SFL Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 7 speakers on the call.

Operator

Welcome to SFL's 4th Quarter 2023 Conference Call. My name is Sande Borglin and I'm an analyst in SFL. Our CEO, Ole Hakkar will kick off the call with an overview of the Q4 highlights. Then our Chief Operating Officer, Tim Schoehrle, will comment on vessel performance matters, followed by our CFO, Aksel Olesen, who will take us through the financials. The conference call will be concluded by opening up for questions, and I will explain the procedure to do so right to the Q and A session.

Operator

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. Forward looking statements are not guarantees of future performance.

Operator

These statements are based on our current plans and expectations and are inherently subject to 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, but are not limited to, conditions in the shipping, offshore and credit markets. You should therefore not place undue reliance on these forward looking statements. Please refer to our filings within the Securities and Exchange Commission for a more detailed discussion of risks and uncertainties, which may have a direct bearing on our operating results and our financial condition. Then I will leave the word over to our CEO, Ole Aptarkil, with highlights for the Q4.

Speaker 1

Thank you, Sander. We are now celebrating our 80th dividend and have a unique profile as a maritime infrastructure company with a diversified fleet. The total charter revenues were $209,000,000 in the quarter and EBITDA was $132,000,000 which were in line with the Q3. Over the last 12 months, the EBITDA equivalent has been $481,000,000 The net income came in at around $31,000,000 in the quarter or $0.25 per share. The net income was impacted by some one off items in the quarter, including negative mark to market on hedging instruments and accounting effects on Hercules, which our CFO, Aksel Oelesen, will explain in more details later in the presentation.

Speaker 1

In line with the improved results and commitment to return value to our shareholders, we are again increasing our quarterly dividend, this time to $0.26 per share. We have now paid dividends every quarter since our inception in 2004 and this has accumulated to more than $30 per share or nearly $2,700,000,000 in total. Our fixed rate backlog stands at approximately $3,200,000,000 and importantly, this backlog is concentrated around long term charters to very strong end users. And the backlog figure excludes revenues from the vessels traded in the short term market and also excludes future profit share optionality, which we have seen can contribute significantly to our net income. And with that, I will give a word over to our Chief Operating Officer, Trim Schurling.

Speaker 2

Thank you, Ole. We have 73 maritime assets in our portfolio and our backlog from owned and managed shipping assets stand at $3,200,000,000 The current fleet is made up of 15 drybulk vessels, 36 container ships, 13 tankers, 2 drilling rigs and 7 car carriers, where 6 are on the water and one still under construction in China. The latest newbuilding is scheduled for delivery in March 24. We have evolved from having a single asset class chartered to 1 single customer to a diversified fleet and multiple counterparties and the fleet composition has varied from originally 100% tankers via majority offshore assets 10 years ago to container vessels now being the largest segment with just under 50% of the backlog. Most of our vessels are on long term charters, but we have over the last 8 to 10 years completely transformed the company's operating model and have moved away from financing type bareboat charters and instead assumed full operating exposure, which makes us relevant for large industrial end users like Maersk, K Line, Hauppau Lloyd and others.

Speaker 2

In the Q4, 95% of charter revenues from all assets came from time charter contracts and only 5% from bareboats or dry leases. In addition to fixed rate charter revenues, we have had significant contribution to cash flow from profit share arrangements over time both relating to charter rates and cost savings on fuels. Out of the current 73 vessels, we have 13 on bareboat type contracts and 60 on time charter and spot trading. Our operation is quite complex with vessels across multiple sectors. We have our own commercial operation out of Oslo and operational management out of Singapore and Stavanger.

Speaker 2

Our OpEx philosophy is to continuously invest in our fleet to optimize the vessel's performance and maintain a high level of service to our customers. This includes investing to minimize our fire as well as investments to increase cargo carrying capacity and reducing energy consumption. This has become increasingly important with the implementation of IMO Carbon Intensity Indicator, which will impact vessels' operational profile including routing and speed. In Q4, we had a total of over 6,400 operating days defined as calendar day, less technical off hire and drydockings. 2 vessels have been in drydock in the quarter.

Speaker 2

Our overall utilization across the shipping fleet was 99.7% in Q4 and 99% for the drilling rigs. The chart revenue from our fleet was $209,000,000 in Q4 and OpEx for the fleet was $76,000,000 Among the key ESG targets for SFL is the reduction of carbon emissions on our fleet. Such reduction can either be met by fleet renewal in more efficient ships and with greener fuels, increased efficiency of existing fleet or a combination of both. As part of our fleet rejuvenation program, we are working with our main container charters Maersk and Hapag Lloyd to increase energy efficiency of our container fleet. For the 6 Hapag Lloyd vessels, we are investing in energy saving devices, improved hull form with new bulbous bow, new propellers and fittings, supreme antifouling paints and exhaust gas scrubbers.

Speaker 2

Furthermore, we are boosting the cargo intake up to nominally 15,400 TEU by increased deadweight and modifications to lashing bridges and lashing gears. We estimate that fuel consumption and emissions per TEU carried is down by approximately 20%. We have also had similar work done on vessels to Maersk, where the energy saving is in the same region or better. And with that, I will give the word over to our CFO, Aksel Oudson, who will take us through the financial highlights of the quarter.

Speaker 3

Thank you, Trim. On this slide, we are showing a pro form a illustration of cash flows for the Q4. Please note that this is on a guideline to assess the company's performance and is not in accordance with U. S. GAAP and also net of extraordinary and non cash items.

Speaker 3

The company generated gross charter hire of approximately NOK 209,000,000 in the 4th quarter, with approximately 93% of the revenue coming from fixed charter rate backlog, which currently stands at SEK 3,200,000,000, providing us a strong visibility on the cash flow going forward. In the Q4, the container fleet generated gross charter hire of approximately NOK 92,000,000 including approximately NOK 3,400,000 in profit share related to fuel savings on some of or 7 of our large container vessels. With 5 car carriers on charter following the delivery of our 2nd dual fuel LNG car carrier in November, gross charter hire increased to approximately €22,000,000 in the 4th quarter compared to approximately SEK9 1,000,000 in the 3rd quarter. Our tankers or 15 tankers on long term charters generated approximately SEK30 1,000,000 in gross charter hire during the Q4, in line with the previous quarter. The company has 15 dry bulk carriers, which 8 were employed in long term charters.

Speaker 3

The vessel generated approximately SEK21 1,000,000 in gross charter hire in the 4th quarter. 7 of these vessels were employed in the spot and short term market and contributed approximately SEK7.3 million in net charter hire compared to approximately SEK6.2 million in the previous quarter. SOV owns 2 modern harsh environment drilling rigs, the large tackier rig liners and the semisubmersible ultra deepwater rig Hercules. During the Q4, the rigs generated approximately SEK 44 point 9,000,000 in contract revenues compared to approximately 64,100,000 in the 3rd quarter. Lioness is under long term contract with Konica Philips on the Greater Ekobisk field in Norway until the end of 2020.

Speaker 3

During the quarter, Lioners revenue was approximately SEK 19,000,000 compared to approximately SEK 16,600,000 in the previous quarter. Hercules completed a drilling contract with ExxonMobil in Canada in September and commenced a contract with Galp Energia in Namibia in mid November after a short stay in Los Palmas for preparations. During the quarter, Hercules revenues was approximately SEK25.9 million compared to approximately SEK47.5 million in the previous quarter. The reduction in contract revenue for the Hercules relates to fewer contract days in the quarter as Zurich spent about half of the quarter in mobilization mode. On the U.

Speaker 3

S. GAAP, mobilization revenue and costs are deferred and recorded over estimated contract duration. Accordingly, we expect to record additional net mobilization revenue for approximately SEK3.6 million in the first quarter in addition to ordinary operating revenue under the contract. Our operating and G and A expenses for the quarter was SEK80 1,000,000 compared to SEK 86,000,000 in the 3rd quarter as well as fewer dry dockings and lower rig operating expenses in the quarter. This summarizes an adjusted EBITDA of approximately SEK 132,000,000 in the 4th quarter compared to SEK 130,000,000 in the previous quarter.

Speaker 3

Then we move on to the profit and loss statements. For the 4th quarter, we report total operating revenues according to U. S. GAAP of approximately NOK209,600,000, which is in line with the NOK209,500,000 of ChartHire actually received. During the quarter, the company recorded profit sharing income of approximately NOK3.4 million from fuel savings for some of our large container vessels and the car carrier.

Speaker 3

The increase in operating revenue is primarily driven by revenue from commencement of new charters for car carriers. Also, we booked an extra SEK 8,300,000 of accrued income on 2 car carriers as the vessels charter extensions and the U. S. GAAP are subject to averaging the previous charter rate and the higher charter rate until the end of the extensions. We expect an additional positive effect of approximately SEK1.1 million in the Q1 before we will record approximately SEK800,000 lower earnings versus actuals received higher per quarter until the end of the extended charter.

Speaker 3

On the financial items, we had negative noncash mark to market effects from derivatives of approximately SEK5.1 million, negative market effects from equity investments of approximately SEK1.4 million and an increase of approximately SEK300,000 on credit loss provisions. So overall and according to US GAAP, the company reported a net profit of approximately €31,400,000 or €0.25 per share compared to approximately €29,300,000 or €0.23 per share in the previous quarter. Moving on to the balance sheet. At quarter end, Espel had approximately €165,000,000 of cash and cash equivalents. Furthermore, in the company, marketable securities of approximately SEK 5,100,000 in addition to 8 debt free vessels with an estimated market value of more than SEK100 1,000,000 following the debt repayment of approximately SEK20 1,000,000 related to our 5 Supramax dry bulk vessels.

Speaker 3

In terms of CapEx commitments, we have SEK 77,000,000 of remaining CapEx at quarter end on 2 car carriers under construction. The vessels are fully financed by individual Yoco financing arrangements, and the combined net cash proceeds upon delivery from Doctor is estimated to approximately €45,000,000 Furthermore, our harsh environment jacket Rigliners is scheduled to undergo its 10 year special periodic survey in the Q2 of 2024. With an estimated net capital expenditure of approximately SEK30 1,000,000, which will be funded with cash at hand. Based on the Q4 numbers, the company had a book equity ratio of approximately 28%. Then to conclude, the company has delivered another strong quarter and the Board has declared the 80th consecutive cash dividend, which has been increased to 0.26 dollars per share.

Speaker 3

Our fixed charter in backlog currently stands at SEK 3,200,000,000, which provides us with strong visibility on the cash flow going forward. The company has a strong balance sheet and a liquidity position with SEK165,000,000 of cash at quarter end and a significant investment capacity. And finally, with the Hercules on back to back contracts with Galp and Equinor in 2024 and delivery of our newbuilding car carriers together with new contracts for our existing vessels, this is strong revenue generations in the quarters to come. And with that, we conclude the presentation and move on to the Q and A session.

Operator

Thank you, Aksel. We will now open up for a Q and A session. For those of you who are following this presentation through Zoom, please use the raise hand function to ask a question. When a name is called out, Our first question from Chris Wedeby. Please unmute your speaker to ask your question.

Speaker 4

Okay, thanks. Good afternoon, guys. Appreciate the time here. I guess I wanted to first start off with across the portfolio as you're looking out to 2024, where do you see the opportunities here? I guess, where would you be thinking about potentially deploying incremental capital to across the portfolio?

Speaker 1

Thank you. We are looking pretty broad at the market opportunities in several segments. I would say many of the segments are fundamentally undersupplied, so there could be good growth opportunities. We are we have done quite a few deals on the tanker side. We'll be happy to do more there, very low order books.

Speaker 1

We believe there is long term sustainable growth opportunities there. We have done several car carriers recently with deliveries of new dual fuel vessels, also a market with good underlying growth, a long gap in with very few new buildings for a period of around 10 years, structurally undersupplied and with significant growth, particularly out of China and where you have industrial counterparties who are willing to then look at longer charters. Same thing also on the liner side generally on containers. Yes, there is a significant order book on some of the larger sizes. But as we have seen, the liner companies are very focused efficiency.

Speaker 1

And you could look at so even though there isn't a good order book, they could still be very interested in adding new capacity both with the new fuels and with improved cargo capacity. So we and we are turning all the stones. I would say last year was a little slow generally, I mean, for two reasons. 1, we saw an increase in newbuilding prices or replacement cost for assets and also a combination with interest rates coming upwards. And as we are discussing, of course, we are very when we look at project opportunities, we also look at the cost of it, operating costs, the funding of it, etcetera.

Speaker 1

And it takes a little time when you have underlying fundamental factors moving upwards for that to filter into call it our chartering counterparties in this decision mode. We think that is changing now. We think our discussions partners are taking in that this is it's more of a long term development and not a short term sort of spike. And therefore, to be more open to do more business also at the levels that we see now. So we are optimistic on 2024 looking at multiple opportunities, but can, of course, not comment on any of those until they are concluded.

Speaker 4

Understood. Maybe I could follow-up on the container side. So I guess maybe a 2 part question here. So you noted maybe some interest on the chartering there. Can you maybe talk a little bit about what you're seeing?

Speaker 4

A little surprising there, but I guess maybe there is potential for some duration or bid in that market. And I guess maybe in connection with that, as you think about operational changes that you may be seeing from the liner companies in terms of how they're handling some of the disruptions that are out there, whether it be Red Sea, Suez Canal diversions or if it's Panama Canal low water levels and even sort of East Coast potential labor issues later in the fall. I don't know if you're seeing specific changes from the way that these companies want to operate the vessels that could potentially lead to incremental capacity being put to work. Yes. We we're

Speaker 1

saw this exceptional windfall profits in particular in 2021 2022. And we've seen the market normalize more. Generally, I would say that the liner business has more similarities to the airline industry than general shipping markets like tankers and bulkers. It's all about efficiency. It's all about cost per produced unit.

Speaker 1

And that is why now when we also see longer transportation lags, caused by it could be canal issues and other factors, it's all down to using the most fuel efficient vessels and where they are and with fuel efficient, I mean, fuel efficient per produced box for the liner company because they are also measured on emissions in addition to the cost that it is to transport this. So, the modifications we did to some of our existing vessels is a good example. They are very modern vessels, electronic engine. They were all designed after the financial crisis. So they are so called wide beam designs.

Speaker 1

And we can with a relatively modest investment make them obviously effectively as good as a brand new vessel that you would construct today with that engine configuration type. Of course, for liner companies, it's also all about making sure that they are positioned for new fuels. So that's also something that we would be very interested in looking at. But been mindful that when we do that, we want some charter duration as it's not set in stone quite yet what will be the long term, call it, fuel for the future. So we would be happy to look at we have some dual fuel LNG vessels in our fleet.

Speaker 1

We would be happy to look at methanol and other fuel types if we can work in cooperation with our customers. We have very strong vessel operations. I think what we hear from our customers is that they like our mindset. They like the way we focus on efficiencies every single day. We have and we try to make sure that we facilitate our customers with good long term logistics assets.

Operator

Thank you, Ole. Our next question comes from Gregory Lewis. Please unmute to ask your question.

Speaker 5

Yes. Hey, good afternoon, everybody, and thanks for taking my question. I did want to talk a little bit about the asset portfolio. I'm always asking about the rigs, but I guess I first wanted to ask about the drybulk fleet. I mean, it's a handful of vessels, asset prices seem firm.

Speaker 5

It's difficult it seems like it's difficult to find multiyear charters. Just kind of curious on your views on how that how the dry bulk assets fit into the portfolio and how you're thinking about those assets longer term?

Speaker 2

Thank you. As you rightly say, for the Supramaxes and the Kantramaxes, there isn't really a lot of interesting long term sharper opportunities. That's why these vessels are being traded in the short term market. We believe we have a robust setup to get maximum results out of that and they've been trading okay and quite well. We think for a company like SFL, it would be perhaps wrong to say that these are strategic assets.

Speaker 2

We when we're looking at new projects, it's very difficult to make sort of that kind of ships work in our model due to the lack of long term charters available, at least at the moment. So regarding how long they will be in our portfolio, I think that depends on the market going forward. As we've shown before, we will if the right market conditions prevail, we will sell them. But right now, I think on balance, it makes more sense to keep them. But of course, if we see a strong dry bulk market coming, then we might want to change our mind on that.

Speaker 5

And as part of the thought process, just as I try to work through this, I mean clearly the assets are fine, are doing fine and generating a return. Is part

Speaker 4

of the

Speaker 5

issue finding an opportunity to recycle that cash? Is that kind of what we need to be thinking about as kind of the trigger to monetize those assets?

Speaker 1

Yes, absolutely. I mean for now, as Trim said, I mean they're performing quite well. Most of these vessels are debt free, and they're generating quite good cash flow even in today's not too exciting market. So of course, we enjoy that. But longer term, our mindset and as we have seen in the past, we've turned over, I mean, over the 20 years the company has been in business.

Speaker 1

We have continuously sort of effectively recycled vessels by selling them after end of long term charter periods or when we feel that they don't they are not so easy to find long term charters for and then reinvest it in other vessels where we can find, call it that, the dynamic. So our core focus is obviously on the modern vessels. We can put on long term charters to very strong counterparties. And then we manage the other vessels and try to optimize the return on those. So whether we continue charter them and enjoy the cash flow or we dispose of them at some stage at the right price, that all depends on our market view at the time.

Speaker 1

But these vessels are relatively it's a relatively small proportion of our fleet, both in terms of numbers, but certainly in terms of, well, it implied values and cash flow. So over time, we've always had, I would say, sort of between 10% to 20% of our fleet effectively in the short term market. And I think right now, we are maybe on the lower end of that percentage.

Operator

Thank you, Ole. Our next question comes from Ari Pammid.

Speaker 6

Yes. Hello. Thank you for taking my question. First of all, another good quarter. Thank you very much and thank you for the good prospects going forward.

Speaker 6

I wanted to ask about a geopolitical issue. Recently, there were problems in and around the Red Sea. And I'm wondering what effect that has on SFL's business. Do you see, for example, an increase in demand for more fuel efficient boats? Or you go into a little detail on that, please?

Speaker 1

Yes. Thank you. Yes, I mean, we have seen quite changing market dynamics relating to that. And I would say also relating to the Panama Canal, where you have seen the restrictions and reduction in capacity going through the canal due to draft issues in that region. So first of all, I mean, our vessels are on long term charters.

Speaker 1

So our customers are paying their daily hire, would say, irrespective of where the vessel goes, whether it goes whether it used to go through the Suez Canal or whether these vessels went around Africa. And for our customers, that was also a question economics and logistics. Taking a vessel through the Suez Canal had some significant costs in canal juice. I mean, just to be mindful of that, I mean, we talk about our ships. If you look at the country Egypt, I mean, they used to have around $10,000,000,000 in canal fees as part of their revenue stream.

Speaker 1

And now that, of course, has dramatically reduced as a consequence of the turmoils and the deviation of the assets. So but for our customers, they spend more days at sea burning more fuel and that is you are absolutely correct. For them, it's all about having the most fuel efficient vessels as they now trade the these vessels longer. So but we hope, of course, that noise will subcede and that we can return to a more normalized, call it, transition level through that region. But I would say in the near term, we don't see so much direct impact on our numbers because we don't really have many vessels in the spot market that would normally trade through those areas.

Operator

Thank you. To thank everyone for participating in this conference call. If you have any follow-up questions to management, there are contact details in the press release or you can get in touch with us through the contact pages on our web page, www.sflcorp.com. Thank you.

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SFL Q4 2023
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