Kirby - Q1 2017
April 27, 2017
Transcript
Operator (participant)
Good morning, and welcome to the Kirby Corporation Q1 2017 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. To ask a question, you may press Star, then One on your telephone keypad. To withdraw your question, please press Star, then Two. Please note, this event is being recorded. I would now like to turn the conference over to Brian Carey. Please go ahead.
Brian Carey (Head of Investor Relations)
Thank you very much, and good 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 included in our Q1 earnings press release and 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. 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, 2016, filed with the Securities and Exchange Commission. I'll now turn the call over to Joe.
Joe Pyne (Chairman)
Okay, thank you, Brian, and good morning. Yesterday afternoon, we announced our 2017 Q1 earnings of $0.51 per share, versus our guidance range of $0.40-$0.65 per share. That compares with $0.71 per share reported in the 2016 Q1. In the marine tank barge utilization during the Q1 was improved relative to recent quarters. This was in part due to operating restrictions caused by the usual poor but seasonally normal weather on the Gulf Coast, and also stronger utilization in our black oil fleet, driven by refinery turnarounds. We do believe that we're continuing to move slowly towards supply and demand balance in the inland market. In the coastal market, tank barge utilization was in the mid-70s to low 80% range.
Utilization continues to be impacted by a large number of vessels trading in the spot market, which adds exposure idle time on these vessels. Barge oversupply continues to weigh on utilization and pricing in the coastal market. As a result, we took significant cost-cutting measures during the quarter, which David will discuss in more detail later in the call. In our land-based diesel engine services business, we saw strong service demand, particularly for pressure pumping, unit remanufacturing, and transmission overhauls. The U.S. rig count continues to rise steadily during the quarter, and our customers show healthier balance sheets as oil prices have mostly stabilized and capital is starting to come back into the oil service industry. We plan to continue to take a cautious approach to this business and are focused on operational improvements and sound inventory management.
We expect service demand to remain steady for the remainder of the year, with a potential upside if sales of new equipment continue. Summarizing the Q1, it unfolded mostly as we expected, with the coastal marine business performing worse and the land-based engine business performing better than we anticipated. I'll now turn the call over to David.
David Grzebinski (President and CEO)
Thank you, Joe. Good morning, everyone, and thank you for joining us today. I'll start my comments with a summary of the Q1 results in each of our markets, and then turn the call over to Andy to walk through the financials in more detail. Following Andy's comments, I'll provide an update on our Q2 and full year guidance, and then we'll open up the call to Q&A. In the inland marine transportation market, our utilization ranged from high 80% to low 90% level during the Q1, as weather-related delays from high winds and fog were a factor along the Gulf Coast. Utilization was fairly stable throughout the quarter, boosted in part by a refinery turnaround season that was busy. We also continued our retirement plan for older barges, which helped utilization.
Pricing on term contracts that renewed during the Q1 was down in the mid-single digits compared to the 2016 Q1. However, spot rates were flat compared to the 2016 Q4. In our coastal marine transportation sector, demand for the coastwise transportation of black oil and petrochemicals was relatively stable compared to the 2016 Q4. In the refined petroleum products market, demand was lower sequentially and year-over-year. The coastal market continues to be negatively affected by the oversupply of tank barges in the industry. While we expect the supply of barges and barrel capacity in the coastal industry fleet to eventually balance with demand, we don't anticipate it'll happen this year without a significant improvement in demand. As a result, we made the decision to release chartered-in tugboats, idle some owned boats and barges, and reduced headcount accordingly.
These moves will allow us to reduce costs until such time as the coastal market improves. Including temporary, temporarily laid-up barges, coastal tank barge utilization was in the mid-70% to low 80% range during the Q1. With respect to coastal market pricing, generally, spot rates were below contract rates, but the magnitude varies by geography, vessel size, vessel capabilities, and the products being moved. As an indication of where spot pricing is, spot rates for vessels in the 80,000- to 100,000-barrel range in clean service are approximately 20%-25% below year-ago levels. In our Diesel Engine Services Segment, our marine diesel engine business saw no improvement in the Gulf of Mexico oilfield services market, which remains at a very depressed level. Service activity and parts demand in the power generation market remained relatively consistent with the 2016 Q1.
Performance in the marine diesel engine services business reflected seasonal improvement over the 2016 Q4, but revenues were lower compared to 2016 Q1 due to customers deferring major overhauls, particularly in the Midwest. However, the cost-cutting measures implemented in 2016 are showing results, as operating profit for the quarter was higher year-over-year. In our land-based diesel engine services market, demand for pressure pumping unit remanufacturing maintained its momentum from the 2016 Q4, as the number of units on premises awaiting remanufacture stayed above 120 throughout the quarter. We have seen a small increase in parts sales as part of the remanufacturing work and believe this indicates that customers are beginning to deplete their inventories of spare parts and equipment.
In terms of new equipment manufacturing, we completed the majority of one frac spread for a customer, the remainder of which will ship in the Q2. One frac spread generally consists of 20-28 pieces of new equipment, made up primarily of pressure pumping units, but also some ancillary support equipment. We continue to receive strong customer interest in new frac spreads, but firm orders have been slow to materialize. The sale of engines, parts, and transmissions remained relatively flat compared to the prior quarter, although we did experience a significant pickup in demand for rebuilt transmissions, which we anticipated at the beginning of the year and had factored into our guidance. I'll now turn over the call to Andy, and then I'll come back for a discussion on guidance and outlook.
Andy Smith (EVP and CFO)
Thank you, David, and good morning. In the 2017 Q1, Marine Transportation segment revenue declined $34.7 million or 9.2%, and operating income declined $34.5 million or 49.5% as compared with the 2016 Q1. The decline in revenue in the Q1 as compared to the prior year quarter was primarily due to continued lower inland marine pricing and lower coastal marine utilization. Decline in operating income was driven by these same factors. Modest savings from the cost-cutting measures David mentioned were realized during the quarter, and the full benefit of these reductions will positively influence results for the rest of 2017. The Marine Transportation segment's operating margin was 10.3%, compared with 18.4% for the 2016 Q1.
The inland sector contributed slightly more than two-thirds of Marine Transportation revenue during the 2017 Q1. Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 75% of revenue, with 48% attributable to time charters and 52% from the affreightment contracts. The inland sector generated an operating margin in the mid-teens for the quarter. In the coastal sector, the trend of customers electing to source coastal equipment from the spot market over renewing existing term contracts continued. However, the percentage of coastal revenue under term contracts was consistent with the 2016 Q4 at approximately 78%, as a result of lower utilization and revenue for spot equipment. The Q1 negative operating margin for the coastal sector was in the mid-single digits. Turning now to our marine construction and retirement plans.
Over the course of the Q1, we took delivery of one 30,000-barrel inland tank barge and retired 17. After accounting for temporary charters, the net result was a decrease of 12 tank barges in our inland tank barge fleet for a total reduction of approximately 230,000 barrels of capacity. For the remaining nine months of the year, we expect to take delivery of four additional 30,000-barrel inland tank barges and retire 19 additional barges with approximately 3,333,000 barrels of capacity, and we expect to end 2017 with a total of 849 barges, representing 17.4 million barrels of capacity. In the coastwise transportation sector, there were no new additions to the fleet.
We did sell 155,000-barrel barge during the quarter, ending the quarter with approximately 6.1 million barrels of capacity. In terms of coastal fleet additions, we now have just one remaining barge on order, and we expect to take delivery of that 155,000-barrel ATB sometime in the Q3. Moving on to our Diesel Engine Services Segment, revenue for the 2017 Q1 increased 84% from the 2016 Q1, and operating income for the quarter was $13.7 million, as compared with an operating loss of $806,000 in the 2016 Q1. The segment's operating margin was 9.3%, compared with -1% for the 2016 Q1.
The marine and power generation operations contributed approximately 30% of the diesel engine services revenue in the Q1, with an operating margin in the mid-teens. Our land-based operations contributed approximately 70% of the Diesel Engine Services Segment's revenue in the Q1, with an operating margin in the mid-single digits. On the corporate side of things, our capital spending guidance for 2017 remains unchanged at $165 million-$185 million. Our guidance includes approximately $50 million in progress payments on new coastal equipment, including one 155,000-barrel coastal ATB, two 4,900-horsepower, and six 5,000-horsepower coastal tugboats, and final costs for the new coastal petrochemical tank barge that we took delivery of at the very end of last year.
The balance of $115 million-$135 million is primarily for five inland tank barges and capital upgrades and improvements to existing equipment and facilities. As I discussed in last quarter's call, included in the capital guidance I just provided, is a three-year build plan for the construction of six 5,000-horsepower coastal tugboats to replace older boats in our fleet. We expect the first of these tugboats to deliver in the Q2 of 2018, and the last tug to deliver in mid to late 2019, with a total expected cost over the three years of approximately $75 million-$80 million. There is no change to the expected quarterly tax rates we announced last quarter as a result of the FASB rule change on accounting for equity-based compensation.
Our guidance assumes a rate of approximately 40% for the second and Q3 and approximately 38% for the Q4. For the year, we do not expect any significant change in our tax rate, with our guidance based on a full year rate of 38%. Turning to our balance sheet, total debt as of March 31, 2017, was $674.6 million, a $48.3 million decrease from December 31, 2016, and our debt-to-cap ratio at March 31, 2017, was 21.7%. As of today, our debt stands at $660 million. I'll now turn the call back over to David.
David Grzebinski (President and CEO)
All right. Thank you, Andy. In our press release last night, we announced our 2017 Q2 guidance of $0.40-$0.55 per share, and our full year guidance remains unchanged at $1.70-$2.20 per share. In the inland marine transportation market, we expect utilization in the mid-80% to low 90% range for the Q2 and the full year. This range assumes the Q1's increased demand for black oil barges returns to expected lower levels this quarter and stable demand across the rest of the inland fleet. We also look for weather-related delays to taper off in the Q2 as weather conditions typically improve. Our guidance also factors in the full year effect of pricing declines experienced in 2016.
At the middle to high end of our annual guidance range, we factor in modestly better pricing at some point in the second half of the year as the industry continues nearing supply-demand balance. In the coastal market, on the low end, our guidance range contemplates utilization in the mid-70% range, both for the Q2 and full year 2017. On the high end of guidance, we're contemplating utilization in the mid-80% range. As I mentioned earlier in my remarks, spot rates in the coastal market for units in the 80,000-100,000 barrel size range in clean service are approximately down 20%-25% from a year ago. Additionally, spot pricing is below contract rates. Our guidance assumes these rates persist through the end of the year, and that renewing contracts reprice at spot levels.
After the cost-cutting measures we took in the Q1, we expect to be able to maintain quarterly performance ranging from a small operating loss to break-even operating profit through the end of the year. For our diesel engine services segment in our land-based sector, we expect service work from pressure pumping unit remanufacturing and transmission overhauls in the Q2 to maintain levels consistent with levels seen in the Q1 and remain healthy through the remainder of the year. The remaining new pressure pumping units from the frac spread ordered in the Q1 are expected to ship in the Q2. We expect inquiries regarding sales of new additional pressure pumping equipment to result in at least one additional frac spread order.
While the Q1 results were strong, risk does remain should oil prices dip unexpectedly lower and current drilling activity trends and demands for pressure pumping horsepower reverse. In our marine diesel markets, we do not expect any revenue improvement relative to the 2016 Q2. In the power generation market, we expect results that are relatively consistent with 2016.... So in closing, our Q1 2017 results largely met expectations. We remain in a strong financial position with a debt-to-cap ratio that continues to move lower and an expectation that 2017 free cash flow, exclusive of any potential acquisitions, will be comparable to 2016. The inland marine business is well positioned for the eventual return to supply-demand balance.
And although the coastal market is difficult, we believe our cost structure has been adjusted in the short term to weather a downturn through the remainder of the year. The land-based diesel engine business has hit its stride and shows positive signs of maintaining that momentum. And finally, we remain able to put our balance sheet to work on acquisitions, but we are staying with our disciplined approach. Operator, that concludes our prepared remarks. We are 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 touchtone 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. In the interest of time, we ask that you limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question is from John Chappell with Evercore. Please go ahead.
Jon Chappel (Senior Managing Director)
Thank you. Good morning, guys.
David Grzebinski (President and CEO)
Hey, good morning, John.
Jon Chappel (Senior Managing Director)
David, I wanted to just focus my two questions on the inland business. I know that you mentioned in the press release that the black oil recovery, which I know is a bit of a higher margin business, was more of the result of kind of seasonal factors and you know stuff going on in the Gulf. But it got me thinking, especially as we kind of put it up to what's going on with the land-based diesel engine services, with rising U.S. production, is there any thought, whether it's kind of realistic or maybe just hopeful, that there will be a return of the kind of crude oil business to the inland barge business that can start to absorb some of the overcapacity and maybe accelerate the return to supply-demand balance in that business?
David Grzebinski (President and CEO)
Yeah, that's a good question. You know, we've been on record for years saying that, you know, crude is best moved in pipelines. But as the shale industry starts producing at higher levels, there'll be transitory times where it won't be in pipelines because the pipelines are still being built or they actually get overused, and then they'll have to go to crude by barge. But we're not counting on that. You know, if there's a little bit there, we'd be okay. What we don't want to happen is a significant ramp-up in building again because of that, because those crude volumes tend to be transitory.
Now, as it pertains to black oil movements in the Gulf Coast and around our system, you know, I think heavy crude coming down from Canada is good. There's more byproducts. It tends to lead. The byproducts tend to lead to barge moves for us. And, you know, frankly, the feedstock flexibility is good for our customers, and that's helpful as well. Yeah, we did see, as you mentioned, a temporary pickup in black oil in the quarter. A lot of that was refinery driven, but you know, hopefully, some longer-term crude supplies in the Gulf Coast that could bolster that black oil business would be good.
Jon Chappel (Senior Managing Director)
Mm-hmm. So the pipelines are actually beneficial to you, and maybe not necessarily as competitive. The second question I wanted to ask is just a broader picture update on petrochemical build-out. I mean, I know it's something that's been a major focus and even a source of controversy, depending on who you talk to over the last couple of years. Just kind of give an update on the timing of, you know, kind of ramp up of some of those facilities that have been pushed to the right a little bit. And also, any update that you could possibly give on kind of the output from that, whether that's liquids or pellets, and just kind of what your customers are saying to you as they kind of reach out for capacity a little bit ahead of startup.
David Grzebinski (President and CEO)
Yeah, no. The pet chem build-out, if you look at ethylene as the proxy for all of the pet chem build-out, the big bulk of the pet- of ethylene plants coming online is now scheduled for 2018. And then there's a reasonable amount that come on in 2019 and 2020, but the big spike in ethylene output comes in 2018. Now, to your question, you know, does that lead to barge moves and how much of it's pellets? We've seen studies that about 60% of the ethylene will go to downstream products and about 40%-- excuse me, I'm reversing that. 40% will be downstream products, and 60% will be pellets.
So even, even if it's that much in terms of plastic pellets, that's still a big number, 40% of all this new ethylene capacity going to some downstream chemical product, which is, makes it more likely that there'll be barge moves that we'll see throughout that. And even in a, even if it's an ethylene plant with petrochemical, with going straight to polyethylene pellets. There are feedstocks that will come into the plant, that will come in on barges. So, that doesn't mean that just because it's polyethylene, we won't see any barge moves. But back to the core essence of your question, it's 2018 before you see significant volumes coming online.
Jon Chappel (Senior Managing Director)
Is it still too early for the customers to be kind of reaching out for capacity? Is that like a quarter or two away?
David Grzebinski (President and CEO)
Yeah, the customers kind of assume the capacity will be there. Now, that said, we've had detailed conversations with a number of customers about their needs, and clearly are working with them to plan how to handle their needs.
Jon Chappel (Senior Managing Director)
Okay. Very helpful. Thanks so much, David.
David Grzebinski (President and CEO)
Yeah, thanks, John.
Operator (participant)
Our next question is from Douglas Mavrinac with Jefferies. Please go ahead.
Douglas Mavrinac (Managing Director Investment Banking)
Great. Thank you, operator. Good morning, guys. I just had-
David Grzebinski (President and CEO)
Good morning.
Douglas Mavrinac (Managing Director Investment Banking)
Good morning. I just had a few follow-ups for you guys this morning, or actually a couple. With the first being on the diesel engine services side, because, you know, out of everything that came out of your report this morning, you know, one thing that jumped out at me was just how well the engine services business has done, particularly the land-based. And if I'm not mistaken, it looks like this is your best quarterly revenue performance since 1Q of 2015. So when we look at kind of what's happening there, and we know why it's happening, you know, and we think about, you know, kind of maybe modeling going forward, you know, this is a harder business, I think, to model than the inland or the coastal.
So how should we think about, you know, margin contribution from, you know, remanufacturing your pressure pumping units versus the sale of new pressure pumping units? And then also, just kind of when you think about your guidance, you know, more quantitatively, you know, how should we think about ranges of revenue growth potential for this business, throughout, you know, the balance of this year?
David Grzebinski (President and CEO)
Yeah, Doug, let Andy and I tag team this. Let me give you some context about ranges here, and then Andy can get into the margin question in more detail. You know, this is an interesting time. Our pressure pumping customers have gone through a very severe downturn, probably one of the worst they've ever seen. And the stronger ones have survived, and there's been some consolidation. And also, they've been very, very smart, and they're recapitalizing. A number of them are reemerging, issuing some equity and coming to market basically debt-free or with very low levels of debt. So, which is great news to us. It's a much more sustainable model for them.
So far, they've been very disciplined in terms of their capital deployment, with remans leading the way. Then, you know, we do believe we'll see some new equipment orders, but they're being very cautious and very disciplined, which is good, and they're starting from a very strong capital position, which is good, and it's more consolidated. So, that's all positive and probably more sustainable. We don't think you'll see the big spiky ramp-ups in volumes like we did back in 2011. We're hoping it's more ratable. What we've seen so far is they're being very disciplined and cautious. But Andy can give you some more specific revenue kind of guidance and margin guidance.
Andy Smith (EVP and CFO)
Yeah, Doug, I wanna, I wanna kind of focus on new frac spread construction. In our guidance, we've assumed one new spread. Now we had one spread in the Q1, most of which was recognized in the revenue in the Q1. And so if you look at our Q1 revenue at about $100 million, that's what our revenue would look like with one spread per quarter. Our guidance only assumes one more for the year, and we don't have a firm order for that. But, you know, we've been talking to our customers, and our conversations have been very constructive.
So at the low end of a quarterly guidance range for this business, I would say that assuming no, no frac spread, you probably look like you're doing $65-$70 million of revenue at maybe a low- to mid-single-digit margin. And at the high end, you're doing closer to $100 million at a sort of a mid- to high-single-digit margin. And so if you add all that up through the year, what we're giving as guidance for the full year now has been raised to $290 million on the low end, at the low end, on a low-single-digit margin to $340 million on the high end, at a high-single-digit margin, with one new fleet in it. So that's kind of where we're bracketing right now.
It's, it's a relatively cautious approach, but until we start seeing those firm orders, we think it's the right way to go.
Douglas Mavrinac (Managing Director Investment Banking)
Right. That is super, super helpful. Thank you, Andy, for that. And then just my follow-up, and it's kind of along the same theme as what John was asking on the inland side, you know, focusing on the two sectors, you know, land-based engine services and inland on the marine side, that we've seen inflection points or seemingly seen inflection points. And my question is, my follow-up is, you know, when you look at, you know, that sector seemingly having put in a bottom, utilization levels now starting to firm, pricing, you know, stabilizing sequentially, you know, what levels do you guys expect to see, you know, utilization levels cross to where you start seeing pricing power again?
You know, even though, you know, shale volumes may be transitory, and not permanent, you know, could that maybe help tip you over that utilization threshold to where you start seeing, you know, decent pricing power at some point in the coming quarters?
David Grzebinski (President and CEO)
... Yeah, that, so utilization, as you know, ticks up in bad weather, and that's-
not necessarily good utilization. So, that was-
Douglas Mavrinac (Managing Director Investment Banking)
Right
David Grzebinski (President and CEO)
part of the Q1's tick up in utilization. And then we had the black oil, which we talked about. But utilization has been fairly good across-
- the industry, and typically, this is the type of utilization where you might start seeing pricing. I think we are inching ever closer to supply-demand balance.
The number of new builds coming out or planned for this year are very low. We continue to retire old capacity and older barges. You know, I think we've got, this year, 38 scheduled to be retired. I think we did 17 in the Q1. I think others, you know, will be looking at retiring and if not already retiring. And if they don't have candidates for retirement, they're probably tying up some of their older barges and on the bank, which essentially retires them because they'll have a big maintenance catch up at some point. But we're seeing supply and demand come together a little bit. It's still not there.
I think, you know, you heard the high end of our guidance. We've got the back half of the year at some point, some better pricing. We'll see. I think the incremental chemical demand, which comes on in 2018, should certainly help with the overall demand picture. But right now, you know, supply is in check, I think, and demand's, you know, inching up. The U.S. economy is a little better, and that's certainly positive for our business. Over the years, you've heard us say that our volume demand kind of grows with GDP, and as GDP picks up a little bit, overall volumes grow. Now we've got this tailwind with the chemicals coming. So it, you know, the outlook's pretty bright.
It's just, it's painful right now because spot pricing is kind of at break-even cash flow breakeven. But I'll say this, that spot pricing is kind of been flat for three quarters now.
Douglas Mavrinac (Managing Director Investment Banking)
Right.
David Grzebinski (President and CEO)
So it's stopped going down. I think we're getting poised to be back into supply and demand balance. Now, hopefully, that happens, and we get an inflection in pricing sometime this year. But it could go into next year, but, we're marching very, very much towards being in balance.
Douglas Mavrinac (Managing Director Investment Banking)
Gotcha. Very helpful, guys, and, thanks for the time.
David Grzebinski (President and CEO)
Thanks, Doug.
Andy Smith (EVP and CFO)
Thanks, Doug.
Operator (participant)
Our next question is from Gregory, excuse me, Gregory Lewis with Credit Suisse. Please go ahead.
Gregory Lewis (Oil Service Analyst)
Yeah. Hi, thank you, and good morning.
David Grzebinski (President and CEO)
Hey, good morning, Greg.
Gregory Lewis (Oil Service Analyst)
Hey, hey, David. You know, just looking at Coastal. I mean, that was, you know, that was a tough quarter for Coastal. You know, I guess we now have EBIT margins negative. You know, I don't think this, it doesn't sound like it caught you by surprise, given that you've kind of, it sounds like you've been quick to respond. When you think about, you know, moving back towards a slightly negative, breakeven EBIT margin, is any of that based on some seasonal weakness that we saw in the Q1 returning back in the market, or is that more of, you know, we've kind of right-sized the fleet and right-sized it?
David Grzebinski (President and CEO)
Yeah, a little, yeah, a little bit of it is seasonal. You know, the Alaska business is seasonal, obviously, and that impacts it, but it's pretty small. We did have some shipyard work that was in the Q1 on some bigger units that impacted us a little bit, so that's also part of it. But you know, cost savings is a significant piece of it. Laying off some charter boats and idling some of our own equipment was painful because it involved headcount cuts. But it was meaningful, and we needed to do it and respond quickly, and I think we did. And we'll continue to monitor the market and adjust as we need to.
But, yeah, putting all those factors together is what really got us kind of back to the, closer to the breakeven from what we saw in the Q1.
Gregory Lewis (Oil Service Analyst)
Okay. And then, and before I transition over to diesel engine services, you mentioned that coastal barge got sold. Is that getting sold for more active trading?
David Grzebinski (President and CEO)
No, it was a one-off barge that we had in a market that one of our customers needed, and it made more sense for us to sell it than to keep it. It's just a one-off, one-off barge.
Gregory Lewis (Oil Service Analyst)
But, so that vessel's gonna still trade?
David Grzebinski (President and CEO)
Yeah, it will still trade.
Gregory Lewis (Oil Service Analyst)
Okay.
David Grzebinski (President and CEO)
The customer will directly own the barge.
Gregory Lewis (Oil Service Analyst)
Okay, great. And then just switching over to diesel engine services. You know, as we think about, you know, just following up on Doug's question, you know, clearly, it looked like the overall industry for pressure pumping maybe got caught a little bit flat-footed, given you know, the strength in the recovery. As you think about your capacity or your utilization, you know, of your staff, of your Oklahoma facility, are we kind of fully ramped up, or and if you think about where we are maybe in baseball terminologies, is United in sort of the middle innings of where it needs to be to service your customers, or could we still...
What I'm trying to get at is, are we still gonna be spending money to get United where it needs to be for this cycle?
David Grzebinski (President and CEO)
... No, actually, we're quite excited because we during the downturn in 2016, we spent a lot of money consolidating the facilities, investing in our facilities, in our supply chain processes. So, you know, the way I like to think about it, you know, the cycles have been pretty robust up and down in this industry, but our ability to respond is much better. And if we go back to, you know, the prior cycle peaks, I would expect our margins to be considerably better, you know, perhaps 20-20% better. So in other words, if we were doing at the past, you know, kind of a 10% margin, we should be well north of that, going forward, just because of the consolidation and streamlining we've done.
Also, that supply chain, the moves we've made on our supply chain should help inventory management, which is where all the capital is in this business.
Gregory Lewis (Oil Service Analyst)
Is-
Andy Smith (EVP and CFO)
Hey, Greg, I would add something to that. But, you know, as you look at this business relative to prior cycles, you know, right now, our mix is much different than it has been in the past. I mean, we've got a lot more remanufacturing, which, if you recall, the original thesis for getting into the business was the remanufacturing and the service work. But we also haven't seen the product pull through yet. It's still lagging a little bit behind. And so as that comes through, I think you'll... To David's point, you'll really see the thing ramp up and throw off a little bit more profitability.
Gregory Lewis (Oil Service Analyst)
Okay, just one final. Are you guys still hiring at United?
Andy Smith (EVP and CFO)
Yes.
Gregory Lewis (Oil Service Analyst)
Okay. Hey, thanks very much for your time, guys.
Andy Smith (EVP and CFO)
Yep.
Operator (participant)
Our next question is from Jack Atkins with Stephens. Please go ahead.
Jack Atkins (Research Analyst)
Hey, thanks. This is actually Andrew Hall in for Jack. Just a couple questions from us. You know, David, as you think about, you know, pricing beginning to recover on the inland side, you know, hopefully that's later this year, you know, I think we typically think of, you know, Kirby in the broader market, we see a fairly robust pricing coming out of a downturn, you know, somewhere in the high single digit range. You know, is that how we should be thinking about potential recovery this cycle, or is it, you know, because this is more a supply-driven recovery, you know, pricing power could be a bit more muted?
David Grzebinski (President and CEO)
Yeah, it may be a little more muted, but coming out of the bottom of the cycle, it can get sporty. But I think because this has been particularly painful with respect to overbuilding it, it could be a little more muted coming out of this cycle.
Jack Atkins (Research Analyst)
Okay. Okay, perfect. And then as a follow-up, you know, if you look at your utilization levels on the inland side, do you think that's indicative of the broader market?
David Grzebinski (President and CEO)
Yeah.
Jack Atkins (Research Analyst)
And then, you know, I guess as a follow-up, you know, given where your utilization is, have you guys had to bring back any leased-in towboats to better service, you know, your customers?
David Grzebinski (President and CEO)
Yeah, yeah. Let me take that by each question. We have ramped up and ramped down our chartered-in towboats. As you know, we use that as a way to variabilize some of our costs. We have added towboats at times and taken them out at times, and we will continue to do that, and it feels like we've got plenty of capacity to do that. Now, in terms of industry utilization, you know, Kirby may be a couple% better than the industry average, but we're hearing that the industry is pretty similar in terms of utilization.
There may be a customer or a competitor or two that's a little, little lower, but, on average, we think they're pretty close to us, which is good. That means, you know, that means the whole industry is starting to tighten up. But it's still probably early to say that. Again, we had the weather and the turnaround season. I think we've got to see how it plays out through the summer as weather gets better, and see how that transpires.
Jack Atkins (Research Analyst)
Perfect. Thank you.
Andy Smith (EVP and CFO)
Thanks, [Andrew].
Operator (participant)
Our next question is from Kevin Sterling with Seaport Global Securities. Please go ahead.
Kevin Sterling (Senior Equity Research Analyst)
Thank you. Good morning, gentlemen.
David Grzebinski (President and CEO)
Hey, good morning, Kevin.
Kevin Sterling (Senior Equity Research Analyst)
Yeah, hey, your marine margins took a step back this quarter, and is all of that coastal, or is there some inland deterioration in there for that reduction in your marine operating margins?
David Grzebinski (President and CEO)
Yeah, Kevin, I'll take that. Most of it's coastal.
Kevin Sterling (Senior Equity Research Analyst)
Okay.
David Grzebinski (President and CEO)
With coastal, you know, slipping into a sort of a mid-single-digit loss, certainly it had an effect dragging on the overall marine, but a little of it is still inland. If you look, we certainly—we came down a little bit from the Q4, but if you even go back to the Q3, we're probably off, you know, a couple hundred basis points on the inland side. But most of it was coastal.
Kevin Sterling (Senior Equity Research Analyst)
Gotcha. Okay, that's what I figured. And then, you know, maybe along those lines, David, and, and you guys, and you've seen a little bit of that deterioration in inland, but there—it seems to me there's still some squirrely pricing in the inland market, particularly in the 30,000-barrel segment, you know, by a handful of players. And, you know, they may be operating at or below cash breakeven. And in my simple world, that just doesn't make sense to me or seems reasonable to me. So at some point, someone cries uncle, you know, and they kind of—you gotta get over that.... And so my question to you is, in past cycles, when you've seen gutter-type pricing, how long does it typically last before, you know, before you throw in the towel and pricing moves higher?
David Grzebinski (President and CEO)
Yeah, I'm—I may get Joe to chime in here in a minute, given his long industry history and knowledge. But yeah, we are seeing several people that are pushing pricing down to the cash flow breakeven level. But that really hasn't changed in the last three quarters. It's kind of been bouncing along there. We keep trying to push it up a little bit, and we will continue that process. I think part of the issue with some of these players, and it gets into whether they'll sell at the bottom here or not, and you know, nobody likes to sell at the bottom.
But some of our competitors are pretty highly levered, and they're just looking for any incremental cash to help either debt service or cover fixed costs. And I think that has to work itself out. I think it is working itself out, and that's part of the dynamic here. Everybody's looking for a little incremental cash to help defray fixed costs and debt service. But I'm gonna ask Joe to give us a longer-term perspective on that.
Joe Pyne (Chairman)
Well, I think the simple answer is that it. You can't operate at levels that are below your cash flow breakeven levels for very long. And I think where we are is essentially at cash flow breakeven levels. If their operators are operating below, they probably have other business that at least gets them to a breakeven level. I think you know the observation I'd make about pricing is that there are two components of pricing. One is utilization. And as we, you know, as we look at utilization around the industry, I mean, frankly, it should support higher pricing levels. So what's absent?
Well, what's absent is the confidence that this utilization is gonna continue. We think it will. And maybe secondly, that we have—we've come off a 3-4-year period where the industry was essentially fully utilized. In fact, it was short of barges, and it was building barges to address that shortage. And the expectation was that, you know, you always stay fully utilized. Well, if you go back in history, that wasn't the case. You know, you always had swings seasonally, where you had excess barges, typically as the weather improved. And I think the threshold for modest price increases, we always thought was around kind of the mid-80% level.
Well, the industry is above that. So you know, you really need to go back to the standard that within anybody's fleet, there's gonna be idle equipment. And what's important is that you have rate levels that support a sustainable business, and not to think that the experiences of the past several years, where every barge is utilized, is normal. You know, I think that's gonna happen. I think that there is a big incentive by everybody that's operating in this business to see rate levels at a higher level.
You know, when it's gonna turn is, you know, hard to say, but, you know, certainly rates at these levels are not long-term sustainable, so, you know, the turn has to happen.
Kevin Sterling (Senior Equity Research Analyst)
Right. Well, Joe, thank you very much, and David, thank you. That was extremely helpful, and I appreciate your insight. And one last question, David, you mentioned M&A, and obviously, no one wants to sell at the bottom. Is there still ... as you're looking at potential acquisition opportunities, I'd imagine it's probably still a pretty wide gap between sellers' expectations and buyer expectations like yourself. Is that a fair assessment?
David Grzebinski (President and CEO)
I think that's reasonably fair. Part of it, again, is the debt. Some competitors have built equipment at levels that are pretty high in terms of price and what you could build new for now, and they financed that. And so there's a bit of a gap between what we'd be willing to pay and what you could build new for, and what some of their book values and debt levels are for that equipment. So and that's been slowly coming together. It's just, it's still a bit apart. And, of course, as you mentioned at the, with your question, nobody wants to sell at the bottom.
Kevin Sterling (Senior Equity Research Analyst)
Right. Okay. Thanks so much for your time this morning. I really appreciate it. It was very helpful getting the insight. Take care.
David Grzebinski (President and CEO)
All right. Thanks, Kevin. Take care.
Operator (participant)
Our next question is from Mike Webber with Wells Fargo. Please go ahead.
Mich Webber (VP of Senior Business Initiatives Manager)
... Hey, good morning, guys. How are you?
David Grzebinski (President and CEO)
Good, Mike, how are you?
Mich Webber (VP of Senior Business Initiatives Manager)
Good, good. It's been picked over quite a bit, but I want to try to make sense of some of the inland talking points here. There seems to be a bit of a rush to put an inflection point around inland pricing. And I guess I'm trying to make sense of the, I guess, Andy's comment that inland margins, I guess, within the overall Ocean Trans, were probably off 200 basis points, but most of that weakness was coastal. And then, David, your comments around kind of the irrational pricing within the space, and Kirby, you know, trying to support that, and you're trying to kind of support firmer prices.
I guess when I look at the numbers, right, you've got, you know, Ocean Trans revenue is more or less flat. You've got the lowest operating margin in the last 10 years in that business by 500 basis points. And it just seems like there was a lot of kind of low to no margin business that got worked through the system during Q1, which led to utilization actually being inching higher. I know some weather noise in there, too. So I guess my question is, you know, how much of that low to no margin business actually got worked through your inland book in Q1? Do you have an idea about how much, you know, how much of that book actually turned over and repriced during the quarter?
Do you think it's feasible we could see, you know, mid- to high-single-digit operating margins for that coastal business or for the Ocean Trans business into the back half of the year?
David Grzebinski (President and CEO)
Yeah. Hey, Mike, I just want to make sure that you heard correctly. A couple hundred basis points of margin pressure I was talking about was specific to inland. It wasn't the overall marine transportation business. Marine transportation has fallen further than that, largely due to-
Yeah. All right, I want to make sure you-
Mich Webber (VP of Senior Business Initiatives Manager)
Yeah. No, I'm with you. 500 or 200 basis points is still a decline, right? So when I see revenue flat, utilization up, margins that low, right, and then talk about supporting pricing. I'm just trying to tie that up in my head to make sure it makes sense. So I guess, how much of your, your book got repriced during the quarter, and could we see a, a single digit operating margin for that, for that unit into the back half of the year?
David Grzebinski (President and CEO)
Yeah, well, if you think about it, spot pricing has been flat kind of three quarters in a row. So, you know, as things get repriced to that level or around there, you know, there's less and less impact because it's kind of flattened out. And I would also say that nobody really wants, and this is throughout the industry, none of our competitors wants to term up anything at these low spot rates. And we're chief among that group of not wanting to term up at low rates. So there's a bit of that going on, where we're booking only the spot business that we have to and trying to maintain our contract portfolio.
Now, in terms of repricing, I think, or contracts that renew, Andy's gone through those numbers, before, but we roughly, 35% of our business is long-term, multiyear contracts. And then, if you think about our whole contract portfolio, it's roughly, what, 75% right now under contract. So it's the spot business that is the most impacted. I don't know if that helps you, but-
Mich Webber (VP of Senior Business Initiatives Manager)
Yeah.
David Grzebinski (President and CEO)
Yeah, it's, we're still kind of mid-teens in the operating margin for the inland business. And, I would say, and Andy can chime in here, but, you know, it may bounce around that up a little, down a little from there. But I think if you averaged our inland operating margins for how 2017 will probably play out, it's probably going to be around the mid-teens level, and that's essentially what's in our guidance.
Yeah, I think-
Mich Webber (VP of Senior Business Initiatives Manager)
Okay.
Andy Smith (EVP and CFO)
I agree with you.
Mich Webber (VP of Senior Business Initiatives Manager)
No, it's helpful. I guess you mentioned that this, the benchmark of 35%, was it lumpy at all during the quarter? I'm trying to get a sense that if we could see this kind of sequential margin decline. I know coastal plays a big role in that, that you know, if it's lumpy within Q1, right, you can make the case that maybe we stabilize here. But if we're only three quarters into this, right, in terms of this kind of flat pricing on the inland side, getting work through the system, you know, that would stand to reason we would have another big leg down in Q2.
I'm trying to get a sense of whether there's anything else going on within the quarter besides what you guys have mentioned, that would've driven that kind of disparity between utilization up and margins that low.
Andy Smith (EVP and CFO)
No. No, it wasn't. I wouldn't say it was lumpy in the Q1. I mean, we sort of, our contracts will renew relatively ratably throughout the year. But again, you know, I think most of that stuff is renewed closer to spot pricing now, over the last three quarters than, say, what you were getting from 2015 into 2016. So you've seen, you've seen the worst of it in terms of, I think, the effect on margins. And I, I would say that, as David mentioned, we're sort of bottoming out close to that sort of mid-teens type number.
David Grzebinski (President and CEO)
Yeah. Let me, let me just come back to kind of more of an overview here. Look, if you look historically, quarter one for our inland business is almost always our weakest quarter in terms of margins.
Yeah, particularly if you compare it versus the second and Q3s. Q4 is usually better than Q1. And that's a pattern that's existed for years, and a lot of that's the seasonal weather, and just the way the trade works. So that, you know, that's part of what you're seeing. Also, you know, pricing is flat on spot, but, you know, we do have some inflationary pressures, whether it's medical and pension and insurance-type costs. So that's also rolling through. But if you come back to coastal, look, it was ugly. We've been talking about coastal getting worse, and it was pretty bad, but we reacted quickly. I think we've got that under control now.
You know, if we need to do more, we will. But, right now, we think we've right-sized it. So, in my mind, that's, that's kind of the big picture.
Mich Webber (VP of Senior Business Initiatives Manager)
Gotcha. Okay, I appreciate all the color, guys. Thanks a lot.
David Grzebinski (President and CEO)
Yeah.
Operator (participant)
Our next question comes from David Beard with Coker Palmer. Please go ahead.
David Beard (Analyst)
Hi, gentlemen. Thanks for the time, and good morning.
David Grzebinski (President and CEO)
Good morning, David.
Andy Smith (EVP and CFO)
Yeah.
David Beard (Analyst)
My question relates to the inland barge business, specifically in supply-demand. I don't know if you have any color relative to what you expect for deliveries and scrapping for the industry. And then specifically, a barge manufacturer mentioned they were seeing some pushouts of deliveries. I wondered if that was related, if you pushed out any deliveries into 2018, or if that was someone else in the industry. Thanks.
David Grzebinski (President and CEO)
Yeah, no, we've. Look, this is a little dated. The last number I saw was the estimate of about 40 barges being built this year. And, roughly half, maybe just a little less than half, was for one captive MLP customer, so, Marathon, in particular, that was building for their own use. So, it feels like the supply is pretty muted right now, the new supply coming in. And-
Andy Smith (EVP and CFO)
You know, and, David, just... I mean, again, we're scrapping, you know, roughly 30, I think, this year, net. So, you know, if the industry behaves as we hope they will, and if they behave using us as a proxy or if we're a proxy for the industry, then, you know, you would assume that you'll see sort of that standard 100-150 come out this year or more.
David Beard (Analyst)
Just on the comment on pushout and deliveries, any color there would be appreciated.
David Grzebinski (President and CEO)
Yeah, yeah. You know, I don't have any good data on that, David. I'm sorry. I don't. Now, maybe it's dry cargo. I know the dry cargo market's in pretty much disarray. There's too many covered hoppers, and I would imagine that if there were covered hopper orders, that those would be getting pushed out. So maybe it's dry cargo that's being talked about.
David Beard (Analyst)
Yeah, that's a good point. All right, gentlemen, thanks for your time.
David Grzebinski (President and CEO)
All right. Thanks, David.
Operator (participant)
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Carey for any closing remarks.
Brian Carey (Head of Investor Relations)
Thanks, everyone, for your interest in Kirby Corporation and for participating in our call. If you have any additional questions or comments, you can reach me or Sterling at 713-435-1413. Thank you, and have a great day.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.