SFL Corporation Ltd (SFL) 2007 Q1 法說會逐字稿

Thank you for standing by and welcome to the Ship Finance quarter one 2007 result presentation. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, [Operator Instructions]. I must advise you that this conference is being recorded today, Wednesday the 30th of May, 2007.

I would now like to turn the conference over to your speaker today, Ole Hjertaker. Please go ahead, and thank you sir.

Thank you very much and welcome to everyone to the Ship Finance International and the first-quarter conference call. From the Company present today, we have Chief Executive Officer, Lars Solbakken; and Chief Financial Officer, Ole Hjertaker.

We will then turn to page number two, the forward-looking statements. This presentation contains forward-looking statements. These statements are based upon various assumptions, many of which are based in turn upon further assumptions, including Ship Finance management's examination of historical operating trends. Although Ship Finance believes that these assumptions were reasonable when made, because assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond its control, Ship Finance cannot give assurance that it will achieve or accomplish these expectations, beliefs or intentions.

Important factors that in the Company's view could cause actual results to differ materially from those discussed in this presentation, include the strength of world economies and currencies; general market conditions, including fluctuations in charter hire rates and vessel values; changes in demand in the tanker market as a result of changes in OPEC's petroleum production levels and worldwide oil consumption and storage; changes in the Company's operating expenses including bunker prices, dry-docking and insurance costs; changes in government rules and regulations or actions taken by regulatory authorities; potential liability from pending or future litigation; general domestic and international political conditions; political disruption of shipping routes due to accidents or political events; and other important factors described from time to time in the reports filed by the Company with the United States Securities and Exchange Commission.

We'll then turn to page 3. Today we will discuss the first-quarter results and focus on highlights in the quarter and subsequent events. We will comment on the financial results. And we will also touch upon some issues relating to our accounting treatment. At the end, we will open up for questions from participants.

Next page; the Board has reviewed the existing and new projects and the long-term prospects for the Company, and has decided to increase the dividend to $0.55 per share. This is up from the $0.54 per share dividend for the fourth quarter and it's the fourth consecutive increase in dividends. The increased dividend capacity can also be explained by a higher activity level in the Company after a separate management team was hired in 2006.

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 for some other companies.

The total operating revenues were reported at $86.5 million for the quarter, or $1.19 per share. This number excludes revenues in the subsidiary, accounted for as investments in associates. It also excludes a significant portion of the charter rates classified in our accounts as repayment of investment in finance leases. For the first quarter, that alone was $36.3 million, or $0.50 per share.

The net income for the quarter was reported at $55.3 million or $0.76 per share. This number includes $30.8 million of gain relating to the sale of six single-hull Suezmax tankers in the quarter. Based on the performance by vessels on charter to Frontline, we estimate that a total of $15.2 million in profit share has accumulated so far this year. This has not been recognized in our accounts for the first quarter, and will be recognized later in the year, provided the vessels continue to earn in access of the minimum fixed charter rates.

We have a significant liquidity position; including cash on our balance sheet and available credit lines we have around $360 million that can be used to fund the equity portions in new investments.

Next page; we have reduced our single-hull tanker exposure significantly and following the recently announced sales and hire purchase agreement, we will only have 10 single-hulls left. Of these, three have double sides. Compared to our 60-vessel fleet, this is not a very large portion, and Frontline has also chartered out most of the remaining single-hull tankers to third parties at charter rates well above our fixed charter rate.

The sold single-hull Suezmax tankers have been operating in the spot market, and as the profit share calculation is across each vessel class, they have in effect dragged the average down. The relative performance and contribution to the profit share from the remaining vessel is therefore expected to increase after the sale.

Net cash proceeds from the sale of the six single-hull tankers were around $128 million, after repayment of associated debts. And as I mentioned earlier, the book gain was $30.8 million.

We have also acquired a second jack-up drilling rig, as we also announced in the previous press release after the fourth quarter of 2006. The purchase price for that rig is $210 million and the delivery from the shipyard is scheduled in July 2007. That rig will go on a 15-year charter to Seadrill and we have already paid in the equity contribution relating to that rig.

In the first quarter, we also announced the acquisition of two newbuilding Capesize bulk vessels. These investments will total $160 million, and we estimate an equity contribution of $40 million. The delivery of those vessels is scheduled for the end of 2008 and the first quarter 2009 and the vessels will go on 15-year charters to Golden Ocean.

Later in the quarter, we announced the acquisition of three newbuilding seismic vessels. Investment totaled $210 million and $30 million will be the equity contribution from Ship Finance. The delivery of those vessels is scheduled for 2008 and the vessels will then go on 12-year charters to SCAN Geophysical.

Next page; the VLCC Front Vanadis was sold on hire purchase terms to a subsidiary of Thailand-based TMT, where TMT has a purchase obligation at [$3] million in November 2010. The delivery took place in May and the fixed charter rate is now $25,000 on payable terms, which is on average $10,000 per day higher than the previous charter to Frontline, adjusted for the $6,500 per day OPEC allowance. We have agreed to pay a compensation of $13.2 million to Frontline, and we receive an up-front payment of $12.5 million from TMT upon the commencement of that charter.

In November last year, we took delivery of the first of five container vessels to Horizon Lines. And vessel number two was delivered in the first quarter. The remaining three vessels have all been delivered in April and May and the transaction will therefore have full earnings and cash flow effect as from the second half of 2007.

As we mentioned in the fourth-quarter report, we have reviewed the consolidation basis for subsidiaries under US GAAP. The jack-up drilling rig West Ceres was previously accounted for as investment in associate, but will now be consolidated into Ship Finance's accounts.

Front Shadow, which owns the Panamax bulk carrier, Golden Shadow, will continue to be accounted for as investment in associate due to the nature of that charter where we in addition to a fixed [inaudible] rate for the duration of the charter, also have a put option on Golden Ocean at the end of that charter.

On March 22nd, Frontline distributed its remaining shares in Ship Finance to Frontline shareholders as a dividend. Ship Finance was originally a 100%-owned subsidiary of Frontline in 2004. But Frontline has thereafter distributed its share holdings as dividends. Following the latest distribution, Frontline will no longer consolidate Ship Finance into its accounts. For Ship Finance, this will not have any accounting impact.

Next page; Ship Finance has currently 60 vessels, including 11 vessels under construction. The Company has the highest charter backlog in the industry and very limited operating expense exposure relating to these charters. To enhance the value to our shareholders, we will on a selective and limited basis, make investments including second-hand vessels or newbuildings with no or limited charter coverage initially, if we see interesting opportunities.

As an example, we acquired two contracts for Suezmax tankers in late 2006 at the cost of $71 million per vessel. We did this because we got the opportunity to acquire at the very attractive price and also expected the market to strengthen, which it also has. We can therefore now market these vessels for medium to long-term charters, consistent with our strategy at the levels reflecting the new value of approximately $85 to $90 million; and thereby capturing the increased value to our shareholders. And we will continue to look for opportunities where we can do this also in other vessel classes.

We have significant capital available for investments in new projects. As of March 31st, we had $360 million in cash and un-drawn lines. Although we have several projects in the pipeline, we estimate that we can make additional investments in the amount of approximately $1 billion without raising additional equity capital.

Next page; as we have lease accounting and one of our subsidiaries are accounted for as investment in associates; there are certain elements that are not included in the total operating revenues that you would normally see in a shipping company. As I mentioned previously, there is a significant portion called repayment of investment in finance leases; that is not included in our profit and loss statement. For the quarter, this amounted to $36.3 million and only appears in the cash flow statement.

After we changed the accounting for our subsidiary [rate] finance limited, the result in associate has been changed to only reflect the net income from the subsidiary Front Shadow Inc., which owns the Panamax dry bulk Golden Shadow.

Also, as we have mentioned earlier, the net income includes a $13.8 million gain on sale of vessels in the quarter. Excluding this gain, the net income would have been $24.5 million or about $0.34 per share.

Next page; the book value of vessels and equipment has increased from the previous quarter due to the delivery of the second Horizon Lines vessel. We will take delivery of the remaining three vessels in the second quarter. The line investments in finance leases, has been restated for 2006 and now also includes the jack-up drilling rig West Ceres. The numbers as per March 31st is adjusted for the sale of the six single-hull Suezmax tankers.

This balance sheet does not include the dry bulk vessel Golden Shadow, but instead this investment is termed investment in associates. Also, only two of the five vessels to Horizon Lines is delivered and on the balance sheet.

There is more than $223 million of deferred equity not included in the book equity. This relates to the acquisition of vessels from Frontline at a different price than Frontline's booked value at the time in 2004. This amount is deferred back to equity over the lease terms.

Next page; in the cash flow statement, I just want to point your attention to the repayment of investment in finance lease item. This is the first line under the investing activities heading. This was $36.3 million for the first quarter, up from $32.1 million for the fourth quarter of 2006. This number is in fact part of a regular charter cash flow and if we did not have lease accounting, it would be part of the operating revenues. The increase is partly due to some vessels also coming off other charters and being reclassified as finance leases.

Next page; one 100%-owned subsidiary is accounted for as investment in associates. We have therefore shown the accounts for that subsidiary separately and also for this company, as this has lease accounting, a part of the charter payment is classified as repayment of investment in finance lease under US GAAP and appears in the cash flow statement for this subsidiary only. For the first quarter of 2007, that amounted to about $800,000.

Next page; as an internal guideline and also for management to assess the Company's core business, we have made an overview based on the fixed contribution from charters, excluding profit share and where we also illustrate the accumulated profit share a bit further down in the table. And we have separated the fixed contribution from the charters based on asset classes.

As we can see, the fixed contributions from charters for the first quarter of 2007 was $120 million; compared to $118 million for the fourth quarter of 2006. The contribution before interest, taxes, depreciation and amortization; before profit share, was $89 million for the quarter, compared to $84 million in the fourth quarter of 2006. And if we adjust for the accumulated profit share based on management calculations, the contribution before interest, taxes, depreciation and amortization; after the profit share is $104 million, compared to $99 million for the fourth quarter last year. And on a per-share basis, the contribution after profit share then equals to $1.43 per share.

Next page; we have a very high charter backlog and as per March 31st, the weighted average tenor of our charters were at 14.1 years if you weigh the charters by the charter revenues. Excluding the single-hull vessels that have recently been sold, we have about $5.6 billion of total charter payments and the estimated EBITDA backlog from these charters is around $4.4 billion.

Next page; we have declared a dividend of $0.55 per share for the first quarter of 2007. On a four-quarter trailing basis, this amounts to $2.14 per share. We do retain a significant portion of the cash flow from charters for debt repayments and further acquisitions. And we believe that new transactions will potentially increase the dividend capacity going forward.

Next page; the profit share from the vessels on charter to Frontline has proved to be very profitable for Ship Finance. We receive 20% of the profit from the vessels in excess of the base charter rates we receive from Frontline. On average, from the first quarter of 2004, the quarterly profit share has been $22.8 million or $0.31 per share. For this quarter, the accumulated dividend is estimated to be $0.21 per share, and this will be recognized in our accounts later in the year if vessels continue to earn in excess of the minimum rates.

Next page; we currently have $1.9 billion in loans, which includes $449 million in bond loans. This is excluding $21.7 million financing in the subsidiary accounted for as investment in associate. More than 65% of the interest-rate exposure is fixed through swaps, fixed-interest rates, or interest compensation clauses with charters.

We also have several new projects which are financed on a stand-alone basis, with no or limited recourse to Ship Finance. We believe that this improves the investors' position and also reduces the overall risk in the different projects. We have significant capital available as equity on new projects and we had $146 million of net cash available as of March 31st, in addition to the amounts available under the credit facility.

Next page; the net income for the first quarter was $0.76 per share, including the gain from the sale of the single-hull vessels. We increased the dividends from $0.54 per share to $0.55 per share, and we have several projects in the pipeline; and we also believe that we can find new projects which can grow the dividend capacity going forward.

We have the highest fixed-rate charter backlog in the industry and we have upside potential through profit sharing and also through residual value. We do have an opportunistic approach to secure higher benefit for Ship Finance shareholders in new projects. We see significant growth opportunities in large, diverse markets and we have a strong liquidity position to fund equity portions in investments.

Thank you very much. And then I will turn it over to the Operator to open up the line for questions.

Thank you very much. [Operator Instructions]. Your first question, from JPMorgan, comes from Jon Chappell. Please ask your question, sir.

Thank you and good afternoon. Ole and Lars, you've done a lot so far this year as far as expansion and especially as diversification is concerned. Are there any end markets that you believe have the better supply-demand fundamentals that you'd be focusing some future growth on?

I think that if you look at the different markets, we have the focus on the container market; which we think the fundamentals are strong because you had a reduction in values and rates [last season] during last year and it was another weak market in the start of this year. But we're seeing that basically turning over the last two months. So that's definitely one market that we are following very closely.

And we also, in the offshore sector, both on the supply vessel and [inaudible], it is still a very interesting market.

And what's the comfortable leverage ratio that you would be at as you continue to look at projects going forward?

I think that in most of the projects it depends of course, on the charter coverage; but as a guideline I would say 80%.

But just to add to that, that is for certain new projects with no or limited recourse to Ship Finance. I think also adding to that, Ship Finance overall has a relatively moderate leverage, if you compare to the charter backlog; due to the high values for the tankers and we continuously pay down the debt we have associated to them.

It's very important that we-- the debt level of course on the Frontline fleet, the fleet that is on charter to frontline; is very low. We are less than $900 million outstanding on the bank loan debt for basically -- this is for the main facility just for illustration-- we have less than 900 for about $2.9 billion in invested value. So the Frontline space has about 30% leverage. It's very low leverage on a very large portion of the fleet. And we also have some vessels with no debt at all; for example the container vessels, the [inaudible] and Sea Beta, which as of 2005 there's no debt at all.

So of course on an overall basis, the leverage will be lower. [Inaudible] we have when we talk about our capacity, of course we have now a strong cash position and also we have totally repaid the drawings under the revolver of $219 million. Then we also have additional capacity to increase the other bank facilities that we have, if we wanted to do that.

Yes, there's a lot of liquidity left. Last question; this one is for Ole, most likely. The repayment of finance leases; you said that it increased as some ships have come off charters and they've been reclassified as finance leases. That 36.3 million; I mean should we look at that as a target that's going to continue to rise by-- I don't know-- a million, a million and a half every quarter or is that a good run rate for right now based on what you see on the current fleet and their charters?

The repayment of investment in finance leases is a number. Technically you can look upon that as the capital element in an annuity. And each and every vessel which is classified based on lease accounting has a separate lease schedule. So we can therefore not give the guidance based on a fixed number. I think over time, as foreign annuity, as the time goes the interest component goes down and the capital component increases. So therefore over time, you would expect that the capital element should increase. But we also want to mention that in this quarter-- this is the second quarter, the two last vessels that were originally not classified as finance leases that came from Frontline, have now been reclassified as finance leases because they came off certain third-party charters.

And also from the third quarter, we expect to take delivery of the second jack-up drilling rig to Seadrill. That will also be a finance lease and there will be a finance lease schedule set up for that one. So it's a little bit more tricky I'm afraid, than giving sort of a fixed number or a fixed decrease.

I wouldn't expect anything less.

But we intend to come back at a later stage to give more accurate guiding on the split between the capital element and the interest element in the leases; because this is just how it's treated in our books. It will not have anything to do with the actual cash flow from those charters.

Okay. That's helpful. Thanks, Ole. Thanks, Lars.

Okay, thank you. Bye-bye.

Your next question from ABG comes from [Rosenlund Anders]. Please ask your question.

Hi. I have a question-- looking at slide number 12, which is a very interesting slide I must say; in your report you have given us detail on how much the cash flow contribution would be from all of the investments being delivered. That particular post, interest and debt repayments; do you have a similar figure BITDA figure for [inaudible]?

Sorry, we have not made a separate breakdown for the vessels that are not included. And as an example, for the containers we got the second container vessel to Horizon Line delivered during the first quarter. The three remaining vessels will be delivered during this quarter or have been delivered in the second quarter. But the number we gave, we gave in the press release, was the total cash flow capacity from all five vessels. But they're not made on a vessel by vessel --

I think that when you look at what has happened [after that] and that's two container vessels that have been delivered. Of course we also sold these six single-hull vessels-- it goes to the end of the first quarter. So that will have a negative impact. But then we will have the additional container vessels, one that was delivered at the end of the first quarter and two more have been delivered now in the second quarter. And then we have the rig that will be delivered early in July, which of course will then have a significant positive contribution.

And of course the SCAN vessels as well--

Yes, but that is only [going on stream] next year. Of course and then we have the two Capesize to Golden Ocean. And then of course we will then finally also have the two Suezmaxes.

And the total remaining CapEx on the vessels that you will take on-- I think you mentioned in the press release-- what was the figure-- remaining CapEx for vessels not delivered yet?

The equity portion of that is-- I think the equity portion is about-- a rough number is about $100 million. But that is a number that is going out over the next two years. That is through 2009.

And how much debt will you draw?

We don't have the exact number for that.

We will give it to you-- I would like to double check the number and I can give it to you later.

Okay, fine. Thank you.

Thank you. And from [Jefferies], your next question comes from John Parker. Please ask your question, sir.

Hi. Do your debt numbers for the first quarter include $170 million for the second jack-up rig?

No. It includes a portion-- approximately half the debt relating to that vessel.

The drilling rig-- we have paid the total equity contribution and then drawn up part of the debt, but the remaining of the debt will then be drawn on delivery.

Okay, that's good. And your revolver is completely paid off. I noticed you said you have $219.7 million of capacity. I thought it was a $219 million revolver note. It's a small number but I'm just curious as to where that .7 comes from.

It has always been there. It's probably just a rounding--

Okay. And I'm curious if you've had any more inquiries about your single-hull tankers. Have you had any inquiries for conversions to dry bulk ships or are you continuing to look to get out of the single hulls or do you feel comfortable with the number of single hulls that you have now?

I think we have reduced the single hull exposure quite significantly, going from 18 vessels just a few months ago. And also the remaining-- most of the remaining single-hull tankers are actually also fixed out on charters which are profitable and which will contribute to the profit share calculation. Of course, we don't see single-hull tankers as a long-term investment from our part, but we will do that in a very diligent manner and we will of course do what we can to maximize the value from those either through the charters or through other potential transactions.

I think that-- what I am [inaudible] is that we have seen a definite increased interest in those vessels. There are inquiries. One of the problems we are facing is that most of those remaining vessels are now on charter. So if we're going to sell them, we have them chartered to Frontline; Frontline has charted them out. So Frontline would then need to cancel the third-party charter.

Got it. Great, well thank you very much for your help.

Okay, bye-bye.

[Operator Instructions]. We appear to have no further questions at this time, so please continue.

Thank you. And thank you everyone for attending the conference call. And the presentation has also been posted on our webpage. Have a good afternoon.

And that does conclude our conference for today.