Kirby - Q2 2013
July 25, 2013
Transcript
Operator (participant)
Welcome to the Kirby Corporation 2013 second quarter earnings conference call. My name is Christine, and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Steve Holcomb. You may begin.
Steve Holcomb (VP of Investor Relations)
Good morning. Thank you for joining us. With me today are Joe Pyne, Kirby's Chairman, President, and Chief Executive Officer; David Grzebinski, Kirby's Executive Vice President and Chief Financial Officer; and Greg Binion, President of Kirby's Marine Transportation Group. 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 kirbycorp.com in the Investor Relations section under Non-GAAP Financial Data. Statements contained in this conference call with respect are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risk 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, 2002, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman, President, and CEO)
Okay. Thank you, Steve. Yesterday afternoon, we announced second quarter earnings of $1.11 per share, which included a $0.07 per share reversal of the earn-out liability from our April 2011 acquisition of United Holdings, and an additional $0.03 per share negative impact from a combination of high water and lock issues. During the 2013 second quarter, our inland and coastal tank barge fleets continued to benefit from strong U.S. petrochemical production levels, stable refinery volumes, the export of lube oils and diesel fuel, as well as movements of crude oil and gas condensate from shale formations. Both the inland and coastal fleets maintained high equipment utilization levels and higher pricing trends.
The second quarter was negatively impacted by heavier shipyard schedules in the coastal area, something that we discussed during our second quarter conference call. With respect to our land-based diesel engine business, the market for manufacturing new pressure pumping units continues to be slow. Partially offsetting the situation is the remanufacture of these units, which you know continues to progress as we expected. It does appear that this business is on the bottom, and we are seeing some signs of improvement.
On the marine side of the diesel engine business, while market conditions were generally stable across the majority of our markets, the high water conditions during the quarter on the Mississippi River did lead some of our customers to defer several maintenance projects, but we expect to see these projects later this year. With respect to the oil service market in the Gulf of Mexico, that's stable. Power generation markets are also stable. I'm gonna now turn the call over to Greg, who will take you through our marine transportation business, and then David will take you through the financial side of the business, and I'll come back at the end of the call with some concluding remarks.
Greg Binion (President of Marine Transportation Group)
Well, thank you, Joe, and good morning to all. I will address the inland market first and then follow up with the coastal market. For the second quarter, our inland marine transportation business continued its overall strong performance, with equipment utilization in the 90%-95% range, and, as Joe said, favorable term and spot contract pricing. In the 2013 second quarter, we saw high water conditions on the Mississippi River and Illinois River that persisted really throughout the second quarter. This was a result of snow melt and consistent rains. The high water conditions resulted in slower transit times, additional horsepower requirements, and assist boats at numerous bridges and locks. Additionally, the Algiers Lock, that's located on the Gulf Intracoastal Waterway near New Orleans, was closed due to structural damage from late March until July 18th.
This created heavy congestion and multi-day delays at Harvey Lock in the New Orleans area, and also along the alternate route to the Mississippi River at Bayou Sorrel Lock and Port Allen Lock. The high water and lock delays negatively impacted our second quarter results by an estimated $0.03 per share. Inland transportation revenues from our long-term contracts, that is one year or longer, were 75% of the total revenue, and the mix of time charter and affreightment contracts for the second quarter were 58% time charter and 42% affreightment. Moving to inland marine transportation pricing, term contracts during the second quarter, term contracts renewed during the second quarter continued at mid-single digit levels when compared with the 2012 second quarter. Second quarter spot contract pricing, on the average, remained about 5% higher than term contract pricing... Turning to new inland tank barge and towboat construction.
During the 2013 first six months, we took delivery of 51 new tank barges, totaling about 1.1 million barrels of capacity and 2 inland towboats. We retired 26 tank barges and returned 3 chartered tank barges, removing approximately 450,000 barrels of capacity. So net net, during the 2013 first six months, we added 22 tank barges to our fleet, increasing our inland capacity by approximately 650,000 barrels. As of June 30th, we are operating 863 inland tank barges with a capacity of 17.3 million barrels. In May, we signed contracts for the construction of 50 new 10,000-barrel inland tank barges and 2 new 30,000-barrel inland tank barges, totaling approximately 580,000 barrels of capacity.
11 of the 10,000-barrel tank barges and both of the 30,000-barrel tank barges are scheduled for delivery in the 2013 fourth quarter, with the remaining 39 new 10,000-barrel tank barges to be delivered in 2014. For the 2013 first half, we expect to place into service 17 inland tank barges with a capacity... Excuse me. For the 2013 second half, we expect to place into service 17 inland tank barges with a capacity of approximately 270,000 barrels and 1 new towboat. For 2013, the cost of new inland tank barges and towboats delivered throughout the year will be approximately $135 million.
At the present time, we expect to finish 2013 with approximately 17.3 million barrels, about the same as our present capacity level, and approximately 675,000 barrels above the 16.7 million barrels of capacity we had at the beginning of 2013. Moving to the coastal business, Kirby Offshore Marine's overall equipment utilization remained in the 90% range during the second quarter, consistent with the 2013 first quarter and significantly above the 75% utilization range for the 2012 second quarter. All the coastal markets, with the exception of the New York Harbor and Philadelphia Harbor ship bunkering markets, remained strong, driven in part by increased demand for crude oil and condensate moves, and continued progress in expanding our coastal business to our inland customer base. As we previously noted, the 2013 second quarter was impacted by a heavy shipyard schedule for coastal equipment.
As of June 30th, 2013, approximately 75% of the coastal operations revenue were under term contracts, compared with 60% of the 2012 second quarter, with the balance coming from spot contract revenues. This improvement represented the addition of Allied and Penn, as well as new contracts signed in 2012 fourth quarter and the 2013 first half. With respect to coastal marine transportation pricing, term contracts that renewed during the second quarter increased in the high single digit range, and in some cases higher when compared with the 2012 second quarter. Second quarter spot contract pricing was on the average 15%-20% higher than term contract pricing. The New York Harbor bunker market has been challenging for us. Last week, we entered into agreement to sell the small bunkering tank barge fleet that operates in the New York and Philadelphia harbors to another operator.
We anticipate the closing to occur during the 2013 third quarter. I want to emphasize that we are not exiting the New York Harbor and Philadelphia Harbor markets, just the ship bunkering portion of these markets. With that, I'll turn the call over to David.
David Grzebinski (EVP and CFO)
Thank you, Greg, and good morning, everyone. As Joe noted, our 2013 second quarter earnings per share of $1.11 included $0.07 per share credit for the earn-out. As of June 30, the earn-out liability stands at $7.9 million. Marine transportation revenues grew 24%, and operating income grew 36% over the 2012 second quarter. The inland sector contributed approximately 70% of the second quarter marine transportation revenue, and the coastal sector, approximately 30%. Despite the high water levels and lock issues, our inland operations earned an operating margin of over 25% for the second quarter. The coastal operations operating margin, despite the high maintenance quarter, remained in the mid-teens, compared to the low single digits for the 2012 second quarter.
The overall marine transportation segment second quarter operating margin was 23%, compared with 21% a year ago. Our diesel engine services revenue for 2013 second quarter was 17% below the year ago quarter, and diesel engine services operating income was in line with the 2012 second quarter. However, without the $6.1 million earn-out adjustment, the operating income would have been 42% lower than the 2012 second quarter. The segment's operating margin was 10.7%, compared to 8.9% from the 2012 second quarter. The decline in revenue and operating income was due primarily to the lower results in our land-based operation. Our land-based operation contributed approximately 65% of the diesel engine services segment revenues, and excluding the earn-out credit, earned a mid-single-digit operating margin.
The legacy diesel engine operations contributed about 35% of the diesel engine service revenue, with an operating margin in the 10% range. As Greg mentioned, some of our CapEx, we are increasing our capital expenditure guidance to $230 million-$240 million for the year, and that's up from a guidance of $190 million-$200 million. Capital expenditures guidance for new construction increased by $20 million to $135 million, reflecting 13 inland tank barges scheduled for delivery in the fourth quarter that Greg noted. Capital upgrades and improvements to the existing inland and coastal equipment increased by approximately $18 million to the $83 million-$93 million range, which is up from previous guidance of $65 million-$75 million.
Total debt as of June 30th was one point oh two billion dollars, and our debt to total cap was approximately thirty-five point seven percent. As of June 30th, we had seventy point nine million outstanding under our revolving credit agreement, which compared to a hundred and forty-five million as of March thirty-first of 2013. However, this morning, our revolver's outstanding balance was forty-three million as we continue to delever with our strong cash flow. And over the past six months, we've paid down a hundred and fifty million dollars of debt, and as of last night, our debt for the company is at nine hundred and eighty-five million. With that, I'll turn the call back to Joe.
Joe Pyne (Chairman, President, and CEO)
Okay, thank you. Thank you, David. Yesterday, we announced our third quarter guidance of $1.05-$1.15 per share. This compares with $0.95 per share earned in the 2012 third quarter. For the year, we raised our guidance to a range of $4.15-$4.35 per share, compared to the $3.73 per share earned in 2012. This annual guidance range includes a $0.05 per share first quarter and a $0.07 per share second quarter adjustment to the United earn-out. Our third quarter and year guidance range does not include any additional adjustments to this earn-out.
Our third quarter guidance assumes a continued improvement over 2012 pricing for our inland transportation market. Markets are currently operating at close to full utilization levels. It assumes a continued improvement in coastal utilization and corresponding higher term and spot contract pricing. We feel, as I mentioned earlier, that we're at the bottom of the cycle in our land-based market and still believe that we're gonna see some improvement late this year, early next year. Our guidance additionally assumes our legacy diesel engine service market will remain consistent with the first half of 2013.
During last quarter's conference call, I talked about my intention to step down as Kirby's CEO early next year, but remain as an active chairman, with David Grzebinski assuming the position of President and CEO, early next year. This transition remains on track. As part of my transition plan, I intend to establish a sale plan in accordance with SEC Rule 10b5-1 and sell 200,000 of my Kirby shares. Most of my net worth is in Kirby stock, so some diversification is the prudent thing to do. I intend to hold on to my remaining shares.
With respect to the last 12 months, in the inland side of our business, we've had some unusual and challenging operating conditions, high and low water, and some significant, and again, unusual infrastructure problems, which have imposed some headwinds on our earnings. I'm hopeful that this is, for the most part, behind us, and that we will experience going forward more typical operating conditions for the balance of this year into next year. Operator, that concludes our prepared remarks. We're now ready to open the call up for questions.
Operator (participant)
Thank you. We will now begin the question-answer session. If you have a question, please press star, then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Please limit yourself to one question and one follow-up question. Our first question comes from John Chappell from Evercore Partners. Please go ahead.
Greg Lewis (Oil Service Analyst)
...Thank you. Good morning, everyone.
Joe Pyne (Chairman, President, and CEO)
Good morning, John.
Greg Lewis (Oil Service Analyst)
Joe or David, I was going to ask you about use of cash even before the press release came out, but then I think there's a little bit of clarity there, in the end with the CapEx budget. I'm just wondering, with the ramp up in the spend on barge new builds, is that kind of a statement about the acquisition environment? Have prices kind of run away from you because of the strength in your core businesses, and, and should we expect you to focus a lot of the cash flow generation on maybe organic growth through new builds?
Joe Pyne (Chairman, President, and CEO)
You know, I think it certainly says that there are opportunities to add capacity, which, you know, as you know, we do prudently. I'm not ready to say that acquisitions are, you know, behind us, at least at this point. There was one noted, of course, a couple days ago with Hornbeck selling their fleet at, you know, a good rich value. We think that that's positive because it demonstrates others' enthusiasm with respect to this market.
You know, along the way, there's going to be other acquisition opportunities, and we'll just have to evaluate them based on what we think, you know, our view is of the cycle and our ability to get the returns that we try to run the company to achieve.
Greg Lewis (Oil Service Analyst)
Okay. And then, I guess, as a true kind of follow-up to that, what was the yard capacity for you to be able to go out and order those barges? And what does it kind of mean for the total industry capacity? If there's opportunities for you, you know, to expand through some new builds with pretty timely or prompt deliveries, are you concerned at all that others would follow suit, given the returns, and you can see maybe an acceleration of the capacity growth?
Greg Binion (President of Marine Transportation Group)
Hey, John, this is Greg. One of the things you have to recall is we're constantly looking at our fleet, and this 50 barge order is really a large part of fleet replacement, a fleet replacement order with some small capacity add, and we've been talking to the shipyards for quite a while before we actually placed the order. In terms of, you know, maybe a way to think about it is that, in terms of capacity to get new barges, the timeline now looks like kind of the tail end of 2014, the second half of 2014, there's some shipyard availability. So, that that's a little shorter timeline than we had at this time last year.
So I think, you know, I think that it's certainly easier to get additional capacity now than it was a year ago.
Greg Lewis (Oil Service Analyst)
Mm-hmm. And does that change your view on kind of the supply-demand dynamic over the next 12-18 months?
Joe Pyne (Chairman, President, and CEO)
Well, no, I think what it says is that the industry is maybe a little more cautious with respect to ordering new equipment, to where they were a year ago. Yeah, we'll have to see, but the order book a year ago was at this point really fully booked the 2013 year.
Greg Lewis (Oil Service Analyst)
Okay. That's great. Thanks, Joe. Thanks, Greg.
Operator (participant)
Thank you. Our next question comes from Greg Lewis from Credit Suisse. Please go ahead.
Greg Lewis (Oil Service Analyst)
Yes, thank you. Good morning, guys.
Joe Pyne (Chairman, President, and CEO)
Good morning.
Greg Lewis (Oil Service Analyst)
Just, I guess, staying on Jonathan's question, on the CapEx. I mean, so it looks like the fleet capital upgrades were increased by about $18 million for the year. Were those capital upgrades, is that something that's being driven by customer demand? Is it regulation? Is it simply, you know, your guys' confidence in upgrading that equipment enables you to get a better return? Just if you could provide some color around the decision to, you know, you know, upgrade.
David Grzebinski (EVP and CFO)
Yeah, yeah, Greg, this is David. Yeah, it's a little bit of all of it. There are some opportunities where you can, for example, just to give you one example, in the coast-wide fleet, where you could add vapor recovery to an existing barge, which gives it more optionality and functionality and allows us to, you know, for example, to maybe move some crude and condensate with it. Or you may, you know, take a wire boat and convert it into a notched boat, where you get better utilization in weather, in tough weather environments. But it's all of what you said, you know, looking for ways to extend the life and the usefulness of our equipment.
Greg Lewis (Oil Service Analyst)
Okay, great. And then just on the sale of the bunkering business in New York and Philadelphia, I guess you could just loosely sketch out what was involved. I mean, what type of equipment, if any, and, you know, maybe, like, how much cash is being realized for the sale of that?
David Grzebinski (EVP and CFO)
Yeah. No, it's... Hey, this is all very small equipment in the New York and Philly market. For us, it was five small barges, very small barges. We're still in the New York and Philly markets, and the Northeast markets in a big way. You know, our focus is on the clean equipment and some of the bigger equipment, where you know, quite frankly, we find it much more attractive. The New York ship bunker market, it was. There was a lot of capacity up there. To be blunt, you know, it was a small business for us, only about $10 million in revenue on an annualized basis.
To be blunt, we were, you know, kind of at break-even and losing money at for periods of time. So, you know, it's just a slight little tweak. We're still focused, particularly with the Bain and, excuse me, the Penn and Allied acquisitions. We're still focused on that larger market up there with the bigger pieces of equipment.
Greg Lewis (Oil Service Analyst)
Sure. And actually, just real quick, do you do bunkering anywhere else beyond those two regions?
David Grzebinski (EVP and CFO)
Yeah. No, we're in bunkering in a big way in the Miami market. We've got a lot of equipment and infrastructure, nice business for us. And all along the Gulf Coast, we're in bunkering in a big way. You know, the New York market had way too much equipment, a lot of players, and we had a small presence in that.
Joe Pyne (Chairman, President, and CEO)
Yeah, and, and, this is Joe. And remember, Greg, that actually, we've been talking about this for a number of quarters. We've moved equipment out of New York, positioned it in other places. It, you know, one of the beauties of Kirby is our flexibility and our ability to move equipment to respond to market opportunities really throughout the system. In the New York Harbor, you know, our focus has kind of moved. With this, this is some of the business that we inherited with our K-Sea acquisition, has moved, as David suggested, with Allied and Penn, to kind of larger coastal units.
You know, this allows us to kind of fully focus on continuing to develop that business and exiting, you know, a business that has been a little problematic, really, since we bought it.
Greg Lewis (Oil Service Analyst)
Okay, guys. Hey, perfect. Thank you for the caller.
Operator (participant)
Thank you. Our next question comes from Jack Atkins from Stephens. Please go ahead.
Greg Lewis (Oil Service Analyst)
Good morning, guys. Thanks for the time. So I guess first off here, David and Greg, could you maybe quantify the revenue impact from the increased coastal maintenance that you guys undertook in the quarter? And if you could give us some color on you know, what was that maintenance level that you actually undertook higher than what you were expecting, kind of, going into it, or was it about what you thought it would be?
David Grzebinski (EVP and CFO)
Yeah, Jack, in our guidance for the second quarter, we had the maintenance time and, you know, lost revenue days and the actual cost of the maintenance that we incurred in the shipyards this quarter. You know, it was within our guidance range and as expected. You know, as you look forward, you know, the amount of shipyard maintenance that's scheduled is gonna go down in the third quarter and go down even further in the fourth quarter. So we've got a lot of tailwinds coming. Just the way the regulatory shipyards fell. And again, it was, it's kind of in our guidance range.
Greg Lewis (Oil Service Analyst)
Okay. Okay, thank you for that. And then, David, you know, I guess just to kind of think about the, on the margin side of, of the marine transportation business, how should we think about incremental margins there for the next, you know, call it a year or so? I would think with the favorable pricing trends that you're seeing, both on the inland side and really accelerating pricing on the coastal side, you know, something in excess of like a 35% type incremental margin is, is doable. But just was curious to kind of hear how you all think about incremental margins over the next four to six quarters.
David Grzebinski (EVP and CFO)
Yeah. No, no, you're right, Jack. The incremental margins are quite good because when you get price increases, it's unless you have some cost inflation. Now we see a little bit of cost inflation here and there, but it's by and large, the price increases do fall to the bottom line. So the incremental margins can be very healthy. You know, to be honest, I haven't put pencil to paper on the coastal and inland incremental margins as price increases go through. But you know, your estimate, if anything, might be a little low. The incremental margins are quite good.
Greg Lewis (Oil Service Analyst)
Okay. Thanks again for the time.
Operator (participant)
Thank you. Our next question comes from Ken Hoexter from Bank of America. Please go ahead.
Veronica Zhang (Equity Research Associate of Transportation)
Hey, guys. This is actually Veronica Zhang in for Ken.
David Grzebinski (EVP and CFO)
Great.
Joe Pyne (Chairman, President, and CEO)
Hi, Veronica.
Veronica Zhang (Equity Research Associate of Transportation)
Hi, how are you? So just on offshore, so we've seen that, you know, 90% utilization level carry over for two quarters. I was just wondering what needs to happen at this point for it to get to, you know, mid-90s, 95 level, and if it's just all pricing at this point?
Joe Pyne (Chairman, President, and CEO)
Uh, utilization?
Veronica Zhang (Equity Research Associate of Transportation)
Mm-hmm.
David Grzebinski (EVP and CFO)
Yeah.
Joe Pyne (Chairman, President, and CEO)
Yeah, I think it's gonna get there as equipment continues to leave the business and volumes improve. So it's just a matter of time, I think. Pricing is, you're already in a pretty good pricing environment, so pricing should continue to be favorable going forward.
Veronica Zhang (Equity Research Associate of Transportation)
I guess since, I mean, 6-9 months ago, you guys were seeing contract renewals that may be low single digit, and now you're saying high single digits. Where does that sort of go to?
Joe Pyne (Chairman, President, and CEO)
Well, I think you're gonna see this kind of rate escalation for a little while. You're still significantly below replacement value pricing. There is continued, you know, demand for the equipment. You're coming off of very low pricing levels. So, you know, you're gonna continue to see a favorable trend for a while.
Veronica Zhang (Equity Research Associate of Transportation)
Okay. Just one last thing. I think you mentioned that you had spot prices about 15%-20% higher than your long-term contracts. Where has that delta sort of been trending over the past couple of months, and where do you see that going?
David Grzebinski (EVP and CFO)
Yeah, over the last, you know, over the quarter, that's that 15%-20% really describes the last quarter, the second quarter. And, you know, the expectation, as Joe kind of painted, is that that should continue, you know, for the foreseeable future in any event.
Joe Pyne (Chairman, President, and CEO)
Yeah, that gives me the confidence of saying that pricing trends should continue. Now, whether it's gonna stay at that level, 15%-20% above contract pricing is a bit unusual. What you typically see in a more normal market is spot pricing leading contracts, you know, 5%-7%, something like that. So when you see a delta of that magnitude, it gives you a pretty good indication of, you know, the direction that the market is going.
Veronica Zhang (Equity Research Associate of Transportation)
Okay, great. Thank you for the time.
Operator (participant)
Thank you. Our next question comes from John Barnes from RBC Capital. Please go ahead.
John Barnes (Managing Director and Senior Research Analyst)
Good morning, guys. A couple of questions. Along those same line of questioning around pricing. When we've seen spot rates move this magnitude over a couple of quarters, I think in the past, Kirby has started to see more customer demand for longer term contracts or contracts that, you know, more on a day rate basis, that kind of thing. Can you just speak to, as spot rates have popped up, as contractual rates are moving higher, what kind of behavior you're seeing out of your customer base in terms of demands on terms and lengths and things like that?
David Grzebinski (EVP and CFO)
Yeah, John, this is David. I can use Coastwise as an example. But you saw that over the last basically year, we've gone from about 60% contracted, you know, last quarter, we were around 70%. This quarter, we're about 75%. So you're precisely right. You know, as pricing is going up, the customers are looking for longer contracts. They're wanting to get those term contracts in place to protect themselves. We're being very thoughtful, as you would expect. You want contracts with the right customers for the right volumes in the right markets, and we're slowly edging that contract mix up.
Joe Pyne (Chairman, President, and CEO)
Yeah, and with respect to the offshore market, that's principally a time charter market.
John Barnes (Managing Director and Senior Research Analyst)
Right.
Joe Pyne (Chairman, President, and CEO)
So you don't have the affreightment to time charter mix in the inland business. About 95% of that business is gonna be on time charters.
John Barnes (Managing Director and Senior Research Analyst)
Okay. All right. And I think you've said in the past that, especially on the inland business, you've always looked for—you'd like to have maybe spot represent as much as, you know, say, 25% of your total business. Have those percentages changed, I mean, or is it just what the market will bear?
Greg Binion (President of Marine Transportation Group)
Yeah. John, this is Greg. I'll take that. I think it's still about that ballpark because the spot market gives us a couple of things. It gives us flexibility to take care of our term customers when their needs accelerate, and they need more capacity from us, we can back away from the spot market and answer those needs. And it also gives us an opportunity when our term customers, particularly on time charter equipment, don't—when they don't have the need, because we're in the spot market every day, we can take that equipment, use it elsewhere, and reduce their costs, and decrease their cost per unit delivered.
So, for those two reasons, I think you're gonna see us try to maintain that, that spot presence at about that level.
John Barnes (Managing Director and Senior Research Analyst)
Okay. And then, Dave, last quarter, you indicated that you were beginning to have conversations with coastal customers about longer-term deals that would facilitate the purchase of new vessels. Is there any update to those discussions, or are you closer to making a decision along those lines?
David Grzebinski (EVP and CFO)
Yeah, I would say they're progressing and everything is moving forward in a positive manner.
John Barnes (Managing Director and Senior Research Analyst)
All right. Very good. Thanks for your time, guys. I appreciate it.
Operator (participant)
Thank you. Our next question comes from Michael Webber from Wells Fargo. Please go ahead.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Hey, good morning, guys. How are you?
David Grzebinski (EVP and CFO)
Morning.
Joe Pyne (Chairman, President, and CEO)
Morning.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Hey, Joe and David, I just wanted to jump back onto the idea of coastal new builds for a second. And you mentioned that they're progressing. Can you maybe give us some kind of quarter-over-quarter color around maybe, you know, kind of how that customer demand is shaping up? And then, you know, early indications around size, type, and any sort of time frame. And then maybe also on a cost basis, and I think we were talking about $400 a barrel, whether that's still relatively viable in terms of what you guys are seeing from Aker and NASSCO and some of the other coastal yards.
Joe Pyne (Chairman, President, and CEO)
... Yeah, it's delicate. You don't want to get into too many specifics-
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Sure.
Joe Pyne (Chairman, President, and CEO)
- given that you're talking to customers. But yeah, you know, when we threw out the $400 a barrel number, that was for a coastwise 185,000-barrel. And those numbers can move around depending on, you know, how much horsepower you put behind each barge.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Mm-hmm.
Joe Pyne (Chairman, President, and CEO)
Clearly, this is a process, you know. You got to work with your customers, you talk to a shipyard, you come back and you give them options about what they can do on the barge and/or with the tug in terms of horsepower and speed, and you know, whether they want certain attributes on the barge, you know, like a crude oil washing system or a vapor recovery system. So it's a process, is the best way to describe it.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Mm-hmm.
Joe Pyne (Chairman, President, and CEO)
It's, you know, in terms of how that process is going, it's very, very positive. You know, you just don't want to jeopardize a customer-
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Sure
Joe Pyne (Chairman, President, and CEO)
- situation by getting too specific.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Got you. You know, we've seen more FPSO activity in the Gulf with the Shell Stones field and some Jones Act shuttle tankers there. Would that be something you guys would be potentially interested in, or is that a little bit too far away from your core competencies?
Joe Pyne (Chairman, President, and CEO)
Well, you never, you never say never, but, right, right now, that's certainly not our focus.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Fair enough. And just as kind of my follow-up, kind of a different subject, but you know, have you guys get questions on a dividend pretty regularly, and you're obviously looking to allocate capital toward some newer assets. But getting to the size where you guys could probably think about doing both in terms of returning capital to shareholders and growing. You know, are you thinking about the dividend? And do you need to kind of come to some sort of final investment decision on any sort of new build tonnage before you would seriously think about making that move? Or can you do it in tandem?
Joe Pyne (Chairman, President, and CEO)
You know, depending on the opportunity.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Mm-hmm.
Joe Pyne (Chairman, President, and CEO)
I mean, there are some scenarios where you could, you know, absorb, you know, most of your cash, responding to opportunities. But I think that you're getting pretty close to being able to do both, and we certainly talk about it at the board level. We'll continue to talk about it, but I don't really want to signal where we're going with it yet.
Michael Webber (Managing Director of Investments with Webber Wealth Management)
Mm-hmm. Okay. That's fair. Thanks for the time, guys.
Joe Pyne (Chairman, President, and CEO)
No, thank you, Mike.
Operator (participant)
Thank you. Our next question comes from Chaz Jones from Wunderlich. Please go ahead.
Chaz Jones (SVP)
Yeah. Hey, thanks. Good morning. I was just curious. I was wondering if the coastal side of the business, if all the cost synergies have been realized from the acquisitions that were in the fourth quarter, is there still some more opportunity there?
Joe Pyne (Chairman, President, and CEO)
You know, we—you probably can see through some of the SG&A moves that we have indeed seen some cost benefit. Yeah, the bulk of it is gone, Chaz. There may be, you know, maybe a little bit of improvement as we finish out the year here. There are still some pieces in transition, but I would say the bulk of the cost savings is out.
Chaz Jones (SVP)
Okay, that's helpful. And then, as a follow-up, I know it's a small piece of the business, but the ocean transport segment that does the dry bulk, you referenced the two units being placed back into service. Is that, you know, looking out to the second half, gonna ramp back up a little bit in terms of revenue? I know it's somewhat profitable.
Greg Binion (President of Marine Transportation Group)
Yes, Chaz, Greg here. We did get our second unit, and of course, we'll get a revenue uplift and a little bit of an earnings uplift from that second unit going into service. So you know, there'll be a positive impact going forward.
Chaz Jones (SVP)
Okay, great.
Operator (participant)
Thank you. Our next question comes from Kevin Sterling, from BB&T Capital Markets. Please go ahead.
Kevin Sterling (Managing Director and Equity Research Analyst)
Thank you. Good morning, gentlemen.
Joe Pyne (Chairman, President, and CEO)
Good morning.
Greg Binion (President of Marine Transportation Group)
Good morning.
Kevin Sterling (Managing Director and Equity Research Analyst)
Joe, David, how should we think about the collapse in the spread between Brent and WTI? And, you know, did you see any impact on your crude volumes in your coastal business as the spread, kind of came in some?
Joe Pyne (Chairman, President, and CEO)
Yeah, I don't think so, Kevin. I don't think anybody believes it's sustainable, that it's driven more by anomalies and that, you know, you're producing a lot of crude oil. It's being priced significantly above the marginal cost. It's gonna be sold at probably lower prices, and that spread is gonna widen. But at this point, I don't think we're seeing anything that at least in the markets that we're in, that is driven by the spread contraction.
Kevin Sterling (Managing Director and Equity Research Analyst)
Right, right. So even that spread contraction we saw in the second quarter really didn't have an impact on your volumes. Is that fair to say?
Joe Pyne (Chairman, President, and CEO)
No, that's right, because I don't think the market believes it, truthfully.
Kevin Sterling (Managing Director and Equity Research Analyst)
Yep.
Joe Pyne (Chairman, President, and CEO)
You know, it may have an impact on larger volume moves from the Gulf Coast up to the East Coast, but of course, we're not, you know, we're not in that market.
Kevin Sterling (Managing Director and Equity Research Analyst)
... Right, right. Okay. And Joe, you guys had highlighted an improvement in your legacy marine engine services business. Is this a function of maintenance that had been delayed and finally coming back? And do you expect this strength or this improvement that you saw in the second quarter to continue for the foreseeable future as maintenance that was delayed is, looks like maybe finally kicking back in?
Joe Pyne (Chairman, President, and CEO)
Yeah, yeah. We think that that business is gonna continue to improve. There are several trends that affect it. Probably the most significant one is that the Gulf of Mexico, a resurgence, permits are being issued. They're beginning to drill. It requires new power or power to come off the bank and be deployed. Some of that equipment is also, you know, reaching its overhaul cycle. So all of that, I think, plays into that market. Now, with respect to the deferrals, the deferrals were more in the inland river business, where some overhauls that were planned for the second quarter were pushed into the third quarter, and, you know, that happens, you know, pretty consistently.
You base your budgets and forecasts on talking to your customers, and you know, they have a kind of a view of when they can fit these things in, and that view is very dynamic. It moves around, so those overhauls will move around. I think you know, generally, that business should continue to improve you know, into the foreseeable future.
Kevin Sterling (Managing Director and Equity Research Analyst)
Right. Okay. Thanks so much for your time this morning. I really do appreciate it.
Joe Pyne (Chairman, President, and CEO)
Thank you, Kevin.
Operator (participant)
Thank you. Our next question comes from David Tamburino from Stifel. Please go ahead.
Speaker 13
Great. Thank you for taking my questions, gentlemen. Earlier, you mentioned on the coastal side of the market, that pricing was still kind of below the, where the replacement value would be. You know, how much further does pricing have to go there in order to get up to that level?
Joe Pyne (Chairman, President, and CEO)
Yeah, it's still got a little ways to go, but we're getting closer and closer. Yeah, maybe 10%-20%.
Speaker 13
Well, it depends on the unit.
Joe Pyne (Chairman, President, and CEO)
Yeah, well, it depends on the unit and the market, but it's got some way to go, but it's getting closer.
Speaker 13
And have prices, pricing surpassed kind of prior peaks in the coastal market, or are we still below there as well?
Joe Pyne (Chairman, President, and CEO)
Approaching peak pricing, and we think that it's gonna trend for a number of reasons, it's gonna trend higher. One, you have new volume. Two, you continue to have equipment that's being taken out of business, so the supply and demand is gonna tighten up. The cost of replacing this equipment is more expensive, and frankly, you know, maintenance is getting more expensive. Fleet's getting older. You have, you know, because of a very difficult market the last three or four years, some deferrals. It's got a lot of things that are working through that business that suggest that you really need to make more money to get it healthy.
Speaker 13
Mm-hmm. Okay, and then maybe shifting gears to the guidance for the quarter. I was wondering if you could just provide a little bit of color on what provides the, you know, the variability from the top end to the bottom end of the range for 3Q?
Joe Pyne (Chairman, President, and CEO)
We were joking. It's a relative, you know, better or worse performance in the markets that we're in. You know, I think I think that you know, continued favorable pricing in inland and offshore markets, some marginal improvements in the diesel engine business is the top end. You know, the bottom end is less pricing in both the marine transportation segments and continued deferral of maintenance in the diesel engine business. Those would be the kind of the broad, I guess, influences on the range.
Speaker 13
Okay. And then digging into the diesel engine services business for the inland, new manufacturing and remanufacturing, did you see, or did you, did you note what the split was in between revenue for kind of new manufacturing versus remanufacturing, with a view towards, you know, the question is, if you've seen a pickup in remanufacturing business over the quarter or not, and starting to head into 3Q?
Joe Pyne (Chairman, President, and CEO)
Yeah, we did break that out. We've, you know, the land-based revenues are about 65%. Our legacy business is about 35%. You know, reman and manufacturing are, you know, still only about, you'd call it, between 30% and 40% of what we're doing in the land-based business. We haven't broken out how much reman and new is, but I would say-
... you know, the bulk of what we're doing in our manufacturing facility up there is remanufacturing. We're not really building new frac units. Now, we are, we have sold some existing frac units that we had in inventory that from canceled orders last year. So there are, you know, as Joe mentioned, there, we're seeing signs that we've bottomed because we're actually selling some inventory frac units. But we're not really making new frac units at this time.
Yeah, and I might just add just a little, a little more color there. What we've said is that we'd like, as an objective, to see that business be about, you know, 30% new product and about 70%, remand service, parts, and distribution, and that's about where we are. You know, the manufacturing is about, you know, thirty, now, 30%-40% of that business and service parts and distribution, you know, 60%-70%.
Speaker 13
Okay. Thank you for your time.
David Grzebinski (EVP and CFO)
Thank you, Dave.
Operator (participant)
Thank you. Our next question comes from David Beard from Iberia. Please go ahead.
David Beard (Managing Director of Energy Equity Research)
Good morning, gentlemen.
David Grzebinski (EVP and CFO)
Good morning.
Joe Pyne (Chairman, President, and CEO)
Morning.
David Beard (Managing Director of Energy Equity Research)
Wanted to just get a question or clarification on guidance and then just talk a little bit about CapEx for next year. In your guidance, what are you, or did you assume for first and second quarter earnings?
Joe Pyne (Chairman, President, and CEO)
Where did we start?
David Beard (Managing Director of Energy Equity Research)
Yeah.
Joe Pyne (Chairman, President, and CEO)
Um.
David Beard (Managing Director of Energy Equity Research)
Just, there's a difference sometimes between operated and actual reporting, and just wanted to make sure that I backed into your fourth quarter earnings accurately.
Joe Pyne (Chairman, President, and CEO)
Yeah. I wanna make sure I understand the question. You know, we reported $1.00 first quarter, and we reported $1.11 second quarter, and within those numbers-
David Grzebinski (EVP and CFO)
Eleven.
Joe Pyne (Chairman, President, and CEO)
-there were-
David Grzebinski (EVP and CFO)
$0.11.
Joe Pyne (Chairman, President, and CEO)
For the earn-out. Yeah, there were $0.11 in earn-out. The ranges that we had, I think the first quarter initial range was what, Steve? $0.95-$1.05, or was it $0.90-$1.00?
David Grzebinski (EVP and CFO)
I think it was 90 to a dollar.
Joe Pyne (Chairman, President, and CEO)
$0.90-$1, and then, the second quarter guidance was,
David Grzebinski (EVP and CFO)
A dollar.
Joe Pyne (Chairman, President, and CEO)
$1-$1.10.
David Grzebinski (EVP and CFO)
Ten.
Joe Pyne (Chairman, President, and CEO)
You, are we getting to where you wanna be?
David Beard (Managing Director of Energy Equity Research)
Maybe it's a little bit simpler. When I add up the first quarter, plus the second quarter, plus the guidance of third quarter, and then use your $4.15-$4.35, I'm gonna get an implied range for the fourth quarter.
Joe Pyne (Chairman, President, and CEO)
Oh, okay.
David Beard (Managing Director of Energy Equity Research)
But it makes a difference if the first and second, if I'm using $1 reported or $0.95, the same way in the second quarter, $1.11 versus $1.07. And it really, what I'm... Since you gave fourth quarter implied guidance, I'm just trying to make sure we're using the right numbers to back into that.
David Grzebinski (EVP and CFO)
Yeah. Let me try and help here. Year to date, we have our number, which is the GAAP number, and that-
David Beard (Managing Director of Energy Equity Research)
Okay.
David Grzebinski (EVP and CFO)
-is in our guidance. So that is inclusive of the earn-out of $0.11-some, $0.11-$0.12. So, but going forward, third and fourth quarter, we've got no earn-out in it. So you know what we've made, what was it? $2.15 year to date, and... No, excuse me. What was the number?
Joe Pyne (Chairman, President, and CEO)
$2.11.
David Grzebinski (EVP and CFO)
$2.11 year to date. I don't have the number right here. Right. $2.11. So if you, you take our range of $1.05-$1.15, that does imply your fourth quarter, and that is, that is what you're getting at. That is-
David Beard (Managing Director of Energy Equity Research)
Right.
David Grzebinski (EVP and CFO)
That is the guidance for the fourth quarter, implicitly.
David Beard (Managing Director of Energy Equity Research)
Yeah, then the follow-on would be, if it is $1 + $1.11, you take the low end at $1.05 for the third quarter, that implies $0.99 for the fourth quarter, which isn't up very much from last year's $0.94. And so-
David Grzebinski (EVP and CFO)
Well, yeah, if it's a dollar-
David Beard (Managing Director of Energy Equity Research)
kind of get a good look out into the fourth quarter and why it would not be up much year-over-year.
David Grzebinski (EVP and CFO)
Yeah, I think, you know, it depends on where we come out in the third quarter. It's $1.05-$1.15 in the third quarter, which means the potential ranges for the fourth quarter, but could be $0.99-$1.09.
David Beard (Managing Director of Energy Equity Research)
Yep.
David Grzebinski (EVP and CFO)
Of course, we'll adjust that depending on what happens in the third quarter, right?
David Beard (Managing Director of Energy Equity Research)
Okay. No, that's helpful. And can you talk a little bit about CapEx in 2014, just because you have brought the average age of your fleet down quite substantially. Would you expect 2014 to be another big year of CapEx as you finish that, or should we see a drop-off, and could it be significant?
David Grzebinski (EVP and CFO)
Yeah, it, you know, absent a decision on coastwise building, you would have a pretty strong drop-off, actually. Because we don't need to do much replacement building in the inland fleet. So it, you know, it could, you know, if we're at 230-240 this year, we could be down $150 million-$175 million next year, absent any coastwise building.
David Beard (Managing Director of Energy Equity Research)
Okay, great. I appreciate it. Thanks, guys.
Operator (participant)
Thank you. Our next question comes from Matt Young, from Morningstar. Please go ahead.
Matt Young (Senior Equity Analyst of Industrials)
Good morning, guys. Thanks for fitting me in. One last quick question here. It sounds like the coastal utilization gains are mostly coming from the crude and some cross-selling. Are some of those also, at this point, coming from the fleet phase outs, or is that more of a gradual benefit?
David Grzebinski (EVP and CFO)
Yeah, more gradual. Yeah. I don't think there's been a lot of equipment retired yet. You know, in a very strong market, you know, people are looking for every way they can extend the life of these equipment and keep them going for the next shipyard.
Joe Pyne (Chairman, President, and CEO)
Yeah, but having said that, it does. You know, the single-skin fleet is gone end of next year.
Matt Young (Senior Equity Analyst of Industrials)
Oh, okay. And then assuming that the crude movements are mostly, if I have this right, coming from the old Penn operations, could you comment if there's any—how are some of the legacy products, maybe more refined products with the original K-Sea operations, are they fairly strong at this point?
David Grzebinski (EVP and CFO)
Yeah. No, I think everything's pretty much strong across the board.
Joe Pyne (Chairman, President, and CEO)
Yeah, and we're putting K-Sea equipment into crude oil, too. And there's some legacy K-Sea equipment that's in the crude oil trade now.
Matt Young (Senior Equity Analyst of Industrials)
Okay. That's helpful. Thanks. That's all I had.
Operator (participant)
Thank you. We have no further questions at this time.
David Grzebinski (EVP and CFO)
Well, we appreciate your interest in Kirby and for participating in the call. If you have any additional questions, you can give me a call. My direct dial number is 713-435-1135, and we wish you a good day.
Operator (participant)
Thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.