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Edited Transcript of SFL earnings conference call or presentation 28-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Ship Finance International Ltd Earnings Call

Hamilton Feb 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Ship Finance International Ltd earnings conference call or presentation Tuesday, February 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ole Hjertaker

Ship Finance International, Ltd - CEO

* Harald Gurvin

Ship Finance International, Ltd - CFO

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Conference Call Participants

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* John Reardon

Western International - Analyst

* Richard Diamond

Strait Line Capital - Analyst

* Stephen Mitchell

- Private Investor

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Presentation

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Operator [1]

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Good day, and welcome to the Q4 2016 Ship Finance International Limited Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Ole B. Hjertaker. Please go ahead, sir.

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Ole Hjertaker, Ship Finance International, Ltd - CEO [2]

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Thank you, and welcome, everyone, to Ship Financial International and our fourth quarter conference call. With me here today I have our CFO, Harald Gurvin, 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 US 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 & Exchange Commission.

The Board has declared a quarterly dividend of $0.45 per share. This dividend represents $1.80 per share on an annualized basis, or more than 12% dividend yield based on closing price of $14.62 yesterday. This is our 52nd consecutive dividend, and we have now paid more than $22 per share in dividends, or $1.8 billion in aggregate, since 2004.

Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was approximately $154 million, and EBITDA equivalent cash flow in the fourth quarter was approximately $121 million. Last 12 months, the EBITDA equivalent has been $503 million. And the reported net income for the quarter was $29 million, or $0.31 per share, after a one-time expense of $9 million relating to the new $225 million convertible loan and asset impairments of $5.3 million relating to two older vessels.

In October 2016, we announced issuance of the $225 million senior unsecured convertible notes due 2021 in the US market. Most of the proceeds were used to repurchase a significant portion of the 2018 convertible note, but there was also an incremental cash proceed of $40 million, adding to our investment capacity. Our CFO, Harald Gurvin, will comment more on this transaction.

Comparing our cash flow mix this quarter to the situation in the fourth quarter of 2014 is an interesting illustration on how we are constantly diversifying our portfolio. The tankers segment contributed 24% in the fourth quarter of 2016, marginally down from 28% the corresponding period in 2014. The big change has been in the offshore segment, which is down from 52% in 2014 to 34% now. And we have seen a significant increase from the dry book and liner segments, which have increased from 11% and 9% in 2014 to 18% and 24% respectively in the fourth quarter this year.

In December, we took delivery of a large 19,200 TEU container vessel, which immediately commenced a 15-year bareboat charter to a Mediterranean Shipping Company, or MSC, the world's second-largest container line. The second vessel will be delivered next week, and we will have the full cash flow effect from the vessels in the second quarter.

We estimate the average EBITDA from these vessels to $31 million per year, and the financing is by way of a finance lease matching the term of the charter. This financing is without recourse to Ship Finance, and the remaining net CapEx is $15 million for the second vessel.

In addition, we have two 114,000 deadweight ton product tankers, also called LR2 type, under construction with delivery scheduled for second half 2017. The vessels have been chartered out on time charter basis to Phillips 66, with a minimum period of seven years plus five optional years. The minimum period represents a backlog of approximately $113 million, and the aggregate annual EBITDA contribution from the vessels is estimated to approximately $11 million on average. Remaining yard payments are approximately $38 million per vessel, and financing will be arranged in due course.

And owning a significant fleet of vessels also means that we will have to continuously renew and diversify the fleet. We have recently sold a 19-year-old VLCC Front Century, with expected delivery in March. Net proceeds from the sale will be approximately $24 million, including compensation due from Frontline, and we recorded a small book impairment of approximately $500,000 in the fourth quarter relating to this transaction.

In the offshore segment, most of our investments are relating to drilling rigs. This market is in distress, with low utilization of the assets generally. We have three of our drilling rigs chartered to fully guaranteed subsidiaries of Seadrill, while one jackup rig is being marketed for new contracts in Asia. Two of the drilling rigs acquired in 2008, the West Taurus and West Hercules, had a cost price of more than $850 million per rig, and we financed them with $700 million in the bank market. These deals were all on the back of strong subcharters for the rigs, and we structured it with front-heavy charter payments.

As illustrated on the right-hand side of this slide, have the aggregate charter rate was received over the first five years, while the other half is spread out over the next 10 years. And we are no more than eight years into the charter. We have amortized more than 60% of the loans, and the average net bareboat charter rate for the two deepwater units is below $150,000 per day on average, which is only 40% of the initial charter rate.

One of the rigs is the harsh environment rig West Hercules, which was upgraded for a very substantial amount in connection with full winterization for Arctic operations a few years ago. The rate was operating for Statoil in Canada until last year, and is now idle in Norway and being marketed for new contracts in the North Sea region, while the other semisubmersible rig, the West Taurus, is idle in Spain.

The harsh environment jackup drilling rig, West Linus, has a charter to ConocoPhillips at a rate of $326,000 per day until 2019, and it's working at the Ekofisk field in Norway. There is no termination right for ConocoPhillips during the charter as long as the rate performs. And during this subcharter period, the debt will be reduced from $475 million initially to $237.5 million. Thereafter, we will still have 10 years remaining charter to Seadrill, but then at the significantly lower rate, giving Seadrill a comfortably low breakeven rate.

Seadrill today announced that it is continuing its negotiation of a financial restructuring with its secured lending banks, unsecured bondholders, and potentially new money investors. We believe it will be in all stakeholders' interest to have a financially [stronger] counterparty, and we intend to engage in constructive dialogue with Seadrill to find a sustainable path, going forward. This would also in due course include discussions with the banks that are financing the three rigs in order to find a balanced solution. We cannot comment anymore relating to this process, but Seadrill has never missed a charter hire payment, and is continuing to pay us the full agreed charter rate. And we continue to receive scheduled repayment [for] profile on the loan.

We also own the 2007 build, the jackup drilling rig, Soehanah. This is a modern, 375-foot jackup drilling rig built in Singapore, and the rig is currently idle in Indonesia and is being marketed for new work in the Southeast Asia and Middle East regions. Apexindo, who has chartered the rig since 2011, has covered all expenses relating to the rig until now, including a full special survey of the rig, which was completed recently. And the rig is debt-free.

If you look at the aggregate loan balance for all our rigs, this is now well below $900 million, which is less than 50% of the initial loan amounts. Of this, less than 30% is guaranteed by Ship Finance, and the rest is non-recourse to our balance sheet. We have also depreciated the assets significantly over the charter period, and have book values below charter-free evaluations quoted by rig brokers despite a significant drop in rig values.

We have over the last few years invested in new design container vessels between 9,000 and 19,000 TEU, and most of our vessels are chartered to the world's two largest container lines. There has been a technology shift in this segment, where the new vessels are significantly more efficient than the previous generation vessels, and in a logistics operation like the container market, efficiency is everything.

We have discussed the new 19,000 TEU vessels already, and, in addition, we took delivery of three new 9,500 TEU vessels to Maersk last year. The year before, we took delivery of four similar 8,700 TEU vessels to Hamburg Sud, which is now in the process of being acquired by Maersk in a transaction expected to be completed later this year.

Of our 24 container vessels, only two vessels have operated in the short-term charter market. One of the vessels, the 2003 build SFL Europa, has been unlawfully detained in Bangladesh for a period due to monies owned to the Port of Chittagong by a previous charter [of] the vessel. We did, therefore, not earn any revenues on the vessel in the fourth quarter.

We are taking every legal step to have the vessel released as soon as possible, but due to [our] slow legal processes locally, this has taken longer than expected. But, we now have a Bangladesh High Court order in our favor for the release of the vessel. It could potentially sail in a few days, but we cannot take anything for granted until the vessel is actually released.

The vessel is 14 years old and have its third special survey due in a year's time. In order to be conservative, we have therefore decided to write down the book value of the vessel to the equivalent of recycling value, and recorded a $4.8 million impairment in the fourth quarter.

After the sale of the Century, we will have 10 VLCCs and two Suezmaxes remaining on charter to a subsidiary of Frontline, down from nearly 50 vessels at the peak in 2004. The profit share arrangement of these vessels gives us interesting leverage to the tanker market and kicks in already from $20,000 per day for the VLCCs. In 2015, we also changed the profit [spot] calculation basis from annual to quarterly basis, adding optionality value for us.

And as [we] can see at the bottom of this slide, the actual charter revenues were significantly higher than the backlog going into the quarter, illustrating the upside potential from profit share arrangements and spot-trading vessels. In the first quarter of 2017, Frontline is guiding $37,000 per day for 74% of their VLCC capacity, which is significantly above this profit share threshold. And in addition, we also have the dividend potential from our 11 million Frontline shares, with a dividend payout of $1.7 million due in March based on the [$0.50] dividend announced today. In total, we will then have received $60 million in cash dividends from Frontline since 2015.

And in addition to the Frontline vessels, we also have exposure to the crude oil tanker market through two modern Suezmax tankers, which are traded in a pool with sister vessels owned by Frontline. For these vessels, the average charter rate in the second quarter was approximately $31,000 per trading day compared to our breakeven level of approximately $17,000 per day after interest and amortization for the vessels.

In 2017, we have covered nearly three-quarters of the vessel days for these two vessels with a combination of charters with a floor rate and profit split which will create the buffer if markets stay soft, and still with some upside if and when market strengthens. And in addition to these crude oil tankers, we have two 2008 build chemical carriers chartered until 2018, and the new building 114,000 deadweight ton product carriers to Phillips 66, which I have mentioned earlier.

We now have 22 dry bulk vessels in the fleet, with 15 larger vessels chartered out on long-term basis and seven Handysize vessels traded in the spot market. One of our long-term objectives is to combine stability and predictability and cash flows with optionality, and we have seen over time that market volatility can generate super returns from time to time.

So, when we negotiated a deal with Gold Notion for eight Capesize bulkers back in 2015, we included our 33% profit split on top of the base rate. At the time, not much value was attributed to the profit split due to [our] soft chartering market, but we see now charter fixtures at levels that are not too far away from the threshold level of $17,600 per day initially.

Going back in time, and even if we exclude the Chinese super cycle for bulkers between 2004 and 2008, we have seen charter rate levels well in excess of our base rates multiple times over this period, as illustrated in the chart. And while we do not expect the market to recover to a very significant extent very soon, we are not surprised to see market rates move upwards from time to time.

The profit split will be based on actual performance by these specific vessels, so we cannot guide you on if and when a profit share will materialize on the Capesize bulkers. But, as the profit share is calculated and payable on a quarterly basis, we believe there is a good probability for profit shares over the remaining eight-year charter period.

And for the seven Handysize dry bulk carriers we currently trade in the spot market, the rates achieved this quarter were approximately $6,200 per day, which is up from the previous quarter. There are indications that market sentiment may be gradually improving in the segment, and we intend to continue trading these vessels in the spot market until long-term rates improve.

If we then switch to our performance last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associates, the EBITDA, which we define as charter hire plus profit share less operating expenses and general and administrative expenses, was $503 million in the period. Net interest was $97 million, or approximately $1 per share, and the normalized ordinary debt installments relating to the Company's projects was $184 million, or nearly $2 per share in the 12-month period. This is excluding prepayments relating to sale of older vessels.

Net contributions after this was $221 million, or $2.36 per share over the last 12 months. For the same period, we have declared dividends [on] $1.80 per share, or $168 million in aggregate. And this 76% payout ratio is also in line with the average dividend payments compared to net income for the full period since 2004.

And with that, I will give the word over to our CFO, Harald Gurvin, who will take you through the numbers for the fourth quarter.

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Harald Gurvin, Ship Finance International, Ltd - CFO [3]

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Thank you, Ole. On this slide, we are showing 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 US GAAP.

For the fourth quarter, total charter revenues before profit share were $143.5 million, or $1.54 per share, up from $141.3 million in the previous quarter. Suezmax revenues were slightly up in the quarter due to higher revenues from the two Suezmaxes trading in the pool with two sister vessels owned by Frontline. Liner revenues were in line with the previous quarter, but in December we took delivery of the first of the two 19,000 TEU container vessels with 15-year charters to MSC, which will [help to] (inaudible) in the first quarter, and the second vessel is expected to be delivered in March.

The increase in dry bulk revenues was mainly due to better earnings on the Handysize dry bulk carriers trading in the spot market. We recorded a profit share of $6.8 million under the 50% profit share agreement with Frontline, up from $5.4 million in the previous quarter.

The tanker market strengthened in the fourth quarter, but has softened somewhat in the first quarter. We also recorded a profit share of approximately $150,000 relating to some of our Handysize dry bulk carriers. So, overall, this summarizes to an adjusted EBITDA of $120.6 million for the quarter, or $1.29 per share, up from $114.5 million in the previous quarter.

[With that], we're now onto the profit and loss statement as reported under US GAAP. As we have described in previous earning calls, our accounting statements are slightly different than those of a traditional shipping company. As 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 being used cap operating revenues], and instead booked [out to] revenues classified as repayment of investment in [finance leases] resulting associates and long-term investments, and interest income from associates. If you wish to gain more understanding of our accounts, we will also this quarter publish a separate webcast which explains the [finance lease] accounting and investment in associates in more details. This webcast can be viewed on our website, shipfinance.bm, under Investor Relations and webcasts.

Overall for the quarter, we report total operating revenues, according to US GAAP, of $98 million, which includes the profit share from Frontline. The 19,200 TEU container vessel delivered in December with a 15-year (inaudible) out to MSC, has been accounted for as a finance lease, with revenues split between total revenues finance lease and revenues classified as repayment of investment to finance lease. The repayment part of the lease is deducted from operating revenues but included in our cash flow statement.

As the vessel was delivered in [end] December, we only reported marginal revenues for this vessel in the fourth quarter. The corresponding 15-year lease financing has also been accounted for as a finance lease, with interest expenses under the lease included under interest expense in our income statement, and the installments on the lease included under repayment of lease obligation liability in our cash flow statement. A full breakdown of both these leases can be obtained by using the contact form on our website, shipfinance.bm.

As Ole mentioned, we recorded an impairment of $4.8 million on the 2003 build 1,700 TEU container vessel, SFL Europa, and an impairment of $500,000 on the 1998 built, the VSCC Front Century, which was [agree] sold in November with expected delivery in March. Including the impairments, total operating expenses were $64 million, resulting in an operating income of $34 million.

Interest expenses were up in the quarter mainly due to the $225 million convertible notes issued in October. Most of the proceeds were used to repurchase a significant portion of the $350 million convertible notes due 2018, reducing the outstanding [under the lease] to approximately $184 million. The notes were repurchased at above-par value, and we recorded a one-time expense of $8.8 million on the repurchase of the bonds included under other financial items. We also recorded a positive loan cash mark-to-market of derivatives of $9.9 million during the quarter, and $2.6 million of negative noncash amortization of deferred charges. So, overall, and according to US GAAP, the Company reported net income of $28.5 million, or $0.31 per share.

Moving on to the balance sheet, we showed $62 million of total (inaudible) cash at the end of the quarter, excluding amounts freely available for drawdown under revolving credit facilities. The 19,200 TEU container vessel delivered in December is included under investment in finance leases, with the corresponding lease financing included under other long-term liabilities. Total [with] equity was approximately $1.1 billion, giving a book equity ratio of 39% at the end of the quarter.

Then, looking at our liquidity and capital expenditure, the Company had total available liquidity of approximately $267 million at the end of the quarter, which includes approximately $205 million freely available under revolving credit lines. Available for-sale securities of $118 million includes divestments in senior secured bonds with a fair value of $39 million at quarter-end, and also our 11 million shares in Frontline with a market value of approximately $74 million based on the closing share price yesterday.

Moving on to the CapEx, we had three newbuildings under construction at quarter-end, all with long-term charters to strong counterparties. The second largest container vessel to MSC has expected delivery next week, and the vessel will be financed through a 15-year financial lease agreement matching the term of the charter with MSC. The financing is non-recourse to Ship Finance, and the net remaining [capital] is limited to $50 million payable upon delivery. The accounting for this vessel is expected to be in line with the first vessel delivery in December.

We also have two newbuilding (inaudible) tankers under construction, with scheduled delivery during the second half of 2017. The remaining CapEx before financing is approximately $38 million per vessel. We are in discussion with several financing institutions with respect to the financing of the vessels, and expect to secure a competitive financing well before delivery.

In October 2016, we issued $275 million in senior unsecured commercial notes. The five-year notes have a coupon of 5.75% per annum, and initial conversion price of approximately $17.77 per share. The higher coupon on the new notes compared to the existing $350 million convertible notes is used to limit the dividend protection and a higher conversion price on the new notes. The strike price on the new notes is only adjusted for dividends in excess of $0.225 per share per quarter, and, based on the current dividend, the new notes are significantly less dilutive than the existing notes.

The majority of the proceeds from the new notes were used to repurchase existing notes maturing in February 2018, and the net outstanding has been reduced from $350 million to approximately $184 million after [assignment] of the repurchase notes. The net cash proceeds from the issuance of the new notes was approximately $40 million.

On the debt side, we had approximately $1.6 billion of consolidated interest-bearing debt outstanding at quarter-end, which includes approximately $1 billion in bank loans and approximately $560 million in senior unsecured notes. In addition, our 100% owned subsidiaries accounted for as investment in associates had approximately [$880 million] in bank loans at quarter-end. The debt in these subsidiaries is not included in the [consolidated accounts] but included in the graph on this slide.

The Company has no bank or bond maturities until the fourth quarter 2017, while we continue our scheduled debt amortization of close to $45 million per quarter. We are in compliance with all financial covenants under our loan agreements at quarter-end. It is worth noting that not only has Ship Finance been profitable and paid dividends each of the 52 quarters since the Company was established, we have also been in full compliance with all financial covenants on our loan agreements, which gives us a strong standing in the banking market.

Then, to summarize, the Board has declared a quarterly cash dividend of $0.45 per share for the quarter. This represents a dividend yield of around 12% based on yesterday's closing price. Net income for the quarter was $28.5 million, or $0.31 per share. We successfully replaced the $235 million of convertible notes in October and used the proceeds to repurchase a substantial portion of the convertible notes due 2018. The first of the two 19,200 TEU container vessels with 15-year charters to MSC was delivered end December, and we look for [earnings] effect in the first quarter, with the second vessel expected delivered next week. We have a strong liquidity position and limited remaining CapEx.

And with that, I give the word back to the operator, who will open the line for any questions.

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Questions and Answers

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Operator [1]

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(Operator instructions.) John Reardon, Western International.

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John Reardon, Western International - Analyst [2]

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I've been on conference calls today, mainly in the John Fredrikson universe, and I get a sense that things are improving, that things have turned. And then, I also see in oil and gas journals that suddenly the North Sea and the Barents Sea seems to have a pickup in activity as far as offshore drilling goes. Would you concur with that? Are you seeing a turn? Is a turn at hand?

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Ole Hjertaker, Ship Finance International, Ltd - CEO [3]

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Well, thank you. Yes, I would say that at least there is a sense of more optimism, we call it the psychology has changed somewhat. We do not think that the charter rates are necessarily changing very soon, and there are many idle units, drilling units out there. So, for the charter rates to really pick up to the good old days, or to healthy levels, I think we would have to see a higher utilization of the fleet. But, there are certain expectations that there will be more drilling on the back of higher oil price, and also based on the fact that we have reserves that are dropping, and you need to replenish those reserves over time also based on an increased oil demand, as we see from the oil analysts.

So, we think that is encouraging. We have already seen the US land rig market changed dramatically over the last six months where you had a lot of idle units just in the summer last year, and now it seems like all the modern units have been reactivated, and they already talk about building new rigs. So, we know that [sentiment] and the market can change quickly also in the offshore market, but for now I think we are cautiously optimistic that the market will balance over time, but we do not anticipate any sort of near-term change in charter rates.

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John Reardon, Western International - Analyst [4]

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And as a follow-up, Ship Finance has always had a pretty balanced portfolio. You have the containers. You have some bulkers. You've got some tankers, and then you have the offshore segment. Out of those constituencies of yours, is there one that's nudging ahead in terms of improvement, or can you give a comment about your various segments? And is there one that seems to be emerging? Like the bulkers lately seem to have come to life a little bit. Could you talk about your various groups?

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Ole Hjertaker, Ship Finance International, Ltd - CEO [5]

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Absolutely. We talked briefly about the offshore sector, where we had 34% that were cash flow in the fourth quarter, where there are some signs of improvement, but not necessarily near-term, but utilization there is very low. If [we] then switch to tankers, which is the segment we started in back in 2004 when we basically had oil tankers in the fleet, that market did pick up significantly in 2016, I would say way -- and the charter rates came up to higher levels than most people expected.

There is an order book there that is being delivered now in 2017, so speaking to the market analysts, I think there is an expectation that market on average, for 2017 in the crude oil tanker market in particular, will remain soft, but then there is a very thin order book after that. So, unless we see a dramatic decrease in ship ordering, generally market analysts have a positive view on 2018 and beyond. So, we all, of course, hope that the market players will remain, call it, careful and not to order too many vessels aggressively, because that could mean that the charter rate earned in this segment could come up also from today's level.

You mentioned the dry bulk segment, and I totally agree with you. There are good signs in that segment. There was a huge ordering boom a couple of years ago. Many of those vessels have now been effectively absorbed into the market.

I think generally, for many shipping segments, you also have some new regulations relating to ballast water treatment systems that requires additional investments for older vessels, and also from 2020 the phasing in of the new low-sulfur regime, which again would require significant investment for older vessels to comply. So, that all means that there are signs that the market in both those segments could balance much better certainly in 2018 and beyond, and hopefully bring the rates up to very healthy levels for the market players.

In the liner segment, we've seen a technology shift, I would say. So, you have a lot of assets that are old-style assets, typically the old Panamaxes. And over the last few months, we have, I would say for the first time since the 1980s, we have seen vessels being scrapped before their first drydocking. That is dramatic. And these are typically the old Panamaxes that are almost -- you could say almost being obsolete, because the new vessels are so much more efficient than the old-type assets.

Our main investments are in the new higher-efficiency assets, and that's also where we see the liner companies focus their attention when they source their transportation capacity. The liner companies lost quite a bit of money in 2016. There was some very fierce competition for the various trade lanes, which of course also pushed the rates very low. Now we see a more healthy underlying market for the liner operators, so where the [box] rates have increased significantly. So, what they really need to do now is to get better utilization of their assets, and it's easier for them to make money.

You've also seen the newbuilding ordering, also of the newer vessels slowing down, and also in that segment we hope that that would also create a better charter rate environment, going forward. But, there are some encouraging signs out there in these subsegments, but I think, to be cautious, I would say that for 2017, I don't think anybody expects any of these segments to create real super-profits, but there are good prospects, I would say, from 2018 and beyond in some of the subsegments.

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John Reardon, Western International - Analyst [6]

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Did the Hanjin bankruptcy help the liner business? Are those assets still trading, or are they all tied up in a restructuring?

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Ole Hjertaker, Ship Finance International, Ltd - CEO [7]

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I would say most of those assets have been, call it, effectively released or sold out of the bankruptcy proceedings also before it happened. I mean, they had a very significant fleet of chartered-in vessels, and they were released very, very soon afterwards. So, I would say, if you look at the charter market for container vessels, that has certainly pushed charter rates down in the short-term chartering market.

But, that said, most of the vessels that weren't chartered to Hanjin were old-type assets, not the new, modern, high-efficiency assets, and therefore we don't think that will have a long-term impact on the market. But, I would say, short-term, it certainly had an impact, because a lot of vessels came out and were released into the market that was already, I would say, slow and not very busy from a chartering perspective.

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Operator [8]

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Richard Diamond, Strait Line Capital.

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Richard Diamond, Strait Line Capital - Analyst [9]

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Can you talk about increasing steel prices globally and the impact on asset values? Thank you.

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Ole Hjertaker, Ship Finance International, Ltd - CEO [10]

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Excuse me, there was a little -- had a little of bad line here. Could you please repeat the questions (inaudible)?

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Richard Diamond, Strait Line Capital - Analyst [11]

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Yes. Can you talk about increasing steel prices globally and the impact on asset values?

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Ole Hjertaker, Ship Finance International, Ltd - CEO [12]

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Yes, thank you. The steel prices of course has an impact on two factors relating to shipping. One is the shipping of iron ore and also coal, and the other is of course as an input factor in building the vessels.

I think if you look at the transportation of ore, that's typically been driven by the Chinese market, where a lot of that demand has been for infrastructure in China and not necessarily only to build vessels or other assets for export out of China. But, the prices there have certainly come up, and that also has an impact on the prices for newbuildings, where an increasing steel price, of course, being one of the factors going into a vessel will have to be reflected in the newbuilding prices.

And what we have seen over time in many of the sectors, as newbuilding prices come upwards, second-hand values also are being pulled after on the back of effectively the cost of replacing the units over time. But, I think I would say that the steel price is, of course, one of the input factors, but it's not -- there is also many other factors going into building a vessel. So, I wouldn't say that there is a immediate expectation that the newbuilding prices will increase near-term.

What we see, at least when we discuss with shipyards and when we look at the order books that we have seen being -- or newbuilding orders that have been taken over the last few months, I think there have been very few orders, which of course means that the shipyards will struggle to fill their capacity.

So, what we have seen in the past is that some [new] shipyards have taken orders where they probably, or at least if you look at today's steel price, may lose money on. But, I think also the shipyards, and I would say particular shipyards in Korea and China, have been prudently not taking orders at too low levels where they effectively build vessels at a loss, because that also has an impact on whether they can source financing themselves. So, with a stabilized sort of higher steel price, we think that will also positively impact our secondhand -- the secondhand values in the fleet.

At the same time, maybe adding to that, replacement cost is one factor. The other factor is, of course, the financing market and the availability for any market player who wishes to buy a secondhand vessel, the availability of financing is, of course, an important component in paying for it. And what we have seen is that European banks have been, I would say over the last two years, have been more reluctant, or have had lower volumes that they've had previously, while Asian banks, and maybe particularly Chinese banks, have been very active in financing vessels, including secondhand vessels.

So, it's a mixed picture, and it's a nuanced picture. But, I would say over time, and with normalized financing available for the industry, increased steel price should also impact secondhand values.

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Operator [13]

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(Operator instructions.) [Stephen Mitchell], Private Investor.

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Stephen Mitchell, - Private Investor [14]

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First of all, I want to commend Ship Finance for having transparency in its communication and making certain that the investors know what's going on most of the time, especially through your e-mails.

My other question is basically more of an Investor Relations question. And I'm just curious whether your stockholders meeting will be again in September in Bermuda, and if I could possibly find out what the dates are. I'd certainly like to attend with my wife because it's a rather nice occasion to do so. We're going to be celebrating our 50th anniversary. Thank you.

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Ole Hjertaker, Ship Finance International, Ltd - CEO [15]

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Yes, thank you. We usually have the AGM in Bermuda in late September. We will send a press release well in advance. But, preliminary, it's in the week of September 18th, typically late in the week, but I cannot give you the exact date, of course, until it's formally set, and we will send that out.

So, I would say plus-minus September 22nd, but we will notify you, of course, well in advance through press release.

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Stephen Mitchell, - Private Investor [16]

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May I ask you one further point about that? Do you need some sort of a pass to get into the shareholders meeting?

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Ole Hjertaker, Ship Finance International, Ltd - CEO [17]

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No, there's no pass. I mean, all shareholders will be mailed the notifications, and that should be. But, there will be instructions in the material that is being mailed out in the proxy statement. So, you will get that through your broker.

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Stephen Mitchell, - Private Investor [18]

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Thank you very much. I appreciate it. And I would say this, that our family has been a long-time investor in Ship Finance, and we've been extremely pleased with the way you've handled the operation. Thank you very much for taking my call.

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Ole Hjertaker, Ship Finance International, Ltd - CEO [19]

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Thank you, and thanks for calling in.

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Operator [20]

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Thank you. There are no further questions in the queue at this time, sirs. I would like to hand the call back to you for any additional or closing remarks.

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Ole Hjertaker, Ship Finance International, Ltd - CEO [21]

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Thank you. Then, I would like to thank everyone for participating in our fourth quarter conference call. If you have any follow-up questions, there are contact details in the press release, or you can get in touch with us through the content pages on our Web page, shipfinance.bm. Thank you.

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Operator [22]

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Thank you. So, ladies and gentlemen, that will conclude the Q4 2016 Ship Finance International Limited Earnings Conference Call. Thank you for participation. You may now disconnect.