SFL Corporation Ltd (SFL) 2006 Q4 法說會逐字稿

Welcome to Ship Finance International and the fourth quarter conference call. From the Company, we have Lars Solbakken, the CEO; [Parwell Gervin], Vice President; and my name is Ole Hjertaker, and I am the CFO.

Please flip to page 2 and to page 3 in the presentation. Today, we will discuss the fourth quarter results, and we will focus on highlights in the quarter and subsequent events. We will comment on the financial results and also discuss the business model of Ship Finance. At the end, we will open up for questions from the participants.

Slide 4. The board has reviewed the existing and new projects and the long term prospects for the Company and decided to increase the dividend to $0.54 per share. This is up from the $0.53 for the third quarter, and total dividends this year is 4.5% higher than the dividends last year. Most of our assets and related revenues are classified based on lease accounting. This is not very usual in the shipping industry, and the presentation of our accounts will therefore be different than some other companies. The total operating revenues were reported at $118 million for the quarter and $415 million for the year. However, this number excludes revenues in two subsidiaries accounted for as investment in associates. It also excludes a significant portion of the charter rate classified in our accounts as repayment of investment in finance leases. For the year 2006, that alone was $125 million. I will point that out to you as we go through the financial results. The net income for the quarter was reported at $0.79 per share, and net income for the year was $2.48 per share. The profit share payment for Frontline for 2006 is $78.9 million and is payable in March. $35.9 million was recorded in the fourth quarter, and this consisted of $20.9 million of profit share not yet recognized for the three first quarters based on U.S. GAAP and $15 million accrued in the quarter. We have a significant liquidity position. In addition to the cash on our balance sheet, we have around $147 million available on the credit lines. We also expect to receive around $130 million in cash proceeds from the sale of single-hull tankers in this quarter and the $79 million profit share due from Frontline.

Page 5. We have reduced our single-hull tanker exposure significantly, and, following the recently announced sales, we will only have 11 single-hulls left. Of these, 3 have double size. Compared to our total fleet of 57 vessels, this is not a large portion. And Frontline has also chartered out several of the single-hull tankers that are remaining to third-party parties at charter rates well above our fixed charter rates. The single-hull Suezmaxes have all been operated in the spot market. And as the profit share calculation is across each separate vessel class, they have effectively dragged down the average for the Suezmax tankers. The relative performance and contribution to the profit share is therefore expected to increase when we deliver the six single-hull tankers to their new owners and they go out of our fleet. As I mentioned, net proceeds from that sale is expected to be around $130 million. We have charted out 1,700 TEU container vessel Sea Beta on a shorter term charter, following the cancellation of the previous charter to PAN Logistics in Australia. The new charter rate is starting at $12,500 per day until June, and increasing somewhat if two extensions options are exercised. We will make claims under a $2.7 million bank guarantee for costs and reduced revenues as a consequence of the termination of the PAN Logistics charter, but this is not expected to have a material impact on our P&L.

Page 6. In November, we took delivery of the first of five container vessels to Horizon Lines. The remaining vessels will be delivered during the first and second quarters this year and will therefore have full earnings and cash flow effect from the second half of 2007. After the end of the fourth quarter, we agreed to acquire a new drilling rig from Seadrill and a newbuild jack-up drilling rig similar to the one we already own, and the purchase price is agreed to be $210 million. There will be a 15-year charter, and there will also be an accelerated rate structure during the first 400 days when the rig has a very profitable third-party charter. Equity contribution from Ship Finance will be $40 million, and we expect to get a running yield on this project in the 13% to 14% range on our paid in equity. We have also agreed to acquire two Capesize newbuildings from Golden Ocean. Cost price will be $80 million per vessel, and we expect to finance $60 million, or 75% of the cost price, with bank debt. Delivery is expected in fourth quarter 2008 and first quarter 2009. And we will not make any payments relating to that project until early 2008. The running yield on the equity in this project is also expected to be in the 13% to 14% range. Frontline has also today announced that they will distribute all their remaining 11% shares in Ship Finance as a dividend to their shareholders. The distribution date for those shares is expected to be on or about March 22. After this, Frontline will not own any shares in Ship Finance.

Page 7. As we have lease accounting and some subsidiaries are accounted for as investments in associates, there are certain elements that are not included in the total operating revenues, if we compare our accounts to some other shipping companies. I mentioned earlier that, in our books, we have $125 million classified as repayment of investment in capital leases, which appears in the cash flow statement. Also, we have two subsidiaries which are not consolidated but taken in as investment in associates. From those, we have $10 million in revenues in 2006 alone and $12 million repayment of investment to capital leases for those two assets, separately. It's worth mentioning that those two assets were only in operation for part of the year, and we would therefore expect that this will increase going forward. The net income in the non-consolidated subsidiaries are included in the profit and loss statement as result in associates.

Page 8. In addition to the cash on our balance sheet, there is $8.4 million in cash freely available to us in the non-consolidated subsidiaries. The amount due from related parties is predominantly the profit share amount. And the balance sheet does not include investments in the jack-up drilling rig West Ceres and dry bulk vessel Golden Shadow, which are the subsidiaries classified as investment in associates. Also, only one of the five vessels to Horizon Lines is delivered and, therefore, on our balance sheet. If you look at the stockholders' equity, we want to mention that there is more than $237 million or deferred equity contribution not included in the book equity. This relates to the acquisition of vessels from Frontline at the time at different price that Frontline book value. This amount is deferred back to equity over the lease term for the respective vessels.

Page 9. In the cash flow statement, I only want to point your attention to the repayment of finance lease item. That is the first line under the Investing Activities. The number was $125.5 million for 2006, up from $95 million in 2005. This is part of our regular charter cash flow, and, if we did not have the lease accounting, it would be part of the operating revenues. The increase from 2005 to 2006 is partly due to some vessels coming off other charters and being reclassified as finance leases on our balance sheet.

Page 10. Two of our subsidiaries are, as I mentioned, classified as investments in associates. We have therefore included this slide to give you more details on the specific numbers for those two companies. The vessels have only been in operation for a part of the year. The jack-up drilling rig has been in for half a year in 2006, while the dry bulk vessel, Golden Shadow, was delivered to us in September 2006. We want to stress that these subsidiaries also have lease accounting, and therefore a portion of the charter rate is classified as repayment of investment in finance lease there as well. For rig finance, this amounted to $11.3 million for the year 2006, and Front Shadow was $400,000 for the year.

Page number 11. We recognize that we have complicated accounts compared to some other companies. Internally, we use a different set up to compare our performance from period to period and also to assess the Company's core business. This overview is based on the fixed contribution from the charters, divided by asset class for the year, then subtracting vessel operating expenses and G&A. Then we get to contribution before profit share. This is effectively the EBITDA equivalent. We are, however, not allowed to use the term EBITDA under U.S. GAAP. If we then add on the profit share, the contribution after profit share or EBITDA is $424 million for 2006. This amounts to $5.83 per share. Again, I want to point out that four of the container vessels were not delivered at all, and one container vessel was in for only one month in 2006. For the dry bulk vessels, we had the vessel in only three months. And for the jack-up drilling rig under offshore, that was only included for half a year in 2006. So, in 2007, we will get the additional four container vessels delivered and the new jack-up drilling rig, which will come into operation expected in July.

Slide number 12. For December 31, the weighted average tenor of our charters were 14.3 years. Excluding the single-hull vessels now sold, we have fixed charter payment backlog of $5.5 billion, and the estimated EBITDA backlog from these charters is around $4.2 billion.

Page 13. This total fleet consists of 57 vessels, if you exclude all vessels announced sold and include the vessels not yet delivered. The largest group of vessels are tankers, of which 26 have double hull and 11 have single hull, including the three with double size. The base charter rates for the single-hull and double-hull tankers are effectively the same until 2010, but we earn more profit split from the double-hull tankers. Of the asset-- of the 57 vessels, we will take delivery of the 4 container vessels and a jack-up rig this year, and the 2 bulkers will be delivered end of 2008 and early 2009, respectively.

Page 14. The board has decided to increase the dividend to $0.54 per share. The total dividends for 2006 will then be $2.09, which is a 4.5% increase. It is important to note that we have a very significant debt repayment schedule, and we calculate our dividends after repayment. This represents reinvestment capital and will enable us to pay sustainable dividends going forward. We also are currently reviewing several projects, and we hope that, by adding new projects to the portfolio, we can increase the dividend capacity going forward.

Page 15. The profit share agreement with Frontline, which gives Ship Finance 20% of the earnings above the base rates, has been very profitable for us. On average, since 2004, this has contributed $23.5 million per quarter, or $0.32 per share per quarter. 2006 was a very strong year, but 2005 and '06 have also been well above the fixed charter rate level. And for 2006, we have the single-hull Suezmaxes in that we have announced sold. We therefore believe that the relative contribution with a higher percentage of double-hull tankers in the fleet would increase the profit share on an equal basis.

Slide 16. At the end of the fourth quarter, we had outstanding loans of $1.76 billion. This excludes $178 million of financing in subsidiaries accounted for as investments in associates. Of the financing, $449 million was under a bond loan, and we have-- and part of that is held through a bond swap line, which effectively reduces the interest to Libor plus 1%. More than 60% of our interest rate exposure is fixed through swaps, fixed interest rates or interest compensation clauses with charters. Taking into account a very strong charter backlog, we consider that leverage to be very moderate, and several of the new projects are financed with limited or no recourse to Ship Finance. After the sale of the single-hull vessels and the profit share, in addition to the available amounts under our credit facility, we believe we have significant capital available as equity in new projects.

Page 17. Therefore, as a summary, we want to highlight that we do have the highest fixed rate charter backlog in the industry, and we do have upside potential in the cash flow from those charters through profit sharing. And, also, we control the residual value. The quarterly dividend has been increased to $0.54 per share, and new projects are expected to grow the dividend capacity. Over the last 12 months, we have announced more than $1.1 billion of acquisitions. And, we see significant growth opportunities in large, diverse markets. And, finally, with a strong liquidity position, we believe we have the capacity to invest more than $1 billion in new gross investments without raising additional equity capital.

Thank you, and then we open up for questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from Jon Chappell from JP Morgan. Please ask your question.

Ole, you made mention of the Frontline spinoff of Ship Finance next month. What kind of impact is that going to have on Ship Finance's financial statements? And then, from an operational standpoint, does that change how you look at your partnership with Frontline, whether it be the selling of current assets in your relationship or any new projects you may do with Frontline?

We don't expect the spinoff from Frontline of Ship Finance shares to have impact on the Ship Finance books. We are currently reviewing our consolidation principles in general, and that also relates to the two subsidiaries accounted for as investment in associates. However, there will be-- in any event, there will be no effect on the cash flow or P&L as far as we can see, if there would be any change.

With respect to the distribution of those shares, I think it's very important to stress that we treat Frontline as any other client of ours. So, we have not given them any preferential treatment before, and we will not give them any preferential treatment going forward. And, everything is conducted on arm's length basis. We will, of course, continue to have a significant business relationship with them, with many tankers and OBOs on charter to Frontline. And we would consider additional business with them but, again, on arm's length basis.

Okay. Would this change at all the way that the profit sharing is accounted for? Would you still just get one bulk payment in March of the following year?

Exactly. That's a contractual agreement with Frontline to receive the profit share once a year. And the profit share is calculated on the annual average.

One more question on page 11. That's the first time we've seen your pro forma cash flow contribution. It sounds, with the new container ships and the new rig, it could be materially higher in 2007. That's a number that's much greater than the dividend. I understand you don't want to let the dividend get too ahead of itself, where you may have to potentially cut it. You want to do it conservatively. But do you think there's the potential, once these new rigs and container ships are delivered to Ship Finance in 2007, that you could see a more meaningful increase in the dividend based on these fixed cash flows?

We think a 4.5% increase in dividends is meaningful over the last year. And we, of course, want to be very diligent when we do increase dividends. This is the board's decision, of course. But we want to ensure that we can continue to pay sustainable dividends over time. We think that will benefit our investors. And we see a lot of investment opportunities. So we believe that we can invest the capital we have available to us in a meaningful way and accretive way for our investors. But, the dividend policy and, of course, any decision relating to an increase in dividend would be the board's decision.

Yes. Okay. Thank you, Ole.

Your next question comes from Omar Nokta from Dahlman Rose. Please ask your question.

You'd mentioned that you'd be paying down the debt associated with the jack-up on a more accelerated basis. Are you able to quantify that? I'm looking at what your EBITDA is over the first year or two on those, and it's roughly $40 million. Is that what you would--? Would you be looking to pay all that down with the $170 million that you'd be borrowing?

Typically, we structure the financing around the contract. And we ensure that we will get a good running yield from those contracts during that charter. So I think it's probably easier for you when you run your model to look at our equity contribution into that project. Then you can see that if you get-- I indicated a running yield of 13% to 14%. So, if you assume that that is taken out as dividends from those subsidiaries up to Ship Finance, the balance will be repayment of debt and interest payments in that subsidiary.

Okay. And the finance lease repayments, the $125 million in '06-- are you able to give an estimate of what that number is for '07 that will be showing up on the cash flow statement?

We don't have prepared estimates for 2007 for that number. I'm sorry.

Okay. All right. That's all I have. Thank you.

Your next question comes from John Parker from Jefferies. Please ask your question.

Can you tell me--? The administrative expenses were up significantly. Can you tell me--? Is there anything special in there?

With respect-- of course, from second half of 2006, we were building up the organization here but still had the old agreements with Frontline, which we are currently renegotiating and terminating part of that as we build up our organization. In addition, there are provisions for bonus payments and provision for options, which is due to the substantial increase in share price that basically took place the second half of last year. So, that is--

Is that going to be a fourth quarter event going forward? For modeling--

Basically, we expect the administrative expenses to be lower going forward. It was extraordinary in the fourth quarter.

Okay. Can you provide any more color on all these single-hull sales? It seems to me that you already had your returns locked up with the contract, so there's no great motivation on your part to sell these vessels, whereas Frontline is kind of stuck with something they have to charter, and they have their high fixed costs to you. So, it would occur to me that they're the ones who are pushing the single-hull sales. I was wondering if you could offer any color on how these discussions take place. Secondly, when you do sell one of these, at a high level, how do you determine the charter breakage fee and the split of profits from the sale?

I can try to explain that. We have been interested in basically selling single-hull vessels as there has been a concern that, of course, there is a significant reduction in charter rates in mid 2010. [Inaudible.] Therefore, you know, in order to-- we have seen it as an advantage for Ship Finance to sell single-hull vessels and reinvest this in new tonnage with a long life. So you can see that we have a stable cash flow for the foreseeable future. When a vessel is sold, basically, we have looked at the net present value of the remaining charter, plus the value of residual value after the charter. That is basically-- the difference between the market price, or the sales price, and that value - just some of the present value plus the residual - that we have split, basically, as per the profit split, which is 80% to Frontline and 20% to ourselves.

That's very helpful.

I also want to add one thing to that. It's important also to note that we don't have any pre-agreement with Frontline for how that is calculated. We have found a logical way to calculate that, but we have to stress that that calculation would be very different from a single-hull tanker and a double-hull tanker. For the single-hull tankers, we also have to take into account the steep reduction in charter rate from 2010 until the end of the charter with Frontline.

And we don't have any profit split. We don't have any profit split, basically, after 2010 on the single-hulls. We still were able to basically split 80/20.

Okay. So that gives you more motivation to do these transactions.

But we both have to agree if a vessel should be sold. So, there have been tough negotiations for each time there is an opportunity.

Great. All right. That's all I have for now. Thank you very much for your help.

[OPERATOR INSTRUCTIONS]. There are no further questions at this time, sir. Please continue.

Thank you very much, everyone, for attending this conference call. We look forward to 2007. And you're all very welcome to contact us through our email at ir@shipfinance.no or through our toll-free number, which is found on our website, www.shipfinance.org. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.