SFL Corporation Ltd (SFL) 2015 Q1 法說會逐字稿

Good day and welcome to the Q1 2015 Ship Finance International, Limited, conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Ole Hjertaker, CEO. Please go ahead, sir.

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

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, 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 an increased dividend of $0.43, up from the $0.42 dividend declared in the previous quarter. This dividend represents $1.72 per share on an annualized basis, or 11% dividend yield based on closing price yesterday, and the Company has paid an aggregate of more than $18 in dividends per share since 2004.

Reported net income for the quarter was $33 million or $0.35 per share, but if we adjust for nonrecurring and non-cash items, the adjusted net income was $0.46 per share.

Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries got counted for as investment in associate, was $153 million. The EBITDA equivalent cash flow in the third quarter was approximately $127 million, and over the last 12 months, the EBITDA equivalent has been approximately $550 million.

In the first quarter and including all 100% owned assets, 44% of our charter revenues came from the offshore segment, around 30% from tankers, and the remaining split between our dry-bulk and container assets. This includes cash sweep and profit split contribution.

After the sale of West Polaris and scheduled reduction in bareboat rate on West Taurus from the last -- for the late first quarter, their relative share from offshore has been reduced, where the liner segment share has increased where we now have nearly full cash effect from the new 8,700 TEU container vessels. With the delivery of the bulkers, that segment will [increase] in the second and third quarter. And we have significant capital available for new accretive investments.

All the 8,700 TEU container vessels are now in service and have commenced their long-term time charters. The two last vessels were delivered in January and will have full cash flow effect in the second quarter. The EBITDA contribution from the vessels is estimated at approximately $46 million per year, on average, during the charter period to Hamburg Sud, giving us a very good return on the invested capital.

In April, we announced the acquisition of eight Capesize bulkers in a sale-leaseback transaction with Golden Ocean. The vessels are built between 2009 and 2013 and scheduled to be delivered to us in the second and third quarter this year. The transaction will add $500 million to our charter backlog and there is a profit share featured in the agreement that could be very interesting over time.

Today, we also announced an amended charter structure with Frontline, including revised base rates and operating expenses and new profit split arrangements starting from a lower level and a 28% ownership stake in Frontline.

I will get back to more details on both the Golden Ocean deal and the new Frontline agreement later in the presentation.

On the back of a strong tanker market, there was a full cash sweep effect of $10 million in the first quarter, and so far into the second quarter, the market has strengthened further. The average charter rate per trading day in the first quarter for the Frontline VLCCs was approximately $50,900 per day and $28,600 per day for the Suezmaxes.

In addition to the Frontline vessels, we also have exposure to the crude oil tanker market through two modern Suezmax tankers. For these vessels, the average charter rate was approximately $37,400 per trading day. One of the vessels was out of service for a total of 33 days in the quarter in connection with scheduled special survey and a major upgrade to improve earnings capacity.

The Golden Ocean transaction is a combination of a fixed rate -- fixed base rate and a profit split calculated on a quarterly basis. We have a fixed-rate operating expense agreement with a subsidiary of Golden Ocean, essentially similar to the agreement we'd had with Frontline, and we also have an interest adjustment feature where the charter rate will be adjusted up and down, depending on movements in underlying interest rates. This will effectively eliminate interest rate risk relating to the financing.

Harald Gurvin will get back to the financing of the transaction later in the presentation, but I would like to highlight the profit split arrangement where there could be very interesting optionality for us over time. It is fair to say that the near-term outlook in the dry bulk segment is relatively weak, but our deal runs over 10 years and we have seen in the past there have been significantly volatility in the Capesize rates over time.

As our profit share is on a quarterly basis, even a short-term spike will give a good contribution, and as an example, a $30,000 per day market would give us a profit split contribution of approximately $3 million per quarter. The vessels are expected to be delivered to us in the second and third quarter this year.

Golden Ocean has a purchase option of approximately $14 million per vessel after 10 years, and we have a put option to extend the charters an additional three years if these purchase options are not exercised.

While the financing terms are not fully finalized yet, we expect the net cash yield on our equity investment of at least 10%, thus profit share contribution relating to this deal.

Frontline has always performed on the charter arrangement with us, but we have seen that the original base charter rate set in 2004 and 2005 have been on the high side in periods with soft tanker market, and Frontline has then in reality been required to subsidize these charters.

Following discussions with Frontline, we have agreed to amend the base charter rates to a level we believe is more sustainable over time and also adjust the operating expenses to a level closer to current run rate. The charter period will remain as before, with approximately eight years remaining charters, on average, and in exchange for the adjustments we have done, we will get a higher profit split of 50% kicking in from the new low base rates and to be calculated on a quarterly basis, instead of the annual calculation we have today.

We will also receive 55 million shares in Frontline, which will give us a 28% stake in the company. These shares will be registered and appropriate filings will be made to ensure we have full flexibility with respect to these shares. They could be distributed to our shareholders or sold at a later stage, but no decision has been made as to if and when this could take place.

We have amortized down the debt on these vessels very quickly and have current loans on only three out of 17 vessels. With this low leverage, there is no net loan amortization required, and even with the new scratch base rates only from Frontline, there will be significant free cash flow from these vessels. We do not anticipate any book impact of the transaction, as we will write down the value of the leases with an amount corresponding to the value of the compensation we will receive.

An interesting side effect of this is that very low profit split contribution is required to make it more accretive on a profit-and-loss basis compared to the old structure when the charter rate goes up to the old level from 2016.

We estimate this to be only $2,500 per day per vessel on top of the new base rates. So from a VLCC earnings perspective, only $22,500 per day is required in order to be accretive from an earnings perspective.

We also believe the revised profit split at 50%, starting from a much lower level, could be interesting over time. The forward market, as illustrated by the TD3 forward rate, currently quoted at $44,000 per day in 2016, indicates market expectations for a fair market at least the next 18 months. And at this level, the net contribution per share from the Frontline vessels and notes could be close to $0.40 per share per quarter. This is assuming a refinancing of the 17 VLCCs and Suezmaxes with an amount essentially equal to approximate scrap values and therefore without amortization requirement.

Without any profit split contribution, the net contribution per share will be approximately $0.20 per share per quarter. As part of the transaction, we will not have a corporate guarantee from Frontline anymore on the charters, but the $2 million cash buffer per vessel that will be built up in the chartering company will be sufficient to buffer -- be a sufficient buffer to withstand 12 months of the lowest average 12-month average charter rates we have seen for these vessels over the last 15 years.

And the above does not take into account any benefits from the shares to be received from Frontline, so all in all, we believe it is a balanced deal where we have better upside potential in a strong market and lower breakeven rates and thereby resilience in a soft market.

Most of our vessels are chartered out on a long-term basis and we still have more than nine years' weighted average charter coverage. Full details on a vessel-by-vessel basis, and including estimates for the new Frontline leases, is available by contacting us on email at IR@shipfinance.no.

We have more than $4 billion of fixed-rate order backlog, which is in fact an increase of $200 million compared to last quarter, despite the reduction in fixed rate with Frontline. The estimated EBITDA as given in backlog is approximately $3.3 billion, or around $35 per share. These numbers includes the new and reduced base rates from the Frontline vessels and do not include any contributions from the profit split arrangement, nor does it include cash flows from the two Suezmax vessels operated in the spot market. As the backlog is based on fixed-rate charters only, we have not included revenues from our other vessels after the end of the current charters.

And we are now a total of 16 customers across our four market segments, and with the exception of the eight bulkers to Golden Ocean and the jackup West Linus, we have not done any long-term charter deals with the related companies for more than six years.

If we then switch to our performance last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associates, the EBITDA, defined as charter hire plus profit share, less operating expenses and G&A, was more than $550 million in the period.

Net interest was $170 million or approximately $1.25 per share and our normalized ordinary debt installments relating to the Company's projects was around $220 million. This is excluding prepayments relating to sale of older assets and without net amortization on Frontline vessels. In fact, at quarter-end, most of the Frontline were debt free, after significant prepayments of debt earlier.

In the corresponding period over the last 12 months, we have declared dividends of $1.67 per share or $156 million in aggregate. This is in line with our historic payout (technical difficulty) of approximately 75% since 2004.

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 first quarter.

Thank you, Ole.

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

For the first quarter, total charter revenues before profit split and cash sweep were $139.1 million or $1.36 per share, down from $162.6 million in the previous quarter. The main reason for the reduction is the decline in offshore revenues due to the sale of West Polaris at year-end and scheduled reductions in the charter rates of West Hercules and West Taurus in November 2014 and February 2015.

It is important to note that the scheduled rate reductions are balanced by reduced interest and debt repayments on the related financings, while the net effect on the distribution capacity is neutral.

Revenues from VLCCs was slightly down in the quarter, due to the sale of three older VLCCs in the fourth quarter, while revenues from Suezmaxes were up, due to stronger earnings on the two Suezmax tankers trading in the spot market, one of which was out of service for 33 days during the quarter in connection with a special survey and a major upgrade to improve earnings efficiency.

Following the revised agreement with Frontline, with effects from July 1, 2015, fixed-charter revenues from the vessels are expected to increase slightly in the third and fourth quarter, while they will reduce in 2016 compared to the original agreements, where rates were scheduled to go back to their original levels.

Revenues from liners were up in the quarter, due to the delivery of the remaining two 8,700 TEU container newbuildings in January 2015, which will have full cash flow effect in the second quarter.

Revenues on dry bulk were in line with the previous quarter, but will increase when we take delivery of the eight Capesize dry-bulk carriers on charter to Golden Ocean, which is scheduled within the third quarter.

Vessel operating expenses and G&A were $26.5 million, slightly down from the previous quarter. Under the revised agreement with Frontline, operating expenses on these vessels will increase by approximately $3.8 million per quarter as from the third quarter 2015.

We recorded a cash sweep of $9.9 million from Frontline in the first quarter, representing a full cash sweep on all vessels, and also a profit share of approximately $200,000 relating to five Handysize dry-bulk carriers.

So overall, this sum rises to an EBITDA of $127 million for the quarter or $1.36 per share.

We now 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 book operating revenues and instead booked as revenues classified as repayment of investment in finance leases, results 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 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 $90.1 million, which includes $9.9 million in cash fee from Frontline. Total operating expenses were $47.8 million, giving net operating income of $42.2 million.

Results in associates and the interest income from associates were down compared to the previous quarter, mainly due to the sale of West Polaris at year-end. Interest expenses were also down, mainly due to reduced interest expenses on our floating-rate debt.

Expenses related to non-designated derivatives of $8.1 million includes a $6.6 million non-cash mark to market of derivatives.

So overall and according to US GAAP, the Company reported net income of $33.1 million or $0.35 per share for the quarter. Adjusted for one-off and non-cash items, the net income was $42.6 million or $0.46 per share.

Moving on to the balance sheet, we showed $50 million of consolidated cash at the end of the quarter. In addition, we had approximately $132 million freely available for drawdown under revolving facilities. Available-for-sale securities of $69 million includes $44 million invested in short-term tradable securities as a short-term liquidity placement.

In addition, the second-lien notes in Horizon Lines are recorded under available-for-sale securities at only $25 million or 40% of par value, including accrued interest.

Ship Finance also has 9.25 million warrants in Horizon Lines with a book value of $1.2 million, including under other long-term assets. As discussed in our fourth-quarter earnings call, there is a good probability of the notes being settled at par and the warrants being sold at $0.72 per share, which could give a significant book profit if and when it closes.

The $117 million amortizing Frontline notes are included in amount due from related parties and the current and long-term assets. The notes are conservatively recorded in our balance sheet as 73% of par value, on average, at quarter-end. The notes are not part of the amended agreement with Frontline and we continue as before.

On the debt side, we had approximately $1.5 billion of consolidated interest-bearing debt outstanding at quarter-end. In addition, our 100%-owned subsidiaries accounted for investment in associates and approximately $1 billion in bank loans at quarter-end. The debt in these subsidiaries is not included in the consolidated accounts.

Consolidated bank loans were approximately $900 million. In addition, we had approximately $650 million of consolidated senior unsecured notes outstanding at quarter-end. The figures includes the NOK900 million bonds maturing in 2019, of which $106 million was net outstanding, and the NOK600 million bonds maturing in 2017, of which $70 million was net outstanding. The figure also includes the $350 million convertible bonds maturing in 2018 and $125 million convertible bonds maturing in 2016.

Stockholders' equity was approximately $1.24 billion, including $86 million of deferred equity. The book equity ratio, including deferred equity, was 42.5% at the end of the quarter.

Then looking at our liquidity and remaining CapEx. As mentioned, the Company had a total available liquidity of approximately $182 million at the end of the quarter, which includes $50 million in cash and approximately $132 million freely available on the revolving credit facilities. We also had $69 million in available-for-sale securities at quarter-end, as previously described. Further, 17 of our vessels were debt free at quarter-end, including 14 of the VLCCs and Suezmaxes on charter to Frontline.

We intend to refinance all the Frontline vessels in the near future, which should give us significant additional investment capacity.

On the CapEx side, our remaining CapEx relates to the eight Capesize dry-bulk carriers to be acquired from Golden Ocean at a total cost of $272 million. We are in the process of arranging $177 million long-term financing with a syndicate of banks, while the remaining $95 million will be funded from our available liquidity.

We are comfortably in compliance with all financial covenants under 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 45 quarters this 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.

Then to summarize, the Board has declared an increased quarterly cash dividend of $0.43 per share for the quarter. This represents a dividend yield of 11%, based on the closing share price as of May 28. Net income for the quarter was $33 million or $0.35 per share. Net income adjusted for one-off and non-cash item was $42.6 million or $0.46 per share.

The aggregate EBITDA was $127 million or $1.36 per share. We took delivery of the two remaining container newbuildings in January 2015, which immediately commenced their seven-year charters to Hamburg Sud container line.

We have agreed to acquire eight Capesize dry-bulk carriers from Golden Ocean in combination with long-term charters, which are expected to deliver within the third quarter. We have entered into a long-term solution with Frontline with significant upside potential in the current strong market and see investment opportunities in all our segments, with capital available for new investments.

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

(Operator Instructions). Matthias Detjen, Morgan Stanley.

Good morning, gentlemen, and congratulations on the strong quarter. You said the dry-bulk deal with Golden Ocean, I guess the market is very weak right now. Does that mean that you think the market has bottomed out and you think that -- do you maybe think that there might be more opportunities in that market right now?

Well, we certainly think that the market is on the right side of the cycle, so to speak, from an investment perspective.

When we look at the different segments, we take, I call it, a cyclical view, and generally you can say that it is always possible to structure deals also when you feel that you are very high up in the cycle, but you have to be very careful with who the counterparty is and how you mitigate, call it, the risk factors linked to the risk that if the market goes down, there could be problems servicing the charter hire.

When we are down in the cycle, as we believe we are in the dry-bulk segment right now, we see more opportunity in that piece and it is more interesting to see, call it, volatility linked to the charter market going up again.

We have seen values coming down sharply. A year ago, these vessels would have been worth probably more than $50 million apiece. Now we are buying them much, much cheaper. So from that perspective and with a long-term investment profile -- remember, we have 10 years' charter share with quarterly profit split calculation, we think the optionality here could be quite interesting from our side.

That makes sense, and are there any other markets that you see as a cyclical low where you would also be interested in investing and deploying the capital that you have?

I think -- we are definitely in a relative cyclical low also in the offshore segment. Unfortunately there, I think it will take a little longer until we see, what we say, the best investment opportunities, call it, at the bottom of the cycle. So, we are a bit cautious on the offshore side.

Of course, we can do deals there as well, but we would be quite careful now because we are not sure if that market really has bottomed out quite yet. But we look at opportunities across all our segments and we just did this deal on the dry-bulk side. We have just taken delivery of four newbuilding container ships. There are other opportunities also on the container side and we also look at opportunities on the tanker side.

So I would say there are opportunities across the board, but right now I think we would be more cautious on the offshore side for the time being. I think over time there could be some -- hopefully, some very interesting opportunities coming off boats on the offshore side.

And looking at the offshore side a bit more, would you say that you would be more interested in rigs or on offshore supply vessels, or is there no real preference between the two there?

Well, I would say our investments' preference on the offshore side is commodity-type assets, so what we own is, call it, modern ultradeepwater drilling rigs. We own, call it, more standard but modern jackup drilling rigs and we own anchor handlers and platform supply vessels.

We have always been cautious. We have not invested in seismic vessels, for instance, or cable-laying vessels or, call it, or niche type assets where there is a bigger risk of being, what do we say, left up in a corner if the market should turn down and there are limited, call it, counterparties you could actually charter those to.

But we are pretty flexible in what we would look at, but we look at each deal individually, and if we think that there is more, call it, more structural risk in the asset itself, i.e., more specialized asset, it has to be mitigated by other factors, like length of the charter, whether it's a full payout, who is the counterparty, et cetera.

Okay, that makes sense. And then, I have one question. If you just walk us through the -- you might have explained this before, but how do you arrive at the $168 million in the Frontline deal and the 55 million shares that were issued by Ship Finance? How do you arrive at that valuation or that value there for these charters?

Well, you know, processes like these, it is always a negotiation. We have our, call it, opinion of what we believe the value of, what do we say -- of value what we give away, and of course, we are giving away some of the fixed-rate charters. Of course, you can apply a discount rate to that and that discount rate may depend on your view on cost of capital.

We have a profit split one that is higher and it is starting -- a percentage -- and it started from a lower level. We have good visibility in what we say in charter rates, certainly on forward rates next 18 months, so you can have a view on the value there. And of course, also, you can have a view on the value of the Frontline shares.

At least on the Frontline shares, there is very significant trading in those shares. Basically, the full shareholder base has traded several times over the last 12 months, so from that perspective, there is certainly liquidity there to support issuing the shares to us.

But that said, no decision has been made from our side as to if and when these shares could be distributed as a special dividend or if we want to sell them or something else. I think generally with a firm tanker market, what we say, having investments in that segment right now may not be the worst of investments.

That's true. Ole, thank you very much for the update.

(Operator Instructions). There are no further questions at this moment, Mr. Hjertaker.

Okay, thank you. Then I would like to thank everyone for participating in our first-quarter conference call, and if you have any follow-up questions, there are contact details in the press release. Thank you very much.

This concludes this conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.