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.

Thank you, Trym. On this slide, we have shown our pro forma 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 a gross charter hire of approximately 194 million during the second quarter, with approximately 82 million coming from a container fleet, including profit share related to fuel savings on seven of her large container vessels. As in the previous quarter, revenue was impacted by scheduled dry dockings and efficiency upgrades on some of the large container vessels, as four vessels underwent scheduled dry docking during the quarter. Also, the company sold the 2005-built 1,702-container vessel Asian Ace, and just before quarter-end, seven of the container ships on Bebo charters to MSC were re-delivered to the chartering arrangement. The car carrier fleet generated approximately 26 million of gross charter hire in the quarter, including profit share from fuel savings, which is slightly up from the last quarter. The tanker fleet generated approximately 41 million in gross charter hire, which is down from approximately 45 in the previous quarter, as three vessels underwent scheduled dry dockings. SFL has 14 drybook vessels, of which 8 are employed on long-term charters. The vessels generated approximately 19 million in gross charter hire in the second quarter. The 7 vessels employed in the spot and short-term market contributed with approximately 5.8 million in net charter revenue, compared to approximately 4.4 million in the fourth quarter. During the quarter, the company agreed to sell its remaining four SupraMax tribal vessels, and subsequent to quarter end, the company delivered its eight CapeSize tribal vessels on contracted Golden Ocean to them as part of the previously announced purchase option that was exercised in the first quarter. SFL owns two harsh environmental rigs, the Large Jackup Rig Liners and the ultra-deepwater semi-submersible rig Hurtless. The risk generated approximately 26 million of charter hire in the quarter. Our operating and G&A expenses for the quarter was approximately 83 million, up from approximately 78 million in the first quarter. We had a relatively high number of vessels in scheduled dry dock in the quarter, and dry dock expenses for ships are being expensed when incurred. Furthermore, the vessels are out of service during the dry dock period, reducing revenues temporarily. During the second quarter, we expensed approximately 16.5 million for vessels in dry dock, compared to a normalized average of approximately 5 million per quarter. This summarizes to an adjusted EBITDA of approximately 112 million compared to 160 million in the previous quarter. We then move on to the profit and loss statement as reported on the US GAAP. For the second quarter, we report total operating revenues of approximately 192 million compared to approximately 187 million in the previous quarter. The contribution from our vessels was approximately 167 million compared to approximately 171 in the previous quarter, while the rigs contributed with approximately 26 million compared to approximately 22.5 in the previous quarter. Vessel operating expenses in the quarter was approximately 67 million, including approximately 16 million related to scheduled dry dockings, compared to approximately 58 million in total in the previous quarter. Rig operating expenses in the quarter was approximately 19 million, compared to approximately 18 in the previous quarter. The net results in the second quarter was also impacted by non-recurring or non-cash items, including net gain on sale of assets of approximately 4.2, negative mark-to-mark effects from hedging derivatives of 2.4 million, and negative mark-to-mark effects from equity investments of approximately 1 million. Overall, and according to US GAAP, the company reported a net profit of approximately 1.5 million or 1 cents per share, compared to a net loss of approximately 32 million or 24 cents per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately 156 million of cash and cash equivalents, in addition to undrawn credit lines in the amount of approximately 49 million. In addition, the company had 15 unencumbered vessels with a market value of approximately 192 million at quarter end. During the quarter, the company received net proceeds of approximately 20 million from the sale of one SupraMax vessel and seven container vessels. Subsequent to quarter end, 12 of our 15 undercover vessels have been delivered to its new owners, including the eight Cape-sized tribal vessels to Golden Ocean, with a total net proceeds of approximately 150 million, further strengthening our liquidity position. So including available credit lines, we currently have available liquidity of more than 300 million. During the quarter, the company entered into approximately 84 million of new financing arrangements for the two car carriers, SFL Conductor and SFL Compulsor. We also prepaid three debt facilities in a total amount of approximately 95 million, in addition to ordinary installments of approximately 59. As of the end of the quarter, the company had approximately 25 million remaining capital expenditures, mainly relating to efficiency upgrades on the large container vessels and the hurtless. We furthermore have remaining capital expenditures of 850 million remaining on five container new buildings, expected to be funded through pre- and post-delivery financing. So based on the Q2 numbers, the company had a book-equity ratio of approximately 25.5%. Then to summarize, the Board has declared the 86th consecutive cash dividend of 20 cents per share, which represents a dividend yield of approximately 9% based on the closing share price yesterday. Our charter backlog is currently $4.2 billion, and importantly, approximately two-thirds of this is to customers with investment-grade rating, giving us a unique cash flow visibility and resilience in light of the current market volatility. Furthermore, our strong balance sheet and liquidity position provides flexibility in the current market environment and enables us to pursue new investment opportunities. And with that, I give the word back to the operator who will open the line for questions. Thank you, Axel.

We will now open for a Q&A 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 will have our first question from Mr. Jeff Harvey. What's the status with the lawsuit with Cedril?

I think there's two lawsuits. The larger one relating to the re-delivery of the Hurtless. That will be scheduled sometime in hopefully the first half of 2026. And also, I mean, as you know, we were awarded a judgment in the first instance of approximately $45 to $50 million, depending on kind of the currency rate. And we have also received a guarantee for that amount by serial, including interest rates. Yeah.

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

Yeah, hi, good afternoon, everybody, and thanks for taking my questions. I was hoping to get more of a kind of, if you could kind of walk us through your thought process on the decision to lower the dividend. You know, obviously the 7th Sense, well, you know, called out, you know, You know, is that, you know, clearly you highlighted the rig as kind of the main driver for that. But I imagine it's not just that simple. So just kind of curious, you know, how you kind of set that 20 cent number and how we should think about that moving forward as, you know, if our base case is that that rig goes back to work, I don't know, sometime next year.

Thank you, Greg. It's Ole here. Yes, and I fully understand and appreciate that there is some disappointment on an adjustment to the dividend level. We guided in the first quarter that unless we saw a clear path onwards in near term for the Hercules, that we might have to look at the distribution, call it longer term distribution capacity in the company. So it's clear that the rig is warm stacked. These assets are quite expensive to keep to make sure that they are effectively ready to drill when there are contract opportunities. But it looks like this market continues to be relatively slow and the opportunities take longer to materialize than we had hoped for. So that is, of course, one piece of it. And while the rig is idle, we have a worm stack rate currently in the region of $60,000 per day. And then, of course, also some interest and amortization on the financing relating to it. So that is something that we... we of course are focused on. But also bearing in mind that when the last full quarter the rig worked in the third quarter of 2024, it had a significant contribution. Just that one rig alone had an EBITDA contribution of around 35 million dollars. or around 20 million dollars that quarter after interest and amortization. So it's a big, you know, it's a significant asset when it's working but right now we feel and the board feels that it's very prudent to make sure that the distribution isn't effectively subsidized, you know, because that unit is out of service currently. We also have recently divested some of the assets that we noted, you know, some of the dry book vessels to Golden Ocean. And, you know, incidentally, we find it, you know, it's also a, I call it a historic moment when Golden Ocean first was sold and then Now the vessels were effectively repurchased based on the pre-agreed purchase option. That was the last related party deal we had in our portfolio. All our transactions are with third-party companies and customers out there. both the sale of those vessels, the sale of some older container ships we had, and also the bulkers. That is more from a timing perspective. You know, we now have significant investment capacity, you know, from that, and that capital is hopefully redeployed when we see the right investment opportunities going forward. So the adjustment to 20 cents is seen as a whole, but You could also say that that is also illustrating the distribution capacity coming out from the other assets that we have in our portfolio, you know, currently. And then with investment capacity on the side and hopefully some good upside potential relating to the Hercules when that is back out working.

Okay, super helpful. And then just, you know, I'll ask just my two questions. And then the first one is pretty quick. You know, as we think about, you called out the dry docking, which impacted tankers and container hotbed costs in the second quarter. You know, as we think about the back half of the year, should we be thinking around, you know, costs for those uh sub asset classes to look more like q1 um in terms of costs or or maybe somewhere in in between q1 and q2 and and then just and then i was hoping you know after that you could talk um you know you you know cash has gone up Obviously, there's a lot of uncertainty in the market, but just kind of curious, broadly speaking, you know, how you're thinking about the ability to and really what the market is telling you in terms of the opportunities to acquire assets, because it does look like that's really what's going to, you know, drive any pickup in the dividend going forward.

So on dry dockings, we've had a high number of dry dockings, both in Q1 and Q2. And now in Q3, we will have a couple of ships sort of scheduled. And in Q4, perhaps one, depending a little bit on timing. So the last two quarters this year will be, we expect the cost for dry docking and any positioning of vessels to be very low and sort of under the average. So that this year, although more busy than a normal year, we'll still average out. So, and sort of per vessel docking, if it's a large container ship, we'll be maybe around 2 million. If it's a small container ship, maybe one and a half. So, and And for a car carrier, so I think in Q3, we might be looking at maybe 3.5 million. And in Q4, maybe 1 to 2 on the dry docking side.

And just for illustration, that is down from around 16.5 in the second quarter because of the high number of vessels in dry dock.

I believe around 10 in the first quarter. So the front half of the year has been kind of very heavy on the dry dockings and then it's going to normalize for the rest of the year.

Okay, super helpful. And then just on the opportunity, the landscape for potential acquisitions.

Yeah, absolutely. I mean, yes, we are. We continue to look at opportunities. The market has been a little slower in terms of I think this is more to do with the general market uncertainty from April onwards. So I would say through the second quarter was slower in terms of new opportunities or where we saw that there was some real uncertainty. window to get a transaction done. We are very focused on counterparties and counterparty strength, asset types, what kind of residual exposure we will be willing to take and of course that is bearing into the opportunities that we end up doing in the end. We have never guided in the past on how much we are going to deploy in every single quarter. Just as an illustration, the last 18 months in 2024 and first half 2025, I believe we added more than $2 billion to our charter backlog, invested well north of a billion dollars. We have been quite active over time, but it's all about getting the right deal done. But we definitely have investment capacity, and not least now when we have had the transactions relating to both the CapeSize bulkers, the Supermax bulkers, and also the container ships, which has given us a good net cash contribution.

Super helpful, thank you very much. Yes, thank you.

Thank you. We'll take our next question from Mr. Clément Mollat. Please unmute your speaker to ask your question.

Hi, thank you for taking my questions. If I remember correctly, this is the first quarter in which you've provided the EBITDA contribution from your energy assets on a standalone basis. If we strip out the 3 to 4 million in rental income you mentioned you generated during the quarter, should we expect the organic VDA contribution from the energy side to come in at around 3 million per quarter until a new contract for the helpfulness is secured?

I'm not sure exactly which number you are looking at now, but we have the two drilling rigs, Linus and Hercules. Linus is operated currently at a charter rate of around $230,000 per day. as operating expense in the region of $140,000 per day. So there is around $90,000 per day net after OpEx.

So in terms of kind of on the revenues on the energy side, I think it's slightly 3 million higher than than we should expect in the run rate rest of the year, as the revenues are mainly from the liners. And we had 3 million, call it extra, from the previous work for the Hurtless that came in a bit later in this quarter. So we'll unfortunately continue to have kind of a negative drag from the energy segment going forward, but we thought it would be good to highlight the very solid contribution and cash flow we have from our shipping fleet. I'm just kind of making this clear for investors and also analysts.

Yeah, I think that's helpful. And now I also wanted to ask a question, this one more on the modeling side. You still have around 850 million in capex outstanding for the container ship new builds. Correct. And that's expected to be covered by debt proceeds. Are the deliveries still expected in 2028?

Correct. So in terms of the progress there, I mean, the yard will kind of commence with kind of the construction of these vessels approximately one year of effective construction time on the ship. So kind of you'll have installments starting one year before delivery of the ships. So Q1 in 27 will have some more installments and then the ships are delivered throughout the 2028 starting in Q1.

Yeah. Makes sense. I'll turn it back. Thank you for taking my questions. Thank you.

So we have a question here from Arne at Lunasol Polaris. Just a question on the Western rig operating expenses. I think we addressed that already. So on the shipping side, we should expect that to be coming down. There's also a follow-up question on the Hercules in terms of the kind of stacking cost on that. I think we're continuously working on reducing that to an efficient number, preserving kind of the warm stack mode of the rig. And hopefully we can push that down to around 60-ish per day going forward, but always looking to increase this further, yeah.

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, 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.