SFL Corporation Ltd (SFL) 2011 Q4 法說會逐字稿

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

Today's 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 and welcome, everyone, to the Ship Finance International fourth-quarter conference call.

My name is Ole Hjertaker.

I am the CEO in Ship Finance management and with me here today I also have the CFO, Eirik Eide, and our Senior 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 include conditions in the shipping officer 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 a cash dividend of $0.30 per share for the fourth quarter.

This represents $1.20 per share on an annualized basis or nearly 10% dividend yield based on closing price yesterday.

We have now declared dividends for 32 consecutive quarters and paid out more than $1 billion in dividends since 2004.

The net income for the quarter was $30 million or $0.38 per share.

Adjusted net income was $32 million or $0.41 per share.

This is before gain on sales so negative adjustments relating to profit split in previous quarters, a gain related to repurchase of bonds and also some non-cash mark-to-market of interest rate swaps and amortization of deferred charges relating to pre-payment of debt.

The fixed-rate charter revenues in the quarter including 100% owned subsidiaries accounted for as investment in Associate was more than $190 million and the EBITDA equivalent cash flow in the quarter was $162 million or $2.05 per share, which was in line with the previous quarter.

Ship Finance took delivery of the 34,000 deadweight ton newbuilding Handysize drybulk vessel SSL Medway in October and so far into the first quarter, we have taken delivery of three additional newbuilding drybulk vessels, the 57,000 deadweight ton Super Max SFL Humber, the 34,000 deadweight ton Handysize Vessel SFL Trent, and the 32,000 deadweight ton Handysize drybulk vessel, Western Australia.

With the delivery of SFL Humber, we have taken delivery of all five vessels chartered to Hyundai Glovis on eight- to 10-year time charters.

SFL Medway and SFL Trent are chartered to Hong Xiang Shipping on five-year time charters while Western Australia has been chartered for three years to Western Bulk Carriers.

We have seven remaining vessels under construction, three Handysize drybulk carriers with expected delivery this year and four 4800 TEU container vessels with expected delivery in 2013.

All vessels are fully financed and we expect a positive cash effect in 2012 net of financing as we have already paid significant amounts in cash to the yards.

In October last year, we sold a 1992-built combination carrier Front Striver and simultaneously terminated the charter to Frontline.

This was the third OBO sold in 2011.

Net proceeds from the sale was approximately $18.7 million, including an $8.1 million compensation from Frontline.

We recorded a book gain of $2.3 million in the fourth quarter in connection with this sale.

We finalized the restructuring of the agreements with frontline before year-end and this is therefore reflected in the accounts for the fourth quarter.

There will be a temporary reduction in charter rates of $6,500 per day per vessel from 2012 through 2015 and thereafter revert to previous charter rate levels.

The adjusted base rates are reflected in the updated lease schedules which are available upon request by contacting us at IR@shipfinance.no.

Frontline paid a cash compensation of $106 million to us, which is equivalent to nearly two years charter rate reduction.

In addition, the new cash sweep feature will give us 100% of vessel earnings up to the old base rates.

The old profit share arrangement has also been improved from 20% to 25% and will be calculated from the old threshold levels.

The cash sweep and the profit split will be payable on an annual basis as before.

If Frontline generates market revenues in line with the previous base rates, the cash sweep payments alone may give a positive net effect of approximately $0.20 per share per quarter or double the previous net contribution from Frontline.

Actually due to the fact that many of these vessels have sub charters at significantly higher level than the base rates, we estimate that the cash sweep in 2012 will start accumulating from a level as low as $10,000 per day for VLCCs and Suezmaxes or in line with operating expenses for the vessels.

Before year-end, Ship Finance prepaid $156 million of related bank financing, of which $106 million represented the cash compensation from Frontline.

Consequently, the bank financing relating to the vessels have been reduced from approximately $740 million to approximately $584 million.

If you compare this with scrap value, it represents approximately $600 per lightweight ton, which is only 25% or so over current scrap prices.

And the vessels still have ten-year remaining charters on average and we continue to amortize the debt as scheduled.

The net effect of the debt prepayments is considerably lower debt service payment for Ship Finance going forward relating to the Frontline vessels.

And for 2012 alone, we estimate that service relating to this to be reduced by approximately $40 million.

Even without any cash sweep, the reduced base rate on the Frontline vessels will be sufficient through service interest and amortization on the debt -- on the vessels.

We have a very significant portfolio of long-term charters, which gives us a very transparent and predictable cash flow.

Essentially all our vessels are chartered out on long-term basis and we still have close to 11 years weighted average charter coverage.

Full details on a vessel by vessel basis can be -- is available by contacting us on e-mail.

We have $6.2 billion of fixed-rate order backlog, which is equivalent to approximately $78 per share.

The EBITDA equivalent backlog is $4.9 billion or approximately $62 per share.

These numbers include only the reduced base rates from Frontline vessels and are before cash sweep and profit share and do not include any rechartering after the end of current charters for these vessels or for any of our other assets.

Looking at the segments where this cash flow will be generated, we see that offshore is still the largest, with 44% or $2.7 billion of the backlog, while tankers, where the Company started now represents approximately 32% of the backlog or $2 billion.

It is worth noting that this not only includes Frontline but also tankers chartered to [Sino Cam] and North China Shipping.

Containers have recently increased to 17% through the acquisitions in 2011 and drybulk now stands at 7%.

Over time we expect to 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 sectors and there could be interesting opportunities for growth across all four segments in light of recent market developments.

We have a total of 14 customers and all are current on their charter payments to us.

Around 40% of the portfolio is with companies with a market cap in excess of $5 billion and if we include all listed companies, the percentage is 83%.

In addition, a majority of the backlog in the private segment is with companies with a public rating.

This gives us and our investors and other stakeholders a very good access to information and ability to monitor the quality of the backlog and to assess the counterparty risks.

And of course if you look at counterparty risk, it is worth noting that we own all the assets and they all have an alternative market so the effective counterparty risk in theory as we see it should be limited to the excess charter hire, if any, above current market for the corresponding charter period.

The rest is effectively covered by this deal.

If you look at the average weighted charter tenor as indicated on the right side on this chart, we see that around 70% of the portfolio are charters in excess of 10 years and only 3% shorter than five years.

If you look at normalized contributions from our projects and these includes vessels accounted for as investment in Associates, the EBITDA was $670 million last 12 months.

This is approximately $8.50 per share.

These numbers are without essentially any profit sharing in the period.

Net interest was $145 million or approximately $1.80 per share, but more importantly were normalized ordinary debt installments relating to the Company's projects was more than $400 million or approximately $5 per share.

This is excluding the prepayments relating to the front-line vessels.

We had approximately $3.2 billion of net interest-bearing debt at the end of the fourth quarter and we continue our scheduled steep loan amortization.

The amortization then represents around eight-year profile to zero and this compared to a weighted average age of the vessels of approximately five years.

The net contribution from our projects last 12 months after this aggressive debt prepayment profile was $120 million or $1.52 per share.

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

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

Thank you, Ole.

On the next slide, we have shown our pro forma illustration and cash flows for the fourth quarter and compare that to the third quarter of 2011.

Please note that this is only a guideline to assess the Company's performance.

It is not in accordance with US GAAP.

For the fourth quarter 2011, the Company had charter revenues of $192.9 million or $2.44 per share, compared to $200.3 million or $2.53 per share in the third quarter.

As you can see from the numbers, this quarter was a steady quarter of performance as the revenues for the VLCCs, the Suezmaxes, the chemical tankers, and the container vessels all were in line with the third quarter.

The drybulk vessels showed revenues of $17 million compared to $14.9 million in the third quarter.

This is due to delivery of two new buildings midway through the quarter and one newbuilding during the fourth quarter.

The increase was slightly offset by the sale of the OBO Front Striver, which was delivered to the buyers during the fourth quarter.

For the first quarter 2012, we have already taken delivery of three more drybulk newbuilding vessels and expect to take delivery of one more towards the end of the quarter.

These vessels will contribute positively to our revenues going forward.

On the offshore side, charter hire came in at $98.9 million compared to $107.5 million in the third quarter.

The reduction is due to a scheduled step down in the charter rate for the West Hercules that is on long-term charter to Seadrill.

It is important to note that the rate reduction is balanced by reduced interest and debt repayments so that the net cash flow for Ship Finance going forwards will be more or less unchanged.

The vessel operating expenses are slightly increasing compared to the third quarter and came in at $30.7 million compared to $30.1 million in the third quarter.

This will continue as we take delivery of further drybulk newbuildings during 2012.

There was no profit split accumulated for the VLCCs and Suezmax vessels in the quarter so overall, the profit split for 2011 is then $0.5 million.

So overall, that summarizes to an EBITDA of $162.2 million for the quarter or $2.05 per share.

Now moving on to the profit and loss, as we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional company, shipping company, due to the fact that our business strategy focuses on long-term charter contracts and as a result, a large part of our activities are classified as capital 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 lease, results in Associates on long-term investments and interest income from Associates.

If you wish to gain more understanding of our accounts, we have also this quarter published a separate webcast which explains the finance lease accounting and investments in Associates in more detail.

This webcast can be viewed on our website, www.shipfinance.no.

So overall for the quarter, we report total operating revenues according to US GAAP of $76 million.

Following the restructuring of the Frontline charters, the cash compensation of $106 million paid to Ship Finance has been booked as a repayment of investment in finance lease.

And this revenue figure is $106 million higher than scheduled, but has no effect on operating income.

Going forward, any cash repayment or profit split from Frontline will be booked directly through the P&L on a quarter-by-quarter basis.

You will note that depreciation is increasing quarter on quarter as we take delivery of the drybulk newbuildings.

Vessels are depreciated from delivered costs over 25 year life down to scrap value.

As a guidance, we can say that each delivered drybulk vessel will increase depreciation with about $260,000 to $270,000 per quarter.

As mentioned, so far we have taken delivery of three newbuildings already in the first quarter.

Also I can comment that following the significant debt repayment of $156 million after the Frontline restructuring, we had deferred charges related to the financing that had to be amortized in the quarter.

Hence, this non-cash item is larger than compared to previous quarters.

So overall and according to US GAAP, the Company showed reported net income of $30.1 million or $0.38 per share for the quarter.

Or if you exclude the negative non-cash mark-to-market of derivatives and other non-cash items, the adjusted net income was $32.1 million or $0.41 per share.

Now moving onto the balance sheet where we showed $95 million of cash at the end of the quarter.

In addition, we have invested $23 million in short-term tradable maturities as a short-term liquidity placement.

If you look at other current assets, this figure is reduced compared to the third quarter.

The reason is that this includes the current portion of investments in finance leases, which has been reduced as a result of the Frontline restructuring where we have agreed to lower the rates with $6,500 per day for all vessels until the end of 2015.

Now mirroring this is the line investments and finance leases, which reflects the book value of the Frontline leases.

This has been reduced with a cash prepayment of $106 million in addition to the ordinary quarterly payments.

As we have mentioned previously, the $50 million investment in the two CMA CGM vessels is booked under other long-term assets and this transaction is structured as a loan and we have a mortgage securing our investment.

So that brings us to stockholders equity, which stands at just over $1 billion if we include the $164.5 million of deferred equity.

The book equity ratio including deferred equity was 33.4% at the end of the quarter.

Then looking at our liquidity and financing status, as mentioned, the Company had cash of $95 million at the end of the quarter and that excludes the $23 million of liquid securities that we hold as a short-term liquidity placement.

On the debt side, we had $3.3 billion of total long-term debt at the end of the quarter of which $1.9 million is consolidated long-term debt and approximately $1.4 billion is long-term debt in our subsidiaries which are accounted for as investments in Associates.

This figure includes the unsecured (inaudible) bonds maturing in 2014 of which $75 million is now net outstanding, the $125 million of convertible bonds maturing in 2016, and the $274 million of unsecured bonds maturing in 2013.

The convertible bonds can be repaid in shares in the Company's option at maturity.

We have arranged for long-term finance for all vessels under construction with the remaining total commitments of up to $265 million.

The leverage is in excess of 75% of the contract price for each vessel, with maturities between 10 and 12 years.

Parts of these facilities have already been drawn and we have had a significant positive cash effect from this in the fourth quarter.

Hence, we have no refinancing requirements in the near term.

Now the next slide provides more detail on the newbuilding installments and the remaining payments to the shipyards.

In the first quarter, we will take delivery of four new drybulk vessels.

Then we have another two drybulk vessels with expected delivery in Q2 and Q4 2012 plus four container vessels scheduled for delivery in 2013.

This graph shows the committed financing in the blue bars compared to the remaining shipyard installments in the yellow bars.

For the first quarter 2012, we have $47 million of remaining scheduled payments on our newbuildings or we can draw down $55 million of related financing, which means a potential cash positive effect of $8 million in the quarter.

For 2012 overall, we have remaining scheduled payments of $103 million or we can draw down $127 million giving an overall positive cash effect of $24 million for the year.

And in 2013, the remaining installments is $173 million or we can draw down $138 million of related financing resulted in a cash requirement of $35 million for that year.

So if you look at the period overall from now until the end of 2013, the overall cash requirement compared to the available financing is only $11 million.

Now moving onto covenant compliance, as of the fourth quarter, we are in compliance with all financial covenants under our loan agreements.

Free cash was $95 million compared to the minimum requirements of $25 million.

The working capital was $169 million compared to the requirements of being positive and the book equity ratio was 33% compared to the minimum requirement of 20%.

And on those loan agreements where we have a minimum value covenant, we were in fully compliance at the end of the quarter.

Then to summarize for the fourth quarter 2011, the Board has declared a quarterly cash dividend of $0.30 per share.

This is a dividend yield of 9.7% based on the closing price as of February 16.

The quarterly adjusted net income of $32 million or $0.41 per share and aggregated EBITDA of $162 million or $2.05 per share.

Our charter agreements with Frontline were restructured during the quarter which included a significant debt reduction and increased upside potential through adjusted profit split agreements.

Now going forward, we expect to see improved cash flow as we take delivery of further newbuildings with three additional vessels already delivered in the first quarter.

We have minimal capital commitments going forwards and our dividend capacity is supported by a $6 billion charter backlog.

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

(Operator Instructions).

Oliver Corlett, RW Pressprich Company.

Good evening and thanks for taking my questions.

Could you just break down the $584 million of Frontline-related debt, there's two facilities there.

Can you break it out between the two of them?

Let me just -- give me a second here and I can find the table.

One, let me just say here now the one is $439.8 million and the other is $144.1 million.

Thank you, and as far as your debt amortization schedule overall for 2012 and maybe 2013, can you give us some idea of how much you will be amortizing?

The amortization will -- we don't give a guiding on specific amortization.

I would say generally the amortization has been relatively stable over the last few years at around $400 million regular amortization.

With the significant prepayments we made relating to the Frontline vessels, the amortization on those vessels are then being adjusted somewhat, so you will see some reduction on that.

And I would say that -- I would say that would be to the tune of, say, between $20 million and $30 million, but we don't give a full breakdown on the full debt schedule in our reporting.

Okay, that's fine.

Thank you.

Now you have a couple of counterparties here where there's some doubt I guess about their credit worthiness right now, the first one being Horizon Lines.

Has there been any development on that front?

Can you give us any sort of color on the status of the Horizon charters?

First of all, I will just repeat that all our clients are current with their charter payments to us.

Horizon Lines, as you may have seen have had or been in -- had a difficult market and they came through a restructuring in October where a significant portion of the convertible note was converted into other debt instruments and partly to equity.

But apart from that, we cannot give you specific comments relating to those -- to that transaction.

The vessels themselves are being reflagged to international flagged and we expect them to be marketed in the market for alternative employment by Horizon Lines.

Okay, and the CMA situation there, I know they are also somewhat in a difficult condition right now.

How does that affect the subsidiary that you have your loan to?

Yes, the two 13,800 TEU container vessels that we have through a subsidiary and as a charter to CMA CGM was structured before they had finished their previous restructuring.

So you could say that we have -- it was structured basically of course to withstand call it also further volatility in the market.

What's important here is to see what's the relative exposure in that deal and if you look at the debt ahead of us and we have a secured note in that subsidiary, which is our investment, so we have invested $25 million per vessel and if we sum up the debt ahead of us and our note, the exposure was $109 million in December and that is being reduced as we go along.

These are vessels that cost $171 million to build.

They are virtually brand-new, built in 2010 and we believe replacement costs for similar type vessels would be on a delivered basis between $130 million and $140 million.

So we believe that we are well covered by the asset itself but of course, they are current with the payments.

It's their own and structured through a French tax lease scheme where there is also some substantial tax benefits for them if they perform on the charters.

So we have no indications that there are any issues or problems relating to them servicing that contract.

Okay, great.

Thank you.

Just one other thing.

There's a restricted payments covenant on the 8.5% notes.

I don't quite understand the language but it seems to imply that you can only make a dividend payment on the stock if you -- if after the payment you have $100 million of cash.

Have I misread that or can you explain that a little?

Well, the restricted payments that is there is referring to us and the charterer and if you remember that was structured back in 2003, where Ship Finance was effectively call it a financing arm and a subsidiary of Frontline.

What's happened after that is that we have developed and built our portfolio significantly and of course a lot of things have happened to Frontline in the meantime.

But we changed the overall call it the charter structure with Frontline in the past.

They did not guarantee those charters up until 2010 but then we changed the agreement where Frontline is now fully guaranteeing that exposure.

So the cash restriction there is linked to us -- the combined cash in Ship Finance and the charterer and so Frontline had $160 million and we had $95 million.

Right, so that covenant is no longer effective or it just --?

It's not restrictive on our ability to pay dividends.

Okay, that's all the questions I have.

Thank you very much for your help.

Herman Hildan, RS Platou Markets.

Hi, just the one question on the Frontline quarterly report today.

They said that they would be selling or be looking to sell some vessels and to my knowledge all the vessels are owned by you guys.

So I was just wondering if you could make any comments on potentially how many vessels you would be reselling and net call it liquidity effect for you if it's possible to say anything about that?

Well, over the years, we have sold a number of vessels.

I think we have sold more than 20 vessels together with Frontline, you can say.

Of course we have a relationship where the vessels are in long-term charters, so if you sell it, you also have to do something with the charter otherwise of course it's impossible to do something.

Some of these vessels are older and like the OBOs, we sold three of them last year.

They are reaching, they are sort of 18 to 20 years of age and of course, not long-term strategic assets as we know that tankers and bulkers typically have a commercial life of between 20 and 25 years.

The good thing, though, is that several of these vessels have very strong charters producing very significant cash flows and that is of course is good for us and for Frontline but it's good for us in the facts -- in the sense that it provides us with better visibility on both the cash sweep and potential for profit split on top.

But in terms of looking at potential sales, it's something that is done obviously on a case-by-case basis and of course we try to be opportunistic and maximize value for shareholders, be it to find new vessels to invest in or to dispose of assets.

Okay, could you also say a few words about more specifically about growth?

Do you expect to grow in 2012 and what kind of timeline can we see?

Are you considering anything specific at the moment?

Well, we will have always and are of course always looking at the potential investment opportunities.

But for us it's more important to do the right deals than to commit to a certain investment number or a certain percentage growth.

We think it is an interesting market because there's a certain scarcity of capital and we believe that we are well-positioned given our size and position in the market.

At the same time, it's not necessarily a market you need to rush into because we don't think opportunities are disappearing short-term, so we are evaluating of course our opportunities and we will hopefully invest in due course.

But I cannot give you any specific bidding on when and in what type of asset.

We have investments in four main segments, offshore being the largest.

We have tankers, bulkers, and container vessels and we are confident that there will be some interesting opportunities across these segments over the next quarters.

So you are still kind of waiting for call it the optimal deals to come and you think there is more stress ahead basically and that's why you would wait or --?

Well, we invested significant capital in 2011, so I believe $800 million to $900 million, so it was -- we were not sitting still last year, but we don't and we have never given guidance previously either on specific investments or guided on when these investments would take place.

Okay, thank you.

(Operator Instructions).

CJ Baldoni, Principal Global Investors.

Yes, regarding the cash sweep and profit share, I just want to make sure I understand it.

So with respect to the cash sweep, you are going to get 100% of the rate up to the old base rate and then after that, it will be based on the profit split arrangements but you first need to offset the $50 million prepayment.

Is that correct?

That is correct, yes.

And then all of the cash sweep and profit share is only paid to you annually or do you get the amount that is up to the old base rate right away?

It's paid annually, so for 2012, it will accumulate quarter by quarter but the final payment will be based on the year-to-date, the 2012 number at the end of the year and will then be payable in March 2013.

This is the same principle as we have for the profit split arrangement that we had today, where we do -- where we have the same mechanism.

But of course there are two different calculations and you are correct that for the profit split on top of the old base rates, we need to -- before there's a cash payment on that part, we need to cross over $50 million, which they have prepaid to us already.

Right.

And the $0.20 per share, that would reflect the amount that would be just up to the old base rate only?

Exactly.

So that is the effect of if there was -- if the market rate was sufficient to pay the old base rates, the cash sweep, which is equivalent to $66 million per year, would amount to $0.20 per share per quarter.

Now that's -- let's just assume that we have profit share, cash sweep and it's accruing during the course of the year.

And on Frontline's books, is that unrestricted or does that go into some type of restricted account for a payment next March?

I just don't recall how it works.

There's no specific requirements for having these amounts in a blocked account, so we have to rely on a good charterer to take the necessary precautions and retain sufficient capital to be able to support their obligations which is then to pay us on a yearly basis.

Okay, and are there any protections to the extent that you don't get paid?

Do you have any like recourse to them or is it just like an unsecured claim?

Well, it is a claim with -- we have full corporate guarantee from Frontline Ltd.

So you could say that there is recourse to the Company, but nothing more than that.

We don't have any mortgages or anything like that supporting the claim.

All right, thank you.

(Operator Instructions).

As there are no further questions at this time, I would like to turn the call back to our hosts for any additional or closing remarks.

Thank you.

I would like to thank everyone for participating in our fourth-quarter conference call and wish everyone a nice day.