new investments, it is reducing the near-term cash flow generation. The board has therefore decided to adjust the dividend to 20 cents per share for the second quarter. With this dividend, we have returned nearly $2.9 billion to our shareholders over 86 consecutive quarters. And the 20 cent dividend represents the yield of approximately 9% based on share price yesterday. Our charter backlog is currently $4.2 billion. And importantly, two third of this is to customers with investment grade rating, giving us a unique cashflow visibility and resilience in light of the current market volatility. Over time, we have consistently demonstrated our ability to renew and diversify the portfolio of assets and charters, supporting a sustainable long-term capacity for shareholder distributions. And we have a strong liquidity position, including on-drone portions of credit line and also multiple unlevered vessels at quarter end, which should enable us to continue investing in new accretive assets. And with that, I will leave the word over to our Chief Operating Officer, Trim Schörle.

Thank you, Ola. Our current fleet is made up of 16 maritime assets, including vessels, rigs and contracted new buildings. Although not a material reduction in charter backlog, we have a reduction in fleet from last quarter after having disposed of 20 of our older vessels. These sales partly come as a result of end-of-lease vessels being sold back to charterers under option structures, but also due to fleet renewal. The average age of the vessels sold was about 18 years, reducing the fleet average by about two years. Our backlog from owned and managed shipping assets stands at $4.2 billion, and the fleet following Q2 is made up of three dry bulk vessels, 30 container ships, 16 large tankers, two chemical tankers, seven car carriers, and two drilling rigs. Now, we have a diversified fleet of assets charted out to first-class customers on mostly long-term charters, and the majority of our customer base is large industrial end users. Container vessels dominate our backlog, accounting for about 71% of our portfolio. A key to remain an attractive partner is to ramp up investments in fleet renewal, new technology, and vessel upgrades, which we are doing. Stricter regulatory demands, particularly from the IMO and EU, aimed at cutting shipping emissions, is another driving factor. By enhancing our fleet, we position ourselves for organic growth, either by supplying new vessels to clients or extending the life of existing ones. In Q2, we had four container vessels in dry dock for special survey and major upgrades to cargo systems, energy saving technologies, propeller enhancements, and hull modifications. On the back of already executed projects with Maersk, we have agreed new five-year time charges on three of our 9,500 TU container vessels, also including a similar investment scope. In Q2, 95% of charter revenues from all assets came from time charter contracts and only 5% from bare boats or dry leases. The charter revenue from our fleet was about $194 million in the quarter, and we had a total of 6,475 operating days. Operating days being defined as calendar day, less technical or fire and dry dockings or stacking for rigs. Eight vessels have been in dry dock in the quarter, four of which were container ships undergoing major upgrade projects, and the time at the shipyard required for those upgrades beyond the 15 days normal dry docking is for charter's account. This quarter, in addition to high number of vessels in dry dock, the scope of repairs and upgrades was larger than usual. Thus, the dry dock costs in the quarter was about $16 million, where we in a normalized quarter would see an average of two and a half vessels in dry dock at a cost of around $5 million. We expect dry dock costs in Q3 and Q4 to taper down significantly. Our overall utilization across the shipping fleet in Q2 was 98.1%. Adjusted for unscheduled technical off-fire only, the utilization of the shipping fleet was 99.9%. A testament to a high quality of our vessel management. Subsequent to Porter End, our car carrier SFL Composer had a collision in Denmark upon approaching Odense pilot station going in for her special survey dry docking at Feyard. Just before midnight on August 4th, the vessel was hit from behind by an overtaking container vessel. Luckily, there were no injuries to personnel and no pollution as a result of the collision. The vessel went straight into dry dock after the incident and is currently scheduled for completion of all repairs by early September. Due to loss of higher insurance, we expect no impact to earnings. On the energy side, the Linus rig earned $22.6 million in Q2, about 10% up from Q1, as the contract rate was adjusted up by 2% from May, and the rig had no downtime during the quarter. OPEX was $14.5 million in Q2, up from $12.2 in Q1 as the US dollar weakened versus the NOC, thereby impacting personnel expense in dollars. The Hercules rig is currently warm stacked in Norway and being marketed for new contract opportunities. During the second quarter, the RIG recorded $3.3 million in revenues relating to contract payments from Equinor and equipment rental income. The majority of this equipment has been returned subsequent to quarter end, and we do not expect to receive further rental income. RIG OPEX was approximately $4.9 million in the second quarter. I will now give the word over to our CFO, Axel Olsson, who will take us through the financial highlights of the quarter.