Anthony Gurnee - Chief Executive Officer Paul Tivnan - Chief Financial Officer.

Randy Giveans - Jefferies Michael Webber - Wells Fargo Jon Chappell - Evercore Ben Nolan - Stifel Magnus Fyhr - Seaport Global Fotis Giannakoulis - Morgan Stanley.

Good morning, ladies and gentlemen, and welcome to Ardmore Shipping's Second Quarter 2018 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 anytime during the next two weeks by dialing 1 (877) 344-7529 or 1 (412) 317-0088 and entering passcode 10122598. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping. Please go ahead..

Good morning, and welcome everyone to Ardmore Shipping second quarter earnings call. First, let me ask our CFO, Paul Tivnan, to describe the format of the call and discuss forward-looking statements..

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 second quarter 2018 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 actual results to differ materially from those in the forward-looking statements is contained in the Second Quarter 2018 Earnings Release, which is available on our website.

And now I'll turn the call back over to Tony..

Thanks, Paul. So on the call today, we'll follow our usual format. First, we'll discuss our performance and recent activity, followed by an update on the product in chemical tanker markets, after which Paul will provide a fleet update and review our financial results. And then I'll conclude the presentation and open up the call for questions.

So turning first to Slide 5, on our performance and recent activity. We're reporting EBITDA of $7.6 million and an adjusted net loss of $8.2 million or $0.25 per share for the second quarter, reflecting ongoing significant weakness in the product tanker market.

The company continues to perform very well in terms of costs, with operating expenses and corporate overhead under budget. But of course, the real issue is charter rates, our MR has earned $11,500 per day on the second quarter and $12,100 year-to-date.

Based on the second quarter, we're particularly impacted by lower cargo volumes, resulting from what we consider to be unrelated one-off events in key consumer regions in the Atlantic Basin, which we will go through in more detail later on.

An exceptional weakness in the crude tanker spot market resulting in some crude tanker voyages -- sorry, some crude tanker new buildings carrying refined products on maiden voyages.

The charter market continues to be weak, particularly in the Atlantic Basin, but is now coming off of very low levels we saw in June and July, and we believe rates should bottomed out and should be now on an upward trajectory, supported by global refinery throughput rising to record levels in the third quarter, normalizing cargo trading patterns in the Atlantic basin, and crew tankers trading in CPP on maiden voyages declining in the second half as the new building delivery phase tails off.

And looking ahead, the IMO 2020 sulphur cap is coming more into focus. We've been anticipating significant increase in seaborne cargo volumes as well as heightened cost advantage for more fuel-efficient vessels, such as those in the Ardmore fleet. Turning next to Slide 6 for a look at our fleet profile. This is unchanged since the last call.

But for those not familiar with Ardmore, this is a modern fuel-efficient fleet, all built in top-tier yards in Korea and Japan, and with significant earnings power and the rise in market. Now to Slide 8 for more detail on the product tanker market.

The MR charter market took an unanticipated hit in the second quarter of 2018 from a number of what we consider to be unrelated onetime events, which we highlight here along with some ongoing headwinds that have been discussed in prior calls.

First, lower demand at the Atlantic Basin as a result of localized factors in the key consumer markets in Brazil, Mexico and West Africa. These are largely political issues, not fundamental economic issues.

Second, the continuation of high oil prices and future's backwardation impacting oil trading activity, and also higher bunker prices impacting voyage profitability by $2,500 a day as compared to 1 year ago, and $1,000 per day versus first quarter of this year.

And third, crude tanker market weakness resulting in some encroachment to product tanker trades, particularly Aframax newbuildings competing with LR2s. Having said that, we feel that the impact of crude tankers on MR trade is limited, probably well under 1% of overall supply.

Clearly, the second quarter has turned out to be unexpectedly tough, and it's easy to focus on the short-term negatives but, there are many positives to remember.

The first is that MR supply growth remains at all-time lows, we're forecasting 23 MRs to deliver over the remainder of 2018, with 29 delivered year-to-date, and this is compared to the 5-year historical average of 112 per year.

Scrapping has increase with 31 MRs scrapped year-to-date, indicating a run rate of approximately 50 to 60 per year, and as a consequence, MR fleet growth net of scrapping is expected to be well below 1% in 2018 and into 2019.

The second is that the underlying demand fundamentals are still solid in terms of oil consumption growth and export-oriented refinery capacity development. And as a result, we believe the outlook for the MR sector remains positive.

Atlantic Basin cargo volume should return to normal levels in the second half as the short-term factors play themselves out.

Refined product inventories are well below 5-year averages, and with refinery throughput set to increased by further 2 million barrels a day in the third quarter to all-time highs, the conditions are in place for an increase in CPP trading activity. And in addition, IMO 2020 sulphur regulations are expected to have an impact from mid-2019.

The initial estimates suggest that approximately 2 million barrels a day of refined products will display high sulphur fuel oil, with the majority of this moving at sea and over longer distances, with some analyst calling for a 10%-plus increase in product tanker demand. Turning now to Slide 9, on the Chemical tanker market.

Our chemical tankers averaged $12,550 per day in the second quarter, down from $13,500 in the first quarter, which while lower, is still a very good result relative to the MRs.

Looking to recent chemical tanker trading activity, given the overlap of cargoes, the most important factor has been the softness of the product tanker sector, resulting in downward pressure on chemical tanker freight rates late in the second quarter.

We believe that the only thing really holding back the chemical tanker sector now is [indiscernible] a product tanker sector. In terms of overall demand, chemical tankers are highly correlated to the global economy, and with GDP forecast to grow by 3.9% in 2018, chemical demand is expected to be robust.

And other point is that we've been withing for petrochemical plant expansion in the U.S. on the back of shipment -- shale gas boom that is to come online, and this is now finally happening in the second half of 2018 and into 2019.

As a consequence, forecasted demand growth for seaborne commodity chemical trade out to 2020 is very strong at 6% per annum. Meanwhile, looking at supply, the chemical tanker order book continues to decline, and is now 5.9% of the existing fleet.

But within that number, stainless steel tankers, currently about half of the order book, comprised 6.8% of the current stainless steel tanker fleet, whereas coded IMO2 tankers, such as ours, account for the other half of the order book, but are only 5.2% of the existing fleet.

Overall, we expect net chemical tanker fleet growth in 2018 of 3% or less, which should be well below demand growth. In summary then, the outlook for the chemical tanker market is positive, demand issue now being weakness in the product tanker sector.

And with that, I'll hand the call back to Paul to provide an update on our fleet and financial performance..

Thanks, Tony. Moving to Slide 11, we will launch on the fleet days. Revenue days this year will increase by 3% to 9,966 days. We have 35 drydock days in the second quarter, comprising three drydocks and two in-water surveys, and we expect a 55 drydock days in the third quarter, four drydocks and three in-water surveys.

Turning to Slide 13, we will take a look at our financials. As you will see on the second line, we're reporting an adjusted net loss for the second quarter of $8.2 million, about $0.25 per share. Total overhead costs were $4.6 million for the quarter, comprising corporate expenses of $3.8 million and commercial and chartering expenses of $800,000.

The movement from the first quarter primarily relates to noncash items. As mentioned before, in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate costs is a comparable overhead.

Our full year corporate tax costs are expected to be $12.5 million, which works at a $1,250 per ship per day. For the third quarter, we expect corporate and commercial overhead to be $4.6 million, including both cash and noncash items. Depreciation and amortization for the second quarter was $9.6 million.

We expect depreciation and amortization in the third quarter to be approximately $9.9 million. Our interest and finance costs were $6.1 million for the second quarter, comprising cash interest of $5.5 million, and amortized deferred finance fees of $600,000.

We also had a write-off of deferred finance fees of $400,000 related to the refinancing of 2 vessels. We expect interest and finance cost in the third quarter to be approximately $6.5 million, which includes amortized deferred finance fees of $600,000.

Moving to the bottom of the slide, our operating cost for the quarter came in at $16.1 million, or $6,328 per day across the fleet, including technical management. OpEx with Eco-Design MRs was $6,360 per day for the quarter, Eco-Mod MRs came in at $6,615 per day while the chemical tankers came in at $5,923 per day.

As outlined in the last call, our OpEx in the first quarter is slightly higher due to timings of certain items and some upgradings, but overall, the cost is back in line in the second quarter.

Looking ahead, we expect total operating expenses for the third quarter to be approximately $16.4 million, which is a more normalized run rate for the rest of the year. Turning to Slide 14, we take the look at charter rates for the quarter.

Despite of soft charter market conditions, the pool and spot MR has reported TCE of $11,510 per day while the fleet average came in at $11,503 per day. Looking at the various ship types, we had 15 Eco-Designed MRs in operation, which earned an average of $10,600 per day for the quarter, and the 7 Eco-Mod MRs in $12,579 per day.

Slightly higher performance with Eco-Mods, it's purely down to vessel positioning and timing of fixtures in the quarter. Our six chemical tankers performed well overall, with average rates of $12,527 for the quarter.

These chemical tankers started out very well, but the rates came under pressure from a softer product tanker markets in the second half of the quarter. Looking ahead to the third quarter with 40% of the days booked today.

Spot MRs are earning approximately $10,000 per day for voyages in progress, and the chemical tankers are also earning approximately $10,000 per day. Overall, we remained focused on managing performance and voyage efficiency in order to maximize TCE.

Slide 15, we have our summary balance sheet, which shows at the end of June, our total booked debt and leases was $454 million. Our leverage is 54.8%, and our cash on hand at the end of the quarter was $47.9 million. Turning to Slide 16. We remain focused on maintaining a strong liquidity position, and we're continuing to pay down debt.

As mentioned, our cash balance at the end of June was $47.9 million, and we had an additional $28.8 million -- or $21.8 million in net working capital. We have $2.5 million undrawn under the revolving credit facility.

We completed sale and leasebacks on 2 2013 MRs in June, with the top-tier Asian financier raising cash of $10.3 million and maintaining corporate leverage levels. We issued $5.2 million to an ATM at $8.15 per share for general corporate purposes.

And finally, all of our debt, including capital leases, is amortizing at $44 million a year, so we're continuing to delever and strengthen the balance sheet. And with that, I will turn the call back over to Tony..

Thanks, Paul. So to sum up then, we're reporting a net and adjusted net loss of $8.2 million or $0.25 per share for the second quarter, reflecting ongoing weakness in the product tanker market.

The decline in MR spot rates in the second quarter was largely the result of unrelated politically driven short-term events, most notably in Brazil, Mexico and West Africa, which we hope to discuss in more detail in Q&A as well as higher bunker prices and some incursion of crude targets into product trades.

Meanwhile, supply-demand fundamentals are sound, with the order book continuing at record lows, and supply growth expected to be below 1% this year and next. And tonne-mile demand growth underpinned by 1.4 million barrels a day, oil consumption growth and export-oriented refineries coming online to meet this demand.

IMO 2020 is now coming into focus as a major event for the product tanker sector, which may prove to be a game changer in terms of demand starting in mid-2019.

When we look at very recent trading activity and charter rates, we believe MR rates have bottomed out at very low levels, particularly in the Atlantic Basin, and that we should see improvement through the second half of 2018.

Against this backdrop, Ardmore remains on solid financial footing, with conservative leverage, good balance sheet liquidity and an efficient cost structure. And is well-positioned to benefit from a recovery in product tanker charter rates with significant earnings power where $1,000 per day translates into $0.32 per share in earnings.

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

We’ll now begin the question-and-answer session. [Operator Instructions] The first question today will come from Randy Giveans with Jefferies. Please go ahead..

Few quick questions for me.

So looking at ballast water treatment systems, what is your fleet's status for that? And do you have a total cost and timeline for installations?.

We don't have something at our fingertips, but it is part of our longer-term plan. Like everyone else, we've availed ourselves with deferrals, and we're installing the ballast water systems into our ships in connection with their scheduled dockings at later dates. We don't believe any are going to be installed until late 2020 or 2021.

And about one third of our fleet have them already installed..

Late '20? Okay.

So not much drydocking next year or installations of ballast water treatment systems?.

No. No installations next year..

And then for the sale and leaseback, can you give a little more color around that, specifically maybe duration or the leaseback rate?.

I'll let Paul answer that..

Yes. We -- some of this is quite confidential, so we haven't disclosed all the details. In terms of tenure, the leased facility, they're seven year facilities with purchase options from early on, and the ratio is comparable to existing financings that we've done.

And in other ways, I'm not sure we can go into much detail on this, it is quite confidential from a financial standpoint..

Okay. And is there a purchase obligation? You said options starting this year so....

Right, purchase obligation at the end of year seven, exactly..

Fine, was just clarifying that. And then last question for me, ATM, about $5 million in proceeds this quarter.

What is the remaining authorization on that?.

In total, it's a $25 million plan..

$25 million remaining?.

No, it'll be $25 million minus $5 million, so it's $20 million remaining..

Our next question comes from Michael Webber with Wells Fargo. Please go ahead. .

So I just wanted to start off with some of the shorter-term kind of non-continuing events you referenced in your prepared remarks, Brazil, Mexico as well as West Africa.

Can you give into a bit more detail there, and then particularly around any kind of bleed-through into Q3? It looks like the guidance sequentially looked a bit softer in Q3, a lot of that was seasonal.

I'm just curious is that how contained those items are within Q2, and how it impacts the back half of the year?.

Sure. So I'll try to find a bit of framework for each of the points, and then we can go into more detail on it, if I could. So in terms of Mexico, the volumes in Mexico are normalizing as we speak. But it certainly did impact July. But we think that they're coming back to more normal levels. More or less the same thing for West Africa.

West Africa, there was a very, very large buildup in offshore floating storage, largely for Nigeria in the first quarter, and there was a subsequent runoff. They continued up until this very recently. We're now beginning to see an increase in MR fixtures going down to West Africa. So we think that's normalizing.

Both of those are of course -- the backdrop there is more political than anything else. In West Africa, they've got elections in February '19, and wanted to make sure that they didn't face any shortages by either jet fuel or gasoline in the run up to that.

And so we think that they're going to continue with relatively elevated levels, which means the flow of imports down to that region will be back to normal levels. Now it may drop, step down again next spring once the election is over, but that's a while away. See the biggest issue is Brazil.

Brazil is very -- it is -- it was, the largest individual contributor to MR tonne-mile demand, using a total of around 60 MRs, which is a very large number if you factor that in. So for example, against the Atlantic Basin demand.

So as we all know, in late May, the truck drivers went on strike in Brazil, created a political crisis, the revolution was the reintroduction of subsidies, which has been -- is being born largely by Petrobras.

And so that has resulted in a complete change in the dynamics regarding the refined product market down there, particularly the importing of diesel. So up until that point, Brazil was importing in excess of 500,000 barrels a day of diesel, which, like I said, was probably importing around 60 MRs on a full-time basis equivalent.

That number basically almost evaporated. It's come back a little bit, so then in July, that number appears to be about maybe -- we think maybe 200,000 barrels a day or less, representing around full-time demand equivalent around 20 MRs. So that event has taken, we believe on a relatively temporary basis, about 40 MRs worth of demand out of the market.

We think that will gradually come back. They have elections in October. The first repricing of the subsidy level happens on August 22th. Meanwhile, the government is handing out reimbursements for the subsidies to more than Petrobras, so we believe that a process is beginning.

Meanwhile, they're probably working down inventories and also relying on elevated levels of throughput in Petrobras refineries in Brazil, which we don't believe is quite sustainable. So we think it will recover, it will probably take a few more months.

It may not get back to the levels that we saw a year ago, which, in hindsight, look like they were pretty artificial..

Yes, that's going to be my follow up, the unwinding of that Brazilian trade. You think that's measured in months.

That's kind of a gradual process at the back half of the year?.

Yes. And then -- our guess would be that maybe we get back to equivalent of 40 MRs of worth, where ppm is 50..

Just kind of on a high-level, it's been a tough run from a rate perspective in this space for a while. Asset values have actually held up exceedingly well all things considered.

And then when we look at cash/noncash returns or unlevered IRRs or whatever -- kind of pick your metric in this space, it seems like they've been unsustainably low for quite a while now.

And when you just look at like a $35 million to $36 million print on a prompt MR versus where some charter rates are, it seems as though something should give, given the catalyst that you kind of laid out in your deck, kind of heading into '19 and '20, it seems like there -- the speculative bid in this space makes it unlikely we see asset value downside from here, but the more we kind of print red ink, I guess, the more likely that becomes.

I guess, when you think about managing the business and think about -- you think about opportunities laid out in front of you, how do you think about that? How do you justify kind of the returns that you're seeing in the market right now, with where asset values are.

Is this simply just something that you would kind of stay away from for now? Maybe it's something you would probably stare at all day, or at least when you're looking at opportunities in this space, how do you think that ultimately resolves itself?.

Our view is that the current rate levels are not really sustainable or will be sustained, that they will improve. And when we think about investment returns, we think about rate forecasts going into the future, obviously. So I think the only factor that today's market environment might have on a purchasing decision would be on sustainability.

Can you generate enough cash flow to service debt at a certain level, et cetera? So we actually think it would be an excellent time to be buying ships.

There's not a lot available in the more modern Eco-Design kind of frame, but in terms of the slightly older Japanese or even conventional Korean ships, they're actually down to fairly attractive levels. And there's a bit more activity there. So those would be very good investments. Obviously, against current levels, clearly not.

But I don't think any of us are in this business to kind of rely on these kind of levels going forward.

So I think another interesting point to make is that it's very unlikely we're going to see any newbuilding activity at these levels for all the reasons you've mentioned, and that the prices that yards are asking, which effectively their breakeven, are -- they're high.

They're kind of $35 million, $36 million, meaning that the fully delivered cost on a ship is more like $37 million, that's way beyond anybody's desired cost structure in the industry at the moment..

Right. Right. It's an interesting framework. We have -- probably would've and probably did call it unsustainable 18 months or two years ago, and it's kind of persisted longer than I think anyone expected.

When you mentioned the slightly interesting value prop slightly older, I think you're talking three to seven years on the Korean- and Japanese-built MRs?.

Or even -- we bought one last year that was kind of nine years old, and that's the price, and it's probably the best performer in our fleet right now in terms of returns on capital for that very reason. So but you have to be picky. A lot of these ships are not well-maintained through their lives.

You got to get a well-maintained ship at a good price, it'll prove to be a very good investment. So yes, we think it's just a lack of trading liquidity in the market and a lack of sustainability at current charter rates that's holding that back. But we also don't sense that there is a impending drop in the newer valuations..

Our next question comes from Jon Chappell with Evercore..

I was wondering if I can tie together some of the thoughts in the prepared comments and also your answer to Mike's question. I mean, obviously, the outlook looks incredibly favorable, but we've been disappointed, and a lot of us have been really early.

So how do you think about offense versus defense? I mean, you've done the sale on leasebacks, which seems to be somewhat of a defensive measure, and obviously, kind of shores of your balance sheet and adds another arrow to your quiver as far as your liquidity is concerned.

[indiscernible] you talked about the potential to add tonnage at attractive prices. So those, I guess, aren't necessarily mutually exclusive, but given the limited EBITDA and maybe continuation of that in the third quarter, there's not a ton of liquidity to be aggressive.

So are there other sale on leasebacks opportunity you're thinking about just in case this gets worse or do you think now is the time to strike?.

Well, I think it is -- I think that was a good description, John, of offense versus defense. And clearly, we're -- we, along with virtually everyone else is playing defense, and we're trying to play this as well as we can, by being very kind of measured in the way we assess and manage our liquidity and, in particular, our debt cost.

When we feel that we've got the resources and either available or in-hand, and we see opportunities that are meaningfully accretive to value, then we're interested. But it's a tough environment to play offense, at the moment..

How would you gauge your current liquidity and ability to buy ships? I mean, is it still kind of in this stock price environment? Is it kind of sentiment macro headwind environment? Is it basically ones and twos is all you can do at this point?.

I think so. Again, without tapping a lot of capital, that's the case. Obviously, there's little arena of M&A as well but again, we've thus far never been presented with, or developed, an opportunity that was going to be meaningfully accretive to our shareholders. So but we're always surveying those opportunities as well.

Having said that, I think we did the Frontline acquisition a couple years ago now. Arguably that was too early, but if you look at what that did for the company incrementally, it was absolutely the right thing to do at the time. And in fact, if you age-adjust what we bought those ships for, that's still hasn't been matched in the market.

So we're still happy with the transaction..

I think also just to be clear, even though the offensive initiatives may be somewhat limited, defensively, there really isn't any near-term liquidity issues.

And you've already done a pretty decent job being proactive, but you think you would pursue other defenses, actions, just in case?.

Well, look -- I think we're always monitoring and seeking. Quite frankly, we're looking to be opportunistically defensive in a sense that if we, for example, a lot of dialogue going on in Japan on sale of leasebacks. And the 3 that we've done in that part of the world already were very attractively priced.

They're 90%, 95% advanced swapped into LIBOR today's levels, we'll probably be ranked 3%, no covenant. So we are always looking for opportunities to tap into new attractive sources of capital, whether that's for defense or maintenance or perhaps building up a war chest if -- depends on the situation..

And then just a final one on [indiscernible]. It's not surprising to be the third quarter of days bookings on the MRs is just -- given where that market's been.

But the chemical market's a bit more opaqued, and given what you've done in the first half of the year, 12-, 13-plus, now 10.5, is that a seasonal [indiscernible] associated with the chemical order day bookings or is that kind, as you kind of alluded to before, just the MR market is really starting to pressure that segment as well?.

My guess is that it's really both. It's -- I wouldn't call it seasonal, but I think that the coated chemicals sector has definitely been impacted by product tanker rates. But at the same time, some of those ships, small as they are, they're going on very long voyages and so there's some fronthaul/backhaul pattern is what they do.

Not exactly seasonal but so far, we think it's got really to do with a combination of product tanker market impact and backhaul versus fronthaul..

The next question comes from Ben Nolan Stifel. Please go ahead..

So you've -- you're telling me it hit pretty well on some of the macro drivers that are moving things. One of the things that I thought was interesting in the quarter was that the Eco-Mod vessels, in particular, helped performed the actually Eco-Designed ships. And I understand that a lot of that has to do with location and timing and everything else.

But one of the things I had expected to see in a higher oil price environment is the real differentiation or widening gap for those more fuel-efficient vessels, like we talked about a number of years ago.

And I don't know, are you seeing that happening? I mean, is the higher price of fuel starting to again create potentially a 2-tier market?.

Let me try to answer that, Ben, in 2 parts. First of all, with regard to our Eco-Mods versus Eco-Designs, it is luck of the draw. The Eco-Mods just did relatively well.

But I think it's important to point out that we call it Eco-Mods for a reason, which is that they were already very fuel-efficient ships when we bought them, and we further improved them. And so they're actually not that much more -- they don't consume much more than the Eco-Designs that we have, maybe 1 or 2 tons a day.

So they -- I think that's a point worthwhile making. The second thing generally is, yes, I would imagine that there is probably more of a differential between some of the very high-consuming kind of 10-year-old Korean-Chinese built ships compared to the more modern fuel-efficient vessels.

And you may not exactly see that in the results because it very much depends on the voyages and positioning, East versus West, et cetera, but you know the consumption differentials are. That could be upwards of six to eight tons a day, and the math on that is pretty simple..

Okay. All right, that's helpful. And then for Paul, unless I'm mistaken, there wasn't any sort of explicit cost guidance for the third quarter in the presentation.

Any -- could you maybe give me any sense of where you might expect whatever G&A or OpEx to look like in the coming quarter?.

Yes -- no, I can run through them all, it was actually in my script. So the depreciation and amortization in the third quarter would be $9.9 million. The interest and finance cost will be $6.5 million. And the OpEx is expected to be $15.4 million for the third quarter..

The next question will be from Magnus Fyhr with Seaport Global. Please go ahead. .

Just one question on the capacity on the balance sheet to take on more of the sale leasebacks. How much more do you think you have and how much -- what level would you be comfortable with based on our numbers, it looks like the -- it's a pretty high level of debt versus fleet volume? So it would be interesting to hear your thoughts..

Well, I think the important thing, Magnus, to point out there is that without doing anything, we delever by about 4% a year. So it's actually [indiscernible] by under than 2% sale leasebacks, whether early on the Japanese or more likely the one that Paul described, where effectively keeping our leverage at around 55%.

So on that basis, given that we're pretty disciplined on cost, we can keep doing these for a long, long time if we choose to..

Okay. And just a question on the supply. I mean, I think on the last conference call, we were talking about an inflection point here in 3Q, 4Q.

Do you think -- I mean, is there more structural oversupply, or do you think with the Brazilian market coming back, and that would see scrapping of about maybe 50 ships this year that we should be in a balance market? Or are you still confident that will get a recovery? Or do you think there's still more scrapping needed to get the market back in balance?.

Well, we sound like a broken record, I'm afraid, but the fundamentals are compelling. The global macro environment seems fine. I think that the sort of the pressure in the incursion from LR2 has been somewhat problematic for MRs.

But in addition, we're dealing with a really very large number of kind of onetime events, which in shipping, they come and go. And right now, they're all here. So we're talking about Mexico, West Africa, Brazil.

You know, a few other things that we didn't mention, but it's a lesser impact, but emerging economy, local currencies, with volume with slightly higher oil prices, we think it's going to help people off from purchasing for a while.

We also think that exports are part of the world has been a little bit less, in part due to higher consumption domestically of gasoline.

So there's a lot of these kind of factors that play right now, which seem to be all conspiring against us, but they don't feel like any of them are particularly long-term, and that they will turn around and, at the same time, other similar type of activity or events will occur that will swing the other way.

So if you strip away the malaise and the kind of the pressure from the bigger ships with the kind of oil market dynamics we've been talking about for a while, combined with all these kind of accumulation of onetime events that we're facing just right now or have -- they're kind of going away, as we speak. We think we're in very good shape.

So if you take those out, we've been a very good market..

One last question. The IMO 2020 should be a big shot in the arm for the product tanker market.

What are your clients saying as far as the refineries being ready to supply the fuel, come 2020?.

We're not hearing much other than what we all read and kind of get from reports, to be honest with you. But it seems like there's a relatively passive approach still across any other refining and the oil industry in terms of responding to it. It's a bit of wait and see.

Clearly, there's going to be a big run on the gas oil initially, and that over time, when people figure things what's what, that will transition to 0.5% ultra low sulfur fuel oil blend, which will be -- we think a lot of that is going to be gas oil as well.

So it will go through disruptive period but it's the kind of disruption that almost everybody's going to benefit from so why would they do anything about it now..

[Operator Instructions] The next question comes from Fotis Giannakoulis with Morgan Stanley. Please go ahead..

Tony, the rates, the spot rates are very low, and I'm trying to understand if this is an opportunity for trade as to -- take some cheap tonnage and chartering some vessels.

The collections data do not show any time charter fixtures for quite a while, and I'm wondering if there is any activity and if this rate of around $13,000 that the brokers are quoting are real?.

There is a wide spread between what owners are prepared to accept as a rate and what charters are prepared trade, and that's resulting in a standoff. You would think that analytically, it would be a very good time to charter in a lot of ships, but at the same time, nobody likes to lock in trades where they're basically losing money on day 1st.

I mean, the more normal course of action is you wait until you got specified trades or you know the market at a level that you can make money on the PCM for at least the first portion of the charter. And then the back half of it -- or the back part of it has got a little breakeven. Obviously, that would be reversed at the moment.

So I can understand why they're a little bit reticent but the other thing is that there are plenty of ships for them to charter, they're just doing it on a spot basis..

And is this something that you would consider if -- you were talking earlier about being offensive versus defensive, and I was wondering if time chartering in tonnage would be a way to go a midway between these 2 options?.

It's a possibility, but I think our mindset right now is more in tune with the oil traders. That -- let's kind of a wait-and-see..

And then you mentioned earlier about the difficulties in the U.S., Brazilian trade and West Africa and Mexico of course.

I was wondering, if there are -- how is the situation in other regions like the Mediterranean and in the Far East? Do you see any difference in activity there and is this a weakness that we see in the Atlantic basin because of this -- just because of Brazil and the rest of the world is doing better or it's a more inventory destocking that is keeping the markets so low?.

Fotis, that's a good question, and with one thing that we haven't highlighted on this call yet, which I'm glad we now have a chance to do it, is the fact that the market East of Suez is actually quite healthy at the moment. The rates are up in the kind of low to mid-teens. And so on a world basis, we may be 10 or 11, but East is quite strong.

So there's good activity there. And so it's really a matter of waiting to see these onetime events, and that have impacted the Atlantic Basin play themselves out. At the same time, a lot of tonnage is trying to find a way to go east. And there's a fairly a long line of ships heading east.

So even on a global basis, markets tend to normalize over a several-month period. So that should actually help to even out the global market..

And given the fact that the -- we already -- we have a very heavy delivery from the crude tanker side, which it seems that they are putting some pressure on LRs, and then whereas it cascade to MRs.

Is there a way that you can quantify the pressure that you get from the LR vessels? Or even adding direct pressure that the LR vessels get from the newbuildings? How many cargoes, how much of the demand are we missing right now for the MRs because of the weakness on the crude side?.

Well, as I mentioned in the presentation, we think it's less than 1% for MRs. The reality is that because these ships are really just engaging in initial voyages or maiden voyages, the overall impact is actually quite limited.

So for example, so far this year -- the first half of the year, I think it's [indiscernible] reported that three VLCCs carried diesel or gas oil on their initial voyages, but not the full cargoes. And it was only three out of 25 deliveries. So it's not like you have that [indiscernible] going into that business.

Suez Max's were carrying quite a bit, but the pace of Suez Max deliveries is way down. More problematic for LR2s are Aframaxes, they're basically the same. We're about 85% of all the Aframaxes delivering have done maiden voyages and CPP.

However, if you assume that those are operating on a 40-, 45-day initial voyage, that actually works out to a little bit above 1% of the LR2s that are trading clean. So it's not a very big number. It certainly doesn't help, but it's not particularly devastating, we don't think.

In terms of how much LR2 fv is taking business away from MRs, it's hard to quantify it, but it just doesn't seem like it's gotten any worse than it was the first quarter..

Ladies and gentlemen, this concludes our question-and-answer session, and thus concludes today's call. We thank you very much for joining today's presentation. You may now disconnect your lines at this time. Take care..