Good morning and welcome to the Kirby Corporation 2017 Fourth Quarter and Full Year Earnings Conference Call. All participants will be in listen-only mode. [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. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

Good morning and thank you for joining us. With me today are Joe Pyne, Kirby’s Chairman; David Grzebinski, Kirby's President and Chief Executive Officer and Bill Harvey, Kirby’s Executive Vice President of Finance. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our fourth quarter earnings press release and is available on our website at www.kirbycorp.com in the Investor Relations section under Financial Highlights. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2016, and in Kirby’s subsequent quarterly report on Form 10-Q for the period ended September 30, 2017. I'll now turn the call over to Joe.

Thank you, Eric and good morning to everybody. Yesterday afternoon, we announced 2017 fourth quarter earnings of $3.87 per share. These earnings included a one-time deferred tax revaluation benefit of $4.51 per share, which comes as a result of recent tax form legislation and is partially offset by non-reoccurring after tax charges of $1.18 per share, including impairments of coastal vessels, severance and early workforce retirement. Without these items, our fourth quarter earnings would have been $0.54 per share. Fourth quarter results compare to our guidance range of $0.40 to $0.55 per share for the fourth quarter and $0.60 per share reported for the 2016 fourth quarter. During the quarter, Inland Marine tank barge utilization remained at elevated levels that were similar to what we experienced in the third quarter after hurricane Harvey. Favorable commodity prices for our customers’ products and new petrochemical capacity, both contributed to higher demand for tank barge transportation. Despite this, the existence of a few aggressive competitors and excess industry barge capacity did little to improve depressed spot market pricing. As we look forward, economists are projecting that 2018 will see the largest GDP growth since the start of the downturn. With much of our petrochemical demand ultimately tied to consumer nondurables goods and expectations for 30 new petrochemical plants scheduled to complete in the next two years, we have a favorable long-term outlook for this business. In the coastal market, fundamentals remain challenging during the quarter as more barges transition from term contracts into the spot market and our utilization rates ranged in the low two to mid-60% level for the second consecutive quarter. During the quarter, we proactively impaired and early retired a number of our older coastal barges and tub boats. We believe this action is necessary, not only to help restore…

Thank you, Joe. Good morning, everyone and thank you for joining us. In our 2017 fourth quarter, our marine transportation segment revenue was 330.4 million, which is a decrease of 25.8 million or 7% compared to the 2016 fourth quarter. Operating income declined 30.2 million or 51% to 28.9 million. The declines were mainly due to lower term contract pricing in both marine markets and lower coastal marine spot pricing and utilization. The marine transportation segment’s operating margin was 8.8% compared with 16.6% for the 2016 fourth quarter and was negatively impacted by approximately $0.04 per share of severance and early retirement costs. In the Inland marine transportation market, our barge utilization ranged in the low to mid-90% level, aided by favorable commodity pricing and new petrochemical capacity and also by normal seasonal weather. During the quarter, operating conditions were challenged by wind, fog and lock delays along the Gulf Coast as well as infrastructure and water level delays primarily on the Ohio River. Demand for transportation by Inland tank barge in the quarter was higher than the fourth quarter of 2016. The Inland sector contributed slightly more than 70% of marine transportation revenue during the 2017 fourth quarter. Long-term, Inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 75% of the revenue with 51% attributable to time charters and 49% from contracts of affreightment. Contracts that renewed during the fourth quarter were down in the mid to high single digits compared to the 2016 fourth quarter. Spot contracts rates were consistent with the first nine months of 2017, however, we did see a very slight price improvement on the low end of the spot market toward the end of the year. During the fourth quarter, the Inland sector generated an…

[Operator Instructions] Our first question comes from Gregory Lewis of Credit Suisse.

And so David, as we look at the Inland market, if you could talk a little bit about that. It looked like Inland revenue spiked up sequentially. But as we look forward, it seems like contractor resets and roll-offs are going to continue to put downward pressure on the Inland business. So I'm just kind of trying to connect the dots and what got Q4 Inland utilization higher, but as we think about roll-offs, it sounds and looks like -- it sounds like Inland revenues going forward should be going down.

First, in the fourth quarter, you saw Inland utilization is up and it spiked up right after hurricane Harvey, but frankly, it's maintained a higher level of utilization. We've been in the 90% to 95% range all through the fourth quarter and that's carried on into January. Now some of that is temporary as you know with weather and lock delays and whatnot, that's temporary and we also had a customer or two that had some plant upsets which added demand, but we've seen a pickup in crude and also these chemical plants coming on as increase in volumes and then just a general market environment with higher crude prices and higher refined product prices has helped our customers and we're just seeing more volume. So some of the pickup in utilization is temporary, but another portion of it -- a good portion of it seems to be more sustainable. What frankly gives us some optimism as we look to a pricing inflection as you heard in our prepared comments, we saw a little pickup in spot pricing at the end of the fourth quarter and frankly that's carried into the first quarter with the bottom end of the spot market starting to pick up a little bit on pricing, which is good. So in our guidance, as you know, we put an inflection happening mid-year ’18. It may happen sooner, but as you know we said that might happen in ’17. So we're being a little cautious before calling a turn, but we're certainly a lot closer. And if this demand continues to hold, it could be pretty good. But to your question about contracts, almost all of our major contracts have reset and were basically reset through ‘18. But as you know Greg, that has a full year effect when you average in the revenue and the pricing declines that when we renewed the contracts in 2017 happened. So I would say most of our contracts have reset and there's only a very tiny bit that need to reset in ’18. So I think we're largely behind that and we're looking at Inland margins and what Marine margins essentially that are flat year-over-year through ’18.

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

Yeah. That's part of it. We are certainly a lot more busy in our land based distribution and services business, it continues to build, but we are seeing our OEM vendors’ delivery time and lead time stretch out. So I think the market does need 2 million to 4 million more horsepower. What will constrain that growth is the supply chains. So that’s all in our guidance. But I would say this, we got a lot going on in the quarter as you could tell with the tax rates and revenue recognition and the addition of Stewart & Stevenson and the growth in the land based business, but one way to maybe cut through all that noise is if you look at Kirby's EBIT for 2017, it was around 200 million. And if you look at our low end and high end of our guidance, it implies about 240 million in EBIT in the low end and 285 million in the high end. So we’ve got the growth happening and clearly the land base is a big part of that in 2018. If the supply chain works really well, we’d certainly be closer to the high end. If it's more constrained, we could be in the middle or even on the low end, but we will see. Our vendors are ramping up their capacity as best they can and everybody's working towards it. I am encouraged that our pressure pumping customers and even their customers, the E&P customers have a little more capital discipline, so the cycle is more ratable than it has been in the past. We’re just seeing a little more discipline and if you listen to Halliburton and Schlumberger’s capital expenditure plans, they're essentially flat year-over-year. So we're actually encouraged by that. It means that it could be a more ratable cycle that has longer legs.

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

Our next question comes from Michael Webber of Wells Fargo.

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

Yeah. It’s very little. As a matter of fact, it's pretty small. Almost every major contract is repriced through ’17. And of course, as you heard in the prepared comments, the first part of ’18, we had a major one reprice. So there's really very little that's going to reprice in 2018. We're pretty much through.

And then just maybe on [indiscernible], just curious after you guys are done, I guess, digesting S&S, when you look at the coastal market, I guess my question is two-fold. One, is there a scenario in which you think about the coastal marketing consolidation in the same way you thought about the Inland market, just given the fact that the space is, you're starting to see some capacity come out. I know, she has a bunch of all ATBs that have been lingering for the better part of a decade, but eventually those will start to come out. So I’m just curious whether that is a nonstarter for you or whether it's something you would entertain and then kind of as a corollary to that, when you think about that market, the LNS seems like it should be starting to support some longer haul movements for some larger assets up in around Florida. I'm just curious are you seeing any uptick there.

Well on the coastwise side, we did an early retirement and impairment of the assets, which we think is a good step to bring in that market back in the balance. We need some of our competitors to do the same. And I think when you start looking at ballast water treatment, they will do the same. So we could get back into balance sooner with the coastal market, but in terms of consolidating, we’re about to come out of the bottom of the -- we certainly reached the bottom of the Inland market and we’re about to come out of it. So, our focus really is on Inland consolidating acquisitions now. I do think it'll be a while before we'd consider coastwise consolidating acquisition. Our real preference would be to do an Inland one now. But I think the news is positive in the coastwise market. As you said, the Brent WTI spread helps. We're hearing that more MR tankers are booked up. There's been a little tick up in utilization here recently. I think some of that's cold weather in the northeast that’s certainly helping. Our steps to take out capacity is helping and as you mentioned, OSG, I think they've got some plans to retire some older equipment and others need to do the same. So, we're constructive. We're doing our part and we need the others in the industry to do their part and we feel that ballast water treatment is going to help them get to that decision point.

Our next question comes from Jack Atkins of Stephens.

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

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

It does. Thank you. I thought there was a good chunk that renewed annually. I just wanted to make sure, I think that was on the same page there. So that definitely makes sense. And then for my follow-up question, just kind of sticking with Inland for a moment, where do you think industry utilization sits right now. I mean you guys have sort of been trending, it seems like at the upper end of the industry, really this entire downcycle because of the quality of your assets and operations, but do you feel like the industry is trending at, call it, mid-80s or so or maybe even higher than that and if so, why do you think it's taking so long to actually start to get price, because it seems like historically, at this level of utilization, we would have already begun to see contractual pricing recover?

Good question. Our utilization as I said was 90% to 95%. I think the industry's a little below that, maybe mid-80s to high-80s, maybe even low-90s. And as you heard, at the end of the fourth quarter, we saw a little bit of spot pricing improvement on the low and that’s kind of continued here in to January. So what has to happen is you have to have the spot pricing increase before you can start getting the contract pricing up. And it's just too early to call that right now. Some of it, as I said in my earlier comments, is weather related and temporary with some plant disruptions. But if this continues, it could be very constructive. It's just too early to say that and we need spot pricing to continue to strengthen for the contracts to start renewing higher.

David, let me just add that there's another component of pricing in that and that’s confidence. The market has to have confidence that they think that the pricing is going to stick. And that -- based on utilization rates and industry utilization rates, I think if you maintain these rates, you're going to see the confidence to begin to move rates, so that's encouraging.

Our next question comes from Jon Chappell of Evercore.

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

Yeah. This is just an estimate, but I'd say 1.5 million to 2 million barrels of capacity needs to come out. We did 830,000 barrels. So -- and we're kind of a quarter of the market as you say. So if others do their part, we can get back in to balance a lot sooner than we had originally gone.

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

In excess. Yeah.

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

Yeah. We're getting closer, we're having more detailed discussions around potential barge moves, particularly with some of our customers that we've got multi-year agreements with, we’re getting more specific about their barge needs. I don't want to get into too much detail because it is customer specific, but yes, we're getting into more detailed discussions about the barge moves, which is actually pretty exciting. Now again, it's hard to -- if you ask me how many barges is it going to be, that’s really hard for me to say. I just know GDP is going to be 3% and this chemical is going to add something to it. It's a pretty big increase in the chemical plant capacity, but it's still hard to nail down the liquid side of it. When we look at the derivative plants that are being announced, roughly 40% will go into derivative plants, the ethylene and then 60% will go into pellets or plastics. So it's just really tough to get more specific than that. We're not trying to avoid getting specific. It's just -- it's still hard to nail it down to the number of barges. But I will say this and we've seen it in ethanol. We’ve picked up the number of methanol barges we're moving, we're seeing some other barge moves a little bit in some of the other trade lanes and we're having definitive discussions with some of our major customers about their needs. So that's kind of where we are. I know you like us to say, it’s ex-100 barges, but it's just still too difficult to say that, John.

Our next question comes from Randy Giveans of Jefferies.

So clearly, your press release and the call covered a lot. So just a few quick questions. Last quarter, you said S&S contributed $0.03 per share to 3Q 17 earnings. What was that contribution for 4Q earnings?

Yeah. It was about $0.06.

Okay. And is that a good run rate going forward?

Yeah. Well, you can annualize that and then add a little bit for growth and add a little bit for synergies. But again, we're merging those businesses with our two land based businesses at United and S&S and it's going to be more and more difficult for us to break out S&S. So, what you’ll hear us start to talk about is in distribution and services, about 60% of it is oil and gas and we'll try and give you a feel for that going forward. Another 20% will be marine and power generation and the remaining 20% will be commercial and industrial and we'll probably talk to that. If you think 60-20-20 in terms of revenue split and then the margins in each of those splits are manufacturing or excuse me oil and gas is more like mid to high single digits and the other two segments are more high single digits in terms of margin. So as you think about building out a model, you might start thinking about it that way because as we merge the businesses, we're going to run them seamlessly. We saw in the fourth quarter we were able to share orders in manufacturing capability between S&S and United and we were frankly able to capture more inbound because of our ability to do that. And as you would expect, we're putting them together, looking for synergies and finding them. So it's just going to be harder and harder to talk about it S&S specific.

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

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

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

Some of these smaller operators are not really keen to let go of their last two or three barges. So make sense.

Our next question comes from Kevin Sterling of Seaport Global.

David, let me ask the pricing question if you don't mind maybe a little differently. You guys have always given great color and you always do a good job answering, but as we think about 2017, we thought pricing would go up and this is on the Inland side, it never really materialized and now we think it might increase in the back half of ’18, but as I look at the dynamics in the Inland business, we have -- it seems to me we have a couple of operators, a few operators that are trafficking in the spot market that are pressuring pricing that are pricing well below contract rates or even pricing well below where they need to be. A question to you is what needs to happen to get them to change their behavior. It seems like they've been acting this way for some time and they haven't changed yet. So maybe what do we need to see that will get these guys to change their behavior and essentially price more rationally.

Yeah. Well I think not to be competitor specific, but one or two of the aggressive competitors has termed up things. We're happy for that, but they’ve turned up at low rates and we're starting to see a little movement in the low end of the spot market. So I think that's a good sign. It indicates that the market's a little tighter across the board, some of the aggressive guys are termed up. They don't have as much spot equipment to go out and pressure the market and frankly with the utilization having picked up, it's good to have scarce barges. We barge short here helps everybody's mindset. So I think it's marching toward where we wanted to be, Kevin and it’s just too soon to say that that we're there. I think having some of the aggressive guys turned up is definitely what needs to happen and what we think has begun to happen.

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

Well, our utilization jump basically because we took out the 11 barges. And we've got a pretty good portfolio of customers and feel pretty good about keeping our utilization for the year in that 80% to 85% range. I think other competitors are going to do the same. It’s just the fact that they've got to bring these older vessels in for shipyards. They're going to be looking at ballast water treatment. So I think there will be more scrapping and the whole industry’s utilization will tighten up. Hard to say when, but again, we did our share, maybe a little more than our share and I'm getting more optimistic about the coastal business, but it's still going to be painful. We're not – you heard our guidance for coastal this year, but it’s certainly feeling it a little better.

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

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

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

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

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

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

Right.

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

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

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

Well, it’s certainly our ambitions, but there are some other competitors there that have fairly decent balance sheets and for example, we know one of the shippers, a major oil company that has their own barge fleet. They bought a series of barges from one of our other competitors, so they're actually helping consolidate. Now, they're buying it for their own book of business, not to compete with us, but -- so that's even better. But there are other couple -- well reasonably capitalized competitors that I'm sure would be looking for consolidation opportunities as well, but primarily we've been the biggest consolidator in the industry. From my perspective, any consolidation is good. The more rational approach is to have fewer and fewer competitors, right, in any business that's better. But there is still, as you know 40 or so players in this market, used to be a lot more than that. But as time marches on, that list will get smaller and smaller and that's just good for any business as you know.

Our next question is from David Beard of Coker Palmer.

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

Yeah. Well in terms of Inland supply and demand, we believe supply, rough estimate about 50 to 60 barges will be built in 2018. The vast majority of those will be tens and we understand one of our competitors is building a series of about 40 barges for direct replacement that got some old that old barges that they're retiring. So, there is, as I said, 50 to 60 barges being built in 2018, but the vast majority for replacement. So we're not too worried about that. I don't think it adds to the overhang. It's just replacement. In terms of what our returning charter barges, I think that's just normal noise in the market. And to be honest, I don't know what the charter will do with those barges. But they will have to adjust and find out what they do with them. I don't know whether they will come back to compete or not, but it's something we’ll watch. We may change your mind and keep the barges if things tighten up, but that's our plans as of now. David, I’m sorry. Let me come back to that. I just got handed a note here. Actually, the 30 that are going away are not all charter and it's only about five of those are chartered and 25 are owned. So those would be cut up. I apologize for that.

Okay. Thank you, everyone for your interest in Kirby Corporation and participating in our call today. If you have any additional questions or comments, you can reach me directly at 7134351545 or Brian Carey at 7134351413. Thank you and have a nice day.

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