Kirby - Q2 2015
July 30, 2015
Transcript
Operator (participant)
Welcome to the Kirby Corporation 2015 second quarter earnings conference call. My name is Hilda, and I will be your operator for today. 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 Sterling Adlakha. Sterling, you may begin.
Sterling Adlakha (Head of Investor Relations)
Thanks, Hilda, and thanks to everyone on the call for joining us this morning. With me today are Joe Pyne, Kirby's Chairman, David Grzebinski, Kirby's President and Chief Executive Officer, and Andy Smith, Kirby's Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our newly redesigned website at kirbycorp.com in the Investor Relations section under Financial Highlights. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors.
A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31st, 2014, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman)
Okay, thank you, Sterling, and good morning. Yesterday afternoon, we announced second-quarter earnings of $1.04 per share through the middle of our published range of $0.95-$1.10 per share. That compares to $1.31 per share reported for the second quarter last year. During the 2015 second quarter, our marine transportation tank barge fleet experienced consistent levels of demand and high equipment utilization. In the inland tank barge market, utilization remained in the 90%-95% range. We experienced good customer demand for equipment during the quarter. However, worries about future crude oil volumes and some market uncertainty continued to make it difficult to secure better pricing on contract renewals. In the coastal market, utilization also remained in the 90%-95% range, and price increases were in the mid-single-digit % range.
As expected, we had a number of vessels in the shipyard during the quarter, which impacted both our revenues and our earnings. With respect to the diesel engine service segment, revenue and operating income both declined significantly. In our land-based market, we continue to work through a very challenging environment that shows little signs of improvement, at least this year. Marine and power generation engine business... continues to perform well, but has been affected by weaknesses in the Gulf of Mexico oil service market. Before I turn the call over to David, let me make some overall observations on the current environment. The lower oil prices we are seeing may well be with us for a while.
While lower crude prices are not particularly helpful in our diesel engine business, or at least parts of our diesel engine business, particularly the parts that service equipment used in the oil service business, and may affect some future barge movements, it is long-term positive for both the American consumer and global business, and all the products they consume. Lower feedstock prices help them. It also helps many of our other customers, such as chemical, petrochemical, plants and gasoline refinery customers. Our strong balance sheet will certainly position us for opportunities, whether it's an acquisition or building equipment or a requirement. I'll now turn the call over to David.
David Grzebinski (President and CEO)
Oh, thank you, Joe, and good morning. In the marine transportation segment, as Joe indicated, during the second quarter, our inland marine barge demand was stable and equipment utilization in the 90%-95% range. Long-term inland marine transportation contracts, those contracts over a year or longer, contributed 80% of revenue for the 2015 second quarter, with 55% attributable to time charters and then 45% from contracts of affreightment. Pricing on inland marine transportation term contracts that renewed during the second quarter was down in the low single digits. Spot contract rates are above contract pricing. In our coastal marine transportation sector, equipment utilization remained in the 90%-95% range. During the second quarter, approximately 85% of the coastal revenues were under term contracts, unchanged from year ago levels.
Demand for coastal transportation of refined products, black oil, and petrochemicals remained consistent with the first quarter. With respect to coastal marine transportation pricing, term contracts that renewed during the second quarter increased in the mid-single-digit % range. In our diesel engine services segment, our marine diesel and power generation markets experienced stable demand in most regions of the country, but there continues to be weakness in the supply vessel and offshore rig market in the Gulf of Mexico. Our land-based diesel engine services market remains challenging. Demand for service, parts, and distribution was relatively stable during the quarter, but at reduced levels relative to 2014. During the 2015 second quarter, we continued to execute on our share repurchase authorization, buying approximately 530,000 shares for approximately $41 million, or $76.99 per share.
We continued to repurchase shares in the month of July, with purchases that totaled 477,000 shares at an average price of $76.20. July's purchases brought the repurchases since our first quarter call on April 30th to just over 1 million shares. Since we started repurchasing shares in late 2014, we have repurchased approximately 4.3% of our outstanding shares. Currently, our unused repurchase authorization is 2.5 million shares. I will now turn the call over to Andy to provide some detailed financial information before I come back with a discussion of the outlook.
Andy Smith (EVP and CFO)
Thank you, David, and good morning. In the 2015 second quarter, Marine Transportation segment revenue declined 7% and operating income declined 16% as compared with the 2014 second quarter. The decline in revenue in the second quarter, as compared to the prior year, was primarily due to a 36% decline in the average cost of marine diesel fuel. The Marine Transportation segment's operating margin was 22.8%, compared with 25.4% for the 2014 second quarter. The inland sector contributed approximately 70% of marine transportation revenue, with the coastal sector contributing 30%. Inland Marine operating conditions were challenging during the quarter due to high water conditions and lock closures in the river system, as well as high cross currents at several points along the Gulf Coast.
Despite these challenges, the inland sector generated an operating margin in the mid-20% range. The second quarter results for Inland Marine also reflected the anticipated year-over-year negative impact of $0.03 per share for higher pension expense, reflecting actuarial changes to mortality tables and a lower discount rate. In the coastal sector, we experienced a heavy shipyard cycle in the second quarter, as mentioned on our April conference call. With the 36% decline in fuel prices and a number of vessels in the shipyard, revenue in the coastal sector declined. Pricing on contracts renewing during the quarter continued to improve, as David mentioned. Higher maintenance expense during the quarter, ongoing impacts from higher wages, higher deferred dry dock amortization, and an increase in depreciation expense led to a year-over-year decline in the coastal sector operating margin, which was in the mid-teens.
Also impacting the coastal operating margin was the hiring of new crew members for training and preparations ahead of the delivery of our new 185,000-barrel ATBs. During the 2015 first half, we took delivery of 35 new tank barges, in addition to the six pressure barges we purchased in the first quarter, increasing capacity by approximately 560,000 barrels. We retired 13 tank barges, removing approximately 220,000 barrels of capacity. The net result was an addition of 28 tank barges to our fleet and approximately 340,000 barrels of additional capacity. For the second half of 2015, we expect to take delivery of three 30,000-barrel inland tank barges with a total capacity of approximately 90,000 barrels.
Combining these additions with our current planned retirements for the second half of the year of 12 barges with 150,000 barrels of capacity, will result in an approximate capacity at the end of the year of 18 million barrels, a reduction of 60,000 barrels from our current capacity. In the coastwise transportation sector, construction of our four coastal articulated tank barge and tugboat units continues to progress, with the first unit, a 185,000-barrel, 10,000 horsepower ATB, expected to be delivered and in service sometime during the 2015 fourth quarter. Our second new offshore vessel, also a 185,000-barrel ATB, is likely to deliver early next year.
We continue to expect delivery of the third and fourth vessels, both 155,000-barrel ATBs, in late 2016 and mid-2017, respectively. Moving on to our diesel engine services business. Revenue for the 2015 second quarter declined 31%, and operating income decreased 66% compared with the 2014 second quarter. The segment's operating margin was 4.2%, compared with 8.4% for the 2014 second quarter. The marine and power generation operations contributed approximately 40% of the diesel engine services revenue in the second quarter, with an operating margin in the low-to-mid double digits. Our land-based operations contributed approximately 60% of the diesel engine services segment's revenue in the second quarter, with a negative operating margin in the low-to-mid-single digits.
On the second on the corporate side of things, our cash flow remained strong during the quarter, which helped fund our marine equipment construction plans and $40.8 million of treasury stock purchases during the quarter. Subsequent to the quarter, we purchased an additional 477,000 shares for $36.4 million. Any future decision to repurchase stock will be based on a number of factors, including the stock price, our long-term earnings and cash flow forecasts, as well as alternative opportunities available to deploy capital, including acquisitions.
Our 2015 capital spending is still expected to be in the range of $315 million-$325 million, including approximately $70 million for the construction of 38 inland tank barges and 3 inland towboats, expected to be delivered in 2015, and approximately $95 million in progress payments on the construction of the new ATBs. The balance of $150 million-$160 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine services facilities. Total debt as of June 30 was $808 million, an $11 million decrease since March 31 of this year, and a $91 million increase from our total debt of $717 million on December 31, 2014.
The increased debt was primarily due to the acquisition of the six pressure barges in the 2015 first quarter and treasury stock purchase during the first half of the year. As of today, our debt stands at $820.1 million. Our debt-to-cap ratio at June 30 was 26.4%, compared with 24% at the end of last year. I'll now turn the call back over to David.
David Grzebinski (President and CEO)
Thank you, Andy. In our press release, we announced our third quarter guidance of $0.95-$1.10 per share, and for the full, full year, 2015, we slightly narrowed our guidance to $4.10-$4.35 per share. With respect to the inland market, our third quarter guidance reflects the assumed effects related to high water conditions in two separate closures of the Illinois River that we experienced in July, all of which are somewhat unusual for this point in the summer. We are assuming normal seasonal weather patterns for the remainder of the quarter, and that utilization remains in the 90%-95% range. With respect to inland pricing, we expect a similar trend as in the second quarter.
Although contract pricing has been impacted by uncertainty related to future barge movements of crude and condensate, since the second half of 2014, we believe the number of barges moving crude has fallen 30%-40%, and the industry has absorbed these barges and is still operating in the 90%-95% range. In the coastal market, supply and demand remain in balance, which is supporting higher pricing on term contracts. The decline in crude oil prices is not having the same impact on contract pricing in the coastal market that we have seen in the inland market. While some impact from lower crude prices is possible, demand for refined products, the sector's biggest product trade, continues to be quite strong. This is reflected in some recent macroeconomic statistics, including new record highs for refinery operating rates and total miles driven.
The coastal transportation portion of our business will be impacted by continued shipyard activity in the third quarter. For our diesel engine services segment, in our land-based sector, we expect the market to remain challenging for the remainder of the year, and our guidance does not include any substantial change from the guidance we provided earlier in the year. However, with the dip in the WTI, or West Texas Intermediate crude, below $50 a barrel here in late July, any recovery in the business has likely been pushed out further into 2016. As such, we continue to look at further cost reductions for this business in preparation for a more prolonged pressure pumping market downturn.
In our marine, diesel and power generation markets, we continue to expect this business to earn an operating margin in the low double-digit percentage range for the year, although we expect revenue and profit to be down slightly due to the weakness I mentioned in the Gulf of Mexico oil service market. For our full-year guidance, the difference between the low end and high end of our range is related primarily to inland marine transportation pricing. The low end of the guidance range also includes weaker than expected results in our land-based diesel engine business. As we've said in prior calls, while we expect 2015 earnings to fall below 2014, we expect our cash flow to remain strong.
We continue to invest our strong cash flow in maintaining our inland and coastal equipment, and we will continue to look for attractive opportunities to invest that capital, to invest the capital in our equipment or through potential acquisitions, or stock repurchases. 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. If you have a question, please press star and then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. And if you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Please note that questions will be reserved to one initial question and one follow-up question per person. Once again, if you have a question, please press star and then one on your touchtone phone. We have a question from Gregory Lewis from Credit Suisse.
Gregory Lewis (Oil Service Analyst)
Yes, thank you and good morning.
David Grzebinski (President and CEO)
Good morning, Greg.
Gregory Lewis (Oil Service Analyst)
David, as we think about the inland and the coastal businesses, I mean, both seem like utilization continues to be firm, but it seems like on the inland side, at least, pricing continues to remain under pressure due to a slowdown. It sounds like in the crude business. And I guess I'm just trying to understand why the same driver of crude is helping drive the coastal business higher. So if you could just sort of... It seems like the weakness in one isn't affecting the other.
David Grzebinski (President and CEO)
Yeah, yeah, I think it's the way crude's being moved around. But clearly, this overhang on the inland side is being absorbed. It's, as you heard, it's almost half of what it was a year ago. We've been absorbing the barges. So perhaps this, the pricing overhang that we're seeing with contract pricing mitigates itself with time. But on the coastwise business, as you recall, the larger moves there are refined products. And you can look at refinery utilization. It's running maxed out. You know, demand, we're seeing demand, end user demand for refined products is growing. I think vehicle miles driven is now at an all-time high. We've had five months in a row, I think, of strong uptick.
So, you know, the move around of the coastal business is still pretty robust. Now, you know, in our business, it's regional moves on the water, for the coastwise business, and that hasn't been displaced by some of the pipelines that you've seen in the inland sector that have come on. So, things are... It's just a little bit different market, if you will, Greg.
Gregory Lewis (Oil Service Analyst)
Okay. Okay, great. And then just as I think, as we think about, you know, you bought back some stock, you know, generally, it sounds like you're always weighing the ability to buy back stock and look at acquisitions. Has anything changed on the acquisition front in the last couple, over the last quarter? Is it kind of the same? Do we get the sense that, you know, with the weakness in the commodity price, there's potentially an opportunity in the medium term for acquisitions to start to surface, or are we kind of in this holding pattern?
David Grzebinski (President and CEO)
Yeah, as you know, it's difficult to predict acquisitions. But I'll just say this, you know, the choppier it is, the more difficult it is, the more likely you're able to get an acquisition at a reasonable price. So, you know, this period is probably more positive than it's been in the last several years because we've had a very, very strong upward price moving market. But you know, we may need more pain before we could get acquisitions, but we'll see. It's just so hard to predict. We're always talking to somebody, and there's always possibilities when... But we're gonna stay disciplined and see where that goes. Meanwhile, we've got the ability to buy back our stock, which clearly you saw we found attractive during the second quarter.
Gregory Lewis (Oil Service Analyst)
Okay, absolutely. Okay. Hey, thank you very much, and, and have a good summer, guys.
David Grzebinski (President and CEO)
Thanks, Greg.
Operator (participant)
We have a question from Jon Chappell from Evercore.
Jon Chappell (Senior Managing Director)
Thank you. Good morning, guys.
David Grzebinski (President and CEO)
Morning, John.
Jon Chappell (Senior Managing Director)
David, thanks for the commentary and a little bit more transparency on the pricing side. I guess what we're still trying to figure out is just the pace of the pricing pressure in inland. So is it possible to kind of compare, as that 30%-40% of the crude oil barges have entered the market, what the tone is, and maybe what the pace of contract declines look like relative to three months ago and six months ago?
David Grzebinski (President and CEO)
Well, six months ago, we were still flat on pricing. So, you know, three months, about the same as it was three months ago. Yeah, it's a little paradoxical because we're seeing contract, excuse me, spot prices above, contract prices, and we're essentially, you know, 90%-95% utilized in the industry. So it's, you know, contract prices should be going up right now. It's this hangover. It's a bit of an anomaly. And Joe will tell you, in, you know, his 35-40 years in this business, he's not seen this. Joe, you wanna make.
Joe Pyne (Chairman)
Yeah, I'll just comment on that for everybody. It's surprising to us that contract prices are going down while spot prices are, you know, slightly up from where they were, let's say, two months ago. And the gap seems to be widening. So why is that? And I think you know, to get pricing momentum on contract renewals, you need two things: You need equipment utilization to be at levels where they are today, but you need the belief that the market is gonna continue to improve and support those continued utilization levels. What's absent here is the belief that the market's gonna continue to improve.
And having said that, as David pointed out, we've had a lot of returns into other products of equipment that was dedicated to crude oil, and that equipment has been absorbed, and I frankly think will continue to be absorbed. And, you know, what you have in the market are operators that really don't like spot exposure, either because they're not equipped to, from an organizational perspective, to work in a more dynamic market, that are looking at rates that are still pretty acceptable, and they're committing their equipment for the next year at those rates. I think that, you know, once the market believes that the return of crude oil equipment is stabilized and it's being absorbed, I think then you'll see some pricing momentum going the other way.
Jon Chappell (Senior Managing Director)
That's very helpful.
David Grzebinski (President and CEO)
Yeah.
Jon Chappell (Senior Managing Director)
For my follow-up, I just wanted to ask about the shipyards a little bit and the capacity. What's the delivery schedule look like today in this kind of overhang type environment relative to the last couple of years? And with steel prices down, are the shipyards becoming more aggressive on their marketing? Is there a concern that even in a kind of softer price environment, there may be a rush to build and modernize the fleet?
David Grzebinski (President and CEO)
Yeah. No, the shipyard build, well, for 2015 is down probably on the order of 100 barges from what it had been last year. And, you know, most of those barges have been delivered. I know we've taken – we had, I think, 39 barges on schedule for delivery this year. We've already taken all, but I think four of them. And so the industry has taken much of the new build equipment already. And as I said, it's down this year quite a bit, you know, probably 30% off, 30% lower this year than it was last year.
And 2016, we haven't heard much at all about 2016's order book, but that's, you know, that generally doesn't happen until late summer, early fall anyway. So, you know, that's a positive. This market has maybe slowed down some of the building, and so we're pretty optimistic about that on the supply side of the equation.
Jon Chappell (Senior Managing Director)
Great. Thanks a lot for your... Thank you, Joe.
David Grzebinski (President and CEO)
Thanks. Thanks, Jon.
Operator (participant)
Our next question comes from Jack Atkins from Stephens.
Jack Atkins (Research Analyst)
Good morning, guys. Thanks for the time. So I guess, David, you know, when we think about spot pricing being above contractual pricing, typically, that's a good forward indicator of where contractual pricing is gonna go. And then, you know, we're call it 12 to, you know, maybe 15, 18 months away from an influx of volumes from this petrochemical expansion here in the United States. So, you know, I guess, as you look out over the course of the next year, year and a half, I mean, at what point do you think your customers are gonna wanna start locking in capacity for what will likely become a much more, you know, a much tighter market over the next couple of years?
David Grzebinski (President and CEO)
Yeah, that's a good question. The short answer is we don't know. But, clearly, you know, our customers have seen a big change in commodity prices, and they're adjusting their thinking, too, right? It's everybody's kind of resetting what's going on with the commodity prices and trying to adjust their thinking about sourcing and whatnot. So that could be part of what's going on in terms of a reluctance to term up things in the short term. Also, this view that maybe there's more equipment available later. Once, you know, as these crude barges, the barges moving crude and condensate continue to shrink, and that overhang goes away, you know, it'll become increasingly more obvious that we're gonna stay tight.
And as you say, we've got this petrochemical potential that's out there in a year or two that could add additional demand. But it's hard to pinpoint the timing, Jack. But directionally, I think what you're saying is right. It's demand's gonna continue to grow, and sooner or later, the barges that are no longer gonna move crude are gonna be... We'll reach an equilibrium. I think you'll always move some crude by barges, but it's just at what level?
Joe Pyne (Chairman)
Yeah, and David, just to add to your comment. So you, I mean, you are having conversations with customers about their future requirements. Those conversations have been ongoing for, you know, I think, the last quarter or two. But, you know, there are more to come. It's not that you're, you know, not talking to people, you're talking to people about their requirements. But the requirements are, you know, far enough in the future that they're not willing to begin to commit to equipment.
Jack Atkins (Research Analyst)
Okay. That makes sense. And then, you know, David, I guess when you think about the Jones Act tanker market, you know, seems like the build rates in the Jones Act tanker market are actually pretty significant over the next couple of years. Would you guys be willing to share sort of your thoughts on the potential impact that could have to your, you know, your coastal barging business? You know, it seems like those are two very different types of assets, but I'd be very curious to know if you think that could impact what you guys are doing there.
David Grzebinski (President and CEO)
Yeah. No, no, you're, you're, you're correct, Jack. They're two very different types, types of assets. You know, our barges, you know, we go from 30,000 barrels up to 185,000-barrel in size, in our barges. And the tankers, the MR tankers are, you know, 330,000 barrels. So, it's quite a bit different in size and the access that the tankers versus the barges have in terms of customers, docks, and unloading and tankage facilities. So by and large, the barge business, the coastwise barge business, is regional in nature.
So we could be on the East Coast, going from Delaware Valley up to the New York area, or West Coast, so Washington, between Washington and San Francisco, for example, and then the Gulf Coast, could be as simple as Houston to New Orleans or Corpus to Houston. Very regional in nature. The MR tankers, you know, they're ships. They're built to go faster and carry large volumes, so their most economic moves are the long-haul moves. For example, Corpus Christi to the East Coast, to you know, one of the refineries up in the Delaware Valley, where typically we wouldn't play in that type of move. So it's a different market. You are right, there are a number of MR tankers coming out in the next year or two, and but it is a completely different market.
Jack Atkins (Research Analyst)
Okay, great. Thank you, David. And one quick housekeeping item. And, Andy, I noticed that, you know, that taxes in the marine segment on, other than on income, took a step up. Could you maybe help us sort of dig into what's driving that? And also, what's the go-forward share count we should be using?
Andy Smith (EVP and CFO)
Yeah, the taxes went up. It's the waterways use tax, which went into effect in April, which, you know, it ends up on our taxes other than income line, but that's a pass-through. So it did go up, but that's, it's not a profitability issue.
Jack Atkins (Research Analyst)
Okay.
Andy Smith (EVP and CFO)
On share count going forward, for the year, we're projecting, you know, sort of the share count will be a 55 million number.
Jack Atkins (Research Analyst)
Okay. Okay. Thank you, guys.
Andy Smith (EVP and CFO)
Yep.
David Grzebinski (President and CEO)
Thanks, Jack.
Operator (participant)
We have a question from John Barnes from RBC Capital Markets.
John Barnes (Managing Director and Senior Research Analyst)
Hey, thanks for taking my question. Dave, going back to your comments on the shipyards, just one point of clarification. When you said the shipyard for 2015 was down 100 barges, you're talking entirely on the liquid side, correct?
David Grzebinski (President and CEO)
Yeah, that, that's the liquid inland barge build.
John Barnes (Managing Director and Senior Research Analyst)
Okay. All right. Very good. Thank you. A couple of things here. Number one, you talked about acquisitions on the marine side of the business. You know, obviously, you guys do a pretty good job of buying at the trough. I would argue that the land-based diesel business is clearly getting close to a trough. Could you talk a little bit about maybe an appetite there for potential acquisitions, maybe try to grow that business a little bit through acquisition and scale it up even, you know, even given the volatility it's seen?
David Grzebinski (President and CEO)
Yeah. I think on that business, as we've seen it, it's very volatile. And before we do any consolidating moves, and I'm not sure we would in that space, we wanna get to where our costs are much more variable and where we can scale that business up and down quicker. And until we are comfortable with that, you know, I think we'd stay away from acquisitions in the in that land-based pressure pumping business. That said, you know, we're working on our facilities and our scalability in that business. And rights, not rights, I think, because that's a that sounds wrong, but more enhancing our ability to scale up and down as demand moves around there.
John Barnes (Managing Director and Senior Research Analyst)
Okay. All right, very good. And then maybe going off the back of a prior question, you know, talking about the outlook on the petrochem side, and you guys elaborated to it, you know, with the lower feedstock cost and being in net positive for your customer base. You know, you've got the shipyards producing less this year. You've got the industry taking or potentially retiring more than they're taking. I mean, you guys are even talking about being down slightly on a total capacity amount this year. I know it's modest, but, you know, as you view maybe some slowdown in capacity growth versus what's coming on the volume side from this petrochemical build-out, you know, how long do you think the industry could be at a capacity deficit? You know, and how long would it take?
What do you think is the likelihood of the timing of correcting that? Is it a multi-year period in order to catch back up if they get behind? Or, you know, is it something that could be, can be righted relatively quickly?
David Grzebinski (President and CEO)
Yeah, I think, you know, the shipyards have proven that, you know, they can ramp up and build capacity. I would just say that, you know, this chemical build-out is long-term in nature. You know, these plants are gonna come on, you know, starting late next year and through 2020. And so, you know, hopefully, we don't overbuild in anticipation of that, and then the addition of these chemical plants is ratable enough where the market will be rational and supply and demand will stay, you know, in good balance. You know, we're pretty tight now, so, I think this pause that we have is good because it sets up the next upside for pricing which could start, you know, it's hard to predict that, but certainly, the onset of these new chemical plants could help facilitate that next step up in the long-term pricing cycle.
John Barnes (Managing Director and Senior Research Analyst)
Okay, all right. And then lastly, on the share buyback, we saw in the quarter, you know, the debt levels were slightly elevated. Your debt to, you know, debt to cap was up a little bit. You still have, obviously, a tremendous amount of runway on that, you know, on that metric alone. It seemed to us like, you know, maybe some of that, you know, incurrence of debt was, you know, partly to fund, you know, the buyback. You know, given where the stock is, you know, the fact that you've kind of dipped your toe in on, on buyback activity, you know, do you—are you comfortable levering up the company to be more aggressive at that if it does take longer to find, you know, maybe some acquisition targets on the marine side?
I mean, how comfortable are you, you know, in maybe taking on some debt, given where, you know, it seems to us like the stock price today, you know, maybe your own stock is the most appealing investment at this point?
David Grzebinski (President and CEO)
Yeah, no, it clearly we've got a lot of balance sheet capacity and have no problem using that balance sheet. You know, so far, this you saw, I think, the statistics Andy gave in the second quarter, our debt was at-
Andy Smith (EVP and CFO)
Down.
David Grzebinski (President and CEO)
Was actually down $11 million from the first quarter. Now in July, we bought back a nice slug of stocks that took it back up a little bit. But typically, in our cash flow generation cycle, the second half is the strongest in terms of our cash flow. So, you know, we've got plenty of cash flow. As you saw, we liked our stock where it was priced, and we always have that option. You know, we're not gonna foreshadow exactly what we're gonna do, but, you know, clearly, we're not shy about using our balance sheet.
John Barnes (Managing Director and Senior Research Analyst)
Very good. Thanks for, thanks for the time today. Appreciate it.
David Grzebinski (President and CEO)
Yeah. Thank you, John.
Operator (participant)
We have a question from Kelly Dougherty from Macquarie.
Kelly Dougherty (Research Analyst)
Good morning, guys. Thanks for taking the question. Apologies to keep harping on this pricing thing, but, you know, just, I think you've mentioned previously that the contracts with your largest inland customers didn't really come up for renewal in 2015. And I know it's early, but maybe you can help us think about how much of that revenue does come up for renewal in 2016. And if you've had any early talks with those customers, either are they maybe trying to revisit it early because they see what's pricing is happening now, or have they given you kind of any indication of where they're thinking about for next year? Just trying to get a sense of, you know, whether you expect pricing to kind of stabilize and flatten into 2016, or maybe move higher, or, you know, maybe it's just too early to make a directional call even?
David Grzebinski (President and CEO)
Yeah, it's too early to make a directional call on 2016, but if we stay high, tight like we are, it could be positive. I would say this, you know, every customer is a little different, and every contract's a little different, and you approach each one a little different in terms of talking about it. But we're, you know, we're talking to our customers all the time. So when we have contract renewals, you know, we're talking about how that's gonna look and talking with them about their future needs as they change. Their needs change all the time. So it's not a, you know, a bright line kind of walk in the door, okay, now it's the contract thing. It's more of a process, as you would expect.
You know, we've got long-term relationships with these customers that are really just codified by this contract. These are relationships of helping them and providing them a service. So it's not a bright line item. But we do, to your point, have some renewals coming up in 2016 and 2017. You know, we're already in discussions with customers about how that might...
Kelly Dougherty (Research Analyst)
Is there a concern that, because, and correct me if I'm wrong, I don't, I don't think any of the kind of the big ones renewed in, in 2015, is there a concern that there's gonna kind of have to be a, a catch up for, I don't know if you want to put it this way, but maybe what they missed, you know, on the downside in 2015? Or do these contract renewals kind of really just kind of typically revolve around whatever the market is looking like, you know, at the time that you're renewing them?
David Grzebinski (President and CEO)
Most of our long-term contracts that are multi-year in nature, well, all of them have escalators. So by and large, the contracts kind of keep up with what the market pricing is. So there's-
Kelly Dougherty (Research Analyst)
Okay.
David Grzebinski (President and CEO)
There's not usually a big... You can have some catch up or give back in any one renewal, but it's generally not a huge remarking of price.
Kelly Dougherty (Research Analyst)
Okay, no, that's helpful, just as we think about next year. And then, I guess, as a follow-up, given some of the uncertainty and on the pricing side, have you started to see higher than normal retirement, just through the industry of older barges that maybe were kept in service just because pricing was so good for so long? Any way to quantify maybe that, the overall impact on capacity, and is that what we've seen helping keep utilization higher than, you know, maybe it would be given where the pricing looks to be going?
David Grzebinski (President and CEO)
It's hard to tell what's been retired and what's not being marketed. We get a sense for that annually when Informa does a little industry survey, and we get a sense for what's been retired. It's very difficult for us to determine kind of on a real-time basis what's been retired or what's kind of laid up waiting for retirement. We do know our retirements, and you know, we're retiring as per our kind of schedule. You know, I would imagine that retirements will be up this year versus where they've been the last three years. But we don't have real-time data on that, Kelly.
Kelly Dougherty (Research Analyst)
Okay, great. Just one more related to that, then if I can. Is there any way to think about your utilization? That's obviously remained very high. Any sense you have for what the industry overall might be, you know, closer to what the industry utilization levels might be?
David Grzebinski (President and CEO)
Yeah, we think they're similar. We think they're in our, the same range where we are.
Kelly Dougherty (Research Analyst)
Okay, great. Thanks very much, guys.
David Grzebinski (President and CEO)
Thank you, Kelly.
Operator (participant)
We have a question from [Donald Broughton from Wells Fargo].
Speaker 13
Good morning. You touched upon this briefly and mentioned this during your last call, that you're cutting costs, reducing staffing in the DES unit. To what extent is that cost rationalization complete, and what is the potential to further cut costs on either DES or the inland transportation business units?
David Grzebinski (President and CEO)
Yeah, no. Thanks, Donald. You know, we took out over 40% of our manufacturing labor kind of early in the year. We've been taking out more costs, but it's been more of a, you know, not a broad base to kind of reduction in force. It's been more attrition related as well as, as you know, consolidating some functions. We're gonna continue to look for opportunities like that. What you don't wanna do is get rid of really high-skilled mechanic labor, for example, to use that as an example, and not be able to respond to the customer needs when business starts to pick back up. There is a skill set that you, a core skill set that you've got to have. So it's a balance.
I would say we're in that kind of balance phase, keep looking for ways to take out costs, rather than wholesale kind of reductions in force. On the inland side, again, we're constantly looking at our cost structure and taking costs out where we can and where it makes sense.
Speaker 13
Right. And with that, I mean, generally, the age at which you look to scrap ton, as you mentioned during the last question, actually, that really you're still on schedule. Are you beginning to look at maybe a slightly lesser age at which you scrap tons, or generally, you're still consistent with where you've always been?
David Grzebinski (President and CEO)
Yeah, no, it's typically on an inland barge, it's around 35 years on average, 30-35 years when you start to scrap it. You know, we do everything kind of on a case-by-case basis. You look at the condition of an older barge, you look at what its earnings opportunities are and what it might cost to extend its life through another shipyard. And frankly, we do a DCF calculation and make sure we can earn back our capital if we spend on extending the life. And you got to believe that, you know, that rationality exists throughout. So if the cost of extending can't get paid back, you'll see more retirements. I think you may see more retirements here, given this pricing environment we've recently had.
Speaker 13
Right. And just one last follow-up on the dry docking. I mean, have dry docking costs generally gone down as you've seen the steel prices come in, or are they relatively consistent?
David Grzebinski (President and CEO)
No, I mean, clearly, there's a steel component. You've seen steel prices down 20%-25%. So, you know, that's usually a pass-through from the shipyards. So, yeah, that's reflected in when we go in to do, to replace steel or whatnot, we get kind of the prevailing steel prices. And obviously, when we build new construction, particularly on these new four ATBs we're building, there are steel escalators and de-escalators in there based on how steel prices move and the procurement schedule with the shipyard has. So yes, as prices come down in shipyards with steel price, but, you know, the labor component and others, I think are pretty consistent. I don't think they've changed materially.
Speaker 13
All right. Well, appreciate the call, gentlemen. Have a good summer.
David Grzebinski (President and CEO)
Thank you, Donald.
Operator (participant)
We have a question from Steve Sherowski from Goldman Sachs.
Steve Sherowski (VP of Equity Research)
Hi, good morning. Apologies if I missed this earlier, but of the inland barges that are still in crude and condensate service, and this is at an industry level, do you have any sense for what percentage is in light versus heavy crude service? And I'm just trying to get a better sense of how much of the existing capacity can still be relatively inexpensively repurposed to serve different product types.
David Grzebinski (President and CEO)
Yeah, don't have a definitive percentage. You know, the Eagle Ford crude is more is lighter. Some of the Marcellus and Utica crude is lighter. So those, that's probably a good portion of the barges. So, those barges could be cleaned up fairly easily. I think, you know, the heavier crudes coming from Canada and stuff, those are a little harder to clean up. But in terms of a percentage, I don't have a percentage for you, but I would say that, you know, it's reasonably fungible to clean those barges up and put them back into service.
Steve Sherowski (VP of Equity Research)
Gotcha. Okay. And then, looking at longer term, I know that there's a large Bakken pipeline in development that would deliver crude into Nederland in East Texas. And there continues to be talk about Capline being reversed, which would deliver crude into the Louisiana Gulf Coast refinery market. I know that your crude volumes in the inland segment are now pretty small. I'm just trying to get a better understanding of what the risks are or even potential opportunities this poses to your coastal business since these locations represent a fairly large waterborne delivery points, and I recognize it's probably more Louisiana than East Texas.
David Grzebinski (President and CEO)
Yeah, I'm not sure it would be much of a risk. You know, most of the inland moves from the upper river down to the Gulf Coast have gone away anyway with the Flanagan South and Seaway pipelines. You know, while Bakken, more Bakken down to the Gulf Coast would put more liquids into the refineries down there, which, you know, the more liquids you have, generally, that means more barge movements. Now, on the coastwise, you know, if that Bakken doesn't go by unit train to the East Coast, for example, to the Hudson, you may see some of those moves change.
There are some barge moves that come down from Albany down into the New York refinery area or all the way down to the Delaware Valley area. But those refineries are gonna have to source crude from somewhere, and if it doesn't come from the Bakken down the Hudson, for example, even if it comes in from abroad on Brent on a tanker, those tankers can't get into most of those docks, and you'll have barges that are lightering the crude and taking it into those facilities. So, I don't know if I've answered your question, but not particularly worried about risks with that new pipeline that you're asking about. But you know, there can always be transportation shifts that happen because of those new pipelines. You know, sometimes it's difficult to predict exactly how everything will shift around.
Steve Sherowski (VP of Equity Research)
Gotcha. That's helpful. Thank you.
David Grzebinski (President and CEO)
Thanks, Steve.
Operator (participant)
Our next question comes from Ken Hoexter from Merrill Lynch.
Ken Hoexter (Managing Director)
Great. Good morning. Hey, Dave and Andy, if you can talk a bit about ton-miles were down 3%, ton-miles per barge dropped 7%, yet utilization was in 90-95%. Can you contrast that a bit? Is that a mix shift, or maybe talk about what's going on there and if that's impacting pricing as well?
Andy Smith (EVP and CFO)
No, that really hasn't impacted pricing. It's just a mix shift. And, you know, as you know, those, you know, sort of revenue per ton-mile can sort of move around quite a bit. You know, some of it has to do with, you know, in ton-miles, specifically, some of it has to do with delays and weather and again, where everything's working, but it's really just a mix shift.
Ken Hoexter (Managing Director)
So, just a couple of rapid fire ones, but the barges, you mentioned that remaining crude, I think, Dave, you mentioned 40% have swapped over already. Can you talk about how much you think are still left on the crude trade and could come back in?
David Grzebinski (President and CEO)
Yeah, sure. We think late last year we were around 550 barges. I think right now we think it's... Again, we don't have perfect information here, as you know, this is our estimate, but we think it's somewhere between 325, maybe to 350, 375, still in crude service.
Ken Hoexter (Managing Director)
Okay. And then-
David Grzebinski (President and CEO)
That's, that's, you know, so call it, call it 350 on a. Now, I don't think all of those barges would ever come out, completely out of crude service. So, but that's the order of magnitude of, of the number of barges remaining.
Ken Hoexter (Managing Director)
Thanks for that. And Andy, on the coastal, can you walk through the impact of dry docking for the quarter? Was it about $16 million in revenues, and what's to come in the third quarter?
Andy Smith (EVP and CFO)
You mean, you're talking about the shipyard?
Ken Hoexter (Managing Director)
Sorry, yes.
Andy Smith (EVP and CFO)
In terms of revenue, you know, the revenue was probably off. I wouldn't say it was $16 million. It was probably a little less than that. And going forward into the third quarter, it'll probably be a pretty similar-looking story. You know, a lot of the revenue decline that you're seeing in the coastwise business was due to the fuel effect. There is a little bit of coast, there is a little bit of dry docking in there. But in general, dry docking probably ended up sort of falling down to the bottom line. You know, I would, you know, say it was probably during the quarter, it was a $2-$3 million number in terms of shipyards.
Ken Hoexter (Managing Director)
Wonderful, helpful. And I guess for the bigger picture follow-up, I guess if your ton-miles don't make the difference, and that was a mix change, as you answered before, yet utilization is still 90%-95% on the inland, why do you see pricing coming down mid-single digits? Is it more, I just want to understand this, going back to what you said originally. Is it more just the perception of the, whether it's the crude barges coming in or the perception of excess capacity versus what you're actually seeing if utilization stays in that range? Just because if utilization doesn't move, what forces that pricing move down? Usually, when utilization comes down, that's when you free up on the pricing side.
David Grzebinski (President and CEO)
Yeah, I think, Ken, it's the combination of a number of things. One, as Joe mentioned, it's the perception of the customers that there may be more availability later, one. Two, it could be, if you're a, just to use an example, an MLP, and you've just got, just had 15 crude barges returned to you, you know, an MLP wants steady kind of predictable cash flow. They just say, "Hey, look, let's just take a discount. We're still at a pretty good rate. Let's just take a discount and put them to work for another year." Or you could, same token, it could be a private individual who says, "Well, you know, that's still a pretty good rate. I'm not gonna fight it.
I don't have a sales force out there, you know, pushing, pushing barges and, and helping customers every day. It still supports my lifestyle. I'll just take a little haircut and put them away for, for a year." So there's a lot of that dynamic going on as these crude barges are returned, so it's, it's put kind of a, kind of this downward pressure on contract prices. But when the customers start to look for barges, kind of one-off, and they, they find that the, the market's pretty tight, and, you know, that's why spot prices are going up. So it, it's, it's got a. They're gonna come together at some point.
Andy Smith (EVP and CFO)
Hey, hey, Ken, real quick, just to clarify my comment as well. I you know, those shipyard numbers that I gave you were sort of incremental to last year, so that's kind of over and above what we have seen in the past.
Ken Hoexter (Managing Director)
Thanks for the time, guys. Appreciate the insights.
Operator (participant)
We have a question from Kevin Sterling from BB&T Capital Markets.
Kevin Sterling (Managing Director and Equity Research Analyst)
Good morning. Good morning. Thank you, gentlemen, for your time. And David and Joe, I really do appreciate all the color you give on pricing. It's very helpful, and particularly Joe, with all your experience. But can I, I don't want to beat a dead horse here, but I'd like to ask the pricing question, take a different angle and go at it a different way. Do you think the recent increases seen in spot pricing, do you think some of that might be weather related, particularly with high water, shortening tows, et cetera, may have temporarily pushed up the spot pricing? Or do you think the spot pricing increase we're seeing now is a little more sustainable? So I'd just like to get your insights into kind of maybe what's been driving spot pricing higher. Has it been weather related?
David Grzebinski (President and CEO)
Yeah, that, that's a good question. It certainly, some of that happens because, you know, as weather and lock delays and, the Illinois closed. It does put some artificial demand. Artificial is probably the wrong word, but it does reduce the barge availability, which makes the market tighter. So there is some of that. You know, but as summer goes on, summer is always better than the winter in terms of the impacts of weather, and you still stay pretty busy. It's good. But to your point, July was a rough weather month, and you know, that did help tighten up the market a little bit. But I would still say that the demand is out there for barges, and it's still pretty tight.
Yeah, yeah. Kevin, I'll just from a historical perspective, you typically see utilization deteriorate during the summer, but it doesn't affect earnings because you're operating so much more efficiently. So you know, you kind of go into the summer, utilization ticks down a little bit, then you get to the fall, it ticks up, ticks up a little bit, and you know, the earnings are about the same. And the reason they're about the same is really efficiency versus kind of the rate impact of increased utilization. Increased utilization typically drives rates up. You know, this summer has been a pretty messy summer in terms of delays. But, you know, as you get into the fall, I think that, you know, the natural delays of, you know, kind of tougher weather will continue to keep utilization pretty high.
Kevin Sterling (Managing Director and Equity Research Analyst)
Gotcha. Thank you, Joe and David. That's very, very helpful. And let me come at it a different way, too, on the contract side of pricing. And correct me if I'm wrong, if I'm not mistaken, most of the new equipment that have been built and put in the crude trade were 30,000-barrel barges. And as those have been repurposed and put into other trade, you know, while it's more barges, but effectively, it's a lot more capacity on a per barrel basis. So is that kind of impacting shipper sentiment as they look and see, you know, yes, it's more barges, but on a per barrel basis, it's a lot more capacity on a per barrel basis. Is that having some impact on the contract pricing being weak?
Joe Pyne (Chairman)
Yeah. I don't think it's so much the shipper sentiment. I think the shipper is just taking advantage of operators who are willing to give them equipment at lower rates, because, you know, the rates are still pretty good, and they just don't want to fight a much more dynamic spot market. You know, I think what's encouraging is the point that David keeps making, and that is that, you know, you had all this equipment in crude oil service and suddenly we're getting it back, but utilization is still in the 90%-95% range, so it's being absorbed.
Kevin Sterling (Managing Director and Equity Research Analyst)
Gotcha. Okay. Thank you so much, and have a great day. And by the way, I like the functionality and aesthetics of your newly redesigned website. Looks great. Thank you.
David Grzebinski (President and CEO)
Thanks.
Andy Smith (EVP and CFO)
Was that just for Sterling?
Kevin Sterling (Managing Director and Equity Research Analyst)
It was, yes. He did a very good job with that.
Sterling Adlakha (Head of Investor Relations)
I think you're expressing a widely held sentiment there, Kevin. Operator, I think that's all the time we have.
Operator (participant)
Thank you, sir. At this time, I would like to turn the call back over to you for any closing remarks.
Sterling Adlakha (Head of Investor Relations)
We appreciate your interest in Kirby Corporation and for participating in our call. If you have any additional questions or comments, you can reach me directly at 713-435-1101. Thank you and have a nice day.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.