SFL Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 14, 2024

There are 5 speakers on the call.

Operator

Welcome to SFL's Second Quarter 2024 Conference Call. My name is Sande Borglie. I'm Vice President for Investor Relations in SFL. Our CEO, Ole Hakakir, will start the call with an overview of the 2nd quarter highlights. Then our Chief Operating Officer, Trim Schoeli, will comment on vessel performance matters followed by our CFO, Akzo Oesen, who will take us through the financials.

Operator

The conference call will be concluded by opening up for questions, and I will explain the procedure to do so prior to the Q and 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 statements.

Operator

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 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.

Operator

Then I will leave the word over to our CEO, Uli Atake with the highlights for the Q2.

Speaker 1

Thank you, Sander. We are now announcing our 82nd dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. We had full cash flow effect from our car carrier newbuilds this quarter, but charter revenues from drilling rigs were lower, partly due to U. S. GAAP accounting rules, where mobilization fees received for the transit to Canada and corresponding costs will be recognized in the Q3.

Speaker 1

We also coincidentally had liners out of service most of the quarter in connection with a scheduled periodic survey. We reported revenues of nearly $200,000,000 this quarter, and the EBITDA equivalent cash flow in the quarter was approximately $131,000,000 Over the last 12 months, the EBITDA equivalent has been $545,000,000 The net income came in at around $21,000,000 in the quarter or $0.16 per share. We had a positive contribution relating to profit share on Capesize Bulkers of $1,600,000 and fuels cost savings of $2,800,000 in the quarter. And in line with our commitment to return value to shareholders, we are paying a quarterly dividend of $0.27 per share or around 9% dividend yield. Our fixed rate backlog stands at approximately $4,900,000,000 and importantly, the backlog is concentrated around long term charters to very strong end users.

Speaker 1

And this backlog figure excludes revenues from the vessels trading in the short term market and also excludes revenue on the new dual fuel chemical carrier that will operate in a pool with Stolt Nielsen. And it also excludes future profit share optionality, which we have seen can contribute significantly to our net income. 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 Vitol. And we continue to build the asset portfolio and have taken delivery of 4 vessels so far this year and expect to take delivery of another 3 vessels by October and most of these new vessels have dual fuel propulsion. We have also added massively to the backlog through multiple charter extensions on existing vessels and recently through the ordering of 5 large container ships in combination with 10 year charters.

Speaker 1

Our COO, Trim Shirley, will talk more about this later. And in order to fuel further growth and build long term distributable cash flow per share, we raised $100,000,000 in a public offering a few weeks ago. And with that, I will give the word over to our Chief Operating Officer, Trim Schirling.

Speaker 2

Thank you, Ole. Including vessels to be delivered, we have 81 maritime assets in our portfolio and our backlog from owned and managed shipping assets stands at $4,900,000,000 The current fleet is made up of 15 dry bulk vessels, 39 containership, 18 tankers, 2 drilling rigs and 7 car carriers. We have a diversified fleet of assets chartered out to 1st class charters on mostly long term charters. Container vessels is now our largest segment with just under 50% of the backlog. We have over the last 10 years completely transformed the company's operating model from variable leases to time charters and the majority of our customer base is large industrial end users.

Speaker 2

In the Q2, 95% of charter revenues from all assets came from time charter contracts and only about 5% from bareboats or dry leases. In addition to fixed rate charter revenues, we've had significant contribution to cash flow from profit share arrangements over time, both relating to charter rates and cost savings on fuel. In Q2, profit split arrangements have contributed $4,300,000 Out of the 81 vessels and rigs, we have 11 container ships on bareboat type contracts and the rest on time charter and spot trading. In Q2, we had a total of 6,400 operating days, defined as calendar day less technical or fire and dry dockings. 2 vessels and 1 rig have been in dry dock in the quarter.

Speaker 2

Our overall utilization across the fleet in Q2 was 97.6%, mainly due to these dry dockings. The charter revenue from our fleet was $199,000,000 in Q2, which is down from Q1, mainly due to reduced revenues from our 2 drilling rigs. Hercules left Namibia mid May and commenced operations in Canada in mid July. Due to U. S.

Speaker 2

GAAP accounting rules, mobilization fees from the Canada campaign and associated costs are deferred and amortized over the drilling period. Therefore, we will accordingly record high revenues and costs in the Q3 from Hercules. Linus went in for its 10 year special periodic survey in mid May and spent about 10 weeks in dock for the class survey. The rig was back on rate end of July. In the Q3, we expect revenues to be materially higher than in the Q2 from both drilling rigs.

Speaker 2

In July, a judgment was made in the High Court case against AllSeas, REFDA GreenACE Charter for US27.4 million dollars in favor of SFL. Subsequent to this judgment, the AllSeas guarantor has become subject to administration, which means there are challenging prospects for recovery of the awarded judgment. SFL are currently considering next steps. Our OpEx philosophy is to continuously invest in our fleet to optimize the vessel's performance and maintain a high level of service to our customers. This includes investing to minimize off hire as well as making investments to increase cargo carrying capacity and reducing energy consumption.

Speaker 2

Such investments and cooperation with our charterers is important as a way to grow our relationship and increase backlog from existing vessels. So far this year, we have increased the backlog to Maersk with new 5 year charters for 7 of our large container vessels, which is a result of close relationship and cooperation on vessel upgrades and performance enhancements. On the back of our container experience, we have also recently placed chartered out on 10 year time charters to a leading liner company. On the Hapag Lloyd charters, the first two upgraded container ships have been delivered already and the third is scheduled for delivery from the yard this month. On the tanker side, we have delivered the first of 3 LR2 newbuildings to Vitol from the yard in China.

Speaker 2

The second vessel is scheduled for delivery in about 1 week time. And we are also pleased to announce that we have just this morning taken delivery of the 33,000 ton deadweight chemical tanker SML Aruba for deployment in the Stolt Tankers Pool. We further aim to take delivery of the sister vessel by the end of the month for delivery to Stolt under an 8 year time charter. I'll now give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.

Speaker 3

Thank you, Tim. On this slide, we are showing a pro form a illustration of cash flows for the 2nd quarter. Please note that this is on a guideline to assess the company's performance and is not in accordance with U. S. GAAP and also net of extraordinary and noncash items.

Speaker 3

The company generated gross charter hire of approximately SEK199,000,000 during the Q2, with approximately SEK 90,000,000 coming from our container fleet. This includes approximately SEK 2,800,000 in profit share related to fuel savings on 7 of our large container vessels. The car carrier fleet generated approximately $26,000,000 of charter hire, and our tanker fleet generated approximately $30,000,000 in charter hire, in line with the previous quarter. SFL has 15 drybulk carriers, of which 8 are employed on long term charters. The vessels generated approximately SEK 23,000,000 in gross charter hire in the Q2, including approximately SEK 1,600,000 profit share generated from our 8 Capesize vessels on long term charters to Golden Ocean.

Speaker 3

The 7 vessels employed in the spot and short term market contributed with approximately $8,200,000 in charter revenue compared to approximately $6,500,000 in the first quarter. In the Q2, our energy assets generated approximately SEK29,000,000 in contract revenues compared to approximately SEK66,000,000 in the previous quarter. Linus is under a long term contract with Konka Phillips in Norway until the end of 2028. During the quarter, revenues from the rig were SEK 10,000,000 compared to SEK 19,600,000 in the previous quarter as the rig underwent its 10 year special survey. The rig was back on contract rate at the end of July after an additional repair scope, which extended SPS and docking scope by an additional 5 weeks.

Speaker 3

Hercules finalized the contract with Galpin and GEA in Namibia in mid May and then spent approximately half of the quarter in mobilization mode, recording approximately SEK 19,400,000 of revenues compared to SEK 46,900,000 in the first quarter. The recommenced contract with Equinor in Canada in mid July. And on the U. S. GAAP, mobilization fees and costs are deferred and amortized over the course of the contract.

Speaker 3

SFL has accordingly recorded lower income and costs on Hercules in the 2nd quarter. Our operating and G and A expenses for the quarter was approximately SEK 70,000,000 compared to SEK 85,000,000 in the first quarter, mainly due to deferred operating costs of the Hercules as per the U. S. GAAP accounting treatment just mentioned. This summarizes an adjusted EBITDA of approximately SEK 131,000,000 compared to SEK 152,000,000 in the previous quarter.

Speaker 3

We then move on to the profit and loss statement as reported under US GAAP. As I 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, some parts of our activities are classified as capital leasing. Therefore, a portion of our charter revenues are excluded from U. S.

Speaker 3

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 associates for accounting purposes. So for the 2nd quarter report, total operating revenues according to U. S. GAAP of approximately SEK 190,000,000, which is less than approximately SEK 199,000,000 of charter hire actually received for reasons just mentioned.

Speaker 3

During the quarter, the company recorded profit share income of approximately SEK 4,400,000 from fuel savings on some of our large container vessels, our Car Care, our 8 Capesize vessels on charter to Golden Ocean. Exped by revenue from our vessels were in line with the Q1, but revenues and operating expenses from our energy assets was slower during the quarter for reasons previously mentioned. So overall and according to US GAAP, the company reported a net profit of approximately SEK 20,600,000 or SEK 0.16 per share compared to approximately SEK 45,000,000 or SEK 0.36 per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately SEK186 1,000,000 of cash and cash equivalents.

Speaker 3

During the quarter, the company arranged a SEK 37,000,000 financing for previously debt free container as of Merskoye at very attractive terms and maturity matching the long term charter. In terms of CapEx commitments, we have recently acquired 5 tankers with a total CapEx of approximately SEK 340,000,000, of which approximately SEK 244,000,000 will be financed with senior bank financing. 2 of the vessels have already been delivered, the 3 remaining vessels expected to be delivered during the 3rd Q4. In addition, our harsh environment tech group, Rigliners, recently underwent its 10 year SPS with an estimated net remaining capital expenditure of approximately SEK 30,000,000. Dollars Due to an additional repair scope, the CapEx scope increased from with approximately 10,000,000 to a total of approximately 40,000,000 Subsequent to quarter end, the company entered into agreements to build 5 16,800 TEU container vessels with scheduled delivery in 2028 at an aggregate construction cost of approximately SEK 1,000,000,000.

Speaker 3

The vessels are expected to be funded by a combination of cash at hand and conventional pre- and post delivery vessel financings. Furthermore, SFL has recently secured financing commitments for a combined amount of approximately SEK 700,000,000 effectively covering most secured debt financing commitments maturing over the next 12 months. And finally, the company raised SEK 100,000,000 in net proceeds from a U. S. Public offering by issuing 8,000,000 common shares in July.

Speaker 3

Based on the Q2 numbers, the company had a book equity ratio of approximately 27%. Then to conclude, the Board has declared the 82nd consecutive cash dividend of 0 point 27 dollars per share, which represents a dividend yield of approximately 9%. Following recent investments and charter renewals, our fixed charter rate backlog currently stands at SEK 4,900,000,000 providing us with strong visibility on our cash flow going forward. The company has a strong balance sheet and liquidity position, and we recently raised SEK 100,000,000 of gross proceeds in a public offering and have secured more than SEK 1,000,000,000 in senior secured financing this year to address refinancing of existing vessels and new acquisitions. And with that, we conclude the presentation and move on to the Q and A session.

Operator

Thank you, Aksel. 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 Please unmute your speaker to ask your question.

Speaker 4

Hi. Thanks for taking my question. So first on the Hercules, that rig is now getting a little bit closer to the end of its existing contracts. And given recent consolidation within the offshore space, are operators becoming more interested in the rig? Or would you say they're still focused on whiteboard within their own backlog at the moment?

Speaker 1

Yes. Thank you. The reason we're working now in Canada for Equinor doing a really good job there. Made a big find in Namibia for Galp. So there's clearly a decent market for rigs of this caliber, but these are specialized assets.

Speaker 1

We have not concluded any follow on work from the rig. The rig is expected to come off charter sometime during the Q4. It all depends on call it both the drilling efficiency and the scope of work that Equinor wants to do in Canada. So we are in dialogue with various oil companies and potential charters, but have not concluded anything so far and cannot make any specific comments on that until you have something place. In terms of M and A, what we have seen has been more relating to listed companies and consolidation with a primary focus, I would think, on drillships and not so much on semi submersibles, which is the type of assets that the Hercules is.

Speaker 1

But we are of course following it closely. We see that charter rates are edging up particularly for ultra deepwater units and have seen some quite strong charters and charter rates over the last few months. So we still believe strongly in the long term story in this segment, but we cannot be specific on when we will announce a new charter for the Hercules quite yet.

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Earnings Conference Call
SFL Q2 2024
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