Kirby - Q4 2014
January 29, 2015
Transcript
Operator (participant)
Welcome to the Kirby Corporation 2014 Q4 Earnings Conference Call. My name is Ellen, and I will be your 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 will now turn the call over to Sterling Adlakha. Sterling, you may begin.
Sterling Adlakha (Head of Investor Relations)
Thanks, Ellen, and thank you all for joining us this morning. With me today are Joe Pyne, Kirby's Chairman; David Grzebinski, Kirby's President and Chief Executive Officer; and Andy Smith, Kirby's Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirbycorp.com in the Investor Relations section under Non-GAAP Financial Data. 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, 2013, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman and CEO)
Thank you. Thank you, Sterling, and good morning. Yesterday afternoon, we announced our fourth-quarter earnings of $1.19 per share. That compares with $1.13 per share reported for the 2013 Q4, and is at the upper end of the revised guidance range we provided in December of $1.10-$1.20 per share. For the year, we achieved our fourth consecutive year of record earnings of $4.93 per share, compared with $4.44 per share in 2013. Our 2013 results also included a $0.20 per share benefit from reducing the earn-out liability associated with the acquisition of United Holdings. During the 2014 Q4, our marine transport...
Our marine transportation, inland and coastal tank barge fleets experienced healthy levels of demand across all markets and high equipment utilization levels. In the coastal market, pricing increases remained good. In the inland market, despite some pressure on spot prices, we continued to be very busy. As I stated, on our guidance call in December, the steep decline in energy prices over the past three months is frankly good for the economy and should translate into more petrochemical and refined product demands and volumes, which we will be able to move. U.S. petrochemical business continues to remain globally advantaged, which has spurred an unprecedented level of new plant construction.
We expect to see substantial increases in domestic petrochemical production over the next several years from these new petrochemical facilities. In the crude oil and condensate markets, lower oil prices could lead to a decline in volumes.
Customers continue to view the real or perceived loss of this volume as a reason to resist in the marine price increases, particularly since prices are already at historically high levels. Heightened uncertainty has also given some carriers pause when attempting to achieve higher pricing, particularly for equipment in the spot market. With respect to Kirby, we have been very selective concerning whom we work for in the crude and condensate markets. Only about 6% of our inland equipment is dedicated now to carrying these products, and all of it is under contract. As the market attempts to decipher how this will all sort out, Kirby is in an ideal position with its strong investment-grade rated balance sheet, strong cash flow, and strong contract base to take advantage of uncertainty.
Periods of uncertainty create opportunities for us, and we will look to put capital to work, which will include buying back our stock. In our diesel engine service business, our marine diesel engine and power generation business performed well with healthy levels of demand in most of its markets. With respect to our land-based diesel engine service business, it had a good year-over-year growth due to higher levels of demand for oil service equipment, including the sale of new and remanufactured pumping units. As we mentioned in our December call, customers have pushed out order deliveries, and we have continued to receive cancellations. Over the course of the year, we expect this business to represent less than 5% of our 2015 EBITDA.
From a strategic standpoint, we continue to emphasize in this business growth in the remanufacturing of part of the business to help dampen the volatility of future oil and gas cycles. We remain committed to improving our capabilities and stabilizing this part of the business. I'll now turn the call over to David.
David Grzebinski (President & COO)
... Thank you, Joe, and good morning, everyone. In the Marine Transportation segment, during the Q4, our inland marine business continued its overall strong performance, with equipment utilization in the 90%-95% range. We did experience some adverse weather conditions along the Gulf Coast that impacted our Q4 performance. Long-term inland marine transportation contracts, those contracts with a term of one year or longer, contributed 80% of the revenue for the Q4, with 55% attributable to time charters and 45% of freight contracts. Pricing on the inland marine transportation term contracts that renewed in the Q4 increased on an average at low single-digit levels when compared with 2013 Q4. However, as Joe mentioned, pricing momentum slowed towards the end of the quarter due to the drop in crude oil prices.
Consequently, in the latter part of the Q4 and into the Q1 of this year, pricing has been flat, and spot contracts, which include the price of fuel, have narrowed toward term contract rates. Moving on to our coastal marine transportation sector, equipment utilization remained in the 90%-95% range. During the Q4, approximately 85% of coastal revenues were under term contracts, compared with approximately 75% for the 2013 Q4. Demand for the coastal marine transportation of refined products, black oil, and petrochemicals remained very strong. With respect to coastal marine transportation pricing, term contracts that renewed during the Q4 increased in the mid-single digit range when compared with the 2013 Q4. Spot contracts continued to improve sequentially during the Q4 and remained above term contract rates.
In our diesel engine services segment, our marine, diesel, and power generation markets experienced stable demand. The land-based diesel engine service market benefited from strong demand for new parts and equipment prior to the steep decline in oil prices that began to accelerate in late November. We continue to expect market headwinds in this business with oil prices below $50 per barrel. But as Joe mentioned, the EBITDA contribution from this business remains relatively small in relation to our total EBITDA. During the Q4, we also took advantage of a significant pullback in the price of our stock to initiate a share repurchase program. Since beginning the buyback program in mid-December, we have repurchased $100 million worth of stock, or approximately 1.3 million shares, at an average price of around $79 a share.
You'll also note that in our press release last night, we announced that our board has approved the addition of 2 million shares to our existing authorization, which brings our current unused authorization to 3.685 million shares. I'll now turn the call over to Andy to provide some financial details, and I'll come back to discuss our outlook.
Andy Smith (EVP and CFO)
Thanks, David, and good morning. In the 2014 Q4, Marine Transportation segment revenue declined 1%, and operating income declined 3% as compared with the 2013 Q4. The inland sector contributed approximately 70% of marine transportation revenue in the Q4, with the coastal sector contributing approximately 30%. Our inland sector generated a Q4 operating margin in the mid- to high-20% range, and the coastal sector generated an operating margin in the mid-teens. Overall, the Marine Transportation segment's Q4 operating margin was 24.3%, compared with 24.8% for the 2013 Q4. The decline in the Marine Transportation segment revenue in the Q4, as compared to the prior year, was primarily due to a 13% decline in the average cost of marine diesel fuel.
The cost of fuel is passed on to our customers through our contracts, but is included in our revenue. Both revenue and operating margin were negatively impacted by the change of a bunkering contract, which we mentioned on our Q3 conference call, as well as poor operating conditions that restricted inland barge movements along the Gulf Intracoastal Waterway. As a reminder, approximately 75% of our inland marine revenue is generated from operations along the Gulf Coast, so delays in this area of our business tend to have a more significant effect on our results. In our offshore market, we experienced a seasonally normal decline associated with the cessation of winter operations in Alaska. Overall, inland marine delay days were down 11% as compared to the 2013 Q4.
Better weather and good lot conditions on the Mississippi River and tributary systems led to the decline in delay days and a 16% year-over-year increase in ton-miles, which, as inland revenue, was little changed from the prior year, drove a 15% decline in revenue per ton mile. During 2014, we took delivery of 61 new tank barges with a total capacity of approximately 1.1 million barrels. We retired 33 inland tank barges and returned 5 leased barges, removing 580,000 barrels of capacity. The net result was an addition of 23 inland tank barges to our fleet, constituting a net increase of approximately 500,000 barrels. Of the 61 inland tank barges delivered, 37 were 10,000-barrel barges and 24 were 30,000-barrel barges.
In 2015, we expect to take delivery of nine 30,000-barrel inland tank barges and 30 10,000-barrel barges, including retirements, we expect to add net capacity of approximately 400,000 barrels over the course of the year, leading to year-end capacity of approximately 8.2 million barrels versus 17.8 million barrels at the end of 2014. In the coastal sector, construction of our four coastal articulated tank barge and tugboat units is proceeding as planned, with the first unit, a 185,000-barrel, 10,000 horsepower ATB, expected to be delivered and in service in the 2015 Q4.
We continue to expect the first new unit to deliver in the fall of 2015, followed by deliveries roughly every six months thereafter until the fourth unit is delivered by mid-2017. As we have previously announced, the first two units are already committed to operate under multiyear customer contracts. Moving on to our diesel engine services business. Revenue for the 2014 Q4 increased 79%, and operating increased 173% compared with the 2013 Q4. The segment's operating margin came in at 5.4%, compared with 3.5% for the 2013 Q4. The marine and power generation operations contributed approximately 25% of the diesel engine services revenue in the Q4, with an operating margin in the high single digits.
Our land-based operations contributed approximately 75% of the diesel engine services segment's revenue in the Q4 at a mid-single-digit operating margin. The year-over-year improvement in this business was driven by demand for the sale of parts, engines, and transmissions, as well as orders for new pressure pumping units. As David mentioned, order cancellations and customers' requests to delay projects negatively impacted the performance of this business in the latter part of the quarter. In addition, the operating margin was weaker than expected, primarily as a result of production inefficiencies related to supply chain issues and difficulties adding qualified, productive labor. On the corporate side of things, our cash flow remained strong during the quarter, which helped to fund our marine equipment construction plans and the $100 million stock repurchase program, which we completed yesterday.
As such, our 2015 earnings per share guidance is based on approximately 56.2 million shares outstanding as of today. With respect to any further repurchases, we will continue to evaluate all available potential uses of capital. Any future decision to repurchase stock will be based on a number of factors, including the stock price and our long-term earnings and cash flow forecasts, as well as the alternative opportunities available to deploy capital, including acquisitions, capital equipment investment, and debt paydown. David will discuss our outlook, but I want to briefly address some aspects of our 2015 earnings per share guidance.
Our expectation in our 2015 guidance is that we will continue to see mid-single-digit pricing in our coastal market, and that our inland and coastal utilization, including the capacity additions in 2014 and those expected in 2015, will remain in the 90%-95% range. Offsetting those increases is our expectation for modest pricing pressure in the inland fleet, the significant decline in the land-based diesel engine services business due to the decline in oil prices, and a year-over-year increase of $0.15 per share for pension expense and $0.24 per share for increased depreciation and amortization, largely related to the aforementioned capacity additions and capital upgrade expenditures in 2014.
Our 2015 capital spending guidance is currently in the $300 million-$310 million range, including approximately $75 million for the construction of 39 inland tank barges and 3 inland towboats expected to be delivered in 2015, and approximately $85 million in progress payments on the construction of the new ATBs. The balance of $140 million-$150 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 at December 31st was $717 million, a $32 million reduction from our total debt of $749 million on December 31st, 2013. As of today, our debt stands at $778 million. Our debt-to-capital ratio at the end of 2014 was 24%, compared with 27% as of December 31st, 2013. I'll now turn the call back over to David.
David Grzebinski (President & COO)
Thank you, Andy. In our press release, we announced our 2015 Q1 guidance of $1.05-$1.15 per share. This compares with $1.09 per share earned in 2014 Q1. For the 2015 year, we issued guidance of $4.50-$4.70 per share, compared with $4.93, earned this year in 2014—or excuse me, last year in 2014. Our Q1 guidance assumes normal seasonal operating conditions in our marine transportation markets and continued strong coastal market dynamics with higher term and spot contract pricing. In our inland markets, our guidance assumes that utilization will remain in the 90%-95% range, and that there may be some potential price weakness as the year progresses.
We have seen spot prices come down to contract levels and, on occasion or two, dip below those levels. Consequently, we are being cautious with our 2015 price expectations. For our diesel engine services group and our land-based business, given the crude oil environment and announced oil field capital spending reductions, we expect to see a significant year-over-year decline, as well as sequential declines in earnings throughout the year. We remain focused on servicing our customers, executing on the backlog we have, and on cutting costs.
Both our Q1 and full year guidance assumes our diesel engine services, marine and power generation markets will remain stable. The difference between the low end and high end of our guidance range is related to the activity level in the land-based diesel engine services business and our ability to execute on those projects in backlog, as well as how utilization and pricing trends in the inland marine transportation market progress. While our 2015 earnings guidance is lower than 2014, we expect our cash flow to remain strong. As Andy mentioned, our 2015 guidance includes an increase in pension expense, which, as we know, moves around year to year, and increases in depreciation and amortization, which are non-cash charges. So depending on working capital levels, our operating cash flow may exceed 2014.
our operating cash flow in 2015 may exceed 2014 levels, which, combined with lower CapEx, could provide additional free cash flow for potential acquisitions and other opportunities, as well as share repurchases. In summary, as Joe mentioned, 2014 was our fourth consecutive year of record earnings at Kirby. Our balance sheet is strong, and our debt to total capital ratio is 24%. As I mentioned, we expect our cash flow to continue to grow in 2015. As such, we remain very well positioned should any market weakness or disruption open up good investment opportunities, including acquisitions and share 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, then one on your touchtone 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. We ask that you please limit yourself to one initial question and one follow-up question. Once again, for any questions, press star, then one. The first question is from Kelly Dougherty with Macquarie. Please go ahead.
Kelly Dougherty (Research Analyst)
Good morning, guys. Just a few questions on pricing, because it seems to me that it's really more pricing as opposed to volume that seems to be your biggest concern for the share, if I'm hearing that right. So I just wanted to see what you mean when you mentioned, I think, in the release, that customers are testing rate levels. Are they trying to renegotiate current contracts, or is that just applicable to contracts that are up for renewal? And just what you mean by an expectation for modest pricing pressure in inland. I think you were previously talking about kind of inflationary levels, and just wondering if you're thinking that prices are actually going to decline. So just wanted to see what was built into the base case of guidance.
David Grzebinski (President & COO)
Yeah, sure. Good morning, Kelly. No, they're not trying to open up existing term contracts. This is, you know, spot pricing, they're testing rates on spot pricing mostly. And then as term contracts come up for renewal, there's testing that's going on there as well. In this environment, it's, you know, nobody wants to push pricing on the carrier side. And of course, the shippers are always looking to test prices. They do it all the time, but in this environment, it makes it particularly difficult. So, you know, in our guidance, we've assumed that pricing will come under pressure. We haven't given a specific percentage that it, that we might see it go down, but we, we do expect some pressure throughout the year, as pricing is tested.
Kelly Dougherty (Research Analyst)
Okay, thanks.
David Grzebinski (President & COO)
Yeah, the lower end of the range, you might assume, you know, some reduction in prices.
Kelly Dougherty (Research Analyst)
Okay, thank you. And then on the inland side, I'm sorry, on the coastal side, when you talk about a mid-single-digit increase, that seems to be a little bit lower than what you were talking about before. I know fuel is factored into the expectation somewhere, but I think that's kind of an ex-fuel number. Can you just talk to us about that a little bit?
David Grzebinski (President & COO)
That is an ex-fuel number. It's the rule of large numbers here, you know. Pricing has been going up, and we're still getting good, strong increases. It's just the percentages drop a little bit. So it is down from, you know, high single digits to mid single digits, but we have been saying it's mid to high single digits. Now it's more like mid to mid single digits.
Kelly Dougherty (Research Analyst)
So kind of the uncertainty and the, you know, somebody once classified it, the industry kind of in a holding pattern to us right now. That is really inland-focused. It, it's that, that's not impacting what you're seeing on, on the coastal pricing side of things?
David Grzebinski (President & COO)
Correct.
Kelly Dougherty (Research Analyst)
Okay. And then just on the same topic, we've heard these comments about sluggish demand. You know, you mentioned on the pre-announcement that, you know, you were seeing—you weren't seeing really volumes impacted. Just wondering if operating levels have gotten back to normal again, if customers have started to resume orders or if not, you know, what we need to see to get things back on track from a volume perspective.
David Grzebinski (President & COO)
Yeah, no, it, you know, chemical volumes and the amount of product we're moving now is flowing more normally now. But there are still some dock congestion issues in some of the high-traffic areas like Corpus Christi and Houston, but it's flowing better than it had been in the Q4.
Kelly Dougherty (Research Analyst)
Thanks, guys. I'll jump back in the queue.
David Grzebinski (President & COO)
Thanks, Kelly.
Operator (participant)
The next question is from Jack Atkins with Stephens.
Good morning, guys. Thanks for the time.
Jack Atkins (Managing Director and Equity Research Analyst)
... Just sort of starting off here, guys. I guess, you know, you talked, David, several points in your prepared comments about opportunities, you know, for potential M&A. Could you maybe speak to, you know, are you seeing, you know, the dislocations in the marketplace creating, you know, M&A opportunities already? And are you maybe seeing, you know, what the targets are asking for and what you're willing to pay, maybe come closer to being in line with expectations?
David Grzebinski (President & COO)
Yeah. Well, as you know, anytime business starts to get a little more challenging, people reassess whether they wanna be in the business. So, you know, it wouldn't be prudent for me to comment on any specific acquisitions. But, you know, as you've seen with us over the years, when things get a little rough is when we're able to take advantage of our strong balance sheet and put it to work. And, we look forward to potential opportunities.
Jack Atkins (Managing Director and Equity Research Analyst)
Okay, that makes, that makes a lot of sense. And, yeah, you guys have, have been, you know, very active in the past using downturns like this. So I guess, you know, shifting gears and, and thinking about, you know, the inland marine side of the business. You know, given, you know, given the, the lack of, you know, pricing traction, and, you know, I know you guys have talked in the past about potential inflationary pressures, just from, you know, your, your labor force, how should we think about inland marine operating margins trending in, in 2015?
David Grzebinski (President & COO)
Yeah, well, I think you'll see the margins come down a little bit in 2015. With pricing, you know, flat to maybe even down a little bit, with labor inflation pressures. And then, as you heard Andy say, that we've got, you know, some pension headwinds here, too, that will help push margins down a little bit. But we're going to work on our costs, which is what we can control.
Jack Atkins (Managing Director and Equity Research Analyst)
Okay.
David Grzebinski (President & COO)
But you will see a little margin compression.
Jack Atkins (Managing Director and Equity Research Analyst)
Okay. And then last quick one for me. On the diesel engine side, could you maybe talk to the cost levers you could pull there to, you know, keep, you know, keep the profitability a little bit, you know, more in line with your expectations, given the lagging demand?
David Grzebinski (President & COO)
Yeah. Well, well, paradoxically, we're still pretty busy in Oklahoma, working on our backlog. But we'll look at, look at our cost structure as, as, as we work through that. I would just say this, if, if, if you think about kind of break-even levels, our, our break-even levels should improve this, this cycle versus last cycle, yeah, based on, you know, cost, cost containment and, and the way we're working, through things.
Jack Atkins (Managing Director and Equity Research Analyst)
Okay, that's helpful, David. Thanks so much.
David Grzebinski (President & COO)
Thanks.
Operator (participant)
The next question is from Jon Chappell with Evercore.
Jon Chappell (Senior Managing Director)
Thanks. Good morning, guys.
David Grzebinski (President & COO)
Good morning, John.
Jon Chappell (Senior Managing Director)
David, just trying to get a little bit of a sense of the magnitude of the rollover in the land-based diesel engine services. In the, you know, the commentary in the, press release, there wasn't too much description about that. It said, "Servicing customers, working on costs." And then you talked about kind of a decline as the year progresses. But are we going back to kind of thirteen levels, were there are a couple quarters, by our estimates of, you know, negative profits? Or are we talking right around break even, as we get to the back half of this year?
Andy Smith (EVP and CFO)
Yeah. Hey, John, this is Andy. You know, what we'll do coming out of, out of year-end is we'll continue to execute against our backlog. And, and I think what you'll see as the, as the year progresses, at least what we're seeing today, is that, you know, you'll see profitability coming out of the land-based side, tick down a little bit in the Q1, a little bit more in the Q2, and then we're expecting it to be a very minimal contributor to earnings in the third and Q4. But we don't expect to go negative.
Jon Chappell (Senior Managing Director)
All right. That's good insight. And then for my follow-up, you know, Joe said in his comments, that the crude and condensate's only 6% of your inland barge capacity is tied up there, and all of that is contracted. On the coastal side, how much of the business is related to, crude and condensate? And I know it's tough to say because the CapEx spending cuts are just starting to be, enacted, but how does your guidance range kind of think about the potential for U.S. production to slow in the H1 of the year as the CapEx cuts go into effect?
David Grzebinski (President & COO)
Yeah. No, on the coastwise side, we're, you know, we're less than 15% of our capacity is in crude and condensate. And we're -- you'll recall that we're highly levered to refined products in the coastwise business. And as you know, with the lower gasoline, diesel, and jet fuel prices, that will stimulate some demand. So actually, we're more excited about what's going on coastwise because of that dynamic as the economy improves and as the lower prices stimulate demand. So we're not concerned about the crude on the coastal side. You could see some of the Bakken moves up in the Northeast slow down. But frankly, if they start bringing in Brent, that will...
They'll have to lighter off of the ships coming in into the East Coast, which will be a different type of barge demand. So we're not too concerned about that. It is in our thinking, John, so we've kind of factored that in. But it's, as you know, a dynamic thing, so it's not a precise thing.
Joe Pyne (Chairman and CEO)
Yeah. John, let me just add one other comment. With respect to that part of the business, we have the largest asphalt fleet active in the U.S. And lower crude oil significantly expands the ability of municipalities and states to buy asphalt. You can buy a lot more for your budgeted dollars. So we think that business is gonna be better this year.
Jon Chappell (Senior Managing Director)
All right, that's great insight. And, I'm sorry, just Andy, if you could just repeat the operating margin range that you gave for the inland marine. You said, I think it was high teens for coastal. I just missed the inland barge.
Andy Smith (EVP and CFO)
Mid to high teens. I mean, I'm sorry, mid to high 20% range.
Jon Chappell (Senior Managing Director)
All right. That's what I thought. Okay. Thanks a lot, guys. Appreciate the help.
Joe Pyne (Chairman and CEO)
Thanks, John.
Operator (participant)
The next question is from Gregory Lewis with Credit Suisse.
Gregory Lewis (Senior Research Analyst)
Hi. Thank you, and good morning.
Joe Pyne (Chairman and CEO)
Good morning, Greg.
Gregory Lewis (Senior Research Analyst)
David, just real quick, if you could provide a little bit of color on here. You mentioned that currently, Kirby has 39 inland barges for delivery in 2015. Do you have any sense for what percentage of the 2015 order book that is across the industry?
David Grzebinski (President & COO)
Yeah, it's about 25% of the order book.
Gregory Lewis (Senior Research Analyst)
Okay.
David Grzebinski (President & COO)
We think the order book's somewhere between 160 to 180 barges for 2015.Which is kind of flattish with what it was. Flattish with what it was in, you know, for the last four or so months. And by the way, that order book is mostly 10,000-barrel units, not 30,000. So from a capacity add, it's not that as significant as if it were 30,000s.
Gregory Lewis (Senior Research Analyst)
Okay, great. And then just, you know, shifting gears to the buyback. You know, clearly, that's something with the recent board increase. It's something that you're seriously considering, you know, expanding, you know, I guess this year. When we think about the buyback, how does the company approach it? Does the company approach it on an asset basis analysis? I mean, how should we think about Kirby trying to find value in implementing the buyback? I would imagine at certain points, it makes sense to do it, at other points, it probably makes sense to just hold off.
David Grzebinski (President & COO)
Yeah. Well, Greg, you know that we're very long-term focused, and we look at cash flow. That's the way we invest, whether we're looking at capital spending or acquisitions. And quite frankly, Kirby is like an acquisition, right? We look at a discounted cash flow method, and when we see value, we act on it. At these price levels, you know, this is—these kind of multiples are what we pay for acquisitions. So, you know, it's been attractive. But again, it's a very long-term focus. We look at cash flow, and that pretty much tells us when and where to put our capital to work.
Gregory Lewis (Senior Research Analyst)
Okay, guys. Hey, thank you very much.
David Grzebinski (President & COO)
Thanks, Greg.
Operator (participant)
The next question is from John Barnes with RBC Capital Markets.
John Barnes (Equity Research Analyst)
Hey, good morning, guys.
Joe Pyne (Chairman and CEO)
Hi, John.
John Barnes (Equity Research Analyst)
Look, if I go back to, you know, kind of the 2008, 2009 time frame, when you know, you saw some disruption in pricing, you know, your company was able to kind of tap the brakes in, in terms of capacity and, and kind of prop the industry up a little bit from a, a pricing perspective. You know, given your market share and, and the number of vessels you control, you know, is that still a possibility if you saw pricing, you know, begin to weaken a little bit more on the inland side during the year than, than expected? Would you be willing or are you capable of doing so again?
Joe Pyne (Chairman and CEO)
John, Joe, this actually is a little different. 2008, 2009, you had a collapse in volume. We don't have a collapse in volume. What we have is just a lot of uncertainty that is having both carriers and shippers reassess price levels. Remember that the pricing right now is at historical highs. So, you know, taking a lot of equipment out probably doesn't make a lot of sense now. In 2008 and 2009, we had, I think, 917 barges at the top of that period. And what we did was we actually took about 100 barges out of service.
We scrapped them or sold them into alternative service. That's gonna be more difficult now. The fleet's younger, and utilization levels are much higher. I think 2008, utilization at one point got down below 80%. Today, we're looking at utilization mid-90s%.
John Barnes (Equity Research Analyst)
Okay. That's great color. Thank you. And then, secondly, you know, in terms of the M&A side of the business, you know... Well, no, skip that. You already answered that. More importantly, you know, for again, from a capacity standpoint, the number of barges in the industry that have kind of moved over to crude oil service, and I'm really interested in maybe the number of barges that have been sold in MLP.
You know, how easy is it for that equipment, you know, to get pulled out of that service if you see a decline in kind of the oil volume and in condensate volume? How easy is it for that equipment, especially on the MLP side, to kind of reenter, say, the petrochemical business and cause a disruption in terms of maybe too much, you know, too much capacity?
David Grzebinski (President & COO)
Yeah. It's, you know, some of the barges could be cleaned up. The, you know, there's a cost to cleaning a barge and redeploying it into clean service. We've seen a very small bit of that so far, but, you know, we'll see. There's still a lot of volume out there, and the volume coming out of the Eagle Ford is still pretty strong. It's the, it's the Canadian oil and the Bakken, not a lot of Bakken was moving on the river anyway, but the Canadian has become less competitive.
So, it's, you know, it can be done. You can move some of that crude out of some of those barges out of crude service and put them in a clean service, but it's, there is a cost. I would also say in the MLPs in particular, a lot of the chemicals or the vast majority of the chemicals don't qualify. So, they'd have some resistance there to do that. They wouldn't be able to do it, and at some point, it becomes non-qualifying income and would put their MLP at risk.
John Barnes (Equity Research Analyst)
Okay. All right. Yeah, that makes sense. And then lastly, just on the shipyard, I guess, you know, Trinity had already moved one of their lines from liquid back to dry. You know, so there already seemed to be maybe some limitation in 2015 in terms of just tank deliveries or liquid deliveries versus dry deliveries. You know, have you seen any further action at the shipyards or within the order books? And, you know, you guys took advantage, obviously, of a competitor that got a little bit out over their tips last year. You know, have you seen any of that kind of activity, you know, within the order books as well?
David Grzebinski (President & COO)
Yeah, on the order book, we just have not seen it grow, which is very positive. I think this volatility and uncertainty is. It's put the brakes on new orders. We really, you know, usually, as time goes on, you see the order book fill up a little bit and some carriers taking some slots at shipyards, but frankly, we just haven't seen it. The order book's been flat, as I said earlier, for about four months. So, from our perspective, that's a positive.
John Barnes (Equity Research Analyst)
Very good. Hey, thanks for your time. I appreciate it.
David Grzebinski (President & COO)
Thanks, John.
Operator (participant)
The next question is from Ken Hoexter with Merrill Lynch.
Ken Hoexter (Managing Director and Equity Research Analyst)
Great. Good morning. Hey, Joe, Dave, Andy. If we just follow up on John's question there, in terms of adding the 400,000 barrels, is there a thought, given the crude freeing up on maybe pulling back on some of that ordering? Is that committed contractual on the barge ordering? Just wondering what your variability on your own order book is.
David Grzebinski (President & COO)
Yeah. No, that's committed. You know, we contracted for that last year in 2014, so it's under contract. So we wouldn't pull back on it. We have need for those barges. We're putting them to work as they come out. Again, we're still very busy, but we'll see how the year progresses.
Ken Hoexter (Managing Director and Equity Research Analyst)
Okay. Andy, on the buyback, is there a timeframe on the $3 million-plus second tranche here after the initial $100 million?
Andy Smith (EVP and CFO)
No. No, we don't, we don't have any timeframe. We'll evaluate that going forward.
Ken Hoexter (Managing Director and Equity Research Analyst)
It's not like you're committing to doing that within the next year or, or any particular period. It's just an open-ended plan?
Andy Smith (EVP and CFO)
Just... Yeah, exactly. It's open-ended.
Ken Hoexter (Managing Director and Equity Research Analyst)
Okay. And then, Joe, maybe just some thoughts, given the rapid pullback on the oil prices here. You know, you've talked about uncertainty. You talked on the first question was asking you about kind of pricing, and it seemed like you were intimating that it's still the customers are having these debates. Are you actually seeing any pullback at this point on the volume and commitments for that, or is it still just the uncertainty that the customers are facing?
Joe Pyne (Chairman and CEO)
No, no pullback on volume. I mean, the volumes are gonna be what they are, and they drive utilization rates, and utilization rates are still high. You know, you know, you could see, you know, going forward in the year as capital expenditure comes rapidly down in the oil field, volumes decline with that. Now, having said that, with respect to Kirby, we think that we're moving the volumes that are sustainable. Both our river volumes and our canal volumes are from fields that are very competitive, even at these prices. So we're not so much worried about it in our fleet. There are other fleets that move volumes from less competitive areas. They may be affected, but I frankly think it's just too early to tell what's gonna happen.
Ken Hoexter (Managing Director and Equity Research Analyst)
Great. Just a last quick one. You mentioned the land-based, customers on diesel engine services remain strong and, and marine... I'm sorry, is pulling back and marine has, has remained stable. Is there a transition there where the marine customers could feel a little concerned on the market and, and they come back, or is that more tied to your utilization, within the fleet?
David Grzebinski (President & COO)
Yeah, are you talking marine diesel engine services?
Ken Hoexter (Managing Director and Equity Research Analyst)
Diesel engine services, yes, sir.
David Grzebinski (President & COO)
Yeah, yeah. No, on the marine and power generation side, things are pretty stable and then ebbs and flows. I mean, these are a lot of, lot of towboat companies and that type of thing, which are continuing to, to work. But, as you know, and we've, we've talked about this in, in past cycles, that, on the marine diesel engine repair side, there's about 25% of, of that that is oil service related. So that, that may be impacted a little bit. Frankly, some of that is in our guidance for 2015, that it may be impacted. It, it's the, you know, lift boats and supply boats that, could be impacted.
Ken Hoexter (Managing Director and Equity Research Analyst)
Wonderful. Appreciate the time and thought. Thanks.
David Grzebinski (President & COO)
All right, Keith. Thanks.
Operator (participant)
The next question is from Steve Sherowski with Goldman Sachs.
Steve Sherowski (Equity Research Analyst)
Hi, good morning. You mentioned roughly 6% of your inland capacity is dedicated to crude and condensate transportation. I was just wondering, is that fairly representative of the industry as a whole? I'm just trying to gauge what the potential is for equipment switching from crude or condensate transportation into refined products that you had mentioned before.
David Grzebinski (President & COO)
Yeah. It, you know, depends on whose fleet it's in. In our fleet, it's 6%. In other fleets, it's higher. You know, it's difficult to estimate what the total percentage is of crude in the inland business. Crude is a relatively new movement, and, you know, the bulk of what's moved is gonna be refined products, chemicals, and fertilizers are our traditional business. But there, you know, there is equipment out there that is gonna be displaced. Some of it's already been displaced. It's being absorbed, given the high utilization levels. We'll just have to see.
Steve Sherowski (Equity Research Analyst)
Got it. Thanks. Just as a quick follow-up, the BIS recently provided some clarification on what qualifies as a condensate that's allowable for export. Just how do you think about that and the potential impact on your coastal business, your coastal segment?
David Grzebinski (President & COO)
Actually, we're we think it may be a slight positive because it's just more volumes. As more volumes get produced and more volumes get moved, the likelihood of us touching it increases. So if it comes into a condensate splitter, for example, we may touch, you know, some of the naphtha that comes out of the condensate splitter. We may take it from the splitter to an export terminal, for example. So, it's generally, the more volumes that move, the better for our business. So we're not necessarily opposed to exports of crude or condensate.
Steve Sherowski (Equity Research Analyst)
Gotcha, understood. Are most of those movements coming out of Corpus Christi into the Houston refinery market?
David Grzebinski (President & COO)
Yes.
Steve Sherowski (Equity Research Analyst)
Okay.
David Grzebinski (President & COO)
Yeah, Corpus Christi is a hub for a lot of the Eagle Ford and a good portion of the Permian. So, it comes to Corpus, and then it gets over to the Houston and Port Arthur, and even over to the Louisiana market.
Steve Sherowski (Equity Research Analyst)
Gotcha
David Grzebinski (President & COO)
...by water, in general.
Steve Sherowski (Equity Research Analyst)
Okay. That's it for me. Thank you.
David Grzebinski (President & COO)
Yeah, thanks, Steve.
Operator (participant)
The next question is from Kevin Sterling with BB&T Capital Markets.
Kevin Sterling (SVP and Senior Equity Research Analyst)
Thank you. Good morning, gentlemen.
David Grzebinski (President & COO)
Good morning, Kevin.
Kevin Sterling (SVP and Senior Equity Research Analyst)
David and Joe, you guys talked about your utilization in the inland markets being strong, and I think you think they're gonna remain strong, and it sounds like really because you haven't seen the drop-off in volumes, you know, this cycle as maybe we saw last cycle. Am I thinking about that right? But I'm also thinking, you know, when I hear your pricing commentary and, you know, customers may be shifting some of their trade patterns, could we see a little utilization weakness later in this year? Or do you think just the real kind of increase, the volume increase on the pet chem side will continue to drive utilization?
David Grzebinski (President & COO)
Yeah, it's difficult to say, but you know, in the last cycle, in the 2008, 2009, you know, that was an economic contraction, and the volumes really dropped. So here, and as Joe said, that you know, at one point, they got down below 80% utilization, I think, one quarter. But we haven't seen that. We're still in the 90s, very, very utilized. So the pricing is coming. The pricing pressure is coming more from uncertainty than anything else. It's not volume driven. Bottom end. Yeah.
Kevin Sterling (SVP and Senior Equity Research Analyst)
Okay.
David Grzebinski (President & COO)
But again, you know, the bottom end of our range does, does contemplate some negative pricing.
Kevin Sterling (SVP and Senior Equity Research Analyst)
Okay, thank you, David. And my last question here: moving to the diesel side of the business, as oil field services companies, you know, tighten their belts, are you seeing some interest in your reman business versus new OEM equipment, given the favorable cost differential, or is it still too early to tell, given the huge drop we've seen in oil?
David Grzebinski (President & COO)
Yeah, it's still a little early to tell, but it's interesting. Some of the customers that don't have a lot of spare capacity, and if they're running, the maintenance, the maintenance becomes more critical. And you know, we're getting more—well, I wouldn't say a lot more, but yeah, there is interest in reman. Reman does make capital sense, right? I mean, it saves you a lot of money, and if you're short on equipment, you've got a frac spread unit running, which may have 20 pumping units on it, and 1 or 2 of those fail—you don't wanna buy new equipment in this environment. So, we're hopeful, but it's too early to tell. I wouldn't, you know, I wouldn't factor a lot of growth in that, in this current environment. But, you know, maintenance, maintenance dollars could go up, though.
Kelly Dougherty (Research Analyst)
Yep. Okay, gotcha. Thanks so much for your time this morning.
David Grzebinski (President & COO)
Yeah. Thanks, Kevin.
Operator (participant)
The next question is from Ben Nolan with Stifel.
Ben Nolan (Managing Director)
Good morning, gentlemen. Thank you very much for your time.
David Grzebinski (President & COO)
Good morning.
Ben Nolan (Managing Director)
I was interested in hearing a bit about sort of the spot and contract split across the inland and coastal segments, and then kind of within each of those quadrants, if you could talk about, the fuel cost impacts and how that's kind of constructed within each of the contracts.
David Grzebinski (President & COO)
Yeah, sure. On the inland side, we're 80% contracted, 20% spot, and the coastwise, it's about 85% contract, 15% spot. Fuel, John, we work to make all of our business fuel neutral. So fuel's a pass-through, whether it's in a term contract or, of course, spot pricing is embedded at the current fuel price. So, fuel, we try and be neutral in. What you do see, since it's a pass-through, though, it does move revenue around a little bit, right, as fuel prices fall. But since it's a pass-through, it, there's no real net net income impact.
Ben Nolan (Managing Director)
Okay, fantastic. Very helpful. So then I guess when you talk about pricing pressure, we're really talking core pricing and that sort of, net of any sort of fuel influence because that doesn't really impact your EBIT?
David Grzebinski (President & COO)
That's correct.
Ben Nolan (Managing Director)
Fantastic. And then just one last question, just to rehash the acquisition topic. I'm wondering, sort of how aggressively are you guys sourcing acquisitions, talking to possible acquirees and things of that sort? And then any kind of sort of valuation metrics you'd be looking for within your targets? Thank you.
David Grzebinski (President & COO)
Yeah. Yeah, John, we're always talking to various companies. You never know when an acquisition can present itself, but you know, in the inland side, there's 40 different companies and we have relationships and know the principals at all those companies. And you know, we... They know that Kirby is a logical buyer, so we stay in touch. You know, whether something's actionable or not will remain to be seen. But typically, when there's some volatility and there's some downward pressure is when things start to get interesting. In terms of metrics, we do everything kind of with a discounted cash flow approach, looking at whether we can earn a 12% after-tax return on our investment.
That typically means that we're able to or we would get things in the 5-7x EBITDA. Sometimes we go north of 7x EBITDA if there's a lot of synergies, but that's the typical metric range. But again, we don't look at it as a multiple of EBITDA. We look at it in terms of discounted cash flow.
Ben Nolan (Managing Director)
Fantastic. Thank you very much for your time.
David Grzebinski (President & COO)
Thanks, John.
Operator (participant)
The next question is from David Beard with Iberia Capital.
David Beard (Managing Director)
Good morning, gentlemen.
David Grzebinski (President & COO)
Good morning.
David Beard (Managing Director)
I was just hoping to get maybe a little more guidance on, or a little more color, really, on the diesel engine land services assumptions behind your guidance. I know you guys don't typically talk about rig count or capital spending, but I'm just trying to get a sense of, have you, you know, really thrown in the kitchen sink in terms of US spending this year in your guidance, just on that land-based component or, you know, using a 20% or 30% decline in US capital spending? Just some color there to try to get a sense of what's in your guidance would be real helpful. Thanks.
David Grzebinski (President & COO)
Yeah. Yeah. David, you know, we look at the surveys everybody else does, and we're anticipating capital spending cuts of 30, 30%, and it could even be worse than that. Also, the rig, land-based rig count, you know, I've seen anywhere from 600 down to 850 down. We're probably closer to the latter number. We think it's gonna be pretty sloppy this year. You know, that said, it's hard for us to see that we don't get some rebound at some point down the road. But, you know, who knows? Predicting crude oil prices is a tough thing to do.
David Beard (Managing Director)
Yeah, I would probably agree with you on all three of your comments, so that's, that's very helpful. Thank you.
David Grzebinski (President & COO)
Thanks, David.
Operator (participant)
The next question is a follow-up from Kelly Dougherty with Macquarie.
Kelly Dougherty (Research Analyst)
Hi, thanks. I just wanted to follow up on the utilization. Is that 90%-95% outlook driven more by a confidence in volume remaining robust or really the ability to retire some of your older barges, if need be? And then, how do you see your utilization for the entire industry right now, and maybe as we progress throughout the year? Because I imagine there are some people that have barges that are a lot older than yours. And have you seen any accelerated retirement, at least at this point yet?
David Grzebinski (President & COO)
Yeah.
Kelly Dougherty (Research Analyst)
Yeah.
David Grzebinski (President & COO)
We got a little feedback here. Sorry, Kelly. That 90%-95% doesn't factor any retirements. That's what we think we'll use going forward. As Joe mentioned, we don't have a lot of older equipment to retire. We've done a pretty good job lowering the age of our fleet. We do think the industry is about the same utilization. As to their retirement plans, it's hard to predict, but a number of carriers have some very old equipment, and we would expect that equipment would come out if things get tougher.
Kelly Dougherty (Research Analyst)
Okay, great. Thank you.
David Grzebinski (President & COO)
Thanks, Kelly.
Joe Pyne (Chairman and CEO)
Thanks, Kelly.
Operator (participant)
We have no further questions at this time. I'd like to turn the call back over to Sterling for closing remarks.
Sterling Adlakha (Head of Investor Relations)
We appreciate your interest in Kirby Corporation and for participating in our call. If you have additional questions or comments, you can reach me directly at 713-435-1101. Thank you, and have a nice day.
Operator (participant)
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.