SFL Corporation Ltd (SFL) 2006 Q3 法說會逐字稿

Yes. Welcome to Ship Finance International and The Third Quarter Conference Call. We are sorry about the delay. There are, unfortunately, some technical problems relating to publishing the PowerPoint presentation on the web, but it is being resolved as we speak, so you should have it available in just a few moments. From the company here today we have Lars Solbakken, the CEO. We have [Graham Baker], the Chief Accounting Officer, [Halal Gerwin], Vice President, and I am Ole Hjertaker, the CFO.

We are pleased to present to you today a marine leasing company with a high end increasing dividend yield, industry record charter backlog and very good growth prospects. We will flip through page two, the forward-looking statements, and go to page three, the agenda. We will discuss the third quarter results and focus on highlights in the quarter, comments to the financial results and also give some more information on the business model of Ship Finance. At the end, we will open up for questions from the listeners.

Page four. The board has reviewed the existing and new projects and the long-term prospects for the company and decided that the ordinary base dividend should be increased from $0.45 per share to $0.50 per share per quarter. In addition, there will be an extraordinary dividend of $0.03 per share, bringing the total dividend up to $0.53 per share this quarter. The net income for the quarter was reported at $0.63 per share, and was impacted by a $0.22 per share negative contribution from non-cash mark-to-market of interest rate swaps. This was due to a lower interest rate environment, which in reality is beneficial to the company as approximately 40% of our committed financing is based on floating rate.

Based on the results in frontline so far this year, there has accumulated a significant profit share. We estimate that a total of 63.9 million has accumulated, but only $43 million has been recognized in our earnings so far this year. The 20.9 million balance plus any profit share accumulated in the fourth quarter, will be recognized in the fourth quarter. We have a significant liquidity position with around $200 million available for investments. This will go into new projects as equity contribution and on a levered basis, the investments could amount to 800 to $1 billion in total. We are currently reviewing a number of investment alternatives.

To page five. Our single-hull fleet will be reduced by two vessels -- the Front Tobago and the Front Sunda. Front Tobago has been sold to a third-party buyer for $45 million while Front Sunda will be converted to a heavy-lift vessel. The conversion for the Front Tobago is expected to be around $41 million and planned delivery from the shipyard is in second quarter 2007. The vessel will then go on a new ten-year fixed rate charter to Frontline Shipping Limited. After this reduction, there will be 16 single-hull vessels left, including three vessels that have double sides. These vessels could potentially be converted to double-hull vessels.

More single-hull vessels are expected to be converted to heavy-lift vessels or floating production units over the next few years. We have recently also ordered two Suezmax tankers at the Jiangsu Rongsheng shipyard in China. The vessels will be delivered to us in February and August 2009. The contract prices and terms are very attractive due to affiliated companies having and extensive new building program at this yard. The intention is to fix the vessels on medium to long-term charters during the construction period.

Page six. One of our two 1,700 TEU container vessels are operated on market terms, following the charter going into voluntary receivership. We have a guarantee of $2.7 million securing that charter, and we do not expect a material impact on the company's numbers. The vessel is now employed in the short-term market, but will be marketed for longer term employment. In July this year, we agreed to buy a 1997 built Panamax dry bulk carrier for $28.7 million. The vessel was delivered to us in September and is chartered for 10 years to Golden Ocean, which is listed on the Oslo Stock Exchange.

In April this year, we agreed to acquire five new building container vessels at a total cost price of $280 million. The five vessels will be on 12-year fixed charter to Horizon Lines, which is a U.S. based liner company listed on the New York Stock Exchange. The first of the vessel will be delivered at the end of this month and the last of the vessels expected to be delivered in May 2007.

The annual charter income from these five vessels will be about $32 million and the vessels are financed with a $210 million non-recourse loan facility, and an equity contribution of $70 million. The last quarter, we also repurchased another $8 million of our senior notes, which leaves $449 million outstanding. Of this amount, we control $51.5 million through a bond swap agreement, which effectively reduces our interest expense to LIBOR plus 1%.

Page seven. The company has been very active this year and has committed to investments in excess of $650 million. The investments are expected to increase the company's fixed charter income and also the dividend distribution capacity. And this is part of the reason why the board has decided to increase the dividend base from $0.45 to $0.50 per share. The company has capital available to fund equity portion of new projects, and we are looking at several new project opportunities. We will announce new projects as they materialize.

To facilitate investments from individual shareholders, we are also planning to implement a dividend reinvestment plan and a direct stock purchase plan. These plans are popular investment tools for individual shareholders, who wish to invest in the shares on a regular basis. This year, Ole Hjertaker, which is CFO, was hired in Ship Finance Management and we now have a full management team in place.

Page number eight. Total operating revenues for the quarter was $122 million or $1.67 per share. The net income was reported at $45.7 million or $0.63 per share. We want to point out a few items on the P&L statement. First, there is a negative $16 million impact in other financial items. A part of this is a reduction of $16.4 million, representing the mark-to-market of the interest rate swaps mentioned earlier. This quarter, we also have a $2 million impact as a result in associate.

Two of our assets, the jack up rig and the dry bulk carrier are treated as investments in the associated companies. And this is the only line in the P&L statement where these vessels will appear. The total depreciation for the quarter is $3.6 million. And the reason for this number is that most of the vessels are on finance leases and will not appear directly on our balance sheet as owned vessels.

Page number eight. We have a total of $31.2 million of cash and cash equivalents available. In addition, we have $10.9 million restricted cash, which are linked to the bond swap line. We have an amount of $44.7 million due from related parties. This is, for the most part, the booked profit share due, but not from Frontline Limited, a total of $43 million in -- for the third quarter. We also have $10.4 million of new building and vessel purchase options. This relates to the -- to accrued conversion costs on the Front Sunda.

Page number ten. In the cash flow statement, we want to point your attention to an item under investment activities -- repayment of investments in finance leases. Due to our accounting requirements where the vessels on lease to Frontline Shipping are treated as sales type lease accounting, a part of the fixed charter revenue is classified as repayment on investment in finance leases.

This amount will not appear in the income statement, but will appear under investment activities in the cash flow statement. For the third quarter, this number amounted to $31.5 million. Based on the activities this quarter, the net cash reduced by $1.7 million and the ending cash was $31.3 million. This, combined with the undrawn credit facility that we have available, means that we have a lot of liquidity available for further investments.

Page 11. Per September 30, we had a very high charter backlog. The total backlog, which are the fixed charter rates over the fixed charter period, amounts to $5.3 billion. EBITDA from these charters amounts to $3.9 billion, while the average tenor of the charters are 11.6 years. We want to point out to you that we have included the full lease length of all our charters here, and should any of the charters exercise purchase options, these numbers could be reduced.

Page 12. The ship finance fleet counts 61 vessels of which seven are new buildings or under construction. These vessels are predominantly on medium to long-term charters. The largest group of vessels are tankers of which 34 have double-hull and 16 single hull after the Front Tobago has been delivered. The base charter rates for the single-hull and double-hull tankers are the same until 2010, but we do earn more profit split from the double-hull tankers, based on the trading we see in the market currently.

Five of the container vessels will be delivered over the next six months, and they will, together with the recently delivered jack up rig and dry bulk vessels and also the new -- the converted heavy lift vessels, they will result in an increased fixed charter hire going forward.

Page 13. The vision of Ship Finance is to offer the most attractive shipping offshore investment opportunity with a high running yield and limited downside risk. Our strategy to achieve our vision is to continue to pay high and predictable dividends, to grow our fleet, to diversify our customer and asset base, and to employ our fleet on medium to long-term charters.

Page 14. This quarter, we have declared a dividend of $0.53 per share. The last previous quarter, we paid a dividend of $0.52 per share and in the previous six quarters, we paid $0.50 per share. The extensive charter coverage makes is possible for us to pay a stable dividend through market cycles and short-term market fluctuations are therefore not expected to have a material impact on our dividend payments. As the earnings have exceeded the dividends consecutively since the company was established, we have the capacity to both grow the company and also to maintain the current dividend policy.

Page 15. The profit share agreement with Frontline, which gives Ship Finance 20% of the earnings above the base charter rates, have been very profitable for Ship Finance. On average, the profit share has been around $24 million or $0.33 per quarter. 2004 was a particularly strong year, but 2005 and the three quarters of 2006 have also been well above the fixed charter rate level. Based on tanker rates reported in the market so far this year, we would expect there to be a profit share also in the fourth quarter of 2006.

Page 16. We have a very high fixed charter backlog and we also have upside potential through profit sharing and residual value. We have increased our dividend to $0.53 per share and the basis fixed dividend has been increased from $0.45 to $0.50 per share. New projects are expected to grow the dividend capacity going forward.

We have a very strong liquidity position with almost $200 million available under revolving credit facility with no restrictions on use. We also expect a profit share payment for 2006, which will be received in March 2007 and this will add to the liquidity in the company. And the new dedicated management team is expected to generate an increased volume of new transactions going forward.

So, by that, we would like to open for questions.

[OPERATOR INSTRUCTIONS]

The first one is Mr. Nokta from Dahlman Rose.

Good afternoon, guys.

Hi.

In Frontline's earnings release today, they talk about their investment in Ship Finance no longer being viewed as a strategic investment. Do you view this as a positive for Ship Finance? It looks like another step in making SFL completely independent from Frontline.

As it has been announced earlier, Ship Finance is being separated from Frontline with the establishment of the separate management team. And I think we -- if they should choose to sell their shares, we will view that as positive. But that is, of course, something that is totally up to Frontline to decide.

I'm sure you can't comment on this, but have they approached you on whether they would be doing a spin-off in the form of a dividend to their shareholders or maybe through a secondary?

No, I don't think we can comment on that.

Yes, that's what I figured, so -- and then just with the Front Sunda, I know it's going to cost around 40, $41 million to convert it into the heavy lift. And it goes onto a ten-year charter back to Frontline. Do you know what the day rate is, or could you give us what that day rate would be?

Yes, we -- I don't have the day rates here in front of me, but it will give a normal kind of our return on our invested capital, which is in line with what we have on the other projects.

Okay. So, I'll just --

Within the 13% and 14% on our equity in the project.

Okay. And then just with respect to SeaDrill and Golden Ocean, they've got jack ups and new builds -- new build Panamax's on order -- have you approached them or have they approached you in detail about maybe doing some more sale leasebacks in the future? I know that SeaDrill has, I think, three or four jack ups coming up for delivery in '07 and I know Golden Ocean has, I think, six or eight in 2008. Would those -- would you be looking at those?

We are in discussions with a number of clients for potential transactions. As we mentioned earlier, we have quite substantial capital available for investments. And -- but we cannot comment on specific companies. We will announce any deal we make as they come through.

Okay. Thanks a lot, guys.

Okay. Thank you.

Thank you.

Next one is Mr. Jonathan Chappell from JP Morgan.

Thank you. Good afternoon.

Yes. Hi.

You mentioned a bunch in your presentation the investment opportunities that you're looking at. Many of us are familiar with the tanker markets and kind of consensus views that asset prices are quite robust right now. Can you talk to us a little bit about how you see the drilling rig secondhand market or new build market as far as attractiveness of pricing is concerned, and also, into other segments as well? You did buy those five container ships for Horizon Lines, and you've made a small little venture into the dry bulk markets. But just how do you see the different markets panning out as far as pricing is concerned?

With respect to the -- we look very positively at the drilling rig market. We expect that to be stronger over the next few years. Of course, there has been an increase in values, but we think the market will stay strong and we see a lot of the companies also making more long-term charges with oil companies. So, we're absolutely interested in doing more on the rig side. We also see on the [supply] vessel side, which also looks interesting over the next two years. On the dry bulk side, it looks pretty solid over the next two years with a reasonable balance between the supply and demand.

On the container side -- container vessel side, of course, there is a substantial volume of transaction and we are basically constantly looking at new transactions and evaluating new opportunity in that sector. And that's mostly linked to the larger container lines which also have a strong balance sheet.

Right. I know that mostly you're going to focus on returns and accretion with any acquisition. But your strategy is kind of set up with long-term time charters for most of your assets. You mentioned in that last comment that you're looking at the supply vessel market, which, in my views doesn't have -- as long as a charter hire as you can see in tankers or in drilling rigs.

As you look into other segments, would you look to get away from like kind of the long-term time charter or sale and leaseback type structure of contracts? Would you look to be of an operator of some assets if you saw an opportunity in the market?

I think that our strategy, particular if you are high in the cycle, we will try to [go] long. If we think that we are very low in the cycle, we may go a little bit shorter. But the business model is based on medium to long-term charters. So, but we -- in the -- if we think we are reasonable high in the cycle, we will look for more solid counterparts and longer charters. Whereas, we'd be willing to take a little bit more risk if we think that vessel values will increase.

Okay. And then, finally, Ole, I just want to be clear that this unrealized loss on the fair value of the interest rate swaps -- that's a non-cash item and even though it's going to be volatile based on movements in interest rates, it's not going to have an impact on the dividend payout potential?

No, it won't have any impact and you could say that -- of course, lower interest rates are positive for Ship Finance, and -- cash-wise as -- part of our loan portfolio is [resulting] rates. So, cash-wise, lower interest rates are positive for us and it also is positive earnings-wise in the long term. So, we think that it's an accounting item.

Okay. Thank you, Lars.

Yes. Thanks. Bye-bye.

Next one is Mr. [John Parker] from Jefferies.

Hi, guys. Can you give any more detail on the one-line item? For example, the jack up revenues I would have coming in around 10 million. Is there any way -- I assume the number you reported includes depreciation and interest expense. Can you give any more breakout on that number?

Hi. This is Graham Baker speaking. I don't have any -- announce any [specifics] at hand. But I'll just say, [inaudible] the invest the results of the investment associates. It's just our net return in the quarter. Income expense, depreciation, it's a net return in the quarter.

Okay. I'm sorry, I didn't quite catch that. You said you'll report that next quarter?

No, it's not -- I'm saying that the line we show in the income statement is our net return from SeaDrill.

Yes, okay. I understand.

And Golden Shadow.

And Golden Shadow.

But most of it is from the jack up rig.

Yes.

But it's the net results.

Yes, I understand. Maybe I'll follow-up later, too.

We can try to see if we can later follow-up with more detailed information about that.

Okay. The Front Sunda, how does it work with the -- while it's being converted -- the uses -- do you still get the charter payments from Frontline? How does that all work?

Yes, that's correct. We will get the basis charter hire from Frontline until it is delivered from the shipyard.

Okay. The -- I guess, your profit share was a little bit lower than I expected, and is that a result of the fact that the dry-docking schedule was pretty heavy and that impacts the ability to earn a profit on those vessels?

That is correct. That has impacted it. And also the fact that several of the vessels were on charters during the quarter and could not fully get the benefit of the strong market in the third quarter. Of course, charter coverage also provides a cushion in the lower market.

Yes, okay. And then, finally, on the Sea Beta, I've been reading about it going off charter due to the bankruptcy. What is the -- I guess my question is how long [does] that guarantee cover you, and at what point do you need to market this things for additional charters?

We are marketing the vessel. The vessel has basically left Australia and we have fixed on more short-term charter. And while we're basically looking for more long-term employment. But it is chartered out on new charter. And so, but we have this $2.7 million guarantee which should cover us from a loss that we may then incur. And this was a charter until 2009.

Okay. So, any charter rates you incur below what you -- they had agreed to would be covered by that guarantee?

We will -- that is basically the diverting of the [debt]. They should cover any loss that we may incur as a consequence of their default.

Okay. Okay, and finally in the Frontline call they mentioned that there were some loss revenues due to the grounding of one of their tankers. I can't recall -- is that one of your tankers and they said some insurance claims should come back from that. Would that impact you in the future -- those insurance claims?

No, that kind of incident don't impact us.

Okay. Thank you, very much.

Okay. Thank you.

Next one is Mr. Rosenlund from ABG.

Hi.

Hi.

I have a question on your single-hull fleet. You have a number of single-hull vessels. What are your thoughts on 2010 and onwards?

As we mentioned on the call, we take an active approach to our single-hull vessels, and one of the VLCCs was sold or will be delivered in December, probably. And one of the single-hull Suezmaxes will be converted to a heavy-lift vessel. As Frontline also reported in their quarterly statement, they say -- also said that there are several options for converting additional vessels.

And we will, of course, look into that, but in our view, in 2010, the -- it all depends on how the market is and the balance for supply and demand, whether or not all vessels will have to be phased out or if there will be a trading market for them following 2010. But we are not waiting for 2010 to come and hit us.

And we are basically considering more conversion projects to heavy lift. And it's also important to note that, of course, we have these on charter until -- between 2010 or it ends during 2010, paying them down to a reasonable level. And then they're on the lower chart rate thereafter.

Is your view that there will a quite large single-hull market after 2010? I know that if Frontline decides to deliver the single-hull vessels back to you, they can do so, but still, if they -- Frontline will continue to trade them, they're getting them very cheap.

I think that it's, in general, expected that there will be a single-hull market after 2010. The question is, especially basically then from the Middle East to the Far East, which is probably the -- where the largest part of that market will be. It is not easy today to say, basically, how attractive that market will be after 2010, but it is expected that there will be a market.

And I would also add that our single-hull fleet is among the most modern in the whole market. Virtually all our single-hull vessels, apart from one, is built in the 1990s, which of course -- and several of them are also -- have also the so-called mild steel type, which makes them very attractive also as conversion candidates. And that conversion market should also be there in 2010 onwards.

Is it up to Frontline to decide when they want to deliver those vessels back, or can you call them back as well, if you have an interesting project where you can use the single-hull vessels?

We're working with the - Frontline, and if we want to convert them, we need to agree both parties.

Great. Thank you.

There is no more questions.

Then I want to thank everyone listening in, and we hope to come back to you next quarter with updated news. Thank you. Bye-bye.