Ship Finance International Limited (SFL)

Q2 2011 Earnings Call

August 25, 2011 10:00 am ET


Eirik Eide - Chief Financial Officer

Ole Hjertaker - Chief Executive Officer and Chief Executive Officer of Ship Finance Management AS


John Parker - Jefferies

Brian Grad - DLS Capital Management

Justine Fisher - Goldman Sachs


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Good day, and welcome to the Ship Finance International Q2 2011 Results Presentation. Today's conference is being recorded. At this time, I'd like to turn the call over to your host today, Mr. Ole Hjertaker, CEO. Please go ahead, sir.

Ole Hjertaker

Thank you, and welcome to Ship Finance International and our second quarter conference call. My name is Ole Hjertaker, and I am the CEO in Ship Finance Management. And with me here today, I also have the CFO, Eirik Eide; and 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 statement. Important factors that could cause actual results to differ include conditions in the shipping, offshore and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

The Board of Directors has declared a cash dividend of $0.39 per share. This represents $1.56 per share on an annualized basis or 12% dividend yield based on closing price yesterday. We have now declared dividends for 30 consecutive quarters and paid out more than $13 per share in total aggregate cash dividends. Net income for the quarter was $41.5 million or $0.42 per share. Positive profit sharing was generated also this quarter, but marginal compared to previous quarters. There was a $5.8 million gain on sale relating to 2 old combination carriers in the second quarter, and also a $4.1 million gain on the sale of the jack-up drilling rig, West Prospero.

The net cash effect of these transactions were $54 million. The 6 straight charter revenues in the quarter, including subsidiaries, accounted for as investment and associate, was $202 million before profit share contribution. The EBITDA equivalent cash flow, including profit share, was $171 million or $2.16 per share. Despite a weak spot tanker market in 2011, $2.4 million of profit share has accumulated in the 2 first quarters. Several of Frontline's vessels have been sub-chartered on profitable terms above our base rate, and will provide a positive contribution to profit share calculation irrespective of the spot market. The base rate for the VLCCs is approximately $26,000 per day. The profit share calculation is based on contribution on a yearly basis, so we will not have the final number for 2011 until the end of the year.

In total, more than $500 million in profit share has accumulated since 2004 in addition to the base charter rates. The final profit share will be based on -- will be calculated based on actual performance in the full year of 2011, and therefore also impacted by revenues generated by the vessels in the second half of the year. We have now secured financing for all the newbuildings and also a containership delivered in 2010. As we have paid significant installments to the shipyards already, there will actually be a significant positive cash contribution for the company from the newbuilding program in excess of $100 million in the second half of 2011 alone.

In March, we announced the acquisition of 2 13,800 teu container vessels from CMA CGM in combination with long-term time charters back. Net acquisition price after Seles credit is $116 million per vessel, which is 30% lower than construction costs. The vessels were delivered at the end of March and in the beginning of April and our equity investment is $25 million per vessel. The vessels are financed through a French tax lease structure, where title to each vessel has been transferred to a French company and Ship Finance's investment is effectively secured by junior mortgages. The 2 container vessels are managed by an affiliate of CMA CGM and the time charters include a compensation clause whereby Ship Finance will be compensated for any increase in operating expenses. CMA CGM has purchase options for the vessels first time in 2014, and we are earning a 15% return on our invested capital and potentially more based on profit split arrangement if a purchase option is exercised.

In May 2011, Ship Finance contracted to acquire 4 newbuilding 4,800 teu container vessels at a state-owned shipyard in China with scheduled delivery in 2013. The vessels are high specification so-called wide-beam container vessels optimized for higher cargo intake, a radically improved speed consumption economics compared to existing vessels of similar size. The aggregate yard contract price is approximately $230 million with the majority of the payments due on delivery of the vessels. The vessels will be employed by the European-based Hamburg Süd container line for 7 years from delivery, and the net time charter rate will be approximately $26,250 per day per vessel. We have already sourced 80% financing on these vessels with very long maturities.

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