SFL Corporation Ltd (SFL) 2011 Q1 法說會逐字稿

Good day and welcome to the Ship Finance International first-quarter results presentation conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to your host today, Mr.

Ole Hjertaker, CEO.

Please go ahead, sir.

Thank you, and welcome everyone to Ship Finance International and our first-quarter conference call.

My name is Ole Hjertaker and I am the CEO in Ship Finance Management.

With me here today I also have our CFO Eirik Eide, our Commercial Director Peter Lund, and our 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 statement.

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.

The Board of Directors has declared an increased cash dividend of $0.39 per share.

This is the fifth consecutive dividend increase and represents $1.56 per share on an annualized basis, or 7.8% dividend yield based on closing price on Friday.

We now have declared dividends for 29 consecutive quarters and paid out nearly $13 per share in total aggregate cash dividends.

The net income for the quarter was $32.1 million or $0.41 per share.

This is including profit share contribution and the minor gain relating to the sale of two single-hull VLCCs in the first quarter.

The fixed-rate charter revenues in the quarter, including subsidiaries accounted for as investment in associate, was $189.1 million before profit share contribution and $191.4 million after profit share.

The EBITDA equivalent cash flow including profit share was $167.8 million or $2.12 per share.

Despite the weak spot tanker market in the quarter the profit share contribution was marginally higher than the fourth quarter and generated $2.3 million.

According to Clarkson's the spot market so far in the second quarter has been softer than the first quarter and Clarkson's reported average more than VLCC earnings of $33,600 per day in the first quarter and $21,800 per day so far in the second quarter.

Please note that the numbers from Clarkson's do not factor in waiting time for cargo, so actual numbers may be materially different based on actual waiting time for the specific vessels.

Many of Frontline's vessels have been subchartered on profitable terms above our base rate and will provide a positive contribution to profit share calculation irrespective of the spot market.

The base rate for the VLCCs is approximately $26,000 per day, and the profit share generated in the first quarter as I mentioned was $2.3 million.

The profit share calculation is based on contribution on a yearly basis, so we will not have the final number for 2011 until the end of the year.

In total more than $500 million in profit share has accumulated since 2004 in addition to the base charter rates.

In February we acquired a 2007 build jack-up drilling rig from Apexindo, Indonesia's largest independent drilling contractor.

The agreed purchase price was $151.5 million, of which $146.5 million was paid on delivery.

The rig was delivered to us at the end of February and has been chartered back to Apexindo for seven years.

The agreed purchase price is very attractive compared to the estimated charter freight value of $190 million for the rig.

In addition to the fixed charter rate we also have a profit split agreement at the end of the charter where Ship Finance will receive 25% of the charter freight market value in excess of $70 million.

The rig is accounted for as an operating assets and fully consolidated into our balance sheet.

Net of estimated depreciation and interest the rig is contributing $0.04 to $0.05 of earnings-per-share capacity per quarter and slightly more in distributable cash flow.

In March we announced the acquisition of two 13,800 TEU container vessels from CMA CGM in combination with long-term time charters [back].

Net acquisition price after seller's credit was $116 million per vessel, which is approximately 30% lower than the construction cost for the vessels.

The vessels were delivered at the end of March and at the beginning of April, and our equity contribution is $25 million per vessel.

The vessels are financed through a French tax lease structure where title to each vessel has been transferred to a French company and Ship Finance's investment is effectively secured by junior mortgages.

The two container vessels will be managed by an affiliate of CMA CGM, and the time charters include a compensation clause whereby Ship Finance will be compensated for any increase in operating expenses.

CMA CGM has purchased options for the vessels, the first time in 2014.

And we are earning a 15% return on our capital, and potentially more based on a profit split arrangement, if a purchase option is exercised.

In May 2011 Ship Finance contracted to acquire four newbuilding 4,800 TEU container vessels and a state-owned shipyard in China, with scheduled delivery in 2013.

The vessels are high specification, so-called wide beam container vessels optimized for higher cargo intake and radically improved speed consumption economics compared to existing vessels of similar size.

The aggregate yard contract price is approximately $230 million, with a majority of the payments due on delivery.

The vessels will be employed by the European-based Hamburg Sud container line for seven years from delivery.

And the net time charter rate will be approximately $26,250 per day per vessel.

We expect to source 75% to 80% financing on these vessels in due course.

And we are continuing the reduction of single hulls in all the vessels.

Following the sale of two single-hull VLCCs in the first quarter, there are only three vessels remaining, of which one is a double-sided vessel.

These vessels are subchartered by Frontline for a longer period and we, therefore, don't expect to be able to sell them for some time.

We have recently announced the sale of two 20-year-old OBOs.

We have here received an early charter termination compensation for Frontline of approximately $14 million, and expect to record a book gain of approximately $5.7 million in the second quarter.

The sale of the VLCCs and the OBOs have freed up approximately $32 million to be reinvested in new projects.

In addition, Seadrill has notified us that they will exercise a purchase option for the jack-up drilling rig, West Prospero in June this year.

The option price is $133 million and we expect around $36 million of liquidity to be freed up in connection with this transaction.

The rig contributed approximately $0.02 of earnings-per-share in the first quarter, and we have adjusted our charter backlog by approximately $170 million as a consequence of the sale.

But we have year-to-date still added around $800 million net in charter backlog.

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 other shipping and offshore companies, with more than 11 years weighted average charter coverage.

We have a total of $7.1 billion fixed-rate order backlog, or the equivalent of around $90 per share.

And the EBITDA equivalent backlog is $6 billion or around $75 per share.

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

Looking at the segments where this cash flow will be generated, we see that offshore is still the largest with 43% or around $3 billion of the backlog, while tankers, where the Company started, now represents approximately one-third or approximately $2.3 billion.

Containers have increased recently through our recent transactions and now stands at around 15% of the backlog.

Over time we expect to further balance these segments, but it is more important for us to do the right transactions than to focus on a specific percentage per segment.

We have recently added to both the container and offshore side sectors, but we see interesting opportunities for growth across all four segments.

Our key focus is on building our portfolio with accretive transactions.

One of the key strengths of the Company is the charter portfolio and our counterparties.

We have a total of 14 customers, and 84% of our charter backlog is with public companies, which gives a very good visibility for both our shareholders and ourselves to monitor the quality of the backlog.

Around three-quarters of the portfolio is with companies with a market cap in excess of $1 billion, and more than 40% is with companies with a market cap in excess of $5 billion.

Also, the charter tender, as indicated per segment on the previous slide, is quite unique with more than 70% of the portfolio in excess of 10 years, and only 3% shorter than five years.

If you look at normalized contributions from our projected -- of our projects, and this includes vessels accounted for as investment in associates, the EBITDA, which we defined as charter hire, plus profit share, less operating expenses and general and administrative expenses, was close to $700 million the last 12 months.

Net interest was $158 million or approximately $2 per share, but more importantly, our normalized ordinarily debt installments relating to the Company's projects was more than $400 million, or approximately $5 per share in the period.

We have approximately $3.6 billion of net interest-bearing debt.

And this loan amortization than represents approximately 9-year profile to zero.

This compares to our weighted average age of around five years in the fleet.

And if you continue repaying the debt at this rate, we will then be effectively be debt-free when the vessels on are on average 14 years, while estimated commercial life for the vessels is 25 to 35 years, depending on segment.

The net contribution from our projects the last 12 months, after the above significant repayments of debt, was $137 million or $1.73 [percent].

The aggregate declared dividend for the four quarters was $117 million or $1.48 per share.

So there is still a good cash buffer also after our heavy debt repayments.

With that I will I will leave the word over it to Mr.

Eirik Eide, our Chief Financial Officer, who will take you through the numbers for the first quarter.

Thank you, Ole.

On slide 9 we have shown our pro forma illustration of cash flows for the quarter compared to the fourth quarter of 2010.

It is only a guideline to assess the Company's performance and is not in accordance with US GAAP.

For the first quarter 2011 the Company had an EBITDA excluding profit share of $165.6 million or $2.09 per share compared to $167.6 million or $2.12 per share for the fourth quarter 2010.

For the VLCCs and the Suezmaxes the revenues were somewhat reduced compared to the fourth quarter, mainly due to a reduction of $1,000 per day for those vessels on finance leases to Frontline, as according to the agreed lease schedules.

For the chemical tankers revenues were in-line with the fourth quarter.

And for the container vessels they had earnings in line with the fourth quarter, but we expect this to increase going forward, as we have taken delivery on our vessels chartered to CMA CGM, and entered into a new charter for the SFL Avon at a rate of $11,750 per day for the next five months.

The CMA CGM vessels are expected to contribute approximately $7 million per year in free cash flow or approximately $1.75 million per quarter.

For the drybulk vessels earnings improved to $17.9 million compared to $17.2 million in the fourth quarter due to delivery of two newbuildings, the SFL Yukon late in the fourth quarter and the SFL Sara on February 24.

We expect the positive contribution for our drybulk vessels to continue going forward, with the addition of another newbuilding scheduled for delivery early in July.

On the offshore side revenues were $103.7 million compared to $103.8 million in the fourth quarter.

We took delivery of the new jack-up drilling rig Soehanah on February 28, and this transaction is expected to generate revenues of approximately $6.4 million per quarter going forward.

The reason why revenues were slightly down from the fourth quarter is simply the fact that we had 92 revenue days in the fourth quarter compared to 90 in the first quarter.

The vessel operating expenses were slightly up from last quarter due to delivery of the newbuilding drybulk vessels.

The profit share, as Ole mentioned, for the VLCCs for the quarter was again negatively impacted by the soft tanker market, and came in at $2.3 million compared to $2.0 million in the fourth quarter.

So, overall for the quarter, we have an EBITDA of $167.8 million or $2.12 per share on a pro forma basis.

As we have described in previous earnings calls, our accounting statements are slightly different from those of an ordinary shipping company due to the fact our business strategy focuses on long-term charter contracts, and as result a large part of our activities are classified as finance leasing.

Therefore, a significant portion of our charter revenue is excluded from our book operating revenues, and instead booked as revenues classified as repayment of investment in finance leases, results in associates on long-term investments, and interest income from associates.

Our new container vessels on long-term charters to CMA CGM has been accounted for as investment in associates.

Since the vessels are financed through a French tax lease our investment of $25 million per vessel is structured as a loan and secured by a third priority mortgage.

Hence part of our income from these vessels will be reflected under interest income from associates and long-term investments, and another part will be reflected under results in associates.

I will also mention here that the increase in results in associates, which came in at $13.3 million compared to $11.7 million in the fourth quarter is due to the reclassification of the West Prospero, which took effect as of December 31, 2010.

So overall and according to US GAAP the Company showed net income of $32.1 million or $0.41 per share.

Now moving on to the balance sheet, where we show $90.1 million in cash at the end of the quarter, plus $5.6 million in restricted cash.

Stockholders equity stands at just over $1 billion, which includes $177.9 million of deferred equity, as we mentioned in the footnotes.

Newbuildings and vessel deposits are steadily increasing quarter by quarter, as we continue to progress on our newbuilding program and paying installments on our newbuilding contracts.

The lines investment in associate and amount due from related parties long-term reflect our investment in the Seadrill rigs, while the investment in the CMA CGM vessels are shown under other long-term assets.

As we took delivery of the second CMA CGM vessel after the end of this quarter, this vessel is not yet reflected in this figure.

Long-term interest-bearing debt came in at $1.86 billion on an unconsolidated basis, but during the quarter we have repaid approximately $97 million of debt and drawn down $125 million of the convertible bond loan, plus the $85 million long-term financing for the jack-up rig Soehanah.

The book equity ratio including deferred equity was 32.3% at the end of the quarter.

So on the cash flow statement we show net cash flow from operating activities under US GAAP of $70.1 million in the first quarter compared to $132.2 million in the first quarter of 2010.

Net positive cash flow after investment and financing activities was $3.1 million for the quarter, resulting in ending cash of $90.1 million.

As we have commented earlier, repayment of investment in finance leases under investing activities is part of the charter hire from consolidated assets that are not included in operating income.

The line cash received from/investment in associates are only a part of the contribution from our subsidiaries, the balance is recorded as interest income from associates and reflected in the P&L.

Now moving onto the next slide which shows selected first-quarter income figures for each of the subsidiaries accounted for as investments in associates.

These are our deepwater units, one jackup drilling rig, and the company related to the first of the two CMA CGM vessels where a part of the income is reflected here.

All these subsidiaries have finance lease accounting, except for Bluelot Shipping Company, related to the vessel CMA CGM Magellan, which is accounted for as an operating lease.

Net income from these subsidiaries appear in the consolidated accounts as results in associate companies, and the interest on intercompany loans appear as interest income from associates and long-term investments in our consolidated P&L statements.

Our net interest investment in these subsidiaries is in the form of intercompany loans and equity contribution, which appear in the consolidated balance sheet as investment in associate and long-term investments and amounts due from related party long-term.

Now moving on to slide 14, including undrawn credit lines, the Company had liquidity of $144 million at the end of the quarter.

On the financing side we show approximately $2 billion of interest-bearing debt at quarter end, including the current portion.

In addition, our subsidiaries classified as investment in associates have about $1.7 billion of interest-bearing debt, totaling $3.7 billion of interest-bearing debt in the Company.

In February 2011 we completed an offering of $125 million senior unsecured convertible notes.

These notes have an annual coupon of 3.75%, and the conversion price now stands at $26.55 per share following our dividend payment for the fourth quarter of 2010.

Ship Finance has therefore a strong liquidity position with capacity for further investments going forward.

During the first quarter we have been very active on the financing side, securing long-term financing of more than $600 million for our vessels.

We secured a $75 million bank financing for three of our Supramax drybulk vessels at approximately 80% of the contract price.

We still had two Supramax vessels under construction for delivery later this year.

We also secured a loan of up to $95 million for the jack-up big Soehanah, where $85 million was drawn on delivery of the rig and the facility matches the term of the bareboat charter, which is seven years.

Also we have entered into long-term financing agreement for seven newbuilding Handymax vessels and one container vessel delivered in 2010, which was previously not financed.

This is a ten-year facility financing approximately 77% of the vessels' contract price.

In addition, we have agreed with some of our banks to extend the maturity on a facility related to five VLCCs on charter to Frontline.

The facility originally matured in the second quarter of 2012, but is now extended until the second quarter of 2018 on more or less the same repayment structure as before.

Moving then to page 16, this means that we have total capital requirement of $173 million for our vessels that are not yet financed, as you can see from the table in the bottom right corner.

As a result of committed financing we expect to be cash positive from these investments in the second quarter and also in the second half of 2011.

The only vessels that have not yet been financed on long-term basis are our newbuilding container vessels under construction in China that have been fixed out on seven-year charters from delivery.

These vessels are delivering in 2013, but we are ready in advanced discussions with a financing institution regarding these vessels.

If this is completed, the total net capital requirement will be marginal.

Now the tanker market continued to be weak during the first quarter, and Clarkson's reported average earnings of $33,600 per day compared to $27,600 in the fourth quarter.

As Ole mentioned, these rates do not include waiting times, so average rates are in effect lower.

Our profit-sharing agreement with Frontline provided an additional $2.3 million in revenue, above the base charter rates for the quarter.

This is the 29th consecutive quarterly profit share since the inception of the Frontline charters in 2004.

So far in the second quarter, Clarkson's report average earnings of $21,800 per day for a moderate VLCC.

As Frontline is reporting this week, we cannot comment further on the detailed charter revenues per segment.

Then to summarize, for the first quarter 2011 the Board has declared an increased quarterly cash dividend of $0.39 per share.

This is a dividend yield of 7.8% based on the closing price as May 20.

The quarterly net income of $32.1 million or $0.41 per share, and aggregate EBITDA of $167.8 million or $2.12 per share.

We have shown premium access to financing in capital markets in this quarter, entering into financing agreements for more than $500 million this quarter, and continuing to take a prudent approach towards managing our capital commitments.

We have entered into several accretive transactions, including the jack-up drilling rig, the two modern container vessels to CMA CGM and the four newbuilding container vessels.

With that, I give the word back to the operator who will open the line for any questions.

(Operator Instructions).

Phyllis Camara, Pax World Funds.

I have a question.

Where are you now in your newbuilding for the future?

You've got the three containerships for delivery in 2013.

What are your plans for the future?

Are you going to add any more vessels?

Thank you.

For newbuilding what we have, we have the seven dry bulk newbuildings for delivery in this year and next year.

Then we have, as you mentioned, the four for the 800 TEU containership newbuildings for delivery in 2013.

We definitely have capacity for more acquisitions.

Of course, what we tried to do is also to match ordering vessels with the charter -- with charters that we believe are accretive for our shareholders.

So I cannot indicate any specific numbers, but we are definitely looking, both at newbuildings with forward delivery, and also at vessels with more immediate delivery that are either on the water already or are closer to delivery from the shipyards.

Okay, are you seeing, especially with tanker rates so low, are you saying any kind of potential or taking ships that are already on the water or that have been contracted out to be built by the shipyards?

What does the activity look like in the market right now?

Well, we see quite a few opportunities in the market, but we will only be specific and comment on that to the extent that we actually go ahead and do something.

But, generally, I would say that there are opportunities in the sale and purchase market, both in terms of second-hand vessels that are on the water and also for so-called resales, i.e., vessels that have been ordered from the shipyard by others and where they will look at potentially dispose of those assets.

Okay.

What are your thoughts on the tanker market in general right now as far as where day rate are?

I know you guys are not as exposed to that, but with Frontline being exposed, what is your opinion or your thoughts on how long the market is going to be like this?

We don't take a specific view on the spot tanker market, because we have such -- what we say -- extreme charter coverage in a portfolio with more than 11-year weighted average charter tenure.

Of course, what is important for us is that our good clients are operating in a market where they are earning money.

What we have seen Frontline, who is our biggest counterpart on the tanker side, they have been able to beat the market repeatedly by the trading in the market.

But for a specific guiding on -- be it the tanker market or other markets in terms of the spot market and the prospects there, you would probably be better served by speaking to one of the analysts or to some of the companies who are, what I would say, directly facing those markets.

Okay.

I knew you weren't directly exposed, but I didn't know if you had an opinion.

Especially when you look to Frontline for the dividend, what your thoughts were, or if you had talked to them at all about what their thoughts were on the tanker market.

What do you plan to do with your bonds, the 8.5% of '13s.

Yes, we have some of those bonds remaining.

We have around $290 million of those bonds outstanding in the market.

The rest of the bonds -- the bonds used to be $580 million when that deal was started in 2003, and subsequently we have repurchased approximately 50% of the bonds.

It is still close to three years to maturity of that bond, and we have call options for the bonds where we can call it effectively on 30-day notice.

Currently at the premium of 101.4%, but from December 2011 the call is at par, i.e., at 100%.

If you look at -- on the overall structure, we have an aggregate net interest-bearing debt of around $3.6 billion.

And that bond then represents less than 10% of our financing portfolio.

We believe that we will be able to refinance that at least by the time it will expire end of 2013.

But we will, of course, try to be opportunistic on the timing and do that if and when we believe the terms and the structure is attractive to us.

We don't have any urgency as the relative amount is -- the amount is relatively small compared to our overall financing in the Company.

Okay.

Do you think you would try and keep at least some high-yield bonds outstanding?

Well, currently we have the -- what used to be $580 million, the 8.5% bond, but we also have a shorter bond, a bond maturing in 2014, which is approximately $85 million, which is placed in Norwegian kroners.

And we also in the first quarter raised $125 million of five-year convertible notes.

So we have different papers in the capital markets.

So just based on that we will have paper there in the market for at least another five years.

Okay, thank you.

(Operator Instructions).

John Parker, Jefferies.

I'm wondering on your CMA CGM transactions, will there be no debt showing on the balance sheet of the subsidiaries for those transactions?

In other words, the senior debt as part of those structures, will that not show up on your subsidiary balance sheets?

That is correct, John.

It is Eirik here.

We will not reflect that debt on the balance sheet.

That is because the data subject to this French tax lease structures, so it is not consolidated either on our accounts or it is not shown in the -- on consolidated subsidiaries.

Then, next, your admin expense jumped up by $800,000 from the fourth quarter to the first quarter.

I'm wondering if you can give us any guidance going forward, or was there anything unusual in that line item?

I know Eirik is very good, but I don't think he is getting paid that much.

I think -- the number on the G&A is more also reflecting on when the different amounts are booked in our accounts.

So I would look more to the trailing four quarter as more of a guiding for what the number could look like going forward.

Okay, that's good.

Then the OBO that you sold, I assume -- are those going to the scrapyards?

Do you know?

Well, we have sold both of those vessels to third-party payers.

And, of course, it is their prerogative to use those vessels for whatever they want to, so I cannot comment on what they may or may not do with those vessels.

Then it looks to me based on the last presentation of Frontline, maybe three more of their OBOs are coming off charters next year.

Would you expect similar type transactions as those come off charters at Frontline?

Well, I mean, yes, that is, of course, subject to what is -- what will be agreed at that time and what the market looks like.

But given the state of the market today, that is likely.

Then, finally, nice job on getting that VLCC facility done.

Was that a result of reverse inquiry?

How did that all come about?

It seems like a very nice extension of your maturity on that bank debt facility.

That was an approach by the banks to us.

We were not in a rush to do that, because we felt -- remember, this loan facility started as a $350 million facility five years ago, and has been amortized down to approximately half that already.

And in 2012 when it would mature, originally, it would still be more than $500 million of fixed-rate charter revenue backing it.

But when the banks came to us and asked us if we wanted to do this, and terms were quite attractive, we said, yes, why not.

And we extended it effectively then through 2018.

Okay, that's all I have.

Thank you very much for your help.

(Operator Instructions).

Gentlemen, we currently do not have any questions in the queue.

Okay, and then I would like to round it off and say thank you for participating in the first quarter -- for this first-quarter conference call.

We are also planning to host an investor and analyst day in New York on June 20.

I will provide you with more information on that event in due course.

And, with that, have a very nice day.