SFL Corporation Ltd (SFL) 2005 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Ship Finance fourth-quarter 2005 presentation. My name is Tom Jebsen. I am CFO in Ship Finance. And with me here today, I have Oscar Spieler, CEO in Frontline management.

Moving on to slide two in the presentation, Ship Finance has a fleet consisting of 14 Suezmax tankers, 28 VLCCs, eight Suezmax OBOs, and two container vessels. In addition, we have entered into a [hedge-sell] agreement for buying and chartering back to the seller of an accommodation unit. We have over last year increased our annual revenue base by 18%.

Moving to slide three, here we show you the main events in Q4 and so far this year. We paid out a dividend of $0.50 in December for the third quarter of 2005. And today, the Board has declared a dividend to be paid of $0.50 per share, which represents an ordinary cash dividend of $0.45 and a supplementary extraordinary dividend of $0.05 per share.

The record date for the dividend is March 6. The ex-dividend date is March 2nd, and the dividend will be paid on or about March 20, 2006. In November 2005, the bareboat charterer of the vessel -- VLCC Navix Astral exercised an option to purchase the vessel, and took delivery in early January. The vessel's strike price or option price was $40.5 million.

At the same time, the Company then acquired from Frontline a VLCC, Front Tobago, to replace the Navix Astral in the agreement between Ship Finance and Frontline. This vessel was acquired at $40 million -- basically the same kind of vessel 260, 270,000 deadweight tons. And there's a -- Navix Astral was two years younger than the Front Tobago.

Moving on to slide four, we have also bought back another $1 million of bonds, so that in total we have acquired more than 73 million par value Ship Finance bonds in 2005. Outstanding currently, there is $457 million of bonds. We bought back 1.4 million shares for $27 million during the fourth quarter. And so far in the first quarter, we have acquired a further 400,000 shares.

The profit share agreement with Frontline ended up at $88 million for 2005, of which 51.8 million has been booked in 2004. And in accordance with the agreement, that profit share will be payable during the first week of March this year.

Moving on to slide five -- excuse me; I should mention one final point on slide four. In our press release, the Board commented on its disappointment with the liquidity in the Ship Finance shares. And it also addressed the possibility of listing on another stock exchange as well so that we get the dual listing for this Company.

Moving on to slide five then, our strategy has been to be a yield instrument, but the same time, unlike many of the other, let's say, shipping yield plays that have come after us, we believe that we should at the same time as we pay out the yield, that we should be holding back part of our cash flow for future investments so that the Company can grow over time.

As mentioned we have a growth in the annual revenue base of 18% last year, while our target is a more modest 5 to 10% per year. The high levels of profit shares from Frontline obviously opens for financing a stronger growth currently. But obviously, that is something one has to look into from year to year.

We will consider both participating in corporate acquisitions and straight purchases on our own. We also see a need to diversify the customer base. We started last year by acquiring two container vessels, and we're working on the accommodation unit. And we also have several other projects where we are in the final stages of negotiations -- final stages not necessarily meaning that something will materialize, but at least it shows that we are working on finding new investments for our shareholders.

I should also mention again as we said in the last quarter that we are continuously looking into new projects, including offshore. And the Board noted in its press release today that the interesting thing about offshore is obviously that the underlying fundamentals are very strong, and the assets generate a high cash flow. And the competition with other financiers is somewhat reduced compared to the normal commodity shipping markets in which, for example, Frontline and Ship Finance have started spaces.

We have one independent Board member, but are likely to expand this. And we're also in the process of implementing the Sarb-Ox requirements in corporation with Frontline [our] manager.

Moving on to slide six, we posted operating revenues of $143 million in the fourth quarter, of which 51.8 million is from the profit split with Frontline. I will get back to the split on the next slide.

We had total operating income of $107 million and net income of 83 million, or $1.11 per share. For the full year, we posted net income of 210 million or earnings per share of $2.84. Of this, 88 million is related to the profit share.

Moving to slide seven, this basically shows the split of total operating revenues split between time charters, bareboat charter revenues, voyage charters, and then finally the finance leases which -- over time, most of the vessels that we have contract with Frontline have moved into that category.

Moving to slide eight, the balance sheet shows you that we have increased our asset base during the year by $250 million. In addition to this, as you may see on slide 14 later, we have actually paid 120 million above what we have booked here in the balance sheet for certain vessels acquired from Frontline. The 120 million is reduced due to GAAP requiring book value to be used in such a transfer between parties within the same group. That's parties that are consolidated for accounting purposes. Effectively, this reduces Ship Finance book equity by $120 million [too].

Moving on to slide nine, net cash from operating activities is $37 million. Keep in mind that the add back of the quarter's profit split is due to it being payable first in early March. Investing activity stands at 24 million for the quarter, and financing activities is 97 million, including dividends paid out, shares repurchased and repayment of long-term debt.

Moving on to the final slide, breakeven rates -- as you can see on this slide, our current cash breakeven rates -- that's the column on the right-hand side -- are substantially lower than the base charter rates which the Company invoices towards Frontline. The [VLC] rates are average rates, and these rates differ between different vessels.

And that's basically all we wanted to present here of slides. I should also mention that Frontline in its press release and call earlier today did announce that it's converting several vessels from tankers into heavy lifts, and also considering vessels for FPSO conversions. This will include certain vessels that are with Ship Finance and.

But basically, the way the agreements have been structured between Frontline and Ship Finance, Ship Finance get a full payback of its lease for most of the single hulls that we are discussing here by 2014. And as such, I guess one can argue that there shouldn't really be any additional risk introduced for Ship Finance by doing this.

On the contrary, as the markets stand for both FPSOs and heavy lifts, even adjusting for the new capital requirements to do the conversions, the outlook in both segments, heavy lifts and the FPSOs, are probably as bright as they are for single-hull tankers. And as we all know, even though Frontline has been very bullish on the potential for trading singles past 2010, that is still a commercial risk. So we hope that our shareholders endorse that Ship Finance will look upon such conversions with a positive mind.

Having said that, operator, I open up for questions and answers.

Mr. Chappell, JPMorgan.

Just following up on the last thing you said in a little bit more detail on the FPSOs, we talked about the heavy lifting a bit on the Frontline call. But what's the timing for the transfer of ships, and how many SFL ships are you looking at for the FPSO conversions?

We will convert vessels as the projects come along. I mean we will [not] already one -- or we start off with and convert one FPSO, as I said, by the middle of 2007 as a speculative conversion. We will make that a generic type. And then after the project comes up, we will take one by one.

Okay. And I'm going to ask the same follow-up, Oscar, as I did for the heavy lifting market. Is this market more of a contract-covered market, or is it FPSO spot market as well?

Yes, the FPSO market is definitely a time [charter] market, or it's long-term charters, you know; it lasts from three to seven, eight years. So that's a typical contract period for FPSO.

Okay. It's a little bit early in the process, but the new builds you just announced for China, 2009 delivery -- are those eventually slated to fall into the Ship Finance structure?

That will be considered later on, based on the competitiveness in the market and so forth.

Okay. Some other things -- the 5% spinoff of the Frontline stake in Ship Finance -- is there any timing us to when the remaining 11% will be spun off? Are you abandoning the thought that you will do a separate listing of these shares?

You mean a separate -- a private (multiple speakers) placement?

Right, right, a private placement.

No, we're not. Actually, as you heard on the Frontline call, we've been held back by a long discussion involving us and Ship Finance auditor and Frontline's auditor with regard to the booking of two of the VLCCs that Ship Finance ended up buying last year. And that involved also the SEC.

And what that led to -- that discussion was really that it postponed our ability to get a shelf filed both for Frontline and for Ship Finance. And you know, we've been working on this for a long time, and its well communicated into the market, I believe.

So basically having settled that case, even though it didn't end up with the conclusion that we endorsed, at least sometimes here in life, the most important thing is not what you decide, but that you decide on something. And that opens really for us in the management to finalize the F3 -- that's a shelf. And as soon as that's done, then we should be in a position to do -- place those shares, if that's what we end up wanting.

With the stock trading where it is right now, though, you've mentioned in the past that private placement is something you might put on hold until the stock reacted a little bit better. Just by doing the filing, that doesn't necessarily mean that the placement will be imminent. Could you still do just a spinoff to Frontline shareholders of the remaining 11%?

That's also a possibility, yes. Definitely.

And then just one last final thing. You have the accommodation rig, and that does seem like a good market. Your cash flow has definitely been rising since you've listed this Company. The dividend has moved a little bit as well -- it's $0.50 per quarter almost on a regular basis now.

The way I calculate it, you could generate almost 2.50 in cash with zero profit-sharing from Frontline. Have you as a Board talked about possibly increasing the dividend as a way to -- number one, take advantage of your higher cash flows, but two, maybe get that price moving a little bit higher so you can do the private placement of the shares?

Yes, but I think that -- as you know, there's approximately 18 of the vessels are single hulls. And one of the problems, if I can use that word, for Ship Finance from day one was really -- many of the investors in the market were worried about the drop in earnings that was envisaged if 2010 became a firm date for phase out of singles.

And effectively, that's one of the reasons why Ship Finance was sort of founded on the idea that it should hold back some of the cash flow and use that to reinvest, so that -- that is to make the $2.00 per share sustainable. And I would assume if we went to $2.50 now, then we would probably be close to having it problem making that sustainable in 2010.

Justine Fisher, Goldman Sachs.

The first question is -- I'm just going to give it a go again with the potential cost for the heavy lifting. Would I be totally out of the range if I said 10 to $30 million a ship to refit it?

I think you're in the range there, more or less. That's the range.

Okay, thanks. And I just wanted to also doublecheck on where we can expect total debt to go from this point on, because I guess at the end of 2005, the balance sheet had almost $1.8 billion of debt. And so if we look at what the Company is going to take on in the first quarter, I guess it's the 80% financing for the Consafe rig. And then is there any other debt to finance other vessels, etc., that we can expect to see on the balance sheet in 2006?

Well, there's no plans currently. But obviously, the goal is, as we wrote in the press release, in addition to, let's say, the profit split 88 million, and they are currently $30 million, there's a large potential -- there's unencumbered assets, as you say -- that's vessels without any loans. And effectively, that means that we basically have -- we need to keep some cash at the bottom of the chest, but basically, we have close to $200 million of cash that can be used for financing the equity portion of projects.

So given that we find the right projects, we could easily do investments for -- I would say anywhere between 500 and $650 million over the coming year. Of which -- that means that 300 to, let's say, 450 million would be depth.

And when you were talking about the total liquidity available, that doesn't include the sort of restricted cash at your finance. Is it like the initial 250 that it was capitalized with?

That's actually not in Ship Finance itself. That's in Frontline's remote bankruptcy trust subsidiary.

But so when you talk about available liquidity, you're talking about the 34 million that was on the balance sheet at the end of '05 plus the profit-sharing plus free cash flow generated this year?

Yes, that's 34 plus 88 plus 120. So that's 240 million. And then I say that we need -- let's say, 40 at the bottom of chest. So there's 200 million available for investments. And they can be geared up, of course.

John Kartsonas, Citigroup.

I want to follow up on this reinvestment thesis, because one way or another in 2010, your revenues will drop -- I mean, the single hulls will go to 7500 per day. Do you think that this cash or the 5 to 10 growth you're predicting is enough to replace these assets? I mean, at some point you might -- replacing 18 tankers probably is close to 1.5 billion investment. And even if you gear that up to 70%, you're looking for somewhere close to 0.5 billion in equity.

When we [picked] up the Company, we calculated that if we had something like 5% increase in the asset base every year, then that would be sufficient. But obviously, with the current strong tanker market, which means lots of profit-sharing rating onto Ship Finance, then we see that we can expand even faster, which would eventually end up -- if this is sustainable for another few years, then we definitely should be able to easily pass through to 2010 -- [no] potential problem.

And this calculation includes also the balloon payment of the debt?

Yes, yes, sure, sure. When we would model, we would just assume that any balloon is basically refinanced, and stays on the same profile for example. So if you look on the balance sheet, you see that currently, slide eight, you see that the short-term and current portion of long-term debt is $122 million. So we are already paying down substantially with the current cash flow in addition to paying out dividends, and reinvesting hopefully for the benefit of our shareholders.

But this is the required amortization of debt, correct? (multiple speakers) that's what you have to pay, right?

Yes, sure. As you know, there's nothing -- no down payment on the bond. That all matures in 2013. But again, we've already paid down 123 million of it voluntarily by buying back bonds. But the 122 that you see on the balance sheet now -- that's regular commercial bank debt.

Also, finally, on the offshore rig, did you secure financing for that, and what kind of rate are you paying?

Yes, that's in the final stages. As it looks now, it's basically Ship Finance corporate rating -- so pretty similar to what we get on the vessels. That we are financing.

Mr. Temple, Pioneer Investments.

I wanted to just touch base -- talk a little bit about kind of the different views of the equity versus debtholders here. Talk a little bit about what Justine had just pointed out from Goldman Sachs, and then the previous caller on the equity side.

In terms of the bondholder -- I'm one of the original bondholders in this deal -- what I see is I see a company who had originally promised to essentially take a balanced approach to investing in the organization, adding ships over time -- a balance between debt and equity.

And I see a situation where, in fact, just the opposite has occurred, where you've actually significantly increased the amount of debt associated with this Company at a time when there are some questions out there in the marketplace as to where long-term contract rates are going to go. If you ex out the profit-sharing portion, which is the variable portion of your organization's cash flow, this Company is now over seven times levered. And that profit-sharing clearly can disappear overnight, depending upon what happens with dayrates.

So my question to you is have you thought about the amount of risk you're taking onto your balance sheet by this aggressive growth strategy relative to the other organizations out there, your competitors, who have actually taken the opposite tact, which is to safeguard their balance sheet in the event of a significant fall in capacity rates?

Well, first of all, the increase on the asset side has been -- if you look at, we've done over the last year five VLCCs. They've been financed with 30% equity, 70% debt. And that debt is all -- all of it has installments from day one. So it's not [we are bullet] like what the bonds have.

We've invested in two container vessels that don't have any debt attached to them currently. We have three Suezmax tankers and one VLCCs that doesn't have any debt attached to it.

So I'm not really sure whether what you said is necessarily correct, because if you look at the investments we've been doing after we put up the Company in the first place, we've been buying back bonds like crazy. We have been buying back some shares, yes. But we have also been investing heavily at a lower gearing than what we did initially.

Like you, we also have seen that prices on commodity shipping has increased tremendously since we put up the Company. And that's why we've been stating as we have over the last few quarters that we think the risk/reward picture has been somewhat skewed, let's say, to the less advantageous for both bondholders and shareholders I guess you could say, compared to what it used to be.

And when we put up -- started up Ship Finance, I think a modern, promptly delivered [VLC] was priced at approximately $70 million, if I recall correct -- top of my head. A few months ago, you were talking 135, $140 million. And we wouldn't be there to do that kind of a transaction. Oscar, do you want to add -- okay.

I don't know if that helps you or anything, but --

Well, I guess it's just a difference of opinion. I mean, if things were as rosy as you suggested, the bonds, which I bought at par over a year ago, would be trading somewhere near there. In fact, they're down close to 8 points, despite the fact that you've been buying back in the marketplace.

I mean, I think that part of the problem is you've been adding bank debt fast and furiously. In fact, the overall level of debt on the balance sheet is up quite substantially, and you've continued to buy back stock and pay out huge dividends.

So to be honest with you, I feel like the growth strategy that you've embarked upon, while it might make sense in a longer-term strategic sense, is being done frankly on the back of the bondholders. So I'm not happy. And I would like you to reconsider whether or not the strategy makes sense in wuhat could be a fairly volatile environment.

So I just wanted to get that comment on the record. And clearly, we have a difference of opinion -- at least the bond market has a difference of opinion possibly with the equity market. So just for you to be cognizant of that fact, please.

Yes. No, I -- it's been aired by some investors, also, in the past. And it's the classical, let's say, dilemma between bondholders and shareholders. And I guess we're never going to agree, but I thank you for airing it anyway.

(Operator Instructions). There are no more questions.

Okay. Well, then, Oscar and I would like to thank you all for listening in. And if you have questions, then please give us a call here in Oslo. Or if not, we hope to see you again in three months' time. And in the meantime, we hope you enjoy the (technical difficulty).