Preliminary Q3 2022 SFL Corporation Ltd Earnings Call

November 14, 2022

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

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Hi, everyone and welcome to I suppose third.

Quarter Conference call, we do apologize for the problems with their service provider, who has delayed the call now for more than 20 minutes, but I hope that you know you have been patient and are able to do this needed to assess deal.

I will start the call by briefly going through the highlights of the quarter following that our CFO , Oxford, Willison, who will take us through the financials and the call will be concluded by opening up for questions or Chief operating officer trimmed surely would also be precedent for 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 U S. Private Securities Litigation Reform Act of 1995 words, such as expects anticipates intends estimates or similar expressions are intended to identify these forward looking.

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 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 more detailed discussion on our risks and uncertainties, which.

They have a direct bearing on our operating results on our financial condition.

The total charter revenues for $178 million in the quarter, which was up 8% compared to the second quarter there.

The majority of revenues was for muscles of the charters on the around 18% for vessel supplied on short term charters.

Amid this book market.

The EBITDA equivalent cash flow in the quarter was approximately $126 million and over the last 12 months. The EBITDA equivalent has been $489 million.

The net income came in at around $50 million in the quarter or <unk> 39 per share. This includes contributions from profit sharing arrangements and also positive mark to market on interest rate swaps and equity and bond investments.

The announced dividend of 23 cents per share is in line with the dividend declared for the second quarter and represents a dividend yield of around 8.8% based on closing price on Friday. This is our 75th quarterly dividend and over the years, we have paid more than $2.5 billion in total were more than $28 per share.

And we have a robust charter backlog supporting continued dividend capacity going forward.

And our fixed rate backlog has increased significantly over the last year and now stands at approximately $3 $8 billion from owned and managed vessels. After recent acquisitions in charters, providing continued cash flow visibility going forward and.

And importantly, the backlog figure excludes revenues from the vessels traded into short term market and also excludes future profit share Optionality, which we have seen can contribute significantly to our net income.

We have recently announced the acquisition of four modern eco design Suezmax tankers in combination with long term charters to Koch industries.

Two vessels were delivered in the third quarter and true delivered after quarter end and full cash flow effect will therefore be from the first quarter 2023.

The transaction added $250 million to a fixed rate charter backlog and demonstrates our standing in the market as a high quality provider of transportation services, including Tactical management vessel operations investing four four for industry leading customers.

Based on market sources, the charter free value of these vessels are already up 16% compared to a purchase price. This does not mean that anything for the near term cash flows, but it is important for the overall risk profile for us.

In early September we announced the acquisition of two new build feeder container vessels. This was an opportunity that come up on short notice and a result of our strong business relationship with Maersk line, where we have done multiple repeat business resections over the last years.

We were able to step in and organized to take out of the first vessel from the shipyard in China in a matter of only a few weeks and the structure of the charter enables us to derisk the deal significantly over the charter period with a relatively high charter rate to balance this weekend versus the benefit of purchase options below mid cycle levels, but still with a pro.

<unk> share to SSL.

The first vessel was delivered and enter service for Maersk in September and the second vessel is due in just a few days now.

We have also recently agreed to acquire at 2010 built mid sized car carrier with long term charter to a large Korea based logistics company.

The contract runs until mid 2028 and at $65 million in fixed rate charter revenues. In addition to potential significant benefits from the vessels install scrubber, where most of the economics goes to SSL.

The economic return on the vessel is strong even without leverage, but we plan to source financing for the vessels in due course, which will boost the returns from this deal.

And while it is a single vessel it will be managed technically and operationally together with her two existing car carriers and our four <unk> vessels under construction, which will ensure operational efficiency.

We also own two harsh environment drilling rigs Linus and Hercules, which we chart where charter to a surplus of subsidiaries of sea drill for a number of years.

In connection with seed rules recent chapter 11 restructuring, we agreed to take the rigs back and the long term drilling contract Holiness with clinical Phillips was assigned from seed rule to ASUR fell at the end of the third quarter.

<unk> technology is managing the rig for us technically and operationally and the transition, including government approvals was seamless and without any commercial off hire.

The charter rate is adjusted Semiannually and currently the charter rate is approximately $199000 per day up from $193000 per day from May through October .

Operating expenses is currently approximately $125000 per day.

The harsh environment semi submersible rig Hercules is still a charter to see drill while it is finalizing a drilling contract with ignore before we delivery to asset fell in Norway in December .

This rig will be managed technically and operationally by oilfield drilling going forward.

The rig is one of only a handful rigs fully equipped to drill in the harshest Arctic environment and market analysts are positive to market prospects based on recent tender activity and a tight supply demand balance.

You have seen that the international market for deepwater drilling rigs without these harsh environment features have rising quickly.

The harsh market has been lagging this but we believe prospects for 'twenty 'twenty, four and 'twenty to 'twenty five in particular is very promising.

Before new contract the rig will have to complete a schedule comprehensive special periodic survey and we are considering some upgrades to the rig to make it more attractive for longer term contracts. Currently we estimate the sps costs to approximately $50 million plus potential contract specific upgrades the.

The rig will be available for new contracts from medio as second quarter and there is good progress on new charter opportunities. We therefore hope to be able to announce a drilling contract soon.

Over the years, we have changed both fleet composition and structure and we now have 78 maritime assets in our portfolio and our backlog from owned and managed shipping assets stands at $3 8 billion up from $3 7 billion in the previous quarter over the years, we have gone from a single asset class charter to one signal.

Customer to a diversified fleet and multiple Counterparties and fleet composition has varied from 100% tankers to nearly 60% offshore 10 years ago, two container vessels no being the largest segment with 53% of the backlog.

Most of the vessels are on long term charters and more than 90% of charter revenues from our shipping assets came from time charter contracts and only 8% on bareboat or dry lease.

In addition to fixed rate charter revenues, we have had significant contributions to cash flow from profit share over time, both relating to charter rates and fuel savings.

12 months, the aggregate profit share has been $28 $5 million with $11 3 million in the third quarter alone.

And we do not have a set mix in the portfolio focus is on evaluating deal opportunities across the segments and try to do the right transactions from a risk reward perspective over time, 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 strength of our Counterparties and diversification is key when we assessed our portfolio and quality over contracted backlog and the list speaks for itself with market, leading operators like Maersk Hapag Lloyd clinical Phillips P 66, coke industry and Volkswagen to name a few.

Relatively few of our customers, our 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 and Trafigura 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 tanker 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 at full control of our vessel maintenance and performance, including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels through the life of the assets and not only be possibly owning vessels employed on bareboat, where the customers may not always have an incentive to make such improvements.

In addition, we can retain more of the residual value of the assets when we charter out the time on time charter basis and in the current environment with rising rising raw material costs and inflation driving replacement cost for vessels. This value is for the benefit of sfas under stakeholders for bareboat charter deals the value as usual.

We retained by the charterer through fixed price purchase options.

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

Okay.

Thank you Mr. F again on this slide that's on a pro forma illustration of cash build for the third quarter. Please note that this is only a guideline to since the company's performance and is not in accordance with U S. GAAP and also net of extraordinary and noncash items.

The company generated gross charter hire of approximately 158 million in the third quarter, including approximately $11 million of profit share with approximately 82% of revenue coming through a fixed charter rate backlog, which currently stands at three 8 billion, providing strong visibility on our cash flow going forward.

In the third quarter. The line of fees generated gross charter hire of approximately $98 million, including approximately $10 million and profit share contribution related to fuel savings on some of our large container vessels.

At the end of the third quarter is it the <unk> backlog was approximately 2 billion at an average remaining charter term of approximately Portland seven years with 7.4 years, if weighted by charter hire.

Charter backlog includes approximately half a billion of backlog from the seven car carriers.

In the third quarter and developed a fleet of 18 crude oil product and chemical tankers with the majority are employed on long term charters, our tanker fleet generated approximately $42 million in gross charge higher during the quarter compared to $35 million in the previous quarter.

As well as Twosies makes tankers and two smaller chemical tankers trading in the spot and short term market.

The charter hire from this vessel was approximately $11 5 million in the third quarter compared to approximately $6 6 million in the second quarter.

The company has 15 Drybulk carrier with nine are employed on long term charters during the quarter.

Well generated approximately 27 million and gross charter hire from the Drybulk fleet in the third quarter, including approximately $1 2 million of profit share.

Six vessels were employed with both a soccer market and contributed approximately $10 million in that saga higher during this quarter compared to approximately $30 million in the previous quarter.

As development, the two drilling rigs, which have been thought about subsidiaries of Israel on payable terms.

In the third quarter the company received charter hire of approximately $10 million from Louie.

The largest was redelivered to us until at the end of the third quarter, we will from the fourth quarter with your pool re contract revenue from clinical Covid, appearing opex similar to a ship on time charter.

We also expect close to full quarterly revenue from the Hercules in the fourth quarter at the rig is expected to be redelivered at the very end of year.

This summarizes to an adjusted EBITDA of approximately 126 million for the third quarter compared to 174 million in the second quarter.

Okay.

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

As described in previous earnings calls our accounting statements are different from both the traditional shipping company.

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

Therefore, a significant portion of our charter revenues are excluded from U S. GAAP operating revenues.

This includes repayment of investment in sales type financing leases and leaseback assets and.

And revenues from entities classified as investment in associates for accounting purposes.

Our third quarter report total operating revenues according to U S. GAAP for approximately $167 million, which is less than the approximately $178 million of charter hire actually received for the reasons just mentioned.

The company recorded a profit share income of approximately $1 2 million from eight capesize dry bulk vessel.

Listen to approximately $10 million from flu saving arrangement on some of our large containers.

Furthermore, the company recorded a 5.5 million gain related with positive mark to market effect related to interest rate swaps.

Quarter end, approximately 70% of our financing was fixed rate with folks to think back on natural hedging instruments with the recent rate and the interest rates. We now see the benefits of our conservative approach to financing.

And similar to our cutting strategy.

AMC has significant diversification and upcoming bass Wilsons third the structure and geography that is preventing us more flexibility over time.

Based on our assumptions, we estimate that 1% this increase in interest rates from our current levels equal to approximately <unk> <unk> per share and lower distributable cash flow per quarter and vice versa.

Yeah.

And evaluating new investment opportunities you take a conservative approach and assuming the interest rate cost during the life of the project I mean generally speaking the interest rate back to back with the fixed charter duration were accrued in interest rate adjustment and the charter rate.

In addition, the company recorded $8 6 million gain related to positive mark to market effects relating to equity and debt investments.

Increase.

With 500000 in credit loss provisions.

So overall and according to U S. GAAP the company reported a net profit of approximately 50 million or 39 cents per share.

Moving onto the balance sheet.

Quarter end as fell approximately 139 million of cash and cash equivalents.

Furthermore, the company had marketable securities of approximately $9 3 million based on market prices at the end of the quarter. In addition, the company filed that pre vessels at quarter end, the combined software value for approximately $114 million based on average broker appraisals during.

During the third quarter as it fell secured refinancing facilities with eight capesize vessels and two cancer my settled with 115 and 23 million respectively.

Also during the third quarter the company entered into agreements with long term financing of the 214000 Teu container vessel highlight the Patriot until after Peter with form of Japanese operating leases.

Combined amount is $240 million and the person who closed in October with the second one is scheduled for December .

Transaction fees of approximately $120 million compared to the previous secured financing on these two vessels.

Furthermore, Isabel in advanced discussions to enter into long term financing facility with approximately $144 million to part finance poor recently acquired Suezmax tankers.

This facility is expected to close later in the fourth quarter.

The approximate 275 million of remaining Capex on our report card carriers under construction is expected to define a athena debt facilities images to build other asset with long term charters.

Based on the Q3 numbers the company at a book equity ratio of approximately 2009.

Then to conclude.

The board has declared a cash dividend authentic <unk> <unk> per share for the quarter is.

This represents a dividend yield of approximately eight 8% ethnic dosing Sherpa last Friday.

Following our recent investments and sort of arrangements. This year, we've added more than $1 4 billion for fixed rate backlog, which now stands at $3 8 billion, providing us with strong visibility on future cash flow debt service and continued dividend distribution capacity.

A strong balance sheet and significant investment capacity as it fell is very well positioned to execute our new accretive investments, while continuing to create shareholder value.

Thank you.

And then I would like to thank everyone here, who has helped us prepare the material for the third quarter. Unfortunately due to the technical issues with the service provider, it's not possible to conduct a question and answer session. So I will ask anyone who has questions.

Who want anything clarified to contact us either through our webpage under contact patient webpage Www Dot SFO Corp. Dot Com and also there are contact details direct to several persons in the press release that you can reach out to <unk> to get this answered so with that I.

I'd like to wrap up the conference call and I promise you. This technical issues. These executives will not be there next quarter. Thank you.

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Preliminary Q3 2022 SFL Corporation Ltd Earnings Call

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