Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to today's Fourth Quarter 2018 Ship Finance International Limited Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today on February 26, 2019. I would now like to hand the conference over to your speaker today, Ole Hjertaker. Please go ahead, sir.

Thank you and welcome all to Ship Finance International and our Fourth Quarter Conference Call, which also marks our 15-year anniversary of dividend payments. In connection with this, we have also changed our logo as some of you may have noticed. Our ticker on the New York Stock Exchanges is SFL, and going forward, we will most likely use the letters SFL more actively in our marketing to customers, as what we offer to them is a lot more than just ship financing, as we will discuss more about later. With me here today, I have our CFO, Aksel Olesen; and Senior Vice President, Andre Reppen. 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 forward 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 has declared a quarterly dividend of $0.35 per share. This is our 15-year anniversary of profits and dividends, and the dividend represents $1.40 per share on an annualized basis or 11% dividend yield, based on closing price of $12.49 yesterday. Over the years, we have paid more than $25 per share in dividends or more than $2.1 billion in aggregate and we have a fixed rate charter backlog of $3.8 billion, which should…

Thank you, Ole. On this Slide, we have shown our pro forma illustration of cash flows for the fourth quarter compared to the third quarter. Please note, that this is only a guideline to assess the company's performance and is not in accordance with U.S. GAAP. Total charter hire for the fourth quarter was $154 million, up from $150 million in the previous quarter. The main reason for this increase, is the delivery of the third container vessel on charter to Maersk in October, and a full quarter with revenues from this first two vessels. The two 19,400 TEU container vessels acquired at the end of December, will have full earnings effect in the first quarter. Revenues from our tankers was down due to the sale of two VLCCs, partly offset by the profit share from the Frontline for three remaining VLCCs in the order for $1.5 million and better earnings on the two Suezmax vessels trading in a pool. The marginal reduction in dry bulk was due to lower revenues on the seven smaller Handysize vessels trading in the spot market. There was no profit share accumulated on the Capesize Bulkers in this quarter. This summarizes to an adjusted EBITDA of $126 million for the quarter or $1.17 per share, up from $120.5 million in the previous quarter. We then move on to the profit and loss statement as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statements are different from those of the traditional shipping company. As a strategy - our business strategy focuses on long-term charter contracts. A large part of our activities are classified as capital leasing. As a result, a significant portion of our charter revenues are excluded from U.S. GAAP operating revenues and instead booked as revenues classified…

[Operator Instructions] The first question comes from the line of Chris Wetherbee. Please ask your question.

James on for Chris. Wanted to touch on the offshore, wanted to get a sense of your plans to those five vessels. Mike, how are you thinking about possibly divesting them, redeploying them, restructuring them. Just wanted to get a sense for how the standstill might have impacted - how you think about those vessels moving forward?

Yes, on those vessels, we did agree mid-last year for a reduction in charter rate with a catch-up later. So, we are receiving charter rates on two of those vessels. I think, it's important to note that this - we are taking this impairment now as a precautionary measure. On the basis of communication by Solstad to the market that they are commencing a restructuring of their balance sheet in light of the weak market. We have therefore taken this - we have definitely taken that impairment now, written them down to the charter free broker values and also removed the charters from our charter backlog. That said those vessels are still on charter to the subsidiaries of Solstad Offshore. So, we have not, call it taking the vessels back or taking any other action like that. So, it's a precautionary measure for us and it's not on the back of specific, call it, action that's happened with those vessels recently. I would like to add that those five vessels represent less than 2% of our - or before we took them out of the backlog, they represented less than 2% and also our financial exposure is really now limited to the $30 million financing guarantees, we have with the related financings. So, compared to our overall balance sheet of $4.5 billion, we think this is a relatively marginal situation, but of course, a situation, we will focus on and manage as best as we can and to get - to extract as much value out of this for us and our stakeholders. So, but no, we don't have any specific plans or we don't have any specific plans to take actions where we will terminate those charters, which is what we would have to do to be able to take the vessels and possibly recharter them to someone else.

Do you have the option to terminate the charters or does that actually fit with Solstad?

Well, there is not an option to terminate. As an owner, you always have - as an owner, if your counterparty is not paying the charter hire, there are mechanics in a charter agreement that you can then take the vessel back and terminate the charter. This is in all our agreements. So, nothing special relating to these vessels. For the time being, as I said they are on charter two Solstad and we are receiving charter hire, as we agreed six months ago.

And then, also wanted to touch on end market concentration. You had - you haven't really - you had said that you weren't going to provide guidance essentially on how that might look. But, on the lower end, how small would you be willing to let particular segment become? Is there a minimum value that you think makes sense or would you let potential end market fall entirely?

Well, when we make --- when we look at transactions, we don't focus specifically on allocation first for segments as such. It's all deal-by-deal, and we have - we used to have 100% in the tanker space, now we are 7% there. The offshore space used to be almost 60% at some stage a few years back, now it's down to 27%. So, this is a moving mix, it's all down to which transactions we do from time-to-time. I think one of our benefits of having a multiple segment approach is that we can benchmark deals between the segments. What we have seen over the years is, is that, if you focus on one segment only, you are almost programmed to invest at the peak of a cycle. Because it's when the market is peaking, that's when the equity market typically are wide open for specific - in a specific segment. And also that's when banks usually are willing to lend the most, both absolute and relative. So, we think having a multiple segment approach, it gives us a better balance on the market, it gives us a way to benchmark between the segments. And if we think that things are going too fast in a segment, we can pull back and focus on another segment. You know, of course, we have relatively few tankers left. I mean we wouldn't mind owning more tanker vessels if we had the right structure, and if we have the right counterparty with the right type of assets. And there are also segments that we are not in, like LNG for instance, which would be a very normal - natural fit for us. But, it's all about finding the transaction with the right assets, and we prefer modern assets we don't - we would be hesitant to take on older type assets. To the right counterparty, with the right structure of the deal, where we can also generate a running cash flow that can support our dividend capacity. So, we are monitoring deal flow across the board, consistently here and of course we have ambitions to continue building the charter backlog across the board, and across the segments.

And then one more follow-up on that. Looking at dry bulk, the eight vessels which you have off-chartered. Do you see any indications in the market that those actually might be put on longer term charters in 2019. And if you can't put them on longer term charters in 2019, are those assets that you might consider divesting or monetizing it some way?

Well, as we say everything - here, everything is for sale. At the right price, you can even get by dogs. No. But joking aside, we always monitor the market and there are - we have looked at - there had been charter opportunities also for those vessels. That said, we - given our size of our fleet and given that we can actually run and operate vessels in the market means that we don't have to fix them out long-term to keep them employed. So, these vessels were on long-term charters and - they were redelivered from the charters, and we have traded them in the market and our ambition is to continue doing that until we think the market has the right balance and we would fix them out. So, us not having fixed them, I guess would be an indication that we haven't - we don't think the market has been strong enough for a long enough period to the right counterparty. But, as I said initially, jokingly, I mean everything in our portfolio is for sale at the right price. And, if you offer me a good price, you can get that one and I'm sure you can get other assets too. But, our ambition is to build our portfolio of assets, which hopefully can also support - increasing the charter backlog and support the dividend.

Our next question comes from the line of Randy Giveans. Please ask your question.

So, a few quick questions from me. Ship Finance, roughly $212 million in liquidity, plus you expect pretty significant free cash in both 2019 and 2020. So, where are some of those expected uses of this cash, any thoughts on share repurchases at this point?

Well, we did repurchase some convertible notes just before year-end. So, - but, it was on a relatively small scale, it was less than $30 million nominal. We wanted to roll-out to classes, we look at deal opportunities. I would say on a - new deal opportunities, almost on a daily basis and we are capital agnostic. So, for us, it's all about doing transactions that we think will be accretive to our distribution capacity in the long run. It could be everything from buying a vessel to potentially buying back a share. So, this is something we focus on all the time, but we don't have any sort of specific target. As Aksel mentioned, we believe we have relatively strong cash position. We have more cash now than we have when we bought the three deepwater drilling rigs, 10-years ago. So, we believe that we could do significant transaction, if the right transaction materializes.

And then kind of looking at that dividend or distribution, your coverage ratio should remain above at least 1.5 times in both 2019 and 2020, like you mentioned a few times current yield of 11%. I know you don't give specific dividend guidance per se, but if you can just handicap, is the dividend more likely to go up or down in the next year or two years?

Well, I think from a management perspective, our ambition is of course to build a dividend and increase it over time, but the Board has always been very cautious, and we haven't - and the Board has never promised future dividends. But, if you look at the history, the dividend has normally been stable or increasing. And when the Board looks at I would say distribution capacity, they don't look at it on a quarter-by-quarter basis, they take a more long-term view when they set the dividend. So, our ambition is to grow it. But no promises.

And then one quick question from me. Any of the long-term charters interested in scrubbers? I know there were some talk for scrubbers on the Capesizes chartered to Golden Ocean. So, maybe any update for those or other vessels, maybe containerships?

Yes. We are going to install scrubbers on a number of the vessels that we have in our fleet. We are going to install some scrubbers for our own account, relating to tankers. As you mentioned, Golden Ocean is in the process or has committed to purchase scrubbers on most of the vessels we have in our fleet. We are discussing with them, whether they should pay for it, or whether we should, call it, finance it effectively for them and we are also in the process of installing scrubbers on a number of the large containerships. When we look at scrubbers, you call it from our side, when we do it for our own account, it's typically for vessels that are sort of in the spot market or short-term market because that's when you can get the benefit of potential, dislocation and potential for spread expansion, particularly in the early phases of the - with 2020 phase in. But, when we have vessels on long-term charters, it's always our charterer who pays for the fuel. So, whether we put a scrubber on a chartered vessel is really down to what kind of deal it for us. Does it make sense from a cost of capital perspective? Do we get the returns we need and then we are pretty agnostic on that.

And then, I guess, with that any CapEx or off hire day guidance for this year and assuming the scrubbers come from Feen Marine?

Well, we have - as you know the Feen Marine as one provider. I think there will be many scrubbers from other providers. So, we are - we have a - we're not locked into one single provider of that. In terms of CapEx, as I said, for a round account we are looking at CapEx of around, I would say around $10 million in aggregate. And then potentially depending on agreements with our charterers, it could be more, if we get the right return on the capital invested. But from an overall perspective, in terms of our own cash outlay, it's relatively marginal and if we do more it's typically because we get a very nice return on the capital we put in.

And that would all be in 2019?

Most of it will be a 2019 and some into 2020.

The next question comes from the line of Gregory Lewis. Please ask your question.

Ole, could you talk a little bit about the opportunity set, you're seeing in 2019? I mean clearly, 2018 was a strong year for you guys in deploying capital pretty much throughout the year. But, as you look at 2019, could you talk a little bit about the deals you're seeing, are they similar in nature? Have yields moved at all? Or is it kind of 2019 shaping up just a lot like 2018?

Yes, I think every deal is different. So, it's difficult just to be specific and tell that the general market is changing. I would say that the deals are certainly not becoming worse from a risk-reward perspective in our minds, and also in light of the continued effective reduction in bank portfolios, we also see more, call it, opportunities, what we say on bareboat or call it structured finance related, where many players out there, and I would say sort of Tier II players where Tier I are the listed large entities, who continue to have very good access to bank markets like we do. But, there are many on the notch below that, who don't have that access and who cannot necessarily go up and race up on in the market et cetera. So, there could be opportunities around that, but also for companies who look at their own cost of capital, because what we, I think we can offer a wide range of products, either from a bareboat structure, which with a purchase obligation in the end, which is really a structured financing, our cost of capital arbitrage, where we can benefit from our superior access to capital than many others. We can also go to the other end, where we can have a vessel on time charter, where we, through our affiliation with the Fredriksen Group, can source - can manage those vessels more cost efficient than most, we can build vessels, and we have relationships with the shipyards that are much stronger than almost any other shipping company out there, and therefore can potentially source deals and manage deals very efficiently, combining with efficient capital. So, we're looking at a wide range of products where we are now, at ranging, from either end of the scale. But in the end, it's all down to what's the risk adjusted return for us. Do we think it will be beneficial and support our dividend capacity going forward.

And then just on your liquidity. I mean, you have the bond due coming later this quarter. After you take away that, I mean you have the Frontline shares, I don't imagine you'd want to sell those at this point, you have the, I guess $200 million of unencumbered vessels. Could you sort of talk a little bit about how you're thinking about overall dry powder at this point, in terms of what type of growth or projects we could see without the addition of new debt at this point?

I think we - as you see, we have a very different sources of capital available. I think we refinanced our NOK from the last fall. So, part of that was to take out - in the upcoming March bond. We might still go to market, as the market develops. So, we'll just have to monitor basically how that market develops. I think - for the time being, I think we are in a good position and it will really depend on the specific project or acquisition on how we finance that. We have very good access to call it bank - bank capital at attractive costs, so really on a case-to-case basis, a bit difficult to kind of give a general comment on exactly how that's going to look at the end of the day. But, I think we are in a real good position to basically look at end market opportunities and there are a few coming our way.

And then just one last one from me. As I look at those on encumbered vessels, I mean, you mentioned the two VLCCs. The other vessels that are - should we be thinking about those more in terms of going the bank debt route market or do we think maybe it will be better - more suited to be in the lease market?

I think, if we are going to drill down on new facility for the VLCCS, now in this quarter, that's correct. I think to the extent we're going to leverage of those vessels that will just be with paying [indiscernible] senior financing, if we do that at all. It's also good to just have some free assets providing just cash flow to support the dividend. So, I think that's how we'd like to have it for the time being.

The next question comes from the line of Magnus Fyhr. Please ask your question.

Just few questions here. First, I mean, you've done a good job in diversifying the company into having a fleet of assets in various segments. Is it - at any point, the liner segment because - is it a risk or is it becoming too big, given that most of the deals have been in that segment or is there any target level that you feel like, you would need to look at other segments from a diversification standpoint?

Well over time, you know, we have been - as I mentioned, we started with 100% tankers, now it's smaller. We had a very big proportion of offshore at some time, it's smaller now, it's container ships that's relatively larger. So, this goes in waves. Also, when we look at the container ship exposure there are really three of the top liner companies, so it's not all concentrated on one counterparty, it's multiple counterparty, and it's also different in structure. Some of them are bareboats and more fully structured financing, sort of tuned, while others - we have time charters, where we have more, call it, residual exposure and opportunity toward that. That said, of course, our ambition is to have a diversified portfolio, so we are looking also at transactions in other segments. But again, it's all down to what's the deal - what does the deal look like? Risk reward, individual deals and we're not so focused on specific percentage in any segment. So, if we think the deal is right, we could do more on the container side, while, of course, our preference everything equal would be to weight it up and some of the other segments, again to have a have a balanced portfolio over time.

Yes, likely on the slide seven, has that made - I noticed you dropped one slide on the payout ratio and distributed cash flow, was there any reason for that?

Not really. It was really a slide we didn't use that much. I mean, we give out all the numbers and the only - the thing we really focus on there has always been sort of the debt reduction. So, it's been very sort of stable from quarter-to-quarter. Also, we didn't have a sort of a separate slide on each segment, because we basically provide full breakdown on our fleet and the backlog, through our website. So, instead we focused on slide six where we sort of combined that in that one slide. So, I think it's really more of a refresh of the slide deck than anything.

And one last question. There's been lot of focus on, I mean the excess liquidity on the balance sheet with I guess 2018 somewhat of a transition year, with expected cash flow to increase in 2019. How much do you, cash you really need on the balance sheet? I mean, you have excess of $200 million now of liquidity, and it doesn't seem like a lot of the recent investments have required much equity capital.

Well, if you look at our portfolio with the predominant long-term chartered assets, you are very correct. I mean, you really don't need that much cash on the balance sheet, because you really need to have a buffered cash because call it, the timing of when money comes in, may be different for when you pay, say debt installments, et cetera or operating expense on the vessels. In addition to the $200 million as Aksel pointed out, we have $200 million of unencumbered assets and also a lot of, call it financial investments. So, our capacity if you really, call it, squeeze it, and is more without raising outside capital in our portfolio. So, I would say you can easily run a portfolio like this with say plus-minus $50 million of debt without any problems and without really testing - testing any limits. We have been running with relatively high cash proportion. I think all the way since we were in the - call it, in the process with Seadrill and we've done a few transactions where we have freed up a lot of cash, selling a couple of offshore assets. So, I think this is more a matter of timing for when capital is being invested more so than necessarily a desire to sit with a very big pool of cash.

And then just one last. I mean, the yield has come down a little bit here, which is good to see. But you've checked a lot of boxes here, you've diversified your cash flow, and you diversified your capital structure, you got good solid long-term contracts and a strong backlog. What else can you do to make investors more comfortable with the Ship Finance model?

Yes. Like we said, over time, hopefully, we can demonstrate that we are performing as through the cycles. We have in the presentation, I'll try to also to highlight, how the different products that we can offer to our counterparties. If we look at our charter backlog, we did take that impairment on the offshore assets, they were relatively marginal from an overall portfolio perspective. But, all the other customers are performing very well and no other issues in the portfolio as we speak, which of course makes us very happy. So, over time, hopefully, because the model proves itself and if we can continue paying a sustainable and hopefully dividends, maybe, we can - maybe more people will believe in us. Who knows. I mean, we tried - we have to do our best, we have to continue focusing on finding opportunities, minimizing costs and delivering value to shareholders, and over time, hopefully it will reward itself.

Right. I definitely think a dividend increase will speed up the process. Thank you.

[Operator Instructions] Dear speaker, there are no further questions.

Okay. Then, I would like to thank everyone for participating in our fourth quarter conference call, and hope that many of you have enjoyed all the dividends, we have distributed over the past 15 years. We are committed to continue building of the company and we believe there will be good investment opportunities for us going forward, with attractive risk-reward profile. If you have any follow-up questions, there are contact details in the press release, where you can get in touch with us through the contact pages on our web page www.shipfinance.bm. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day. Dear speaker, please standby.