SFL Corporation Ltd. (SFL) Earnings Call Transcript & Summary

Welcome to SFL's Second Quarter 2026 Conference Call. My name is Espen Gjosund, 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. Ben, our Chief Operating Officer, Trym Sjølie, will comment on metal performance matters, followed by our CFO, Aksel Olesen, who will take us through the financials. [Operator Instructions] 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 be materially different from those support in the forward-looking statements. Important factors that could cause actual results to differ include, but not limited to, conditions in the shipping, offshore and credit markets. We should, therefore, 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 which may have a deck faring on operating results and our financial condition. Then I will leave the word over to our CEO, Ole Hjertaker, who will highlight for the second quarter.

Thank you, Espen. We are pleased to celebrate our 90th consecutive dividend and $3 billion in accumulated dividend payouts today. Over the years, we have firmly positioned SFL as a maritime infrastructure company with a diversified high-quality fleet and we keep adding new business. For the second quarter, we reported revenues of $201 million and an EBITDA equivalent cash flow of $130 million, which is 20% higher than the first quarter. Over the past 12 months, EBITDA amounts to $461 million, reflecting the continued strength and stability in our operations. Net income in the quarter was $34 million or $0.25 per share, and the dividend declared is $0.22 per share. In aggregate, we have now returned more than $32 per share in dividends since 2004, not missing a single quarter on the way. And we have a robust charter backlog of $3.8 billion with a very strong counterparty profile, where 2/3 of the backlog is to customers with investment grade credit trading. During the quarter, we agreed to charter our older car carriers, SFL conductor and SFO Composer on new 3-year charters back to back with the current Volkswagen charters. We are not at liberty to disclose the name of our charterer, but it is linked to a leading global liner company based in Asia. Despite being 20 years old, the vessels are maintained to a high standard which makes them attractive in the chartering market also for premium customers. The new charter adds $83 million to our charter backlog. We have also recently ordered 4 dual fuel, 7,000 CEU capacity car carriers with delivery into 2029. The aggregate yard cost is approximately $360 million with a majority payable closer to delivery. And 2 of the vessels have already been charted out on 5-plus 5-year charters from delivery to a major Asia-based car manufacturer. The first fixed 5-year period adds $150 million in backlog, which could increase to $300 million if the optional period is declared. The other 2 new buildings are open for Charter, and we are in some discussions already. In the past, we have been reluctant to order vessels without charters attached but we believe the dynamics in the car [ tire ] market remain attractive with most shipyards sold out well into 2030. We, therefore, expect to find charters for these as well in due course. During the second and third quarter, we raised an aggregate of $100 million in equity in the market, utilizing our at the market or ATM and dividend reinvestment plan, or DRIP, programs. A total of 8.8 million shares has been issued, and we actually managed to raise the capital at a premium to the volume-weighted average price or VIVA in this period. With good liquidity and a rising share price, we saw this as an opportunity to add investment capacity with limited dilution compared to an ordinary share offering, which normally carries significant discounts and fees. We have already deployed some of the capital into new projects, but for the avoidance of doubt, we have no plans to issue additional shares in the foreseeable future. This last quarter, we have also had significant benefits of having 2 modern Suezmax crude oil tankers employed in the booming spot market. These vessels were previously on a long-term charter at around $30,000 per day until December last year. This year, the market has been on fire. And in the first quarter, we earned an average rate of $54,000 per day and then up to $133,000 per day in the second quarter which is more than $100,000 per day per vessel higher than the charter rate last year. So far into the third quarter, we have covered 63% of the vessel days at an average charter rate of around $93,000 per day. But please note that the charter hire from vessels in the spot market it's accounted for on a load to discharge basis pursuant to the U.S. GAAP, where we only recognize revenues when there is cargo on board the vessels. So the final reported number will depend on trading towards the end of the quarter, including ballast days. And while we are enjoying phenomenal cash flow from these vessels right now, we will look for new long-term charter opportunities for these vessels in due course. The 2 dry bulk vessels in the spot market also had increased revenues in the second quarter. But this is a very different market with less volatility compared to the large crude oil tankers. So the difference in revenue is only marginal from an aggregate perspective. And with that, I will now hand the call over to our Chief Operating Officer, Trym Sjølie.

Thank you, Ole. We have a diversified fleet of assets chartered out to first-class customers on mostly long-term charters and the majority of our customer base is large industrial end users. Following the car carrier newbuilding orders placed during the quarter, our portfolio now comprises 61 maritime assets, including vessels, rigs and contracted newbuildings. The fleet is made up of 30 containerships, 16 tankers, 11 car carriers, 2 dry bulk vessels and 2 billing rigs. . Our backlog from owned and managed shipping assets stands at approximately $3.8 billion, up from $3.7 billion at the end of the first quarter, reflecting the new car carrier charters and newbuilding commitments added in the period. The backlog is well diversified across segments. Container vessels account for close to 70% of contracted revenue, car carriers around 15%, our energy assets around 10% and tankers to the balance. On duration, the weighted average remaining charter term is 7.1 years on the container fleet, 5.9 years on the car carriers and 3.5 years on the tankers. This gives us long visibility on the core of the portfolio. And around 2/3 of 65% of our contracted revenue is with investment-grade counterparties, which gives us a high degree of confidence in the earnings visibility of this portfolio even in the volatile market environment. So I would like to spend a moment on the car carrier segment where we have added meaningful scale and visibility during the quarter. First, we agree 3-year time charter contracts for 2 of our existing [indiscernible] vessels with new charters, adding firm backlog of approximately $83 million. Second, we have ordered 4 7,000 CEO LNG dual-fuel PCTC newbuildings with deliveries scheduled for 2029. As Ole just explained to these vessels have already secured long-term charters with the leading Asian car manufacturers, and we are working on employment for the remaining to Taken together, these transactions added around $233 million of firm backlog in the quarter. Our total car carrier charter backlog now stands at $578 million with a weighted average firm charter duration of 5.9 years. This reflects our long-standing strategy in the car carrier segment pairing modern fuel-efficient tonnage with strong industrial counterparties on long-term contracts. Our existing charters with Volkswagen and KLN extend well into the next decade, and the new orders and charters further strengthened both the earnings profile and environmental credentials of this fleet. Our charter backlog is mainly derived from time charter contracts and with the exception of poor container ships on bareboat leases, the rest of the fleet is on time charter or operating in the short-term spot market. Gross charter higher from our fleet, including profit share was around $199 million in the second quarter, and we had a total of approximately 4,620 operating days across the fleet. And utilization was strong across all the shipping segments. Container vessels run at 99.3%, car carriers at 10 tankers at 99.8% and dry bulk at 99.4%. The Energy segment ran up 50%. This reflects the lines drilling rig operating through the quarter, while Hercules remains one stack ahead of its upcoming contracts. OpEx for the shipping fleet came in at about $37 million in the quarter, of which $2.2 million is drydocking cost. Two of our large container vessels completed their special survey drydockings and upgrade works during the quarter. And for reference, a typical cost for a 10 year is for special survey drydocking on a container vessel like this. is around $2.5 million. I will now give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.

Thank you, Trym. Turning now to the cash flow slide. And financeable because it gives investors a clear view of the underlying operating performance, separate from the effects of noncash and nonrecurring items in the GAAP results. Before I begin, I would like to flag the required disclosure. This cash flow presentation is a non-GAAP measure prepared as a management tool to assess underlying performance. It's not prepared in according to U.S. GAAP, and it should not be considered in isolation or as a substitute for any GAAP measure. A full reconciliation of the most direct comparable GAAP figures is included in our earnings release filed this morning. The presentation also excludes certain noncash charges and items we consider nonrecurring, which can at times obscure the underlying run rate of the business. With that context, let me take you through the performance of the fleet. In total, we generated approximately $199 million in gross charter hire during the quarter, a significant increase compared to the previous quarter. Of that total, approximately $83 million was from our container fleet which remain our largest contributor by charter hire. Turning to car carriers. The fleet generated approximately $27 million in gross charter hire during the quarter, a slight improvement from the first quarter. In tankers, the fleet generated approximately $62 million in gross charter hire up from approximately $46 million in the prior quarter, a significant quarter-over-quarter improvement driven by our 2 Suezmax vessels trading in the spot market. On the U.S. GAAP, revenues for spot traded vessels are recorded on a low to discharge basis, whereby revenues are graded on today's cargo is on board. During the second quarter, Suezmax tankers achieved an average state spot time charter equivalent, or TCE per vessel of approximately 133,000 compared to 54,000 in the first quarter. Our 2 counter [indiscernible] vessels trading in short-term market achieved average daily spot TCE per vessel of approximately 16,100 compared to 10,700 in the first quarter. As a result, in the second quarter, we recorded revenue of approximately $3 million compared to $2 million in the prior quarter. Moving to Energy. Revenue from our energy assets was approximately $24 million for the quarter. This was driven by the [ Line Strien rig, ] which remains on a long-term contract with [ Conoco Phillips ] running through May 2029 and providing substantial contracted cash flow visibility. The Hercules is currently preparing its upcoming contract in Canada and is expected to begin contributing revenue in the first half of 2027. On the cost side, net operating and G&A expenses for the quarter came in at approximately $69 million, all in line with the prior quarter. So putting it all together, adjusted EBITDA for the quarter was approximately $130 million compared to approximately $108 million in the first quarter. Turning now to results on the U.S. GAAP. For the quarter, we reported total operating revenues of approximately $201 million compared to approximately $174.5 million in Q1. Operating expenses were approximately $69 million, in line with the previous quarter. We'd like to clearly identify the nonrecurring and noncash items that affected the GAAP net results this quarter so that the investors can appropriately adjust their models. Mark-to-mark gain on hedging derivatives of $3 million mark-to-market gain on equity investments of $1 million. After accounting for these items, we report a GAAP net profit of approximately $34 million for the quarter or $0.25 per share. This compares to a net profit of $26 million or $0.20 per share in Q1. Turning to the balance sheet. At quarter end, we had cash and cash equivalents of approximately $113 million with an additional $ 160 million available under undrawn credit facilities giving us a total available equity in excess of $270 million. In April, we completed a $75 million tap issue of our 2030 USD senior unsecured bonds at 13.5%, implying a yield of approximately $6.8 million. an outcome, we believe, reflects the bond market's confidence in SFL's credit profile and use part of the proceeds together with cash on the balance sheet to redeem SFL's $150 million bond due in May 2026 at maturity. Furthermore, we raised $63 million in new equity through ATM and try programs, we refer $37 million risk subsequently to quarter end. On new buildings -- the company has approximately $1.2 billion of remaining capital expenditures across 5 container vessels and 4 PCTs in new buildings, 7 of which have long-term charters in place. Finally, our book equity ratio as of quarter end stood at approximately 29%. Before I hand the back -- the call back to Espen, let me close with a few summary points. The Board has declared our 90th consecutive quarterly cash dividend of $0.22 per share. At current prices, that represents an annualized dividend yield of approximately 7%. Our charter backlog now stands at approximately SEK 3.8 billion. Approximately 2/3 of that backlog is its customers carrying investment-grade credit ratings. That combination, scale, duration and counterparty quality, provides exceptional cash flow visibility and gives us the confidence to continue investing in growth. We have strong balance sheet, ample liquidity and disciplined capital allocation, we remain well positioned to pursue accretive investment opportunities. The American mass market continues to evolve and VidSL is uniquely positioned for long-term charter model, diversified fleet and access to capital to continue generating value for shareholders. Thank you all for joining us this morning. I'll now hand the call back to Espen in order to open the line for questions.

Thank you, Aksel. [Operator Instructions] And we will have our first question from Sherif.

Starting with the car carrier market, could you just shed a little bit of light on what it is about that market that's giving you confidence to order new builds on spec, especially because demand has been so strong across the shipping space.

Yes, maybe I can answer that, Ole. It's the -- the big story on the car can market is the growth of the China volumes and it's been growing consistently over many years, while the investment in car carrier vessels, although strong in the past few years in many years with low investment volume. So that means there will be a lot of older vessels that will have to be phased out at some point. And when we look at the balance of the demand for ships going forward, we see there's sort of a gap between supply demand growing from sort of 2029, 2030 and onwards even with a strong ordering activity that has been lately.