Q3 2021 SFL Corporation Ltd Earnings Call

November 10, 2021

Good day and thank you first time by welcome to the kidneys and you can't do on S. F. L Corporation's earnings Conference call. At this time, all participants are in a listen only mode. All sorta speak a presentation that will be a question and answer session and to ask a question. During the session you will need to press star one.

And your telephone and used to require any further assistance. Please press star zero I'm. Please be advised that today's conference is being with Bouygues I would not like on the conference over to your speaker today, all a yep soccer. Thank you. Please go ahead.

Thank you and welcome everyone to <unk> third quarter conference call.

I will start the call by briefly going through the highlights of the quarter and following that our CFO Aksel Olesen will take us through the financials and the COVID-19 be concluded by opening up for questions. Our Chief operating officer from Shirley would also be a precedent for the Q&A session.

Okay.

Before we begin our presentation I would like to note that this conference call will contain forward looking statements within the meaning of the U S. Private Securities Litigation Reform Act of $19 95.

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 projections 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 includes 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 with the Securities and Exchange Commission for a more detailed discussion of our risks and uncertainties.

Which may have a direct bearing on our operating results and our financial condition.

The announced dividend of <unk> 18 per share is an increase of 20% over last quarter's dividend and represents a dividend yield of around 9% based on closing price yesterday.

This is our 71st quarterly dividend and over the years, we have paid nearly $28 per share in dividends or $2 4 billion in total.

And if you have an increased fixed rate charter backlog supporting continued dividend capacity going forward.

The total charter revenues was $156 million in the quarter with around 77% from vessels on long term charters at 23% from vessels employed on short term charters and then the spot market.

The EBITDA equivalent cash flow in the quarter was approximately $112 million or around 10% higher than the second quarter.

Over the last 12 months, the EBITDA equivalent has been approximately $419 million.

The net income came in at around $33 million in the quarter or <unk> 26 per share.

There were only minor one offs in the quarter, including a smaller mark to market gain on interest hedging instruments.

There were also a on non or at 1000 and higher operating costs in the quarter due to additional crew rotation costs linked to COVID-19 restrictions.

Our fixed rate backlog has increased and stands at approximately $2 $7 billion from the owned and managed vessels. After recent acquisitions and disposals, providing continued cash flow visibility going forward.

And the backlog of $2 7 billion exclude revenues from the vessels traded into short term market and also excludes future profit share optionality.

In addition, we have excluded charter hire relating to the drilling rigs to be conservative in light of the ongoing financial restructuring and Ctrip.

We continue building the portfolio with modern assets on long term charters and have recently agreed to acquire three moderate in 2019 built suezmax tankers in combination made time charters to one of the leading commodity trading companies.

This deal includes some interesting optionality features if the market should strengthen during the charter period, where sales can be triggered with a profit split and if not the long term charters amortize the vessels down to a comfortable low level with a good base return supported by the $140 million of backlog.

We have recently also agreed to sell seven handy sized vessels for an aggregate net sales price of $98 billion and with delivery in the fourth quarter.

Compared to one year ago the value of these vessels has nearly doubled.

These vessels were debt free at quarter end, so cash effect will be similar to net sales price too.

Two of the vessels have been delivered already while the remaining five will be delivered towards the end of the quarter.

And in addition to the sales price, we therefore estimate another around $50 million net cash flow from trading the vessels from the time, we agreed the sale until delivery.

Recently, we have also agreed to charter out two supermac smokers for periods of approximately 12 months at around $24000 per day and.

And we have also agreed to charter out that 2005 built 1700 Teu feeder container ship for a period of approximately three and a half years at a rate of approximately $27000 per day. These charters alone at around $48 million to the backlog.

And during the third quarter, we took delivery of five container vessels with long term charters to Maersk and evergreen. These vessels represent approximately $300 million charter backlog and we will have a full cash flow effect in the fourth quarter.

With these vessels, we have 15 vessels on charter to Maersk and six six vessels on charter to evergreen and all of these vessels are on time charter terms, where we are responsible for technical management and vessel operations.

Excluding the drilling rigs the backlog from our O&M managed shipping assets was $2 7 billion at the end of the third quarter.

Over the years, we have changed both fleet composition and structure Andrew.

670 vessels.

In our portfolio.

In addition to the long term chartered vessels, we have 15 vessels trading in the short term market.

And we also had a significant contribution from profit share over time, both relating to charter rates and fuel savings.

We do not have a set mixing the portfolio focus is on evaluating deal opportunities across the segments and try to do the right transactions from a risk reward perspective.

Overtime, we believe this will balance itself out, but we've tried to be careful and conservative in our investments with a focus on technology and transition over time to more fuel efficient vessels.

The two drilling rigs are not included in our reported charter backlog figures.

And we expect to see drill and the ongoing financial restructuring, we cannot give more details than we ever had disclosed in our press releases or otherwise publicly available.

After <unk> plan of reorganization was approved by the court two weeks ago. They estimate the emergence from chapter 11 around year end.

We received approximately 75% of the lease higher under the existing charter agreements for <unk> invest surplus during the <unk> chapter 11 proceedings.

Both rigs are active and working for all companies and the charter rate is sufficient to cover our debt service relating to these rates.

And we are of course pleased to see strengthening drilling markets on the back of the firm oil price.

During the third quarter, we entered into amendments to the charter agreements relating to the semi submersible drilling rig west Hercules.

Under the amendment agreement with Seadrome divest surplus is contracted to be employed with all major equity nor in Norway, and Canada until the second half of 2022, and thereafter redelivered to <unk> in Norway.

<unk> will continue to receive a bareboat hire of around $65000 per day until T drill emergence from chapter 11 around year end and therefore thereafter approximately $60000 per day, while the rig is employed under a contract and generated revenues procedural and approximately $40000 per day and all of the modes.

<unk>, including whether the rig is idle and mobilized to and from Canada for the <unk> work.

With regards to divest leanness, which is on a sub charter to an oil major in the North sea until the end of 2028 <unk> continues to have a constructive dialogue with <unk>, but we have not yet agreed terms for the period after <unk> emergence from chapter 11.

Given the ongoing discussions we can unfortunately not comment anymore on this for the time being.

Over the years, we have gone from a single asset chartered to one single customer to a diversified fleet and multiple counterparties and over time the mix of the assets and charter backlog has varied from 100% tankers to nearly 60% offshore 10 years ago, two container vessels now being the largest segment with more.

That 60% of the backlog.

If you look at the counter parties. It is no mainly to end users and market theaters into respective segments and relative few art to intermediaries, where we have less visibility on the use of the assets and quality of operations.

Strategically. This also gives us access to more deal flow opportunities such as the repeat business with Maersk MSC Evergreen for example.

Our strategy is therefore being to maintain a strong technical and commercial operating platform in cooperation with our sister companies in the sea tankers group.

This gives us the ability to offer a wider range of services to our customers from structured financing to full service time charters.

And with full control of a vessel maintenance and performance, including energy efficiency and emissions minimizing efforts, we can impact improvements to our vessels through the life of the assets and not only be constantly owning vessels employed available where the customers may not always have an incentive to make such improvements.

In addition, we can retain more of the residual value in the assets when we charter out on time charter basis and in the current environment with rising raw material cost driving replacement cost for vessels this valuation where the benefits of our asset fell under stakeholders.

<unk> deals this valve value is usually retained by the charter through fixed fixed price purchase options.

And this is illustrated by the recent sale of the <unk> brokers, where operating platform has enabled us to trade the vessels in the spot market during the soft market for a period and now when the values have nearly doubled over the last year, we sell the vessels with a significant profit plus additional net cash flow from trading the vessels.

Til delivery.

And with I will give the word over to our CFO Aksel Olesen, who will take us through the financial highlights for the quarter.

Thank you Mr <unk>.

On this slide shown our pro forma illustration of cash flows for the third quarter. Please.

Please note that it is only a guideline to assess the company's performance and its not in accordance with U S. GAAP and also net of extraordinary and noncash items.

The company generated gross charter hire of approximately $166 million in the third quarter, including $7 million of profit Approx.

Approximately 77% of revenue coming from our fixed charter rate backlog, which currently stands at $2 7 billion, providing us with strong visibility on our cash flow going forward.

In the third quarter design, the fleet generated gross charter hire of approximately $79 million, including approximately $2 8 million and profit split contribution related to fuel savings on some of the large container vessels.

While this amount more than 90% was derived from our vessels on long term charters.

Following the Companys recent acquisition.

Pete.

Our backlog currently stands at approximately $2 1 billion with an average remaining charter term of approximately six years, where approximately seven years, if waiting but charter hire.

During the quarter.

Took delivery of two modern 6800 teu within our targets.

Chartered to Maersk.

<unk> modern 14000, Teu container vessels chartered to evergreen.

Listen to 5300 Teu container vessel commenced a seven year charter to mol.

All of these vessels in that pool.

During the fourth quarter.

Thank you for your generated approximately $16 million in gross charter hire during the quarter. This amount to about 75% was derived from our vessels on long term charters to among others frontline that Phillips 66.

The net charter hire from the company's two suezmax tankers and Prudential through market.

Approximately $1 seven compared to $1 8 million in the previous quarters.

During the third quarter. We also acquired three Suezmax tankers with five year charters to world, leading commodity trading and logistics company.

We expect the vessels to deliver later this year and early in the first quarter.

A drybulk fleet generated approximately $49 million in gross charter hire in the third quarter, including approximately $4 1 million in profit share contribution from our capesize vessels on charter to Golden Ocean.

During the quarter the company.

To drive Drybulk vessels with four vessels are employed on long term charters.

Timna fitting initial market.

In September the company entered into an agreement to sell seven.

The nation buyer.

Two vessels have been delivered and the remaining vessels to be delivered before year end, resulting in net sales proceeds of more than $98 million in the fourth quarter. The vessels were debt free at quarter end.

<unk>, two drilling rigs, which have been chartered out the subsidiaries the seizure on favorable terms in the third quarter received charter hire of approximately $12 3 million from the rig.

This summarizes an adjusted EBITDA of approximately $112 million for the third quarter compared to $103 million in the second quarter.

We then move on to the profit and loss statement as reported under U S. GAAP.

We have described in previous earnings calls our accounting statements are different from those of a traditional shipping company.

And as our business strategy focuses on long term charter contracts a large part of our activities are classified as capital leasing.

As a result, a significant portion of our software revenues are excluded from U S. GAAP operating revenues.

And that rent.

Revenues classified as repayment of investment in finance leases and this alone.

With certain associates and long term investments.

Income from associates.

For the third quarter report total operating revenues. According to U S. GAAP of approximately $135 4 million, which assist in approximately $156 million of charter hire actually received for the reasons just mentioned.

During the quarter. The company recorded income $4 1 million from our cases focus on charters to Golden Ocean.

In addition to $2 8 million from huge saving arrangements on some of the large container vessels.

Furthermore, the company's operating expenses increased.

Delivery of five vessels during the quarter.

And we also had approximately 900000.

Operating expenses relating to COVID-19 measures among others due to efforts to maintain a normalized food chain cycle for our seafarers, despite challenging travel logistics around the globe.

In addition, we also saw an increase in depreciation due to the new additions to the fleet during the quarter.

So overall and according to U S GAAP.

We reported a net profit of $33 2 million six cents per share.

Moving on to the balance sheet at quarter end <unk> at approximately $251 million in cash and cash equivalents.

Additionally, the company.

As marketable securities of approximately $25 million based on market prices.

At the end of the quarter.

Furthermore, the company at $6 three vessels that are combined flooded the market value of approximately $185 million.

In the U S. GAAP the wholly owned drilling rig the surplus that's being accounted for as investments in associates supplying the equity method.

However, pulling the agreement with cereal to amend the charter for investors during the quarter.

Consolidated on our balance sheet on the vessels and equipment from the effective date of the agreement on the tender and the focus.

During the quarter the company secured attractive financing for four large container vessels in the form of senior secured bank financing and Zippo and Japanese operating leases with total proceeds of approximately $260 million.

Approximately 400.

$430 million remaining Capex for recent <unk> acquisition is expected to be financed by debt facilities similar to <unk> older assets with long term charters.

Subsequent to quarter end approximately $148 million was used to repay a development of the convertible bonds due in mid October.

Furthermore, the company expects to receive approximately $98 million in cash proceeds from the sale of four seven handsets focus during the fourth quarter a third currently debt free.

Based on the Q3 numbers the company has a book equity ratio of approximately 26%.

Then to summarize.

<unk> declared a cash dividend of <unk> 10 per.

Per share for the quarter. This represents a dividend yield of approximately 9% based on the closing share price yesterday.

This is the SMT first consecutive quarterly dividends since inception of the company in 2000 and for approximately <unk> <unk> per share or approximately $2 $4 billion in aggregate.

Total shareholders to dividend.

SSL and successfully committed towards the $850 million towards accretive in less than so far this year.

And then the process, we have expanded our relationship with some of our key clients by investing in modern eco design containership and at the same time disposal of older less efficient vessels, demonstrating our commitment to further improve our carbon footprint pursuant or ESG strategy.

Following the recent investments our backlog from a shipping assets now stands at $2 7 billion, providing strong visibility on future cash flow debt service and continued distribution and capacity.

And with more than $250 million of cash at quarter end, that's about as well positioned to execute our new accretive investments in the quarters to come.

And with that I give the word back to the operator, who will open the line for questions.

Thank you and as a reminder to ask a question. Please press star and one in your telephone and your first question comes from the line of Greg Lewis from <unk>. Your line is open please answer Chris.

Yes, Hey, everybody. Thank you Ed.

Good afternoon.

Yes.

See the dividend going higher so yes.

That looks pretty good.

I guess I guess.

As we think about the market.

And the opportunities over the next kind of 12 to 18 months. Realizing that you are planning more for the FERC.

Well long term.

You guys keep a close eye on residuals does.

Correct.

Does the current tightness.

Whether it's ship yards or in the supply chain I E.

<unk>.

Scrap prices are high.

How does that impact your the company's decision to look to continue to source new projects.

Yeah, what we have seen in that.

Greg It's nice nice talking to you and thanks for the question there.

What we see I mean, it's.

It's not it's not uncommon in the market we've seen volatility in these markets before.

We have seen a quite interesting demand.

Four of shipbuilding capacity.

Driven I would say, particularly over the last 12 months by the containership market at the same time, we are seeing.

Over the years over the last few years.

There has been the capacity of the building capacity that shipyards have shrunk quite significantly some estimate up to maybe maybe a third of the market.

As you know has been removed compared to the boom around 2008. So so those dynamics are of course interesting.

So with a tighter market you see more pressure on raw material.

That of course gives us maybe also some confidence on the residual values, we use in our calculations.

When we look for the longer term at the same time.

We're also very cognizant of the technology shift we see.

Coming now and so so it's a balancing act.

But on.

The hole. We are we think this market is going to be quite robust of course, there will be continued volatility.

But we think that.

Both counterparty risk.

And asset prices could well.

B b quite solid going forward.

Okay, Great and then just realizing.

You were able to execute on that Suezmax track Suezmax transaction.

Which was.

You've got all the people would argue hey, that's a good move.

Sort of counter cyclical investing are you.

As we think about.

The challenges facing the tanker market over the last year end.

We'll see how this winter play this winter market develops and into next year.

Could we be at a point where.

I guess yeah.

Your value proposition.

It's starting to become more.

Palatable for some other use for some tanker owners that have historically always wanted.

One their tonnage.

Really what I'm trying to get at is.

Post this winter market it tends to be a long spring and summer.

See the opportunity to deploy more capital in the tanker market.

Yes, we do we are looking at projects all the time, we will see which projects actually comes together.

It materializes, but what we do see areas that we have the lowest order book.

On a relative scale since the mid 1990 days, which was a record low order book level.

And we see a lot of phase out of older vessels, because it was a huge wave of vessels that came in in the early two thousands and they are now getting to 20 years of age and therefore very difficult to trade and very expensive to take through special surveys. So so so that in itself could be.

Two of them to a tightness of the market, but we've seen now with production cuts in floating storage.

Winding we've seen that the near term call. It the market has been quite soft.

But this.

This is a market as we have seen in the past it can turn very quickly.

The price elasticity here is quite interesting.

But back to your question about the tanker owners I mean, what we you have two sets of quality charters release, you have what we call justified straight financing.

Both financing.

At some advance rate.

You've seen us maybe 90% to 100% of value bareboat over time and the purchase obligation in our mind Thats, a financing and it's quite different from the deal we did on those suezmax tankers.

The vessels, we manage the vessels.

Where we have a profit split.

There is incentive during the term of the charter to actually maximize returns by timing potentially potential sale of one or more of the vessels. So it's a much more opportunistic approach.

While we think that we have our downside covered quite well through the base charter rate. If if it goes through the end of the charter period.

So this is a market, where we think being a little opportunistic it can be it can create value, but at the same time.

In a defensive way.

Okay perfect. Thank you Super helpful.

Thanks, a lot.

Thank you and your next question comes from the line of Randy <unk>.

<unk> from Jefferies. Your line is open please ask your question.

Hey, Good morning, guys. This is <unk> on for Randy how are you guys doing.

Thank you.

Good good just couple of quick questions for you I guess first on.

On the decision to increase the dividend can you talk about how that amount what kind of decided on.

And then is it fair to assume that the dividend will likely remain flat here.

Do you think kind of Capex Bill outstanding.

Yes.

Inc.

We reduced the dividend some time back.

Over the year.

I think we are committed more than $850 million in your Capex, we have seen.

And of course, the majority of the new acquisitions coming on the balance sheet producing cash flow.

Of course, you get the higher degree of full contribution on you find room to increase the dividend.

As we look at on new acquisitions going forward I think the board will also on a quarterly basis, particularly on the dividend to what extent they read through to increase that and I think that again for the board to decide on a quarterly basis.

That's the only field.

Good good dividend revenue contribution.

Yes.

In line with the new dividend policy.

For the quarter.

Got it got it that's helpful and.

Then in terms of your fleet is there any appetite to sell maybe some of your older container ships given how strong the asset values are all right now.

Sorry can you repeat that are you asking if we would like to sell older ships contact yes, yes, just given kind of how how high asset values our analysis on the competitive side.

Yes.

Thank you for the question.

We.

We're always looking at the older fleet as potential sale candidates of course.

But in light of the current strong market for some of these vessels like like the container ships. For instance, these are we just fixed slot in 2005 to 700 Teu vessels at <unk>.

7000, a day for three three and a half years.

We have one more vessel in the portfolio of the same type coming open sort of second half next year.

And we feel quite confident about that.

So we're not necessarily looking to sell more ships right now.

The same sort of.

Evaluation also goes for our older <unk>.

All are bulk vessels at the moment.

But I think it's worth just adding to that that for the vessels that we chartered up four three to three and half years.

<unk> contribution from that vessel is stupid.

Essentially similar to the sales value. So in a way you get you get the value through cash flow and you keep.

The vessel.

So where we are we are at the cake and keep it.

Okay.

Got it very helpful. I'll turn it back over thank you.

Thank you.

Thank you once again, if you wish to ask a question. Please press star one and our <unk>.

Next question comes from the line of Chris <unk> from Citi. Your line is open. Please ask your question.

Hey, guys James on for Chris wanted to ask him about the capital structure and just how you're thinking about it at this point.

Basically is there any do you think that might make sense to put in a traditional slug of capital that's a bit more permanent.

Like another bond issuance.

Sure.

Now just kind of wanted to understand sort of your priorities on that side of the aisle.

That side of the house and what you.

You might be thinking about doing in the near term.

Yes, Thanks, Jess I think we are quite happy with the current capital structure I think.

As you know we are.

Annually, we are retiring about $200 million in senior secured debt.

On our assets.

Recently repaid.

The convert as you know.

Think for time being we are quite pleased I think the oil supply quite pleased to see.

The feedback we get from financing institutions in terms of.

Financing or kind of reasons acquisitions.

As I mentioned of four vessels, we have financed already two and the senior bank market them to with Japanese operating leases.

And as I stated.

<unk> Capex is expected to be financed in a similar manner.

For Us I think we see those financing terms coming in I will take close to historic lows in terms of margin cost and also duration of that debt I think thats the reflection of our approach to structuring deals.

Type of assets counterparty quality and of course, the duration of the charters so.

For Us I think.

We will continue as is.

For the time being but of course always evaluating.

Alternatives to see if we can kind of improve from what we have today.

Thank you.

And also wanted to ask.

Just what are you seeing in the market from a financing perspective I think there is.

Been a longer term trend.

I have been commenting on coming into the pandemic.

This shifting.

Basically the current search seems to at least increased at least some appetite just wanted to understand sort.

What youre seeing in the market if youre seeing.

That sort of moved away from shipping reentering or calm and UN td's coming and just wanted to get a sense of the sort of competitive environment from a financing perspective.

Absolutely I think I mean, this but you said the banks going to retract and put a market for some time now we've been fortunate to have a very good success with more than 25 international banks in our portfolio. The three observation is correct. We see many banks that for a long time havent basically with you.

Through portfolios coming back with strengths in the market.

That is far more competition now than we've seen in quite some time I think thats kind of a reflection of a.

A strengthening market.

Belief that that market.

We lost through quite some time, given the favorable supply demand dynamics I missed the I talked about earlier on.

Happy to see more banks, so banks, we have a group within the past coming back and offering attractive financing terms.

Thank you.

Thank you no question at this time please continue.

Thank you then I would like to thank everybody for participating in our conference call and also thank the <unk> teams on board the vessels and onshore for their continued efforts in delivering value for our shareholders.

If you have any follow up questions. There are contact details in the press release, where you can get in touch with us through the contact pages on our webpage Www Dot SSL Corp Dot com. Thank you.

And this concludes today's squad France call. Thank you for participating you may now disconnect.

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Q3 2021 SFL Corporation Ltd Earnings Call

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