SFL Corporation Ltd (SFL) 2007 Q4 法說會逐字稿

Ladies and gentlemen welcome to the Ship Finance International conference call. Today's conference is being recorded. At this time I would like to turn the conference over to your hosts today, Mr. Ole Hjertaker, CFO; and Mr. Lars Solbakken, CEO. Also there will be a question and answer session following today's presentation. Please go ahead gentlemen.

Thank you very much, and welcome to all participants to Ship Finance International's fourth quarter conference call. From the company here today we have the Chief Executive Officer, Lars Solbakken, and my name is Ole Hjertaker, and I am the Chief Financial Officer.

We'll then turn to page number two in the presentation that is available on our website. Before we begin our presentation I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expect, anticipate, intend, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operation to be materially different from those set forth in the forward-looking statements.

Important factors that could cause actual results to differ include conditions in the shipping, offshore and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

Page number three; today we will cover the fourth quarter of 2007 and we will discuss the highlights and also subsequent events. We will also discuss the financial results for the quarter. At the end there will be a question and answer session. In addition we have also included some more information on Ship Finance and our charter overview, and we've also enclosed some information related to our accounting and specifically the breakdown of our finance leases and our deferred equity.

The board of directors has declared a dividend of $0.55 per share. Over the last four quarters this represents $2.20 and a dividend yield of 8% based on the closing price yesterday.

The net income for the quarter was $52 million or $0.72 per share. During the quarter $16 million, or $0.22 per share of profit share accumulated, which is an increase from the $6 million or $0.08 per share accumulated in the third quarter. In addition in these quarterly results there's also $15.2 million of profit share that accumulated in the first quarter but has not been recognized until this quarter.

This quarter there was also a $6 million or $0.08 per share non-cash negative adjustment in mark-to-market of derivatives relating to our interest rate swaps, and this is mainly due to lower interest rates compared to the third quarter.

We have an increased fixed rate charter hire backlog, and if you exclude profit share, our net fixed rate contributions from operations was $108 million or $1.49 per share. This is up 2.6% over the third quarter.

If we include profit share and also a vessel that is not consolidated into our accounts, based on U.S. GAAP, the fixed rate contribution is $125 million or $1.72 per share. And we will go into more detail on that later in the presentation.

We have continued to reduce our non-double hull tankers, and in the fourth quarter we announced the sale of three additional. Following these sales we will only have six non-double hull vessels remaining and all these vessels are chartered out on medium to long-term by Frontline. We will have an operating fleet of 57 vessels, and we also have 12 vessels, new buildings that we have ordered.

Next page; we now have six offshore supply vessels in operation as of January 2008. Four vessels were delivered prior to the fourth quarter and were therefore in full operation during the quarter. One vessel was delivered in mid-October, and then we took delivery of two vessels in January while we also sold one vessel, so we net have six vessels in operation.

We have also recently announced a new 12 year bareboat charter for two container vessels. These are chartered to an Asia based regional liner company and our fixed rate charter backlog has been increased by $170 million over this period.

We have also initiated a share repurchase program, and 692,000 shares have been accumulated so far, of which 349,000 shares were accumulated by the end of the fourth quarter. we have utilized equity total return swaps to finance this program and in our accounts for the fourth quarter there was a $900,000 gain in mark-to-market of derivatives related to these shares.

The concept of the share repurchase program is, for us, an instrument in the toolbox where we have a very opportunistic approach to how we use that. We see that we have a higher yield on our equity than our funding rate under the total return swap. Therefore there is a margin there that we can take advantage of. Using these total return swaps requires us to reserve 20% cash deposits and this is reflected in our balance sheet as restricted cash. Our key focus going forward is to focus on new investments primarily, and of course take advantage of opportunities as we see them, also relating own stocks.

The board has also approved a dividend reinvestment plan and direct stock purchase plan, which we expect to be announced in a separate press release very shortly. This is due to the fact that we have a large number of retail shareholders in the U.S. and we received a lot of requests for investing on this basis from our shareholder base.

In our profit and loss statement this quarter we have, for the benefit of our analysts and investors, have disclosed more details in our total operating revenues. We have in this quarter illustrated and showed the revenue lines both from the operating leases, the finance leases, and then subtracted out the revenues which are classified as repayment of investment and finance lease. Ship Finances has most of the assets classified as finance lease based on U.S. GAAP, and therefore a very significant portion of the charter hire does not appear normally in the income statement. This is illustrated by the negative amount which was $42.6 million for the quarter and $173.2 million for the full year.

We have also recorded $52.5 million in profit share for the year, which will be paid to us by Frontline in March this year.

If we look at other financial items, there is a negative $6.2 million. This consists primarily of a negative $6 million mark-to-market on our interest rate swaps and approximately $1 million of positive mark-to-market relating to our equity total return swaps. If you look at the negative impact on our mark-to-market of interest rate swaps, a reduction in interest rates is in reality a very positive event for Ship Finance, plus we have covered 70% of our financing exposure but we still have 30% open so a reduction in interest rates actually reduces the interest cost going forward. But on a mark-to-market basis we get this non-cash effect.

Next page; in our balance sheet we have most of our assets classified as investments in finance lease. There is also a $226 million of deferred equity which is not recorded in our balance sheet. This relates to the initial transaction, and some subsequent transactions when we acquired vessels from Frontline, and we were required, due to the related party nature at the time, to record these assets based on Frontline's book value at the time and not on the acquisition price. This deferred equity is amortized back to our equity, in line with the lease schedule we have on the specific vessels.

Next page; in the cash flow statement I just want to point your attention to the first line under investing activities. This is where the repayment of investment and finance lease appears. This is the same amount as we showed on top of the income statement as the deduction from the charter rates received. This is a part of our cash charter rates, but due to our accounting bases where we have lease accounting this flows through the cash flow statement only, and does not appear on our net income.

Next page; Ship Finance's operating performance is what the management focuses more on and we generate a significant cash flow per charter. This is based on our large performing fleet, and we generated from our charters $138 million this quarter compared to $133 million in the previous quarter. If we deduct vessel operating expenses and general and administrative costs, we have a contribution before interest, taxes, depreciation or administration, or effectively the EBITDA before profit share of $109 million this quarter compared to $106 million the previous quarter. if we also add in the profit share accumulated in the quarter, not as booked over P&L, but accumulated in this specific quarter, the contribution EBITA or EBITDA, increased from $111 million in the third quarter to $125 million in the fourth quarter which is a 13% increase. A popular measure for dividend pay out companies is contribution after interest. We paid $34 million of net interest in the quarter, or $0.47 per share.

Next page; Ship Finance started as a pure tanker in 2004 where all the OBOs, or oil boat ore vessels, combination vessels that can trade both in wet and dry, were all trading in the tanker market. Growth in the company has been executed without issuing equity, and this has primarily been fueled by the profit share from Frontline, which has been very substantial over this period. The growth into bulk container and offshore has only been over the last two years, and over time we expect to see a further balancing in all these segments, and particularly container and offshore are viewed as very interesting growth areas for us currently.

For us as we can target several segments we don't need to only focus on one segment and we can look to do the best deals available across these segments and across the market cycles in these segments. What we see in the current market environment where financing is becoming more challenging to put together for many companies, we see an increased deal flow and we also have very good access to transactions. We are well funded to grow, as we still have surplus capital for investments and we think that we can generate very interesting new projects going forward.

Next page; we have a very unique order backlog and companies with large charter backlogs typically have five to seven years coverage, while we are in a different league with 13.5 weighted average charter coverage. This is $5.6 billion or $77 per share, while EBITDA from this charter backlog is around $61 per share. These numbers are, of course, before profit share, and do not include any re-chartering after the end of the current charters.

Next page; we have a history of paying stable quarterly dividends. The dividend announced today is $0.55 per share, which equals an 8% dividend yield, based on yesterday's close price.

We have invested significant amounts in 2007 but have also received significant net proceeds from sales of single hull tankers, which we have reinvested to support a longer-term dividend capacity. And we expect that new transactions will increase the dividend capacity, going forward.

Next page; the profit share agreement with Frontline has been very favorable for the company. The original charters were structured much lower in the tanker cycle and therefore have a low profit share threshold. On average, we have received $84 million per year over the base charters, over a four-year-period. This represents more than $330 million over this period.

Our dividends are based on distribution capacity, exclusive of this profit share contribution and therefore, this can help the company grow even faster than we would have otherwise been able to.

Next page; we have a close slide with the sensitivity relating to the profit share agreement with Frontline. Due to Frontline's third party charter coverage, the profit share is very robust, even in a very slow market. Frontline has sub chartered on all their remaining single hull tankers and also all the OBOs are chartered out, essentially long-term.

This illustration shows the sensitivity versus market earnings, while the final profit share will depend on actual earnings on a vessel-by-vessel basis. As we can see, based on Imarex forward rates as quoted currently, which are in excess of $60,000 per day for the last three quarters of the year that this could illustrate that we would get the profit share this year in line with the average.

Clarksons have reported average VLCC earnings in the region of $100,000 per day, so far for the year, for modern vessels. But of course, we would only know what the profit share will be after the vessels have generated their revenues for the year. But also, this illustration shows that, even when the average rate is below $15,000 per day or more than $11,000 below our base charter rate with Frontline, there will be a profit share contribution in 2008. And we see the same picture also in 2009.

Next page; we currently have $2.3 billion of interest bearing debt, as of December 31st. This is a combination of $1.8 billion of bank loans and approximately $.5 billion of bond loans. We have approximately 70% of our interest rate exposure fixed, for a combination of fixed interest rates, interest rate swaps for interest compensation causes with charterers.

We have several new projects, which have been financed on a stand alone basis with no or very limited recourse to Ship Finance. And this improves our investors' position and, of course, the risk for Ship Finance. And our focus is to continue diversifying the fleet, the customer base, on this basis.

We do have significant capital available as equity in new projects. We reported $79 million of net cash per year-end, which includes $1.1 million of cash and 100% (inaudible), which is not consolidated based on U.S. GAAP. We will also receive $52.5 million of profit share from Frontline for the year 2007. This is payable in March this year.

We have announced the sale of the single hull vessels and the two vessels that are scheduled to be delivered in the first quarter of 2008 is estimated to give us net proceeds of $40 million, after paying compensation to Frontline and paying down the debt associated with these vessels. And we also have $85 million available under our revolving credit facility.

On top of this, we have several vessels without any loans attached and we estimate that we could borrow in the region of $150 million to $200 million against these assets if we would like to.

Next page; so as a summary, the net income for the fourth quarter was $52.4 million or $0.72 per share. Our profit share increased significantly, up from $5.5 million in the third quarter, to $16.1 million in the fourth quarter. The fourth quarter also includes the $15.2 million of profit share, with respect to the first quarter of '07. We have an improved operational performance in the quarter, with a cash contribution from operations, after vessel operating expenses and G&A costs, effectively, EBITDA from operations increased 13% to $125 million.

We see significant growth opportunities in large diverse markets and we have announced approximately $1.1 billion of new transactions in 2007. 12 non-double hulled vessels have been sold and effectively replaced by new projects with a longer-term predictable cash flow. We have a strong liquidity position to fund equity portions in new investments and several projects are in the pipeline.

And finally, the quarterly dividend is maintained at the high level of $0.55 per share, which gives an 8% dividend yield based on the closing price yesterday. And new projects are expected to grow the dividend capacity, going forward.

And we'll hand it over to the operator for questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from Jonathan Chappell, from JP Morgan. Please go ahead, sir.

Thank you. Good afternoon.

Yes, hi.

Ole, I have three questions regarding the current environment and your growth trajectory. The first surrounds banks and the credit environment out there. You know, we've heard a lot of stories about certain European banks that are, quote/unquote, closed for lending because they've taken on more than they could chew. What are you hearing from your banking sources? Are they open to people like Ship Finance? And are they willing to lend to projects in what we could, I guess, call an uncertain macro environment right now?

To your question there, I would say that we see a very good financing market for us. I think what we have seen is, in a way, a (inaudible) of the market where the strong companies, with the strong balance sheets, still have good access to capital; while other, call it less strong companies and maybe more projected related companies are struggling a lot in finding capital. And with our balance sheet and the leverage against our assets, I think it's fair to say that the banks view Ship Finance as a very, very strong credit.

Just as an illustration, the fleet on charter to Frontline, the asset value representing those vessels is in the region of $3.5 billion; while we have outstanding secured debt against those vessels, in the region of $1.3 billion.

So, there's a significant buffer there and this is exactly what the banks are looking for; a strong company that can survive a potential downturn in the market.

And with respect to your question on the European banks, there have been a lot of terrible loans, of course, in the market. What we have seen is that most of the banks, even the banks who apparently, you know, shut their doors a little bit in the fall, have started opening their doors a little bit but on a very selective basis.

But for us, not such a challenge because this was only a few banks. We have more than 20 banks in our banking syndicate. So, while some banks are reluctant to do business, other banks were very eager to do business. So, as long as we maintain a very active relationship with our banks, we see that we have access to capital and we're not relying on just one or two.

Okay. The second question relates to opportunities. Are you seeing more owners who may have built assets on a speculative basis back when times were a little bit better, having problems finding the financing? And are there more projects coming across your desk that you think may have better return criteria?

Yes, it's Lars here. We're seeing projects with better returns than we did last year. And we see some good opportunities to invest now with higher returns and project characteristics that we like. So we expect it to be a quite active year for us, with good volumes.

We did $1.1 billion last year. We were looking at a large number of projects but many of them did not meet our return requirements. And so we turned them down. But now we're seeing many more projects that are meeting our requirements.

Okay. And then the last thing is just balancing, you know, new investments, new projects with the dividend. Your backlog just continues to increase and the charter tenures are longer as well. But the acceleration of the dividend increases has kind of slowed of late as you've been more in an investment mode.

When do you see more of a return to the distribution rather than the reinvestment of cash, as far as the profit share that's generated and other excess cash are concerned?

Of course, our target is to increase our dividend distribution over time. And we will do that through identifying and doing investments. It's fair to say we did a significant volume in 2007. We also sold 12 single hull vessels and effectively reinvested capital that came open relating to those.

So for us, what's really important is to build a very long-term predictable dividend base to insure that we are not in a position where we maybe have to reduce our dividends out in the future.

Right.

We're also very concerned, or focused on making sure that we continue to reinvest to build on our dividend base because, as you know, any vessel will have a finite life. And we have to make sure that we do this on an ongoing basis. That's also why we have a fairly steep repayment profile on our debt, even though, as I mentioned earlier, we have a relatively moderate leverage of our assets.

In a way, that is a way to preserve capital and also facilitate future growth. Also, in this very slow environment, this creates reserves where we can act when others probably can't.

Is there a targeted debt pay down for 2008?

We don't have a disclosed targeted pay down. We have a debt repayment profile, essentially, on most of our debt. And we believe that we may re-borrow some of that but we see that as having a conservative, long-term profile to support the dividend capacity, not just in the near-term, the next few quarters, but on a very long-term basis.

Okay. Thank you, Ole and Lars.

Thank you.

We have our next question from John Kartsonas from Citigroup. Please go ahead.

Hi guys.

Hi.

Two questions here; first of all your Cap Ex, there was some shift between the years, and Q4 was below what you guided in the previous quarter. What's going on there? Is there something that, is there some new deliveries that are moving to 2008 or?

There were some deliveries of the supply vessels that moved into 2008.

Okay and why is there then the increase in 2009?

Yes and also on the (inaudible) vessels we have, I think we included more of them in 2008 and we have pushed whatever that leaves into 2009.

Okay so that increased 2009 in Cap Ex. And then on the depreciation, first of all should we assume that going forward all these vessels will be operating in leases so there won't be any more depreciation? And second, is there any way you can give us some guidance for '08 maybe on the depreciation line?

I don't have the depreciation line in front of me here, but in the fourth quarter we had most of our assets that are on operating lease in operation. So you should get a relatively good guiding from our P&L statement fourth quarter and what will come on top of that is of course that we took delivery of a net increase of one vessel early in the first quarter of 2008.

Okay so if I take the fourth quarter as a run rate plus the one in Q1 that would get me there, right?

Yes, that should be a good rough estimate.

Okay. Okay, that's all I had, thank you.

Our next question comes from John Parker from Jeffries. Please go ahead sir.

Hi, I just wanted to clarify in the profit share payments, are those always going to be in March even though you're now accounting for them on a quarterly basis?

Yes, the profit share payments will continue to be in March the following year. The change we did in the profit share agreement was more related to how we can accumulate that and project those in our P&L statement, but the cash effect of it will be the same in March the following year.

And also I think the recent spike in tanker rates exceeded a lot of expectations, and I'm wondering if you have a view on why the spike was so large.

We don't operate directly in the tanker market so that is probably a question that others may answer better than me why that happened. It's usually a combination of factors and what we saw was that the tanker rate went up much faster than anyone anticipated. The winter market was a bit slow coming and then when it first entered the market was much tighter, and therefore the rates went through the roof in late December. We're also seeing a very healthy market going into 2008, although it has slowed down a little bit from the peak. Also in the forward rate we see good expectations in the market for a strong year in 2008. But we cannot explain exactly why the spike happened.

For the weak market in autumn I think that a lot of shipments were delayed and of course it's also related to oil prices.

Okay. You disclosed your kind of charter backlog, your cash flow backlog and your tenor. Assuming that there are no call options exercised on (inaudible) vessels, could you comment on what might drive people to actually call the vessels away from you and what plans you might have if a lot of vessels are called away, to replenish your backlog?

We have a charter backlog currently of $5.6 million and EBITDA of $4.5 million assuming no call options are exercised. If all call options are exercised this backlog will be reduced by approximately $1 billion. And we are not so concerned about that because we have a big order backlog as it is. Even if they are called at the earliest possible time we have staggered maturities on these call options and if they are exercised we get a better return actually on the projects for early termination than if the projects run through the end of the life. So we will then get a lot of cash to reinvest.

So the question is then really do we see a deal flow, or will we be able to reinvest this capital on top of the growth that we need to build into the company to increase the dividends beyond that. And I think we are quite comfortable with the situation as it is.

I think it's important that there are no purchase options on the Frontline fleet, which is of course a very large portion of our total fleet, and there's no purchase options related to that part of the fleet.

Okay. What do you think might drive people to exercise the (inaudible), would it just be an increase in asset values, would it be an increase in --?

If they want to exit or it certainly could be they could refinance at better terms. But of course it's structured that the early purchase option is typically more expensive than later. So we do not expect any rush of purchase options, many of these are into the future.

Okay. And final question, I realize that most of your assets are in fixed long-term charters, but if you look forward and if you were of a view that we're going into a global economic slowdown, or even a U.S. economic slowdown, which of the sectors that you are invested in, or that you might invest in, do you think would be most impacted by that? And which ones would you perhaps steer clear of and which ones would you be more likely to invest in, if that were your view?

I think that, at least if you look at the market in total, the tanker market looks reasonably healthy, supply and demand, and we're not that concerned about the tanker market. Also the option market looks reasonably healthy going forward. So those sectors we're not that concerned about. Of course the dry bulk market where we are not that exposed, but we have a few vessels, could be exposed if there's a slowdown in the world economy. But of course all our vessels are more under long-term charters and a lot of our vessels have been answering into charters when values and range were much lower than today.

So if you take the Frontline fleet, even if you had substantial reduction in values we could be hurt on the profit share. But values are -- it wouldn't be any problem even if there were substantial reduction in values.

Okay. Thanks very much for your help guys, good quarter.

We are pleased with actually the position we are in, and even if there is a slowdown we don't expect any strong impact on Ship Finance. But there will be some impact if there is lower profit share, but overall the tanker market looks reasonably healthy.

Okay, that's all for me, thank you very much.

Our next question comes from Justine Fisher from Goldman Sachs, please go ahead.

Good morning.

Good morning Justine.

The first question that I have is about the business that you're seeing from various segments of the shipping market; are you seeing any more inquiries for your business as a counter party in any particular segment that you're in? Or are you seeing business opportunities across the board?

We see a general increase across the board, which of course has to do with the access to capital in the market, specifically also for some of the projects with more project focused companies than we were able to do before, but where they don't have that kind of access to funding currently. So we see it across the board and we see the current characteristics higher now than we saw, compared to last year for instance.

And you actually touched upon what my second question was going to be; because I was going to ask whether you guys are seeing increased business from people who may have gone straight to the banks for borrowing previously like a Nordair or a DVV or something like that, and they didn't get financing from the banks because either they didn't have a longer relationship with the banks, or their credit ratings weren't necessarily what they needed to be.

Do they then say, "Oh well we can't get money at the banks, we'll go to Ship Finance", because you guys are a middle man with a better relationship with the banks, they'll sort of do the borrowing through you. Are you seeing increased inquiries from counter parties like that?

We do that also, but I think as a general note our product, you know doing a transaction with Ship Finance for companies; we can deliver in a way a much better cost of capital than most companies can do themselves. And it has to do with the very long term nature of our business, predictable, and our investors, we think, expect a lower total return on equity year-over-year than they do when they invest in more, say a spot tanker company for instance.

So if you combine the cost of our equity with our focus on structuring the right debt structure in each and every project, the combination of that gives a very competitive cost of capital. And we continued to be competitive basically in all market environments. If their interest rates are high and total return expectations for investors are higher, we still are competitive on a relative basis. So we think we are positioned to do business in all market cycles basically.

Are you getting more questions from the banks about your counter party risk? I mean I'm looking at slide 18, and obviously Frontline and Seadrill and Golden Ocean, all of those are companies that the banks would be familiar with. But are they saying to you, "Hey guys are you seeing inquiries from people who were knocking on our door last week, and we didn't give them any money, so now they're coming to you"? Are banks questioning you more about your counter parties' credit risk?

No, but in a way we take care of that also through the fact that we structure our new projects as, in projects effectively, where we find a stand with no or very limited guarantees from Ship Finance. Which means that the banks will actually have to take an active view on the risk profile in the specific project itself. So for us in addition of course to do our own risk assessment relating to different counter parts, we also get a second opinion in a way, from the banks that do their credit evaluation of the chartering counter parts.

Okay. And then the last question I have is just about bond repurchases. I know your bonds are still trading pretty close to par, but would you guys look to buy those back more? Buy back additional amounts of bonds this year; is there a price at which you think that would be attractive?

Well we are very happy with the bond as it is. As you know the bond was an integral part of establishing the company back in 2003, we face an 8.5 coupon, it has different call options in 2011, it's a zero call option. And also our net exposure to the bond has been reduced substantially as we hold $130 million, approximately, of bonds ourselves. So of the 449 of bonds we control around $130 million. So if you compare that to our overall debt portfolio in excess of $2 billion we see that the relative cost of the bond is not very large. We have increased our, are acquiring some bonds, but we have a very opportunistic approach to this, as we do with the share repurchase program which is on a similar financing type basis.

That is we view this as any investment and we put our capital to use where we think we get the best returns at any given time. So if we see other projects that give us better return cash rates, we do that instead. But there's no need for us to do anything with the bond loan currently.

Okay, thank you very much.

Thank you.

As there are no further questions, I would like to hand the call back over to you for any additional or closing remarks.

Thank you. And thank you very much for all listeners to this call. The presentation is also posted on our website and we look forward to build a company for you. Thank you.

That will conclude today's conference call, thank you for your participation ladies and gentlemen, you may now disconnect.