Kirby - Q4 2017

Transcript

Operator (participant)

Good morning, and welcome to the Kirby Corporation 2017 fourth quarter and full year earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. To ask a question, you may press Star, then One on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

Eric Holcomb (VP of Investor Relations)

Good morning, and thank you for joining us. With me today are Joe Pyne, Kirby's Chairman, David Grzebinski, Kirby's President and Chief Executive Officer, and Bill Harvey, Kirby's Executive Vice President of Finance. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our fourth quarter earnings press release and is available on our website at www.kirbycorp.com in the Investor Relations section under Financial Highlights. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties, and 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, 2016, and in Kirby's subsequent quarterly report on Form 10-Q for the period ended September 30th, 2017. I will now turn the call over to Joe.

Joe Pyne (Chairman)

Thank you, Eric, and good morning to everybody. Yesterday afternoon, we announced 2017 fourth quarter earnings of $3.87 per share. These earnings included a one-time deferred tax revaluation benefit of $4.51 per share, which comes as a result of recent tax reform legislation and is partially offset by non-recurring after-tax charges of $1.18 per share, including impairments of coastal vessels, severance, and early workforce retirements. Without these items, our fourth quarter earnings would have been $0.54 per share. Fourth quarter results compared to our guidance range of $0.40-$0.55 per share for the fourth quarter and $0.60 per share reported for the 2016 fourth quarter.

During the quarter, inland marine tank barge utilization remained at elevated levels that were similar to what we experienced in the third quarter after Hurricane Harvey. Favorable commodity prices for our customers' products and new petrochemical capacity both contributed to higher demand for tanks, tank barge transportation. Despite this, the existence of a few aggressive competitors and excess industry barge capacity did little to improve depressed spot market pricing. As we look forward, economists are projecting that 2018 will see the largest GDP growth since the start of the downturn. With much of our petrochemical demand ultimately tied to consumer non-durable goods, and expectations for 30 new petrochemical plants scheduled to complete in the next two years, we have a favorable long-term outlook for this business.

In the coastal market, fundamentals remained challenging during the quarter as more barges transitioned from term contracts into the spot market, and our utilization rates ranged in the low- to mid-60% level for the second consecutive quarter. During the quarter, we proactively impaired and early retired a number of our older coastal barges and tugboats. We believe this action is necessary not only to help restore an early balance into the market, but also to improve our profitability going forward. The distribution and service segment experienced consistently strong demand for our products and services, particularly in our land-based business. While the U.S. rig count declined approximately 2.5% sequentially, growing drilled but not completed well inventories and a shortage of working pressure pumping horsepower drove increased orders for remanufacturing and new pressure pumping units, as well as overhauled and new transmissions.

To capitalize on this growing demand, we moved quickly to integrate Stewart & Stevenson, which immediately led to new contract wins, higher sales, and improved efficiencies. With the industry calling for 2 million-4 million of additional working pressure pumping horsepower in the next one to two years, we are well-positioned to benefit from this growing market, but a bit more ratably than prior cycles, as our customers remain focused on capital discipline over growth. In our marine distribution and service business, we have started to see a modest turnaround in demand for new engines and overhauls following a prolonged deferral of the fleet maintenance program. We expect this trend to continue into 2018, as customers can no longer afford to defer critical overhauls of their fleets.

In summary, while parts of the marine transportation segment remain challenged, the inland business should begin to improve in 2018 as the industry right-sizes and consolidates. We intend to participate in this rationalization as the opportunity to further expand our franchise in this difficult market are excellent. Retiring some of our older coastal marine vessels removes much of our fleet overhang while reducing the age profile and improving the efficiency of the fleet. Our distribution and service business has never been stronger. While our legacy business has already a leader in the overhaul and new construction of oil field equipment, the integration of Stewart & Stevenson further enhances our capabilities as a manufacturer and provider of critical components to the oil field, both domestically and abroad. This combination has certainly positioned our segment well for the current environment of improving oil prices.

I'll now turn the call over to David to discuss our segment results and our guidance for 2018.

David Grzebinski (President and CEO)

Thank you, Joe. Good morning, everyone, and thank you for joining us. In our 2017 fourth quarter, our marine transportation segment revenue was $330.4 million, which is a decrease of $25.8 million, or 7%, compared to the 2016 fourth quarter. Operating income declined $30.2 million, or 51%, to $28.9 million. The declines were mainly due to lower term contract pricing in both marine markets and lower coastal marine spot pricing and utilization. The marine transportation segment's operating margin was 8.8%, compared with 16.6% for the 2016 fourth quarter, and was negatively impacted by approximately $0.04 per share of severance and early retirement costs.

In the inland marine transportation market, our barge utilization ranged in the low- to mid-90% level, aided by favorable commodity pricing and new petrochemical capacity, and also by normal seasonal weather. During the quarter, operating conditions were challenged by wind, fog, and lock delays along the Gulf Coast, as well as infrastructure and water level delays, primarily on the Ohio River. Demand for transportation by inland tank barge in the quarter was higher than the fourth quarter of 2016. The inland sector contributed slightly more than 70% of marine transportation revenue during the 2017 fourth quarter. Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 75% of the revenue, with 51% attributable to time charters and 49% from contracts of affreightment.

Contracts that renewed during the fourth quarter were down in the mid- to high-single digits compared to the 2016 fourth quarter. Spot contract rates were consistent with the first nine months of 2017. However, we did see a very slight price improvement on the low end of the spot market toward the end of the year. During the fourth quarter, the inland sector generated an operating margin in the mid-teens and was adversely impacted by severance costs and some early workforce retirements. In our coastal marine transportation sector, the oversupply in the industry was further exacerbated in the 2017 fourth quarter as more new equipment entered service and demand remained muted. Additional term contracts also expired, placing more of our barges in the spot market, including temporarily laid up barges.

Kirby's coastal tank barge utilization was in the low- to mid-60% range during the quarter. Revenues from the coastwise transportation of refined product and black oil were lower compared to the 2016 fourth quarter, while revenues from the transportation of petrochemicals were higher. Revenues were also negatively impacted by a force majeure event at one of our key customers' facilities. Regarding coastal market pricing, year-over-year contract prices have dropped below spot rates as operators try to lock in guaranteed cash flow and higher utilization. Pricing, of course, is contingent on various factors, including geographic location, vessel size, vessel capabilities, and the product being transported. As an example of where spot pricing was in the fourth quarter, rates in the 80,000-100,000 barrel range in clean service were approximately 15% lower than the fourth quarter a year ago.

Compared to the 2017 third quarter, sequential pricing on both term and spot contracts was stable. The percentage of coastal revenue under term contracts was consistent with the first nine months of 2017 at approximately 80%, mainly as a result of lower revenue from equipment trading in the spot market. As Joe mentioned, we took proactive action to impair and early retire underutilized coastal vessels during the quarter. In total, we retired 11 barges, many of which would have required ballast water treatment system installations in the next few years, and we retired 21 tugboats. These vessels will be scrapped or sold into international or non-competing markets. We also further reduced our shoreside employee base, including early retirements, which resulted in one-time severance expense during the quarter. These actions will improve both our utilization and our profitability going forward.

In the fourth quarter, the negative operating margin for the coastal business was in the high single digits, including the severance expenses and early workforce retirements. With respect to our tank barge construction and retirement plans, we took delivery of one 30,000-barrel inland tank barge and retired 8 over the course of the fourth quarter. The net result was a decrease of seven barges in our inland fleet for a total reduction of approximately 100,000 barrels of capacity. During 2017, we retired 53 tank barges, closing the year with 841 barges, representing 17.3 million barrels of capacity. In 2018, we expect to take delivery of one 30,000-barrel inland tank barge in the first quarter. We also expect to retire or return to charters 30 barges with approximately 450,000 barrels of capacity.

On a net basis, before any acquisition, we expect to end 2018 with a total of 812 barges, representing 16.8 million barrels of capacity. In the coastal marine sector, the early retired barges had a total capacity of approximately 830,000 barrels and had us end the year with approximately 5.4 million barrels of capacity. Our recent coastal build cycle concluded in the 2017 third quarter, and we do not plan to build or take any delivery of any new barges in 2018. Moving on to our distribution and services segment, revenues for the fourth quarter were $377.7 million. Operating income for the quarter was $34.5 million, and this compares with operating income of $1.3 million in the 2016 fourth quarter.

The segment's operating margin was 9.1%, including $0.02 per share of severance and early retirement expenses. This compares with 1.7% for the 2016 fourth quarter. The significant increase in our year-on-year financial performance can be attributed to our land-based operations and the incremental contribution from Stewart & Stevenson. During the quarter, our land-based manufacturing businesses saw strong demand for the new construction of pressure pumping units and higher sales of new transmissions, engines, and parts. Early integration efforts also contributed to higher revenues and profits, as we were able to deliver additional new units that otherwise would not have been possible due to labor and capacity constraints. Additionally, our land-based businesses experienced a steady backlog for the remanufacturing of pressure pumping units and transmission overhauls.

During the fourth quarter, the number of units on premises for remanufacturing remained elevated at levels compared to the third quarter, though it did decline in December as we approached the holidays and customers' inventories of cold-stacked equipment started to decline. Demand for rebuilt transmissions was also steady, but was down compared to the third quarter due to vendor supply constraints and a higher mix of new transmission orders. Rental and service revenues from standby power generation remained elevated in October as a result of hurricane-related demand in Texas and in Florida. This business returned to normal operating levels in November and December. In our marine-based distribution and services business, revenues and operating margin performance improved year-over-year and sequentially, primarily due to increased orders for medium-speed engine overhauls in our inland markets and higher demand for parts in the Gulf Coast offshore drilling market.

Service activity in the power generation market was slightly higher sequentially and year-over-year, primarily due to the timing of major projects. Operating margins in the marine distribution services business were in the low double digits during the fourth quarter. Turning to the balance sheet. As of December 31st, 2017, total debt was $992.4 million, a $269 million increase versus the end of 2016, mainly as a result of the Stewart & Stevenson acquisition. Our debt-to-total cap ratio at the end of the fourth quarter was 24.2%, a 1.1 increase from December 31st, 2016. At the end of last week, on January 26, our debt was approximately $970 million. I will now discuss our guidance for the first quarter and full year 2018.

In our press release last night, we announced our 2018 first quarter guidance of $0.45-$0.65 per share and full year 2018 guidance of $2.50-$3.00 per share. These guidance ranges include the benefit of a lower effective tax rate of $0.08-$0.12 per share for the first quarter and $0.40-$0.50 per share for the full year. Overall, we expect our 2018 tax rate to average 24.5%. Our first quarter guidance includes a $0.05-$0.10 per share temporary negative impact in our distribution and services segment related to the adoption of a new revenue recognition standard that limits percent of completion revenue accruals and is the primary reason for the wider quarterly EPS range.

This new standard will result in revenue accrual timing differences during the first quarter for certain new pressure pumping unit orders. Full revenue recognition on these orders will be delayed until they are completed, with delivery currently expected in the second quarter. We do not expect this new standard to materially impact our full year results. In the inland marine transportation business, we expect our utilization to be in the low- to mid-90% range, which is similar to what we experienced in the fourth quarter, with normal seasonal weather patterns across the year. We expect that continued industry tank barge retirements, minimal new tank barge construction, industry consolidation, and higher customer demand together will yield improved overall utilization compared to 2016-2017. As such, we will likely see modest mid-single-digit pricing improvement in the second half of 2018, if not sooner.

The low end of our guidance range assumes no inland pricing improvement in 2018, and the high end assumes mid to high single-digit pricing improvement in the second half of the year. We expect our revenue mix to be similar to 2017, with term contracts representing approximately 75% of our revenue, with the balance coming from the spot market. In our coastal market, considering the early retirements of barges during the 2017 fourth quarter, we expect our utilization to be in the low to mid-80% range for both the first quarter and the full year. Our guidance range considers pricing on coastal market contracts renewing, declining in the 10%-15% range relative to 2017 levels, with the majority occurring in the first quarter.

Overall, we expect operating profit in our marine transportation segment to be slightly down year-on-year, with reductions in our inland business driven primarily by the lagging effect of prior contract renewals, including a major contract which renewed lower at the beginning of 2018, being offset by modest pricing improvement in the second half of 2018 and lower costs in our coastal business. While these cost savings in coastal will be impactful, we do still anticipate that our operating margins in this business will remain negative throughout 2018, ranging in the low to mid-single digits. For our distribution and services segment, we expect continued strong demand for our land-based products and services tied to the oil and gas industry, which represents approximately 60% of distribution and services revenue.

While rig counts are only expected to increase modestly in 2018, expanding drilled but uncompleted well inventories in North America are expected to contribute to oil field activity growth in excess of 10%, with much of this related to completions-oriented products and services. This plays right into our wheelhouse with our expanded pressure pumping, manufacturing and services businesses. As Joe mentioned, analysts are predicting that another 2 million-4 million horsepower of pressure pumping capacity is needed in North America over the next one to two years. We believe this represents an additional 15%-25% of horsepower needed over current working horsepower in the market. We are confident that with our newly expanded scale, large customer base and improved efficiencies, we will meaningfully participate in these incremental opportunities.

However, it is possible that this growth could be somewhat constrained by declining availability of new engines, transmissions, and parts, as many of our vendor supply chains are challenged. In our marine distribution and services market, we expect improved results in 2018 as maintenance deferrals are no longer sustainable. To that end, we anticipate higher demand for new diesel engines, overhauls, and spare parts as we progress through the year. Our power generation business is expected to be relatively consistent with 2017 levels. Overall, we're expecting operating margins in our distribution and services segment to be in the high single-digits during 2018. Our capital spending for 2018 is expected to be $195 million-$215 million.

This includes approximately $75 million in progress payments on new marine vessels, including six 5,000-horsepower coastal tugboats announced last year, as well as 15 new inland towboats of varying horsepower range. Approximately $100 million-$115 million is associated with capital upgrades and improvements to existing inland and coastal marine equipment, including ballast water treatment systems for coastal vessels, as well as some facility improvements. The balance largely relates to rental fleet growth, new machinery and equipment, and facility improvements in the distribution and services segment. We expect the new 15 inland towboats to be delivered over a period of three years, with five 2,000-horsepower vessels being delivered during the third and fourth quarters of 2018. These 15 towboats are expected to cost approximately $30 million-$35 million, and they will replace older and less efficient vessels that we retired or sold during the fourth quarter, which did result in a $4.3 million loss on sale.

In conclusion, we enter 2018 with optimism in our marine transportation businesses. Demand for inland barges is expected to remain high, and we believe a pricing inflection will occur in the second half of 2018, if not sooner. We are poised to take advantage of our strong balance sheet to pursue appropriate acquisition opportunities and emerge from the industry downturn stronger and more efficient in the inland tank barge market. Coastal-wise, we have done our part to rationalize the industry's fleet and improve our profitability going forward, but we need the industry to mirror our actions. If others will follow our lead, an accelerated balance can be restored to this struggling market.

Our distribution and services segment has considerable opportunity ahead of it for profitable year-on-year growth. The acquisition of Stewart & Stevenson has proven very successful to date, and with additional cost synergies and improved efficiencies to be gained, this segment will likely be a bright spot in 2018. We intend to capitalize on all of these opportunities, and as we do, we will remain steadfast in our unwavering commitment to safety, customer service, and return on capital. This concludes our prepared remarks on the fourth quarter and our guidance. But before we go to questions and answers, I'd like to briefly discuss a few other items. First, please mark your calendar for Kirby's 2018 Analyst Day, to be held in Houston the evening of Monday, May 14, throughout the day, Tuesday, May 15.

The purpose of this event is to showcase our marine transportation operations and to help you better understand our growing distribution and services business. More information will be forthcoming in the coming weeks. Second, as some of you are aware, Brian Kerr, who has been leading our investor relations efforts for the last year, will be rotating back into our distribution and services business in the next couple of weeks. Brian will be working as part of our service operations leadership team, helping with the integration of Stewart & Stevenson into the Kirby organization. Going forward, the IR function will be led by Eric Holcomb, who recently joined Kirby from Baker Hughes as our new VP of Investor Relations. I'd like to thank Brian for his dedicated service during the last year and wish him all the best in his new role, as well as welcome Eric to Kirby.

Finally, I'm pleased to announce that Bill Harvey joins Kirby, effective today, as our Executive Vice President of Finance, and he will become our new CFO later this month after the 10-K is filed. Bill has more than 14 years of experience as a CFO, primarily in the energy and paper industries. He is a chartered financial analyst. He has an MBA from the University of Toronto and a BS in Mechanical Engineering from Queen's University. Please join me in welcoming Bill to Kirby. Operator, we are now ready to take questions.

Operator (participant)

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

Gregory Lewis (Analyst)

Yes, thank you, and good morning. Yeah, I guess welcome, Eric. Good luck, Brian. So David, you know, as we look at the inland market, if you could talk a little bit about that. It looked like inland revenue spiked up sequentially. But as we look forward, it seems like contract resets and roll-offs are going to continue to put downward pressure on the inland business. So I'm just kind of trying to connect the dots in what got Q4 inland utilization higher. But as we think about roll-offs, it sounds and looks like inland revenues going forward should be going down.

David Grzebinski (President and CEO)

Yeah. Well, good morning, Greg. First, in the fourth quarter, you saw inland utilization is up, and it spiked up right after Hurricane Harvey. But frankly, it's maintained a higher level of utilization. We've been in the 90%-95% range all through the fourth quarter, and that's carried off on into January. Now, some of that is temporary, and as you know, with weather and lock delays and whatnot, that's temporary. And we also had a customer or two that had some plant upsets, which added demand. But we've seen a pickup in crude and also these chemical plants coming on as increase in volumes.

And then just the general market environment with higher crude prices and higher refined product prices has helped our customers, and we're just seeing more volume. So some of the pickup in utilization's temporary, but another portion of it, a good portion of it, seems to be more sustainable, which frankly gives us some optimism as we look to a pricing inflection. As you heard in our prepared comments, we saw a little pickup in spot pricing in the at the end of the fourth quarter, and frankly that's carried into the first quarter with the bottom end of the spot market starting to pick up a little bit on pricing, which is good. So in our guidance, as you know, we put an inflection happening mid-year 2018.

You know, that it may happen sooner, but as you know, we said that might happen in 2017. So we're being a little cautious before calling a turn, but we're certainly a lot closer, and if this demand continues to hold, you know, it could be pretty good. But to your question about contracts, almost all of our major contracts have reset, and we're basically reset through 2018. But as you know, Greg, that has a full year effect when you average in the revenue and the pricing declines that when we renewed the contracts in 2017 happened. So I would say most of our contracts have reset, and there's only a very tiny bit that need to reset in 2018.

So I think we're largely behind that, and we're looking at inland margins and, well, marine margins, essentially, that are flat year-over-year through 2018.

Gregory Lewis (Analyst)

Okay, great. And then just as we shift over to D&S, it looks like, you know, the rental business was more steady than accelerating. You know, I guess Joe talked about the fact that the installed fleet base of pressure pumping equipment is expanding. Is part of that reason for the steadiness in rebuilding the lack of or the delays in the supply chain, where it's just difficult for you guys to get your hands on equipment that you need to do these rebuilds?

David Grzebinski (President and CEO)

Yeah, that's part of it. We've certainly a lot more busy in our land-based distribution and services business. It continues to build, but we are seeing our OEM vendors' delivery times and lead times stretch out. So, I think the market does need 2 million-4 million more horsepower. What will constrain that growth is the supply chains. So that's, you know, that's all in our guidance. But I would say this, when we got a lot going on in the quarter, as you could tell, with the tax rates and revenue recognition and the addition of Stewart & Stevenson, and the growth in the land-based business.

But one way to maybe cut through all that, that noise is if you look at Kirby's EBIT for 2017, it was around $200 million. And if you look at our low end and high end of our guidance, it implies about $240 million in EBIT in the low end and $285 million in the high end. So, we've got the growth happening, and clearly, the land base is a big part of that in 2018. You know, if the supply chain works really well, we'll certainly be closer to the high end. If it's more constrained, we could be in the middle or even on the low end. But we'll see.

You know that our vendors are ramping up their capacity as best they can, and everybody's working towards it. I am encouraged that our pressure pumping customers and even their customers, the E&P customers, have a little more capital discipline so that the cycle's more ratable than it has been in the past. We're just seeing a little more discipline, and if you listen to Halliburton and Schlumberger's capital expenditure plans, they're essentially flat year-over-year. So we're actually encouraged by that. It means that it could be a more ratable cycle that has longer legs.

Joe Pyne (Chairman)

And David, let me just add that the remanufacturing side of it should be a more ratable business. It should last really through the cycle. The pure manufacturing side will be a little more volatile, but we're hopeful that the remanufacturing side will be steadier.

Gregory Lewis (Analyst)

Okay, perfect. Hey, thank you very much for the time, gentlemen.

David Grzebinski (President and CEO)

Yeah, thanks, Greg.

Operator (participant)

Our next question comes from Michael Webber of Wells Fargo. Please go ahead.

Michael Webber (Managing Director)

Hey, good morning, guys. How are you?

David Grzebinski (President and CEO)

Hey, good morning.

Michael Webber (Managing Director)

David, I wanted to follow up on inland first and then move to coastal, but kind of along the lines of Greg's question. If we think about the fact that you said most of your business has repriced at this point, and when you're guiding to slightly lower year-on-year EBIT, that's really just the annualization of kind of that bottomed out pricing. Can you maybe put a number on a percentage basis, maybe what the actual tail of your portfolio looks like on the marine trans business that actually hasn't repriced? And maybe how much of that would actually you know kind of the remainder there would get, how much of that would actually get repriced in the first half of the year?

David Grzebinski (President and CEO)

Yeah, it's very little. Matter of fact, it's pretty small. Almost every major contract has repriced through 2017, and of course, as you heard in the prepared comments, the first part of 2018, we had a major reprice. So, there's really very little that's going to reprice in 2018. We're pretty much through.

Michael Webber (Managing Director)

Okay, that's helpful. And then just maybe on coastal, just curious, you know, you know, after you guys are done, I guess, digesting OSG's, when you look at the coastal market, I guess my question is twofold. One, is there a scenario in which you think about the coastal market and consolidation in the same way you thought about the inland market, just given the fact that, you know, the space is, you are starting to see some capacity come out? I know she has a bunch of old ATBs that have been lingering for the better part of a decade, but eventually those will start to come out. So just curious whether that's a nonstarter for you or whether that's something you would entertain.

And then kind of, as a corollary to that, when you think about that market, you know, the LLS Brent spread seems like it should be starting to support some longer-haul movements for some larger assets, up and around Florida. I'm just curious whether you've seen any uptick there.

David Grzebinski (President and CEO)

Yeah. Well, on the coastwise side, you know, we did an early early retirement and impairment of the assets, which we think is a good step to bringing that market back into balance. We need some of our competitors to do the same, and I think when you start looking at ballast water treatment, they will do the same. So we could get back into balance sooner with the coastal market. But in terms of consolidating, you know, we're about to come out of the bottom of the we've certainly reached the bottom of the inland market, and we're about to come out of it. You know, so our focus really is on inland consolidating acquisitions now.

I do think it'll be a while before we'd consider a coastwise consolidating acquisition. Our real preference would be to do an inland one now. But, you know, I think the news is positive in the coastwise market. As you said, the Brent WTI spread helps. We're hearing that more MR tankers are booked up. There's been a little tick-up in utilization here recently. I think some of that's cold weather in the Northeast. That's certainly helping. Our steps to take out capacity is helping. And I, you know, as you mentioned, OSG, I think they've got some plans to retire some older equipment, and others need to do the same.

Michael Webber (Managing Director)

Yep.

David Grzebinski (President and CEO)

So, you know, we're constructive. We're doing our part, and we need the others in the industry to do their part, and we feel that ballast water treatment's gonna help them get to that decision point.

Michael Webber (Managing Director)

Sure. Definitely seems like it. All right, guys. Thanks for the time. I appreciate it.

David Grzebinski (President and CEO)

All right. Thanks, Michael.

Operator (participant)

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

Jack Atkins (Analyst)

Hey, guys. Good morning. Thanks for, thanks for the time.

David Grzebinski (President and CEO)

Hey, Jack.

Jack Atkins (Analyst)

So, David, I guess just going back to the contract renewal cadence that you were referencing earlier. I mean, if we think about, you know, not a lot of contracts being repriced in 2018, but the guidance is expecting, you know, I think if you said that at the upper end, midpoint, upper end, mid to upper single digits in terms of contractual rate renewals, is that I guess I'm just trying to understand where that incremental pricing is coming from, if you don't have a lot of contracts that are renewing this year?

David Grzebinski (President and CEO)

Yeah. No, no. Let me let me be clear, Jack. I'm sorry if I was confusing on that. You know, we have a group of contracts that reprice every year, and then we have a group of spot contracts that are, you know, repricing real time. And then we've got some longer-term pieces. As you've heard us discuss, 35% of our portfolio is multiyear, and then and another probably 30%-35% reprices annually, and then we've got the spot piece that remains. And what I didn't say this very clearly, but the current low pricing, our contracts mostly reflect the current low pricing that we see throughout the market. As that group of contracts reprices in 2018, there if there's an inflection point, we will see some of that in 2018. Does that help?

Jack Atkins (Analyst)

No, it does. It does. Thank you. And I thought there was a good chunk that renewed annually. I just wanted to make sure I think everyone's on the same page there. So that definitely makes sense. And then, for my follow-up question, you know, just kind of sticking with inland for a moment. Where do you think industry utilization sits right now? I mean, you guys have sort of been trending, it seems like, at the, you know, upper end of the industry, really, this entire downcycle because of the quality of your assets and operations. But do you feel like the industry is trending at, you know, call it mid-80s or so, or maybe even higher than that? And if so, you know, why do you think it's taking so long to actually start to get price?

Because it seems like historically, you know, at this level of utilization, we would've already begun to see contractual pricing recover.

David Grzebinski (President and CEO)

Yeah. No, good question. Utilization, our, you know, our utilization, as I said, was 90%-95%. I think the industry is a little below that, maybe mid-80s to high 80s, maybe even low 90s. And as you heard at the end of the fourth quarter, we saw a little bit of spot pricing improvement on the low end, and that's kind of continued here into January. So, what has to happen is you have to have the spot pricing increase before you can start getting the contract pricing up. And it's just too early to call that right now. Some of it, as I said in my earlier comments, is weather related and temporary with some plant disruptions. But if this continues, you know, it could be very constructive.

It's just too early to say that, and we need spot pricing to continue to strengthen for the contracts to start renewing higher.

Jack Atkins (Analyst)

Okay, great.

Joe Pyne (Chairman)

And David, let me just add that, there's another component of pricing, and that's confidence. The market has to have confidence that they think that the pricing is gonna stick.

Jack Atkins (Analyst)

Sure.

Joe Pyne (Chairman)

That, you know, based on utilization rates and industry utilization rates, I think if you maintain these rates, you're gonna see the confidence to begin to move rates. So that's encouraging.

Jack Atkins (Analyst)

Well, that's great. Joe, David, thank you very much.

David Grzebinski (President and CEO)

All right. Thanks, Jack.

Operator (participant)

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

Jon Chappell (Senior Managing Director)

Thank you. Good morning, guys.

David Grzebinski (President and CEO)

Hey, good morning, John.

Jon Chappell (Senior Managing Director)

One more on the coastal side. If the market's 22 million barrels, say, you guys 5.4 million barrels, about a quarter of the market share, and you've done your part by taking out about 4% of the fleet. What's your estimate for the overcapacity? How much needs to be removed, kind of industry-wide, to get you to that of utilization, where you can see an inflection in pricing?

David Grzebinski (President and CEO)

Yeah, this is just an estimate, but I would say 1.5 million-2 million barrels of capacity needs to come out. You know, we did 830 million, 830,000 barrels. So it's, you know, and we're kind of a quarter of the market, as you say. So you know, if others do their part, we could get back into balance a lot sooner than we had originally thought.

Jon Chappell (Senior Managing Director)

I'm sorry, was that 1.5-2 inclusive of your 830,000, or is that in excess of that?

David Grzebinski (President and CEO)

In excess, yeah.

Jon Chappell (Senior Managing Director)

Okay. Got it. And then finally, and this is something we, I think we revisit maybe every six months or so. But you, I think it was in Joe's prepared remarks, actually. 30 new petrochemical plants slated to come online in the next two years or so. It seems like we're, you know, that petrochemical build-out continued to get pushed out to the right, whether it was energy prices or, you know, just capital investment, et cetera, but we seem a lot closer now. So as we get closer to the ramp-up of these plants, is there any better clarity as to liquids versus pellets and what these plants and their nameplate capacity may mean for inland barge demand?

David Grzebinski (President and CEO)

Yeah, we're getting closer. We're having more, more detailed discussions around potential barge moves, particularly with, you know, some of our customers that we've got multiyear agreements with. We're getting more specific about their barge needs. I don't want to get into too much detail because it's customer specific, but yes, we're getting into more detailed discussions about the barge moves, which is actually pretty exciting. Now, again, it's hard to, you know, if you ask me how many barges is it gonna be, that's really hard for me to say. I just know, you know, GDP is gonna be 3%, and this chemical is gonna add something to it. It's a pretty big increase in the chemical plant capacity, but it's still hard to nail down the liquid side of it.

When we look at the derivative plants that are being announced, you know, roughly 40% will go into derivative plants, the ethylene, and then 60% will go into to pellets or plastics. So it's just really tough to get more specific than that. We're not trying to avoid getting specific. It's just still hard to nail it down to the number of barges. But I will say this, and we've seen it in methanol. We've picked up the number of methanol barges we're moving. We're seeing some other barge moves, a little bit, in some of the other trade lanes, and we're having definitive discussions with some of our major customers about their needs. So that's kind of where we are.

I know you'd like us to say it's x hundred barges, but it's just still too difficult to say that, John.

Jon Chappell (Senior Managing Director)

No, I understand. That's very helpful. Thanks, David.

David Grzebinski (President and CEO)

Thanks.

Operator (participant)

Our next question comes from Randy Giveans of Jefferies. Please go ahead.

Randy Giveans (Analyst)

Hey, thanks, guys, and congrats on the great quarter there. So clearly, your press release on the call covered a lot. So just a few quick questions. Last quarter, you said S&S contributed $0.03 per share to 3Q 2017 earnings. What was that contribution for 4Q earnings?

David Grzebinski (President and CEO)

Yeah, it was it's about $0.06.

Randy Giveans (Analyst)

Okay. Is that a good run rate, going forward?

David Grzebinski (President and CEO)

Yeah, well, you can annualize that and then add a little bit for growth and add a little bit for synergies. But again, we're merging those businesses with our land-based businesses at United and S&S, and it's gonna be more and more difficult for us to break out S&S. So what you'll hear us start to talk about is in distribution and services, about 60% of it's oil and gas, and we'll try and give you a feel for that going forward. Another 20% will be marine and power generation, and the remaining 20% will be commercial and industrial, and we'll probably talk to that.

If you think 60, 20, 20 in terms of revenue split, and then the margins in each of those splits are, manufacturing or, excuse me, oil and gas is more like mid to high single-digits, and the other two segments are more high single-digits in terms of margins. So yeah, as you think about building out a model, you might start thinking about it that way, because as we merge the businesses, we're gonna run them seamlessly. We saw in the fourth quarter, we were able to share orders and manufacturing capability between S&S and United, and we were frankly able to capture more inbound because of our ability to do that. And, as you would expect, we're putting them together, looking for synergies and finding them.

It's just gonna be harder and harder to talk about S&S specific.

Randy Giveans (Analyst)

Sure. So I wanted to get it in now. Secondly, so looking at the marine transportation business, I think your last announced acquisition was back in June for $68 million or so. So clearly, Kirby's been a buyer in the downturn over the past years. So just asking, why has there been this lack of acquisitions, I guess, over the last six or seven months?

David Grzebinski (President and CEO)

Yeah, it typically and Joe can give you the history here on all the acquisitions, but typically, you have to be emerging from the bottom of the cycle. Nobody really wants to sell at the bottom of the cycle. You know, we're, as we've said in our earlier calls, we're in discussions. Frankly, I'm not at liberty to talk about any acquisitions at this time, but yeah, you know, typically you have to be coming out of the bottom in order to get these transactions going. Joe, would you mind sharing some history there and your thoughts around that?

Joe Pyne (Chairman)

Yeah, David, I think you said it correctly. You know, this isn't something that, you know, you go to the store, go to the shelf, and take an acquisition off the shelf. These are negotiations sometimes take years. There are a lot of different factors that come to bear when a seller is deciding to sell. I think the only thing that I would, I guess, add to David's comments is that we still think that the environment is excellent for a further rationalization in the business, and we're clearly gonna be a participant in it.

Randy Giveans (Analyst)

Sure. Yeah, I'm sure some of these smaller operators are not really keen to let go of their last two or three barges, so makes sense. All right, I guess that's it for me. Thanks again.

David Grzebinski (President and CEO)

Hey, thanks. Thanks, Randy.

Operator (participant)

Our next question comes from Kevin Sterling of Seaport Global. Please go ahead.

Kevin Sterling (Managing Director)

Thank you. Good morning, Joe and David, and welcome.

David Grzebinski (President and CEO)

Good morning.

Kevin Sterling (Managing Director)

Yeah, thanks, and welcome, Bill and Eric and Brian. Congrats on your new role.

David Grzebinski (President and CEO)

Thank you.

Kevin Sterling (Managing Director)

David, let me ask the pricing question, if you don't mind, maybe a little differently. You guys always give great color, and you always do a good job answering. But, you know, as we think about 2017, you know, we thought pricing would go up, and it. And this is on the inland side, it never really materialized, and, you know, now we think it, you know, it might increase in the back half of 2018. But as I look at the dynamics in the inland business, you know, we have it seems to me we have a couple operators, a few operators, that are trafficking in the spot market, that are pressuring pricing, that are pricing, you know, well below contract rates or even pricing, you know, well below than where they need to be.

My question to you is, what needs to happen to get them to change their behavior? It seems to, you know, it seems like they've been acting this way for some time, they haven't changed yet. So maybe what, what, what do we need to see that'll, that'll get these guys to change their behavior and, and essentially price more rationally?

David Grzebinski (President and CEO)

Yeah, well, I think, you know, not to be competitor specific, but, you know, one or two of the aggressive competitors has termed up things. You know, we're happy for that, and we're glad they termed up at low rates. And, you know, we're starting to see a little movement at the low end of the spot market, so I think that's a good sign. It indicates that the market's a little tighter across the board. Some of the aggressive guys are termed up. They don't have as much spot equipment to go out and pressure the market. And, frankly, with the utilization having picked up, you know, it's good to have scarce barges. You know, being barge short here helps everybody's mindset.

So, you know, I think it's marching toward where we want it to be, Kevin, and it's just too soon to say that we're there. I think having some of the aggressive guys termed up is definitely what needs to happen and what we think has begun to happen.

Kevin Sterling (Managing Director)

Okay, thanks. Then switching gears to coastal. Looks like in your outlook, you guys are calling for, you know, roughly, I guess, low 80s utilization in coastal, and that's almost a 20% improvement from where we are today. I guess my question is, how do we get there? I know you guys have retired some equipment or scrapping some equipment, you know, pulling it off the water. But how do we get to that low 80s utilization coastal, in particular, if other operators don't follow your lead? You know, can we still get to the low 80s, you know, if you guys are the only ones that are scrapping equipment?

David Grzebinski (President and CEO)

Well, our utilization, it jumped basically because we took out the 11 barges. So, and we've got a pretty good portfolio of customers and feel pretty good about keeping our utilization for the year in that 80%-85% range. I think other competitors are gonna do the same. It's just the fact that they've got to bring these older vessels in for shipyards. They're gonna be looking at ballast water treatment. So, I think there will be more scrapping, and the whole industry's utilization will tighten up. Hard to say when, but, you know, again, we did our share, maybe a little more than our share. And, yeah, I'm getting more optimistic about the coastal business, but it's still gonna be painful.

We're not. You heard our guidance for coastal this year, but it's certainly feeling a little better.

Kevin Sterling (Managing Director)

Okay. And is coastal, is it the same dynamic that we're seeing in inland, you know, where you've got a few operators that are just trafficking in the spot market and really pricing aggressively when they don't necessarily need to be? Is it similar dynamic?

David Grzebinski (President and CEO)

Yeah, but not as bad. I think what's happening is it's really painful for these big units to be idle, so people will push down contract prices just to lock them up and keep cash flow moving. It's a little different in the inland market. The increments of capacity in the inland market are smaller and less painful, and they're not working. So you can chase little spot deals. I think in the coastwise market, people want term contracts just because the spot moves can be, you know, hundreds of miles away, and there's a lot of... To reposition for a spot move is very costly. So I think that's what's made the pain in the coastwise markets more acute because, you know, there's a rush to try and get contracts, term contracts.

Kevin Sterling (Managing Director)

Gotcha. Okay, as always, thanks for your time this morning. Really appreciate it.

David Grzebinski (President and CEO)

All right. Thank you.

Operator (participant)

Our next question comes from Justin Bergner of Gabelli & Company. Please go ahead.

Justin Bergner (Manager and Analyst)

Good morning, David and team.

David Grzebinski (President and CEO)

Hey, good morning, Justin.

Justin Bergner (Manager and Analyst)

Two quick clarification questions. Of the 11 coastal barges that you guys are pulling out of service, you mentioned that ballast water treatment was an issue for a number of them. Approximately how many of the 11 sort of were due or soon to be due for ballast water treatment versus those that were retired for other reasons?

David Grzebinski (President and CEO)

I don't have that right off the top of my head. I think it's two or three.

Justin Bergner (Manager and Analyst)

Two or three had the ballast water issue, and the others didn't?

David Grzebinski (President and CEO)

Right. Yeah.

Justin Bergner (Manager and Analyst)

Okay. And second clarification question, I just want to make sure I understood exactly what you meant when you said that the spot market was improving on the low end. So if you could just clarify what that means.

David Grzebinski (President and CEO)

Yeah. Really, our spot pricing is usually a little higher than the markets, and so, when I say low end, you know, it's the aggressive guys going after aggressive spot business aggressively. So we've seen the kind of the low end of deals done in the spot market come up.

Justin Bergner (Manager and Analyst)

Okay, that's very helpful. And then lastly, your press release mentions competitor consolidation as a potential favorable driver for the inland barge market over the coming year. Are you suggesting that there are other players that are also trying to consolidate the inland barge market, or was that just meant to refer to your own ambitions, primarily?

David Grzebinski (President and CEO)

Well, certainly our ambitions, but you know, there are some other competitors out there that have fairly decent balance sheets. You know, for example, we know one of the shippers, a major oil company that has their own barge fleet, they bought a series of barges from one of our other competitors, so they're actually helping consolidate. Now they're buying it for their own book of business, not to compete with us, but so that's even better. But there are other couple well or reasonably capitalized competitors that I'm sure would be looking for consolidation opportunities as well. But primarily, we've been the biggest consolidator in the industry. From my perspective, any consolidation is good.

The more rational approach is to have a fewer and fewer competitors, right? I mean, that's in any business, that's better. But there's still, as you know, 40 or so players in this market. Used to be a lot more than that. But as time marches on, that list will get smaller and smaller, and that's just good for any business, as you know.

Justin Bergner (Manager and Analyst)

Great. Thanks for taking my questions.

David Grzebinski (President and CEO)

Thanks, Justin.

Eric Holcomb (VP of Investor Relations)

Okay, Andrea, we'll take, we'll take one more.

Operator (participant)

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

David Beard (Managing Principal)

Hey, good morning, gentlemen. Thanks for squeezing me in.

David Grzebinski (President and CEO)

Yeah, good morning, Dave.

David Beard (Managing Principal)

Good. David, I always wanted to get your thoughts in terms of what you think for the industry supply-demand in terms of order book and scrappings, and then the corollary to that, with the 30 barges you're returning, do you expect those to trade in the spot market, or will some of those be scrapped, or what's your thoughts there?

David Grzebinski (President and CEO)

Yeah. Well, in terms of inland supply and demand, we believe supply, rough estimate, about 50-60 barges will be built in 2018. The vast majority of those will be 10s, and we understand that one of our competitors is building a series of about 40 barges for direct replacement. They've got some old, old barges that they're retiring. So, there is, as I said, 50-60 barges being built in 2018, but the vast majority for replacement, so we're not too worried about that. I don't think it adds to the overhang. It's just a replacement. In terms of, you know, what our returning charter barges, I think that's just normal noise in the market.

To be honest, I don't know what the charterer will do with those barges. But they'll, you know, have to adjust and find out what they do with them. I don't know whether they'll come back to compete or not, but they, you know, it's something we'll watch. We may change our mind and keep the barges if things tighten up, but, you know, that's our plans as of now.

David Beard (Managing Principal)

All right, good. Thank you.

David Grzebinski (President and CEO)

Thanks. Yeah, David, I'm sorry. Let me come back to that. I just got handed a note here. Actually, the 30 that are going away are not all chartered. It's only about five of those are chartered, and 25 are owned, so those would be cut up. I apologize for that.

David Beard (Managing Principal)

Oh, great. That's, helpful. Thank you.

David Grzebinski (President and CEO)

All right. Thanks, David.

Eric Holcomb (VP of Investor Relations)

Okay. Thank you, everyone, for your interest in Kirby Corporation and participating in our call today. If you have any additional questions or comments, you can reach me directly at 713-435-1545, or Brian Kerr at 713-435-1413. Thank you, and have a nice day.

Operator (participant)

The conference has now concluded. Thank you for attending today's pres entation. You may now disconnect.