Ship Finance International Limited Management Discusses Q2 2012 Results - Earnings Call Transcript

Ship Finance International Limited (SFL)

Q2 2012 Earnings Call

August 28, 2012 10:00 am ET

Executives

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

Harald Gurvin - Principal Financial Officer

Analysts

Justine Fisher - Goldman Sachs Group Inc., Research Division

Martin Korsvold - Pareto Securities AS, Research Division

Rasta Behrang

Herman Hildan - RS Platou Markets AS, Research Division

Presentation

Operator

Good day, and welcome to the presentation of Q2 2012. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Ole Hjertaker. Please go ahead, sir.

Ole B. Hjertaker

Thank you, and welcome, everyone, to Ship Finance International in our Second Quarter Conference Call. 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 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 nearly 10% dividend yield based on closing price yesterday. We have now declared dividends for 34 consecutive quarters and paid out $13.75 per share or nearly $1.1 billion in aggregate dividends since 2004.

Net income for the quarter was $61 million or $0.77 per share. Included in the results was a $21.2 million netbook gain relating to the Horizon Lines restructuring. So net of this book gain adjusted earnings were $40 million or $0.50 per share. Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was $185 million. This includes the $16.3 million of cash sweep from Frontline. The EBITDA equivalent cash flow in the quarter was $151 million or $1.91 per share. There was a full cash sweep effect of 23 out of 28 Frontline vessels and nearly full cash sweep effect on 5 vessels. The aggregate contribution was therefore $0.21 per share in the quarter.

In addition, there was also an accumulation of profit share in the quarter. The amount represented the $600,000 or $0.01 per share approximately, but due to the $50 million prepayment of future profit share that Frontline made in December 2011, we will not recognize profit share revenues in the profit and loss statement until accumulated profit share is in excess of that amount. With the profit share accumulated in this quarter, the threshold is now reduced to $48 million. And as an illustration, the average profits bid per quarter since 2004 has been more than $15 million per quarter or $0.19 per share.

We have now sold -- we recently sold the 2 older combination carriers. One vessel, Front Rider, was announced sold in June and delivered to the new owners in July this year; while another vessel, Front Climber, was announced sold last week and with delivery to new owners in September. Aggregate sales price for the 2 vessels was approximately $19 million, including approximately $1 million compensation from Frontline. Over the last 5 quarters, the number of OBOs have been reduced from 8 to 3 remaining, of which 2 are employed on long-term subcharters. The book gain from the 2 transactions is estimated to $2.6 million in aggregate and will be recorded in the third quarter.

We have previously announced the sale of the 2 remaining non-double haul vessels in the fleet. The delivery will now be earlier than previously announced, with expected delivery in the fourth quarter for the first vessel and in the first quarter of 2013 for the last vessel. Net cash affect from these sales is estimated at approximately $30 million in aggregate.

In April, we announced a restructuring of the Horizon Lines chartering deal. The vessels were built in Korea in 2006 and 2007, and had been on charter to Horizon Lines for 5 years, but the U.S. flag service they were used in was discontinued. As a U.S. domestic Jones Act container line, it could not redeploy the vessels in the international markets without significant losses, and the vessels had therefore been in lay-up for 4 to 5 months. We received a termination compensation of $40 million of nominal value in second lien bonds plus warrants to subscribe for 9.25 million shares in the company, or nearly 10% of the share capital. The bonds have been recorded in our accounts at a conservative 40% of nominal value, and the warrants have been recorded at approximately $0.13 per share, which is significantly below where the share is trading today. Due to the limited liquidity in both the bonds and the shares in Horizon Lines, we believe this is a prudent approach and hopefully there is good upside to these figures.

Before lay-up, the vessels have been dry docked at the stimulated expense of $800,000 to $1 million per vessel. And as part of the deal, we took over fuel inventories, which had a value of approximately $4 million. The breakeven level on the vessels after financing and operating expenses is approximately $10,500 per day the first 18 months and $14,500 per day the next 5.5 years. The financing remains nonrecourse to Ship Finance, and there is only a limited guarantee obligation relating to the charter rate level.

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