SFL Corporation Ltd.
Q2 2008 Earnings Call Transcript

Published: 21 Aug 2008

[Operator:]

Welcome to the ship finance Q2 2008 result presentation conference call. For your information, this conference is being recorded. At this time, I would like to turn the call over to, Mr. Ole Hjertaker. Please go ahead, sir.

[Ole B. Hjertaker:]

Thank you and welcome to Ship Finance International’s second quarter conference call. From the company here today, we have Lars Solbakken, the Chief Executive Officer. My name is Ole Hjertaker and I’m the Chief Financial Officer. I would like to turn to forward-looking statements, page 2. Before we begin the presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. private securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “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 result to operations to be materially different from those at work 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 Finances, reports and filings with the Securities and Exchange Commission. Turning to the next page, today, we will discuss the second quarter, 2008 highlights, and also, to touch on some subsequent events and we will also go the financial results for the quarter. Thereafter, we will open up for questions and answers. Turning to the next page, the Board of Directors has declared increased dividends of $0.58 per share. This represents $2.32 per share on an annualized basis, or 8.5% dividend yield, based on the closing price yesterday of $27.24. Stable and increasing long-term sustainable dividends are very consistent with our strategy. The net income for the quarter was $71.3 million, or $0.98 per share. This includes $33.1 million of profit share and also a $10.6 million gain on sale of a single hull vessel and a positive mark to market of swaps of $3.2 million. Most of our interest rate swaps are now restructured to hedge accounting based on strict SCC guidelines. This means a lower variance in mark to market than we would otherwise see quarter to quarter. I would also like to you know that we received an upfront payment relating to the single hull vessel, Front Sabang, that has been classified as repayment of investment in finance lease, and is therefore not included in the net income. We have a continued high profit share in the quarter, as I mentioned. We have $66.8 million, year-to-date, and this profit share contribution is payable in March 2009. The strong tanker market continued in to the third quarter, but market has slowed down in August. Frontline also expects to dry-dock seven vessels in the third quarter, versus 5 vessels in second quarter, and that was also up from 2 vessels in the first quarter. The dry-docking will, of course, impact the basis for the profit share. If you turn to the fixed charter hire, that was $136.9 million, or $1.88 per share, excluding profit share but including a vessel not consolidated based on US GAAP. This is in line with the previous quarter. This number also excludes the $21.6 million upfront payment relating to the Front Sabang. The EBITDA equivalent, net of OPEX and GNA expenses, was $142.5 million, or $1.95 per share. Next page

[Operator:]

Thank you, sir. (Operator Instructions). We now will take our first question from Jonathan Chappell from JPMorgan. Please go ahead.

[Jonathan Chappell:]

Thank you. Good afternoon. Over the West Polaris being delivered this quarter, it looks like it is going to add significantly to the bottom line and I'm just wondering, are their other Rig opportunities out there first of all; and second of all, I know that you had a huge syndicate of banks, and we've talked about it in the past that lending is open to the right companies but would you have to issue equity to fund the type of purchase price that these Rigs are providing, even though the accretion is very large?

[Ole B. Hjertaker:]

We of course, constantly look at opportunities to grow our balance sheet in all segments. We think that the off shore space is very interesting, also because we see that many clients have very substantial quota backlogs and they are able then to pay a high charter rate in the beginning of the charters as we did with the West Polaris, where we haven't accelerated the payment, which also takes down our exposure to the asset. So we think that type of transaction is attractive to us, and of course we are continuously looking at opportunities. With regard to the capital structure, I think our principal focus is to structure deals that are accretive to our distribution capacity. As we pointed out, also when we went through the liquidity overview, we still had the sources of liquidity available both now and also going into next year that we can tap on. Then of course it is also a question of what is your growth rate; from our perspective I think that if we had the right opportunities, and we could structure deals were accretive enough we could raise equity if we think it will be beneficial for our investors. But our key focus is distribution per share. So I think we are very open-minded.

[Jonathan Chappell:]

You have a pretty good liquidity position versus a lot of the other players in the market right now; are you seeing owners or shipyards coming to you with offers which may be viewed attractively, because this kind of financing can't be achieved by, maybe, speculative orders?

[Ole B. Hjertaker:]

We see a very good deal flow, and of course we will see more opportunities where owners have problems meeting their obligations, and also are struggling to raise their financing in the market, and our position now is to take advantage of such opportunities, we haven't done many of these transactions so far but we are positioning ourselves to take advantage of them.

[Lars Solbakken:]

And that is also illustrated by the financing of the two container vessels as we mentioned $58 million that we are in the process of structuring which will add to our capacity.

[Jonathan Chappell:]

Ok, thanks a lot.

[Operator:]

Now, we move to John Packer from Jefferies. Please go ahead.

[John Parker:]

Hi, I just want to tell you that your disclosure is excellent and it really makes it easy to analyze properly. Just one quick question; your profit share sensitivity, wouldn't the higher expenses to Frontline for operating expenses eat into your profit share calculation?

[Ole B. Hjertaker:]

No, the profit share calculation is based on the time charter revenues that vessels are earning in the market, so that is calculated before Frontline calculates their operating expenses. So of course if the vessel is in dry-dock, it is not generating revenues and that of course impacts the basis for the profit share calculation.

[Lars Solbakken:]

Operating expenses - that is Frontline's risk and it is not impacting our profit share.

[John Parker:]

You said you have $154 million in the current pocket for investors and finance leases that will be paid over the next 12 months, is that correct?

[Ole B. Hjertaker:]

Are you now referring to our cash position?

[John Parker:]

Earlier in the call you mentioned that in your other current assets, I think you said 154 was for investors and finance leases, is that correct, or perhaps I didn't quite hear you?

[Ole B. Hjertaker:]

That is correct.

[John Parker:]

Ok, good. Do you have any idea of the timing of the $58 million of debt that you will take on against the containers?

[Ole B. Hjertaker:]

No, we cannot give any specific timing, we are working on it, but we just wanted to illustrate that… but as we are working on it currently we of course hope to conclude that relatively soon. But we will not give any guiding whether or not that will be in place in September, but by the end of September or immediately after.

[John Parker:]

Yes… after everyone is over their summer vacations, right?

[Ole B. Hjertaker:]

Exactly.

[John Parker:]

The Suezmax is a very nice trade obviously; I'm just curious, as you look at that transaction, did you also entertain offers for long-term charters or did a good deal come along, and I guess that you're thinking along the lines of 'we don't necessarily want to put more into this tanker space because we already have so much in it', or was it just 'this is such a great offer that we cannot refuse'. What was your thinking going into that?

[Ole B. Hjertaker:]

I think, of course we have looked at several opportunities for long-term charters, and that was our mutual idea of these vessels, but what we have seen is that, basically the vessels values has moved up quite substantially over the last few months but we have not seen the long-term charter rates that we could obtain on a move in parallel with that, and certainly we found now that it was more attractive to sell them than to do a long-term charter. Then of course as we negotiated it, the market was strong and we felt that it was an opportunity to take advantage of the strong market.

[John Parker:]

So you feel that you will probably get better returns elsewhere with that cash?

[Ole B. Hjertaker:]

Yes and we would not be able to get the same return by doing a long-term charter. The 111 was an attractive price.

[John Parker:]

Yes it was. Well thank you very much, that's all the questions I have.

[Operator:]

Now we will take our next question from Anders Rosenlund of ABGSC. Please go ahead.

[Anders Rosenlund:]

Would you be comfortable taking on another $1.7 billion worth of Rigs on your balance sheet?

[Ole B. Hjertaker:]

That all depends on the structure of course. We have quite a substantial balance sheet today. If you look at our balance sheet today it is in the region of $3 billion, and we are then adding on close to $900 million when we take on that realship deal next quarter. I think in terms of investing capacity we have done $1.7 billion of deals in the last 18 months, so we have clearly demonstrated the ability to take on a significant volume in the past as we see the bank market still being there for our type of companies. We think that we can continue growing the company. We will not give any specific guidance on numbers and amounts but we think the market is very attractive and we see many opportunities so we want to grow the company in a diligent manner of course with the focus on increasing our distribution capacity.

[Anders Rosenlund:]

You have previously commented on the tank of exposure, where you indicated that the desire to diversify your exposure to different segments. How should we read that in relation to potential additional vigil?

[Ole B. Hjertaker:]

I think you shouldn't really, just expect Rig deals or off-shore related deals. You should also look at the other segments. What we have mentioned in the past is, of course, starting with effectively 100% tanker exposure, we are now down to about 50% tanker exposure and 50% on other deals which is then a mix of off-shore which is around 25% and 25% between dry-boat and container. What we said in the past has been that we of course intend to grow this pie and we believe that both off-shore and container segments are both segments that are attractive for us to grow in over time. Of course we will look at it from deal to deal and of course it is more important for us to structure the right deal than necessarily put the deals in one category or in another category but as we see it we see a very good growth potential for us in both these segments. Over time we will also grow in the dry-boat segment but as we have seen it now, we have been a bit reluctant to grow substantially in that segment that is more based on the values we see there and effectively break even rates for long-term charters on deals in that segment.

[Anders Rosenlund:]

Ok, excellent. Thank you.

[Operator:]

(Operator Instructions). We now will take our next question from Andreas Stubsrud of Kaupthing. Please go ahead.

[Andreas Stubsrud:]

Yes, thank you. Two quick questions. Number one, have you paid Cedral the $850 million this quarter or will that happen in Q4?

[Ole B. Hjertaker:]

You can say that we have paid now about $600 million which was paid on delivery. As the operation starts and it enters into the charter with Accent we will draw the last $250 million of the loan. So the equity in the first $450 million of the loan has been paid and then we will draw an additional $250 million after it is finally accepted by Accent. There is no more cash going out, all the cash has been paid.

[Andreas Stubsrud:]

Ok, and in terms of the $700 million loan for that rig. Is it correct, if you can comment on it, is it approximately 4.9%?

[Ole B. Hjertaker:]

I'm not sure that I've got the question here.

[Andreas Stubsrud:]

Ok, the loan you had to the bank for the $700 million, in terms of the information that you provided for the press release…in terms of paying $65 million in the repayment of debt, I calculated an interest rate of 4.9%, can I confirm that?

[Ole B. Hjertaker:]

No, I don't think that is correct. There was a base rate, but it is liable at 125 and then of course we had a base rate in the press release that went out, but there is an adjustment there so we have now swapped the loans and then there is an adjustment to the rate. But the net to us is the same; the net amount that was announced in the press release is exactly the same.

[Andreas Stubsrud:]

So you will be able to pay the $23 million, or the deal will provide the $23 million?

[Ole B. Hjertaker:]

Yes, because all the interest risk was for an illustration there. If you look at the charter rate, the first three months in the original press release based on the original LIBOR rate that was announced based on $107,500 per day. After this interest rate has been swapped for the first 5 year period, the charter rate that will be payable will be $120,500 per day, and that decreasing after the first three month period we announced then $330,000 per day, while they will pay on average for that close to five year period in the region of $345,000. But that difference is really only going through the interest expense so we will get a higher charter rate but then we will also pay a higher interest rate in that period. It has basically swapped for the whole charter period with Exxon. The next two offers are exactly the same.

[Andreas Stubsrud:]

Ok so the net is the same for C-Finance and Center will pay 345 instead of 330.

[Ole B. Hjertaker:]

Yes.

[Andreas Stubsrud:]

Okay, very good. Thank you so much.

[Operator:]

(Operator Instructions). As we have no further questions, I would like to turn the call back to Mr. Hjertaker for any additional or closing remarks.

[Ole B. Hjertaker:]

Thank you very much for participating at the Ship Finance international Q2 presentation; we hope that the results are in line with your expectations and we will of course continue focusing on growing the company and building on the dividend capacity in the future. Thank you.

[Operator:]

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation, you may now disconnect.