SFL Corporation Ltd (SFL) 2010 Q2 法說會逐字稿

Good day and welcome to the Ship Finance International Q2 2010 earnings release conference call.

This conference is being recorded.

At this time I would like to turn the conference over to Mr.

Ole Hjertaker, CEO.

Please go ahead, sir.

Thank you very much and welcome, everyone, to the Ship Finance International second-quarter conference call.

My name is Ole Hjertaker and I am the CEO, and with me here today I also have Senior Vice President Harald Gurvin, and Vice President Magnus Valeberg.

Before we begin our presentation I would like to note that this conference call will contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, 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 operations to be materially different from those set forth in the forward-looking statements.

Important factors that could cause actual results to differ includes condition 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.

The Board of Directors has declared an increased cash dividend of $0.35 per share.

This is the second dividend increase in 2010 and represents $1.40 per share on an annualized basis, or in excess of 8% dividend yield based on closing price yesterday.

We have now declared dividends for 26 consecutive quarters and paid $11.76 in dividends per share over this time period.

The net income for the quarter was $43.6 million or $0.55 per share.

There were only minor adjustments this quarter linked to sale of a single-hull VLCC and the interest rate -- and some small adjustments relating to the interest rate hedging portfolio.

Our gross charter revenues including subsidiaries accounted for as investment in associates was $196 million or $2.47 per share excluding profit-share contribution.

The EBITDA equivalent cash flow including profit share was $184 million or $2.34 per share.

The profit-share contribution was in line with the first quarter, whereas the spot market rates in the third quarter has today been lower than in the second quarter.

Clarksons, an independent ship broker, reported average VLCC earnings of $58,200 per day in the second quarter, while they so far into the third quarter has reported $29,100 per share.

We do expect that this may have an effect also on the profit-share contribution in the third quarter.

But at the same time we know that many of Frontline's vessels have been subchartered on profitable terms above our base rates, and these vessels are then expected to provide a positive contribution to the profit-share calculation irrespective of the spot market.

In total, more than $500 million in profit share has accumulated since 2004 on top of the base charter rates.

One of the very important features -- I'm sorry -- we are also pleased to announce the acquisition of three 57,000 deadweight ton Supramax bulk carriers.

These vessels are of a so-called dolphin design and built at draftable shipyards in China.

One 2009-built vessel is expected to be delivered to us in October 2010; one newbuilding is expected to be delivered from the shipyard in December; and one newbuilding in March 2011.

The aggregate purchase price is $100.7 million in total including grabs and equipment.

The payment terms are 20/80, where 80% is payable on delivery.

We have received indications from banks for the financing of 80% of the purchase price.

The charterer of the vessels is a major listed Asia-based logistics company with a market capitalization of approximately $5 billion.

The average net charter rate is approximately $17,000 per day on average, and we estimate operating expenses of $5,300 per day per vessel.

There are no purchase options attached.

This transaction will increase the charter backlog by approximately $160 million.

The earnings-per-share effect on a delivered basis will be approximately $0.02 per share.

We also have secured a short-term charter for a newbuilding 1,700 TEU container vessel.

This vessel is expected to be delivered to us in the fourth quarter of 2010 and is chartered to a major container line at approximately $8,100 per day net, plus an option to extend the charter with six months at a higher rate.

We continue to reduce our single-hull exposure.

The VLCC Golden River has been sold to an unrelated third party for $12.6 million net and was delivered in April 2010.

We have paid $2.8 million in charter termination fee to Frontline.

And net of debt prepayments which were made in the first quarter, we received approximately $4.7 million net cash proceeds.

There was recorded a minor book impairment on the sale of this vessel in the second quarter.

The single-hull VLCC Front Sabang was announced sold on hire/purchase terms in 2008, with final delivery to the buyer scheduled for 2011.

Ship Finance and the buyer have now agreed to terminate the agreement in early September 2010, concurrently with the buyer's intended disposal of the vessel.

Ship Finance will then receive the balance of the lease.

One of the very important features with Ship Finance is our long-term charter portfolio that gives us a very transparent and predictable cash flow.

Ship Finance is in a different league than most of the shipping and offshore companies, with more than 12 years weighted average charter coverage.

We have a total of $6.8 billion fixed-rate order backlog, which equates to approximately $86 per share.

The EBITDA equivalent backlog is $5.9 billion or $75 per share.

These numbers are before profit share and do not include any rechartering after the end of the current charter period.

Charter backlog is very important also for refinancing banks in the current economic climate, where access to capital is not as easily available as in the previous few years.

This is also demonstrated by the very good response we had to the refinancing we completed in the first quarter.

Ship Finance generates a very significant cash flow per quarter.

The overview includes all 100%-own assets, including vessels and rigs classified as investment in associate based on US GAAP.

The EBITDA equivalent cash flow before profit share was $173 million, and $185 million or $2.34 per share after profit share.

From the first quarter to the second quarter, we have had the full quarter with the Suezmax Everbright, which was delivered to us at the very end of the first quarter.

That added approximately $1.5 million to the Suezmax line.

At the same time, two single-hulls were transferred to the low rate to Frontline of approximately $1,000 per day net, which reduced the VLCC line somewhat.

We also in the second quarter had the full quarter excluding the Front Vista, which was sold in the first quarter with a gross effect of approximately $1 million.

At the same time we also had lower operating expenses due to three of the Frontline single-hull vessels transferred to bareboat basis and also the effect of the sale of the Front Vista during the first quarter.

Going forward, we expect the first bulker newbuild vessel to be delivered to us in early October, and the second bulker newbuilding is expected to be delivered towards the end of the fourth quarter.

We also expect to get the first newbuilding 1700 TEU container vessel delivered in October, and whereas the last single-hull VLCC will go on the low rate to Frontline in end September.

The profit share is expected to be impacted by a softer market in the third quarter.

But the profit share will of course depend on actual performance of the vessels, so we cannot make any projections on that item.

We do provide a full breakdown on charter hire per vessel, including the accounting treatment.

This is available upon request to ir@shipfinance.no.

If you look at normalized contribution from our projects and this includes vessels accounted for as investment in associates, the EBITDA -- which then is charter hire plus profit share, less operating expenses and general and administrative expenses -- was $2.34 per share in the quarter.

Net interest in the quarter was $40 million or $0.50 per share.

Normalized ordinary debt installments relating to the Company's projects was approximately $104 million or $1.32 per share.

The net contribution from our projects in the quarter after the above significant repayment of debt was $41 million or $0.51 per share.

This is slightly above the comparable first-quarter cash flow number of $0.49 per share.

The declared dividend for the quarter was $0.35 per share, so there is a good cash flow buffer also after heavy debt repayments.

A significant portion of charter hire is excluded from book operating revenues due to finance lease accounting and also charter hire from assets in subsidiaries accounted for as investment in associates.

With respect to the depreciation, the change in accounting treatment for single-hulls after their respective phase-out dates has an impact.

These vessels have been accounted for as finance leases until now, but will be reclassified as operating leases from the respective vessels' anniversary date in 2010.

This means that the full charter hire will be recorded in revenues, but also that there will be ordinary depreciations relating to these assets.

The timing for the different vessels is that the vessel called Edinburgh was changed on January 5, 2010, with effect in the first quarter.

The vessel Titan Orion was transferred on May 29, so it will have an effect in the second quarter.

The vessel Ticen Ocean was transferred on June 4, so had an effect in the second quarter.

Then the vessels Ticen Sun, which transferred on July 30, and Front Ace, which is scheduled to transfer on September 27, will have an effect in the third quarter.

Therefore in the fourth quarter, we expect to have a full accounting effect.

In the second quarter, there was $608,000 of depreciations relating to these assets, and this will increase to approximately $1.2 million on a full-quarter basis when all vessels are reclassified.

For a detailed breakdown of the accounting effect, please contact us at ir@shipfinance.no.

I would like to highlight under the balance sheet the line investment in associates.

This is essentially the equity invested in the subsidiaries owning three deepwater drilling rigs and a bulker that are not consolidated based on US GAAP.

I would also like to comment that there will be balance sheet reclassifications also relating to the change of accounting for the single-hull vessels.

These will be moved from investment in finance lease to vessels and equipment.

$44 million were moved as of the second quarter, and this relates to three vessels.

This will increase to $70 million when all five vessels have been reclassified.

This will have effect as of September 30.

In the cash flow statement, one item under investing activities is called repayment of investment in finance lease.

This is the part of the charter hire from consolidated vessels that is not included in operating income.

Also I would like to highlight the line called net cash payments to/from investment in associates.

This amounted to $18.2 million net cash in the second quarter.

Under investment in associates, we have preliminary accounts for each of the subsidiaries; and this is available on our webpage.

All these subsidiaries have finance lease accounting, and the net income from these subsidiaries appear in consolidated accounts as a result in associated companies.

Shareholders equity from these associates appear on the consolidated balance sheet as investment in associate, with some adjustments.

We have $1.9 billion net interest-bearing debt on a consolidated basis as of the second quarter.

If you also include the financing of assets classified as investment in associate, this number is $3.7 billion.

It is important to note that less than half of this debt is with recourse to the Ship Finance balance sheet.

The gross remaining capital commitments totaled $250 million, including the new transactions announced today.

Compared to our overall asset base, this is a very moderate number.

As we mentioned, the first of the Supramax bulkers built in 2009 is expected to be delivered to us in October, while the second vessel is expected to be delivered from the shipyard in December.

We also expect to take delivery of the 1700 TEU containership in October.

The third Supramax bulker is expected to be delivered in March next year, while the seven Handysize bulkers are scheduled to be delivered from the third quarter 2011 through the fourth quarter of 2012.

So far we have funded all payments from cash, and we expect to secure financing for these vessels in due course at attractive terms.

We have a very solid charter revenue backlog, as illustrated by the graph for the next few years.

The two largest counterparts are Seadrill and Frontline.

With respect to Seadrill we there have a 100% Seadrill Limited guarantee backing the charters.

All the ultra-deepwater units are subchartered to major oil companies.

We also have a very frontloaded charter rate structure, which corresponds then also to a frontloaded loan repayment schedule.

For the Frontline charters, we also there have 100% Frontline Limited guarantee.

On top of the base charters, we have a profit split arrangement which has generated on average $80 million of incremental cash flow per year.

There is also a $62 million cash deposit as security for the charter payments.

The profit-share agreement with Frontline has generated a lot of additional cash flow for Ship Finance.

The original charters were structured fairly low in the tanker cycle and has therefore had a fairly low profit-share threshold.

In the second quarter, $11.4 million of profit share accumulated, and this will be payable in March 2011.

It has been $80 million annual profit share on average, or around $500 million since 2004.

This has enabled the Company to fuel significant growth.

If we look at the average breakeven time charter level for spot VLCCs in the second half, we estimate this to be only $15,500 per day on average.

This is based on the significant level of subchartering on Frontline's side for the vessels we have chartered to them.

Frontline will report tomorrow morning, and we can therefore not comment on the detailed charter revenues per segment.

Therefore, we would like to summarize this presentation and just highlight that we have again increased the quarterly cash dividend, and we are now paying $0.35 per share, which equates to 8.1% dividend yield.

We did report quarterly net income of $43.6 million or $0.55 per share.

And the accrued profit share in the second quarter was in line with the first quarter at $11.4 million.

The gross fixed charter hire of $195.7 million or $2.47 per share in the quarter is including also the accumulated profit share within the associated companies.

We have increased the fixed charter backlog after -- in connection with the new transaction.

Also we have diversified our fleet further through the acquisition of the three Supramax bulk carriers.

We have also added a new long-term chartering counterpart and built on our $6.8 billion fixed-rate charter backlog.

With that, we would like to open up for questions.

(Operator Instructions) John Parker, Jefferies.

Hi, Ole.

It is nice to see you doing new projects again.

I am wondering if you could give us a little bit more color on what made this project work.

Is it the better financing environment for the bank debt?

I see you are going to hopefully get an 80% advance rate, which is certainly helpful.

What are the financial characteristics of your counterparty here that made this work?

And I guess where do you find more counterparties like this?

Yes, we have of course been looking at a lot of projects over the last few quarters, but we have not announced any new transactions as such for some time.

For us it is really important to do the right deal and not do any deal.

In this respect here, we have combined access to, call it, deal flow on the asset side with good access also to the chartering counterpart.

The counterpart in question has an investment grade rating and is a very significant company.

So we are very, very happy with building a relationship with that counterpart.

I think what really made this project come together is not necessarily the advance rate.

I think we could have achieved a similar advance rate, say, two or three years ago.

I think the difference here is what is the risk-adjusted return on the investment.

First of all, vessel values have come down significantly over the last two years.

Also as we see it, when we have a good charter counterpart, we are quite comfortable on the charter rate level.

And then starting from a lower point of course also creates very interesting opportunities for us, linked to the potential residual value of these assets after the fixed-rate period.

These are chartered out for nine years on average with delivery later this year and in early 2011.

So they will come off these charters around the year 2020.

And there are no purchase options attached here, so we of course control all of the upside relating to these assets.

Of course, over time, we will try to build on our relationships with our different clients and, of course, very happy to add this.

It is not a very large transaction, it is $100 million gross; but at least it is a signal of what we see out there.

And we will of course look for other project opportunities.

If we think the projects make sense for us on what you could call a risk-adjusted basis, of course we hope that we can do more projects going forward.

Why were these done on a time charter and not a bareboat basis?

Does the company just not have experience with managing ships?

No, I think from our side we don't have a business model where we have to charter vessels on bareboat.

I think what we have been focusing on is to ensure that we have the right kind of risk-adjusted return.

What we saw a couple of years ago is that there was a very significant competition from many different sources.

We saw on some of the projects we had been looking at, at the time, we saw actually some players offering vessels on time charter basis -- i.e., where you absorb the operating expenses for the vessels -- at the same level as we were offering on bareboat basis.

That said, what we are looking at here, is of course -- we are not afraid of taking on the tactical management.

We will outsource this to of course first-class players in the market.

Of course it is very, very important when you own a vessel to ensure that you do the maintenance program from the start, because what we of course control is the full upside in the residual.

If you look at some of the bareboats we did two or three years ago, when the market was much higher we also linked those to purchase options.

So then you could say that our chartering counterparts had some clear incentives to ensure that the vessels were properly maintained.

Otherwise, of course, you could risk that the counterpart would try to minimize what you could call palliative maintenance, which of course if you don't start with that early it could end up being a very big-ticket when a vessel is eight or 10 years old.

The SFL Avon, you announced a charter; is that a time charter or a bareboat?

That is a time charter.

Okay.

I think you do not yet have financing for that ship in place.

But given that it doesn't have a long-term charter at this time, can you give us an indication, an idea, of what kind of advance rate you might hope to expect on a ship without a long-term charter?

Yes.

We are discussing some chartering -- I'm sorry, some financing options for that vessel and also basically on all the newbuildings.

I don't think I should comment specifically on the percentage finance.

But if you look at the financing which we have done to date, they're typically being between 70% and 80%.

So I think it is fair to assume that we could perhaps do the same kind of financing also on these other newbuildings.

Okay.

And I apologize; you may have disclosed this before.

But can you give us a rough idea of the delivery schedule for the -- is it seven Handysizes that are coming out over the next two years?

Yes, seven Handysizes.

The first vessel is due to be delivered in the third quarter of 2011.

Then there are -- then they will deliver, call it, gradually through the fourth-quarter 2012.

Very good.

That's all I have.

Thank you very much for your help.

Adam France, 1492 Capital Management.

Yes, thank you for taking my question, Ole.

Could you repeat what you said about the rates you need in the second half of the year to earn profit share?

This is based on our estimates.

We believe -- we estimate that to be -- and this is on a VLCC basis only, so it is just what you could call a reference rate.

And this is linked to the specific vessels we have chartered to Frontline, and then Frontline again has subchartered these vessels out into the market.

The profit share is calculated first across the VLCCs we have, and then another tranche across the Suezmaxes.

So the number that I indicated around $15,500 per day is just a sensitivity where we made certain assumptions on the link between the different segments.

We will not make any estimates for the profit share for the quarter, as of course the profit share is generated off the actual earnings of the vessels in question.

Sure.

Very good.

Thank you.

Jon Chappell, JPMorgan.

Thanks, good afternoon.

Ole, a question for you on your capital structure.

You mentioned that you are pretty confident or you have had discussions with the banks at least for the 80% on these new Supramaxes.

But I'm wondering if you are considering any other parts of the capital structure.

Your stock has held in exceptionally well relative to the rest of the market.

Even with your new dividend run rate, your dividend yield is under 8% at the current price.

So your cost of equity is relatively competitive.

With your debt to capital over 70%, do you think you may be approaching the time where you might explore other financing alternatives to bring your leverage back down a little bit and improve your flexibility?

You know, it is always a relative question.

First of all, we have an extreme long charter backlog, so you cannot truly compare our, call it, financing structure to a company with more of an operational exposure.

We have some few smaller vessels, some Handysize vessels, delivering in 2011 that we have not yet fixed charters for yet.

But we do expect to have charters in place for those vessels in due course and well before delivery.

Therefore, when we structure the financing we can do a very different structure with a 12-year charter coverage compared to a one- or two-year coverage as some other companies have.

Our key focus is, of course, to build the distribution capacity over time, and doing that by adding projects and of course maintaining a capital mix that will do that in a conservative manner.

So I can of course not comment on whether or not we would go to the capital market any time soon; but of course as always our focus is on distribution capacity.

Understood.

And then, one more question.

This one might be a little bit detailed, but just the Front Sabang and this new agreement expiring now I guess in September.

How does that change the cash flow expected?

The cash flow expected?

It was previously included with approximately $900,000 per day approximately per month through March 2011.

But then as a compensation for that we will of course get the cash payment now in September.

So there will be a small adjustment there, but this is reflected in the new charter overview that is available to analysts and investors by contacting us at ir@shipfinance.no.

Okay, perfect.

Thanks a lot, Ole.

(Operator Instructions) Phyllis Camara, Pax World Funds.

Hi, good afternoon.

I was hoping you could give me an exact amount of debt that is on the balance sheet that is nonrecourse to Ship Fi?

Yes; that is on the balance sheet.

Let me just do some very quick math as we speak.

Okay.

Or I can certainly do the math.

Is it only the investment in associate amount that is nonrecourse?

Should I look at it that way?

No, it is not linked to that at all.

Okay.

Just bear with me one second.

So if you look at the bank debt on our balance sheet, that totals $1.65 billion.

Okay.

Of the bank debt, let me just do -- you know what?

I think actually to not -- because this is a bit detailed calculation and I don't have the -- I have it on a gross basis.

I have the number ready on a total basis including vessels recorded as investment in associates.

So what I suggest, if you e-mail us at ir@shipfinance.no, we would be very happy to give you the exact number

Okay.

But on an overall basis, we had bank loans as of the second quarter, including investment in associates, of $3.4 billion.

And of that -- and of course on top of that, we have net outstanding under the bond loan of approximately $300 million.

Right.

Of that, the full recourse to Ship Finance was approximately $1.8 billion.

So you could say of $3.7 billion the recourse to Ship Finance is $1.8 billion, or a little less than 50%.

Okay.

Okay.

I mean we will give you the breakdown on what is recourse on a consolidated basis and what is recourse in the associates.

Okay, okay.

That would be good.

Thank you.

I will send you an e-mail.

Then the gross capital outlays of $255 million that you are expecting, that does not include the $69 million that has already been paid to the yards, correct?

Exactly.

So this is just the future payments, and it's the future payments as of June 30, but including and grossed up for the new investments we announced today.

Okay, okay, great.

Thank you.

Thank you.

(Operator Instructions) We have no further questions at the moment.

Thank you very much.

I then would like to thank everyone for participating here in the Ship Finance second-quarter earnings release call.

We in the management will work hard to continue chasing deals and hopefully build the distribution capacity going forward.

We expect to announce our third-quarter results in late November.

Thank you very much.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.