Ardmore Shipping Corporation (ASC) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Ardmore Shipping Q3 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anthony Gurnee, Ardmore CEO. Please go ahead, sir.

Thank you and good morning and welcome to Ardmore Shipping’s third quarter 2015 earnings call. First, let me ask Paul, our CFO to describe the format for the call and discuss forward-looking statements.

Thanks, Tony and welcome, everyone. Before we begin our conference call, I would like to direct all the participants to our website at ardmoreshipping.com, where you will find a link to this morning's third quarter 2015 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. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2015 earnings release, which is available on our website. And now I will turn the call back over to Tony.

Thanks, Paul. So turning first to Slide 3, we will follow our usual format to discuss the quarter, but we’ll also take some time at the end to explain the impact of our new dividend policy. Turning first to Slide 5. We are reporting net income for the quarter of $13.6 million equating to $0.52 per share. We continue to deliver strong spot and pool MR performance with our TCE coming in at just over 24,000 a day underpinning an excellent quarter. Our well-timed fleet growth is further boosting performance with eight tankers delivered so far in 2015 and the remaining two in November. The outlook for the product tanker market is very positive as in the short-term the strong winter market appears imminent and in the medium terms supply-demand fundamentals are continuing to improve notably with the MR order book set to drop to around 10% to 11% by year-end, its lowest level since 2001. We’re continuing to maintain control of operating costs and overhead expenses and are below budget year-to-date, thus sustaining a meaningful cost advantage. And finally, consistent with our dividend change announced in September, today we’re declaring a quarterly dividend of $0.31 a share, under the new 60% constant payout ratio policy representing more than triple [ph] from the second quarter. As the quarter moves on I think it’s worth taking a step back to reflect on what we have done since the IPO. We’ve grown fleet as we said we would, we have done this with modern high quality and fuel efficient tonnage which is reflected in our earnings performance. And we preserve and have demonstrated in our operating leverage upside by being tedious on new equity issuance. And we’ve not only grown our earnings per share, but are now returning those earnings in the form of cash to shareholders through our new dividend policy. I know there are always questions regarding our next moves, so if anybody is looking for guidance on our approach going forward, they only have to look back over the last two years to find the answer, at least with respect to our objectives. Now turning to Slide 7, product tankers have had a great run so far in 2015 and the market looks set to continue for the foreseeable future given the very strong secular trends and the ongoing boost from oil market volatility and supply chain concession. MR triangulations East and West for first nine months of 2015 have increased significantly from the same period last year. With Atlantic Basin up 112% to our $26,000 a day, and Eastern Suez up 78% to around 24,800. U.S. refineries are currently operating only 86% of utilization due to scheduled maintenance turnaround setting the stage for a strong winter market as they comeback online. The EIA is reporting U.S. petroleum product exports are up 12% through July compared to a same period last year so there continues to be meaningful growth in this important market. Middle East and India refinery expansion are set to add more than 1 million barrels per day in product volumes over the next year being driven by a very simple fact, with global oil consumption growing now by 1.2 million barrels per day annually the new refinery capacity required to meet this demand is coming mostly from the Middle East and India adding probably around a 1 million barrels a day in cargo volumes on the current base of only 20 million barrels a day transported by sea. So this factor alone is driving demand growth by around 5%. Meanwhile the order book is set to drop to its lowest level since 2001. This is hugely significant. While the order book had risen to close to 20% about two years ago a large of this tonnage is now delivered and has been fully absorbed by demand growth. Going forward we think the activity for ordering will be muted for three key reasons. First is that most shipyards are unwilling to take in orders at current pricing which is below their breakeven. Second is that new regulations on engine additions are going to cause hiatus and ordering activity as it will increase new building prices and actually reduce fuel efficiency on those new ships. And third is that there does not appear to be any of the enthusiasm that existed two years ago among capital providers to support new orders. So our conclusion on the product market is simple, the outlook is extremely bright in view of the impending winter market and the excellent supply demand fundamentals. Turning to Slide 8, the chemical tanker market. Chemical tanker rates have strengthened in the third quarter as evidenced by our chartering performance up 31% year-on-year. The chemical tanker market is clearly in an earlier stage of recovery than product tanker, but the outlook is nonetheless positive, first the feedstock for most chemicals are petroleum and gas related so cheap pricing is boosting production. Second, seaborne transport continues to grow with global trade. Third continued expansion of Middle East Gulf petrochemical production is an important driver of long haul chemical tankers trade, and four the U.S. Gulf is set to continue growing on the back of cheap shale gas. Simpler coded chemical tankers such as those in our fleet are benefiting from the strong product tanker market by engaging CPP trade to a greater degree than usual, which for example our fleet currently spending around 50% of the time in CPP, 25% in vegoils and 25% in commodity chemicals. Importantly although as the chemical market strengthens these ships can and will swing back into more chemical business which could provide a meaningful boost to our earnings. Meantime fleet growth in the chemical sector is supposed to be -- is expected to be relatively moderate with an estimated 75 deliveries representing net fleet growth around 5% this year and then order book declining to around 11% by year-end. Moving on to Slide 10. We’re continuing to position our vessels to take full advantage of the strong best spot market. Around 72% of our revenue base will be spot for the fourth quarter up from 76% for the first nine months. As we have explained before our chartering strategy is focused solely on revenue and value maximization and at the moment other than for some of our chemical tankers we see the most value in spot trading. So turning now to Slide 11. The average number of ships in operation for the third quarter was just over 21 and will rise to 24 by the year-end. Our new building program remains on track, 8 have delivered so far this year with the remaining two deliveries in the next few weeks and with these new building deliveries and taking into account two dry dockings in the fourth quarter. Our revenue days will increase by 5% in the fourth quarter as compared to the third quarter and by 70% for the full year as compared to 2014. In 2016 our revenue days will still increase by further 23% as compared to 2015. So the revenue growth momentum will continue well into next year on the year-on-year basis, even in the absence of any further growth which we intend to do if the conditions are right. Of the two remaining vessels the one MR will join the proprietary spot trading arrangement with a leading oil trader and the 25,000 deadweight chemical carriers will be employed on a one year charter. And with that, I'll hand the call back to Paul to discuss our financial performance.

Thanks Tony. Starting with Slide 13, to reiterate Tony's comment we're pleased to report a very strong financial performance for a net profit 30.6 million and $0.52 per share for the quarter. This was achieved at an average of 21.3 ships in operation which is very significant in light for our built in fleet growth this year. Our strong profits reflects our fleet expansion, operational efficiency and continued improvements in the charter market. Company reported EBITDA of $24.5 million which represents an increase of 18.7 million from the third quarter of 2014. Revenue was 47.2 million, an increase of 28.3 million from the same period last year. Our vessels are running under budget for the first nine months, net operating cost for Eco design MRs were $6,042 while Eco design product chemical tankers came in at $5,896. Our Eco mod vessels were on average for both products and chemicals $6,556 per day for the first nine months. Depreciation and amortization for the third quarter was 7.1 million and we expect the fourth quarter to be approximately 7.9 million. Corporate overhead costs were 2.8 million in the third quarter, which on a fully delivered basis works out around $1,200 per ship per day which is among the lowest of our peers. To point out, this is above our run rates due to timing and one-time expenses, but we’re on budget for the year-to-date. Our interest and finance costs were 3.8 million, which is net of capitalized interest related to the newbuildings in the quarter of 350,000. We expect interest and finance cost in the third --in the fourth quarter to be approximately 4.5 million net of capitalized interest of $50,000. The above results is the net profits for the third quarter of 13.6 million or $0.52 per share. As Tony mentioned earlier, if our full fleet of 24 ships was in operation, Ardmore’s EPS would have been $0.56 per share for the quarter. Turning to Slide 14, we are again reporting very strong charter rates. We had 11 MRs operating in the spot market until at the end of the quarter earning an average of $24,269 per day. Splitting out for the various ship types, we had eight Eco design MRs in operation, which earned an average of $20,540 per day for the quarter. Our six Eco mod MRs earned $24,625 per day on average. As of today, we have eight ships trading in the spot directly and in line with the stronger market, the vessels are earning an average of approximately $20,500 per day for voyages in progress with approximately 34% of days booked for the fourth quarter. Our Eco design product and chemical tankers earned an average of $18,139 per day in the third quarter, while the Eco mod product and chemical tankers earned $13,840 per day which is a significant increase from one year ago. Again, to reiterate, Ardmore had substantial upside potential in every $1,000 a day increase in rates across the fully delivered fleet equates to $0.34 per share in EPS. And MR spot rates of $24,000 and based on 12 MRs in the spot market or pool, we estimate their earnings will be around 2.20 per share annually. As Tony will highlight later, this also has a very significant impact on our future dividends with our new dividend policy. On Slide 15, we have our summary balance sheet and at the end of September our total debt was $389 million compared to total capital of $750 million leaving our leverage at 53%. Our cash on hand was 43 million which including working capital leaves our net debt at 316 million. In terms of net asset value, as vessels values improve every $1 million increase in vessel values equates to $0.92 in additional NAV per share for our shareholders. Turning to Slide 16. As you all know, we are fully funded with committed bank financing in place for all of our newbuildings. At the end of September we have 39 million remaining in yard installment and delivery costs and we have 42 million in committed debt. At current MR rates, we would be generating around 20 million in surplus cash per quarter over the full fleet which is significant. As I mentioned, our leverage stands at 53% and we expect our leverage to peak out at around 55% with significant cash on hand. We feel the company is appropriately leveraged and it is important to note that all of our debt is amortizing, so our leverage will start reducing again from December of this year. And with that, I would like to turn the call back over to Tony who will discuss our dividend as well as some closing comments.

Thanks, Paul. So turning to Slide 18. We’d like to take moment to highlight our new dividend policy which we announced in September. This new policy is a constant payout ratio of 60% of earnings from continuing operations, which is net income adjusted for gains and losses, as statutory transparent and it could be anticipated based on earnings forecasts from analysts. It will be announced with each earnings release and paid out about two weeks later. Given our current stock price and earnings performance the annualized yield based on this dividend is around 10%. A meaningful number when compared to other indexes and yield instruments, and if anything it highlights to their [indiscernible] trading level at ASC today. It also highlights our operating efficiency which we’ve worked hard to build by maximizing our chartering performance and running in shift when it comes to OpEx and overhead, and it leaves us with 40% of our earnings to engage in growth, debt reduction and share repurchase overtime. And to underscore our final point, we routinely comment that every $1,000 a day across the fleet as $0.34 to earnings, but it also means $0.20 increased in our annual cash dividend to shareholders. So to recap then on Slide 19. We’re reporting strong financial results. The near-term outlook is very positive, we’re anticipating a strong winter market driven by refineries coming out of turnaround and underpinned by continuation of oil price volatility and supply chain congestion relating to the new oil market. Strong secular demand continues as Middle East refinery expansion and complexity of trade drives tonne mile demand over the long-term, almost independent of underlying oil consumption growth. The MR order book set to decline by year-end to 10% to 11%, the lowest since 2001, as deliveries continue and new ordering activity remains relatively low with regulatory changes expected to create an ordering hiatus starting shortly. We’re maintaining our spot oriented chartering strategy and positioning the fleet for continued strong performance. And we’re announcing today a quarterly dividend of $0.31 a share under the new policy representing more than tripling [ph] over the previous quarter. And well positioned now to take advantage of further improvements in rates, as I just mentioned ever increase in $1,000 the day across the fleet is $0.34 and now $0.20 in dividend. And with that we’re now pleased to open up the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Doug Mavrinac with Jefferies. Please go ahead.

Thank you, operator. Good morning or good afternoon, guys. Depending upon where you are. Obviously, the third quarter was tremendous, so first of congratulations, I think, are definitely in order. When we look at the third quarter clearly the market itself strengthened for many of the reasons that you guys have talked about in recent quarters, but what I was most impressed by was the -- I think relative outperformance of your MRs. I mean when we look at what your ships earned relative to some of the industry-wide benchmarks that we watch. We have you guys outperforming by good $2,000 a day. So my question is, what do you attribute that strengthening performance to? I mean over and above just the market being strong, was that your positioning, was it some of the Eco mod, Eco design premium [ph] that you’ve received during the quarter. So if you had to attribute something in terms of how well your ships performer relative to the industry, what would it be?

First of all this is the third quarter, I think we’re one of the first to announce and I would expect that other companies are going to coming with equally strong results. I think one point worth highlighting is the fact that we all don’t trade our ship based on the benchmark rates and it does indicate the fact that when the market is strong there are other non -- of these non-core trades or the non-benchmark trades which can be actually even stronger than the benchmark would suggest. So that’s West Africa, South America, various Asian trade, et cetera. And it's very often the access to [indiscernible] trades which really dramatically shorten the balanced fronts that results in these kind of numbers.

Got you. So Tony would you say that your scale maybe -- now that you have grown to this point enables you to take advantage of some of those non-benchmark routes and non-benchmark opportunities?

Well I wouldn’t -- to think anybody could accuse us of having scaled just yet, but we try really hard and we’ve got a great chartering team. [Multiple Speakers] also remember that we have in our spot employment is in the variety of forms, some we trade ourselves, some are with others. So I think some of this might be the strength coming through from the strategic relationship we have with one of the major oil traders.

And then just second question, looking ahead of the fourth quarter, refinery turnaround season can be coming to an end here soon, you're starting to see a strong up in MR spot charter rates. So that seasonality that normally happens during the quarter seemingly is upon us and you guys mentioned that in your presentation. In your presentation you also mentioned Paradip, so that thing is finally supposed to start producing in December. My question is do you see that as being a potential needle mover for the market given the 300,000 barrels a day capacity and if so, is there a particular asset class that would benefit from that thing coming online?

Well, refineries typically don’t just flip-a-switch and run at full capacity. So there will be a ramp up, I think that’s one a point. I think it's clear that these new refineries opening up in the Middle East and India, they benefit not just ORs, but MRs as well. So I would say look -- I think refineries are just part of this ongoing, you can call it juggernaut of new refinery capacity which is oriented toward export markets, which is really dramatically driving demand growth in the product sector. So I would say its all part of the continuing of demand growth created by these new refineries.

Got you and then just two final questions; one, whenever I am talking with investors, people that know the refining business very well, one of their concerns is that you have a [indiscernible] of refined products, refining margins aren’t going to be that great going forward, et cetera, et cetera. Maybe they are just extrapolating the currencies and the weakness, but my question for you is as a products tanker owner, in the situations where you have over supplied markets and call it clutter of inventories, from your perspective is that a good thing or bad thing, as it pertains to refine products demand, as it pertains to the potential for pricing disconnection, dislocations and just the ability to move all of that excess? So what you view a [indiscernible] of refined products inventory is a good a thing or a bad thing, as a refine products tanker owner?

I mean it's very certainly a good thing because what it means is that our ships are engaged in -- not only in very interesting long haul trades which are priced driven arbitrage opportunities that are typically wouldn’t necessarily be, but it also means that ships taking longer to lift discharge imports and that also then -- because that has a knock-on effect when ships aren’t missing their cancelling dates for their next voyage, than charters have to scramble to replace that with the market tonnage. And so overall it's very, very positive for the business.

Got you, very helpful. And then just final question before I turn it over, looking at your employment profile, you guys have a number of vessels coming off from prime charter contract in the December-January timeframe. We saw time charter contract announcement today at a very strong rate, slot rates are obviously very strong and probably strengthening. So my question is how do you weigh time charter versus spot on those ships, is that an opportunity type of decision that you're looking at in terms say, can we lock it at this rate? Or would you prefer to have certain reports of your fleet on time charter almost regardless of rates. So how do you weight that on these ships that are coming up in terms of expiration on them?

We don't really think of one year time charter as giving any kind of meaningful risk mitigation in terms of the markets, because on average a portfolio one year TC runs off in six months. So that’s not the reason to do it, we do it simply for revenue maximization or in some cases time charter deals are attached to larger packagers in a kind of relationship arrangement. I think we could expect those charter rates to reset much higher levels in line with the market, if we do that we might just take them back and trade on the spot. We’ll just have to judge that when the time comes.

The next question comes from Jon Chappell with Evercore ISI.

Paul question for you regarding capital structure, 55% at year-end with all the capital commitments now in the rear view mirror. What do you feels is like your target leverage as you go through the next couple of quarters, and the associated follow-up to that is, when you think about the remaining 40% of EPS which is obviously if you had cash would be even more. How do you prioritize usage of cash going forward?

That’s a great question Jon. I think our leverage right now is 53% and it peaks out in the next three weeks or four weeks at 55% when we take delivery of the last ships and draw down the remaining debt. After than all our debt is amortizing, so over course of, through December and through 2016 and beyond the leverage starts coming down and probably next year it finishes in the low 50s. Look I think we’re appropriately leveraged right now. I think overtime depending where you're in the cycle you want to get your leverage down a little bit further, so that something will -- that’s one use of excess cash which we start thinking about. And then the two other remaining perspective uses of the cash is obviously further growth and then share buyback. So in terms of further growth, I think we do have excess cash and we’ll have excess cash to tack on a few ships and it will depend really on the opportunities ahead at the time, and then for smaller usage of cash we can continue with the share repurchase program. So I don't think in terms of how we prioritize them, it's hard to say right now, it's more as we see it the at point in time, but as of now I think we would be -- deleveraging is happening automatically and I think we’d probably be keen to tack on a few more ship, giving our lookout on the markets. And also share repurchases for smaller amounts of cash, I guess because it's little bit harder to put significant amount of cash to work in the share repurchase program.

Right and that could lead in to the next question. Obviously, it's pretty clearly that you like to grow with the capital, what’s available to you. So I'm not going to ask how you think that because, I’m sure there is a good answer for that right away, but how long is the window of opportunity opens for assets. The time charter market is moving up, you said yourself Tony it’s probably going to reset at the higher level, asset values have lagged across the board, the cash flow generation from the assets today. Do you see the asset values resetting as well, as the time charter market resets and how narrow is that window for you to move to add ships before they run away from you [indiscernible] wise.

We won't know that until we see it happening, and we’re not quite seeing it's happening yet. But I'll say that when you see kind of charter rates that one of our colleague company has announced this morning, it’s an excellent level and I think those kind of levels will definitely support a rise in second hand values. And look the reality is, I think we've engaged and it's a pretty aggressive growth over the last few years, we’d like to continue growing but if it's not going to be accretive or if the opportunities are not there to acquire high quality ships, we obviously won't do it. But in terms of building momentum and building value in the shares, is what we've done already, that’s all certainly heading in the right direction.

One just industry follow-up to something that doesn’t [indiscernible] before is, becoming more wide spreading ship broker reports that there is almost kind of forced facility storage in the product tanker market, whether that’s actually ships being parked or whether they’re being rerouted along the tip of Africa as opposed to the Suez Canal, are you seeing any of that? Whether it's through your relationships or even more directly through the chartering of your own ships?

Yes, there is -- it's hard to put a number on it, that’s reliable in terms of applying it to a global fleet average. But we definitely -- compared to let's say a year or 18 months ago we’re spending a lot more time in particular waiting to discharge. And so a lot of that is because the short tanks are full and they can't move the cargo on. But it's either -- it's I think largely related to diesel where there is glut. And for gasoline it's happening where something else was going on which is countries where they've got fairly significantly rising import volumes, but they don't have the infrastructure to handle it. So that’s kind of the separate issue which is also a factor in the market today, but it doesn't really related to the glut percent.

And then 30 more seconds, just a clarification, Paul you ripped through a lot of numbers really quickly. That 34% of the MR is a 20,500 for the sport fourth quarter, was that all of the MRs or was that just Eco or Eco mod?

That’s for all MRs that are trading the spot ships 34% of the spot days on the MRs for the fourth quarter rather than to expect 20.5.

Okay. And I got the depreciation and the interest costs run rate. Did you give one for OpEx?

No, I did not.

Okay, understood. All right. Thanks for the time Paul, thanks Tony.

The next question comes from Michael Webber with Wells Fargo.

Just wanted to follow-up on a couple of questions. You’ve already touched on the, I guess Tony did on supporting stores and then delay discharge. Just curious if you could try to put a number around that in terms of what impact you think it’s having on utilization, I know it’s kind of speculative question, but a kind of frame up would be helpful. And then maybe as you look out in the market for the next couple of quarters. What do you mean -- do you think we’re in in terms of seeing an elevated degree of a structural floating storage if you will?

It’s hard to put a number on, because in our fleet the ones that we trade ourselves is relatively small. So I think it appears to be significant, but again I think somebody should be able to use AIS Data to calculate this on a global basis, which would be an interesting a number to track, but we’re not -- we don’t have the time to do that. But yes, so in terms of where we are, there doesn’t appear to be any real end in sight to the glut and it’s apparent that it’s becoming more and more distillate issue, they seem to be enough gasoline demand, in fact gasoline stocks are down in China. But China now is exporting about a million barrels a day of diesel, right. So that again highlights that kind of the amazing thing about this business is that, I keep on referring to trade complexity, that’s what I’m talking about, you got these imbalances which are continuing to add demand. And if you look, if China is going to be growing at the kind of level it’s at now that’s probably structural, that’s going to be there for a long time. So it’s probably going to get worse, it’s probably going to take a long time before it gets any better and that just all new for our business especially against that backdrop of all the refinery expansion.

Got it. No, that makes sense and actually [indiscernible] into my next question around the fact that we’ve seen so much demand for Mogas and Jet fuel and other distillates, but there is a -- just to figure out who exactly wants it. As it pertains particularly to, I guess, European diesel demand and I get questions around Volkswagens and the stuff, so what sort of systemic impact that could potentially have, are they going to be pretty minimal or could be pretty important. Just curious as to how you think long-term European diesel demand, if we were to see that really roll, with sort of long-term impact do you think that has on the tonne mile structure within the market, as the backhaul trade rolls off, what does that do for tonne miles and does it make the overall global tonne mile structure significantly more efficient they were after that?

I think the structural imbalance around the world, other than China, which has been pretty dramatic. They move relatively slowly and we don’t think there is going to any dramatic move with the diesel deficit in Europe. But they do change overtime and some things fade away a little bit and others expand a little bit. So we were as fascinated as I think as anybody else by this revelation from Volkswagen and thinking about what the impact could be. But we don’t think it’s going to have an impact in near-term or even medium-term.

Got you, okay. And just one more. So one more and just for a follow-up on, one of Jon’s question actually. So you guys talked about that measured acquisition and I guess strategy, it all seemed pretty transparent. But I’m just curious around what you see from a value perspective here you get shipyards probably dragging down prices and in an attempt to kind of win new business, which has been hampering new build, even probably bleeding [ph] through the second hand value to a degree, but I’m not saying -- on the other hand you guys, for cash flow profile looks pretty robust, net-net it would stand to reason that we’d see MRs improve in value and give a bit of an any NAV uplift. So I’m just curious when you look at current asset values on a percentage -- general percentage basis. How do you think about those moving higher, is there a level at which you’re not making to high-30s, 40s, you’re not interested in really aggressively expanding. So I’m just curious how you think the dynamics play out for now, because you’re seeing that dynamic across a lot of shipping spaces right now and it’s putting [indiscernible] product because there is such a strong forecast for the profile?

Well, we do feel that there is a real tailwind behind the market. And the last thing to be lifted are going to be vessel values and we think that’s going to happen. It’s really interesting to note that over the last year vessel values in our sector haven’t really moved much at all, whereas they have for example on crude tankers. So we think that a lot of that had to do with the fact that people will starring at the orderbook and saying well, this is going to kill the market at some point. But guess what, it hasn’t and now we’re going to be down to a level that we haven’t seen since 2001 by the end of the year. So I think that combined with the strong winter market could really results in the fundamental shift in psychology in our market in terms of chartering and S&P and we could see values rising there. I mean if you look at it, we did a straight line from newbuilding down, second hand values just still below that line. So there is quite a bit moving upward. And typically the strong market second hand values will rise above that line because they’re in the water and thinking they can generate cash flow from day one and take advantage of that two-year window before a newbuilding would deliver. Korean ship yards in particular are under tremendous financial pressure and I don’t think there is really any interest on the part of their now owners, which are all the banks like [indiscernible] and KDB for them to engage in new orders where they’re doing below breakeven. So we think breakeven is probably now at 35.5, 36, when you add the noise abatement rules, the CSR and the new engine that probably adds 1.5 million to 2 million to MR cost. So you can -- plus nobody really wants to be the first one to order these because they’ve been bench tested and they seem to work. But operationally they are not proven yet in terms of the new engines. So we think there could be real hiatus there. But at some point there is going to be real pressure and they will be ordering, just to meet the ongoing demand. But it will be probably being on the back of continued strong spot performance, higher time charter rates and a meaningful rise in second hand values.

The next question is from Ben Nolan with Stifel.

So my question gets back to little bit to the chartering strategy and you guys have sort of outlined how you foresee it going forward. But it really -- I suppose it is more about what you're seeing from your customers, is there -- has there been any change or higher level of enquiry for those longer term time charters like we saw from Scorpio today coming into you guys? And do you think that there is sufficient liquidity in that market to say if you wanted to, it would be no problem to lock away vessels at pretty good rate?

I think the -- hands off to Scorpio, those are great rates and we think it's a good move on their part and we think it’s the sign of probably something that will -- sign at times to come. I think that we have always felt that if we could lock in long-term rates in below 20s that will be very interesting for us. So I think we maintain that view and we’ll just have to see how the market develops. So far it’s a relatively thin market one year TC is obviously fairly liquid, but when you get beyond that it’s been fairly thin, and kind of backward dated from the one year rate, but that may be changing now. And that’s probably on the recognition that we’re probably in for a really good winter. And that’s on the back of a very low orderbook. So it's something that we do track every day, it's on our agenda, we do have ongoing discussions. But we haven’t done anything yet.

And then my next and last question I guess is for Paul, obviously the top-line revenue is really good. But OpEx is also little bit below I think where we had expected and where you guys had indicated in the past. Is it -- should we think of that as sort of a one-off and that nothing has really changed or are you in fact seeing sort of better lower operating expense line?

Yes, you mean OpEx is always going to be good lumpy from quarter-to-quarter, we are running slightly under budget, but not materially, so-so. I mean I think you're seeing evidence of us running a proving operation, obviously we had -- allowing newbuilding during this year which brought on the OpEx as well on a per share basis. But I would expect in the fourth quarter you might have -- there was probably some slight reduction in the third quarter, it might come back a little bit in the fourth quarter. But put overall we’re running under budget and I think it's hardly true to, A; the ships and B; all sorts of [indiscernible] efficient platform.

That’s under budget on forecast basis not just for the third quarter.

The next question is from Fotis Giannakoulis with Morgan Stanley.

Yes, hi guys and congratulations on the great quarter. Tony I want to also ask you about the demand for products, there seems to be some uncertainty in the market given the fact that the primary margins have come off from their peak, whether there is enough demand and I am talking about both distillate and gasoline, and how do you see the weakness in the distillate demand in both side of Atlantic and if you see any potential impact on refinery runs, given the latest weaker refinery margins?

Good question, look I mean our mindset that with oil consumption growing at 1.2 million barrels a day, which is up a lot from a couple of years ago. Product consumption is growing by 1.2 million barrels a day, I mean it all eventually gets to refined and consumed. So that’s a -- that number is up, not down over the last -- the IEA forecasted slightly higher number a few months ago, but this is still a pretty good number. Obviously, gasoline is in more demand than diesel. We’re not saying we’re refinery experts on the refinery sector, but it would appear to us to that basically the only way for crude oil to get into the consumers vehicle or power generation is if it happens to be refined. So it's being produced, probably the price of crude is going to have to drop to make sure that it's still attractive for refineries to run, and it's going to get refined and shipped out. And you’re going to have this imbalance of demand for gasoline versus distillates, which means that for the tanker market that’s product anyway, that’s pretty excellent news because the distillers are going to get -- it's going to create various congestion and price volatility and cargo movements that you normally wouldn't see. So overall we’re very bullish. European refinery margins are down, but the European refinery business is it's kind of a dinosaur that’s gradually going out of business. So I don't think that’s really necessarily a benchmark. In terms of the two way trade across the Atlanta. We’ll just have to wait and see if the all these regulations about diesel emissions are going to have much of an impact, we’re not sure they will and if they do it will be fairly a long period during which other things will change. But again I think it's really interesting, it's not headline stuff right now, but it's one of these very subtle things that’s continuing to build, it’s the fact that we have these economies in South America, Africa and other places which are either half deteriorating or declining refinery capacity themselves on the back of increasing consumption. So that their imports are expanding and expanding, and they're not improving their infrastructure. So that again creating more congestion and more disruptions to trade. So I don't know if that answers the question, but overall we’re not concerned about what we see happening with refinery margins at the moment.

So what you've telling us is that the you view that refinery runs will not be affected by the weaker margins. And I want to ask you given the quite weak distillate demand and much stronger gasoline demand, how does the flows of a cargo's has changed? Where do you see this distillate that is coming out China going, who is absorbing it? What kind of tonne mile differences you've seen in the last couple of months?

Again just a point refineries is, if the margins gets squeezed but the demand is there, they are going to basically hold off buying until crude price drops and they start running again. With regards to distillates China is a big factor now in terms of their growing exports and we see that going -- it's mostly staying in Asia or down to Australia. It's not essentially going long haul, but it’s having a knock-on effect, given you're seeing -- overall you're seeing some fairly long haul trades taking place. So we think it's positive. I don't think it's quite as simple as saying well it's going to have to be short at sea or it's all going to go into tanks ashore. It's a very, very complex aggregate picture on a global basis, but in the end it’s probably going to result in diesel probably displacing other energy sources for various uses.

And any direction that you see that this distillate is going, any new routes? Is it may be going to East or have you seen the Australian cargos picking up, if you can give us some snapshot of how their market looks like in terms of flows?

Very often we show this map of where all the MRs are at any point in time, it's the very complex global pattern, in fact it's just [indiscernible], almost random. So, no we can't. But in the aggregate we can tell you that when you see those kind of export volumes it is underpinning ongoing demand growth. Maybe one thing I will point out is that, a lot of people kind of maybe they don't quite get the very powerful demand growth that has been going on for long time in our business and one very, very simple calculation is that over the last seven years really since the peak of the market in ’08, global oil consumption has grown about 1.4% per year, at the same time the product tanker demand has growing by about 6%. So these things we talk about now are feeding into an ongoing -- very powerful ongoing trend of demand growth.

That’s very helpful and can you also talk to us about the forward looking supply growth. We have seen obviously a very strong supply growth over the last couple of years which -- it has been easily absorbed by the product tanker market. You talked upon the lack of capital, but we all know that ship owners are not the most disciplined people in the world. How do you see the next couple of years, the supply growth developing and how long would it take until an increase of supply to bring major market down again?

Okay. So as we mentioned at the end of the year, if things continue they are and we think they will, we should be down to 10% or 11% of MRs on order, compared to be existing fleet. So the existing fleet now by the way, if you think about numbers, the existing fleet is up to around 2,000 ships. So when you think about numbers of orders, you have to think about the fact that that’s by far the largest sector, in fact that represents by number of ships more than a third of all tankers in the world fleet. It looks like the order book is going to continue to be delivered rapidly over the next year or so. So by this time next year all the ships who were ordered kind of two years ago or a year and half ago, they will all have delivered and then the question is what’s going to be coming in -- well the delivery schedule after that is lighter and then there still open [indiscernible] in kind of late 2017, right. So then the question is now who has the way resolve and the interest to order in the next, let’s say in the next six months, six to nine months and who is going to finance it. And really those of the questions that we’ve been pondering. And so let’s go back to this Tier 3 issue. So here you have a new engine design which share their two options, nobody really seems to know which one to pick, some yards are pushing one versus the other. They create operational issues and their much less fuel efficient, by about a tonne a day for MR plus the operational problem. So who wants to be the first one to order a whole bunch of those, I don’t know anybody that’s putting their hand up right now. Really literally as we speak, we think we’re kind of at the very end of window where you could order the old design, if it’s an existing design of the shelf and get everything arranged, so the keel could be laid by the end of the year. Because after January 1st, any new keels laid, the ships have to have all this new feature and it’s not just the engine, it’s also noise abatement and some additional structure requirements. So we think that the ordering activity we’ve seen in the last three months or so has been in anticipation of that and we think after this, it’s going to really slowdown. So then I don’t really, we don’t have a lot of investors when we meet with them, begging us to order new ships. I think the recognition is that one of the surest ways to kill a market is -- now they know, is to support company to go out and order a bunch of ships. So there is not, that seems to be pretty unpopular strategy among investors today. And the other thing is just the yards themselves and then I mentioned earlier there are in pretty bad shape and there is not a lot of patience among the banks in Korea to continue supporting losses. You might see here and there some ships ordered, but not to the kind of numbers you see that are needed to really sustain the fleet growth to match this demand growth that we’re seeing.

So pretty much from what I understand you say that at least the next couple of years with exception of the next couple of months -- the next few months. We’re going to have a lower fleet growth given this view, can we assume that you’re not planning to order any additional newbuildings and your main focus for fleet expansion will only be second tonnage?

So again to be clear, if let’s say spot rates went to 30,000 a day, three year time charter rates went to 24,000 a day and newbuilding at second hand values rose by 30%, you’re going to see ordering activity. But then we have a whole different problem and that’s just kind of problem. So because once people start ordering, it is going to take quite a while before those ships to deliver. In terms of what we’re going to do, we evaluate the circumstances that exist at every point in time and every phase of the market. As we sit right now, we don’t envision ordering a lot of new ships and we would much rather buy second hand or prompt delivery resale.

The next question comes from Magnus Fyhr with JMP Securities.

Just a question on the chemical tanker market. With the strength that you’re seen in the CPP market. Kind of curious on your thoughts on the outlook for the chemical market in 2016. I mean you have an interesting fleet with both trading products and chemical. Have you seen any changes in your fleet with more of your IMO 2/3 ships trading CPP rather than vegoil over the last year and maybe that could tighten up to markets further going into 2016?

Yes, as I mentioned you may have not over heard. But we are -- now we’re trading roughly 50% CPP on our chemical tankers, 25% vegoil, 25% commodity chemicals. And we think as long as the, because the reality is that size is -- there are a lot of ships that just engage in products of that size and for regional trade. So it is reliable business for that ship type and especially when the overall product sector strong as it is. We think that’s going to continue meanwhile we think that the demand for commodity chemicals is also going to grow. And it kind of highlights the very delivered strategy that we have of operating relatively simple coded chemical tankers, because they can really -- they can trade both ways. So where the chemical market get strong they can benefit and do very, very well in a strong chemical market, but when the chemical market is not quite there, they can trade in these other activities like CPP, et cetra.

And that 50% number, how does that compare with maybe six months ago or a year ago?

So a year ago I think the number would have been about one-third each.

So I mean you definitely see more of the ships going into the CPP trade?

Right.

The next question is from Noah Parquette with JP Morgan.

I just had a question on scale. I mean you have a pretty good platform right now, very well overhead and effective chartering, I mean as you grow how large can you get and you can kind of keep this type of platform in terms of you see further economies of scale or at some point do you seed these economies and how does that factor into your growth strategy?

So growth is always -- has basically kind of been an important part of our strategy from day one and it's something that we’re continuing to focus on, but it's got to be the right kind of growth at the very time and we’ve got very clear criteria. So I think it's clear that we’re looking for high quality ships, not just in specifications, but where they’re built and the conditions they’re in. We’re also looking for pricing, both where we feel we’re on cycle and also relative to the market at that point in time. Yes but we also want to grow in a way which is strategically coherent and above all that’s going to be accretive to our shareholders because we’re only incentivized to maximize value and improve the stock price. So having said that we are -- we could for example I think we’ve got the capacity now to probably double the fleet, but maintaining or even improve on the efficiencies that we have, so we’ve got great systems in place now, we’ve got a great team, I think the kind of people we have to add, now would be kind of mid-level or to low-level, not senior level. So we’re ready to do that. The incremental overhead would be a fraction of what it is right now on a per ship basis and we would have to believe that if we had more scale on the chartering side that would also probably improve our performance as well. I think that the diseconomies of scale come from becoming diversified in a way which is no way synergistic. So we’re in chemicals and products and we think they might have overlapped and benefits to being in each and the way we’re doing it that wouldn’t necessarily be the case in really desperate type of sale. I think we’re engaging growth by truly diversifying that would probably result the diseconomies of scale. But I think as long as we can grow in a way which is very tightly focused and operationally focused on factors that are closely related to the MRs, we would be able to continue to improve our performance.

And then I have just a question, what do you -- with the new dividend what do you expect the drip participation to be?

Well we encourage everybody to take it because we think the share are still very attractive and the Greenbriar has been very supportive and I think they believe in the value of the company and the fact that we’re undervalued today. So they’ve been the largest participant in the drift, but there have been a couple of others.

The next question comes from Charles Rupinski with Seaport Global.

Thank you very much for taking my call, congratulations on the quarter. I just had a couple of questions. Just first one for Paul and I am sort I miss this, did you guide on depreciation for fourth quarter at all or?

It did, it was 7.1 million for the quarter and for the fourth quarter we estimate about 7.9 million.

That’s great. Thank you very much. And I just appreciate all those color on the macro and I am just curious about one theme that had been brought up over the last few months, was balance quarter regulations, I knew that falls in the some of the other things you're talking about with the new vessels. But is there any way you can quantify or maybe give us a color on what you've seen in terms of the world fleet dry docking ahead of this, is this something that’s still a factor going forward in terms of driving up utilization so far? Thanks.

Well the balance quarter treatment situation has become quite murky because the coast guard is -- there is some legal appeals taking place in the U.S. now which has kind of, no pun intended, but kind of muddied the waters in terms of what to do. So the international regulations are still in place, that haven’t been ratified yet, everything was being driven up until a couple of months ago by the coast guard. They are now pulling back a little bit, but the fact is that all newbuilding are still being fitted with [indiscernible] treatment and we anticipate that and in the near future coast guard is going to clarify the position and the IMO legislation will be ratified. So at that point and we think it will happen sometime later this year, ships going into dry dock will have to install and retrofit balanced water treatment. And our estimate is that could cost upto $2 million per ship.

And then, is it's a longer dry docking from what I understand or is it [multiple speaker].

It will take a little bit longer, but it's mainly the capital cost and because some of the new builds that were delivered shortly before the requirement, were laid out, so there was room and power onboard and switchboards and everything to make the -- to install the system. But if you probably think about a ship that’s 15 or 18 years old, you're scratching your head, A; where you're going to put it, where is the power going to come from and either you want to spend $1 million on a ship that’s 18 years old. But I think that I could accelerate scrapping at that point.

The next question is from Amit Malhotra with Deutsche Bank.

I guess most of my questions have been asked and answered. But just one follow-up Paul on the earlier comment you made on deleveraging, and the question is, will deleveraging the balance sheet basically be your priority or the company's priority after the final couple of deliveries there or does the company prefer to remain at that 50% level and anything that gets below that will be accrued for acquisitions or reduction in the share capital. And then just a follow-up for that for Tony and it's sort of piggybacked from the scale question. But would be curious to get your perspective because you did say that no one would accuse Ardmore of having scale. And so with that respect could you just comment on what number of ships do you think Ardmore will speaking I guess, what number of ships do you think would get a company to scale and sort of allow I guess to optimize the cost structure.

I'll just answer the delivering question first. I guess as I mentioned in the last question to Jon, I think it was the company is delivering from -- as in from December when we take delivery of the last year ships and we were all amortizing debt charts coming down from there, total leverage in November we've about 55%, actually net-net leverage when you take away the cash it will be below 50%. So we think we’re in a pretty strong position where we’re now, I think as we move through the cycle I think we would place emphasis on deleveraging. It obviously puts the company in a much stronger position for future growth. So it is a priority, and I'm not sure it is the priority right now, but it is one of the priorities as we move over the next six months to 18 months and as well that Ardmore entering that question than about growth in ships, Tony?

When I made that comment I should also have said that on the other hand we’re not sure that scale has a needle moving type of impact. So I think only with respect to Ardmore and the way we think about it, we believe that let's say if we were to add another 25 ships to the fleet, The incremental overhead would be significantly lower for those 25 ships. And overhead per ship is a very number and has an impact. But it’s on an operational level, and we think that’s very important, but it's not something that investors always notice. With respect to market power, I think we’re kind of there, I think it's more than just the reputation you have and whether people really want to fix you and one of the reasons charters want to fix you is if you can do them a favor in return down the road, if they're stuck in a situation. So a lot of it is kind of building relationship. And so far I think we felt that we've been very fortunate, but we’ve hard to developed those commercial relationships. So I think we’re okay where we’re. We think that there might some real cost benefits and for us in particular as we grow, and maybe some ongoing relationship benefits on the commercial side. In terms of bank support, we've got high bank support and capacity for growth and I think we’re generally regarded as being on list of companies that banks want to do business with.

And then just one question on the supply side. Over the next three years to four years there are going to be a number of ships that reach that 15 years plus, product tankers that reach that 15 year plus age mark. And can you just talk about the marketability of those relatively older ships and how that may impact the supply picture over the next three years or so?

I think it very much depends on who wants the ship and what condition it’s in. So if you and I won't name nations, okay but some people and it's not European base by the way, but they basically just let their ships absolutely deteriorate and run down and very logically after 10 plus years they start having real problems with vetting which is the inspection process. And those are the ships that had the really hard time fixing business after say 15 years of age. If there are well build ships, well maintained, operated by a good company with otherwise newer ships as well they can still trade okay. Maybe they won't have access to time charter business with majors and then big oil traders, but they'll do okay, and meanwhile the investor capital is going down. So we think that if it's done the right way, it's not necessarily a bad strategy, but the reality is that I would say I'm going to be pretty presumptuous here and say that if you look at a fleet of ships globally over the 15 years -- over 15 years of age a very large percentage of them are in poor condition, because the owners haven't maintained them.

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

Thank you all for your time today. And we look forward to speaking to you in about three months.