SFL Corporation Ltd. (SFL) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2013 Ship Finance International Limited Earnings Conference Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Ole Hjertaker. Please, go ahead.

Thank you, and welcome, everyone, to Ship Finance International and our Third Quarter Conference Call. With me here today, I also have our 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 Ship Finance's reports and filings within -- with the Securities and Exchange Commission. Net income for the quarter was $13.5 million or $0.14 per share. Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was $157 million, which is marginally higher than the previous quarter. This is excluding any cash sweep from the Frontline vessels in the quarter. In 2012, the average cash sweep was $13 million or $0.16 per share per quarter. The EBITDA equivalent cash flow in the second quarter was approximately $121 million, similar to the second quarter. And last 12 months, the EBITDA equivalent was approximately $500 million. The cash dividend declared is $0.39, which is in line with the previous quarter. The dividend represents $1.56 per share on an annualized basis or 9.2% dividend yield based on the closing price yesterday. The dividend declared in the quarter is higher than the reported net income and is a…

Thank you, Ole. On this slide, we have shown our pro forma illustration of cash flows for the third quarter compared to the second quarter of 2013. 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 second (sic) [third] quarter, total charter revenues were $156.4 million or $1.68 per share, up from $153.7 million in the previous quarter. Vessel operating expenses and G&A were $37.7 million, up from $34.8 million in the previous quarter. The increase in both charter revenues and operating expenses is mainly due to the 2 Suezmax tankers Glorycrown and Everbright, which switched from bareboat charters to time charters during the second quarter and are now trading in the spot market as previously described. In addition, operating expenses for the third quarter includes a dry-docking expense of $1.4 million. We also had income of $2.2 million on financial investments during the third quarter, in line with the previous quarter. There was no cash sweep from Frontline in the third quarter, but we recorded a profit share of approximately $200,000 relating to one of the Handysize drybulk carriers. So overall, this summarizes to an EBITDA of $121.1 million for the quarter or $1.30 per share, in line with $121.5 million in the previous quarter. It should be noted that the average number of shares has increased from 86.1 million in the second quarter to 93.3 million in the third quarter following the issuance of 8 million shares in the end of June 2013. The proceeds from the offering were, to a large part, invested in the harsh-environment jack-up rig West Linus, which is expected, delivered and cash flow effect in January 2014. We then move on to the profit and loss statement as reported…

[Operator Instructions] We will now take our first question from Herman Hildan from RS Platou Markets.

I just have a quick question on the 4,800 teu vessels being delivered. In your report, you mentioned that they may be canceled. My question -- I mean, I take it that the vessels have been built purposely and that the charter would like to receive them. So what's kind of the likelihood that you'll be able to renegotiate the price and still maintain positive terms with the charter?

Well there's really not so much to report as of right now. I mean, we have -- of course, we have a team at the shipyard who are, of course, actively working there looking after all these 4 vessels. And we have a dialogue with the yard itself. We have a dialogue with the financing bank, yes, and of course, the charterer. So we really don't have any more information, and we'll notify the market if and when there are any changes. But as we see it right now based on the latest update from the yard, the vessel will be ready in late December. The reason why we made the comments in the press release was really to notify that there have been significant delays, and as we are getting closer to the deadlines, we feel that it is appropriate to let the market know that we are getting closer to that, call it, the time limit. But otherwise, we will make announcements if and when there are any changes.

Okay. So if the vessel is delivered in December, then you -- maybe the new -- that's going to be the position where you could negotiate terms with the yard.

Well I cannot comment specifically on dialogue we may have with the yard or with the charterer, but if there are any changes, we will let you know. The base price for the vessels is around $54 million, and that's really what we have to report right now.

Okay. And then the last question, I mean, you also scrapped 2 VLCCs approaching lapsing [ph]. Did you look at alternatives for chartering out the vessels, or was that market simply not there? I mean, if you can do lapsing [ph] with the charterer, say, for 3 or 5 years, does that not make any sense? Or was it not possible?

Well we were approached by Frontline with respect to these 2 vessels. And as you know, the Frontline has chartered the vessels from us, and we're buying the management services from them where they are then responsible for tactical management, including dry-docking. And Frontline proposed a transaction for us where we, in combination with selling the vessels in the market, would get compensation in cash and in a note. The Frontline effectively coordinated the sales process, and I'm sure they also looked at all available options, but we ended up selling it to a third party for cash. And we think, for us, it is in line with our overall strategy to focus on modern vessels. These vessels were approaching 15 years, and we got a combination of cash and note out that we felt were a fair deal and has improved cash flow [ph]. And we'll have an increased cash -- call it, cash revenue for us over the next year or so. So we think it's a balanced deal.

And the final question I have. I mean, you mentioned that there's a tight lending market on non-core clients and that terms are improving. Is that the benefit being Ship Finance in terms of your margin on new projects? Or does that, call it, call out go into whoever your -- whatever segments you're going to grow into the quality comps [ph] project?

I think we've been fairly active in the banking market over the last year, and we have seen margins coming down every time we do a financing, and we expect them to go further down because there is definitely good appetite for the good name. Of course, the margin will also depend on your counterpart, but it's definitely a good time to finance things, so which, of course, makes us competitive in new projects also.

And what kind of target returns are you -- would you kind of guide on going forward from [ph] new growth?

We don't have very specific target percentages lined up. But we, of course, look at all projects individually and look to get the best return out of the deals we do. So we think we have a decent amount of firepower, if we find the right projects. And then it's, I guess it's all down to trying to do the right deals. There are a lot of opportunities out there, and it's all about trying to choose the ones you think will give you a long-term return, not only cash yield but also in terms of residual exposure and also finding, doing the deals with the right counterparts.

[Operator Instructions] We will now take our next question from David Osler from Lloyd's.

I wonder what you can tell me about how you see your operating margin progressing over the coming few quarters. I mean, I've just been doing some "back of the envelope" calculations. I noticed it's -- seems to be on a downward trend. Do you think you're going to be able to reverse that at any point?

Well we focus on the structuring deals on -- call it, on a deal-by-deal basis. And of course, we try to get all the margin we can get out of deals. You will note that quite a few of our projects in the portfolio are on bareboat basis where we don't have -- run -- or where we don't expose to operating expenses. While in other deals, we have them on time charter where we have operating expenses. In the quarter, we saw an increased operating expense relating to 2 Suezmax tankers, the Glorycrown and Everbright, but that was because they were switched from a structure where we had them on bareboat to a time charter structure where we then both increase the charter revenues but also the operating expenses accordingly. So we don't have any sort of specific target in terms of the operating margin. Our focus is to deliver long-term sustainable net cash flows. And the exact deal structure varies from transaction to transaction.

So you're -- relatively speaking, aren't concerned by the trend.

Yes, but I'm -- I hear what you're saying. I mean, we don't use that as a core test for our business model. What we focus more in on is how much net cash flow is coming out of our different projects.

Right. And, yes, how are you measuring that?

Well it's relatively simple. You start with EBITDA and you subtract the interest and amortization, and you are close to a cash flow that is available for...

Right, on that benchmark, okay.

Sorry?

I was just checking which benchmark you were using. But, yes, okay, fine.

Yes, yes. Which is also in the first of the slides that Mr. Gurvin indicated, which is Slide #6 -- sorry, Slide #9 in the presentation. You will see that third quarter was pretty similar to the second quarter with an EBITDA of around $121 million in the quarter. What we have seen, actually seen, is that debt amortization has come down and particularly linked to the Frontline vessels where we have so low leverage now that there's no need to amortize that debt any further. So the free cash flow, we think, is quite decent. And that is also a background for how the Board has decided to pay a dividend this quarter as well of $0.39 per share.

[Operator Instructions] As it appears there are no further questions, I would like to hand back to Mr. Hjertaker for any additional or closing remarks. Please go ahead, sir.

Yes, thank you. Then I would like to thank everyone for participating in our Third Quarter Conference Call. And if you do have any followup questions, there are contact details in the press release. Have a nice day.

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