SFL Corporation Ltd. (SFL) Q1 2013 Earnings Report, Transcript and Summary

Ole B. Hjertaker - Chief Executive Officer and Chief Executive Officer of Ship Finance Management AS Harald Gurvin - Principal Financial Officer Magnus T. Valeberg - Vice President

Good day, and welcome to the Q1 2013 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 Mr. Ole Hjertaker. Please go ahead.

Thank you, and welcome, everyone, to Ship Finance International on our first quarter conference call. And with me here today, I also have the CFO, Harald Gurvin; and 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 U.S. 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 the Ship Finance's reports and filings with the Securities and Exchange Commission. Net income for the quarter was $32 million or $0.38 per share. This number includes a gain on sale of assets of approximately $18 million but also includes noncash and nonrecurring items of more than $6 million. Our CFO, Harald Gurvin, will elaborate more on this later in the presentation. Aggregate charter revenues recorded in the quarter, including 100%-owned subsidiaries, accounted for investment in associate, was $153 million. This is excluding any cash sweep from the Frontline vessels in the quarter. In 2012, as a reference, the average cash sweep was $0.16 per share per quarter. The EBITDA equivalent cash flow in the first quarter was $122 million and last 12 months, the EBITDA equivalent was $552 million. The Board of Directors declared a cash dividend of $0.39 per share, which is in line with the previous quarter. The $0.39 dividend represents $1.56 per share on an…

Thank you, Ole. On this slide, we are showing our pro forma illustration of cash flow for the first quarter of 2013 compared to the fourth quarter of 2012. Please note that this is only a guideline to assess the company's performance and is not in accordance with U.S. GAAP. For the first quarter 2013, total charter revenues were $152.8 million or $1.79 per share compared to $155.9 million or $1.84 per share in the fourth quarter of 2012. The slight reduction is mainly due to the sale of a total of 7 older vessels during the 2 last quarters, partly offset by the delivery of 2 car carriers and handysize drybulk carriers during the same period. Vessel operating expenses and G&A were $33.6 million, down from $35.9 million in the previous quarter, mainly due to the sale of older vessels employed under time charters. We also had income of $2.4 million on financial investments during the first quarter slightly up from the previous quarter. There was no cash sweep from Frontline in the first quarter compared to $12.1 million in the fourth quarter of 2012. So overall, this summarizes an EBITDA of $121.6 million for the quarter or $1.43 per share, down from $134.4 million in the previous quarter, the reduction mainly due to the lack of cash sweep in the first quarter. We then move on to the profit and loss statement, as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statement 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…

[Operator Instructions] We'll now take our first question from Matthias Ditton [ph] from Morgan Stanley.

So I have -- my first question is about the container ships that you ordered. And I was wondering when you were hoping to fix the vessels and what your outlook was on the container ship market in that sense?

Well, we have not communicated any specific deadline for when we will charter those vessels apart from that the expect to charter them out well before delivery, and there's still 1.5 years until the first will deliver so there is a good time to do that. We would, of course, not have ordered those vessels unless we were -- we had good expectations for charter rates that we could achieve, but we will report that when we have something firm to talk about. So for now, I think we cannot communicate any sort of specifics on charter rate or charter rate expectations as that may, of course, also impact the negotiations we may enter into with potential charterers.

Okay, that is true. And then maybe a second question on that, as you said you were talking about how much more efficient these vessels are and there's been a lot of talk about the eco-ship. And I was wondering if you could maybe give us an idea how much of the premium you would expect this vessel -- the vessels that you're building now to have over, for example, the 2010 vessel you were talking about? Do you think that the actual 30% efficiency will be translated into 30% higher charter rate or what expectations do you have there?

Hello, this is Magnus. Well, I think it's difficult to kind of pinpoint that one to one. I think in general, you also see that a lot of the [indiscernible] they have started ordering these vessels on their own books, and we think these vessels will be particularly flexible and a very good size to have and own as a tonnage provider. So with respect to specific charter rate levels and compare those to the former, I would say 8,500 vessels. It's difficult to say. But it's undoubtedly a fuel advantage compared to these vessels so you will -- we will expect to see a premium compared to those.

Okay. And then, I mean, you gave us a good idea about your -- the exposed Frontline and how that's been reduced. Could you just maybe give -- talk a bit about more about how what the effect would be if you would have to take the vessels back? And at what rates you think you would be able to get them back into the market?

Well, the vessels to Frontline, of course, the charter we have on those, the base charter rate is pretty much in line with the charter with the charter market. So the net effect of that would probably not be so dramatic compared to what we saw now in the first quarter. So and we continue, and of course, the current charter rate -- the current reduced charter rate we have for Frontline, we're still able to have that aggressive repaid downpayment of debt related to those vessels. And while -- and as we are soon very close to scrap value financing levels on the vessels, I think we can probably assume that if we refinance, that we could probably have a softer repayment profile if we wanted to, which then, of course, would give us more free cash flow out to the company. So I think our main focus relating to those vessels has been to minimize and reduce quality financial exposure to those vessels. And should the market recover and of course, if you look back in time, we've seen that the market has surprised it time and again with movements in that market. And of course, if the market should recover, that will then -- if we had taken them back, of course, that would benefit only us and nobody else. I think it's a very hypothetical issue. Yes, I think, Frontline are current with their charter payments. They did report more than $100 million of cash. They still own shares in Frontline 2012, so we think there's still some time before we are at a point where we have to make or -- such a decision.

We'll now take our next question from John Virgen [ph] from Crowell Weekly [ph].

I noticed on your highlights that your offshore segment was 51% of your charter revenue in the quarter. And in light of Seadrill and their younger brother, North Atlantic Drillings, pretty good earnings and robust outlook. Is that something you might consider putting more of your capital into? And could you comment on what you see in the offshore segment?

And of course, we're very happy that our big customer Seadrill is performing very well in the market. They have a very good forward book, a lot of charter coverage, so -- and at the same time, we have delevered those assets quite substantially so we think we have a very nice quality risk-reward book parameter relating to those assets. Of course, we cannot comment specifically on any sort of any potential transaction with anyone. But I would generally say that right now, while we look, of course, in all segments and we try to benchmark deals across segments, as we've done also in the past, right now, I believe it's really more in the liner business, the containerships as we've ordered is an interesting segment, but also offshore is a segment where we see that you may -- you can be able to combine longer-term charters with good counterparts that gets decent returns. So the only thing I can confirm is that yes, we're looking at deals in the offshore segment. We're also looking at all the deals in the container space and other liner assets but we cannot comment specifically until we have something concluded.

[Operator Instructions] At this time, there are no further questions in the queue, gentlemen.

Thank you. Then I would like to thank everyone for participating in our first quarter conference call, and we'd like to wish everyone a nice day.

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