Kirby Corporation (KEX) Q4 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kirby Corporation 2016 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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, Nicole. And thanks everyone on the phone 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 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, 2015 filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Sterling and good morning. Yesterday afternoon, we announced 2016 fourth quarter earnings of $0.60 per share versus our guidance range of $0.45 to $0.60 per share. That compares with $0.94 per share reported for the 2015 fourth quarter. Inland marine tank barge utilization during the fourth quarter was in the low to high-80% range over the course of the quarter. That range reflected an improvement late in the quarter, in large part due to adverse weather conditions that drove delay days along the Gulf Coast. Weather delays are seasonally normal for this time of the year. More than just weather, the utilization improvement from the prior quarter also reflects Kirby’s disciplined approach to return equipment when returns and required maintenance spending and don’t just by keeping older vessels in operations. While with current thresholds will vary throughout our industry, we assume that other operators are also retiring older vessels when they’re no longer economically able to operate them or when minimum pricing is below their cash cost, which is likely in some cases for some operators today. The rebalancing of the industry-wide supply and demand will take a little longer than it has for Kirby but we see plenty of evidence that the rationalization of supply is occurring in the inland tank barge area. In the coastal market, tank barge utilization was in the low-80% range. And we benefited from some seasonal improvement in the Northeast refined product area however utilization continues to be impacted by the amount of equipment trading in the spot market which adds idle time exposure. The ageing of the fleet across the industry combined with lower utilization rates are persuasive forces for driving increased retirements. Over the course of this year and into next, it’s reasonable to expect the number of retirements to exceed the number of new vessel deliveries and drive a subsequent improvement than the overall market. In the meantime, we expect that Kirby’s breadth of operations in terms of both geographic and product capability to benefit us in this challenging environment, as it remained pockets of strength in parts of our fleet. In our land based diesel engine service business, we’re seeing a healthy rebound of service demand, and particularly for pressure pumping unit, remanufacturing and overhaul. The strength in this demand is being coupled with only a tepid improvement in the demand for new and rebuild-engines as well as transmissions in other parts. So there remains much more upside as the market continues to improve. The combination of factors, lead us to be optimistic in the outlook of this business. Used land rig count has improved 82% from its lows in 2016 while prices appear to be stabilizing in the mid-50 range. Service intensity in the completion business continues to increase and judging from the equipment that are up to date, the condition of the OFS industry pressure pumping fleet is very much challenged. We assume for now that these factors will allow us to at least maintain modest profitability through this year with additional upside should order through new products and new pressure pumping equipment increase. In the marine and power generation, diesel engine part of our business, fourth quarter reflected a continuation of recent business trends and the typical fourth quarter seasonal decline. While the Mexico oil service market continues to be challenged, and we do not expect any improvement in the markets this year. Overall, we expect our performance in this business to be relatively consistent to the performance of last year. In summary, we enter 2017 with markets that are de-challenging but which still provide plenty of reason for optimism. Our guidance for the inland marine utilization resumes a balanced market and improving pricing in the latter part of the year. And our coastal market, we continue to face challenges this year but the path to a better market is clear. And there are many reasons to believe the outlook could grow more constructive if current trends in the oil and gas market continue. I’ll now turn the call over to David.

Thank you, Joe. Good morning everyone and thank you for joining us today. I’ll kick-off my comments with a summary of the fourth quarter results in each of our markets and then turn the call over to Andy to walk through the financials in more detail. Following Andy’s comments, I’ll provide some more color around our 2017 guidance and then turn the call over for question-and-answers. In the inland transportation market, our utilization range from the low 80% to high-80% level during the fourth quarter. Our utilization improved throughout the quarter as we kept pace with our barge retirement plan for older vessels. In December utilization remained in the high-80% range largely as a result of significant delays along the Gulf Coast from high winds and fog which as Joe mentioned is a seasonally normal occurrence in the fourth quarter. Pricing on term contracts that renewed during the fourth quarter was down in mid-single digits from year ago levels. Spot rates were flat sequentially compared with third quarter and below term contract rates during the quarter. In our coastal marine transportation sector, demand for the coastwise transportation of black oil and petrochemicals was relatively stable. In the refined products market, a large number of vessels are trading in the spot market which has led to lower pricing and lower utilization. On average, coastal think barge utilization was in the low-80% range during the quarter. With respect to coastal market pricing, we had only one term contract renewed during the fourth quarter which does not provide an accurate gauge of where market pricing is. However, generally speaking, spot rates are below contract rates but the magnitude varies by geography, vessel size, vessel capabilities and the product being transported. As an indication of where spot pricing is relative to contract spot rates for vessels in the 80,000 to 100,000 barrel range, in clean service, approximately - prices are approximately 10% to 20% below year-ago levels. In our diesel engine service segment, our marine diesel engine business saw no improvement in the Gulf of Mexico oil services market and those markets remain at depressed levels. Demand in our power generation and other marine markets followed normal seasonal patterns which reflect a sequential decline in service activity in the fourth quarter. In our land-based diesel engine services market, demand for pressure pumping units, remanufacturing was strong. Customers continue to source new engines, pumps and transmission, used in the remanufacturing process from their own inventories. This dynamic leads to lower revenue and gross profit for our business, though gross margins are at expected levels. Customers have begun to indicate to us that their inventories and supplies used in these jobs is quickly declining, but we have not yet benefited from any significant change on this front. In terms of new equipment, we received some customer inquiries into the sales new pressure pumping fleets but orders have been slow to materialize. We are confident that we will receive at least as few new equipment purchase orders in the first half of 2017. In the fourth quarter we did build some ancillary oil field service and support equipment including blenders, cementing trailers and hydration units. In the distribution side of the business, the sale of engines, transmissions and parts remained weak during the quarter. However, we did experience a modest improvement in transmission overhauls towards the end of the quarter. I’ll now turn the call over to Andy for some more financial detail and I’ll return for a discussion on the outlook.

Thank you, David and good morning. In the 2016 fourth quarter, marine transportation segment revenue declined $44 million or 11%, and operating income declined $29 million or 33% as compared with the 2015 fourth quarter. The decline in revenue in the fourth quarter, as compared to the prior year quarter was primarily, due to lower inland marine pricing and lower coastal marine utilization and a 17% decline in diesel fuel prices. The decline in operating income was driven by the same factors, partially offset by a 5% reduction in the average number of inland towboats in operation during the quarter. The marine transportation segment's operating margin was 16.6% compared with 22.0% for the 2015 fourth quarter. The inland sector contributed approximately two thirds of marine transportation revenue during the 2016 fourth quarter. Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 75% of revenue, with 51% of those contracts attributable to time charters and 49% from affreightment contracts. The inland sector generated an operating margin in the low 20% for the quarter. In the coastal sector, the trend of customers electing to source coastal equipment from the spot market over renewing existing contracts continued. However, the percentage of coastal revenue under term contracts was consistent with the first nine months of the year at approximately 78% as a result of lower utilization in revenue for spot equipment. The fourth quarter operating margin for the coastal sector was in the high single digits. Turning now, to our marine construction and retirement plans. Over the course of 2016, we received 27 barges from the acquisition of SEACOR's inland tank barge fleet, took delivery of five new-build barges, chartered in one and transferred one 30,000-barrel barge from coastal to inland service and retired or returned to charterers a total of 56 barges. The net result was a decrease of 22 tank barges in our inland tank barge fleet for a total reduction of approximately 15,000 barrels of capacity. In 2017, we expect to take delivery of two 30,000-barrel inland tank barges in the first quarter. Over the course of the year, we also expect to retire or return to charterers 36 barges with approximately 600,000 barrels of capacity. On a net basis, we expect to end 2017 with a total of 846 barges representing 17.3 million barrels of capacity. In the coastwise transportation sector, during the fourth quarter, we took delivery of our first new 155,000-barrel ATB, which entered service in late November as well as our new construction 35,000-barrel chemical barge which entered service under a 10-year contract. We also retired an 80,000-barrel barge during the quarter and in the year with approximately 6.2 million barrels of capacity. In January of this year, we removed from service three coastal barges with total capacity of approximately 300,000 barrels. In terms of coastal fleet additions, we now have just one remaining barge on order and we expect to take delivery of that 155,000-barrel ATB sometime in mid-2017. Moving on to our diesel engine services segment. Revenue for the 2016 fourth quarter declined 6% from the 2015 fourth quarter, and the operating income for the quarter was $1.3 million as compared with an operating loss in the 2015 fourth quarter. The segment's operating margin was 1.7% compared with a negative 0.6% for the 2015 fourth quarter. The marine and power generation operations contributed approximately 40% of the diesel engine services revenue in the fourth quarter, with an operating margin in the low-double digits. Our land-based operations contributed approximately 60% of the diesel engine services segment's revenue in the fourth quarter, with a negative operating margin in the mid single-digits. On the corporate side of things, we’re providing 2017 capital spending guidance at $165 million to $185 million. Our guidance includes approximately $15 million on progress payments on new coastal equipment, including one 155,000-barrel coastal ATB, two 4,900 horsepower and six 5,000 horsepower coastal tugboats, and final cost for the new coastal petrochemical tank barge that we took delivery of at the very end of last year. The balance of $115 million to $135 million is primarily for two inland tank barges and capital upgrades and improvements to existing inland and coastal marine equipment and facilities as well as diesel engine services facilities. In corporate end of the guidance, I just provided as a three-year build plan for the construction of six 5,000 horsepower coastal tugboats which will replace older units in our fleet and better align the age-profile of our ATB barges with the age of the boats. We expect the first of these tugboats to deliver in the second quarter of 2018 and the last tugs deliver in the mid-to-late 2019 with a total expected cost over the three-years of approximately $75 million to $80 million. David will discuss our earnings guidance in detail, but I do want to mention one nuance to our 2017 guidance. FASB recently issued an accounting standards update designed to simply a company’s accounting for the tax impacts of equity based compensation. The downside however is that U.S. companies will now have significant added volatility in their GAAP reported tax rate. For Kirby, our 2017 tax guidance is predicated on the following book tax rates by quarter. In the first quarter, approximately 33%, the second and third quarters, approximately 40% and the fourth quarter approximately 38%. For the full-year 2017, we do not expect any significant change in our tax rate barring legislative action on that front with our guidance based on full-year rate of 38%. Turning to our balance sheet, total debt as of December 31, 2016, was $723 million, a $52 million decrease from December 31, 2015. Our debt-to-cap ratio at December 31, 2016 was 23.1%, a 2.3-point decline from December 31, 2015. And as of today, our debt stands at $708 million. Before I turn the call back over to David, I just want to take a minute and discuss some changes we’re making in our investor relations program. I’m pleased to announce that Sterling will be moving to Oklahoma and assuming the role of CFO of United Holdings, our land-based diesel engine business. Brian Carey has accepted an offer to be our new Manager of Corporate Finance and Investor Relations. Brian has been with Kirby for five years, his last assignment was running our generator leasing and service business at United Holdings. Over the next few months, Brian will be taking more of a lead role in our investor relations program. Both Sterling and Steve Holcomb who as many will remember ran our IR program for over 20 years will be helping in the transition. I'll now turn the call back over to David.

All right, thank you, Andy. In our press release last night, we announced our 2017 first quarter guidance of $0.40 to $0.55 per share, and full-year 2017 guidance of $1.70 to $2.20 per share. In the inland marine transportation market, we expect utilization in the mid-80% to low-90% range, a range that recognizes the improvement we saw in the fourth quarter as well as normal seasonal weather patterns. With the level of utilization we’re guiding to, we normally see a stable to modestly improving pricing environment. But we do recognize that pockets of the industry may still be struggling to achieve utilization that is well above 85%. Supply rationalization is typically a longer process for carriers with smaller fleets. Our guidance factors in the full-year effect on pricing declines that we experienced in 2016 are in our guidance. Yet we do expect the industry will achieve supply/demand balance this year, and as such, our guidance incorporates modestly improving pricing in the second half of the year. In the coastal market, on the low end, our guidance range contemplates utilization in the mid-to-high 70% range both for the first quarter and the full-year 2017. On the high end of guidance, we are contemplating utilization in the mid-80% range. As I mentioned earlier in my remarks, spot rates in the coastal market per unit in the 80,000 to 100,000 barrel range in clean service are down approximately 10% to 20% from last year. Additionally, spot pricing is below contract rates. Our guidance assumes these rates to persist through the end of the year and that renewing contracts re-price at spot levels. For diesel engine services segment in our land-based sector, we’ve seen tangible signs of improvement. We have the largest number of pressure pumping units on-site, waiting with remanufacturing in the history of the company. Given trends and demand for rebuild transmissions, we expect that by the middle of 2017, our monthly transmission service completions will exceed our historical peak levels. While we have a number of reasons to be optimistic about this business, oil prices subsequently are customers, pressure pumping service pricing have not recovered to levels that support robust equipment ordering activity. Additionally, customers continue to source equipment used in remanufacturing from their own inventories which leads to few sales dollars than we would normally expect given the level of remanufacturing activity we have in the shop. Our guidance could probably best be described as cautiously optimistic with total 2017 revenue for just the land-based diesel engine services business in the $240 million to $320 million range, and operating margins just above breakeven at the low-end of guidance and in the mid, excuse me, in the high single-digits at the high end. We’re also assuming modest progressive quarterly improvements in operating income throughout the year. In our marine diesel markets, we do not expect any improvement in the Gulf of Mexico oil services market this year and that’s how results should be flat to slightly up with some benefit from an acquisition we made late last year, as well as savings from a 2016 reduction enforced. In the power generation market, we expect results that are relatively consistent with 2016 levels. In closing, we entered 2017 in strong financial position with the lowest debt to capitalization rate that we’ve had in two years and an expectation that 2017 free cash flow before acquisitions will be on par or possibly higher than it was in 2016. Our marine fleet is in great condition with the lowest average vessel age that we’ve ever had and the inland market is poised for recoveries later this year with the added benefit of new chemical volume likely to come on-stream late this year and continue for several more years beyond that. In our diesel engine services business, some indicators suggest we are in the early innings of a cyclical upturn for the entire energy sector. With that said our commitment to safety, customer service and return on capital discipline is unwavering and will be the foundation of Kirby’s continued success. Operator that concludes our prepared remarks. We’re now ready to take questions.

[Operator Instructions]. Our first question comes from Jon Chappell of Evercore ISI. Please go ahead.

Thank you, good morning guys.

Hi, good morning Jon.

David, my first question is on the coastal business. And obviously in broader energy, a lot’s happened in the last couple of months whether it be, the OpEx production announcement, the rising recon in the U.S. pretty significantly and even administration that could potentially be beneficial to the U.S. oil output. So, I think it’s kind of consensus that the coastal is going to be weak this year. But as you kind of put together maybe some of those macro or geopolitical tailwinds that were unexpected three months ago, can you just speak to the potential improvements that are ducted in duration of the downturn in coastal given those backdrops?

Sure, sure. Well, let me start with kind of the supply and demand. I think what you’ve seen over the last couple of years is, as the industry has added some capacity in terms of new ATBs and new barges and tugs. And in fact there is probably 14 left to be delivered into the market. A lot of that was built, I’m sorry, they’re telling me 11, not 14. So, a lot of that was built or has been built to handle some of the crude movements particularly some of the bigger units. And as you know, a lot of the terminals and infrastructure that was going to help getting crude to the water, those permits were not granted. So it kind of put a little more capacity in the market than whatever was have been there. Now that said there are 35 barges in our space that are older than 30 years old. And those need to come out. So, what’s happening now as the industry is retiring those older barges, we are, we retired three large barges last year we’ve got two we know of this year and maybe a third. And I think the industry is looking at shipyards, in shipyard activity they’ve got on their older units and saying, hi, look, probably doesn’t make sense to go through that shipyard. And if you add, Bell’s [ph] water treatment systems that they need to add to these units, it becomes even harder to justify taking these older units through. So long story short, I think the new equipment coming in is declining the amount of equipment that needs to come out is significant. And that equipment is coming out. And then the force, I think you could see some incremental crude demand that could hit the market if under the new administration we get permits for some of this infrastructure and terminals along the coasts that have been denied. So, how long does it take to come to balance, it could be a year, it could be two years, but I think it may come a little quicker if the crude gets going. One of the things it could happen is, we’ve seen the new finds in the Permian there is a significant amount of oil that’s going to come to market in the next two or three years. I’m hearing estimates of perhaps up to 1 million barrels a day by 2020. And that will make its way to the watery, their Corpus Christy or Houston. And where that oil goes will depend on a lot of different things but generally speaking when liquids make it to the water, it’s good for our industry. So, that could be a bright spot irrespective of changes in permitting.

That makes sense, thanks David. Follow-up then just to type some comments to gather from the prepared remarks. You mentioned that free cash flow this year on part or potentially even better than 2016 and I think Joe had said in his comments that there is some pressure and some of your peers that are leading to removal. So, arguably your stocks are not cheap right now, so wouldn’t be expecting you to be in the market for your own stock and certainly probably not the time of the cycle to think about other returns of cash to shareholders. How aggressive and what’s your capacity this year than to use that free cash flow to consolidate in the downturn?

Well, as you know, this is the kind of market where we tend to get opportunities for acquisitions. And that’s pretty much at the top of our list for capital deployment. Our stock is, we bought two years ago we bought a lot of stock back at higher levels than this. And I would tell you that if you look at our four cylinders with the marine business being two in the business, the two diesel businesses. Three of those businesses are close to their cyclical bottoms. I would say the land-based businesses are on it’s out through its bottom end, on its way up. I think you’ll see an inflexion point on the inland marine business this year. So, as we look at it, it’s pretty good time where you got the potential for three of our cylinders to be going up and that’s good. But our preference always is to do a consolidating acquisition that helps with our growth long-term and sets us up as a continued industry consolidator that would be our preference. The problem is predicting acquisitions as you know it’s a difficult process. But we’re optimistic we’ll get the opportunity to make a few acquisitions in the not too distant future.

And just what do you think your firepower is broadly speaking?

Hi Jon, I mean, we just do, I think it sort of depends on what you’re buying, how you’re buying it. But we think probably pushing close to $1.5 billion and maintaining our investment grade rating sort of the firepower we got.

Awesome. All right, thanks Andy, thanks David.

Thanks Jon.

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

Yes, thank you and good morning everybody. Sterling, congratulations on that new move.

Thanks Greg.

So, as just following up on Jonathan’s question about the coastal market, clearly there are challenges. One of the things that seems like it’s been being kicked around in the market is more discrimination from customers. We’re hearing that, companies like BP are being more discriminatory against all of our barges. Joe, I mean or David, as you think about bifurcating markets, is this something that is just a function of the fact that we’re in a bearish outlook for coastal or is this something that is really going to be an impact in the theme over the couple of years as whether it’s BP or someone else starts to discriminate against older coastal barges?

Yes, I’ll start and I’ll give Joe to chime in with, he’s got a longer history and can share some thoughts. But typically in a loose market, the customers can be more, choosy about the equipment they get. There is always a preference for newer equipment, it’s just inherently it’s more reliable and everybody wants to book newer equipment first anyway. But you’re right. There are customers like BP and others that are coming with very strict age requirements, frankly that’s good that will squeeze out some of this older tonnage. As you heard in Andy’s prepared remarks we’re building some new ATBs that are going to replace some very old ones. And it’s part of the reason we’re doing that is for precisely what you’re saying, it’s the customer is vetting, departments are very disciplined and age is a factor in their vetting process. I think that will help bring some discipline to the whole market. Perhaps Joe can talk about the cycles and what he’s seen over the years.

David, I think that you articulated it well. The market is naturally biased against older tonnage that they want the new tonnage first. So, when there is an excess supply of equipment, you’re going to see the newer equipment booked than the older equipment only booked when there weren’t any more new equipment. So, I think that this current environment is very conducive to pushing older equipment out particularly as operators have to spend money on it.

Okay, great. And then just one other question from me, and I’m just really curious on your thoughts on, I mean, there has been a lot of talk about a border tax, perpetually coming in and I realize that it’s early days. I’m just curious if anyone at Kirby is talking anybody in Washington about this and just really as you think about, is there any type of positioning or anything that Kirby can do over the next I don’t know, over the next 12 months to sort of prepare for this or just really any views you have on border tax?

Yes, who knows what it would do. But I guess a lot depends on the magnitude and what items are taxed. So, if they taxed imported Brent for example, that would in our minds have WTI trade at a premium to Brent which is kind of the opposite of what we’ve got now. And frankly, I think what it would mean is you’d take crude from the Gulf Coast coming out of Permian and the Eagle Ford and it would end up going out to the Gulf Coast because of that import tax differential. But who knows, I think there is a potential that it could raise gasoline prices in the U.S. a bit, which would be bad for long-term demand but I think for coastwise moves it would be relatively positive. I do think an import tax would be great for our chemical customers, they would - well, one, the U.S. has a great feedstock position for our chemical customers. And that puts them on a globally competitive basis. And so, I think they would do very well in a situation like that. And I think their exports are going up any way. So, a border tax might help them. But who knows, Greg, we’re watching it every day trying to figure out what could be the impact on our customers, what could be an impact on us at Kirby and watching it carefully.

Okay, guys. Thank you very much for the time.

Thanks Greg.

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

Hi, good morning guys. Thanks for taking my questions.

Good morning Jack.

Just to circle back to the coastal business for a moment David, I mean, I appreciate sort of your bigger picture outlook there on how you think that business sort of trends here over the next 12 to 24 months and beyond. But if thinking about 2017, with the utilization rate trending in the mid-70s and mid-80s with the guidance, do you think that business is profitable this year or is it more on the breakeven side? And with the three barges - three vessels that you retired in January, are there some other actions on the capacity side which you guys are looking at for later on this year with your coastal business?

Yes, no, good question. I would say if you look over the cycles in the coastwise business, and if you go back to the KC days before we purchased KC, you can see some data points. But we’ve seen our utilization range from when we bought KC in the mid-to-high 70s then we got up during 2014 probably into the 95% utilization range. And because the coastal business is so dependent on utilization these are big expensive units and utilization is key to the profitability. As the utilization moves around, you can see that 95% utilization we got to 20% operating income margins, I think last quarter you saw our utilization in the low 80% range and we hit kind of mid-single to high-single digit margins. When we bought KC, their utilization was in the mid-70s and it was basically a breakeven type deal. So, if we get down to the low 70% range or the mid-70% range, you could see us at breakeven. Of course we’ll do everything we can to mitigate that and try and take out cost, maybe layout vessels if it got that bad. But it’s very utilization dependent. I do think the bias will be to better utilization given the older equipment coming out. That may take a while to play out but as we talked about there is less new equipment coming in and a lot of old equipment that has to come out and a lot of capital that needs to be spent on that old equipment to keep it going. So, I think the bias would be to tighten up utilization as you look forward certainly into, late in the year, maybe next year. So that’s the view, it’s really a range of margins that are almost directly tied to utilization.

Okay, okay, David, thank you for that. And then, sort of going back to the inland side for a moment, when you think about 2017, sort of the order book out there from the shipyards that you’re seeing. What do you anticipate in terms of new-builds versus retirements in 2017? And I guess, how do we think about the number of barges that really need to be taken out of the industry before we sort of get back to equilibrium where you can start seeing some pricing momentum?

Yes, if there is about 3,800 barges and the industry was, I would say this summer 5% we’d call it low-to-mid 80s and we need kind of high-80% to 90% to get pricing. Call it 5% over capacity, so we needed to take out as an industry probably 200 barges. And last year, we took out 54 or 56. We’ve got another 35 plus this year, so we’re taking out a good portion of it, the others are taking it out. So, I think you’ll see capacity come out and then I think you can see in the U.S. economy, GDP is doing okay. I think GDP alone you get 2% demand growth in 2017. And then you’ve got the chemical plants coming on, and maybe there is a little GDP pick-up or excuse me, an addition to GDP at the end of the year with the chemical plant, but certainly that could be more in 2018. Now, whether that’s an addition to GDP of 1% to 2% or 2% to 3% or 5%, we’re not sure. But that should be a positive. So, as you add all that together you’ve got supply coming out, call it 3% supply coming out and then you’re going to have 2% demand growth. So our view is that inland comes back into balance pretty quickly sometime this year. Of course our preference would be for it to be early in the year but we’ll see how it plays out. We are running at higher utilization at you heard as we went through December, a lot of that was weather related. But so far utilization is carrying through the first part of January. So we’re cautiously optimistic that we see that inflexion point here in ‘17.

Hi Jack, just to round out that conversation, obviously David talked about we’re doing our part certainly rationalize the industry fleet. But we also just on the other side of the ledger, we think that there is only based on our outlook right now, there is probably only 40 barges in the order book for ‘17.

Okay, Andy. Thank you very much. And David thanks for your comments. And certainly let me just echo Greg’s congratulations on your promotion.

Thank you, Jack. I appreciate it.

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

Great, thank you operator, good morning guys.

Hi, good morning Doug.

Good morning David. I had a follow-up to Jack’s question on the inland business. And just what I’m trying to get at is, trying to sensitize your expectations to all of the moving parts that are going on in the world right now. And what I mean by that is that, when we look at U.S. rig count, U.S. production etcetera. And when we look at where some of those rigs are currently going back to work. Should we expect to see potentially improved crude oil volumes on some of your barges, perhaps before the expected increase from the pick-up side? Based on what we’ve seen so far could we and should we and at what point and where could we see additional activity that would translate into increased crude oil volumes over the next couple of quarters?

Yes, good question. We are seeing a little bit of a pick-up in crude volumes. We can give you perfect information on Kirby’s crude fleet because we know those numbers definitively. But I would say directionally you’re seeing the same thing within the industry. But if you recall 2014, the peak, we probably had 55 to 60 barges moving crude. It fell from ‘14 on down to a low in the summer of 2016 we were down to about 6 barges moving crude. Right now we’re up to about 17 to 18 barges moving crude, most of that’s Utica, Marcellus coming down the Ohio and Mississippi. So, we are seeing a little bit of that pick-up as oil price firm, we’re getting antidotes of what we’re seeing it in our united land-based businesses, activity levels are picking up. So you’ll see more, crude coming on to the system. Of course as we’ve always said, crude moves ultimately we’ll end up in pipelines. But it could be a short-term pick-up. I do think the Utica and Marcellus, because of where it’s located and the lack of infrastructure up there and the difficulty getting infrastructure built-out to get a pipeline all the way from say the Utica down to the Gulf Coast. That will, when it happens, is a long way off I think, it’s going to take some time. But, to the extent that that increases, that’s probably good for our inland business. As I mentioned earlier, when we’re talking about the border tax, Permian, I do think the projections we’ve seen for the Permian in the next three to five years, you can see an extra millions of barrels a day coming out of the Permian. That will go to the coast it will go by pipeline to Corpus, Christy or to Houston. And where it goes from there is the key question. Some of it will go for export undoubtedly because now we can export crude out of the U.S. but that’s just more liquids on the system. So there could be barge moves, some storage moves, terminals have problems and customers have problems and barging is a good interim solution for that. So, in the short-run, I think there could be some nice pick-up from crude volumes. But at the long-term sustainability of crude on barges is something that we saw with the advent of pipeline additions go away. So, that’s something we wouldn’t bet on but it could be a short-term impact and indeed we have seen a pick-up in the number of barges moving crude.

Right. Because it seems from our perspective, at least it provides somewhat of a bridge until we get to the pet-chem volumes. So my follow-up question is consistent with the first and consistent with the idea that firm crude prices is leading to increased drilling activity within the U.S. And when we look at your interim services revenues, we saw six consecutive quarters of revenue decline bottoming at 2 units, you pointed out. It seems like we’re kind of coming out of the other end of that with couple of quarters, worth of revenue increases. And so, when you look at as the rig count grows and not just gets bigger but when you start getting deeper and to some of the types of rigs that are coming online right now, and potentially over the next couple of quarters. When you look at the mix of some service seeing strong demand right now and others not so strong, how can you see that service mix changing? And how could that potentially impact your margins?

Yes, no, we’re seeing as I mentioned in my prepared remarks, we’re seeing a tremendous amount of remanufacturing demand and we’re starting to see new equipment inquiries. So as you know that can move the needle as we’ve absorbed our full overhead cost at United. So, it could be quite impactful.

Got you. Very helpful. Thanks for the time David.

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

Hi, good morning guys. How are you?

Fine.

Hi Mike.

David, first I wanted to jump back to one of your earlier answers around and you kind of provided in context around how oversupplied the inland market was and kind of what the puts and takes were to the expectations, we see a price recovery in the back half of the year. And you mentioned seeing 3% I guess, 3% of that 5% delta kind of coming from supply rationalization. I’m just curious maybe for a little bit of historical context around when the last year that we actually saw net supply growth over 3% loss, we got fair amount of historical data and we’re seeing some flat years maybe even 1-point down but net 3% contraction in a single year, if it’s happened it didn’t seem like it was in the bandwidth of our data. So, I’m just curious, maybe Joe, in terms of just how would you comp the level of oversupply here versus what we’ve seen previously and what would actually need to happen to have 3% of the fleet taken out in six or nine months?

Do you want me to take that?

Yes, go ahead Joe.

So, we’re talking about inland demand right?

Yes.

Well, historically the industry actually peaked with respect to the number of barges in 1982 there were 4,200 barges in service. And between ‘82 and ‘90, I would say probably 1,000 of those barges came out. And the other significant decline was 2009 and ‘10 where Kirby itself took over 100 barges out.

Right, right, so in terms of like a negative, actually a net shrinkage of the fleet if it’s kind of built the early ‘80 or actually early ‘90s rather in terms of where we’ve seen to get a net shrinkage of 3%?

Well, I think you saw that in 2009 truthfully.

Okay.

The equipment can come out pretty quickly, what happens is it just gets tied up. We have made these decisions to make our equipment retire and you can find in the certificate tank barges, certified by the coast guard. And they never come back because the expense of renewing the certificate as the market improved is often too expensive to make it worthwhile.

Got you, okay. And then just this is follow-up to that and kind of along the same lines. I think someone asked it earlier around maybe referenced buybacks and then obviously the stock is pretty resilient here. If I think about the valuation you guys are getting now, at about 10-turn premium to the last cycle. This carries even within the context of supplier rationale but just in terms of looking at this cycle versus the ‘09 to 2010 cycle or even previous cycle. When you think about the opportunity set today versus what you saw Joe in ‘09 and 2010 with the Shale revolution and potential for pick-up in utilization in barge volumes and/or we saw in the earlier part of the last decade. How would you compare the opportunity set today versus that of ‘09 to ‘10 period and maybe just slightly before? Just to get in context.

In terms of acquisitions?

Just in terms of growth, the overall growth potential, be it organic or M&A, how it is back-up or what you saw in write-downs?

Well, of course, growth will be driven by the economy and with respect to this cycle, chemical plants coming on, acquisitions typically you see acquisitions as you begin to come out of the downturn into the up-cycle because operators just don’t want to send this settle at the bottom. But they learn through the cycle that this is a business, if you work at it every day it’s a tough business. And as some of these opportunities mature and you have in both inland and coastal sectors, mostly private companies with owner manage those companies and own those companies for a while. They look for an opportunity to monetize what they have and they don’t want to do that at the bottom. Though you have some exceptions, you have companies that for strategic reasons they’re in more than just the barge business that will sell fleets to raise capital to invest in other areas, a good example of that was the acquisition that we made last year when we bought Sea-Course fleet. So, I think if the economy improves, chemical plants going on, you should get GDP growth. If you get GDP growth over 3% that is a lot of demand that is available to our fleet, and if you come out of the fact well, I think you’ll see more acquisition opportunities. That should be pretty good.

Yes, I would also add Mike that part of our process is we look at through the cycle and we do a DCF. So that’s why when we do talk to people they know that we’re kind of forecasting long-term and we’re not trying to steal their companies. We tend to pay their price. But and it’s because of our process, it’s a DCF process where we look at after-tax cash flows through the cycle and the life of the equipment.

That’s helpful David. Just with regards to that in terms of M&A, it seems like there were some distress sellers in the back half of last year, they were able to get some last minute financing. Do you think, are you further away from the potential deal than you were maybe in the back half of the year and I guess how we could characterize just kind of the mosaic of opportunities you’re seeing now in terms of more likely to see some of the MLPs out in the space looking to sell non-core assets, just if you can kind of characterize that maybe quarter-over-quarter first half over second half?

Yes, let me just comment first. I think you’re closer. I think again, as you come out of the downturn, you typically see more opportunities.

Okay. All right, thanks for the time, guys. I appreciate it.

Thanks Mike.

Thanks Mike.

Our next question is from Ken Hoexter of Bank of America Merrill Lynch. Please go ahead.

Great, good morning. And Sterling congrats for setting the task for former sell-spiders.

Thanks.

Dave, if we could just kind of dig into, you got a lot of questions on the inland side, and I want to kind of what gets you to accelerate your retirements, you talked about the need for that large amount of capacity to come out to create that balance. Will you kind of accelerate your retirements to help the industry get there given your size in the industry?

Hi Ken, this is Andy. We have, we took out 56 barges last year and we’re sort of scheduled to take out 36 this year, so if you think about that that’s close to sort of 10% number on our fleet. So we’re doing our part. Now, again, we don’t have great visibility into what the overall industry is taking out. It’s not nearly as easy to sort of get a good view of that as it is to get what is being built because it is easier in terms of what you’re taking out. But we certainly feel like if we’re taking them out then our competition ought to be taking them out as well.

Okay. And then you’ve got a couple of un-contracted coastwise vessels coming in as well. Are discussions progressing on locking those in or do you want to use those on the spot as they hit the water and wait until the market improves or I mean, can you talk about your discussions on those?

Yes, no, so we’ve got our four big ATBs, we’ve got two 185s that came out last - one last year and one towards the end of the 2015 timeframe. Both of those are longer-term contracts and working. We had a new 155 come out here recently, she traded in the spot market, she’s on a short-term contract right now, less than a year so we call that spot contract. Of course we’d prefer to term her up for multi-years because utilization is so important for these barge units. We’ve got another 155 coming out this summer, we don’t have her contracted yet. We’re talking a number of customers but we’ll have to watch and see where it goes. Our preference clearly is longer-term contracts because it’s just better from utilization. The timing of the second 155 actually works well for some of our customers as they have some contracts on older equipment that’s rolling off. So we’ll see but we’re working actively to put them to work for the longer term.

Great. Thanks David.

Thanks.

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

Thank you operator, good morning gentlemen.

Hi Kevin.

Let me pass along my congratulations to Sterling, who has always been a great asset to investment community.

Thanks Kevin, appreciate it.

Well, I know, because it’s early in the morning, I’m dazed and confused I haven’t had enough coffee yet.

Not to get a big head.

David, let me dig into the coastal market a little bit more if you don’t mind, and you’ve given great color. But historically, when utilization dips below 80%, you’re talking maybe possibly mid-70s, pricing power significantly erodes. Do you - historically, when that happens, if I’m not mistaken, it doesn’t stay there long. But as I look at the coastal market, and some of the excess capacity that you talked about, but as I look at the tanker market and some of those vessels possibly coming off contract. Could we see utilization depressed for a little bit longer than historical norms just because of some of this excess capacity and maybe some of the tanker market possibly playing in your space?

No that’s a good question. We are seeing a little bit of that. The tanker market is over-built. We looked at the tankers, we had some opportunities. But as we looked at it from a supply and demand in the MR tanker market, we saw that they would be over-building. And we are seeing a little bit of them dip down into our 185-barrel kind of range. But you have to remember those MR tankers are 330,000-barrel so they can’t get into all the docks and terminals that our large barges can. So, they can only do it to a certain extent. We’ve seen a little bit of that that certainly has impacted us on margin. But we’ll see. They just can’t get into all the places that we can with the smaller barges.

Okay, thank you. And kind of a follow-up, as I look at your earnings guidance for the year of $1.70 to $2.20, and then when factoring in your Q1 guidance, if I take the mid-point of your Q1 range, and just annualize that, I get to approximately the mid-point of your full-year earnings guidance range. And so that implies kind of if you will steady earnings growth throughout the year, but historically when I look at Kirby, Q2 and Q3 tend to be your seasonally strongest quarters, but if I look at your quarter that may not be the case. Am I missing something? Is that a reflection of just the weakness in the coastal market? I know Andy mentioned the tax rate moving around so that may play a part of that. But if you could help me kind of walk through the rest of the year as to how maybe, how we should think about quarterly guidance I guess given historically Q2 and Q3 tend to be your seasonally strongest quarters?

Yes, Kevin, again this is Andy. It would cross our guidance range. We look at on our inland side that we still got a lot of contracts rolling over and that will happen throughout the year. And again, we kind of take in at the low-end, a cautious view of that, at the high-end we assume that we’ll see some pricing improvement in the back half of the year. So that’s probably the biggest factor. And then, on the coastal side, how much momentum is in the move from term spot and how that affects our utilization kind of will really affect where we are, sort of bottom-end, top-end.

I got you, okay. Thank you gentlemen, appreciate your time this morning.

All right, thanks Kevin.

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

Good morning guys. Thanks for squeezing me at the end and congratulations to Sterling.

Hi David.

Thanks David.

Just most of my questions obviously have been answered. But when you look at the barges you are returning on charter, what happens to those, so those go right back into the market competing or do you think some will be removed relative to certification or even cut up scrap?

Yes, probably a little bit of both depending on the age. We don’t return that many, we don’t lease that many. So it’s not a big number, when you look at our retirements numbers, it’s a bigger number of our older barges just being scrapped. But the ones that we do return, they can, depending on the age, they can come back, the less sort-able try and release them. But there is, look if we don’t them, there are not many people that would want them in this market. So, less so maybe stuck them just sitting on the bank for a while. But again, I just want to say that that’s a very small number in our return numbers.

Good. Thank you. I appreciate the color.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sterling Adlakha for any closing remarks.

Thanks Nicole. Thanks everyone on the phone. 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 or Brian Carey at 713-435-1413. Thank you. And have a nice day.

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