Kirby - Q1 2016

Transcript

Operator (participant)

Good morning, and welcome to the Kirby Corporation 2016 first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star and two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Sterling Adlakha. Please go ahead.

Sterling Adlakha (Head of Investor Relations)

Thank you, Carrie, and thank you everyone for joining us this morning. With me today are Joe Pyne, Kirby's Chairman, David Grzebinski, Kirby's President and Chief Executive Officer, and Andy Smith, Kirby's Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirbycorp.com in the Investor Relations section under Financial Highlights. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors.

A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31st, 2015, filed with the Securities and Exchange Commission. With that, I'll now turn the call over to Joe.

Joe Pyne (Chairman)

Okay, thank you, Sterling, and good morning. Yesterday afternoon, we announced first quarter earnings of $0.71 per share, including severance charges of approximately $0.06 per share, versus our guidance range of $0.75-$0.85 per share. That compares with $1.09 per share reported first quarter last year. In the marine tank barge utilization during the first quarter remained in the 90%-95% range. The supply overhang from barges cleaned out of crude oil service and put into other trades over the past 12-18 months continued to have some impact on pricing. However, we think the trend of barge cleaning out of crude oil service into clean service has slowed significantly, and we believe that industry utilization levels have modestly improved.

Additionally, we have not seen an increase in inland tank barge order book for 2016, which is now at low levels. Should the trends that we've seen in April continue for another couple of months, our outlook for this business will continue to improve. In the coastal sector of our business, utilization remained stable, with coastal tank barge utilization in the high 80s to low 90% range. The market is in relative balance, even with additional spot exposure. Average pricing on contract renewals of the coastal equipment increased during the quarter, but part of this increase was the result of price adjustments of legacy contracts, which were below market rates. Also influencing our results in this business is the amount of equipment trading in the spot market, which has idle time exposure.

In our land-based diesel engine service business, market conditions deteriorated further than we envisioned when we provided guidance in January. There have not been many positive signals in the oil service market. There's been an accelerating decline in U.S. oil production, which has led to cannibalization, or at least some cannibalization, to existing U.S. pressure pumping capacity, which should create future demand. However, without more tangible improvement, the prudent thing to do is to aggressively reduce costs in this business. The market has simply been far worse for longer than I think anyone in the market anticipated, as evidenced by recent earnings and CapEx revisions by several large oil service companies.

In the marine power generation business, our marine diesel engine business, the oilfield service market, which services the Gulf of Mexico, remained depressed, and we experienced customer deferrals of major maintenance projects throughout all of our marine engine service locations during the quarter. This is not unusual when you get in this kind of environment. This broad impact on a marine market speaks to the uncertainty of not only the oilfield service business, but also the dry cargo market that the inland side of the business services, and in some respects, the general economy. In summary, we find ourselves in the midst of a very challenging environment in both our marine and diesel engine businesses.

At the same time, we have seen some encouraging trends in our marine markets, particularly the inland market, where pricing seems to have stabilized. I'll now turn the call over to David.

David Grzebinski (President and CEO)

Thank you, Joe, and good morning, everyone. Let me start with a quick comment on our recent cost savings actions and then move to first quarter results across our businesses. Our cost-cutting efforts included a reduction in force that was implemented in February. We reduced headcount in corporate staff, marine shoreside staff, and diesel engine personnel. These reductions led to severance costs of approximately $0.06 a share. While the staffing reduction was the most visible cost-cutting action during the quarter, we have several teams dedicated to streamlining our cost structure across the company and in improving customer service. It is our belief that as conditions across our markets improve, we will be positioned to improve market share in each of our businesses while simultaneously improving profitability. Turning now to a summary of first quarter results.

In the Marine Transportation segment, our inland marine barge demand saw some modest sequential improvement as utilization stayed in the 90%-95% range throughout the quarter. During the quarter, high wind and fog impacted operations along the Gulf Coast, and high water on the Mississippi River system led to delays and added horsepower requirements. The direct costs associated with these challenges were partially mitigated by contract clauses that protect us from navigation delays, particularly as it relates to high water. On a clearly positive note, we think the number of barges transitioning from crude oil into other services slowed dramatically. We believe the industry fleet-wide number of barges in crude service is currently just under 175, virtually unchanged from earlier in the year.

The industry has absorbed a large number of barges from both new construction and from displaced crude movements during the past year to 18 months, and is very close to tightly balanced. Nevertheless, pricing on our inland Marine Transportation term contracts that renewed during the first quarter were down in the single-digit range. Average contract pricing was skewed lower by repricing of some longer-term contracts. Excluding these contracts, a more representative indication of pricing on inland contract renewals was down in the low single-digit percent range on a year-over-year basis. Spot contract rates were roughly in line with contract rates during the quarter and were flat sequentially with the 2015 fourth quarter. However, in April, we did see some firming in the spot market from market lows.

In the inland marine market, we continued to see growth, modest growth in demand for petrochemicals and refined products transportation, with crude oil demand relatively flat with the 2015 fourth quarter. The black oil market, meaning heated products, excluding crude oil, was weak throughout the quarter, largely due to commodity price volatility, but utilization in our black oil fleet recovered toward the end of the quarter and into April. In our Coastal Marine Transportation segment, demand for the coastwise transportation of refined products, black oil, and petrochemicals remained consistent with the 2015 fourth quarter, and tank barge utilization continued to be relatively strong. With respect to pricing, term contracts that renewed during the first quarter increased by a double-digit percent.

Operator (participant)

Pardon the interruption. Can I have your name, please? You are now rejoining the main conference.

David Grzebinski (President and CEO)

Were significantly below market levels. Excluding those contract renewals, renewals on coastal equipment contracts were essentially flat. In our Diesel Engine Services segment, as Joe mentioned, our marine diesel and power generation markets experienced widespread deferrals of major maintenance projects across all of our marine diesel engine operating regions. While there is some possibility that these deferrals could lead to higher business levels later this year, our assumption is that that will not happen, particularly if the inland dry cargo barge and Gulf of Mexico oil service markets do not improve. In our land-based diesel engine services market, our ability to maintain breakeven profit levels with our current staffing was dependent on maintaining a steady level of parts and component sales and a modest amount of remanufacturing activity, a view which we garnered from close coordination with our major customers.

However, as the first quarter progressed, orders for parts and components declined precipitously. Projected spending levels from our major customers for the full year 2016 for parts and component sales were revised down by over 50%. On the service side of the business, the year began with some incrementally positive indicators as customers requested to remanufacture portions of their fleets, with the opportunity to remanufacture larger portions of their fleet as the year progressed. However, financial stress and uncertainty around consolidation opportunities among our customer base has resulted in almost all remanufacturing being placed on hold for the near term. As we work through these challenges and await an inevitable improvement in the market, we want to strike a balance between maintaining the capability to respond to demand when the market turns and a cost structure that is appropriate for the current market.

The volatility of the market and opaqueness of the outlook make this difficult. So we thought it prudent to assume these tough conditions persist through the remainder of this year, and consequently, we reflected that in our forecast. I will now turn the call over to Andy to provide some detailed financial information before I finish up with a more detailed discussion of the outlook.

Andy Smith (EVP and CFO)

Thank you, David, and good morning. In the 2016 first quarter, Marine Transportation segment revenue declined 10%, and operating income declined 28% as compared with the 2015 first quarter. This decline in revenue was primarily due to a 38% decline in the average cost of marine diesel fuel, lower inland marine contract pricing, and an increase in available spot market days for some of our offshore marine equipment. The Marine Transportation segment's operating margin was 18.4%, compared with 22.9% for the 2015 first quarter. The inland sector contributed approximately 2/3 of Marine Transportation revenue during the 2016 first quarter.

Long-term inland Marine Transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 80% of revenue, with 55% attributable to time charters and 45% from the affreightment contracts. As David mentioned, our utilization was consistently above 90% throughout the quarter, and the inland sector generated an operating margin in the low 20% range for the quarter. In the coastal sector, utilization during the quarter was in the high 80%-low 90% range. The trend of our customers electing to source coastal equipment through the spot market versus renewing existing term contracts continued in the first quarter, as we saw the percentage of coastal revenue under term contracts drop slightly from the 2015 fourth quarter to 78%. The first quarter operating margin for the coastal sector was in the low to mid-teens.

As mentioned in the press release last night, we incurred an approximate $5.6 million or $0.06 per share in severance expenses during the quarter. Of this amount, approximately $0.03 per share was in our inland marine business, approximately $0.01 per share is in our coastal marine business, and approximately $0.01 in our marine and power generation diesel businesses, with the remainder split between the land-based diesel engine business and the Kirby corporate office. Turning now to our marine construction and retirement plans. During the 2016 first quarter, we took delivery of three new tank barges, and we retired a total of 16 barges. The net result was a reduction of 13 tank barges to our inland tank barge fleet, or approximately 278,000 barrels of capacity.

Also, during the quarter, we committed to build an additional four 30,000-barrel tank barges for delivery in 2016 to meet our existing fleet needs at attractive pricing. For the remaining 9 months of the year, we expect to take delivery of these four inland tank barges and to retire or return an additional 18 barges with 235,000 barrels of capacity. On a net basis, before giving effect to the additions from the SEACOR fleet, we expect to end 2016 with approximately 17.5 million barrels of capacity, a reduction of approximately 400,000 barrels from the end of 2015. In mid-April, we closed on the acquisition of SEACOR's fleet of 27 30,000-barrel inland tank barges.

Additionally, a 130,000-barrel tank barge and one inland towboat are under construction and are expected to be delivered before the end of the quarter. Including these additions to our inland fleet, we expect to end 2016 with a total of 18.4 million barrels of capacity. In the coastal Marine Transportation sector, we expect delivery of our second new 185,000-barrel ATB in mid-2016. The first of two new 155,000-barrel ATBs should also deliver in late 2016. Our second 155,000-barrel ATB and a coastal chemical barge are expected to be completed in 2017. Our 2016 coastal equipment capacity plan includes a single retirement of an 80,000-barrel tank barge in the second quarter.

On a net basis, we expect to end the year with 6.3 million barrels of capacity, an additional 260,000 barrels from the end of the 2016 first quarter. Moving on to our Diesel Engine Services segment, revenue for the 2016 first quarter declined 52% from the 2015 first quarter, and we had an $806,000 operating loss for the segment. The segment's operating margin was a -1%, compared with 5.3% for the 2015 first quarter. The marine power generation operations contributed approximately 60% of the diesel engine services revenue in the first quarter, with an operating margin in the low double digits. Our land-based operations contributed roughly 40% of the Diesel Engine Services segment revenue in the first quarter, with a negative operating margin in the high teens.

On the corporate side of things, we raised our 2016 capital spending guidance range by $10 million to a range of $230 million-$250 million, to account for the additional four inland tank barges that we expect to build this year. Our capital spending guidance for the year includes approximately $10 million for the construction of seven inland tank barges to be delivered in 2016, approximately $100 million in progress payments on new coastal equipment, including one 185,000-barrel coastal ATB, two 250,000-barrel coastal ATBs, two 4,900-hp coastal towboats, and a new coastal petrochemical tank barge.

The balance of $120 million-$140 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine services facilities. In addition to capital spending guidance for the year, we used $88 million in cash in April of this year for the purchase of SEACOR's 30,000-barrel inland tank barge fleet. During the 2016 first quarter, we continued to execute on our share repurchase authorization, buying approximately 35,000 shares for $1.8 million or $52.53 per share. The stock price, in our estimation, continues to offer compelling long-term value. We will continue to evaluate share repurchases in concert with other capital allocation opportunities.

Currently, our unused repurchase authorization is approximately 1.4 million shares. Total debt as of March 31st, 2016, was $712 million, a $63 million decrease from December 31st of 2015. Our debt-to-cap ratio at March 31st was 23.5%, compared with 25.4% at the end of last year. As of today, our debt stands at $783 million. I will now turn the call back over to David.

David Grzebinski (President and CEO)

Thank you, Andy. In our press release, we announced our 2016 second quarter guidance of $0.65-$0.75 per share, and for the 2016 full-year guidance of $2.80-$3.20 per share. Our guidance for the year reflects our 2016 first quarter GAAP earnings per share of $0.71, which includes $0.06 per share of severance charges. As we mentioned earlier, the significant change in our outlook is related to the land-based diesel engine business, which we now expect to incur quarterly operating losses for the remainder of the year. With that overview of the changes to our guidance, let me also briefly address the primary factors in the guidance range for each of our markets.

In our inland marine transportation market, as mentioned in our press release last night, the inland market showed some tangible signs of improvement in April, with utilization improving, particularly for 30,000-barrel tank barges, and competitor spot pricing in the spot market improving from previous month. Refined products and chemical volumes have been strong, with the black oil market seeing some renewed strength in April following a tough first quarter. While we're encouraged by these developments, we are cautious in extrapolating the impact for the rest of the year. At the low end of our guidance, our guidance factors in spot and contract renewal pricing include declines of low single digits and tank barge utilization in the high 80s to low 90s percent range. At the high end, we are assuming year-over-year pricing stability going forward and utilization in the 90%-95% range.

We are assuming normal seasonal weather patterns for the remainder of the year. In the coastal market, on the high end of guidance, we are expecting flat to slightly higher pricing on contract renewals and utilization in the high 80% range. On the low end, our guidance range contemplates a deterioration in coastal rates, with pricing declines on contract renewals in the low single-digit % range and utilization in the mid-80% range. For our Diesel Engine Services segment in our land-based sector, although oil prices have improved somewhat, it has not yet translated to an improved outlook. The improvement may come in the second half, but with lower spending levels seen in the first quarter, we felt it prudent to adjust this portion of our quarterly and full-year guidance.

We will continue to evaluate market conditions and adjust the cost structure as necessary to meet current and projected levels of demand, but must balance the lack of volume in today's market with the outlook for a market recovery as oil prices continue to increase. Where we fall within our guidance range this year will partly hinge on whether we see an improvement in activity in the second half of the year. In our marine diesel and power generation markets, we expect the weakness in the Gulf of Mexico oil service market to persist for the entire year. There is some possibility that major maintenance projects deferred by customers in the first quarter could drive better performance later this year, but our base case assumption is that those deferrals will not lead to firm orders until 2017.

So in summary, our balance sheet and cash flow are in great shape, giving us the flexibility to do acquisitions and share repurchases. The marine business is stable, with the inland markets poised for improvement and with a bright outlook for petrochemical volumes. Diesel Engine Services is weak, but with growing pent-up demand. In the diesel engine businesses, it is not a question of if the markets will come back, but a question of when. Operator, that concludes our prepared remarks. We're now ready to take questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, we ask that you please limit your questions to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mike Webber of Wells Fargo. Please go ahead.

Donald Bogden (Analyst)

Hi, this is Donald Bogden stepping in for Mike. Good morning, gentlemen, and thank you for taking my call.

David Grzebinski (President and CEO)

Good morning.

Donald Bogden (Analyst)

My first question is on the inland barge order book. It seems we're coming down from peak levels in 2014 and 2015, and you've mentioned previously the potential for negative growth this year. Could you give some updated color on that and maybe put some numbers around what your expectations for inland barge growth this year or next year are?

David Grzebinski (President and CEO)

Yeah, right now, as we look at the orders, and many of the orders for delivery in 2016 were placed last year, we think it's around 100 new barges, but what we don't know is the number of retirements that may occur this year. You heard in Andy's prepared remarks that we're retiring a number of barges. We do believe that some others are going to retire older equipment as well. Also in that number of new barge builds that we expect this year, the vast, well, not the vast majority, but you know, over half are probably 10,000-barrel. So, and those we know, many of them were placed early in 2015 or in 2015, so kind of a carryover.

It does look reasonably good on the new build additions, given that we expect retirements usually to be in the 75-150 barges retired a year. Sometimes they go north of that.

Donald Bogden (Analyst)

Got you. Thank you for that. My follow-up is on utilization in the inland segment. It seems to be holding up better than the coastal segment. What do you think the primary driver is there? Is that mostly a function of the falloff in crude exports out of Corpus Christi adversely impacting the coastal market, or are there other factors at work there?

David Grzebinski (President and CEO)

Yeah. No, it—the inland market, what we've seen is basically demand's picked up. You know, the inland market has absorbed a lot of barges, with both new builds and returned cleaned up barges from crude service over the last 18 months. And that, as we've mentioned, the crude kind of—the number of crude barges being returned has essentially stopped. So with the demand pickup, the utilization's tightened up, and that's what we've been seeing. And you saw our utilization was in the 90%-95% range for the quarter, which is pretty good. And that's really all about demand. On the coastwise side, you know, demand's relatively in balance. It's not a lot different than we're seeing on the inland side.

Donald Bogden (Analyst)

Gotcha. Well, good to hear there's some green shoots emerging, and thank you for your time, gentlemen.

David Grzebinski (President and CEO)

Thank you, Donald.

Operator (participant)

Our next question comes from Kevin Sterling of BB&T Capital Markets. Please go ahead.

Kevin Sterling (Managing Director)

Oh, thank you. Good morning, gentlemen.

David Grzebinski (President and CEO)

Hey, good morning, Kevin.

Kevin Sterling (Managing Director)

David, if I can follow up on that utilization question, can you remind us how much of your business on the inland side is time charter versus contract of affreightment and spot?

David Grzebinski (President and CEO)

Yeah, he's got the specific—

Andy Smith (EVP and CFO)

Yeah, so term contracts on inland are 80%, Kevin, with 50% of those being time charter and 45%—I'm sorry, 55% and 45% being contract of affreightment.

Kevin Sterling (Managing Director)

Okay. When you guys talk about utilization in the 90%-95% range, do you look at it differently versus time charter versus contract of affreightment and spot?

David Grzebinski (President and CEO)

No, no, that's just outright barge utilization, Kevin.

Kevin Sterling (Managing Director)

Okay. Gotcha. All right. And David, obviously, you talked a little bit about the spot strength you're seeing in April. What do you think is driving that? It sounds like a little bit more demand, but, you know, in March, I think we started seeing the spot market strengthen a little, and that may have been due to some high water, barges out of position, lock closures, et cetera. So do you think this movement we're seeing in April is a little bit more real, if you will? And do you think it'll continue? Because if I recall, last year, we had a little bit of a head fake in the spot market. So maybe talk a little bit about what you're seeing now and why it might be different from last year.

David Grzebinski (President and CEO)

Yeah.

Kevin Sterling (Managing Director)

Or maybe it's not.

David Grzebinski (President and CEO)

Yeah, we're okay, Kevin, good question. It's hard to extrapolate, you know, one month here, but clearly, weather was a little bit of it. You know, weather sometimes tightens up utilization. But what we felt was demand was up a little bit here, and that, you know, there's demand for the spot barges and there's a little bit of a scarcity in the number of available barges because of that additional demand. And so that, you know, brought spot pricing up off its lows, which was good to see. But to your point, it's you don't wanna we don't wanna be overly aggressive in extrapolating that, but it's an encouraging sign.

Kevin Sterling (Managing Director)

Okay, great. Thanks so much for your time this morning.

Andy Smith (EVP and CFO)

Thanks, Kevin.

David Grzebinski (President and CEO)

Thanks, Kevin.

Operator (participant)

Our next question comes from John Barnes of RBC Capital Markets. Please go ahead.

John Barnes (Managing Director)

Thank you. Hey, good morning. Thanks for taking my questions. First, on the new coastal barges that you're taking delivery of, took delivery of, I know those initial barges came with contracts. Because, you know, based on what you've seen in the coastal markets, have you been forced to revisit those contracts? Has there been any change in the terms that were initially struck?

David Grzebinski (President and CEO)

Yeah. No, no, Kevin, there haven't, those contracts, yeah. I'm sorry. Yeah, John, sorry about that.

John Barnes (Managing Director)

No worries.

David Grzebinski (President and CEO)

No. Yeah, the—no, there's been no change. You know, the initial, we had 185 come out, one of the 185s coming out at the end of the year. She's under a long-term contract. There's been no changes to her terms at all. We've got another one coming out mid this year, and she's under a long-term contract as well, and there are no changes to those contract terms at all.

John Barnes (Managing Director)

Any update on contracts for the other two on order?

David Grzebinski (President and CEO)

No, we're working actively with some customers, talking to them about about those two barges. The first one, as Andy mentioned, comes out at the end of the year. The other one's in 2017. But we're in active discussions on those two barges.

John Barnes (Managing Director)

Okay. All right. And then, you know, on the diesel engine business as a whole, you know, obviously, we know the pressure points on the land-based side. It now seems like, you know, the core business, you know, especially from, you know, maybe the offshore business, is a little bit under pressure. You know, you incurred a modest loss in the quarter. I know you've taken a tremendous amount of cost out of that business. Is there any more to do there, you know, that gets this thing back to kind of break even on a consistent basis? Or, you know, at this point, is it really about having to get, you know, some just business activity pumping back through there?

David Grzebinski (President and CEO)

Yeah, it's more of the latter, John. We've taken, in the land-based United business, our headcount from 950 employees around, down to in the 300s. So we've taken a lot of costs out. What we're trying to balance is being prepared for the inevitable upturn. You know, the amount of pent-up demand for maintenance on frac equipment is substantial. So you don't wanna cut too deep. You know, you've got to be able to respond to some customer demand that we believe will be inevitable. So we're trying to balance that. You know, you keep looking at your cost structure every day, and we'll continue to do that.

Yeah, we just felt it prudent to kind of take down our estimate on the land-based business. That's the key part of this of our guidance change here, is all about that land business. You know, it just didn't feel prudent to forecast a kind of a rebound towards the end of the year at this point. Now, maybe we see it, maybe we don't. But we didn't wanna fight it all year long.

John Barnes (Managing Director)

All right. And is there one macro data point on the land-based side that you look at, and it's, you know, I mean, is it, is it the rig count number? I mean, if we were thinking about it, we obviously don't have, you know, we're not privy to your internal discussions with customers. But if there was that one data point, you know, that would suggest stabilization or something, is it, is it rig count? What, what is it that you look for?

David Grzebinski (President and CEO)

Yeah, land-based rig count is probably the most obvious one. Now that said, there are anywhere from 3,500 to 4,000 DUCs, which is drilled but uncompleted wells. So they basically drilled the holes, they just haven't fracked them. So, with this oil price rebound, you could get some of those DUCs, if you will. They could drive some pressure pumping utilization, which would clearly help our business because we think the state of the pressure pumping fleet is in pretty poor repair. You know, they've been cannibalizing it in some of the cold stack fleets really aren't even operable.

So, short answer to your question, the rig count's the most obvious one, but there is this phenomenon of drilled but uncompleted wells out there that may give us some advance business before the rig count rebounds.

John Barnes (Managing Director)

Very good. I appreciate that color. Thanks so much for taking my question.

David Grzebinski (President and CEO)

Thanks, John.

Operator (participant)

Our next question comes from Gregory Lewis of Credit Suisse. Please go ahead.

Gregory Lewis (Analyst)

Yes, thank you, and good morning.

David Grzebinski (President and CEO)

Hey, good morning, Greg.

Gregory Lewis (Analyst)

Hey, David, in the prepared remarks, and again, on the call, you talked about, in regarding the coastal business, that you're just seeing more of the equipment go on to the spot market. And it sounds like it's just on the margin. What do you—do you have any sort of thoughts about what is driving the unwillingness of customers to sort of take those, you know, longer term, charges? And then just the other question I wanted to ask is, you know, when a coastal vessel is in spot, what is the typical duration of a spot voyage?

David Grzebinski (President and CEO)

Yeah. Let me take that in two parts. Well, first, you know, a spot voyage can be anywhere from 1 month to 6 months. For us, anything spot is less than a year. So you can have, you know, 1 month, 3 months, 6 months, 9-month voyages or contracts that we consider spot. But in terms of what we think is driving it is there's a number of newbuilds coming out, and, you know, I think customers given the uncertainty with commodity price volatility and the number of newbuilds coming out, they're kind of waiting to see. They don't feel like they're gonna have a problem finding equipment.

Now, that said, as you know, there's a number of barges, we think it's over 40, that are 30 years or older, that need to come out of the market, and they will come out. It's just, it's a matter of the timing between the newbuilds coming in and the old barges coming out.

Gregory Lewis (Analyst)

Okay, great. And then just my follow-up is gonna be on the diesel engine service business. If you think about, you know, during, you know, I guess, like two years ago, during the peak, it sounded like remans were being, you know, the reman jobs were going anywhere from, you know, $500,000 to upwards of $600,000 a day for a unit for—where is that pricing sort of trended now? Like, what if I had, you mentioned a lot of these cannibalized pieces of equipment. If I wanted to reman one of those in this market, what sort of pricing am I looking at?

David Grzebinski (President and CEO)

Yeah, it's so variable, Greg. I think the issue is, what did they cannibalize? If, you know, if they just took the fluid ends off, or if they, you know, took an engine off and put an engine on another frac spread, it would be—it would depend. Now, if, you know, if they're just sitting there, not maintaining them at all, it could be substantial, and you could see, you know, north of that $500,000 a unit. Some of them may be very small in terms of what it needs to get them back into operation, but others could be quite substantial.

Gregory Lewis (Analyst)

Okay, guys.

David Grzebinski (President and CEO)

I know that's a non-answer, Greg, but the short answer is probably we don't know, but it's gonna vary depending on what they cannibalize.

Gregory Lewis (Analyst)

Yeah, no, and that's actually what I was trying to understand. I mean, we've been hearing that there's varying degrees of what an idle frac spread looks like, where some are just—you're left with just the actual truck, and others where, to your point, there's been one or two or three things maybe taken off. So I was just trying to see if you had any more color than that. But anyway, hey, guys, thanks for the time.

David Grzebinski (President and CEO)

Thank you, Greg.

Operator (participant)

Our next question comes from Doug Mavrinac of Jefferies. Please go ahead.

Doug Mavrinac (Managing Director)

Thank you. Thank you. Good morning, guys.

David Grzebinski (President and CEO)

Good morning, Doug.

Doug Mavrinac (Managing Director)

I just had a couple follow-ups. First, you know, it's been very helpful, when, you know, quantifying the exposure in the inland Marine Transportation market, how many barges were in the crude oil market? My question is, when you look at the coastal business, you know, things are obviously holding in very well there. Can you give us some sort of sense of how many assets or what proportion of your coastal assets are either directly or indirectly involved in the crude oil trade?

David Grzebinski (President and CEO)

Yeah, no, good question. Yeah, I think in coastal, coastwise, there were—it was probably similar to the level in terms of percentages that we saw in the inland side.

I think at the market peak, coastwise business had probably 15% of the barge fleet in crude. Now, we think it's less than 5% as well. You know, at our peak, we had probably 10% of our fleet in crude. Now it's, you know, it's a tiny 2% or so, 2% or 3%. So the coastwise has rationalized it actually, a lot less impact than the inland side. Because you've seen that coastwise has absorbed the larger barges coming out of crude, and pricing has been relatively stable, and in fact, up most of last year. So, you know, in the coastwise business, it's been tighter in terms of balance.

Doug Mavrinac (Managing Director)

Got it. That's very helpful because we have been seeing, you know, narrowing pricing differentials along the Gulf Coast, and I was just curious how much more of an impact that could have on you guys' business. My second question, my follow-up, has to do with a similar theme in that, you know, kind of trying to quantify downside exposure on the diesel engine services side. And this may be less quantifiable, but, you know, in terms of your guidance changes, do you view kind of your guidance now as far as being, you know, this is a kitchen sink type of a number? You know, we're expecting operating losses, and so that's really kind of the worst that we think it's gonna get.

Or how can you, you know, anecdotally, describe how you view your Engine Services guidance going forward?

Andy Smith (EVP and CFO)

Yeah. Hey, Doug, this is Andy. In terms of our guidance, certainly from the midpoint of our prior range to the midpoint of our current range, you know, in the broadest of strokes, that was due to the severance in the first quarter and then the changes in our outlook for the land-based diesel engine services business. From that point to sort of the lower end of our range, I would say there's an additional modest losses or incrementally modest losses out of that business. But we've pretty much taken a pretty dim view of it for the full year and are not really too willing to bet on the come too much there.

Doug Mavrinac (Managing Director)

Got it. That's very helpful. Thanks for the time, David and Andy.

Andy Smith (EVP and CFO)

Thanks.

David Grzebinski (President and CEO)

Hey, thanks, Doug.

Operator (participant)

Our next question comes from Jonathan Chappell of Evercore ISI. Please go ahead.

Jonathan Chappell (Analyst)

Thank you. Good morning, guys.

David Grzebinski (President and CEO)

Hey, morning, Jon.

Jonathan Chappell (Analyst)

David, I wanted to ask about a couple follow-ups on the coastal side, and just how the competitive landscape is changing as more of your equipment enters the spot market and as more of these new builds start to deliver. Is there gonna be a significant shift in you know, kind of the upper hierarchy of who's in that business, and how may that impact kind of the pricing over term contracts especially, but also in the spot market?

David Grzebinski (President and CEO)

Yeah, that—I think roughly speaking, the order, if you will, of the 15 or so players in the market is gonna be roughly the same. I don't think, you know, there's gonna be a big shift between who's the third largest and the, you know, the sixth largest. I think everybody's kind of added capacity, kind of in proportion to their fleet size. You know, you saw we've added—we'll have added, when we complete the new builds here, we'll have added five new barges on a base of 70, right? So, you know, that's kind of proportionate to our size. I think if you looked at our competitors, they've done similar things.

Jonathan Chappell (Analyst)

Do you think the kind of shift to spot becomes more of a permanent issue with the new capacity coming online, or at some point, does it kind of normalize to?

David Grzebinski (President and CEO)

I think it'll normalize, and actually, you'll go back. As the older capacity comes out, you'll go back to more term. I think this is a transitional time in terms of spot versus contract.

Jonathan Chappell (Analyst)

Mm-hmm. For my second question, the SEACOR acquisition looked very well timed and quite interesting, too, because you've kind of been out of the market for a couple of years in the inland business, as values kind of ran away, and you maintained your discipline. Obviously, SEACOR wasn't a pure play in this business and have far more exposure to businesses that have been hammered of late, especially the offshore supply boat business. So was this kind of a one-off, maybe a stressed sale, and just kind of right place, right time? Or is this kind of foreshadowing now that asset values are pulling back to the level where they're kind of in your sweet spot, and you can be a little bit more aggressive on the rolling up of the business?

David Grzebinski (President and CEO)

Yeah, you'd probably have to ask SEACOR some of those questions. But yeah, I wouldn't say it was a stress sale. I think, you know, they're very opportunistic in terms of deploying cash to beaten down sectors, so that may be something they're doing. But you should probably ask them that. From our view, in terms of, you know, pricing, given what we've been going through in the inland market, you know, pricing gets more reasonable. Price expectations becomes more reasonable, and, you know, that's a good thing. As you know, John, it's really tough to predict acquisitions. We're always talking to people.

You know, there are some people that may have a little more stress in terms of leverage than others, but predicting that and predicting an acquisition out of that environment is difficult. You know, I think our view is, as you know, just maintain our discipline. People know we'll pay a fair price, and we're gonna keep our discipline and keep talking to the players. If something happens, that's great, but we're not gonna chase things. I do think that given what we've gone through in the inland market, things are more reasonable in terms of price expectations.

Jonathan Chappell (Analyst)

Yeah, that makes sense. Thanks a lot, David.

David Grzebinski (President and CEO)

Thanks, Jon.

Operator (participant)

Our next question comes from Jack Atkins of Stephens. Please go ahead.

Jack Atkins (Analyst)

Good morning, guys, and thanks for the opportunity to ask a question.

David Grzebinski (President and CEO)

Morning, Jack.

Jack Atkins (Analyst)

You know, I think the April commentary is certainly very encouraging on the, on the inland side. And as you know, as you're talking to your customers, are they taking notice of that? And, you know, at what point do you think this more positive sort of trend line that we've been seeing the last several weeks, last month or so, could translate into, you know, better contractual rate, rate renewals? Do you think that's something that is, you know, a couple of months away? Is it gonna be later this year? Just sort of curious, you know, how you guys are thinking about the cadence of that.

David Grzebinski (President and CEO)

Yeah, it, it's really difficult to say, Jack. It's hard to extrapolate. You know, quick look, our customers are some of the most sophisticated companies in the world, so you know, they, they know what's going on, and they see, they see it. You know, they, they're probably seeing the same thing we are seeing, which is demand, demand is up a little bit. Now, whether that, that carries through the remainder of the year and grows, remains to be seen. It's just really, you know, difficult to predict, and so we, we wanna be cautious in extrapolating it. What we do know that, you know, the chemical, petrochemical build-out is, is continuing. You know, there's a good number of these, these petrochemical plants that are well underway in terms of construction.

Now, maybe some of the volatility has slowed some of them down, or maybe even one or two canceled, but, we do see the petrochemical build-out coming, you know, 2017 and 2018, which, you know, should add to demand. So whether it's a short term, you know, inflection point here or not, remains to be seen, but the longer term volume trends are pretty good.

Jack Atkins (Analyst)

Okay, that's good to hear. And then just a quick follow-up item. You know, with fuel moving back up a little bit here, could you remind us how fuel impacts your P&L? You know, is it more of a pass-through, or, you know, when you have inflections higher or lower, how does that impact near-term profitability?

Andy Smith (EVP and CFO)

Yeah, there's a couple different ways. One, in a lot of our business, it is a pass-through, Jack. But on some of our contracts, we actually have escalation clauses, and those lag about a quarter. So what you can see is, you know, a little bit of a mismatch between when your revenue gets reset on a contract and when your costs have changed. So as we see that, you know, you can have a little bit of friction. But, you know, again, with fuel going up, you know, we would expect that in the second quarter, our costs might rise a little bit ahead of our revenue, which would then reset going into the third quarter.

Jack Atkins (Analyst)

Okay, great. Thanks again for the time, guys.

Andy Smith (EVP and CFO)

Yep.

David Grzebinski (President and CEO)

Thanks, Jack.

Operator (participant)

Our next question comes from Kelly Dougherty of Macquarie. Please go ahead.

Chris Bloom (Analyst)

Good morning, guys. This is Chris Bloom on the line for Kelly. Thanks for taking the question.

David Grzebinski (President and CEO)

Yeah. Good morning.

Chris Bloom (Analyst)

Yeah, so you guys talked a little bit about retirements and the need for some of the barges to come out. I was wondering if you could give us some color, if you've seen whether or not your peers have started some of this accelerated retirement that they currently have in operation? And if not yet, what do you think will spur this acceleration that you're looking for?

David Grzebinski (President and CEO)

Yeah, well, let me talk in terms of the inland side and the coastal side. You know, inland, what happens is, in the inland side in particular, when you're getting to the inspection cycle and the mandated inspections that have to happen, you bring a barge into the shipyard, and you kind of get an estimate of what it takes to extend its life another five years. And you kind of do the math with the current prices, and you say, "Well, does that make sense? Can I get that capital back?" And so, you know, given what we've gone through here, recently, those older barges get harder and harder to justify, and that triggers kind of the retirement.

We've seen this in past cycles where the retirements get pretty heavy. You know, we kind of expect them to be on the, you know, the heavier side than they have been for the last couple years, for sure. And the coastwise business, it's, you know, some of these assets are over 30 years old. You know, I think the count, last count was 45, were over 30 years old. And in the coastwise environment, that's getting pretty old. And, you know, we, Kirby, have retired some of our older assets recently in that, that space. And I think, I think our competitors are going through the same thought processes, that we are in terms of, you know, extending very old coastwise barges.

As you know, those are much more expensive than inland barges, so extending their lives is that much more capital. I don't know if that helps with an answer there, Chris.

Chris Bloom (Analyst)

No, absolutely. I appreciate the color. And, that was my only question, so thank you guys for your time this morning.

David Grzebinski (President and CEO)

All right. Thanks, Chris.

Operator (participant)

Our next question comes from Steve Sherowski of Goldman Sachs. Please go ahead.

Steve Sherowski (VP)

Hi, good morning. On the coastal side, to the extent that crude is causing a weakness relative to inland, how much of that is being driven by crude oil exports, just versus lower production in South Texas?

David Grzebinski (President and CEO)

Yeah. No, Steve, we don't think coastwise is really being impacted by crude. I think most of the crude coastwise moves have migrated out already, and that occurred basically through last year, while pricing was stable to up.

Steve Sherowski (VP)

Mm-hmm.

David Grzebinski (President and CEO)

So I think on the coastwise side, what's been offsetting the crude all last year was refined products continuing to rise. I think you've probably seen some of the macro statistics with vehicle miles driven going up, on some other, positive trends there. So I, you know, I don't think crude's been a factor on the, on the coastwise business as much as it has been on the inland side.

Steve Sherowski (VP)

Gotcha. Okay. And then, I guess, a few months back, there was a lot of speculation, just given, midstream, equity markets, that a lot of companies or a few companies that are in the barge business were looking to, divest non-core assets. Has that, has that cooled off, just given, you know, a market improvement over the past, month or so?

David Grzebinski (President and CEO)

Yeah, it's hard to say. You know, there are a handful, probably six, seven MLPs that have marine assets. You know, I would view some of them, their marine assets, are not core to their, to their business, but others may view it as core. It's, it's, you know, it's hard to say. Clearly, when the high-yield markets closed off, to them, that may have made them think about it a little. And I know, you know, in terms of issuing equity, it wasn't, the best time to do it. Yeah, I think it varies by the different MLPs. Some are very strong, some are smaller and less able to weather this. We'll see it, you know, as we've said in the past, Steve, it's really difficult to predict, acquisition possibilities.

Clearly, we, we stand ready to, to take any, any assets they view as non-core.

Steve Sherowski (VP)

Got it. Thank you.

Operator (participant)

Our next question comes from Ari Rosa of Bank of America. Please go ahead.

Ari Rosa (Analyst)

Hey, good morning, gentlemen. Just first question, wanted to ask a little bit about the SEACOR acquisition and just what your expectations are there in terms of the contribution that could have, and expectations in terms of integration.

Andy Smith (EVP and CFO)

Yeah, for the remainder of this year, we're looking at accretion from that deal, probably at today's rates, of about $0.03. On an annual basis, it's probably mid-single digits on, again, at today's rates. As rates improve, that'll improve as well. Integration-wise, it's pretty well integrated into our fleet already.

Ari Rosa (Analyst)

Okay, that's helpful. So it sounds like not too many speed bumps from that. You know, and just to kind of take a step back, bigger picture, thinking about capital management, I was a little bit surprised to see the CapEx budget going up, and, given some of the challenges you guys have outlined. Can you talk about how you're thinking about capital management, given the environment, and if it's really just a matter of positioning for an upturn?

David Grzebinski (President and CEO)

Yeah, well, typically, in our capital deployment, we tend to be in the market when other people aren't. But, yeah, I wouldn't read a lot into the CapEx. We had an opportunity to buy a few barges at a pretty decent price, and they fit into kind of our retirement plan as we phase out some equipment. Yeah, it's kind of our normal operating mode, if you will.

Andy Smith (EVP and CFO)

Yeah, just to add on a little bit there. I mean, if you add it up, we're adding seven barges this year through capital expenditures on the inland side, and we're retiring 31. So, you know, again, with the, with the trend that we think we'll see in the industry this year, probably some retirements and, and very little building, I think we're right in line with that.

Ari Rosa (Analyst)

Got it. Okay, that's helpful. Just, you know, if I can sneak one more in there, pretty straightforward, but did you guys see any weather impacts in the first quarter, just along the coast, and particularly, the Texas, Louisiana region?

David Grzebinski (President and CEO)

Yeah, no, weather was there. We saw some fog and high winds and some high water that impacted us throughout the quarter. Some of that was covered, we had some navigation and high water clauses in some of our contracts, so some of the costs associated with that was covered. But there, you know, there was some costs associated with it. It's kind of in our numbers. I wouldn't call it something material enough to call out. You know, maybe it was a penny or two, but it's kind of in our numbers.

Ari Rosa (Analyst)

Okay, great. Thank you.

Operator (participant)

Our next question comes from David Beard of Coker & Palmer. Please go ahead.

David Beard (Analyst)

Good morning, gentlemen.

David Grzebinski (President and CEO)

Hey, good morning.

David Beard (Analyst)

Obviously, a lot of questions have been asked, so I'd just like to shift to capital allocation. You know, obviously, you guys like to do acquisitions first, but, you know, relative to debt or share buyback, could you just give a little more color there? Is there a level of debt that you're comfortable with? Or, how should we think about allocating capital between debt and share buyback?

Andy Smith (EVP and CFO)

Yeah, I mean, and again, our, our story on this has, has always been pretty consistent. You know, we, we believe that there's a time to look at M&A, there's a time to be building equipment, there's a time to pay down debt, and a time to, to buy back shares. You know, we're certainly, our capital expenditure program is, is pretty limited this year, with the exception of what was committed for in the past on the offshore side. You know, we'll still sort of look at all the M&A opportunities that we can. Between that, you know, we'll evaluate, where we are in the market and whether or not a share buyback at that time makes sense versus, versus debt repayment. But we don't generally give sort of any kind of guidance about which one we're gonna do.

David Beard (Analyst)

Okay, fair enough. And would you be able to just talk about any type of capital spending needs for next year? I know it's just early, but any color you can give there would be appreciated.

Andy Smith (EVP and CFO)

Yeah, I mean, look, our based on what we've committed to date, our CapEx, you know, should decline somewhat as we take delivery of these larger offshore units. You know, again, as you rightly point out, it's early and, you know, our plans can change, depending upon what goes on in the market. But right now, you should see directionally, our CapEx go down, year-over-year, all things being equal.

David Beard (Analyst)

All right, good. Thank you. Appreciate the time.

Andy Smith (EVP and CFO)

Thanks, David.

Operator (participant)

Our next question comes from Bill Baldwin of Baldwin Securities. Please go ahead.

Bill Baldwin (Analyst)

Good morning.

David Grzebinski (President and CEO)

Hey, good morning, Bill.

Bill Baldwin (Analyst)

Can you offer any color as to what you think the prospects are for your land-based reman business being able to do more and more business with the Schlumbergers and the Halliburtons, you know, the kind of the top-level companies in that pumping business?

David Grzebinski (President and CEO)

Yeah, Bill, those two are generally our largest customers. And you know, they do a lot, a lot of their own remanufacturing. What we do is tend to help them with parts and some product, but we're definitely working with them on a regular basis. As you know, as I said, they're kind of our largest two customers. So you know, I think as they pick up their spending, you know, that should translate to more business for us. But you know, I think as we've seen with the quarterly calls in the oil service space, it's been tough.

I do think, you know, ultimately, the reman business and the pent-up demand from this cannibalized and idled equipment will come through for all of the pressure pumpers. They're gonna have to do something to get their fleets in better repair.

Bill Baldwin (Analyst)

Well, I know from, you know, past conversations on the call that, you know, you definitely have a strong engines and parts business with, with these fellows. But I was also thinking that you'd done some work for them in the reman area, kind of getting your nose under the tent here in the last year or so.

David Grzebinski (President and CEO)

Yeah, service-

Bill Baldwin (Analyst)

I know the reman business obviously has better margins for you than the parts and engine business, and I'm just wondering if you think there's an opportunity really to increase your penetration of the reman business with those companies.

David Grzebinski (President and CEO)

Yeah, yeah. Yeah, clearly, we have people on site. I won't mention which ones specifically, with some of these larger guys that are on site doing service work for them. You know, clearly, we've not been shy about saying they should outsource any of their reman or even manufacturing that they do. That would be good for us. And it's certainly an effort we're undertaking, Bill.

Bill Baldwin (Analyst)

Right. And with your reconfiguration of your facilities there in Oklahoma City, I guess you—I mean, you consider yourself really in good position to be able to handle that business if it were to, you know, come your way.

David Grzebinski (President and CEO)

Yeah, absolutely. Our new facility is state-of-the-art, you know, the response from our customers has been very encouraging. You know, frankly, I think we'll take some share as we come out of this, because, frankly, we're better capitalized than any of our competitors in this area.

Bill Baldwin (Analyst)

Well, this could be a great opportunity for you to be able to, to do that, which I know is your long-term goals in that business, is to become the premier provider of services.

David Grzebinski (President and CEO)

Exactly, yeah.

Bill Baldwin (Analyst)

You kind of made the anecdotal comment, I believe, David, on the last call that some, you know, things just didn't feel right to you when you're talking about the inland marine market out there. Couldn't put your finger on it, but, you know, I just wondered anecdotally what you would say today regarding that same issue.

David Grzebinski (President and CEO)

Yeah. Yeah, I think, Bill, you're right. What we were trying to get a feel for was there something going on in the economy that it just didn't feel right, that the economy was weaker and that, you know, inventories were up and trading patterns were a little different. But that seems to have worked itself out. Yeah, I think, you know, just talking and listening to our customers, you know, inventories are where they need to be, given what they're seeing. I think, you know, in the ethylene markets, what we're hearing is all positive. That's kind of sorted itself out. Yeah, I think clearly, the crude price kind of stabilizing a little bit.

Now it's still volatile, but it's kind of in a more reasonable range lately has taken some uncertainty out of the system. So yeah, that feel we had that maybe something was going on in the economy that we were missing and that unease that we had. It never completely goes away, as you know, but it has certainly improved, and we feel better about it. And certainly, listening to our customers, it's been more positive in the near term.

Bill Baldwin (Analyst)

Very good. Thank you for your time.

David Grzebinski (President and CEO)

Thanks, Bill.

Operator (participant)

Our next question is a follow-up from Mike Webber of Wells Fargo. Please go ahead.

Donald Bogden (Analyst)

Hey, this is Donald again.

David Grzebinski (President and CEO)

Hi, Mike.

Donald Bogden (Analyst)

Thanks, thanks for taking my follow-up. I'll be quick. In the inland barge segment, do you have any idea of the percent breakdown across the industry between petchem, petroleum products, and crude and black oil? And are we back in line with, say, more historic norms that were pre-shale boom? I realize these numbers can be, at times, tough to ballpark, but any color around that would be very helpful.

David Grzebinski (President and CEO)

Yeah, I think, you know, if you look at our business, you know, we're probably around 50%. Now, this is in total barge business, but inland and coastal is around 50% petchem. But when you look at inland, which was your question, our petchem volumes are around 67%-68%, and black oil, which is around 20%, and the rest is refined products and ag chems. So that's us. We're probably stronger in petchems than most of the industry. I would say the industry is probably south of 50% petchems.

Donald Bogden (Analyst)

Okay. And then you—so then would you think the rest would be evenly split between sort of refined and the Black oil industry, or refined is generally a larger market share in some of your peers?

David Grzebinski (President and CEO)

Yeah, I would think so. There's some—yeah, yeah, the short answer is yes. I think it's a good characterization of it.

Donald Bogden (Analyst)

Okay. Thank you. That, that takes care of my last question. Thanks again for your time.

David Grzebinski (President and CEO)

All right. Thanks, Donald.

Operator (participant)

This would conclude our question and answer session. I would now like to turn the conference back over to Mr. Sterling Adlakha for any closing remarks.

Sterling Adlakha (Head of Investor Relations)

Thanks, Carrie. We appreciate your interest in Kirby Corporation, participating in our call. If you have additional questions or comments, you can reach me directly at 713-435-1101. Thank you, and have a nice day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.