Kirby Corporation (KEX) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Kirby Corporation 2016 First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Sterling Adlakha. Please go ahead.

Thank you, Kerry. Thank you everyone for joining us this morning. With me today are Joe Pyne, Kirby’s Chairman; David Grzebinski, Kirby’s President and Chief Executive Officer; and Andy Smith, Kirby’s Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirbycorp.com in the Investor Relations section under 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 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 end the December 31, 2015 filed with the Securities and Exchange Commission. With that, I will now turn the call over to Joe.

Yes, thank you Sterling and good morning. Yesterday afternoon, we announced first quarter earnings of $0.71 per share including severance charges of approximately $0.06 per share versus our guidance range of $0.75 to $0.85 per share. That compares with a $1.09 per share reported first quarter last year. In the marine tank barge utilization during the first quarter remained in the 90% to 95% range. The supply overhang from barge clean data crude oil service and put into other trades over the past 12 to 18 months continued to have some impact on pricing. However, we think the trend of barge cleaning out of crude oil service into clean service has slowed significantly. And we believe that industry utilization levels have modestly improved. Additionally, we have not seen an increase in the inland tank barge order book for 2016, which is now at low levels. Should the trends that we have seen in April continue for another couple of months, our outlook for this business will continue to improve. In the coastal sector of our business, utilization remains stable, with coastal tank barge utilization in the high 80s to low 90% range. Market is in relative balance even with additional spot exposure. Average pricing on contract renewals of the coastal equipment increased during the quarter. Part of this increase was the result of price adjustments of legacy contracts which were below market rates. Also influencing our results in this business is the amount of equipment trading in the spot market, which has idle time exposure. In our land-based diesel engine service business, market conditions deteriorated further than we envisioned when we provided guidance in January. There have not been many positive signals in the oil service market. There has been an accelerating decline in U.S. oil production, which has led to cannibalization or at least some cannibalization to existing U.S. pressure pumping capacity which should create future demand. However, without more tangible improvement, the prudent thing to do is to aggressively reduce cost in this business. Market has simply been far worse for longer than I think anyone in the market anticipated as evidenced by recent earnings in CapEx revisions by several large oil service companies. In the marine power generation business, our marine diesel engine business, the oil service market which services the Gulf of Mexico remained depressed. And we experienced customer deferrals of major maintenance projects throughout all of our marine engine service locations during the quarter. This is not unusual when you get in this kind of environment. This broad impact on a marine market speaks to the uncertainty of not only the oil service business, but also the dry cargo market that the inland side of the business services and in some respects, the general economy. In summary, we find ourselves in the midst of a very challenging environment in both our marine and diesel engine businesses. At the same time, we have seen some encouraging trends in our marine markets, particularly the inland market where pricing seems to have stabilized. I will now turn the call over to David.

Thank you, Joe and good morning everyone. Let me start with a quick comment on our recent cost savings actions and then move to first quarter results across our businesses. Our cost-cutting efforts included a reduction in force that was implemented in February. We reduced headcount and corporate staff, marine shore side staff and diesel engine personnel. These reductions led to severance costs of approximately $0.06 a share. While the staffing reduction was the most visible cost-cutting action during the quarter, we have several teams dedicated to streamlining of our cost structure across the company and in improving customer service. It is our belief that as conditions across our markets improve, we will be positioned to improve market share in each of our businesses while simultaneously improving profitability. Turning now to a summary of first quarter results, in the marine transportation segment our inland marine barge demand saw some modest sequential improvement as utilization stayed in the 90% to 95% range throughout the quarter. During the quarter, high wind and fog impacted operations along the Gulf Coast and high water on the Mississippi River system led to delays and added horsepower requirements. The direct costs associated with these challenges were partially mitigated by contract clauses that protect us from navigation delays, particularly as it relates to high water. On a clearly positive note, we think the number of barges transitioning from crude oil into other services slowed dramatically. We believe the industry fleet wide number of barges in crude service is currently just under 175 virtually unchanged from earlier in the year. The industry has absorbed a large number of barges from both new construction and from displaced crude movements during the past year to 18 months and is very close to tightly balanced. Nevertheless, pricing on our inland marine transportation term contracts that renewed during the first quarter were down in the single-digit range. Average contract pricing was skewed lower by re-pricing of some longer term contracts. Excluding these contracts, a more representative indication of pricing on inland contract renewals was down in the low single-digit percent range on a year-over-year basis. Spot contract rates were roughly in line with contract rates during the quarter and were flat sequentially with the 2015 fourth quarter. However, in April, we did see some firming in the spot market from market lows. In the inland marine market, we continued to see growth, modest growth in demand for petrochemicals and refined products transportation with crude oil demand relatively flat with the 2015 fourth quarter. The black oil market meaning heated products, excluding crude oil, was weak throughout the quarter largely due to commodity price volatility. But utilization in our black oil fleet recovered towards the end of the quarter and into April. In our coastal marine transportation segment, demand for the coastwise transportation of refined products black oil and petrochemicals remained consistent with the 2015 fourth quarter and tank barge utilization continued to be relatively strong. With respect to pricing term contracts that renewed during the first quarter increased by a double-digit percentage on average. However, this pricing was skewed by the renewal of a couple of small legacy contracts with rates that were significantly below market levels. Excluding those contract renewals, renewals on coastal equipment contracts were essentially flat. In our Diesel Engine Services segment as Joe mentioned, our marine diesel and power generation markets experienced widespread deferrals of major maintenance projects across all of our marine diesel engine operating regions. While there is some possibility that these deferrals could lead to higher business levels later this year, our assumption is that that will not happen. Particularly if the inland dry cargo barge and Gulf of Mexico oil service markets do not improve. In our land-based diesel engine services market, our ability to maintain breakeven profit levels with our current staffing was dependent on maintaining a steady level of parts and component sales and a modest amount of remanufacturing activity, a view what we garnered from close coordination with our major customers. However, as the first quarter progressed, orders for parts and components declined precipitously. Projected spending levels from our major customers for the full year 2016 for parts and component sales were revised down by over 50%. On the service side of the business, the year began with some incrementally positive indicators as customers requested to remanufacture portions of their fleets, with the opportunity to remanufacture larger portions of their fleet as the year progressed. However, financial stress and uncertainty around consolidation opportunities among our customer base has resulted in almost all remanufacturing being placed on hold for the near-term. As we will work through these challenges and await an inevitable improvement in the market, we want to strike a balance between maintaining the capability to respond to demand when the market turns and a cost structure that is appropriate for the current market. The volatility of the market and opaqueness of the outlook make this difficult. So we thought it prudent to assume these tough conditions persist through the remainder of this year and consequently we reflected that in our forecast. I will now turn the call over to Andy to provide some detailed financial information before I finish up with a more detailed discussion of the outlook.

Thank you, David and good morning. In the 2016 first quarter, marine transportation segment revenue declined 10% and operating income declined 28% as compared with the 2015 first quarter. This decline in revenue was primarily due to a 38% decline in the average cost of marine diesel fuel, lower inland marine contract pricing and an increase in available spot market days for some of our offshore marine equipment. The marine transportation segment’s operating margin was 18.4% compared with 22.9% for the 2015 first quarter. The inland sector contributed approximately two-thirds of marine transportation revenue during the 2016 first quarter. Long-term inland marine transportation contracts, those contracts with a term of 1 year or longer in duration, contributed approximately 80% of revenue, with 55% attributable to time charters and 45% from affreightment contracts. As David mentioned, our utilization was consistently above 90% throughout the quarter and the inland sector generated an operating margin in the low-20% range for the quarter. In the coastal sector, utilization during the quarter was in the high 80% to the low 90% range. The trend of our customers electing to source coastal equipment through the spot market versus renewing term contracts continued in the first quarter as we saw the percentage of coastal revenue under term contracts dropped slightly from the 2015 fourth quarter to 78%. The first quarter operating margin for the coastal sector was in the low to mid-teens. As mentioned in the press release last night, we incurred an approximate $5.6 million or $0.06 per share in severance expenses during the quarter. Of this amount, approximately $0.03 per share was in our inland marine business approximately $0.01 per share is in our coastal marine business and approximately $0.01 in our marine and power generation diesel businesses, with the remainder split between the land-based diesel engine business and the Kirby Corporate Office. Turning now to our marine, construction and retirement plans, during the 2016 first quarter, we took delivery of three new tank barges and we retired a total of 16 barges. The net result was a reduction of 13 tank barges to our inland tank barge fleet or approximately 278,000 barrels of capacity. Also during the quarter, we committed to build an additional four 30,000 barrel tank barges for delivery in 2016 to meet our existing fleet needs and attractive pricing. For the remaining nine months of the year, we expect to take delivery of these four inland tank barges and to retire or return an additional 18 barges with 235,000 barrels of capacity. On a net basis, before giving effect to the additions from the SEACOR fleet, we expect in 2016 with approximately 17.5 million barrels of capacity, a reduction of approximately 400,000 barrels from the end of 2015. In mid-April, we closed on the acquisition of SEACOR’s fleet of 27 30,000-barrel inland tank barges. Additionally, one 30,000 barrel tank barge and one inland towboat are under construction and are expected to be delivered before the end of the quarter. Including these additions to our inland fleet, we expect to end 2016 with a total of 18.4 million barrels of capacity. In the coastline transportation sector, we expect delivery of our second new 185,000 barrel ATB in mid-2016. The first of two new 155,000 barrel ATBs should deliver in late 2016. Our second 155,000 barrel ATB and the coastal chemical barge are expected to be completed in 2017. Our 2016 coastal equipment capacity plan includes a single retirement of an 80,000 barrel tank barge in the second quarter. On a net basis, we expect to end the year with 6.3 million barrels of capacity, an additional 260,000 barrels from the end of the 2016 first quarter. Moving on to our diesel engine services segment, revenue for the 2016 first quarter declined 52% from the 2015 first quarter and we had an $806,000 operating loss for the segment. The segment’s operating margin was a negative 1% compared with 5.3% for the 2015 first quarter. The marine and power generation operations contributed approximately 60% of the diesel engine services revenue in the first quarter, with an operating margin in the low double-digits. Our land based operations contributed roughly 40% of the diesel engine services segment revenue in the first quarter, with a negative operating margin in the high teens. On the corporate side of things, we raised our 2016 capital spending guidance range by $10 million to a range of $230 million to $250 million to account for the additional four inland tank barges that we expect to build this year. Our capital spending guidance for the year included approximately $10 million for the construction of seven inland tank barges to be delivered in 2016, approximately $100 million in progress payments on new coastal equipment, including one 185,000 barrel coastal ATB to two 150,000 barrel coastal ATBs, two 49,000 horsepower coastal tugboats and a new coastal petrochemical tank barge. The balance of $120 million to $140 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities as well as diesel engine services facilities. In addition to capital spending guidance for the year, we used $88 million in cash in April of this year for the purchase of SEACOR’s 30,000 barrel inland tank barge fleet. During the 2016 first quarter, we continued to execute on our share repurchase authorization buying approximately 35,000 shares for $1.8 million or $52.53 per share. The stock price, in our estimation continues to offer compelling long-term value. We will continue to evaluate share repurchases in concert with other capital allocation opportunities. Currently our unused repurchase authorization is approximately 1.4 million shares. Total debt as of March 31, 2016 was $712 million, a $63 million increase from December 31, 2015. Our debt to cap ratio at March 31 was 23.5% compared with 25.4% the end of last year. As of today, our debt stands at $783 million. I will now turn the call back over to David.

Thank you, Andy. In our press release, we announced our 2016 second quarter guidance of $0.65 to $0.75 per share and for the 2016 full year guidance of $2.80 to $3.20 per share. Our guidance for the year reflects our 2016 first quarter GAAP earnings per share of $0.71 which includes $0.06 per share of severance charges. As we mentioned earlier, the significant change in our outlook is related to the land based diesel engine business, which we now expect to incur quarterly operating losses for the remainder of the year. With that overview of the changes to our guidance, let me also briefly address the primary factors in the guidance range for each of our markets. In our inland marine transportation market, as mentioned in our press release last night, the inland market showed some tangible signs of improvement in April with utilization improving, particularly for 30,000 barrel tank barges and competitor spot pricing in the spot market improving from previous month. Refined products and chemical volumes have been strong, with the black hole market seeing some renewed strength in April following a tough first quarter. While we are encouraged by these developments, we are cautious in extrapolating the impact for the rest of the year. At the low end of our guidance, our guidance factors in spot and contract renewal pricing include declines of low single-digits and tank barge utilization in the high 80s to low 90% range. At the high end, we are assuming year-over-year pricing stability going forward and utilization in the 90% to 95% range. We are assuming normal seasonal weather patterns for the remainder of the year. In the coastal market, on the high-end of guidance, we are expecting flat to slightly higher pricing on contract renewals and utilization in the high 80% range. On the low end, our guidance range contemplates a deterioration in coastal rates, with pricing declines on contract renewals in the low single-digit percentage range and utilization in the mid-80% range. For our Diesel Engine Services segment in our land-based sector, although oil prices have improved somewhat, it has not yet translated to an improved outlook. The improvement may come in the second half, but with lower spending levels seen in the first quarter, we felt it prudent to adjust this portion of our quarterly and full year guidance. We will continue to evaluate market conditions and adjust the cost structure as necessary to meet current and projected levels of demand. But a balance, but must balance the lack of volume in today’s market with the outlook for a market recovery as oil prices continuing to increase. Where we fall within our guidance range this year will partly hinge on whether we see an improvement in activity in the second half of the year. In our marine diesel and power generation markets, we expect the weakness in the Gulf of Mexico oil service market to persist for the entire year. There is some possibility that major maintenance projects deferred by customers in the first quarter could drive better performance later this year, but our base case assumption is that those deferrals will not lead to firm orders until 2017. So in summary, our balance sheet and cash flow are in great shape giving us the flexibility to do acquisitions and share repurchases. The marine business is stable with the inland markets poised for improvement and with a bright outlook for petrochemical volumes. Diesel engine services is weak, but with growing pent-up demand. In the diesel engine businesses, it is not a question if the markets will come back, but a question of when. Operator, that concludes our prepared remarks. We are now ready to take questions.

Thank you. [Operator Instructions] Our first question comes from Mike Webber of Wells Fargo. Please go ahead.

Hi, this is Donald Bogden stepping in for Mike. Good morning, gentlemen and thank you for taking my call.

Good morning.

My first question is on the inland barge order book, it seems we are coming down to peak levels seen in 2014, 2015. And you have mentioned previously the potential for negative growth this year. Could you give some updated color on that? I know you put numbers around what your expectations for inland barge growth this year, next year are?

Yes. Right now as we look at the orders and many of the orders for delivery in 2016 were placed last year. We think it’s around 100 new barges, but what we don’t know is the number of retirements that may occur this year. You heard in Andy’s prepared remarks that we are retiring a number of barges. We do believe that some others are going to retire older equipment as well. Also in that number of new barge builds that we expect this year, the vast, well, not the vast majority, but over half are probably 10,000 barrels. And those we know, many of them were placed early in 2015 or in 2015, so kind of a carryover. So, it does look reasonably good on the new build additions given that we expect retirements usually to be in the 75 to 150 barges retired a year. Sometimes they go north of that.

Got it. Thank you for that. And my follow-up is on utilization in the inland segment, it seems to be holding up better than the coastal segment. What do you think the primary driver is there? Is that mostly a function of the falloff in crude exports out of Corpus Christi adversely impacting the coastal market or are there other factors at work there?

Yes. The inland market what we have seen is basically demands picked up. The inland market has absorbed a lot of barges, with both new builds and returned cleaned up barges from crude service over the last 18 months. And that – as we mentioned the crude kind of – the number of crude barges being returned is essentially stopped. So, with the demand pickup utilization has tightened up and that’s what we have been seeing. And you saw our utilization was in the 90% to 95% range for the quarter, which is pretty good. And that’s really all about demand. On the coastwise side, demand is relatively in balance. It’s not a lot different than we are seeing on the inland side.

Got it. Well, good to hear there is some green shoots emerging. And thank you for your time gentlemen.

Thank you, Donald.

Our next question comes from Kevin Sterling of BB&T Capital Markets. Please go ahead.

Thank you. Good morning, gentlemen.

Hey, good morning, Kevin.

David, I can follow-up on that utilization question. Can you remind us how much of your business on the inland side is time charter versus contract of a freightment and spot?

Yes, Andy has got the specifics.

Yes, so term contracts on inland are 80%, Kevin. With 50% of those being time charter and 45%, I am sorry, 55% and 45% being contract of a fragment.

Okay. When you guys talked about utilization in the 90%, 95% range, do you look at it differently versus time charter versus contract of a freightment and spot?

No, that’s just outright barge utilization, Kevin.

Okay, got it. Alright. And David, obviously you talked a little bit about spot strength you are seeing in April. What do you think is driving that? It sounds like a little bit more demand. But in March, I think we started seeing the spot market strengthen a little and that may have been due to some high water barges out of position, lock closures, etcetera. So, do you think this movement we are seeing in April is a little bit more real, if you will and do you think it will continue? Because if I recall last year, we had a little bit of a head pick in the spot market, so maybe talk about what you are seeing now and why it might be different from last year or maybe it’s not?

No, Kevin. Good question. It is hard to extrapolate one month here, but clearly weather was a little bit of it. Weather sometimes tightens up utilization, but what we felt was demand was up a little bit here. And that there is demand for the spot barges and there is a little bit of a scarcity in the number of available barges, because of that additional demand and so that brought spot pricing up off its lows which was good to see. But to your point, you don’t want to – we don’t want to be overly aggressive in extrapolating that, but it’s an encouraging sign.

Okay, great. Thanks so much for your time this morning.

Thanks, Kevin.

Thanks, Kevin.

Our next question comes from John Barnes of RBC Capital Markets. Please go ahead.

Hey, thank you. Good morning. Thanks for taking my questions. First, on the new coastal barges that you are taking delivery of, took delivery of – I know those initial barges came with contracts. Based on what you have seen in the coastal markets, have you been forced to revisit those contracts? Has there been any change in the terms that were initially struck?

No, Kevin, there haven’t those contracts, yes. I am sorry. John, sorry about that. No. Yes, no, there has been no change. The initial, we have 185 come out, one of the 185s come out at the end of the year. She is under a long-term contract. There has been no changes to her terms at all. We have another one coming out mid this year and she is under a long-term contract as well and there are no changes to those contract terms at all.

And any update on contracts for the other two on order?

No. We are working actively with some customers talking to them about those two barges. The first one, as Andy indicated comes out at the end of the year. The other one is in 2017. But we are in active discussions on those two barges.

Okay, alright. And then looking at the diesel engine business as a whole, obviously we know the pressure points on the land based side, it now seems like the core business, especially from maybe the offshore business is a little bit under pressure, you incurred a modest loss in the quarter, I know you have taken a tremendous amount of cost out of that business, is there anymore to do there, that gets this thing back to kind of breakeven on a consistent basis or at this point is it really about having to get some business activity pumping back through there?

Yes. It’s more of the latter. John, we have taken in the land based united business, we have taken our headcount from 950 employees around, down to in the 300s. So we have taken a lot of costs out. What we are trying to balance is being prepared for the inevitable upturn. The amount of pent-up demand for maintenance on frac equipment is substantial. So you don’t want to cut too deep, you got to be able to respond to some customer demand that we believe will be inevitable. So we are trying to balance that. You keep looking at your cost structure every day. And we will continue to do that. We just felt it prudent to kind of take down our estimate on the land base business, that’s the key part of our guidance change here is all about that land business. This did not feel prudent to forecast kind of a rebound towards the end of the year at this point. Maybe we see it. Maybe we do not. But we did not want to fight it all year long.

Alright. And is there one macro data point on the land based side that you look at and I mean is it the rig count number, I mean if we were thinking about it, we obviously do not have – we are not ready [ph] to your internal discussions with customers, but if there was that one data point that would suggest stabilization or something, is it rig count, what is it that you look for?

Yes. Land-based rig count is probably the most obvious one. Now that said, there are anywhere from 3,500 to 4,000 DUCs, which is drilled but uncompleted wells. So they basically drilled the holes, they just haven’t fracked them. So you could get, with this oil price rebound you could get some of those DUCs, if you will. They could drive some pressure pumping utilization, which would clearly help our business because we think the state of the pressure pumping fleet is in pretty poor repair. They have been cannibalizing it and some of the cold stack fleets really are not even operable. So short answer to your question, the rig counts, the most obvious one, but there is this phenomena of drilled, but uncompleted wells out there that may give us some advance business before the rig count rebounds.

Very good and I appreciate that color. Thanks so much for taking my question.

Thanks John.

Our next question comes from Gregory Lewis of Credit Suisse. Please go ahead.

Yes. Thank you and good morning.

Hi, good morning Greg.

David, in the prepared remarks and again on the call, you talked about in regarding the coastal business that you are just seeing more of the equipment go on to the spot market and it sounds like it’s just on the margin, what do you – do you have sort of any thoughts about what is driving or beyond willingness of customers to sort of take those longer term charters. And then just the other question I wanted to ask is, when a coastal vessel is in spot, what is a typical duration of a spot voyage?

Yes. Let me take that in two parts. Well, first a spot voyage can be anywhere from one month to six months. For us, anything spot is less than 1 year. So you can have one month, three months, six months, nine months voyages or contracts that we consider spot. But in terms of what we think is driving it is, is there a number of new builds coming out. And I think customers, given the uncertainty with commodity price volatility and the number of new builds coming out, they are kind of waiting to see, they don’t feel like they are going to have a problem finding equipment. Now that said, as you know there is a number of barges, we think it is over 40 that are 30 years or older that need to come out of the market. And they will come out. It’s just – it’s a matter of the timing between the new builds coming in and the old barges coming out.

Okay. And then just my follow-up is going to be on the diesel engine service business, if you think about, during I guess 2 years ago, during the peak, it sounded like remans were being – the reman jobs were going anywhere from $500,000 to upwards of $600,000 a day are for a unit, where is that pricing sort of trended now, if I had, you mentioned a lot of these cannibalized pieces of equipment, if I want to reman one of those in this market, what sort of pricing am I looking at?

It’s so variable Greg, I think the issue is, what did they cannibalize, if they just took the fluid ends off or if they took an engine off and put an engine on another frac spread, it would be – it would depend. Now, if they are just sitting there not maintaining them at all, it could be substantial and you could see, north of that $500,000 a unit. Some of them may be very small in terms of what it needs to get them back into operation. But others could be quite substantial.

Okay. Guys…

I know that’s a non-answer, Greg. But the short answer is probably we do not know. But it’s going to vary depending on what they cannibalized.

And that’s what I was trying to understand. I mean we have been hearing that there is varying degrees of what an idle frac spread looks like where some are just – you are left with just the actual truck and others where to your point, there has been one or two or three things, maybe three things taken off. So I just trying to see if you had anymore color than that. But anyway, hey guys, thanks for the time.

Thank you, Greg.

Our next question comes from Doug Mavrinac of Jefferies. Please go ahead.

Thank you, operator. Good morning guys.

Hi, Doug.

I just had – thank you. Good morning David. I just had a couple of follow-ups. First, it;s been very helpful when quantifying the exposure and the inland of marine transportation market, how many barges were in the crude oil market. My question is when you look at the coastal business, things are obviously holding in well there, can you give us some sort of sense of how many assets or what proportion of your coastal assets are either directly or indirectly involved into the crude oil trade?

Yes. Good question. I think coast-wise, there were – it was probably similar to the level in terms of percentages that we saw in the inland side. I think the market peak coast-wise business had probably 15% of the barge fleet in crude. Now we think it’s less than 5%, as well. At our peak, we had probably 10% of our fleet in crude. Now it’s a tiny 2% or so, 2% or 3%. So the coast-wise has rationalized it, actually a lot less – a lot less impact than the inland side, because you have seen that coast-wise has absorbed the larger barges coming out of crude. And pricing has been relatively stable and in fact up most of last year. So in the coast-wise business it’s been tighter in terms of balance.

Got it, that’s very helpful, because we have been seeing narrowing pricing differentials along the Gulf Coast and I was curious how much more of an impact that can have on you guys’ business. My second question – my follow-up has to do with a similar theme and that kind of trying to quantify downside exposure on the diesel engine services side and this may be less quantifiable, but in terms of your guidance changes, do you view kind of your guidance now as far as being, this is a kitchen sink type of a number, we are expecting operating losses and so that’s really kind of the worse we think it’s going to get or how can you anecdotally describe how you view your engine services guidance going forward?

Yes. Hey, Doug, this is Andy. In terms of our guidance, certainly from the midpoint of our prior range to the midpoint of our current range, you know in the broadest of strokes that was due to the severance in the first quarter and then the changes in our outlook for the land-based diesel engine services business. From that point to sort of the lower end of our range, I would say there is some, an additional modest losses or incrementally modest losses out of that business, but we have pretty much taken a pretty dim view for the full year and are not really too willing to bet on the calm too much there.

Got it. That’s very helpful. Thanks for the time, David and Andy.

Thanks.

Hey, thanks.

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

Thank you. Good morning, guys.

Hey, good morning, Jon.

David, I want to ask about a couple of follow-ups on the coastal side and just how the competitive landscape is changing as more of your equipment enters the spot market and as more of these newbuilds start to deliver. Is there going to be a significant shift in, you know kind of the upper hierarchy of who is in that business and how may that impact kind of the pricing over term contract especially but also the spot market?

Yes. I think roughly speaking the order if you will of the 15 or so players in the market is going to be roughly the same. I don’t think there is going to be a big shift between who is the third largest and the sixth largest. I think everybody has kind of added capacity kind of in proportion to their fleet size. So, we have added – we will have added when we complete the new builds here, we will have added five new barges on a basis of 70, right? So, you know that’s kind of proportionate to our size. I think if you look at our competitors they have done similar things.

And do you think the kind of shift to spot becomes more of a permanent issue with the new capacity coming online or at some point does it kind of normalized too?

I think it will normalize. And actually you will go back – as the older capacity comes out, you will go back to more term. I think this is a transitional time in terms of spot versus contract.

For my second question, the SEACOR acquisition was very well timed. And quite interesting too, because you have kind of been out of the market for a couple of years in the inland business as values kind of ran away and you maintained your discipline. Obviously, SEACOR wasn’t a pure play in this business and had far more exposure to businesses that have hammered of late, especially the offshore supply boat business. So, was this kind of a one-off maybe a stressed sale in the just kind of right place, right time or is this kind of foreshadowing now that asset values are pulling back to the level where they are kind of in your sweet spot and you can be a little bit more aggressive on the rolling up of the business?

Yes. You would probably have to ask SEACOR some of those questions. But, yes, I wouldn’t say it was a stress sale. I think they are very opportunistic in terms of deploying cash to beaten down sectors. So, that maybe something they are doing, but you should probably ask them that. From our view in terms of pricing given through what we have been going through in the inland market, you know pricing gets more reasonable. The price expectations, becomes more reasonable and that’s a good thing. As you know, Jon, it’s really tough to predict acquisitions. We are always talking to people. There are some people that may have a little more stress in terms of leverage than others. But predicting that and predicting an acquisition out of that environment is difficult. You know, I think our view is as you know just maintain our discipline. People know we will pay a fair price and we are going to keep our discipline and keep talking to the players. And if something happens, that’s great, but we are not going to chase things. I do think given that given what we have gone through in the inland market, things are more reasonable in terms of price expectations.

Yes, that makes sense. Thanks a lot, David.

Thanks, Jon.

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

Good morning, guys. Thanks for the opportunity to ask a question.

Good morning, Jack.

I think the April commentary is certainly very encouraging on the inland side. And as you are talking to your customers, are they taking notice of that and at what point do you think this more positive sort of trend line we have been seeing the last several weeks, last month or so could translate into better contractual rate renewals? Do you think that’s something that is couple of months away? Is it going to be later this year? Just sort of curious about how you guys are thinking of the cadence of that?

Yes, it’s really difficult to say, Jack. It’s hard to extrapolate. Quick look, our customers are some of the most sophisticated companies in the world. So, they know what’s going on and they see – they see it. They are probably seeing the same thing we are seeing, which is demand. Demand is up a little bit. Now, whether that carries through the remainder of the year and grows remains to be seen. It’s just really difficult to predict. And so we want to be cautious in extrapolating it. What we do know that the chemical, petrochemical build-out is continuing. There is a good number of these petrochemical plants that are well underway in terms of construction. Maybe some of the volatility has slowed some of them down or maybe even one or two cancelled, but we do see the petrochemical build-out coming ‘17 and ‘18 which you know should add demand. So, whether it’s a short-term, inflection point here or not remains to be seen, but the longer term volume trends are pretty good.

Okay, that’s good to hear. And then just a quick follow-up item, with fuel moving back up a little bit here, can you remind us how fuel impacts your P&L? Is it more of a pass-through or when you have inflections higher or lower, how does that impact near-term profitability?

Yes, there is couple of different ways. One, in a lot of our business it is a pass-through, Jack. But on some of our contracts we actually have escalation clauses and those lag about a quarter. So, what you can see is you know little bit of a mismatch when your revenue gets reset on the contract and when your costs have changed. So, as we see that, you can have a little bit of friction, but you know again with fuel going up, we would expect that in the second quarter, our costs might rise a little bit ahead of our revenue which would then reset going into the third quarter.

Okay, great. Thanks again for the time guys.

Yes.

Thanks, Jack.

Our next question comes from Kelly Dougherty of Macquarie. Please go ahead.

Good morning, guys. This is Chris Bloom on the line for Kelly. Thanks for taking the question.

Hey, good morning.

So, you guys talked a little about retirements and the need for some of the barges to come out. I was wondering if you could give us some color if you have seen whether or not your peers have started some of this accelerated retirement that they currently have in operation and if not what do you think will spur this acceleration that you are looking for?

Well, let me talk in terms of the inland side and the coastal side, you know, inland – what happens is, in the inland side in particular when you are getting to the inspection cycle and the mandated inspections that have to happen, you bring a barge into the shipyard. And you kind of get an estimate of what it takes to extend its life another five years. And you kind of do the math with the current prices. And you say well does that make sense? Can I get that capital back? And so given what we have gone through here recently, those older barges get harder and harder to justify and that triggers kind of the retirement. We have seen this in past cycles where the retirements get pretty heavy. We kind of expect them to be on the heavier side than they have been for the last couple of years for sure. On the coastwise business, some of these assets are over 30 years old. I think the count, last count was 45. We are over 30 years old. And then the coastwise environment, that’s getting pretty old and we Kirby have retired some of our older assets recently in that space. And I think our competitors are going through the same thought processes that we are in terms of extending very old coast-wise barges. As you know, they are much more expensive than inland barges. So extending their life is that much more capital. I do not know if that helps with an answer there, Chris.

No, absolutely, I appreciate the color. And that was my only question. So thank you guys for your time this morning.

Alright. Thanks Chris.

Our next question comes from Steve Sherowski of Goldman Sachs. Please go ahead.

Hi, good morning. On the coastal side, to the extent crude is causing weakness relative to inland, how much of that is being driven by crude oil exports just versus lower production in South Texas?

Yes. Steve, we don’t think coast-wise is really being impacted by crude. I think most of the crude coast-wise moves have migrated out already. And that occurred basically through last year while pricing was stable to up. So I think on the coast-wise side, what’s been offsetting the crude oil last year was refined products continuing to rise. I think you have probably seen some of the macro statistics with vehicle miles driven – going up on some other positive trends there. So I don’t think crude has been a factor on the coast-wise business as much as it has been on the inland side.

Got it, okay. And then I guess a few months back there was speculation just given midstream equity markets that a lot of companies or a few companies that are in the barge business were looking to divest non-core assets, has that cooled off just given market improvement over the past month or so?

Yes. It’s hard to say, there are a handful, probably six, seven MLPs that have marine assets. I would view some of them – their marine assets are not core to their business. But others may view it as core. It’s hard to say clearly when the high yield markets closed off to them, that may have made them think about it a little. And I know in terms of issuing equity, it wasn’t the best time to do it. I think it varies by the different MLPs. Some are very strong. Some are smaller and less able to weather this. We will see it. As we have said in the past Steve, it’s really difficult to predict acquisition possibilities. Clearly we stand ready to take any assets they view as non-core.

Got it. Thank you.

Our next question comes from Ari Rosa of Bank of America. Please go ahead.

Hey, good morning, gentlemen. Just first question, I wanted to ask about the SEACOR acquisition and just what your expectations are there in terms of the contribution that could have and expectations in terms of integration?

Yes. For the remainder of this year, we are looking at accretion from that deal probably at today’s rates of about $0.03. On an annual basis it’s probably mid single-digits, again today’s rates. As rates improve, that will improve, as well. Integration wise, it’s pretty well integrated into our fleet already.

Okay, that’s helpful. So it sounds like not too many speed bumps from that. And just to kind of take a step back, bigger picture, thinking about capital management, I was a little bit surprised to see the CapEx budget going up and given some of the challenges you guys have outlined, could you talk about how you are thinking about capital management given the environment and if it’s really just a matter of positioning for an upturn?

Yes. Typically in our capital deployment, we tend to be in the market when other people are not. But I wouldn’t read a lot into the CapEx. We had an opportunity to buy a few barges at a pretty decent price. And they fit into kind of our retirement plan as we phase out some equipment. It’s kind of our normal operating mode, if you will.

Yes. Just to add on a bit there. I mean if you add it up, we are adding seven barges this year through capital expenditures on the inland side. And we are retiring 31. So again with the trend that we think we will see in the industry this year, probably some retirements and very little building. I think we are right in line with that.

Got it. Okay, that’s helpful. Just if I can sneak one more in there, pretty straight forward, but did you guys face have any weather impacts on the first quarter just along the coast, particularly the Texas-Louisiana region?

Yes. No, weather was there. We saw some fog and high winds and some high water that impacted us throughout the quarter. Some of that was covered. We had navigation and high water clauses in some of our contracts. So some of the costs associated with that is in our – was covered. But there were some costs associated with it. It is kind of in our numbers. I wouldn’t call it something material enough to call out. Maybe it was $0.01 or $0.02. But it has kind of been our numbers.

Okay, great. Thank you.

Our next question comes from David Beard of Coker Palmer. Please go ahead.

Good morning, gentlemen.

Hi, good morning.

Obviously, a lot of questions have been asked. So I would just like to shift to capital allocation obviously, you guys like to do acquisitions first, but relative to debt or share buyback, could you just give a little more color there, is there a level of debt that you are comfortable with or how should we think about allocating capital between debt and share buyback?

Yes. I mean and again our story on this has always been pretty consistent. We believe that there is a time to look at M&A. There is a time to be building equipment. There is a time to pay down debt and a time to buyback shares. We are certainly – our capital expenditure program is pretty limited this year with the exception of what was committed for in the past on the offshore side. We will still sort of look at all the M&A opportunities that we can. Between that, we will evaluate where we are in the market and whether or not a share buyback at that time makes sense versus debt repayment. We don’t generally give sort of any kind of guidance about which one we are going to do.

Okay, fair enough. And would you care to talk about any type of capital spending needs for next year, I know it’s just early, but any color you can give there would be appreciated?

Yes. I mean look, based on what we have committed to-date, our CapEx should decline somewhat as we take delivery of these barge or offshore units. Again, as you rightly pointed out, it’s early and our plans can change depending upon what goes on in the market. But right now you should see directionally our CapEx go down year-over-year, all things being equal.

Alright, good. Thank you. I appreciate the time.

Thanks David.

Our next question comes from Bill Baldwin of Baldwin Securities. Please go ahead.

Good morning.

Good morning Bill.

Can you offer any color as to what you think the prospects are for your land-based the reman business being able to do more and more business with Slumber [ph] is in the Haliburton’s kind of the top level companies and that pumping business?

Bill, those two are generally our largest customers. And they do a lot of their own remanufacturing. What we do is tend to help them with parts and some product, but we are definitely working with them on a regular basis. As I have said, they are kind of our largest two customers. So I think as they pick up their spending, that should translate to more business for us. But I think as we have seen with the quarterly calls in the oil service space, it’s been tough. I do think, ultimately the reman business and the pent-up demand from this cannibalized and idled equipment will come through for all of the pressure pumpers. They are going to have to do something to get their fleets in better repair.

I know from past conversations on the call that you definitely have a strong engines and parts business with these fellows, but I was also thinking that you have done some work for them in the reman area kind of getting your nose under the tent here in the last year or so.

Yes.

And I know the reman business obviously has better margins for you than the parts and engine business and I was just wondering if you think there is an opportunity really to increase your penetration of the reman business with those companies?

Yes. Clearly, we are – we have people onsite, I won’t mention which ones specifically, with some of these larger guys that are onsite doing service work for them. Clearly, we have not been shy about saying they should outsource any of their reman or even manufacturing they do. That will be good for us. And that’s certainly an effort we are undertaking, Bill.

Right. And with your reconfiguration of your facilities there in Oklahoma City, I guess I mean you consider yourself really in good position to be able to handle that business if it were to come your way?

Yes, absolutely. Our new facility is state of the art. The response from our customers has been very encouraging. Frankly, I think we will take some share as we come out of this, because frankly we are better capitalized than many of our competitors in this area.

Now, this could be a great opportunity for you to be able to do that, which I know is your long-term goals in that business is to become their premiere provider of services.

Exactly, yes.

You kind of made the anecdotal comment, I believe David on the last call that things just didn’t feel right to you when you were talking about the inland marine market out there, couldn’t put your finger on it? But I just wondered anecdotally what you would say today regarding that same issue?

Yes. I think, Bill, you are right. What we were trying to get a feel for was there something going on in the economy that just didn’t feel right that the economy was weaker and that inventories were up and trading patterns were a little different, but that seems to have worked itself out. I think you know just talking and listening to our customers, you know inventories are where they need to be given what they are seeing. I think you know in the ethylene markets what we are hearing is all positive. That’s kind of sorted itself out. I think clearly the crude price kind of stabilizing a little bit. Now, it’s still volatile, but it’s kind of in a more reasonable range lately, has taken some uncertainty out of the system. So, yes, that feel we had that maybe something was going on in the economy that we were missing and that unease that we had is it never completely goes away as you know, but it has certainly improved and we feel better about it. And certainly listening to our customers, it’s been more positive in the near-term.

Very good. Well, thank you for your time.

Thanks, Bill.

Our next question is a follow-up from Mike Webber of Wells Fargo. Please go ahead.

Hey, it’s Donald again. Thanks for taking my follow-up. I will be quick. In the inland barge segment, do you have any idea of the percent breakdown across the industry between petchem petroleum products and crude and black oil? And are we back line in with say more historic norms that were pre-shale boom? And I realized these numbers can at times tough to ballpark, but any color around that would be very helpful?

Yes. I think if you look at our business. We are probably around 50%. Now, this isn’t total barge business, but inland and coastal is around 50% petchem, but when you look at inland which was your question, our petchem volumes are around 67%, 68% and black oil, which is around 20%. Then the rest is refined products and chems. So, that’s us. We are probably stronger in petchems than most of the industry. I would say the industry is probably south of 50% petchems.

Okay. And then do you think the rest would be evenly split between sort of refined and the black olefin industry or refined has generally a larger market share than some of your peers?

Yes, I would think so. Yes, the short answer is yes. I think, it’s a good characterization of it.

Okay, thank you. That takes care of my last question and thanks again for your time.

Alright. Thanks, Donald.

And this would conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Sterling Adlakha for any closing remarks.

Thanks, Carrie. We appreciate your interest in Kirby Corporation for participating in our call. If you have additional questions or comments, you can reach me directly at 713-435-1101. Thank you and have a nice day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.