Welcome to SFL’s Second Quarter 2023 Conference Call. My name is Marius Furuly, and I’m Vice President for Investor Relations in SFL. We have a new format for the conference call this time using Zoom. And I hope this will be both as informative as usual and easier to navigate afterwards for you. Our CEO, Ole Hjertaker, will start the call by briefly going through the highlights of the quarter. Following that, our Chief Operating Officer, Trym Sjølie, will comment on vessel performance matters before our CFO, Aksel Olesen, will take us through the financials. The call will be concluded by opening up for questions and I will explain the procedure to do this before the Q&A session. 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. 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 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. You should therefore not place undue reliance on these forward-looking statements. Please refer to our filings within the Securities and Exchange Commission for a more detailed discussion of risks and uncertainties, which may have a direct bearing on our operating results and our financial condition. Then I will leave the word over to our CEO, Ole Hjertaker, with highlights for the second quarter.

Thank you, Marius. The total charter revenues were $174 million in the quarter, which were down from the previous quarter, primarily due to the sale of 4 spot traded tankers earlier this year. Over the last 10 years, we have changed the business model from a maritime leasing company to maritime infrastructure with long-term time charters to end users. Only around 9% of our charter revenues were from 7 bulkers and the container vessels employed on short-term charters and in the spot market. The EBITDA equivalent cash flow for the quarter was approximately $109 million [sic] [$100.9 million], in line with the previous quarter. And over the last 12 months, the EBITDA equivalent has been $480 million. The net income came in at around $17 million in the quarter or $0.13 per share. The net income continues to be impacted by the drilling rig Hercules, which had no revenues in the second quarter, but with full operating expenses, while finalizing its comprehensive special survey or SPS and upgrades. The SPS was finalized in mid-June, and we then started the mobilization to Canada. We have been paid the mobilization fee from Exxon for the transit, but due to U.S. GAAP accounting rules, all of this will be recognized in the third quarter, together with the mobilization costs. There was also a $6 million gain in the quarter relating to sale of the last spot traded Suezmax tanker. This is our 78th quarterly dividend. And over the years, we have paid more than $2.6 billion in total and closing in on $30 per share. And we have a robust charter backlog supporting continued dividend capacity going forward. The announced dividend of $0.24 per share is in line with the previous quarter and represents a very strong dividend yield at current share price…

Thank you, Trym. On this slide, we have shown a pro forma illustration of cash flows for the second quarter. Please note that this is only a guideline to set the company’s performance and is not in accordance with U.S. GAAP and also net of extraordinary and noncash items. The company generated cash flow gross charter hire of approximately $174 million in the second quarter, including approximately $2.2 million of profit share, with approximately 92% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.6 billion, providing us with strong visibility on the cash flow going forward. In the second quarter, the container fleet generated gross charter hire of approximately $90 million, including approximately $2 million in profit share related to fuel savings on 7 of our large containers. Our tanker fleet generated approximately $35 million in gross charter hire during the second quarter, compared to approximately $47 million in the previous quarter. Charter hire from our vessels strain in the spot market in the second quarter was $2.2 million, compared to $10 million in the first quarter, following the sale and delivery of the 3 remaining spot vessels during the second quarter. Consequently, we do not expect any contribution from tankers trading in the spot market from Q3 onwards as well as remaining 13 tankers are employed on long-term contracts with high-quality charters. The company has 15 dry bulk carriers, of which 8 were employed on long-term charters during the quarter. The vessels generated approximately $24 million in gross charter higher in the second quarter. Seven of these vessels were employed in the spot and short-term market and contributed approximately $7.2 million and charter hire during the quarter, compared to approximately $4.6 million in the previous quarter. SFL owns 2 harsh environment drilling rigs,…

Thank you, Aksel. We will now open up for a question-and-answer session. For those of you who are following this presentation through Zoom, please use the raise hand function to ask a question. When your name is called out, please unmute your speaker to ask your question. Thank you. And we will have our first question from Richard Diamond. Please unmute your speaker to ask your question.

Yes. Good afternoon, everyone. Given the lack of shipyard capacity and rising ship values, is it fair to assume the purchase options in general will represent in the future significant value to SFL shareholders?

Well, yes, you can say with the newbuilding prices coming up, a very substantial, both on the back of full order book at the shipyards, where they now also start to actually make a little bit of profit instead of losing a lot of money as they used to do. You also have inflation in both the raw material cost that goes into building the ship and, of course, labor building it. Which means that when the ownership typically second-hand values over time will have – will be linked to newbuilding prices. So if we had sort of the old model where we were just sort of a financial leasing provider in the shipping space, we would typically have to give away purchase options in order to do deals. That’s what most people do when they are in that game. And then, of course, there is a higher probability of those purchase options being exercised, and therefore, called away from us. So the good example here, we think is the existing car carriers we have if they have been on a more financial lease, the charterer would have exercised those purchase options because – but instead now, we can reach out of them at a much higher rate than we had in the first charters and that is, of course, goes straight to the shareholders. So I think rising newbuilding prices is definitely benefiting existing shareholders.

Thank you.

Thank you, Richard. We will take our next question from Climent Molins. Please unmute your speaker to ask your question.

Hi, Ole and team. Thank you for taking my questions. I want to start by asking about the West Linus, which is employed on our contract earning and market adjusted rate, which, if I remember correctly, is adjusted semiannually. How should we think about the vessels contribution going forward given the strengthening market environment?

So that is correct. So the line is on our contract with ConocoPhillips until the end of 2028 on the Ekofisk field on the northern side in the North Sea. As you correctly point out, the contract is adjusted semiannually, basically end of April and end of October. There is around just shy of $200,000 per day. For the time being in that market is still – is somewhat kind of neutral. So also going forward, at least we expect the day rate to stay in that region for the time being. But we also expect over time activity on Norwegian continental shelf to increase and that could potentially then reflect in a higher contribution from the rig.

I also wanted to ask about the car carriers to be delivered over the next year. Could you provide some commentary on the cash flows, those vessels are expected to generate? And secondly, is the incremental debt to be drawn down to finance the vessels hedged? Trym Otto Sjølie: So the cash contribution from new buildings is still – it’s considered substantial, I would say, especially for the first 2 vessels coming where we will have an initial voyage there. But I think...

Well, yes, I mean, we do not disclose sort of contribution per vessel on an individual basis. So as Trym was pointing out, first, as you delivered, first, we will have a voyage from Asia to Europe, where the vessels will then be delivered to Volkswagen. The spot market for car carriers right now is super hot. So we will have a very – hopefully, a very significant contribution on the voyage from Asia to Europe. Market is currently quoted well in excess of $100,000 per day. So with an OpEx of around $6,000 per day for similar vessels like this, needless to say, there’s a lot of cash flow coming there. And then they will commence the 10-year charters at the pre-agreed charter rates. And that’s also when the new charter rate will kick in on the existing vessels. So we have several sort of elements coming in, but we haven’t provided full breakdown of that. But what we do have and give everyone access to once it is our full charter backlog where you can back out effectively the charter rates that are being generated by the vessels, also including the new builds.

Exactly. So basically, if you look at I mean our strategies then to fix out these vessels on long-term charters with Conoco, call it, low teens returns on the equities, so the contribution will be accordingly. And for the financing, of course, that is fully financed, that will be drawn down on the 2 first ones in connection with 3 delivery, it is still – and the financing is form of Japanese operating leases at very attractive terms. I do not go into exact details on that. But of course, the margin provided is extremely attractive. So the blended financing is going then to be fixed up on delivery. And all in, considering kind of the long-dated financing, it’s far more competitive than the final traditional banking market.

Makes sense. Final question from me. Looking at the second half of the year and into 2024, it’s clear that your cash flow will improve markedly. How should we think about potential dividend raises going forward? And secondly, how do you plan to balance that, so potential dividend raises with share repurchases?

Yes. So I mean we, of course, see both as shareholder – returning capital effectively to shareholders direct and indirect. Our aim is, of course, and what everything we do is focused around building the distribution capacity to shareholders. But we never communicate – we never give sort of guidance on what the dividend will be in the next quarter or quarters after that. But typically, when we have seen in the past, usually, when we increase dividends, we managed to stay there. and also the Board, an important piece of, call it, the Board deliberations around the dividend every quarter is the long-term sustainability of the dividend level sort of being discussed. You’re correct, third quarter onwards will have significantly more cash flow hopefully than first and second quarter. That’s primarily due to 1 rig being out of service with costs being incurred and paid and that rig is now back working and then we get the new builds. But we kind of guide you specifically on what the dividend might be next quarter and after, nor will we communicate specifically how much – how many shares we will buy back. We have bought back just over 1 million shares, so around 1% of the shareholding, and we have an authorization to buy more than that from the Board and that will be communicated every quarter as we report our quarterly numbers going forward.

Makes sense. That’s all for me. Thank you for taking my questions.

Thank you.

Thank you.

Thank you, Climent. Our next question comes from Arif Hamid. Please unmute.

Yes. Hello. First, I’d like to compliment the management team on continuing to do a good job. I have two questions and requests. Okay, the first question is you’ve reduced some inventory and certainly have cash to reinvest. What areas appear attractive now, both for new builds and for used assets?

Yes. We are looking – I mean, we are – you can call it segment agnostics. So we focus across the board in the maritime space and which is also reflected in our vessel mix. We look at transaction opportunities in all these segments in parallel. And just as an example, last year, we screened and modeled out transactions with an aggregate value of around $23 billion, and we ended up doing only a small fraction of that. That’s a coincidence. And so there are many reasons for why you don’t do a deal. It’s got to be the right counterparty, with the right asset. We are very mindful of sort of the – of new fuel and, what we say, where that is driving and what kind of assets we want to own long term, the financing, we think is available for the specific asset, with the specific charter, et cetera. So that – and of course, we are agreed and we want proper returns as we do deals. If we hadn’t been – if we haven’t – if we would accept really low returns, we could have done, of course, a lot, lot more. So all this comes together, and it’s all about trying to deliver long-term value for shareholders. And we don’t guide on specific allocation of capital between segments. So over time, you have seen that, and sometimes, we were investing more in the energy space and other times over the history of the company, we have invested more on the liner side, specifically container ships and now also car carriers. So we hope to build the business. And – but exactly which segment we will be, we cannot say. I would say maybe to round out that is that some of the segments, there are relatively fewer long-term chartering opportunities, for instance, on the tanker side and the dry bulk side, they are not that frequent to see long-term orders, which we prefer because that’s the cash flow visibility. But we find deals there as well, as you can see from our portfolio. So we looked across the board.

So there’s no specific area that looks like a good trend right now?

No. I think that if we talk to shipping analysts, they’re typically focus on just the near-term, call it, market cycle. And there, of course, you have like the tanker market right now, near term, which has sort of a record low order book, which is on many – in many people’s sort of attention right now. But of course, when we do a deal and say we look for 10-year charters, you have to look through the near-term cycles. So it goes 10 years, you can, in theory, build as many ships as you want in any specific segment. So that it’s more important to look for the right technology, the right counterparty and the right structure where we end up with a, call it, a residual, call it, asset exposure or value that we think makes sense at the end of the charter in addition to taking in the counterparty risk, et cetera, in the charter. And I would say, the way we have, call it, redone or our business model going from a more financial-oriented company where we did a lot of bareboat and bareboat-like structures, that is typically done with intermediaries, who then give service to the end users. So changing that to a more integrated maritime logistics cycle type set up means that we deal more directly with end users. And we think that also gives us better risk/reward operationally and over time.

Okay. Well, that selectivity in your acquisitions, that’s part of the reason for my complement at the beginning. Okay. My next question is you talk about income, cash flow increasing substantially in the next couple of quarters. Can you make an estimate of how big a jump you see in the operating income?

Not – I think we try to guide somewhat, don’t really like to be really too specific on quarter-by-quarter in advance. I think what you’ll see in Q3 is that you’ll see contribution from the Hercules in particular, as we guide the accounting for that rig will be according to service contracts we basically take that over the actually kind of start-up commencement of the drilling, just drilling periods, including mobilization, demobilization, also the costs. So that will also be a bit bumpy quarter-to-quarter going forward. Then in Q4, you’ll see basically the first car carriers contribution coming in same in Q1. So it can be kind of building up, I think, into Q1 and then Q2, you’ll see the full contribution from the rig and the car carriers. So it looks promising. Basically, I mean, everything is locked in. There’s no more spot contribution on the tankers somewhat on the dry up with that, that’s kind of marginal. But I think it looks solid.

And if we look at the charter rates on the drilling rig, I mean the first charter is around $375,000 or so per day. And then the recently announced charter is in excess of $500,000 and most of that goes straight to the bottom line. So that will have a good effect. But that, of course, is over time and well into next year.

Okay. That all sounds great. So what it sounds like is the next quarter, there might be a modest jump, but this will steadily increase. And by the middle of next year, we might be looking a lot better. Is that right?

I think instead we’ll be building up step by step.

And I think it’s fair to say that I think third quarter will be significantly up from the second quarter, because in the second quarter, we had that drilling rig out of service, so 0 revenues, but then with costs...

You have some costs you’re sitting on for the next quarter, right?

Yes. So we still have some costs into next quarter, but then we also have the revenues from the rig.

That’s what I’m saying is you have costs that you couldn’t book in this quarter, so you’re going to book them next quarter. So the revenues won’t be as good.

It’s only 14 – approximately 14, 15 days from the second quarter that are being transferred into the third quarter. So not too much.

Okay. That all sounds great. Okay. I have 1 request. And that is, I know when you do a deal, you don’t usually disclose the details, but what would be very helpful would be to know what the change in the cash position of the company is, once the deal has closed, or what the new cash position of the company is. So if you could consider giving that information out when you announce a deal, that would be helpful.

Absolutely. I think what we do today is we do it on a quarterly basis. And I think one of our strengths as a company is to turn around quickly and close transactions. And sometimes we use cash on balance sheet just to close out the transaction and then in order to find optimal and the best possible price financing, we do the financing later. So that will be quite accurate actually to report that at closing. So I think we try to be very kind of open on the quarterly basis. And I think that’s, I think, what was feasible for a company like SFL.

Okay. Sounds very good. And what I just wanted to say is last time and last quarterly announcement or presentation, the sound was terrible and here on Zoom, it’s fine. So thank you very much for that and thank you for taking my questions. Bye-bye.

Thank you. Trym Otto Sjølie: Thank you.

Thank you, Ole. Our next question comes from the line of Christian Wetherbee. Please unmute to ask your question.

Yes. Hey, thanks guys. Thanks for taking the question. So I actually had a question on the container side. So curious to get a sense of what you’re hearing from your customers just as it pertains to overall demand in the market. I know, obviously, charters are going to give you some insulation from fluctuations in the spot market. But just general thoughts on peak in terms of utilization of the vessels. And then anything that you can kind of think about in terms of that market. We’ve seen spot rates on some of the trans pack business begin to inflect a bit higher. Curious if there’s any discussion of potential stabilization in that business over a longer-term perspective? Or if you think this is a bit of a blip before we were to see more capacity come online out of the new building programs across the industry over the course of the next several quarters? Trym Otto Sjølie: It’s kind of – it’s difficult to be very precise on what charters see, because – but in our discussions and from the utilization of our fleet, we see that the utilization is high. There is no waiting on newer ships, on the container side, all our charters are looking to invest in our ships together with us. And that has to do with the type of ships that we have as well. Of course, not all sizes are the same. But of course, in the sort of big theaters to large sources of 10,000 to 15,000 TEU ships seems to be really sort of the bread and butter of the lines. And so from our discussions, there is definitely no panic or any sort of big worry that we hear about. Things seem to be – they all seem to be looking forward, not any mix of rates, the box rates have fallen, that is an issue. The volumes, at least from what we see and hear are very healthy. And so I think what the container lines are looking at, I mean, they are not really so focused on ships. What they are focused on is logistics and they are really – they are not really shipping companies anymore. So they are looking at lowest cost for container carrier and to get the carbon emissions and the costs down, and we believe that owners that can help them do that are in a good position. And that is becoming really more and more important and especially from the likes of Maersk and Hapag-Lloyd that are big with us, we see that’s their focus really.

I have 1 more question, if I could briefly ask. It has to do with the change in law in Bermuda corporate law. I’m just wondering if that’s going to affect the company at all.

I assume you’re referring to the OECD kind of global taxation? Or is it?

I read just recently that they’re proposing a change. It could be what you just said, but I’m not sure. It’s definitely about corporate taxation.

Yes. Not sure I think that’s a global initiative and certain, call it, kind of thresholds to meet that. I don’t think we are kind of at that threshold yet. I think, see many shipping companies are also under different tonnage tax structure. So that’s, of course, a possibility and some of our fleet is already under wrap in Cyprus. So management and the Board is evaluating and following that closely.

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 to management, there are contact details in the press release or you can get in touch with us through the contact pages on our web page, www.sflcorp.com. Thank you very much.

Thank you.