SFL Corporation Ltd (SFL) 2014 Q2 法說會逐字稿

Good day and welcome to the Q2 2014 Ship Finance International Limited earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ole Hjertaker. Please go ahead, sir.

Thank you and welcome, everyone, to Ship Finance International and our second-quarter conference call. With you here today, I also have our CFO, Harald Gurvin.

Before we begin our presentation, I'd 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, offshore, and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

The Board has declared a $0.41 dividend this quarter, in line with the previous quarter. The dividend represents $1.64 per share on an annualized basis, or 8.4% dividend yield based on closing price yesterday. The Company has now paid an aggregate of nearly $18 per share since 2004.

Net income for the quarter was $22 million, or $0.24 per share, after a $7 million negative non-cash mark-to-market on interest-rate swaps and theoretical costs relating to a convertible loan. Aggregate charter revenues were quoted in the quarter, including 100%-owned subsidiaries account for its investment in associate, was nearly $160 million in the quarter.

The tanker market remained at top levels during the second quarter, but despite this, there was a positive cash rate contribution of $1.8 million on the Frontline vessels, and year to date, the accumulated cash sweep amount is $13.5 million on these vessels.

We also have exposure to the crude oil tanker market through our two modern Suezmax tankers, operated in approval with sister vessels owned by Frontline 2012. The average time charter equivalent for the second quarter was approximately $14,300 per day for these vessels, which is down from the level seen in the first quarter. However, the third quarter has so far been firmer than the second quarter and we expect an increased contribution from these vessels this quarter.

The EBITDA equivalent cash flow in the second quarter was approximately $130 million, and last 12 months, the EBITDA equivalent has been approximately $500 million.

In the second quarter, and including all 100%-owned assets, around 50% of our charter revenues came from the offshore segment, around 30% from tankers, and the remaining 20% split between our drybulk and container assets. This includes cash sweep and profit split contribution. We expect the liner segment share to increase as we take delivery of the new 8,700 TEU vessels later this year and early next year, and we still have significant capital available for new accretive investments.

In March, we announced the acquisition of nine segment container vessels between 4,100 and 5,800 TEU built in 2001 and 2002. These vessels originate from the German KG market and the sales were under instruction by the financing banks. Three of the vessels were delivered to us in March and the remaining six vessels were delivered to us during the second quarter. The price we paid is only a fraction of the construction costs and marginally higher than current scrap values.

The vessels have good specifications, including 1,300 reefer plugs, and some of the vessels have also been upgraded with shore-based power systems. We have secured long-term payable charters for all vessels for periods between five and six years with a Mediterranean shipping company, the second largest liner in the world, and there are purchase options with profit share feature at the end of the charter periods. We also have an extension option in our favor if the purchase options are not exercised.

The vessels are expected to generate approximately $15.5 million in aggregate EBITDA per year, with full cash flow effect in the third quarter.

The Company's four 8,700 TEU container vessels under construction in Korea are ahead of schedule, with one vessel expected to be delivered at the end of the third quarter, one in the fourth quarter, and the last two in early 2015. The vessels are built to very high specifications, including high reefer capacity and the latest in eco-design features.

We have secured seven-year time charters to the Hamburg Sud container line for the vessels at terms we believe reflect the expected operating efficiencies for these new vessels. The EBITDA contribution from the vessels is estimated at approximately $46 million per year on average during the charter period, giving us a very good return on invested capital.

We have also recently acquired two 82,000 deadweight ton Kamsarmax bulk carriers, in combination with long-term charters, through the state-owned charterer in China. The vessels were built in China in 2012 and the charter is for a period of approximately eight years. We took delivery of the second vessel only one week ago, and the annual EBITDA contribution is estimated to approximately $7 million on average during the eight-year charter period.

As for the container vessels chartered to Hamburg Sud, there are no options for the charterer to extend the charters or purchase the vessels at the end of the charter period.

We have also recently announced the agreement to sell three 1999 built VLCCs, which are due for third special survey in the coming months. We expect to receive cash proceeds of $77.5 million in aggregate, including a cash compensation for Frontline, and approximately $48 million in 7.25% amortizing notes from Frontline. With an improved tanker market currently, we expect these vessels to have a positive impact on the cash recalculation until delivery to the new owner and the sales proceeds is expected to be reinvested in new assets.

The backbone of our business remains to be our significant portfolio of long-term charters. Most of our vessels are chartered out on a long-term basis and we still have nearly 10 years weighted-average charter coverage. For full details on a vessel-by-vessel basis, you can contact us on email, IR@ShipFinance.no.

We have $4.7 billion of fixed-rate order backlog and the estimated EBITDA equivalent backlog is approximately $4.1 billion, or around $44 per share. These numbers include only the reduced base rates from the Frontline vessels and do not include the cash flows from the two Suezmax vessels operated in the spot market, nor do they include revenues from our other vessels after the end of their current charter periods.

I would also add that most of our offshore assets have been paid down significantly already and underlying asset exposure is very limited, even in a softening market scenario.

With respect to Frontline, we have an interesting combination of very low financial leverage, well below current (multiple speakers) levels, and significant leverage to the market through the cash sweep arrangement. We have amortized down the debt of these vessels very quickly and have reduced the loan amounts by more than 80% since 2008. Even compared to reported scrap value levels, the financial leverage is very comfortable, as illustrated by the red line in the graph.

With this low leverage, there is no net loan amortization required, and even with the scratch base rates from Frontline, without any cash contribution, the free cash flow is approximately $17 million, or $0.18 per share, per quarter this year.

On top of that, if the average VLCC market for the year should hit $25,000, as estimated by several market analysts, the cash sweep could be around $0.11 per share per quarter, increasing to $0.13 per share per quarter in a $30,000 spot market.

But of course, the actual profits paid is based on the performance of these specific vessels, so we cannot give any specific guiding on contribution in the third or the fourth quarter.

The threshold level kicks in already at $17,675 for most of the VLCCs and $13,200 for Suezmaxes and is capped at $6,500 per day per vessel. The cash sweep, as I mentioned, is an annual calculation, so the average over the year will determine the final payment, and if -- but if the last two quarters are strong enough, we could still get full cash sweep for the year on many vessels, despite the soft second quarter.

We cannot comment on Frontline's financial position or their plans for refinancing their convertible loan due in April next year, but we do know that they reported more than $60 million of free cash at the end of the second quarter after taking delivery of a Suezmax newbuilding without leverage and they have raised more than $50 million over the last few quarters by issuing new shares. And to put our exposure to Frontline in perspective, the EBITDA backlog from all the Frontline vessels put together is approximately the same as the EBITDA backlog from the single drilling rig West Linus, which we took delivery on earlier this year.

If we then switch to our performance the last 12 months, the normalized contribution from our projects, including vessels accounted as investment in associates, the EBITDA, which we define as charter hire plus profit share, less operating expenses and G&A, was nearly $500 million in the period.

Net interest was $160 million, or approximately $1.24 per share, and our normalized ordinary debt installments relating to the Company's projects was around $200 million. This is excluding prepayments relating to sale of older assets and without net amortization on Frontline vessels, given the low leverage of those vessels.

Going forward, we expect a positive contribution from our recent acquisitions, and with that, I will leave the word over to Mr. Harald Gurvin, our Chief Financial Officer, who will take us through the numbers for the second quarter.

Thank you, Ole.

On this slide, we have shown our pro forma illustration of cash flows for the second quarter compared to the first quarter. Please note that this is only a guideline to assess the Company's performance and is not in accordance with US GAAP.

For the second quarter, total charter revenues before profit share and cash sweep were $155 million, or $1.66 per share, up from $147.9 million in the previous quarter. Revenues from VLCCs were in line with the previous quarter, while revenues from Suezmaxes were down in the quarter, due to lower earnings on the two Suezmaxes trading in the spot market.

Revenues on liners, which includes container vessels and car carriers, were down in the quarter, following CMA CGM's exercise of purchase options for the two 13,800 TEU container vessels in the first quarter, slightly offset by the delivery of the nine container vessels on charter to MSC during the first and second quarter.

The increase in offshore revenues is due to West Linus, which was delivered in February, earning full day rates following commencement of the sub-charter to ConocoPhillips at the end of May. We shall have the full effect in the third quarter.

Vessel operating expenses and G&A were $30.7 million, compared to $34 million in the previous quarter, mainly due to the exercise options on the two CMA CGM vessels.

We recorded a cash sweep of $1.8 million from Frontline in the first quarter (sic - see Presentation - "second quarter"), down from $11.7 million in the first quarter, and also a profit share of approximately $300,000 relating to the four Handysize drybulk carriers, down from approximately $500,000 in the previous quarter.

Income from financial investments was $2.5 million in the second quarter, slightly down from the previous quarter.

So overall, this summarizes to an EBITDA of $128.9 million for the quarter, or $1.38 per share, compared to $129.7 million in the previous quarter.

We then move on to the profit and loss statement as reported under US GAAP. As we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing.

As a result, a significant portion of our charter revenues are excluded from our booked operating revenues and instead booked as revenues classified as repayment of investment in finance leases, result in associates and long-term investments, and interest income from associates. If you wish to gain more understanding of our accounts, we would also this quarter publish a separate webcast which explains the finance lease accounting and the investment in associates in more detail. This webcast can be viewed on our website, ShipFinance.org.

Overall for the quarter, we reported total operating revenues according to US GAAP of $73 million, which includes $1.8 million in cash sweep from Frontline in the quarter. We recorded a gain of $5 million following settlement of a claim relating to four Handysize drybulk carriers redelivered to us before expiry of the charters. The total settlement is $30 million, of which $15 million was received in the first quarter, $5 million in the second quarter, with the remaining balance to be paid during the second half 2014.

Total operating expenses were $47.2 million, giving net operating income of $30.8 million.

Results in associates for the quarter was $8 million, up from $6 million in the previous quarter, mainly due to West Linus earning full day rates from end of May. We also recorded a non-cash negative mark-to-market of derivatives of $5.9 million in the quarter.

So overall and according to US GAAP, the Company reported net income of $22.4 million, or $0.24 per share, for the quarter.

Moving on to the balance sheet, we showed $49.5 million of consolidated cash at the end of the quarter. In addition, we had approximately $129 million freely available for drawdown under revolving facilities. Available-for-sale securities of $61.9 million includes the $39.8 million invested in short-term tradable securities as a short-term liquidity replacement.

In addition, the second lien notes in Horizon Lines are recorded on available-for-sale securities at only $22.1 million, or 40% of par value, including accrued interest. That $79 million amortizing Frontline notes are included in amount due from related parties and the current and long-term assets. The remaining balance, as for 30 June, was $74 million, but the notes are conservatively recorded in our balance sheet at 72% of par value.

The three ultra-deepwater units on charter to Seadrill and the harsh-environment jacked-up drilling rig to North Atlantic Drilling are included in the balance sheet under investment in associates and amount due from related parties long term. Our investment in the subsidiaries owning the unit is in the form of both equity and share on loans from the parent company. The total equity investment in the rigs is just a combination of the two and the split between equity and shareholder loans from quarter to quarter will be dependent on intercompany accounting.

Stockholders' equity stands at approximately $1.3 billion, including $104 million of deferred equity. The book equity ratio, including deferred equity, was approximately 41% at the end of the quarter.

Then looking at our liquidity and financing status. As mentioned, the Company had total available liquidity of approximately $178 million at the end of the quarter, which includes $49 million in cash and approximately $129 million in freely available under revolving credit facility. We also had $62 million in available-for-sale securities at quarter-end, as previously described.

On the debt side, we had approximately $3.2 billion of gross interest-bearing debt outstanding at quarter-end. Consolidated bank loans were $1 billion and bank loans in our 100%-owned subsidiaries accounted for investment in associates were $1.5 billion at quarter end.

In addition, we had approximately $714 million of consolidated senior unsecured notes outstanding as of June 30. The figure includes the NOK900 million bonds maturing in 2019, of which [$]145 million was net outstanding, and the NOK600 million bonds maturing in 2017, of which [$]93 million was net outstanding. The figure also includes the $350 million convertible notes maturing in 2018 and $125 million convertible notes maturing in 2016. Both our outstanding convertible notes can be repaid in shares that the Company has optioned at maturity.

The graph shows the scheduled installments and amounts to be refinanced over the next years. The graph includes a $101 million refinancing of six offshore supply vessels, which was concluded at the end of August at very attractive terms.

We are comfortably in compliance with all financial covenants on our loan agreements at quarter-end and we have very limited refinancing requirements over the next years. It is worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 42 quarters since the Company was established. Given the financial turmoil and depressed shipping markets over the last years, this gives us a very strong standing in the banking market and we have recently agreed new refinancing with both existing banks and new banks.

We continue achieving excellent financing terms and have seen a significant reduction in loan margin over the last few years, improving the cash flow from our projects.

The next slide provides a more detail on our remaining CapEx as per quarter-end. Following delivery of West Linus in February and the nine container vessels on charter to MSC between March and May this year, we had four remaining container vessels under construction in Korea at quarter-end and two Kamsarmax drybulk carriers to be delivered. The four newbuildings are state-of-the-art 8,700 TEU container vessels with a total contract price of $340 million, of which $137 million has been paid as per quarter-end.

The yard payments have so far been funded from our available liquidity, but we have now arranged postdelivery financing for the vessels at very attractive terms. The terms of the financing matches the seven-year charters to Hamburg Sud and Ship Finance will provide only a limited guarantee for the loans. The financing amount is higher than the remaining CapEx and will give a positive cash effect on delivery of each vessel.

In May, we announced the acquisition of two 2012-built Kamsarmax drybulk carriers, in combination with charters to a state-owned Chinese charterer in excess of eight years. The vessels were delivered to us in July and end of August and have been funded from our available liquidity, but we are in the process of arranging financing for these vessels.

Now to summarize, net income for the quarter was $22.4 million, or $0.24 per share, including $2.1 million in cash sweep, a profit split, and a $5.9 million negative mark-to-market of derivatives. The aggregate EBITDA was $128.9 million, or $1.38 per share. The Board has declared a quarterly cash dividend of $0.41 per share for the quarter. This represents a dividend yield of 8.4% based on the closing price of the share yesterday.

We have taken delivery of 12 vessels and rigs so far in 2014, all employed under long-term charters and supporting our long-term distribution capacity. We see investment opportunities in multiple segments and have capital available for new investments.

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

(Operator Instructions). Herman Hildan, RS Platou.

Just a quick question. I mean, you highlight that your cash flows will ramp up going forward and also your strong liquidity position. What's the baked in terms of the dividends? What should we expect going forward? Also in terms of investments and planning for that?

The Board never gives specific guiding on dividends going forward, but, of course, as we have reinvested a lot of capital and still have good investment capacity, we still believe there is room before to build the dividends. But we can unfortunately not give you specific guidance, quarter by quarter.

But I think we have demonstrated over the last few years now that we have built the dividend stone by stone and we have an aim to both reinvest funds coming out of assets like the Frontline vessels where we get a lot of cash out and we will then reinvest that in new projects and other financings that we have arranged that also have freed up quite a bit of liquidity for us.

As Harald Gurvin mentioned, also when we take delivery of the 9,000 TEU newbuildings, we expect that to be a cash positive event, as we have paid in more to the yard during construction so we can grow more loans at delivery than at the last installment.

[Investment] opportunities in several sectors, but, of course, we cannot be specific until we have something tangible to report to the market, but I would say for sectors, I would highlight both the container space and also the offshore space as sectors where we have seen several opportunities.

But that said, we also look at the deals both on the tanker and bulker side, and the latest deal with it was the two Kamsarmax bulkers that we just took delivery of.

Frontline mentioned (inaudible) mentioned their full focus on the product on the crude vector portfolio at the moment. What kind of opportunities do you see there?

It's been a very interesting market development in that segment. We've seen significant ordering of vessels, particularly last year. There could be structures or opportunities coming out of that where, call it, the market participants who may wish to optimize the cost of capital could work with us to find interesting, call it, say, leaseback transactions.

If you look at what we do, we basically -- you could say that we have two, call it, main products in our portfolio. One is a cost of capital arbitrage where we believe that we can source capital more efficient and at lower cost than most other players in the market, and therefore we can offer very attractive terms and still make a good profit on doing deals with other players in the market.

And then, on the other hand, we are also able to position ourselves in market segments, like we did last year when we ordered four container ship newbuildings, then turning around and chartering them out long term. So we believe between the combination of those two that we can find good opportunities.

But generally, I would say that both on the tanker side. On the bulker side, a lot of the market focus there has been on ordering vessels to be employed in the spot market. Our preference is, of course, when we can find long-term employment which will give us more visibility on distributable cash flow going forward. So with that said, of course, so we have to be careful with who we work with to generate that kind of visibility.

And I guess you have also seen recently the long-term charter market in particular for tankers has been moving up. Without referring to any particularly relevant situation at the moment, how do you feel like your negotiating abilities are in terms of finding new solutions in your current portfolio? Do you expect that -- do you feel you have a good position due to the charter market picking up? How do you think about that?

Absolutely. I think the short-term charter market doesn't necessarily have a direct impact on the longer-term charter rates, but I think generally we see quite a few opportunities, but we try to be quite selective.

When we do a deal, typically we have several factors that have an implication on the deal. One is who are the counterparties, how comfortable we are with their ability to service the contract also in a volatile market environment. The other is the residual value where we are particularly focused, I would say, where we have seen, of course, with the change -- call it with the technological developments we have seen recently, call it [icor] or whatever, that will have an impact on the residual value of the asset.

So we try to be careful, we tried to build in relatively conservative assumptions for residual value towards that. And then, of course, it's also a question of how we finance the deals, how efficient the leverage can be structured on top of the deal, which drives the equity returns we can expect out of transactions.

And I see if I look at your current portfolio, do you feel -- are you comfortable -- without taking into account deliveries, etc., are you comfortable that your current portfolio will continue to support the current dividends you are paying or do you see any near-term -- any parts of the portfolio that you are worried about in terms of near-term ability to generate the same amount of cash flow from that portfolio that you have now?

Yes. We think the portfolio we have is quite robust. We commented briefly on Frontline and they also in their press release today voiced some concerns about their ability to refinance the convertible loan next year.

But Frontline, going from being our only client and 100% of our backlog, is now becoming, relatively speaking, less and less of an important factor in our portfolio as we do a lot of deals with other counterparts. As I mentioned earlier, the remaining backlog with Frontline on an EBITDA basis is now actually in line with one single rig we took delivery of earlier this year work.

So as we continue building the portfolio, diversifying across sectors with multiple counterparts -- right now, I think we have 16 or 17 different chartering counterparts, I believe that itself, the diversification, brings support to our distribution capacity.

And as our Board guides -- what we stated in the strategy and outlook section linked to our press release, the Board is quite comfortable with the portfolio and also relatively comfortable that the dividend capacity can be increased going forward. But we cannot give you specific guiding on whether that is next quarter, quarter after, and the specific amounts.

That's very helpful. Thank you very much.

(Operator Instructions). Erico Fukushiro, [Armory Investments].

Actually, this is [Marcelo Cusack]. Thank you for the call. Just quick question, just trying to think about your leverage a little bit, and you came to that point in the cycle that you have more ships delivered so you kind of have maximum leverage without getting most of the EBITDA benefit.

So if you could just help me out here, I think you have three groups of assets here on your balance sheet that didn't generate EBITDA yet, which would be the 8,700 TEU container ships, the Kamsarmax ones, and the MSC ships, right? If there is something any more, please let me know. How much you already paying for those vessels? What is the book value of those vessels so far, so we can take that out from calculations?

Yes. In the press release -- let me just find that here -- we have provided a CapEx overview as of June 30 for those two investments.

From that, you can see that on the 8,700 TEU vessels as of June 30, we had $213 million remaining. That is of investments in the region of $350 million in total. That's 340 -- plus also, of course, there are costs and expenses and also some additional equipment you invest in when you build a new vessel. That is basically in line or below what we expect to finance -- or what we have agreed in financing for those vessels.

On the Kamsarmax bulkers, total acquisition cost there is around $62 million, of which around $10 million was paid when we agreed the deal in the second quarter and the remaining has been paid afterwards. There, we have been paid in cash so far, but we have -- we are in the process of financing those vessels and, based on feedback from the banks, we are quite comfortable with our ability to do that.

I think also worth mentioning we see a strengthening financing market in terms of when you look at the terms, and we see new banks also coming into the market, so we are quite happy to see that margins are coming down, which leaves more money, of course, for us and our shareholders.

Okay. And the MSC vessels, that was already generating EBITDA before?

Yes. The MSC vessels, they have been financed already. They have been financed very conservatively, so with a relatively small amount. But they were all delivered and paid for in the second quarter.

Okay, but they haven't generated EBITDA, but that's not that relevant in terms of value in total, right?

Well, yes, they are generating EBITDA and three of the vessels were delivered already at the end of the first quarter, so three of the vessels had full EBITDA contribution in the second quarter, while the remaining six vessels were delivering during the second quarter, so have full cash flow effect in the third.

Okay. Thank you very much.

There are no further questions in the queue at this time.

Thanks. And then, I would like to thank everyone for participating in our second-quarter conference call. If you do have any follow-up questions, there are contact details in the press release, and with that, I would wish you a nice day and enjoy the upcoming Labor Day holiday.

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