Kirby Corporation (KEX) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kirby Corporation Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sterling Adlakha. Mr. Adlakha, please go ahead, sir.

Thank you, Allison. Thank you everyone on the call today 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 kirbycorp.com in the Investor Relations section under Financial Highlights. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Okay. Thank you, Sterling, and good morning. Yesterday afternoon, we announced fourth quarter earnings of $0.94 per share, within our guidance range of $0.93 to $1.03 per share. That compares to $1.19 per share reported for the same period last year. During the 2015 fourth quarter, in our inland market, utilization declined slightly into the high 80s to low 90% range. The additional capacity created by the decline in crude oil volumes has put pressure on both utilization and rates. Although petrochemicals and refined product volumes are stable, we do sense that there's some underlying weakness in the U.S. and global economy. With respect to the industry fleet, we estimate that approximately 375 barges that were in crude oil service are no longer in crude oil service. And on that positive note, the overhang of crude oil barges moving into other services has continued to decline. We now estimate that fewer than 5% of the industry tank barges are in crude oil service today compared to the peak of 15%. Moving to the coastal markets. Utilization has also remained stable -- with utilization in the, again, high 80s and low 90% range. This modest drop in utilization from earlier in the year is explained principally by seasonal-driven -- seasonally-driven barges that are not in service in Alaska at this time of the year. Contact -- contract renewal prices on coastal equipment was flat to slightly up. However, we do see some preference by customers to the spot market, preferring the flexibility of not having to commit to contract tonnage. The utilization levels we have been achieving in the spot market remain at high levels. However, the spot market does expose us to potentially more downtime. With respect to our land-based diesel engine service business, it remains under significant pressure. We continue to aggressively take cost and streamline our processes, but we are prepared for another difficult low oil price environment. In the marine and power generation business, it continues to perform well, except to our limited exposure to the oil service business, which services the Gulf of Mexico. David is going to provide more color to the key drivers in our 2016 guidance, but before he does, I'd like to comment on our sense of the economy and the outlook for our businesses. We find ourselves in an interesting market with respect to our inland business, with utilization levels remaining high but rates under pressure. I think the migration of barges working in the -- in crude oil service to other products has diminished market confidence and allowed for rates to deteriorate. Historically, rates have not declined when utilization is at current levels. When we think about why this is happening in the inland business, we think it's a combination of loss of market confidence combined with what were historically high rate levels. On a positive note, we do believe that the excess crude oil barges are being absorbed. If we're at the leading edge of a more significant economic downturn, which of course is possible, Kirby will follow the same playbook which has served us well for decades. We will stay patient, work on reducing cost, focus on safety and customer service and take advantage of good and prudent capital allocation opportunities that usually come our way during hard times. I'll now turn the call over to David.

Okay. Thank you, Joe, and good morning. Let me start with some comments on the fourth quarter results across our business. I will then turn the call over to Andy to give some added details on our financials before coming back and concluding with comments on our 2016 guidance. In the marine transportation segment, our inland marine barge demand remains at good levels, with utilization in the high 80% to low 90% range. Although we do believe industry utilization outside of Kirby may be slightly lower. As Joe mentioned, customer demand has held up relatively well and the market continues to absorb barges coming out of crude service. That said, volume has been less robust than we would expect in a healthy growing economy. Long-term inland marine transportation contracts, those contracts with a term of 1 year or longer in duration, contributed approximately 80% of revenue for the 2015 fourth quarter, with 55% attributable to time charters and 45% from contracts of affreightment. Pricing on inland marine transportation term contracts that renewed during the fourth quarter was down in the low to mid-single digits. Spot contract rates were at or below contract rates during the quarter. In the spot market, we continue to book the majority of our spot equipment with our term contract customers. In our coastal marine transportation segment, demand for the coastwise transportation of refined products, black oil and petrochemicals remained consistent with the third quarter of 2015. As we have discussed in our third quarter conference call, we've continued to see the trend of the reluctance of customers to term up equipment and electing to access the spot market for their coastal transportation needs. During the fourth quarter, 79% of coastal revenues were under term contracts. Kirby's coastal equipment utilization averaged above 90%, but did briefly touch the high 80s. With respect to coastal marine transportation pricing, term contracts that renewed during the fourth quarter were flat to slightly up. In our diesel engine services segment, our marine diesel and power generation markets experienced stable demand in most regions of the country and pockets of strong demand, particularly in the nuclear power market and in the midwest marine market. Largely offsetting these areas of strength was continued weakness in the Gulf of Mexico oil service business where the OSVs and PSVs are. Our land-based diesel engine services market remains challenging. Inbound orders for pressure pumping, manufacturing and remanufacturing were virtually nonexistent during the quarter. Demand for service parts and distribution also weakened slightly from the 2015 third quarter. We are pleased to say that our transition from 4 manufacturing and remanufacturing facilities into an expanded single location went smoothly during the quarter and should help us continue to streamline costs and bring down the working capital intensity of this business. While this market is depressed, the pace of inquiries for our remanufacturing service has increased recently as consistent attrition in the industry frac fleet continues. This gives us some guarded optimism for a modest recovery in late '16 or early '17. During the 2015 fourth quarter, we continued to execute on our share repurchase authorization, buying approximately 641,000 shares for $39 million or an average of just over $60 per share. The stock price, in our estimation, continues to offer compelling long-term value. In total, for all of 2015, we repurchased over 3.3 million shares or approximately 5.8% of shares outstanding on January 1 of 2015. Currently, our unused repurchase authorization is 1.4 million shares. I'll now turn the call over to Andy to provide some detailed financial information before I finish with a discussion on the outlook.

Great. Thank you, David, and good morning. In the 2015 fourth quarter, marine transportation segment revenue declined 7% and operating income declined 16% as compared with the 2014 fourth quarter. The decline in revenue in the fourth quarter as compared to the prior year was primarily due to a 41% decline in the average cost of marine diesel fuel, an increase in inland marine delay days and an increase in available spot market days for certain offshore marine equipment. The marine transportation segment's operating margin was 22% compared with 24.3% for the 2014 fourth quarter. The inland sector contributed approximately 2/3 of marine transportation revenue, with the coastal sector contributing 1/3. Inland marine weather presented several challenges during the quarter. In the first half of the quarter, we experienced flooding and strong crosscurrents at certain river crossings on the gulf intercoastal waterway as well as the closure of 2 major locks, which were reopened in mid-November. Late in the quarter, high water on the Mississippi River system led to tow restrictions and the closure of the river near St. Louis during the final 3 days of the quarter. These conditions contributed to a 15% year-over-year increase in delay days. High water on the Mississippi River system is continuing into this quarter and, in fact, still impacting the industry in the fourth quarter. Despite these challenges, the inland sector generated an operating margin in the mid-20% range for the quarter. In the coastal sector, the number of contract renewals was limited, but pricing on those that did renew were flat to up slightly. As David and Joe each mentioned, we continue to have equipment move into the spot market as customers are reluctant to agree to term contracts and they are increasingly confident that sufficient spot equipment will be available to handle their needs. We have been successful in keeping spot equipment employed at high levels of utilization, which for the quarter averaged over 90%. Nevertheless, even at high levels of utilization, unutilized days for equipment in the spot market have a negative financial impact relative to the contribution provided under time charter contracts. Additionally, voyage and positioning costs incurred in order to take advantage of spot opportunities can impact profitability. The fourth quarter operating margin for the coastal sector was in the mid-teens. Over the course of 2015, we took delivery of 36 new tank barges, and when combined with the 6 pressure barges purchased in the first quarter, increased capacity by approximately 590,000 barrels. The number of barges we retired, including returned charter barges, totaled 26, removing approximately 380,000 barrels of capacity. We also transferred 2 coastal tank barges that were working inland back into the coastal fleet. The net result was an addition of 14 tank barges to our inland tank barge fleet and approximately 165,000 barrels of additional capacity. In the 2016 first quarter, we expect to take delivery of 3 30,000 barrel inland tank barges, with a total capacity of approximately 90,000 barrels. We currently have no plans to build any tank barges beyond the first quarter, although we will continue to evaluate our needs throughout the year. We expect to retire or return 30 barges over the course of the year and in 2016, with approximately 17.6 million barrels of capacity, a reduction of approximately 365,000 barrels from the end of 2015. In addition to the inland retirements, we retired a 38-year-old ocean-going dry-bulk ATB on the last day of 2015. We expect this will have an approximate $1 million negative year-over-year earnings effect on 2016. In the coastwise transportation sector, with respect to our new vessels, construction of our 4 coastal articulated tank barge and tugboat units continues to progress along the schedule we last presented. The first of our 4 planned ATBs, a 185,000-barrel, 10,000-horsepower ATB, entered service late in 2015. Our second new coastal vessel, also a 185,000-barrel ATB, is likely to deliver in mid-2016. Both 185,000-barrel ATBs are under multiyear customer contracts. We continue to expect delivery of the first 155,000-barrel ATB in late 2016, and our second 155,000-barrel ATB is scheduled to deliver by mid-second quarter 2017. Additionally, we are building a coastal chemical barge that we expect to enter service in early 2017 as a replacement for equipment expected to retire simultaneously. The coastal equipment requirements that we expect to impact our 2016 results include a 150,000-barrel coastal barge that we retired at the end of 2015 and an 80,000-barrel ATB that we expect to retire in the first quarter of this year. You may notice that our total capital expenditures for 2015 were $343 million, approximately $15 million higher than we had anticipated in our last earnings call. This was the result of progress payments on our new coastal units that we incurred in December 2015, a month earlier than anticipated. Moving on to our diesel engine services segment. Revenue for the 2015 fourth quarter declined 65% from the 2014 fourth quarter, and we had a small operating loss for the segment. The segment's operating margin was a negative 0.6% compared with 5.4% for the 2014 fourth quarter. The marine and power generation operations contributed approximately 50% of the diesel engine services revenue in the fourth quarter, with an operating margin in the low double digits. Our land-based operations contributed roughly half of the diesel engine services segment's revenue in the fourth quarter, with a negative operating margin in the low to mid-teens. During the quarter, we recognized some costs related to consolidating our manufacturing facilities into a single location and to inventory adjustments, which led to a more significant operating loss. Also modestly impacting results was our finalization of the previously-announced sale of UE Compression LLC early in the 2015 fourth [ph] quarter. On the corporate side of things, our cash flow remained strong during the quarter, which helped fund our marine equipment construction plans and $39 million of treasury stock purchases during the quarter. Any future decision to repurchase stock will be based on a number of factors, including the stock price, our long-term earnings and cash flow forecasts as well as alternative opportunities available to deploy capital, including acquisitions. On -- our 2016 capital spending guidance range is $220 million to $240 million, including completion of the 3-in-1 tank barges and 1-in-1 towboat to be delivered in 2016 and approximately $95 million in progress payments on new coastal equipment, including 1 185,000-barrel coastal ATB, 2 155,000-barrel coastal ATBs, 2 4,900-horsepower coastal tugboats and a new coastal petrochemical tank barge. The balance of $124 million to $144 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities as well as diesel engine services facilities. Total debt as of December 31, 2015, was $779 million, a $31.6 million decrease from September 30, 2015. Our debt-to-cap ratio at December 31, 2015, was 25.5% compared with 24% as of December 31, 2014. As of today, our debt stands at $734 million. I'll now turn the call back over to David.

Thank you, Andy. In our press release, we announced our 2016 first quarter guidance of $0.75 to $0.85 per share and for the 2016 full year guidance of $3 to $3.50 per share. I'll provide some additional clarity behind the assumptions used in our guidance range in a moment, but first, let me address the environment more holistically. The outlook for our markets is more opaque right now than it has been in many years. Economists tell us that GDP in the U.S. continues to grow, but the source of that growth is not clear. Perhaps the consumer economy is doing okay, but there is a depression in the energy economy and it feels like there is a general malaise, if not a recession looming, in the industrial and manufacturing economies. Most of our markets are being impacted by the volatility in global commodity markets. With these trends as a backdrop, many of our customers are uncertain about the outlook for 2016, which makes the budgeting and forecasting process more difficult. Overall, we think our guidance is pragmatic. Although $0.50 is a wider guidance range than we traditionally give for the year, it reflects the uncertainty we see. We do think we've captured our view of the business as they currently stand. Hopefully, commodity prices will stabilize and the factors that led economists to believe GDP is growing become more evident as the year progresses, in which case, our guidance may prove conservative. Now let me provide some details on our guidance. In our inland market, our guidance is based on continued modest pricing pressure and high levels of utilization for both the first quarter and full year. At the low end, our guidance factors in spot and contract renewal pricing declines in the mid-single digits and utilization remaining in the high 80% range. At the high end, we are assuming pricing stabilizes at current levels and utilization largely remains in the low 90% range. In both of the scenarios I describe, the most influential factor in the income decline from last year is the full year earnings impact from contracts which were repriced at lower levels in 2015. With respect to the first quarter, we also expect an impact from high water that Andy described. We are assuming normal seasonal weather patterns for the remainder of the year. In the coastal market, we continue to realize favorable pricing on spot and contract equipment and the benefit from the new 185,000-barrel ATB, which went into service in the fourth quarter of last year. Additionally, the second 185-barrel ATB -- 185,000-barrel ATB, should deliver towards the middle of the year. The new vessels provide some support for coastal operating margins, but they are largely offset by a combination of the retirement of older vessels and from additional unreimbursed costs for those vessels in service in the spot market when they are not working, which Andy walked through. On the low end, our guidance range contemplates a deterioration in coastal rates, and on the high-end of guidance, we are contemplating coastal rates up in the low single-digit percent range. We expect utilization for the first quarter and the full year to remain consistent with the 2015 fourth quarter. For our diesel engine services segment and our land-based sector, we expect the market to remain extremely challenged. Our most current information suggests that capital spending levels for most of our customers will fall further during 2016. As a result, we expect continued small quarterly operating losses in this business. In the second half of the year, there is the potential for a modest amount of remanufacturing and repair work, which is simply based on the premise that pressure pumping activity will not go to 0 and that there is a finite amount of equipment that can be cannibalized. This is a belief that is backed up with recent customer antidotes. In our marine diesel and power generation markets, we anticipate overall results to be similar to 2015, with weakness in the Gulf of Mexico oilfield service market persisting. In summary, 2015 was a challenging year, but through the challenges, we were able to grow both operating and free cash flow and take steps to position and improve our company for long-term success. We spent over 600 million on a combination of capital expenditures, share repurchases and acquisitions, yet our leverage remained largely unchanged. As always, we will remain focused on what we can control: costs, customer service, safety and disciplined capital allocation. This approach has served Kirby well over our history. While we entered 2016 with an uncertain outlook and a number of market challenges, our 2016 guidance anticipates another year -- year-over-year increase in free cash flow that, combined with our already strong balance sheet, positions us well to take care -- to take advantage of high return opportunities that are often available in these difficult markets. Operator, that concludes our prepared remarks. We are now ready to take questions.

[Operator Instructions] And our first question will come from Jack Atkins of Stephens.

So, David, just to start out, the guidance implies continued deterioration in the marine transportation margins. It looks like '14 to '16 peak to, if you want to call it, trough declines could be greater this cycle than the last cycle. Just curious if there are any cost actions that could be taken on the marine side of the business that could perhaps offset some of the pricing and utilization pressures that you guys are seeing.

Yes, sure. We've begun taking out costs. And actually, through most of '15, we let attrition help take out costs. And we continue to look for cost savings' actions. And you should expect we'll continue to focus on costs and take costs out.

Okay. And then just to follow up. The items that you all called out in terms of the high water and utilization issues, just from a challenging operating conditions in the Marine segment and also the facility rationalization in the diesel engine business, could you guys quantify the impact that had on the fourth quarter, if you're comfortable doing that?

Yes. Jack, this is Andy. Starting from the end, the facility consolidation with the inventory adjustments, and we also took some reserves where we took the opportunity to increase some reserves for bad debts at United, not for any specific customer but just as a general matter of prudence, those were about a $0.03 effect. The high water and the other issues, maybe $0.01 or $0.02. That would be about how I would quantify it.

Our next question will come from Jon Chappell from Evercore ISI.

David, first question around the guidance. And thanks for the detail you provided there, high and low end. But we just kind of think about how it progressed through 2015. It seemed like middle of the year, we started to hear more about the crude oil barges returning to the other services and the pricing pressure really starting to accelerate at that point. So we think about kind of the anniversarying of those -- of that pressure maybe middle of this year and the -- kind of the start of the build-out of some of the new petrochemical capacity. Is it realistic to think that 350 would not be the high end of the range if pricing were to bottom in the middle of this year?

Yes, possibly. To your point, we've seen the number of barges in the crude oil -- in crude oil service in the industry go from -- I think the peak was mid-2014. There were about 550 barges. That's declined all through '15. And as Joe mentioned, we think the current count is about 175. So that overhang of crude oil barges is finite, and it -- there may be a level that the industry will just need because there are some moves, for example, that will continue; for example, maybe Utica. And then if you also think about new barge construction, we're hearing that there's very little on the books to be built this year, maybe 50 or less. And we certainly think retirements will be accelerated this year. So that sets up a pretty good environment potentially. Now the caveat again has been the economy. But you're right, if things stabilize where we're at, we could be at the upper end of that range.

So that was a good lead into my follow-up, too. I've been getting a lot of questions about supply/demand. And maybe the Jones Act business and barges, in particular, a little bit more opaque than some of the other international shipping segments. So that's really interesting, potentially less than 50 barges for this year. Do you have any idea what the net growth was in '15? And it sounds like we could be on the road to contraction in '16. And then how does that match up with -- we keep hearing about petrochemical build-out late '16, but really having more of an impact on '17. Is there any way to kind of quantify the barge capacity that's required for a lot of this new petrochemical capacity? And how that would help balance kind of what's going on in the supply side?

Okay, let me take that in parts. Your first question, the new builds in 2015. We think it was around 260 barges. We're not sure where the retirements are, but they should have been more significant in 2015. Typically, we would expect 100 to 150. It may have been more. We're not sure. But Informa puts out a industry survey later this year. Kind of in April, I believe, is when it comes out. We'll get a better feel for how much had been retired. But clearly, going into '16, we would expect retirements to be more aggressive, and we certainly haven't heard of much building being planned for this year. As it relates to chemicals, we have in our IR presentation a list of over $100 billion, $150 billion worth of chemical plants, and we're tracking them. And over -- we think it's around 70% are under construction right now. So we don't think any of them get -- certainly, if they're under construction, we don't believe they'll be canceled. And the good majority of those, or many of them, will start up in 2017, to your point. Now quantifying what that does to barge utilization, it's hard to put an absolute barge count on it. But certainly, it should be a backdrop, a tailwind, if you will, that will drive barge demand. We've talked about it in terms of GDP, plus something. And now what is that plus? I'm not sure we can quantify it, but in ethylene alone, I think, through 2017, the capacity will increase on the order of about 50%. Well, through 2022, yes. They've got it scheduled out through 2022. But it should be positive. It's very difficult to quantify the absolute number.

Our next question will come from Gregory Lewis from Crédit Suisse.

David, we mentioned the nasty R word on the call a couple of times, it sounds like. Is that something where -- is that more just from a scene macro, listening in to economists? Or is that something that we're starting to see from customers or in some of the business lines, ex the crude barge business?

Yes, it's nothing we can point to. I mean, clearly, the energy business and the energy economy, if you will, is in a recession or maybe even an outright depression. In manufacturing and general industry, refined products and chemicals feel like they're holding up okay, but we just felt and we saw a little dip in utilization. During the fourth quarter, you saw us get into the high 80s. That seemed to be more than just crude barges being returned. However, things are -- we're still pretty busy. It's just you wonder what's really going on in the economy. And as you talk to customers, their tentativeness and uncertainty around what 2016 brings gave us some pause.

Okay, great. And then just, I mean, we saw the U.S. oil ban being lifted. Have we -- has that shown up in any way positively or negatively with the coastal fleet at this point? Or do you think it's kind of just still too early to tell?

It may be a little early to tell, but frankly, it looks like it's been a nonevent. We thought that exporting crude would cause the Brent WTI spread to collapse, but frankly, that had already started to narrow as early as September of last year. And when it did narrow, we saw some imported oil coming up -- coming into the East Coast refineries. So largely, once the legislation was passed, it really didn't change much.

Our next question comes from Kelly Dougherty of Macquarie.

I just want to get your thoughts on how much lower you think inland contract pricing, so, again, on the renewals, not the impact from rolling into 2016. How much lower do you think they can go near term? Because we did an analysis recently that suggests we're quickly approaching a level where some of the highly-levered or the less efficient operators aren't going to be covering their cash costs. So just wondering if you think that provides some kind of floor for inland pricing? Or perhaps accelerates some of these retirements we've been talking about?

Yes, certainly. As we get closer to cash flow breakeven-type rates, that it certainly will put some stress on some of our less well-capitalized competitors, which, frankly, we wouldn't be too disappointed if they have some problems because it may generate some acquisition opportunities. But right now, the utilization rates that we have just don't -- I don't see that as an eventuality. We're still, as you heard, high 80s, low 90s. At these utilization rates, we wouldn't expect rates to get down to cash flow breakeven levels.

Not necessarily for Kirby, but for some of your peers who might be more levered or significantly less efficient?

No, not at these utilization levels. I just don't see it. I mean, it's possible, but we're still pretty busy and we shouldn't get that low.

Okay. And then maybe just as a follow-up, I guess. How bad do things need to get? Or how long do they need to stay that way to serve as an impetus for people to start to scrap some of these older barges and just the fact that there may be customers being more discerning about the age of the barges they take, an old factor [ph]? And I think you said 100 to 150 is a normal year. So I'm just wondering what you think might be the retirement of scrappage numbers for 2016.

Yes, it's hard to say. We're -- you heard in our -- Andy's prepared remarks that we're retiring some vessels and some barges. In this environment, you would expect, as it's more difficult and a little more challenging, that it's just natural to have more retirements. To put a number on it, I can't really do that.

Our next question comes from Doug Mavrinac of Jefferies.

You guys did a great job explaining what happened during the fourth quarter and then also kind of laying out your 2016 expectations. So no real questions there. But my first question pertains to just kind of the bigger picture. I mean, utilization levels in the high 80s, low 90s, not that bad. Term pricing in inland, down a little bit; coastal, up a little bit. I mean, things seemingly are holding in much better than the sentiment is. So my question is, with a 25% debt-to-cap, strong cash flow, is this the type of environment where you can start seeing some acquisition opportunities turn up that otherwise wouldn't have been there over the last 3 to 4 years when things were -- when both sentiment and the fundamentals were quite strong?

Yes, absolutely. As you've seen in the past, when things get a little tougher, you find owners, sole proprietors may be interested in selling or other companies looking to -- for other avenues of growth, maybe want to generate some cash. So it's absolutely more possible and even more probable to have acquisitions in this type of environment.

Got you. And then just as my follow-up. Greg talked about the lifting of the ban on U.S. crude oil exports, and obviously, we haven't seen a big impact yet. But this is more of a confirmation question. I mean, in terms of Kirby's exposure, you guys only have, I think, what, 2 coastal assets moving crude oil, and then those are just in the Texas, Louisiana region. Is that right?

Yes. We have 3 barges moving crude. Yes. And that's out of our 69 barges. So it's not very big. But given the whole industry is down in terms of the number of barges moving crude, but refined products are up.

Our next question comes from Kevin Sterling from BB&T.

Dave, I know there's been a lot of talk about the pricing weakness, but maybe I can ask a different way. The pricing weakness this cycle, it just seems to be so different than past cycles because your utilization that you talked about is still good. I think historically, and if I can remember, I know Joe's on the call, historically, you talk about when utilization is above 80%, barge operators tend to have pricing power. What makes this cycle so different than past cycles with utilization well above 80%? Is it just the volatility of the crude markets?

I think, Kevin, this is Joe, what you have is just a collapse of confidence that occurred when barge rates were historically high levels. And the concern is that those levels aren't sustainable as you get additional capacity back from the crude oil service. And it is unusual. I mean, I would have told you that if you'd asked me this before it happened, that it wouldn't happen. But I think that there was some overenthusiasm in the business that was then crushed by equipment suddenly being returned and having to be placed in other service. As I look at this market, I think that we're a lot closer to balance than really any other period where you saw pricing declines occur in the past. And as things settle down, I think as people get a little more confident that utilization isn't going to continue to go down, I think that you'll -- you should get some stability. With respect to regaining some of that pricing, I think that's going to take a little time. But I don't see anything really out there, other than a -- the potential recession that David alluded to. That's more just a feeling that we're not generating the growth in this country that we'd like to see and that if you're in Houston, you're in a depression, which colors your outlook also. And a lot of our customers, of course, are in Houston. So there is some general concern out there that I think you pick up because of the environment that suggests that maybe the economy's going to get worse. But let's assume that doesn't happen. I think if it doesn't happen, you're a lot closer to balance than maybe the pricing decline suggests.

Right, Joe. That's very, very helpful, kind of what I was thinking. And let me follow up with that if you don't mind. And so let's assume, if utilization were to fall, what do you think happens to pricing? Has pricing -- it seems like pricing, in your opinion, may have fallen enough or maybe too much that if utilization were to roll over, pricing may not follow lockstep. Is that a correct assessment?

Well, I think that there are limits to where pricing can go. It really -- going back to Kelly's line of questioning, you can get to cash breakeven pretty quickly if you see continued deterioration in pricing. Now different operators have different breakeven requirements, but it's hard to see how pricing could get with any significance, any -- much lower than where you are today -- in some of the markets. I mean, pricing, of course, is all over the place, depending on what market you're servicing. But I do think that there's a bottom that is closer to where you are today than where the top was when you were at historically high rates.

Our next question comes from John Barnes of RBC Capital.

Two things. Number one, you talked at the end of the press release about just the balance sheet condition and the fact you're going to generate more free cash in 2016. I know you've typically had these 4 buckets in terms of your use of cash. Given where the stock has fallen to and maybe it seems like M&A's proving a bit more elusive in the cycle than we would have expected, is there any thought about maybe getting much more aggressive at the buyback? It certainly seems like the balance sheet could handle a much more aggressive buyback, plus leave plenty of dry powder for M&A should those opportunities present themselves.

Yes, no, John. We absolutely believe that the price of Kirby stock's a great long-term value right now. And M&A, as you know, and you've heard us say, is very difficult to predict. But we love to do M&A. That's always a good way to grow the company, and that's usually our first preferred use of capital. But certainly, at these price levels, Kirby stock is very attractive to us. We'll -- you'll continue to see us use our balance sheet prudently as opportunities present themselves. Probably best for me not to get any more specific than that.

Okay. All right. Very good. And then in looking at land-based diesel -- and, look, I know it's been volatile over the last couple of years and we get why. With it now popping back up into maybe some operating losses, I guess it's kind of a two-pronged question. You seem like you took a lot of costs out of the business last year and now you've got another leg down that's kind of overwhelming that. Is there anything else to do on the cost side of that business? Or is this just a function of, "Hey, here's the minimum infrastructure we've got to have," and therefore, at some point, it's just going to be revenue-dependent? And then secondly, if that's the equation you're dealing with, and you're dealing with an outlook for maybe some more quarters of operating losses and you've got this maybe nebulous kind of recovery out there, at what point do you just say enough? And you either punt this business, you close it and you walk away somehow because it just doesn't fit, the volatility is too great.

Yes. No, I mean, you are always working on costs. As you know, John, we'll continue to look at cost. But we have taken a lot of costs out. We've got the business pretty much to barebones. Now it is about revenue. If you don't have inbound orders, at some point, you can only do that for so long. I am encouraged by recent customer conversations. The amount of frac equipment that's still being utilized and the amount of frac equipment that's being cannibalized in support of that utilization, really, at some point, there has to be some maintenance done or some remanufacturing done to that fleet. Now as you've seen with the oil service market and our energy customers, it's pretty tough out there. But we will -- we won't sit idle for too long just bleeding. We'll always look for ways to reduce costs and make it as painless as possible.

Our next question will come from Ken Hoexter of Merrill Lynch.

Joe, Dave, and -- I just want to hit on the time frame that you see barges being scrapped. Maybe can you talk about historically what -- how long does it take for the market to react and quickly get those barges out of the market in order to reestablish kind of your baseline on utilization and, ultimately, on pricing?

Kenneth, it's more complicated than you think because it depends on the age of the barge. Barges, if they are over 30 years, it's pretty easy. Barges that are under 30 years, they typically won't get scrapped, but you will have operators that will just defer the maintenance on them, will tie them up, not spend the money and wait for the business to improve before they'll start spending money on them again. And that can happen pretty quickly if you get rate levels towards breakeven. Scrappage is more difficult to determine because it's driven by age.

And, Joe, cash flow breakeven, is there a price in the industry or a utilization in the industry that we should watch for that, hey, that means we're getting closer to that level?

Well, it varies by operator. But in some cases, you're not that far away from it. But again, to David's comments, we don't think we're going to get there. The utilization levels are still pretty high. I think there's a better argument for pricing stabilizing than further deteriorating.

Okay. And then, Andy, just for my follow-up, the -- talking about taking costs out that you were mentioning before. Can you kind of put in perspective, right? Because if we -- I think one of the questions earlier was talking about the downtick of earnings being, it looks like, more severe now than during the Great Recession. So you acted kind of on terms of ending leases and things like that last go around. Do you have as much expenses to cut? Or do you feel like you're a little bit tighter because you've already gone through that only a couple of years ago?

Yes, I would say relative to the last downturn, we're probably a little tighter. Now we've always got things that we can do certainly on the horsepower side of inland should anything get worse. But we don't see that happening. If you look, even if you look at our SG&A expenses over the course of '15, they were $17 million down relative to '14. So we've been doing some things actively and we're always doing these types of things and we'll continue doing that. But given the level of utilization, I would say that you'll continue to see that more on the SG&A side than you would on the operating cost side.

Okay. I'm just a little confused. When you say you don't see that happening, yet your forecast on earnings is to drop more than you did in the recession. So it seems like they are happening. Or am I misinterpreting your answer?

Yes. Ken, let me try. In the big recession, we saw volumes across the board fall. Here, we're just seeing pricing fall, but yet we're still very busy. If you look at our activity levels, we're still very busy. The number of boats we're running is still high. In the Great Recession, when volumes fell off, we were -- basically didn't have work for equipment. And it was very easy to go -- I say very easy; it was -- is still difficult. But we would tie up charter boats. We'd let charter boats off. In this case, we're still very busy and employing a lot of equipment. It's just been the pricing has declined while utilization has stayed fairly robust.

Our next question comes from Bill Baldwin from Baldwin Anthony Securities.

I just wanted to see if the stronger dollar that we've had here versus some of the countries, particularly in South America, that have taken a lot of our refined products and so forth, if those export markets have been impacted here a little bit in the last several months or so of last year, and that could be impacting some demand for equipment.

Yes. I think the export markets have been impacted a little bit by it. And talking to our customer base, some of the refined product exports have maybe tailed off a little bit. But by the same token, they're still running their refineries pretty much flat out here. Domestic demand's up. You've seen vehicle miles traveled and driven are rising. But yes, the strong dollar is certainly not a positive for the exports with our customer base.

And, Bill, the miles that are driven here are going to be -- they're going to mean more for our volumes than the volumes that are exported. If you look at miles driven, it really is remarkable, the increases that we have seen in the last year.

So exports overall then are not that really -- that important to your overall utilization then of your inland fleet?

It all counts, but miles driven is more important.

Our next question comes from Steve Sherowski from Goldman Sachs.

Just from an industry perspective, are you seeing crude oil hold up in any particular market? I know that, previously, you mentioned Utica was an area of strength, but we know that a lot of producers are now focusing more on dry well production, which probably gives less of an opportunity for tank barge movements. And we're also starting to see the Eagle Ford production rollover accelerate. Is that fairly consistent with the data that you're seeing?

It is. Yes, no, we've seen Eagle Ford coming down with -- Permian's probably okay. Bakken is coming down. Utica just seems -- they're drilling for -- or they're producing dry gas. But there's some entrained liquids that they're finding up there, and we're still seeing that go. I think we've looked at some forecasts where Utica actually grows next year. I'm not sure that, that holds up at $30, but some of the forecasts are saying that. So -- but you're right about the other areas declining.

Okay. And just a quick follow-up. For these petchem facilities that you're expecting to come online in '17 and beyond, when could you expect to start having negotiations with those companies in terms of contracting out that barge capacity that they'll need down the road? Is that sort of a midyear event? Or could we expect it maybe towards the latter end of this year or even early next year?

It's so dependent on the customer. Some customers, we basically move everything they have, and they may wait until later and they get much closer to the startup before they start talking about their demands. Others may come earlier because they want to just make sure that they've got the barge capacity lined up. It's just so customer-dependent and actually plant-dependent as well and location-dependent. There's just so many variables. We've had some conversations with some customers already, but I wouldn't say they're in the bid phase.

Our next question comes from Matt Young from MorningStar.

Just on the previous question, in terms of the petrochemical plant expansion along the Gulf Coast and the related opportunity for you guys, would you say that most of that activity will be addressable? Or I think you alluded to, does it depend on the ultimate mix of downstream activity, the types of chemicals being produced and so forth?

Yes, you're exactly right, Matt. It does. If it's an ethylene plant going straight to polyethylene, there's probably not much barge movements. But if they go to the downstream derivatives, and depending on the level of the petrochemical complex that they're building it in and the amount of integrated plants, a lot depends on that. If it's going straight from ethylene to EDC in a plant right next to it, maybe you don't see a lot of moves. But a lot just depends on where they're building it and what's downstream from it. So you're exactly right.

So at this point, it's hard to say if it's going in your favor or to what degree it's going in your favor?

Well, we absolutely believe it's going in our favor. It's to what degree.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Adlakha for any closing remarks.

We appreciate your interest in Kirby Corporation and for participating in our call. If you have additional questions or comments, feel free to reach out to me directly at (713) 435-1101. Thank you, and have a nice day.

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