SFL Corp Ltd. Q2 FY2025 Earnings Call

Hello, everyone. Welcome to SFL's Second Quarter 2025 Conference Call. My name is Espen Gjøsund, and I'm Vice President of Investor Relations in SFL. Our CEO, Ole Hjertaker, will start the call with an overview of the second quarter highlights. Then, our Chief Operating Officer, Trim Shirley, will comment on vessel performance matters, followed by our CFO, Aksel Olesen, who will take us through the financials. 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. Please note that forward-looking statements are not guarantees of future performance. 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 differ materially 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. Therefore, you should not place undue reliance on these forward-looking statements. Please refer to our filings with the Securities and Exchange Commission for a more detailed discussion of risks and uncertainties that may have a direct bearing on operating results and our financial condition. Then I will turn the floor over to our CEO, Ole Hjertaker, with highlights for the second quarter.

Thank you, Espen. We are now announcing our 86th dividend and continue building our business as a maritime infrastructure company with a diversified fleet. We reported revenues of $194 million this quarter and the EBITDA-equivalent cash flow for the quarter was $112 million. Over the last 12 months, the EBITDA equivalent has been $526 million. The second quarter result was impacted by several one-off items, including a higher number of vessels in dry dock and several of these with additional efficiency investments. Dry dockings are expensed when incurred, and the vessel revenues were lower than when they are out of service. The drilling rig Hercules also remained idle in the quarter. In recent quarters, we have taken decisive steps to strengthen our charter backlog by securing agreements with strong counterparties and deploying high-quality assets. We have also made substantial investments in cargo handling and fuel efficiency upgrades across our existing fleet while divesting older, less efficient vessels. As part of this process, we have recently sold 57,000 deadweight dry bulk vessels built between 2009 and 2012. Four of the vessels have already been delivered to their new owners, and the last vessel is due to be delivered next month. The vessels were originally on long-term charters but have been operated in the spot market for the last several years. Due to a combination of age, design, and fuel efficiency, we have not been able to find new long-term charters for these vessels, and therefore, we decided to divest them as part of our continuous fleet renewal process. Eight older Capesize bulkers were sold to Golden Ocean, and seven 2002-built container ships were delivered to MSC in late June and early July, pursuant to the chartering agreements. As a result of this and also vessel efficiency investments, the operational efficiency and fuel consumption profile of the fleet has improved materially, delivering benefits to both SFL and our customers. We have also advanced our commitment to new technology with 11 vessels now capable of operating on LNG fuel, including five new buildings currently under construction. We are pleased to announce new 5-year charters for three 9,500 TEU container vessels on charter to Maersk. This adds $225 million to our backlog from 2026 onwards, and the vessels will be upgraded with both cargo and fuel efficiency features similar to our other large container ships. Most of the upgrades will be compensated by the charterer through charter rate add-ons. The drilling rig Hercules has been idle since the fourth quarter in 2024, and the recent market turmoil and oil price volatility have delayed new employment opportunities for the rig, which is impacting our near-term financial results as we keep the rig warm stacked. We remain optimistic about finding new employment for the rig and continue to explore strategic opportunities for it in parallel, but it is difficult to provide any guidance on timing for this. We have also recently redelivered several vessels pursuant to pre-agreed purchase options and sold vessels employed in the spot market. While this is increasing our available capital for new investments, it is reducing the near-term cash flow generation. The Board has therefore decided to adjust the dividend to $0.20 per share for the second quarter. With this dividend, we have returned nearly $2.9 billion to our shareholders over 86 consecutive quarters, and the $0.20 dividend represents a yield of approximately 9% based on the share price yesterday. Our charter backlog is currently at $4.2 billion. Importantly, two-thirds of this is with customers who have investment-grade ratings, providing us with unique cash flow visibility and resilience in light of the current market volatility. Over time, we have consistently demonstrated our ability to renew and diversify the portfolio of assets and charters, supporting a sustainable long-term capacity for shareholder distributions. We have a strong liquidity position, including undrawn portions of our credit line and also multiple unlevered vessels at quarter-end, which should enable us to continue investing in new accretive assets. And with that, I will turn the floor over to our Chief Operating Officer, Trim Shirley.

Thank you, Ole. Our current fleet consists of 16 maritime assets, including vessels, rigs, and contracted new buildings. Although there has been a material reduction in charter backlog, we have seen a decrease in fleet size from last quarter after having disposed of 20 of our older vessels. These sales partly result from end-of-lease vessels being sold back to charterers under option structures, as well as due to fleet renewal. The average age of the vessels sold was about 18 years, reducing the fleet's average age by about 2 years. Our backlog from owned and managed shipping assets stands at $4.2 billion, and the fleet following Q2 is composed of 3 dry bulk vessels, 30 container ships, 16 large tankers, 2 chemical tankers, 7 car carriers, and 2 drilling rigs. We now have a diversified fleet of assets chartered out to first-class customers on mostly long-term charters, with the majority of our customer base being large industrial end users. Container vessels dominate our backlog, accounting for about 71% of our portfolio. A key to remaining an attractive partner is to ramp up investments in fleet renewal, new technology, and vessel upgrades, which we are doing. Stricter regulatory demands, particularly from the IMO and EU aimed at cutting shipping emissions, is another driving factor. By enhancing our fleet, we position ourselves for organic growth, either by supplying new vessels to clients or extending the life of existing ones. In Q2, we had four container vessels in dry dock for special surveys and major upgrades to cargo systems, energy-saving technologies, propeller enhancements, and home modifications. Backed by the already executed project with Maersk, we have agreed to new 5-year time charters on three of our 9,500 TEU container vessels, which also include a similar investment scope. In Q2, 95% of charter revenues from all assets came from time charter contracts, and only 5% was from bareboats or dry leases. The charter revenue from our fleet was approximately $194 million for the quarter, with a total of 6,475 operating days. Operating days are defined as calendar days less technical off-hire and dry dockings or stacking for rigs. Eight vessels were in dry dock this quarter, four of which were container ships undergoing major upgrade projects, while the time at the shipyard required for those upgrades exceeding the typical 15-day dry docking is accounted for by the charterers. This quarter, in addition to a high number of vessels in dry dock, the scope of repairs and upgrades was larger than usual. Thus, the dry dock costs for the quarter were about $16 million. In a normalized quarter, we'd see, on average, 2.5 vessels in dry dock at around $5 million. We expect dry dock costs in Q3 and Q4 to taper down significantly. Our overall utilization across the shipping fleet in Q2 was 98.1%. Adjusted for unscheduled technical off-hire only, the utilization of the shipping fleet was 99.9%, which is a testament to the high quality of our vessel management. Subsequently to quarter-end, our car carrier SFL Composer had a collision in Denmark while approaching the dry dock for a special survey. Just before midnight on August 4th, the vessel was struck from behind by an overtaking container vessel. Fortunately, there were no injuries to personnel and no pollution as a result of the collision. The vessel went straight into dry dock after the incident and is currently scheduled to complete all repairs by early September. Due to higher insurance costs, we expect no impact to earnings. On the energy side, the liners rig earned $22.6 million in Q2, which is about 10% up from Q1 as the contract rate was adjusted upward by 2% from May, and the rig had no downtime during the quarter. OpEx was $14.5 million in Q2, up from $12.2 million in Q1 as the U.S. dollar weakened against the NOK, thus impacting personnel expenses in dollars. The Hercules rig is currently warm stacked in Norway and being marketed for new contract opportunities. During the second quarter, the rig recorded $3.3 million in revenues relating to contract payments from Equinor and equipment rental income. The majority of this equipment has been returned subsequent to quarter-end, and we do not expect to receive further rental income. Rig OpEx was approximately $4.9 million in the second quarter. I will now turn the floor over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.

Thank you, Trym. On this slide, we have shown our pro forma illustration of cash flows for the second quarter. Please note that this is only a guideline to assess the company's performance and is not in accordance with U.S. GAAP and is also net of extraordinary and non-cash items. The company generated a gross charter hire of approximately $194 million during the second quarter, with approximately $82 million coming from our container fleet, including profit share related to fuel savings on seven of our large container vessels. As in the previous quarter, revenue was impacted by scheduled dry dockings and efficiency upgrades for some of the large container vessels as four vessels underwent scheduled dry docking during the quarter. Additionally, the company sold the 2005-built, 1,700 TEU container vessel. Just before quarter-end, seven container ships were redelivered pursuant to the chartering arrangement. The dry bulk fleet generated approximately $26 million of gross charter hire in the quarter, including profit share from fuel savings, which is slightly up from last quarter. The tanker fleet generated approximately $41 million in gross charter hire, down from approximately $45 million in the previous quarter, as three vessels underwent scheduled dry dockings. SFL has 14 dry bulk vessels, of which eight are employed on long-term charters. The vessels generated approximately $19 million in gross charter hire in the second quarter. The seven vessels employed in the spot and short-term market contributed approximately $5.8 million in net charge revenue compared to approximately $4.4 million in the fourth quarter. During the quarter, the dry bulk segment remained steady for Supramax dry bulk vessels. Subsequent to quarter-end, the company delivered its eight Capesize bulkers on contract with Golden Ocean, as part of the previously announced purchase option that was exercised in the first quarter. Along with two harsh environment drilling rigs, the large backup rig lines and the ultra deepwater semisubmersible rig Hercules, the rigs generated approximately $26 million of charter hire in the quarter. Our operating and G&A expenses for the quarter were approximately $83 million, up from approximately $78 million in the first quarter. We had a relatively high number of vessels in scheduled dry dock throughout the quarter, and dry dock expenses for ships are expensed when incurred. Furthermore, the vessels are out of service during the dry dock period, which tempory reduces revenues. During the second quarter, we expensed approximately $16.5 million for vessels in dry dock compared to a normalized average of approximately $5 million per quarter. This summarizes to an adjusted EBITDA of approximately $112 million compared to $116 million in the previous quarter. Next, we will move on to the profit and loss statement as reported under U.S. GAAP. Our second quarter report totaled operating revenues of approximately $192 million compared to approximately $187 million in the previous quarter. The contribution from our vessels was approximately $167 million compared to approximately $171 million in the previous quarter, while rigs contributed approximately $26 million compared to approximately $22.5 million in the previous quarter. Vessel operating expenses for the quarter were approximately $67 million, including approximately $16 million related to scheduled dry dockings, compared to approximately $58 million in total in the previous quarter. Rig operating expenses in the quarter were approximately $19 million compared to approximately $18 million in the previous quarter. The net results in the second quarter were also impacted by non-recurring or non-cash items, including a net gain on the sale of assets of approximately $4.2 million; negative mark-to-market effects from hedging derivatives of $2.4 million; and negative mark-to-market effects from equity investments of approximately $1 million. Overall, according to U.S. GAAP, the company reported a net profit of approximately $1.5 million, or $0.01 per share, compared to a net loss of approximately $32 million, or $0.24 per share, in the previous quarter. Moving on to the balance sheet, at quarter-end, SFL had approximately $156 million of cash and cash equivalents, in addition to undrawn credit lines of approximately $49 million. The company also had 15 unencumbered vessels with a market value of approximately $192 million at quarter-end. During the quarter, the company received net proceeds of approximately $20 million from the sale of one Supramax vessel and seven container vessels. Subsequent to quarter-end, 12 of our 15 uncovered vessels have been delivered to new owners, including the eight Capesize bulkers to Golden Ocean, with total net proceeds of approximately $150 million further strengthening our liquidity position. Including available credit lines, we currently have liquidity exceeding $300 million. During the quarter, the company entered into approximately $84 million of new financing arrangements for the two car carriers, SFL Conductor and SFL Composer. Additionally, we prepaid facilities totaling approximately $95 million, in addition to owner installments of approximately $59 million. As of the end of the quarter, the company had approximately $25 million in remaining capital expenditures, mainly relating to efficiency upgrades on the large container vessels and the Hercules. We furthermore have remaining capital expenditures of $850 million on five container new buildings expected to be funded through pre- and post-delivery financing. Based on the Q2 numbers, the company had a book ratio of approximately 25.5%. To summarize, the Board has declared the 86th consecutive cash dividend of $0.20 per share, representing a dividend yield of approximately 9% based on the share price yesterday. Our charter backlog is currently $4.2 billion, and importantly, approximately two-thirds of this is with customers holding investment-grade ratings, giving us unique cash flow visibility and resilience in light of current market volatility. Our strong balance sheet and liquidity position provides flexibility in the current market environment and enables us to pursue new investment opportunities. With that, I will hand it back to the operator, who will open the line for questions.

And we will have our first question from Mr. Jeff Harvey. What's the status of the lawsuit with Seadrill?

I think there are two lawsuits, the larger one relating to the redelivery of the Hercules. That will be scheduled sometime in hopefully the first half of 2026. As you know, we were awarded an adjustment in the first instance of approximately $45 million to $50 million, depending on the currency rate. We have also received a guarantee for that amount from Seadrill, including interest rates.

Thank you, Aksel. We will now take our next question from Gregory Lewis. Please unmute your speaker to ask your question.

I was hoping to get more clarity on your thought process regarding the decision to lower the dividend. Obviously, you highlighted the rig as the main driver for that. But I imagine it is not just that simple. I'm curious how you set that $0.20 number and how we should think about that moving forward. If our base case is that the rig goes back to work at some point next year.

Thank you, Greg. It's Ole here. Yes, we fully understand and appreciate that there is some disappointment with the adjustment to the dividend level. We guided in the first quarter that unless we saw a clear path forward for the Hercules in the near term, we might have to adjust the distribution, reflecting the longer-term distribution capacity of the company. It’s clear that the rig is warm stacked, and these assets are expensive to maintain to ensure that they are ready to drill when contract opportunities arise. However, it appears that the market continues to be relatively slow, and opportunities are taking longer to materialize than we had hoped. This is one significant factor. While the rig is idle, we are incurring a warm stack rate of around $60,000 per day, in addition to some interest and amortization on the financing related to it. This is something we are focused on. In the last full quarter that the rig worked, in Q3 2024, it had a significant EBITDA contribution of around $35 million, which translates to about $20 million after interest and amortization. It's a significant asset when it's in operation. However, we believe it’s prudent to ensure that the distribution is not effectively subsidizing this idle unit. Moreover, we have recently divested some assets, including the dry bulk vessels to Golden Ocean, marking a historic moment when these vessels were first sold and then effectively repurchased under a pre-agreed purchase option. All our transactions are now with third-party companies and customers, further improving our investment capacity, which we can deploy when the right opportunities arise. The adjustment to $0.20 reflects a comprehensive review; it also illustrates our distribution capacity from the other assets we own, while maintaining investment capacity in the background and anticipating good potential upside from the Hercules when it returns to work.

Okay. That's very helpful. And then just a quick follow-up. As we think about dry docking, which impacted tankers and container OpEx costs in Q2, should we expect those sub-asset class costs to resemble Q1 in the back half of the year, or somewhere in between Q1 and Q2? Secondly, how does the market reflect your intentions regarding asset acquisitions that could positively impact dividend performance moving forward?

Regarding dry dockings, we've had a high number in both Q1 and Q2. In Q3, we will have a couple of ships scheduled, while Q4 may see perhaps one vessel depending on timing. So the last two quarters of this year, we expect the costs for dry docking and vessel positioning to be very low, essentially below the average. Hence, while this year has been busier than usual, I believe it will average out. For a large container ship, dry docking may cost around $2 million, while a smaller container ship could see costs around $1.5 million. For car carriers in Q3, we might anticipate about $3.5 million, and in Q4, costs could range from $1 to $2 million for dry docking.

Absolutely; we are continuing to look at opportunities. The market has experienced some slowdown since April. Therefore, the second quarter was less active than usual regarding new opportunities, where we saw a genuine window for transactions. Our focus remains on evaluating counterparties, asset types, and the kind of residual exposure we are willing to accept. This evaluation factors into the opportunities we pursue. We have never provided specific guidance on deployment amounts each quarter. However, over the last 18 months—from 2024 through the first half of 2025—we added more than $2 billion to our charter backlog while investing well over $1 billion. We have been quite active, but it all comes down to ensuring we get the right deal done. However, we definitively have investment capacity, especially following our recent transactions regarding both Capesize and Supramax bulkers, along with container ships, which have allowed us to contribute positively to our net cash.

We'll take our next question from Mr. Climent Molins.

If I remember correctly, this is the first quarter in which you've provided the EBITDA contribution from your energy assets on a standalone basis. If we strip out the $3 million to $4 million in rental income you mentioned, should we expect the organic EBITDA contribution from the energy side to remain around $3 million per quarter until a new contract for Hercules is secured?

I'm not sure exactly which number you are referring to, but we have two drilling rigs, Liners and Hercules. Liners is currently operated at a charter rate of around $230,000 per day, with operating expenses around $140,000 per day. This means there is about $90,000 per day net after OpEx.

In terms of the revenues from the energy side, we expect it to be slightly $3 million higher than our anticipated run rate for the remainder of the year, as revenues are mainly from the Liners rig. We experienced an additional $3 million from the previous work for the Hercules that came in a bit late this quarter. Unfortunately, we will continue to face a negative drag from the energy segment moving forward, but we deemed it important to highlight the solid contribution and cash flow we have from our shipping fleet, making this clear for investors and analysts.

I also wanted to ask about the modeling side. You still have around $850 million in CapEx outstanding for the containership new builds, expected to be covered by debt proceeds. Are the deliveries still expected in 2028?

Correct. In terms of progress, construction of these vessels will commence approximately one year into their effective construction time. So expect installments to start one year prior to delivery, in Q1 2027, with deliveries occurring throughout 2028, starting in Q1.

As there are no further questions from the audience, I would like to thank everyone for participating in this conference call. If you have any follow-up questions for management, please refer to the contact details in the press release or reach out through our contact page on our website, www.sflcorp.com. Thank you.