Ship Finance International Limited Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Ship Finance (SFL)

Ship Finance International Limited (NYSE:SFL)

Q1 2013 Earnings Call

May 30, 2013 10:00 am ET


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.

Ole B. Hjertaker

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 annualized basis or nearly 9% dividend yield based on closing price yesterday. And we have now declared dividends for 37 consecutive quarters, totaling nearly $15 per share since 2004.

In the first quarter and including all 100% owned assets, 50% of our charter revenues came from the offshore segment, nearly 30% from tankers and the remaining 20% split between our drybulk and container assets.

In addition to the 4,800 teu container ships we have under construction already, we recently ordered 4 new 8,700 teu container ships at one of the world's leading shipyard. This is part of our fleet renewal and we have sold several older vessels over the last few quarters, particularly in the tanker and combination carrier segments. We do see additional growth opportunities, particularly in the container and offshore segment, and with a robust financial position, we believe we have significant investment capacity for the right opportunities.

Our recently ordered newbuildings will be delivered in 2014 and 2015 from Daewoo's main shipyard in Korea, who are also building the 18,000 teu newbuildings commercial line to be delivered later this year. Our vessels will be built to very high specifications, including high-reefer capacity and the latest in eco-design features. As a consequence, our vessels will be the best-in-class in terms of consumption and can be operated efficiently in a wide range of speeds, providing a lot of flexibility for the container lines who may end up chartering these vessels in the end.

The 9,000 to 10,000 teu class is regarded as the new Panamax size and while even bigger vessels may transverse the new extended canal in -- from 2015 onwards, this size is expected to have more flexibility in container ports throughout the world, both with respect to size and depth restrictions.

We have not chartered the vessels but have initiated dialogue with some potential charterers, and we expect to fix the vessels well before delivery from the shipyard. Bank financing will also be arranged in due course, and we expect that equity investment to be up to approximately $25 million per vessel or $100 million in total.

While there is sufficient transportation capacity in the container market currently, these vessels that we have ordered now will be much more efficient than most vessels on the water today. And for container lines, it's all about operational and efficiency and economy of scale, very similar to what we see in the airline industry.

Following the financial crisis in 2008, the operating mode in the segment has changed dramatically, and where the focus previously was on very high speed, in an environment also where fuel cost was lower, the focus now is to reduce consumption by reducing speeds. And old design vessels, and with old I mean vessels built up to 2010, were configured to run at 24 to 25 knots and some even at higher speeds. We now see that container lines run the vessels at lower speeds than typically in the 16- to 18-knot range.

Therefore, when you run a vessel that's optimized for a much higher speed and you compare that to vessels that are optimized to run at these speeds, but have flexibility both to grow faster and slower, the difference in consumption is dramatic.

If you look at the size comparison on the right side, that is quite interesting. We see that the new vessels we have ordered are not longer than the old Panamax size vessels. These were -- these are approximately 300 meters long but our vessels are approximately 50% wider. But more importantly, the actual cargo-carrying capacity is 2.5x that of the old Panamax. And with cargo capacity, I mean, the number of loaded boxes you can load with an average weight of 14 tons per box, which is the industry standard for measuring cargo capacity.

So therefore, when you look at the left-hand side graph, we see that our vessels compared to the Panamax vessels that typically are -- has been a very versatile fleet so far, our vessels are vastly more efficient than those vessels. And even compared to the vessels of similar size, then here we compare to an 8,600 teu vessel built in 2010, we see that the efficiency is 30% even compared to that vessel.

And that is on the right-hand side in the vessel comparison, that's the middle vessel where we see that, that is narrower but is slightly longer. Part of the reason why our new vessel is so much more efficient than the old Panamax type is that the old Panamax was optimized and maximized to run through the Panama Canal with its current physical limitations. So the effect of that was to build vessels which were longer than were optimal from a seagoing perspective, almost like cigars, and therefore you have to carry around a lot of ballast water to keep them stable.

When we can now design vessels that are much more optimal from a marine perspective, we get a much better efficiency out of our vessels. And of course, importantly too, the historically low newbuilding prices helps in equation. So all in all, we believe this is an interesting time to invest in this segment.

If we then switch back to our existing business, we still have a significant portfolio of long-term charters, which is the backbone of our business. Most of our vessels are chartered out on long-term basis, and we still have approximately 10 years weighted average charter coverage. For full detail on a vessel-by-vessel basis, you can, as always, contact us on e-mail at

We have $5.1 billion of fixed-rate order backlog, which is the equivalent of approximately $60 per share. And the EBITDA backlog is approximately $4 billion or $47 per share. These numbers include only the reduced base rate from the Frontline vessels and do not include any expectations for cash sweep or profit share going forward. And any rechartering after the end of the current charters are also included, and also with that the potential of charters we expect to get for our new containerships.

We have a total of 16 customers and more than 40% of the portfolio is with companies with a market cap in excess of $5 billion. If we include all listed companies, the percentage is 83%. In addition, a majority of the backlog in the private segment is with companies with a public rating, and thereby, of course, good availability with financial information on our counterparts. And if you look at the average weighted charter tenure, as indicated on the right side, we see that more than 60% of the portfolio is in excess of 10 years and only 6% shorter than 5 years.

In light of the soft tanker market, we would again like to highlight the limited financial exposure relating to the vessels we have on charter to Frontline. The original fleet of 47 vessels was acquired in 2004 and another 5 vessels added in 2005, but after that, we have only reduced the number of vessels and we are now down to 22 vessels after recent sales. This has been through the sale of the older -- oldest vessels in the fleet.

In just the last 2 quarters, the reduction has been 7 vessels, with aggregate net cash proceeds of nearly $70 million after debt repayments and with aggregate book gains of approximately $40 million. We are amortizing down the debt on these vessels very quickly and have reduced the financing amount by nearly 2/3 over a period of only 4 years.

Compared to reported scrap value levels, the financial leverage is very moderate, and the scheduled amortization continues with more than $70 million per year, even with the reduced base rate. And I would add only currently only 50% of these loans are drawn, the remaining is held as undrawn reserves on our balance sheet.

The graph on the right-hand side illustrates the difference between the loan amount, assuming everything was fully drawn over time and the scrap value of the fleet bases the current scrap price per ton of approximately $440 per long ton.

While there was no cash sweep effect in the first quarter, the cash sweep effect for 2012 was $52.2 million or approximately $0.15 per share per quarter on average. This amount was paid to us in March this year.

In terms of refinancing going forward, the next refinancing is in 2015, so still 2 years ahead but limited to less than $220 million, assuming everything fully drawn. Other fleet of vessels which were refinanced last time in 2010 at $725 million. And if, in a worst case scenario, Frontline should default on any payment obligation to us, we will then be able to trade the vessels in the market with a low cash proceed breakeven rate and retain 100% of any chartering upside.

Ship Finance also respect as part of the fleet renewal strategy to continue selling off for older vessels and correspondingly reduce the counterparty exposure to Frontline over time. What I would like to note that Frontline is current with all the charter payments to us, and that also we note that they reported more than $100 million of free cash at the end of the first quarter.

If we then switch to our performance last 12 months, the nominal -- the normalized contribution from our projects, which includes vessels accounted for as investment in associate, the EBITDA, which then includes charter hire, profit share, cash sweep less OpEx and general and administrative expenses, was $552 million last 12 months. This is the equivalent of $6.50 per share.

Net interest was $126 million or approximately $1.50 per share, but more importantly when normalized, ordinary debt installments relating to the company's projects was just over $300 million or more than $3.60 per share. This is excluding prepayments relating to sale of the older assets and also early refinancing of debt and further assuming all loans fully drawn.

We had approximately $2.8 billion of net interest bearing debt at quarter end and we continue our scheduled steep loan amortization. The amortization represents around 9-year profile 0 [ph] and this compares to a weighted average age of the vessel to approximately 5 years.

Over the last 8 years, aggregate net income has been more than $21 per share, while aggregate dividends have been approximately $15 per share, illustrating the conservative long-term distribution profile of the company. 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.

Harald Gurvin

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 as revenues classified as repayment of investment in finance leases, results in associate and long-term investments and interest income from associates. If you wish to gain more understanding of our accounts, we will also this quarter publish a separate webcast, which explains the past finance lease accounting and investment in associates in more detail. This webcast can be viewed on our website,

Overall for the quarter, we reported total operating revenues according to U.S. GAAP of $65.1 million. Charter revenues from operating leases were up approximately $1.4 million compared to the previous quarter, mainly due to the delivery of 2 car carriers in the fourth quarter, which had a full quarter of trading in the first quarter.

Charter revenues from finance leases were down approximately $2.5 million, mainly due to the sale of older vessels during the fourth quarter and first quarter. There was no cash sweep accrual from Frontline in the first quarter, while aggregate cash sweep for 2012 of $52.2 million was paid to us in March this year. We also booked a gain of $18 million arising from the sale of 3 older vessels during the quarter.

It should also be noted that the first quarter numbers include certain nonrecurring financial items. These relate to commitment fees and accelerated amortization of deferred charges in connection with refinancing of debt facilities and also additional interest expenses during the period where both the new $350 million convertible bond and the old 8.5% senior notes were outstanding.

In addition, there was a noncash negative mark-to-market on interest rates drops during the quarter. Overall, these nonrecurring items amounted to approximately $6 million for the first quarter or $0.07 per share.

Further, amortization of deferred charges increased by $1 million compared to the last quarter, mainly due to the new $350 million convertible bond issued in January 2013. U.S. GAAP requires us to capitalize an equity component of the convertible bond, which has been amortized over the term of the loan. This is a noncash item and will amount to approximately $1 million [ph] per quarter going forward. So overall and according to U.S. GAAP, the company reported net income of $33.4 million or $0.38 per share for the quarter.

Moving on to the balance sheet. We showed $65 million of cash at the end of the quarter. In addition, we had approximately $235 million available for drawdown under revolving facilities. Available-for-sale securities of $56.5 million includes the $38.1 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 $18.4 million or 40% of par value including accrued interest.

Amounts due from related parties was down approximately $53 million, mainly due to the 2012 cash sweep of $52 million being paid by Frontline in March this year. Stockholder's equity stands at approximately $1.2 billion, including the $148 million of deferred equity. The book equity ratio, including deferred equity, was approximately 40% at the end of the quarter.

Then looking at our liquidity and financing status. As mentioned, the company had a total available liquidity of approximately $300 million at quarter end, which includes $65 million in cash and approximately $235 million available under revolving credit facilities. We also had $56 million in available-for-sale securities at quarter end, as previously described.

On the debt side, we had approximately $2.9 billion of gross interest-bearing debt outstanding at the end of the quarter, of which $1 billion is consolidated bank loans and approximately $1.2 billion is bank loans in our subsidiaries accounted for as investments in associates.

We also had approximately $650 million of consolidated senior unsecured notes outstanding as per 31st March, 2013. This figure includes the new 5-year $350 million senior unsecured convertible note issued in January 2013, which replaced the 8.5% senior notes maturing in December 2013, of which $248 million was net outstanding as per year end 2012. The figure also includes the NOK $500 million unsecured bonds maturing in 2014, of which $75 million is net outstanding.

The NOK $600 million bonds -- unsecured bonds maturing in 2019, of which $103 million is net outstanding; and the $125 million unsecured convertible bonds maturing in 2016. Both our outstanding convertible bonds can be repaid in shares at the company's option at maturity.

We have been active in both the capital and banking market over the last month and have refinanced a significant portion of upcoming debt maturities after tax returns. We continue to demonstrate our premium access to the bank market through the -- latest through the refinancing of the 2 ultra-deepwater drilling units, West Polaris and West Atlas.

In December 2012, we entered into a $420-million facility for the refinancing of West Polaris, which was drawn in January 2013. The facility has a term of 5 years with maturity in the first quarter of 2019.

In May 2013, we entered into the $375-million facility for the refinancing of West Atlas, which is expected to be drawn during the second quarter of 2013. The new facility has a term of 6 years, with maturity in the second quarter of 2019.

Ship Finance has only provided a limited guarantee for the 2 facilities. And both of the facilities were substantially oversubscribed and demonstrates that in a banking environment, where many owners have no or limited access to bank financing, the banks focus on the core clients, benefiting strong owners like Ship Finance.

In January 2013, we also issued $350 million of convertible notes due 2019. The offering was significantly oversubscribed and offering was upsized from the original targeted amount of $250 million to $350 million.

The majority of the remaining debt maturities in 2013 related to the ultra-deepwater drilling rig, West Taurus, which matures in the fourth quarter of 2013. The loan has the final payment of $376 million, representing less than 55% of the current charter-free market value of the unit. The facility will be refinanced in due course, while in the meantime enjoy the benefit of attractive margins on existing loans.

The next slide provides more detail on our newbuilding program and the remaining payments through shipyard. As per the 31st of March, we had 4 remaining container vessels under construction, with scheduled delivery between the third quarter 2013 and the first quarter of 2014. We had a range of 12-year financing for the vessels at attractive terms and have already paid significant amount to the yard, while we have chosen not to fully utilize all available [indiscernible] refinancing in order to reduce interest expenses during the construction period.

The graph shows the committed finance in the blue bars compared to the remaining shipyard installments as per 31st of March 2013. The net remaining equity investment for these 4 vessels is only $25 million.

Subsequent to quarter end, we entered into contracts for 4 newbuildings 8,700 teu container vessels, with expected delivery in 2014 and 2015. The total contract price is $340 million, with the majority of the payments due upon expiry -- due upon delivery of the vessels. We will arrange financing for the vessels in due course, and the expected equity investment is up to $100 million.

We are in compliance with all financial covenants under our loan agreements. Free cash was $281 million compared to the minimum requirement of $25 million. This includes $216 million available under revolving credit facilities, with maturity in excess of 12 months.

Working capital was $172 million compared to the requirement of being positive, and the book equity ratio was approximately 40% compared to the minimum requirement of 20%. And under loan agreements where there are minimal value covenants, we are truly in compliance at the end of the quarter.

It is worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 37 quarters that the company was established. Given the financial turmoil and depression in the shipping market over the last years, this gives us a very strong standing in the banking market as recently demonstrated on the refinancing of the 2 ultra-deepwater drilling units.

Then to summarize. Net income for the quarter was $32 million or $0.38 per share. The aggregate EBITDA was $122 million or $1.43 per share. The board has declared a quarterly cash dividend of $0.39 per share for the quarter. This represents a dividend yield of 9% based on a closing share price as of May 29, 2013.

We have a well-balanced loan portfolio and have refinanced several upcoming debt maturities over the last months, proving our premium access to the bank and capital markets. We recently entered into contracts for 4 newbuildings, state-of-the-art container vessels as the attractive investment opportunities in several segments and are well positioned for selective growth.

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

Question-and-Answer Session


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

Unknown Analyst

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?

Ole B. Hjertaker

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.

Unknown Analyst

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?

Magnus T. Valeberg

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.

Unknown Analyst

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?

Ole B. Hjertaker

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].

Unknown Analyst

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?

Ole B. Hjertaker

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.

Ole B. Hjertaker

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.

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