SFL Corporation Ltd (SFL) 2007 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Ship Finance Q2 2007 results presentation. (Operator Instructions). I must advise you the conference is being recorded today, Wednesday, the 22nd of August, year 2007.

I would now like to hand the conference over to your speaker today, Ole Hjertaker. Please go ahead.

Thank you, and welcome, everyone, to the Ship Finance international second-quarter conference call. From the Company today, we have Chief Executive Officer Lars Solbakken, and Chief Financial Officer Ole Hjertaker.

Slide two in the presentation. For the benefit of the listeners who do not have access to the presentation, I will read 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 insurance 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 -- includes bunker prices, drydocking insurance costs, changes in governmental rules and regulations, or actions taken by regulatory authorities; potential liability from pending or future litigations; general domestic and international political conditions; potential disruptions of shipping routes due to accidents or political events; and other important factors described from time to time in reports filed by the Company with the United States Securities and Exchange Commission.

Slide three -- today, we will discuss the second-quarter results and we will focus on highlights in the quarter and subsequent events, and also comment on the financial results. At the end, we will open up for questions from the participants.

Slide four. A cash dividend of $0.55 per share has been declared for the second quarter of 2007. Annualized, this is to $2.20, which represent an 8.4% yield compared to the closing share price on August 21, which was $26.14.

Total operating revenues for the second quarters were $96.6 million or $1.33 per share. Net income for the second quarter was $39.5 million, or $0.54 per share. $15.7 million or $0.22 per share of profit shares have accumulated during the quarter, and based on an amended profit share agreement with Frontline, we now can recognize the profit share as it accumulates on a quarter-by-quarter basis. In the total operating revenues and net income, $15.7 million representing the profit share contribution is therefore included.

I just want to mention also that there is a $15.2 million accumulated profit share with respect to the first quarter. As the new agreement with Frontline was starting with [effect] as of April 1, the $15.2 million accumulated profit share from the first quarter has not yet been recognized in our earnings. This will be recognized based on the old method, and we expect this to be taken into our P&L in the fourth quarter of 2007.

The Company continues to have a very strong liquidity position, and also create the strong basis for further growth. The Company has (technical difficulty) [$99.9 million] of cash on its balance sheet, and we also have $12 million of restricted cash. Available undrawn credit lines is $220 million, which means that the Company has $320 million of available liquidity.

In addition, we have $1 million in cash in a subsidiary, which are not consolidated into Ship Finance, but is consolidated on the basis of result in associated company. But we have full access to that cash without any restrictions.

Slide five. All five container vessels to Horizon Lines are now at operation. The third and fourth vessels were delivered in April and the fifth vessel was delivered in May. This will therefore have a full cash flow and earnings effect in the third quarter of 2007, and on an annual basis the contribution after interest and debt amortization is approximately $0.15 per share.

The delivery of the second jack-up drilling rig, the West Prospero, to Seadrill took place at the very end of the quarter. The rig has commenced the 15-year charter, and Seadrill has some subchartered the rig to Exxon Malaysia for a 400-day period at a very profitable rate. The transaction, involving the West Prospero will have full cash flow and earnings effect from us in the third quarter. And the annual contribution after interest expense and debt amortization is estimated to $0.10 per year.

In the second quarter, we completed the sale of the single hull VLCC Front Vanadis on higher purchase terms to TMT, a Taiwanese tanker operator. The structure of the deal is that we will continue to own the vessel formally, but we have a higher bareboat rate during the lease period, and there is a purchase obligation on the charter at the end of the lease.

In addition, there was a $12.5 million upfront payment from the charter as a down payment. And in our accounts, that has been recognized in the cash flow statements as an addition to repayment of investment in finance lease.

Over the profit and loss statement, we have recognized a gain of approximately $4.3 million relating to the sale of the Front Vanadis.

Slide six -- during the second quarter, we contracted to acquire five container newbuildings. This consists of two 2,500 TEU vessels and three 1,700 TEU vessels. And all vessels are scheduled for delivery in 2010.

We regard the terms we achieved for these vessels as very attractive in today's market. And we anticipate a very strong market in 2008 and 2009. And we intend to market these vessels for medium to long-term charter during this period.

We have not yet secured charter for these vessels, and we think that as the market strengthens, we can capture more value for our shareholders by taking these this these yard positions, and also gets us in a different negotiation position with the charters. The vessels are very standard design, and are viewed as commodity container vessels. So the technical inherent risk in that is relatively low.

In the second quarter, we also agreed to acquire a 1,700-TEU containership built in 2003. The net purchase price is $32.5 million and the vessel is currently on timecharter to CSAV until end of 2008 at a charter rate of $13,500 per day. Currently, the market rate for 1,700-TEU vessels is in the region of $18,000 per day on a timecharter basis. Delivery to Ship Finance is expected at the end of the month.

We have also recently announced the acquisition of five new offshore supply vessels -- and all vessels are built in 2007 -- from Deep Sea Supply. The aggregate purchase price is $198.5 million, including $17.5 million seller's credit. There is a 12-year bareboat charter back to Deep Sea Supply. And we have already structured and financed the transaction. We expect to close it before the end of the month. The annual contribution after interest expense and debt repayment is estimated to $0.07 per share over the next seven years on average.

Slide seven -- if we look at the profit and loss statement for the three months ended 2007, and compare it to the same period last year, the largest difference is that we have -- after June 30, 2006, we have sold several single hull vessels, and we have taken delivery of one jack-up drilling rig. And also, we have taken delivery of all the containership vessels to Horizon Lines.

But in addition -- but the Horizon Line transaction and also the second drilling rig to Seadrill, the West Prospero, will only have full cash flow and earnings effect from the third quarter. Also, in the second quarter, this year, we have recognized $4.3 million of gain on the sale of the Front Vanadis, and had a slightly higher gain in the second quarter 2006.

The interest expense is higher which is due to the higher activity level. And the ship operating expenses are down, which is due to the sale of the single-hull vessels that were previously on charter to Frontline.

The basic earnings per share for the three months ended June 30, 2007 is therefore $0.54 per share against $0.60 per share in the corresponding period in 2006.

These numbers do not include the one subsidiary accounted for as investment in associate which relates to the dry bulk vessel on charter to Golden Ocean.

Slide number eight -- in the balance sheet, I just want to draw your attention to two items. One is the line called investment in finance leases under assets. And the other is in stockholder's equity a little bit further down.

In connection with the original transaction, when Ship Finance was spun off from Frontline, there were surplus values that could not be recognized in Ship Finance's balance sheet. There is therefore currently a $233 million nonamortized equity which is taking back -- which is amortized back to our equity over time, associated with the charters to Frontline. This effectively reduces the investment in finance lease, and also reduces the book equity by this amount. The book equity on June 30 is $34 million higher than the book equity on December 31.

Slide number nine -- in the cash flow statement, I want to draw your attention to the first item under investing activities. This is called repayment of investments in finance leases. This amount is the part of the charter hire that, due to lease accounting, is not recognized in our income statement, but only appears in the cash flow statement.

For the second quarter of 2007, this amount was $46.2 million. In this number, $12.5 million is relating to the downpayment of $12.5 million in connection with the new lease on the Front Vanadis.

For analysts and investors who want to get a better understanding of how the development in the lease schedules will be, and based on management estimates, you have included a separate slide in this presentation, in the appendix -- slide number 21, with a breakdown of the charter hire and the lease schedules. And this is split in repayment of investment in finance leases, which does not appear in the cash flow statement, and also interest income and service income, which does flow through the income statement.

Slide number 10 -- in the second quarter, the cash flow contribution from our charters were -- from the fixed charters were approximately $115 million. This overview is an overview that the management has set up for as a guideline to assess our core business, and does not represent U.S. GAAP figures.

In this overview, we take in on a line-by-line basis the charter hire -- the fixed charter hire from each of the vessel classes. And this does not exclude the part of the charter higher which is under GAAP classified as repayment of investment in finance leases.

Based on this overview, the contribution before profit share was $88 million, or $1.20 per share on an EBITDA equivalent basis. And including the profit share, it was $104 million or $1.42 per share.

Slide number 11 -- Ship Finance has grown considerably since its inception in 2004. At that time, the asset base had a market value based on broker evaluations of approximately $2.1 billion. Currently, if we adjust for the new transactions that we have announced and the newbuilding commitments, the asset base is a total of $5.4 billion.

In addition, the portfolio, the asset portfolio of the Company has diversified significantly. And we see very good growth opportunities within the offshore market, container market, and we also see opportunities in the tanker and bulker market.

The remaining capital commitments relating to our newbuildings and our announced acquisitions totaled $855 million, of which $266 million will be in the second half of 2007; 323 in 2008; 168 in 2009; and 98 in 2010. Typically, we finance 75% to 80% of this through bank loans. And we have already financed several of these transactions in the bank market. We also own assets where there are no financing commitments as of current.

Slide number 12 -- the Company has a very high order backlog. And these are the numbers as of June 30, and does not include the recently announced acquisitions to Deep Sea and the Montemar Europe.

The total charter hire backlog is $5.5 billion and the EBITDA contribution from those charters is $4.3 billion. The average tenure of the charters weighted by charter revenue is 13.9 years.

Some of the charters have purchase options. And if we adjust for the earliest possible exercise of purchase options for all deals where that are applicable, the total charter hire backlog will be $4.5 billion, and the EBITDA from those charters will then be $3.4 billion. And the weighted average tenure of the charter will be 12.7 years.

But at the same time, as these early [examination] options involves payment of purchase option price, we will then have significant capital to reinvest. So even in the case where everything is exercised at the earliest opportunity, we still have a very, very high charter backlog.

Slide number 13 -- the dividend declared for the quarter was $0.55 per share, which is $2.17 per share on a trailing four-quarter basis. We do retain a lot of capital for debt repayment and acquisitions. And on this basis, and compared to some other companies with high charter backlog, we have a relatively moderate dividend payout ratio. As we do new transactions, we expect to increase the dividend capacity going forward.

Slide number 14 -- the profit share agreement with Frontline has been very profitable for the Company. And on average, over the last 14 quarters, the profit share contribution has been $22.3 million, or $0.31 per share per quarter. As we have now changed the profit share calculation from an annual basis to a quarterly basis, we expect to better account for the profit share as they are accumulated going forward.

The spot [tanker] market therefore represents a very good upside for Ship Finance shareholders. And although the third-quarter spot market for tankers is lower than the second quarter this year, Frontline also has a portfolio of charter coverage and subcharters which is creating a stability in the profit share agreement and expected contribution from profit share.

Slide 15 -- the Company currently has $2.1 billion in interest-bearing debt as of June 30, 2007. This consists of $1.6 million of bank loans and $0.5 billion of bond loan. Approximately 70% of this interest expense exposure is fixed through interest rate swaps, fixed interest rates, and also through interest compensation clauses with charterers.

When we structure the new transactions, we structure these on a stand-alone basis where the subsidiaries have no or limited recourse to Ship Finance. This is because we want to improve our investors' position. And effectively, this reduces the risk for Ship Finance in case one segment has a negative development.

We do have significant capital available as equity in new projects. And we have approximately $320 million available in capital to us. In addition, we also have assets where there are no mortgage.

Page 16 -- so as a summary, we have declared a dividend of $0.55 per share, which represents the 8.4% dividend yield. We do have several projects in the pipeline, and these projects are expected to grow the dividend capacity. We have the highest fixed-rate charter backlog in the industry to our knowledge, and there is upside potential through profit sharing and residual value.

We do take an opportunistic approach in order to secure a higher benefit for Ship Finance shareholders in the new projects. We see significant growth opportunities in large, diverse markets, and we do have liquidity to fund further equity portions in investments. And we also focus on diversifying our fleet further going forward.

Thank you, and then to the operator.

(Operator Instructions). Jonathan Chappell, JPMorgan.

Ole, the last point you brought up in your summary was about the opportunities and how you plan to continue to expand and diversify the fleet. Can you talk about which segments of the broader markets, whether it's oil services or shipping, you believe provides the best opportunities given current asset prices and also current charter opportunities?

It's Lars here. During the last few months, we have focused on the offshore sector and on container vessels.

With respect to container vessels, we looked at a large number of transactions with the more long-term employment. But as we saw the market was turning in April, we decided to basically also look at vessels with no or short-term employment or newbuildings as the market was moving.

And we looked at a large number of transactions. We saw the secondhand market moving up very quickly, whereas some of the yards were slower to increase their prices. So we ended up ordering five newbuildings in China at very attractive terms. And we have seen later, that prices have moved up very substantially.

And we also bought the Montemar Europe at $32.5 million, which was a very attractive price. And the price today is substantially higher.

So there is of course a substantial -- you know a number of opportunities in the container shipping segment and we follow that very closely. Also, we are following the offshore market where we now have done the Deep Sea transaction, and we also are working on other transactions which we hope to conclude within that segment.

Regarding your relationship with Frontline, I know you have diversified away from a pure Frontline income quite significantly over the last couple of years. But you still have a majority of your fleet with them.

With the tanker markets where they are right now and with a very strong orderbook for that segment, possibly leading to a trough market, whether it's one year or two years out, what confidence do you have that Frontline will not try to renegotiate the contracts, and that it will be able to honor completely the contracts that you have with them?

I think that the advantage we have -- the transaction with Frontline was done at the end of 2003, when the market was substantially lower than it is today. And vessel prices have moved up significantly. So the charter rates that Frontline is paying is reasonably attractive.

They have then subchartered a number of these vessels to third parties at substantially higher charter rates than what they paid to us. There is also a $232 million cash deposit securing the security for these charters. So we feel actually very confident with respect to our tankers that even in a weak tanker market, we will receive the charter hire.

And I just want to add to that that we only think for the interests of the Ship Finance shareholders. So if we were to negotiate anything, it would be to the benefit of us.

We don't -- we see that as highly unlikely to happen.

Last question -- in regards to your slide 10, the significant amount of EBITDA even before profit share that your fleet is providing on a pretty secure basis, and all the fleet growth that you have planned for the next several quarters -- I was a little bit surprised that you hadn't kept with the recent trend of increasing your dividend, if not just by a couple of pennies, this quarter. What do you look at when you look at the next 12 months and timing of deliveries and secure cash flows as far as the potential to raise your dividend distributions?

The dividend is determined by our Board from quarter to quarter. So we cannot make any projections for where that dividend will go.

What we can comment, however, is that we have several transactions where there will be full or part cash flow contribution in the third quarter. And we also hope to do more transactions that will further enhance -- call it the potential distribution capacity.

When the dividend is determined, the Board takes a very long-term view, and is focused on a long-term, sustainable dividend. And we currently -- if you compare to some other companies with a very high charter backlog, we are currently paying a much higher yield than the average of those.

So I think we already pay a very high yield, and we think that as we growth, can further enhance that possibility to pay even higher dividends.

Omar Nokta, Dahlman Rose.

Just off of John's question, regarding growth prospects, are you looking at doing more business with Seadrill? I know you have done the two jack-ups. Are you looking to add more of those, and perhaps getting into the floater segment, especially now that Seadrill has secured a few of its newbuilds on longer-term contracts?

As you know, we already have done two transactions with Seadrill. And we are keeping in a close dialog with them. And from the Ship Finance point of view, we are interested in expanding the business with Seadrill. But it takes two parties to make a deal.

I think I just want to add to that that, in general, we are -- we see a lot of charter backlog in the drilling segment. And we are of course focused on modern units. But we could also look at floaters with Seadrill or with other players in the market.

I think it's very important to stress that we are focusing on the entire segment, and not only focusing on companies where Mr. John Fredriksen has the shareholding. We are actively out in the market looking for deal opportunities and will of course announced these as and if they materialize.

Can you say if you have been approached by other players within the offshore space outside of Fredriksen?

Yes, we have.

Okay. And just off of that, there is -- obviously, the past few weeks, although it's been limited in the past few days -- there's been a lot of concerns on liquidity and credit. Have you seen any of that? Is that affecting you at all operationally?

No, because we -- you know, almost all our financing is long-term. And we have not seen any direct implication on Ship Finance.

John Parker, Jefferies.

Just a little bit back to Omar's question, the Deep Sea Supply transaction, you took a little bit more recourse debt than normal. Was that at all a function of the changing market, or was that just a function of how the deal came across?

It's nothing to do with the market. It's basically -- we tried to optimize the terms that we are getting; what kind of margin we get and what kind of debt repayment profile were getting. So by having a slightly higher guarantee, we get better repayment profile and a better margin.

And to add to that, when we do our internal calculations, when we allocate -- when we do take on recourse to Ship Finance in the form of part guaranteeing some of the debt obligations, in our internal calculations we apply a cost to that. So we do factor that in when we look at our internal returns.

I guess my forecast was a little bit off because of the $12.5 million upfront payment on the Front Vanadis. Does that impact the payments in future quarters? I have them coming in at about a little over $2 million a quarter to the end of the contract. Is that 12.5 going to have to be taken out sometime in the future?

No, the $12.5 million was an upfront payment that was paid on delivery in May this year. So it has nothing to do with the charter hire going forward. So this is just the accounting treatment for that upfront payment of charter hire.

Now, Frontline has a bunch of cash sitting to secure its charter agreements. Are those required by the bonds or the bank debt or both?

I think it was --

It's definitely required by the banks. I believe it's also required by the bonds. But there is flexibility in it in connection with taking vessels in and taking vessels out.

Also, as the charter -- over the charter period, as the cash reserve is a fixed amount per vessel effectively, the security position for Ship Finance improves over time relating to that cash reserve.

Justine Fisher, Goldman Sachs.

The first question I have is also about the nonrecourse debt. Do you have an updated number as to how much of the total $2.1 billion is recourse and how much is nonrecourse?

We don't have that (multiple speakers)

We have announced as we do transactions how much of the debt is recourse. And of course, we have some debt on the parent level, which is the bond loan, and also the financing relating to the Frontline transaction. And that is, of course, recourse. But we can do that calculation and e-mail that to you just now --

Because some of the other transaction, there are part guarantees, you know.

Right, that's why I was asking, because some of the Deep Sea Supply is also part guarantees.

And then if you could also, I guess -- if you don't have it at the top of your head now, the total -- which assets in particular of that asset list that you gave on slide, I guess, 18 -- which ones of those are in stand-alone facilities, and which ones of those are in Ship Finance Limited?

That's pretty -- that I can answer right away. All transactions except the Frontline are in single-purpose subsidiaries.

Okay. And then the next question is just about the pro forma interest expense for the Company. First quarter interest expense, is up -- sorry, second quarter was up versus the first quarter. And I'm assuming that that's just because of the Company's higher level of secured debt. But I'm wondering if you guys could give us a forecast of what you expect pro forma interest to be for 2007 -- obviously excluding any new projects, but just given what you have and the pipeline right now?

We don't have a pro forma -- we don't give pro forma estimates on the interest expense, I'm afraid.

But I think that one of the reasons why the interest expense went up is that we funded part of the Prospero, the rig, already in February. So we have actually now from February until the end of June funded a substantial amount for the West Prospero without any earnings on that. You know, the interest expense actually increased but we only from the third quarter will have an earnings impact.

And then, a question on the Deep Sea Supply or the deep vessel supply announcement. So basically, the press releases says that you guys are not responsible (technical difficulty)

Sorry, we --

Hello?

Sorry?

We lost you; sorry. (multiple speakers) Could you please repeat the question?

The press release says that Deep Sea will be responsible for the operating and maintenance costs of the vessels. So does that just mean that from a modeling perspective, we just need to take into account how much Ship Finance will be receiving from those contracts on the revenue line, and then that's it?

Exactly. The structure -- and this is the same for many of our deals -- we have structured many deals on a bareboat basis, which means that the charterer is responsible for the full maintenance and operational costs, which means that we don't have any risk relating to the increase in operating expenses.

Over the last few years, there's been a very high increase in OpEx levels, which I think have surprised many, both in the industry and also in the financial community. And by structuring deals on bareboat basis, we don't take on that risk for the Ship Finance shareholders.

So will there be no -- aside from interest expense obviously on the debt, will there be no other costs associated with the transaction that Ship Finance will bear?

No. For the Deep Sea -- this is not to Ship Finance -- the bareboat rate.

And then the last question is, obviously, again, piggybacking on the credits -- on the questions about the credit market -- obviously, it doesn't sound like you guys are seeing your access to liquidity affected by weakness in the market. Your bonds have held up pretty well, too, as far as trading levels are concerned.

If the bonds did trade down based on general weakness in the markets, is there a level at which you would start buying back more bonds?

We -- as Lars mentioned earlier, we don't -- we haven't seen any material impact from our access to the credit market in relation to what is happening in the general market. And this has to do with the type of Company that Ship Finance is, with the charter coverage, and that the banks generally view the deals we structure as very creditworthy, and not subprime, to put it that way. (laughter)

Well, in relation to the bonds, we have effectively bought back bonds indirectly through bond swap lines, where we currently hold $100 million of bonds through these instruments, where we effectively reduce the interest rate from the fixed 8.5% coupon to LIBOR plus 1%. And we look at this from time to time. And we view an investment in bond as we view any other investment. If we find that to be a good investment for Ship Finance, we will do that.

(Operator Instructions). There are no further questions. Please continue.

Thank you very much, everyone, for attending the Ship Finance second-quarter earnings call. We hope you found the presentation and the material informative. And everything will be available on our Website.

You are also welcome to contact us through the telephone numbers in the press release if you do have further questions. Thank you.

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