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Edited Transcript of ASC earnings conference call or presentation 1-May-19 2:00pm GMT

Q1 2019 Ardmore Shipping Corp Earnings Call

Pembroke May 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Ardmore Shipping Corp earnings conference call or presentation Wednesday, May 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Gurnee

Ardmore Shipping Corporation - Founder, President, CEO & Director

* Paul Tivnan

Ardmore Shipping Corporation - Senior VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Bryan Lee

Private Management Group, Inc. - Investment Professional

* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Michael Webber

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Nick Linnane

* Noah Robert Parquette

JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's First Quarter 2019 Earnings Conference Call. Today's call is being recorded, and an audio webcast and presentation are available in the Investor Relations section of the company's website, ardmoreshipping.com. (Operator Instructions) A replay of the conference call will be accessible to anyone at any time during the next 2 weeks by dialing 1 (877) 344-7529 or 1 (412) 317-0088 and entering the passcode 10131187.

At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [2]

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Thank you. And good morning and welcome to Ardmore Shipping's first quarter earnings call. First, let me ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.

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Paul Tivnan, Ardmore Shipping Corporation - Senior VP, CFO, Treasurer & Secretary [3]

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Thanks, Tony. And welcome, everyone.

Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you'll find a link to this morning's first quarter 2019 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation, and then open up the call to questions.

Turning to Slide 2. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements, and additional information concerning factors that could cause the results to differ materially from those in the forward-looking statements is contained in the first quarter 2019 earnings release, which is available on our website.

I now would like to turn the call back over to Tony.

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [4]

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Thanks, Paul.

So first up, let me outline the format of today's call. To begin with, I will discuss our first quarter results and then key market developments, after which Paul will provide a summary of our performance, an update on recent market activity, supply demand fundamentals and a detailed financial update. And then I'll conclude the presentation and open up the call for questions.

Turning first to Slide 4 on highlights for the quarter.

We're reporting a net loss from continuing operations of $2.6 million or $0.08 per share as compared to a net loss of $8.75 million or $0.26 per share for the fourth quarter of 2018, reflecting improving charter market conditions. Our MR, TCE performance was stronger than expected averaging $15,900 per day as compared to $12,500 per day in the fourth quarter of 2018. Rates on chemical tankers improved as well but lagged MRs, resulting in an overall Ardmore fleet TCE of $15,000 a day.

MR voyages for the second quarter to date are now at around $16,000, representing 45% of revenue days, signifying continued strength in the MR market in what we thought would be a slower period. We're on track to complete 6 out of 8 2019 scheduled drydockings in the first half of the year, enabling us to take full advantage of IMO 2020 in the second half, but also resulting in somewhat reduced earnings in the first half of this year. Meanwhile, we're maintaining a strong liquidity position and balance sheet with quarter-end cash of $52 million and corporate leverage on a net debt basis of 53% (sic) [52%].

Consistent with our modern fleet strategy, we delivered the 2002-built Ardmore Seatrader and the 2004-built Ardmore Seamaster to new owners in the first quarter, and we intend to find more modern replacement units at an appropriate future date.

Regarding dividends, we're maintaining our policy of 60% of earnings from continuing operations. And consistent with that policy, the company is declaring no dividend for the first quarter. And as a final point, a reminder of our earnings upside in a rising market, every $1,000 per day increase in charter rates translates into $0.28 in earnings per share.

Turning now to Slide 5 on key market developments.

MR rates have remained stronger than expected despite extended refinery turnarounds. We believe this is because of solid underlying supply-demand fundamentals, coupled with prolonged winter market conditions and lower global refined product inventories, which together have resulted in heightened geographical product imbalances and arbitrage-driven trading. We believe that for these reasons, MR rates have remained relatively firm as compared to the larger tanker sectors.

It's also worth highlighting that chemical tanker rates have also strengthened -- are also strengthening, largely, we believe, on the back of improving product tanker market fundamentals.

Meanwhile, IMO 2020 is playing out as expected, with strong evidence of extended refinery turnarounds in the first half of this year, and also evidence of fuel oil output declining as refiners reduce yields and run down their inventories. Our assessment is that the impact of IMO 2020 on product tanker demand will commence sometime in the third quarter, with the first signs as early as July and August and expected to come into full swing by the end of September, with prepositioning and, even in some cases, actual bunkering of the new compliant fuels at that point.

But beyond the impact of IMO 2020, we believe that solid supply-demand fundamentals should support a sustained upturn, with ongoing MR demand growth of 4% and the MR order book at very low levels and net fleet growth at well below 2%. Consequence, we believe the elements are in place for a sustained upturn that could last multiple years, with IMO 2020 as the initial catalyst.

And on that note, I'll hand the call back over to Paul.

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Paul Tivnan, Ardmore Shipping Corporation - Senior VP, CFO, Treasurer & Secretary [5]

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Thanks, Tony.

Moving to Slide 11 for a summary of our quarterly performance.

We reported adjusted EBITDA of $13.5 million for the first quarter. Loss from continuing operations was $2.6 million or $0.08 per share, while the GAAP net loss for the quarter was $9.2 million or $0.28 per share. The GAAP loss includes $6.6 million related to the sale of the Seamaster, which delivered to the new owners in the quarter.

As Tony mentioned, our earnings in the first quarter were impacted by reduced revenue days as a result of scheduled drydockings. At the end of the first quarter, we will have completed 50% of drydockings for the full year of 2019.

Ardmore's fleet average TCE in the first quarter was $15,005 per day, made up of $15,856 from the MRs and $12,142 per day on the chemicals. Average rates for the chemical tankers were slightly lower than expected as a consequence of backhaul voyages, but overall rates for chemical vessels rebounded well in recent weeks, tracking the larger MRs.

As mentioned in previous calls, as a rule of thumb, to compare the chemical vessels to the MRs, as they have lower invested capital, you need to add about $1,000 a day to the chemical rates. The fleet continues to perform very well operationally. And despite some weather-related delays on some of our dockings in Asia, all drydockings came in under budget in the quarter.

Turning to Slide 8 for an update on the tanker market activity.

Looking at the first quarter. We experienced strong winter market activity, with increased volumes of gasoil into Europe from the U.S., China and India, while volumes of gasoline from Europe to U.S. were also strong on the back of outages in the U.S.

As you can see from the chart on the upper right, there was a continued drop in OECD product inventories year-on-year, resulting in more trading flows and price volatility. Overall, product starts remained well below 5-year average levels.

China has announced the first round of product export quotas for 2019, and it's increasing its levels for the same period from last year. Total product export quotas are up 13% to 147.2 million barrels, while diesel export quotas alone are up 25% to 69.6 million barrels. Meanwhile, according to oil analysts, production of heavy-sulfur fuel oil is declining in advance of IMO 2020.

Looking ahead, the outlook remains very positive. As Tony mentioned, refineries are front loading maintenance in advance of IMO 2020 in preparation for the expected increase in demand for low-sulfur fuels. Global refinery throughput is expected to ramp up this summer, climbing towards a seasonal peak in August, representing an increase of 4.6 million barrels a day for March levels. Meanwhile, continued inventory drawdowns and regional imbalances should support product tanker activity. Notably, there is a gasoline glut in Asia and an ongoing stock build of gasoil in Europe. And finally, chemical tanker rates are strengthening, supporting new -- supported by an improving product tanker market.

On Slide 9, we take a look at the underlying supply-demand fundamentals for MRs.

MR tanker fundamentals continue to be positive. As you can see from the graph on the upper right, ongoing demand growth remains very strong, driven by oil consumption growth and refinery capacity additions in trading-oriented locations. Global refinery capacity is expected to increase by 2.4 million barrels a day in 2019, with a total of 9.1 million barrels a day of additional refinery capacity from the end of '18 to 2024. In addition to the underlying demand growth, IMO 2020 is expected to result in an additional layer of MR demand commencing in the second half of 2019.

Looking at the supply slide. MR fleet growth remains exceptionally low. The order book today stands at 134 ships or 6.2% of the fleet delivering over the next 3 years. We are forecasting 76 MRs to deliver for the full year 2019, in line with last year and in contrast to the 5-year historical average of 96 ships per year. We expect scrapping to be in the range of 40 to 50 MRs per year, following 49 MRs scrapped last year. Taken together, fleet growth, net of scrapping, for the MRs is expected to be close to 1.5% in 2019 and 1% or less in 2020.

As mentioned, the chemical tanker market outlook is also very positive. On the demand side, petrochemical plant capacity alone is expected to increase by 1.2% this year, while seaborne trade in commodity chemicals is expected to increase by 5.4% per annum to 2023. On the supply side, fleet growth, net of scrapping, for the chemicals is expected to be 1.7% in 2019 and less than 1% in 2020.

Overall, we believe the strong fundamentals for products and chemicals will provide a solid foundation for a sustained upturn in the charter market.

Moving to Slide 11, we can take a look at the fleet days.

Revenue days are estimated at 9,300 in 2019. We completed 4 drydockings in the first quarter, and we expect to have 45 drydocking days in the second quarter, and we expect to have 2 vessel dockings for surveys and ballast water treatment installations. Over 75% of our scheduled drydockings will be completed by the end of the first half of the year, so we're well positioned to benefit from increased IMO 2020-related trading volumes expected in the second half of this year.

Turning to Slide 12. We will take a look at our financials.

As you will see on the second line, we're reporting net loss from continuing operations of $2.6 million or $0.08 per share for the quarter. Total overhead costs were in line with expectations at $4.6 million, comprising corporate expenses of $3.6 million and commercial and chartering expenses of $1 million.

As mentioned before, in many companies the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate cost is the comparable overhead. Our full year corporate cash costs are expected to be $12.5 million, which works out at $470,000 per ship annually. For the second quarter, we expect total overhead in corporate and commercial to be $4.5 million, including noncash items.

Depreciation and amortization was $9.4 million for the first quarter, and we expect depreciation and amortization for the second quarter to be in line at $9.4 million. Interest and finance costs were $6.7 million for the first quarter, comprising cash interests of $6.2 million and amortized deferred finance fees of $500,000. We expect interest and finance costs for the second quarter to be in line at $6.6 million, including amortized deferred finance fees of $500,000.

Moving to the bottom of the slide.

Operating costs for the quarter came in at $16.8 million. And looking at the various ship types, standard OpEx for the Eco-Design MRs was $6,883 per day; the Eco-Mod MRs came in at $7,060 per day, while the chemical tankers came in at $6,734 per day.

Looking ahead to the second quarter, we expect operating expenses to be approximately $16 million.

Turning to Slide 13. We can run through charter rates.

Spot MRs reported TCE of $15,856 per day basis discharge-to-discharge for the first quarter, while the fleet average came in at $15,005. Looking at the various ship types, we had 15 Eco-Design MRs in operation, earning an average of $16,252 per day for the quarter, while the 5 Eco-Mod MRs earned $14,860 per day. Our 6 chemical tankers had average rates of $12,142 for the quarter.

As mentioned previously, as a rule of thumb, you need to add $1,000 a day to make the chems comparable to the MRs.

Looking ahead to the second quarter, we have 45% of the days booked to date. Our MRs are earning $15,000 a day, while the chemical vessels are earning $14,000 a day.

On the right-hand side, you can see the strong rebound in MR rates for the past 3 quarters. You will notice that rates improved nicely in the first quarter, and we expect rates to increase further through the second half and into 2020 given the outlook and increased demand as a result of IMO 2020.

On Slide 14, we have our summary balance sheet, which shows at the end of March total debt and leases was $445 million, while our leverage on a net debt basis was 52%.

Now turning to Slide 15.

We remain focused on maintaining a strong liquidity position and are continuing to pay down debt. We completed the sale of the Seatrader and the Seamaster in the first quarter, and on a combined basis, the sales resulted in debt repayment of $12.2 million. Our cash balance at the end of March was $52.3 million, and we have $21.5 million in net working capital. And finally, we note that all of our debt, including the capital leases, is amortizing, and we're repaying $41 million per year.

And with that, I would like to turn the call back over to Tony.

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [6]

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Thank you, Paul.

To sum up then. MR charter rates continue at relatively strong levels at a time when we expected more weakness from refinery turnarounds. We believe this is a function of solid supply-demand fundamentals and not yet the impact of IMO 2020, with MR demand growth of 4% driven by strong oil consumption compared with refinery capacity additions in trading-oriented locations and the MR order book at very modest levels, resulting in net fleet growth of 1.5% or less in 2019 and lower still in 2020.

On top of these healthy fundamentals, a further boost in product tanker demand is expected in the second half of 2019 when the impact of IMO 2020 begins to be felt. This additional layer of demand is expected, we believe, to last for up to 2 years until the marine fuel market reaches equilibrium. And we estimate that the incremental demand for MRs will be in the region of 5% on top of underlying demand growth. And we believe the impact on MR demand should begin to be felt as early as July and August and kick into full gear by the end of September.

So to conclude then with our -- to conclude then. With our modern, fuel-efficient fleet and spot market exposure, we believe Ardmore is well positioned to take advantage of the market recovery and to generate strong returns for our shareholders, with each $1,000 per day increase in TCE translating into $0.28 per share of earnings.

And with that, we're happy to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Randy Giveans with Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [2]

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So first question. You mentioned you're completing most of your drydockings in the first half of 2019. You plan on keeping your vessels in the spot market throughout the year. So clearly, that means you're pretty bullish on spot rates and that time charter rates are not high enough for you to charter up ships at these levels. So now with that said, what are your thoughts around chartering in ships to increase your operating leverage to what should be pretty high spot rates here later this year?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [3]

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It's always a possibility, and it's something we've done in the past. And beyond that, we wouldn't want to comment on our commercial intentions.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [4]

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All right. And then you recently sold your 2 oldest MRs. You mentioned replacing those with younger vessels. I guess, a few questions on that. Should we assume your 1 remaining 15-year-old vessel gets sold this year? And then does fleet replacement, I guess, takes priority over share repurchases, obviously, dividends? And then with that, would it be newbuildings or kind of younger, modern second-hands? There are multiple parts to that question there.

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [5]

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Yes. No, that's great. So good question. I think for planning purposes, you can assume that we would be selling off the final ship. Again, to explain the rationale. Just as a policy, we don't like to operate ships beyond 15 years of age. They become more difficult to trade, and there are some other restrictions placed on them. In addition, third special survey combined with ballast water treatment is a very significant investment; and we're not sure that it's the best allocation of capital, to be honest. So that's the reason why we're selling. And as we've mentioned in the past, we do intend to replace these over time. We do still like that kind of middle age profile of ships that are sort of maybe 6, 7 years to maybe 8, 9-years old. We wouldn't at this point be contemplating replacing them with newbuilds.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [6]

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Got it. And then just priorities in terms of use of cash. Is that your top priority for now?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [7]

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Yes. So again, we're not really in a position to even tell you straight because it really depends on the circumstances at the time that we have to make that decision. But in any case, look, the options are pay down debt, build the fleet, buy back shares, pay special dividends. And it really depends on what we think is the best use of capital at that point in time.

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Operator [8]

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The next question comes from Noah Parquette with JPMorgan.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [9]

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I wanted to ask kind of capital allocation. I mean, in the last year, 1.5 years, the market has been okay, not great, and understandably leverage has gone up a little bit from the sale-leasebacks. I assume at some point you want to reverse that. I mean, as we go into, hopefully, a much stronger period, are you guys still comfortable with like that 60-40 split as being the proper way to both return shares -- or cash to shareholders and to deleverage appropriately?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [10]

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Yes. So that's our policy. And we -- I think just maybe going back to the point you're making about the leases. We were pleased to be able to execute the number we did last year for a few reasons. But an important one was that they're actually very attractively priced. And so we look at that as an attractive alternative source of capital, alongside our commercial banks. And if you actually look at the weighted average of the leasing deals that we've done and the bank debt, it's actually well under 3% spread over LIBOR still. It's about 2.9%, and we think that's actually pretty good. So I think we're pleased with what we've done. We don't plan to do more of that, nor do we plan to increase our leverage above current levels. But we think it's appropriate and comfortable given our liquidity and also given where we are in the cycle.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [11]

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Okay. And then I just wanted to ask kind of the news that hit yesterday about proposal for like a speed limit for the IMO. Were you guys the signatories to that or -- and what are your thoughts on that and kind of how that would potentially play out for MRs?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [12]

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We're not signatories. However, we are very engaged in industry forums in terms of discussing ways to meet the targets, and we think it's a very realistic one. I think that the various technology-driven solutions are going to come much later. So I think people are realizing that operational methods are really the way to go early on. And it seems like a really interesting idea. Obviously, when you slow ships down, you're essentially reducing effective supply, and that's got consequences for the market. I doubt regulators would intend to put constraints on ships that result in the charter markets going haywire. I don't think we would complain if that happened, but that's probably not really in the cards. But overall, we think it's a pretty sensible component of an overall longer-term solution.

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Operator [13]

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The next question comes from Jon Chappell with Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [14]

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Tony, just a couple of big picture questions for you. First, industry-wide, everything seems set up really well. I mean, we've been waiting for this for so long, and it's finally there. If you kind of think about tail risks, is there anything that kind of concerned you in the setup for second half of '19 or 2020, maybe not even likely but just probable or possible that can kind of throw a wrench in the outlook that we have?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [15]

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Good. Yes. No. I think there are really 2 things that we think about. One is a global recession, and I think we all have our opinions on that. But I think we're probably more likely to continue experiencing a slight global slowdown as opposed to a recession. And hopefully, the other -- the headwinds on the global economy, things like the tariff discussions, et cetera, that will clear up as well. But the other one is if we had a remarkably smooth and effortless transition to the new fuels, that could result in less incremental demand than we thought. But we're not really talking about downside. We're talking about degrees of upside on that. So overall, look, the reality is the order book is what it is. The net fleet growth isn't really going to change for the next couple of years. Oil consumption looks reasonably solid, and the way our ships trade looks like it's relatively stable as well. So there's not a lot to be negative about at the moment.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [16]

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Okay. And then the second one then. As it relates to Ardmore, how do you -- what are you aspiring to be, I guess, over the next couple of years? I mean, is it a mid-20 vessel count fleet kind of where you want to end up through this cycle? Do you think there's opportunities to be significantly bigger? Or is it just let's reap cash flow while the times are good and meet the 60% payout ratio and just kind of be a return of capital to shareholders type play through, hopefully, a pretty massive upturn?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [17]

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Tough question, Jon. Thanks a lot, but let me attempt to answer it succinctly. I think we want to balance out different priorities. We have no incentive other than maximizing shareholder value and increasing intrinsic value on a per share basis. That's what we're incentivized to do. And that's really our -- that's the compass that we hold in our hands. If we can achieve that through further growth, we will. If the best way to achieve that is through debt reduction and ongoing dividend payments, we'll do that. So it's really -- that's really our overriding priority, and we just look at ways to achieve that. We do recognize that the industry is consolidating around us, and we need to be aware of that. We don't think it's really a major issue for us at this point. But we do believe, and we've said this for a long time, that we think with the right kind of growth we can improve our performance. And with the right kind of steps toward growth, we can do that accretively on a NAV per share basis.

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Operator [18]

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The next question comes from Mike Webber with Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [19]

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So Tony, just wanted to start off with IMO. It's pretty well-worn ground at this point, but just to go back to your comment around starting to see some demonstrable impacts from IMO on the market is -- I think, you said July or potentially earlier. Given that it's May 1, is there anything that you still need to do to your fleet in terms of positioning to be ready for that? Or maybe, I guess, from the angle of, is there anything that you think trade flows will do to your fleet in terms of positioning to kind of get ready for that regulation hitting the market?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [20]

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Yes. Thanks, Mike. So from an operational standpoint, we've got a very good plan in place that Mark Cameron and his team are executing on in terms of being prepared for the switchover. That probably means starting to load -- bunker the new fuels in as early as early October, right? So I don't think we're unique in that regard. So there is going to be meaningful demand for the new fuels starting quite early. And it's been pointed out by others that in particular for the really big ships that engage on very long voyages they're going to have to load early. So in terms of cargo movements, I think that one sort of theme you could probably pull out is that on balance you'll probably see gasoil and blended components moving from the east to the west. And so that could -- we think that's going to generate quite a bit of tonne-mile demand. But it's still kind of early days. I mean, we do -- most analysts are, and I believe you as well, are saying that this should result in incremental refinery throughput. So that's certainly a demand -- that's additive to demand. In addition, you've got areas, for example, Northern Europe or Europe generally, which is structurally short middle distillates already, and that's going to be only more so once the switchover takes place. And then you've got -- I think another aspect to this is that you've got a huge number of what you could call outports that are very small ports that have to provide bunkering services but also have to switch over, over time, and maybe they're going to deal with that predominantly with gasoil in the beginning. And then the final thing is that we believe this is going to result in quite a bit of oil price volatility. And that's going to be great for oil traders, but it's also going to be great for us.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [21]

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Right. I guess -- and maybe that trade -- you let that trade kind of pull your fleet where it needs to go as opposed to some sort of strategic repositioning or kind of tweaking your balance in terms of your kind of -- your global geographical balance, I guess?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [22]

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Yes, we do think about that. And anybody who wants to look at our fleet on AIS will get the answer.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [23]

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Okay, fair enough. And then one more for -- probably for Paul. But you guys referenced about $0.28, I mean, EPS bump per $1,000 of rate upside. I know that's a blended number, but you got the $3,000 of rate upside it looks like, on the MRs this quarter. I know -- okay, I'm not trying to play got you because I know that curve is not linear. And I guess, that's kind of the point. I guess, if we've seen rates move to the low 15s, you're talking to 16 now, should the pace of that EPS accretion pick up from what we saw from Q4 to Q1?

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Paul Tivnan, Ardmore Shipping Corporation - Senior VP, CFO, Treasurer & Secretary [24]

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Great question, Mike. I think in terms of our EPS accretion, every -- as you said, every $1,000 a day equals $0.28 in EPS. The bulk of the fleet is in MRs. [Decamas] might [trail] that a little bit. But overall, you'd expect them to increase in tandem. So I guess, the question is, how quickly can rates jump? And how far can they go? I think in 3Q 2015, which was a really good market for us, and the fundamentals probably aren't as good as they are today, but we made mid-20s. That could happen over the course of a quarter too. So I think the pace is really a function of the markets. You could see it jump, maybe no movement at all for a quarter, and then it could skyrocket, which was what you saw in 2015. But no, you're math is right, $0.28 per share. If we can go another $8,000 or $9,000 a day from here across the fleet, you're talking of $2, $2.50 a share in EPS.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [25]

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Yes. I guess I'm looking at it like you got a $2,000 to $3,000 bump in Q1 and that corresponded to the $0.22 bump on EPS. So you didn't quite get that $0.28. But I guess, the inflection point would probably be around breakeven. And I guess, the implication would be that the second derivative then should start out to accelerate, and that -- I guess that the accretion per $1,000 should actually pick up as we move past that point, I guess.

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Paul Tivnan, Ardmore Shipping Corporation - Senior VP, CFO, Treasurer & Secretary [26]

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Yes, I think that's right. I mean, there's -- obviously, you have a little bit of movement quarter-to-quarter in OpEx that might not quite be flat quarter-to-quarter. But you'd expect it to move up, as you said, in a relatively linear basis.

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Operator [27]

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The next call comes from Chris Snyder with Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [28]

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So you said in the prepared remarks that you planned to buy more modern units at a future date. I was hoping to hone in on timing a little bit. I mean, it feels like sooner rather than later is probably best if you want to have these vessels for -- to kind of benefit from the IMO tailwinds. However, I also imagine there's probably not too many willing sellers at the moment with sentiment pretty bullish. I mean, in this context, should we expect that you guys can kind of add to the fleet prior to 2020 or the early part of 2020? Or is that kind of comment maybe more towards, hey, maybe the next downcycle we kind of look to kind of grow the fleet?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [29]

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Everything else being equal, it would be a good time to add ships. You're right. But they're -- then the devil's is in the details. And again, I have to keep on saying this, don't like too, but we just can't comment on our commercial intentions. But you're right. Everything else being equal, it would be good to get more ships in today rather than later.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [30]

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And I guess, kind of, obviously, asset values have firmed a bit. Even with kind of where asset value stand today, you guys see kind of pretty strong returns with your kind of forward rate forecasts?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [31]

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I think -- well, if I understand the question, values have come up for that kind of range that we're interested in, kind of $1 million to $2 million, over the last kind of 4 or 5 months. And generally speaking, this business is, as you well know, the spot market moves, then the time charter rates move and then the vessel values move. So we think that as we see continued strengthening in spot and time charter, you're going to see increasing vessel values.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [32]

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Okay, fair enough. And then just next question. We all spend a lot of time thinking about how the product tanker fleet will benefit from IMO. I think the impact to the chemical fleet is a bit more opaque other than just healthy MR market is good for chemical tankers. Could you maybe provide some specific color or any potential IMO tailwinds for the chemical fleet?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [33]

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I don't think there really are any, and maybe somebody running a chemical -- full chemical tanker company would be able to articulate this a bit better. But I think that simply the improvement in the product tanker sector is more than enough to really push up the chemical market as well.

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Operator [34]

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The next question comes from Ben Nolan with Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [35]

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So I have a couple, and I -- while I appreciate that you don't want to comment on commercial aspects of the business and that's sensitive. Just thinking about a few things with respect to how you're deploying your shares. Obviously, in the past, you've done some time charters, haven't done that lately with the market being weaker, where -- at $16,000 a day. Is there a point at which you kind of approach a threshold and say, "Let's put some of this in the bank" rather than kind of ride the $0.28 of EPS on every $1,000 of spot movement?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [36]

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Yes, we do talk about it quite a bit. And I think we feel like we're well -- we're way, way away from a level that we'd be happy to charter out. And you have to then also just think differently about like a 1-year TCE versus a multiple-year time charter. And clearly, if you're in a strong market, charters have very legitimate reasons for wanting to lock in even at relatively high levels. They've got their own cargo programs and concerns about risk to them in terms of higher spot rates. And that's very often a good time to lock something in, but we're not -- we're nowhere near that today. But that would be on a multiple-year basis. When it comes to 1-year time charter, our view on that is simply how does that 1-year rate compare to our estimate of the subsequent 12 months in the spot market? And obviously, at the moment, we think there's far more upside.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [37]

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Okay. I'll ask again when rates are above $0.20. How's that? The -- my next question goes to sort of thinking through how to go about growing or replacing the fleet or what have you. Obviously, there is some cash as a function of the proceeds from sale. And hopefully, increasingly, the cash flow generation will be more material. But as the share price is now, at least by my calculation, approaching NAV, does that sort of open the door for potential capital -- access to capital a little bit wider? Or is that -- would you say incremental equity capital isn't really something you're very interested in doing?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [38]

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We're not thinking along those lines at the moment. We -- we're -- I guess, in this day and age, 26, 27 ships seems small, but we're happy with it. I think what's much more important is your earnings power, preserving shareholder value by doing things that are accretive, et cetera. So I think we're pretty comfortable with where we are. And as I said, I think if we saw opportunities of any stripe to meaningful increase shareholder value, whether through growth by one means or another, we would certainly consider it. But that's really the -- that's what we think about.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [39]

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All right. And then lastly, kind of from a macro level, just appreciating that -- I'm sure you're kind of thought through this a little bit more than me at least. There's, obviously, been a widening of the price of hydrocarbons in the United States -- well, lower prices of hydrocarbons, specifically natural gas and NGLs, relative to the price of oil. And you are seeing an increase of things like propane exports or natural -- LNG exports, which in theory would eat into things like naphtha demand or diesel demand. That hasn't seem to have impacted the product tanker market at all yet. But is that something that you think potentially longer term is a risk or a potential headwind? Or is it just not big enough on margin to really matter relative to oil consumption?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [40]

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I don't think it's really big enough to be -- to really move the market. But having said that, I think it's a good thing to look into a little bit more. But one thing we thought about is the fact that if you have a world where diesel, gasoil is in higher demand because of the fuel switch, that also results in incremental -- and so, therefore, incremental throughputs required, that's also going to produce more gasoline and more naphtha. And so that could actually create quite a competitive alternative, especially for Asian petrochemical plants to basically go after naphtha instead of LPG. So I think it could -- honestly, it could go either way.

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Operator [41]

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(Operator Instructions) The next question comes from Fotis Giannakoulis with Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [42]

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Tony, I have found that the sale of the 2 older vessels has nothing to do with your view about the market. It's more operationally -- operational decision. But I wonder -- right now, this quarter the difference between Eco-Mod and Eco shift was around $1,400. Do you view that vessels that are relatively older will be in a trading disadvantage compared to the younger vessel that you have in your fleet? And how do you -- how much do you expect to be this differential both between Eco ships and non-Eco ships, relatively modern non-Eco ships, but also on quite older vessels, something that can trigger additional scrapping?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [43]

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Well, I -- okay. So if -- just kind of lay out the fuel differentials. I think it's important. So if you take a -- kind of a standard Korean ship built kind of 10, 11 -- 10 to 15 years ago, they're probably consuming about 24 tonnes per day main engine. And the reason why we call these ships that we have Eco-Mod is because they're Japanese. They're more fuel efficient to begin with. And then we improved them, and they're burning a couple -- 2 to 3 tonnes a day less than that. And many of the first generation of Eco-Designs, which are maybe 1 to 2 tonnes a day better, and then you've got the second generation Eco-Designs that are better, maybe another 1 or 2 tonnes a day better, maybe down to 18 tonnes a day. So that's kind of the spread you're talking about here. And that does -- you can do the quick calculation on the difference. But there's another factor, which is that the Eco-Mods are [pumper] in design, which actually have less cargo flexibility. And so they over time will perhaps earn a little bit less on that basis as well. And when you get over 15 years of age, a lot of oil companies -- not a lot, but enough oil companies will say, "No, thank you," which limits your trading alternatives. And just by our experience, we know that, that does over time diminish the TCEs you can achieve. So it's a little bit fuel consumption, a little bit age discrimination and a little bit cargo restriction that results in that differential, which we think is a fairly reasonable number that you can see there. So we think that that's probably going to remain the case going into the stronger market conditions as well. And again, we just didn't really feel it was a really good use of capital to sink $2 million in for drydocking and ballast water into these ships at their third special survey given those circumstances.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [44]

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Do you foresee that this disadvantage or this discount of the older vessels will increase proportionally to the fuel prices as we move to the IMO 2020? Or there is a possibility that the disadvantage of the older vessels will become even greater beyond of what the fuel consumption differential is within your ships?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [45]

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No, I think it will be -- I think the age discrimination and the cargo -- less cargo flexibility, that will remain the same. And then, obviously, if you double the price of fuel, you're going to double the TCE differential given the same voyage.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [46]

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Tony, one more. Earlier when you mentioned what are your concern, I noted that you didn't say anything about the potential supply. In the past, the excess ordering was what was destroying the tanker market. Is this different this time? And we've been hearing some deals of trading houses triggering newbuilding orders for vessels with scrubbers, offering a couple of years of charters. Is this something that might be a concern for you? Or it's different this time?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [47]

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I think it's -- it would be unwise to say definitively it's going to be different this time. But I think a lot of the money that came into support ordering activity 3 or 4 years ago has, at least for the time being, learned a lesson about the fact that it's a fairly delicate supply-demand balance in this business, and just indiscriminate ordering of these ships isn't necessarily a great investment. So in terms of the shipyard capacity, that's changed a lot even over the last few years. So you kind of went through 3 phases. If you go back to the last boom market and then a couple of years after that, you had a lot of capacity. And they were trying to stay in business, and they were really prepared to do very, very low pricing. And then a lot of those fell out. You still had a fairly large but you could call it core group of builders, at least in the MR size. And they then really, really went at each other competitively and went way below their breakeven costs. Even the best yards like Hyundai Mipo played into that. And that was sort of the ships that delivered in the last 3 or 4 years. And they learned their lesson, went bankrupt, lost their bank support. And so a lot of those yards are still shut down. They'll probably never open up again. And even the yards that are still open are under -- are in a very, very tight -- very short leash from their banks as well as their parent entities. And so the capacity for building even if -- is very limited at the moment. I mean, the one yard that could build and scale would be Hyundai Mipo, but that's not really enough to get us back up to the kind of numbers that we saw even just a few years ago. The order book was 20% of the existing fleet in 2014. Today, it's 6%. And if I could just add one more thing. If you look at the recent order books for the bigger sizes, they're also quite low right now. So looking at, for example, LR1s, that's 4.2% of the existing fleet. LR2s and Aframaxes is 5.4%. So these are all pretty attractive numbers now.

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Operator [48]

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The next question comes from Bryan Lee with Private Management Group.

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Bryan Lee, Private Management Group, Inc. - Investment Professional [49]

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We've heard some chatter that the regulators may restrict the use of the open-loop scrubbers, which actually put the sulfur back into the ocean. And for my knowledge, that's the most economic scrubber out there. So my question is, have you heard any of that -- anything like that? And maybe give me your opinion on that. And then if that would be the case, would that accelerate scrapping, all else being equal?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [50]

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Well, so Bryan, we don't -- we're not intending to install scrubbers. And so it's something that we track but we don't really get too focused on. There are 2 different types of scrubber systems, open loop and closed loop. You're actually right. The closed loop are more expensive. And then you have also a sludge disposal problem, which you don't have with open loop because it just goes over the side. And there are -- I mean, so, for example, Japan has said they're happy enough with open-loop scrubbers in their waters. Singapore had said, "No, thank you." So it's kind of a mixed response from people. And it doesn't appear that there's going to be a significant move against open-loop scrubbers anytime soon. So I don't think that should be a major concern, but we'll see what happens over time. And I think you had a second part to your question?

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Bryan Lee, Private Management Group, Inc. - Investment Professional [51]

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Yes, just kind of stepping back, and actually for your forecast this year of somewhat relatively flat scrapping year-over-year, is that conservative? Or are -- have people gotten ahead of this? And where do you see -- like is there a potential upside to that guidance on the scrapping outlook?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [52]

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Well, the -- scrapping for MRs is a little bit different. It seems to be much more of a routine thing, and a little -- to a degree, independent of charter rates. Whereas with other sizes, bigger ships, it's very much a function of the health of the market. MRs, the average scrapping age is about 25 years. And that -- it's kind of ongoing. So in a very strong market with no other compelling reasons to scrap, you might see 20, 25 ships scrapped and in a weak market 50 plus. So I think that's kind of the range that you can expect. We think -- and this is the wildcard. Certainly, with container ships and bulk carriers, there's, I think, very, very logical, very good analysis indicating that IMO 2020 should result in heightened scrapping of those sectors. We're not sure that's going to happen with MRs, but it's a possibility as well. So it's hard to tell just yet.

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Bryan Lee, Private Management Group, Inc. - Investment Professional [53]

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And should we see that acceleration in August? Or at what point would you know that, that scrapping had accelerated or that thesis played out?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [54]

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I think it wouldn't necessarily be linked to the kind of time line we talked about. But scrapping typically happens when you're coming up against a survey, a drydocking. Because at that point, you're making a marginal investment decision, do I take the ship through and make the investment. And what do I think I can earn for the next 2 to 3 years? Or do I just scrap? And so I think it's more a function of the timing of the docking for that particular ship. And probably at this point, people are beginning to make that decision. So say, for example, if you have a very high-consuming container ship that's rather old and maybe a Panamax not in direct to size and you're coming up against the drydock, this autumn might be a good time to scrap.

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Operator [55]

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The next call comes from Nick Linnane with Sefton.

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Nick Linnane, [56]

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Can you give us some sense of what your expected mix of usage is between LSFO and NGO next year? And can you give us any color on kind of your testing of LSFO products has gone so far, if you're been doing that, and whether you can get any certainty on the price which will be available either relative to HSFO or relative to NGO or if it's not possible to sort of get any contracts to supply with price certainty?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [57]

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Yes. So we don't know yet. Obviously, we'll have -- we'll basically be faced with 1 or 2 choices, either gasoil or compliant fuel. And we -- through our -- the relationships we have and what we're doing, we have sort of indirectly been involved in testing some of the new compliant fuels. And so certainly, that will be available to a degree. But it very much depends on how our ships trade and how confident we are the quality of the compliant fuel that's available. And in particular, in our business, where trading patterns are so unpredictable, we very often give just dozens of port discharge options to our customers. We don't know what's going to be available in that port. And very often, the amount that you bunker in the load port or at a major hub has an impact on how much cargo you can carry. It ends up being a very complex analysis that can only be made at that time and in the framework of what the market looks like at that time vis-à-vis one alternative versus the other. And so, for example, if there's only gasoil available one way whereas you can do compliant fuel the other way, the returns will probably -- will equalize to take account for the difference because it is competitive market. So kind of rambling on about this a little bit, but I think it's -- short answer is that we're going to almost certainly be burning both. I think that most owners are going to be erring on the side of caution by really just sticking with kind of known qualities of the 0.5% compliant fuel. Otherwise, you burn gasoil at least in the beginning.

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Nick Linnane, [58]

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And if I can ask one other. Do you see any potential for actually demand disruption in some areas as a result of IMO? Because diesel that previously got exported from Asia actually stays in Asia to be used as bunker fuel?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [59]

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Yes, that's possible in North Asia, where you've seen these kind of long haul kind of maiden voyage, VLCC and Suezmax and even Aframax cargoes. That may go away because North Asia might just be needing to keep there what is currently a gasoil surplus for their own regional needs.

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Nick Linnane, [60]

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And Singapore?

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [61]

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Singapore, it's a very -- it's complex. Singapore is a major bunkering hub. They -- I can't give you a straight answer, but I would suspect that they're actually probably going to be short gasoil, and they'll be needing to get it either from the Arabian Gulf or from North Asia.

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Operator [62]

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This concludes our question-and-answer session. I would like to turn the conference back over to Anthony Gurnee for any closing remarks.

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Anthony Gurnee, Ardmore Shipping Corporation - Founder, President, CEO & Director [63]

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Thank you. So just one final note before wrapping up the call. We'll be hosting an analyst and investor event in New York on May 30, where in addition to our usual MR market overview and Ardmore update we'll be doing -- and then we'll be having an in-depth discussion with -- on IMO 2020 with Andy Lipow of Lipow Associates. That should be really interesting, and we're looking forward to it.

You can reach out to us or to the IGB Group for more detail or to register. We look forward to seeing you there, and we hope the rest of you will be able to join on the webcast. The other thing I want to mention is just to congratulate our CFO, Paul Tivnan, and his wife Louise on the birth of their daughter Fia last Wednesday. And as you know, we're generally not in favor of newbuildings in this environment, but we are happy if they're human. So congrats, Paul and Louise.

And with that, I'll conclude the call today, and thanks for joining us.

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Operator [64]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.