Q3 2019 Earnings Call
Good morning, and welcome to the Kirby Corporation 2019 third quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist addressing this Archie followed by zero. After today's presentation, there will be an opportunity to ask questions.
Unless you want your questions to one question and one follow up to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press the pound King. Please note. This event is being recorded.
Now I'd like to turn the conference over to Mr. Eric.
Kirbys VP of Investor Relations. Please go ahead.
Good morning, and thank you for joining us with me today or David Grzebinski, Kirbys, President and Chief Executive Officer, and Bill Harvey Kirby's Executive Vice President and Chief Financial Officer, a slide presentation for today's conference call as well as the earnings release that was issued earlier today can be found on our website at Kirby Corp Dot com.
During this conference call, we may refer to certain non-GAAP or adjusted financial measures reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings press release and are also available on our website in the Investor Relations section under financials.
As a reminder 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 in our actual results could differ materially from those anticipated as a result in various factors a list of these risk factors can be found in Kirbys Form 10-K for the year ended December 30, Onest 2018.
I will now turn the call over to David.
Thank you Eric and good morning, everyone earlier today, we announced third quarter revenue of 667 million and earnings of 80 cents per share. This compares to the 2018 third quarter revenue of 705 million and earnings of 70 cents per share.
Although revenues were down 5% year on year earnings per share increased 14% driven largely by significant revenue and earnings growth in marine transportation.
The addition of snack and the continued improvement in marine more than offset reduced oilfield activity and distribution and services.
In inland marine operating conditions improved significantly during the quarter with flood waters on the Mississippi River receding at the beginning of August and favorable summer weather contributing to a 31% sequential reduction and the delay days.
These conditions drove significant improvement in operating efficiencies for much of the quarter, particularly on our contracts of affreightment.
Additionally, the with floodwaters subsiding, we were able to reduce operating expenses that had been elevated for much of the year as a result of high water conditions in the inland market overall customer demand was stable, but with better weather in the quarter, we saw a modest increases in industry barge avail.
Stability.
This led to a temporary pause in the upward momentum of spot pricing.
During the quarter.
Pricing on expiring term contracts, however, renewed higher in the low to mid single digits.
Overall with improved weather increased pricing and lower costs in one margins today, 20% in the third quarter.
In coastal we reported a significant improvement in profitability with the operating margins approaching 10%.
During the third quarter market conditions were favorable with improving customer demand and continued tight supply for large capacity vessels overall, our barge utilization was in the mid 80% range and pricing on expiring term contracts continued to renew higher.
And distribution in services, although we anticipated this slowdown in oilfield spending.
And that would have a negative impact on our third quarter results. The magnitude of the decline was significant.
Our oil and gas related businesses reported sequential reductions in revenue and operating income with many of our customers further scaling back their maintenance activities and equipment and parts spending.
In manufacturing world deliveries of new pressure pumping equipment were in line with our expectations re manufacturing activities were lower than anticipated.
And distribution volumes of new transmission sold and overhauls perform also decline.
Although we believe there is growing pent up demand as a result of this limited spending.
The timing of recovery remains unclear as a result, we were implemented additional cost reduction initiatives during the third quarter, including further reductions in force as well as reduced work schedules.
In summary, Marine transportation had a very good quarter steady demand favorable operating conditions and reduce cost led to strong sequential gains in operating margins for both inland and coastal.
And distribution in services the impact of reduced spending in the oil field was felt across our oil and gas businesses.
In a few moments I'll provide details about our outlook, but before I do I'll turn the call over to bill to discuss our third quarter segment results and the balance sheet.
Thank you David and good morning, everyone.
And our Marine Transportation segment third quarter revenues were 412.7 million with an operating income of 72.7 million and an operating margin of 17.6%.
Compared to the same quarter and 2018. This represented an 8% increase in revenue and a 50% increase in operating income.
The increase in revenue is largely attributable to higher pricing and the inland Marine acquisition system that can see GBM compared to the second quarter revenues increased 8.4 million or 2%.
And operating income increased by 19.5 million or 37%.
These increases are primarily due to reduced delay days and improved operating efficiencies and inland and low overall lower costs.
In the inland business.
Revenues increased 10% year on year due to improve customer demand higher barge utilization increased pricing and the contribution from recent acquisitions.
Compared to the second quarter.
Inlet revenues increased 2%, primarily due to the reduce delay days improved operating conditions and increases in term contract pricing more than offsetting the impact of slightly lower barge utilization.
During the quarter the inland business contributed 77% of Marine transportation revenue and the average barge utilization rate was in the low nineties.
Long term inland marine transportation contracts for those contracts with terms of one year or longer contributed approximately 65% of revenue was 61% attributable to time charters and 39% from contracts of affreightment.
Term contracts every new during the third quarter were higher in the low to mid single digits on average and spot market rates were approximately 15% higher year on year.
During the third quarter, the all pretty margin in the inland business was approximately 20%.
In the coastal business.
Third quarter revenues increased 3% year over year, primarily driven by improved barge utilization and higher pricing.
Compared to the second quarter coastal revenues also increased 3%, primarily as result of higher refined products demand.
Overall coastal barge utilization was in the mid Eightys range during the quarter.
With regards to pricing although rates are contingent on various factors such as geographic location vessel size vessel capabilities and the products being transported in general term contracts renewed higher in the mid single digits and the average spot market rates improved approximately 20.
<unk> percent year on year.
During the third quarter the percentage of coastal revenue under term contracts was approximately 80%.
All of which approximately 85% were time charters.
Coastal's all pretty margin in the third quarter was in the high single digits.
With respect to our tank barge fleet at the end of the third quarter. The inland Pete fleet was largely unchanged. It had 1065 barges representing 23.7 million barrels of capacity.
We expect to end the year with 1060 barges, representing 23.6 billion barrels of capacity.
In the coastal marine market. The barge count was unchanged at 49 barges with 4.7 million barrels of capacity, we do not expect further changes to the coastal barge fleet during the remainder of 2019.
Looking at our distribution services segment.
Revenues for the 2019 third quarter with 254.1 million with operating income up 9.1 million.
Compared to the 2018 third quarter revenues declined approximately 21%, primarily due to lower activity at our oil and gas related businesses.
This was partially offset by higher sales and power generation and increased service levels in the marine repair business.
Sequentially revenues declined 31% with operating income down 14 million as a result of limited activity in the oil and gas sector.
Lower backup power system on installations and reduced demand for new marine engines and repair services.
In the third quarter, the segment's operating margin was 3.6%.
In our oil and gas market revenue and operating income were down due to soft in if activity levels, which resulted in low demand for new and remanufacture pressure pumping units, new an overhaul transmissions and engines as well as parts.
In the third quarter, the oil and gas related businesses represented approximately 45% of distribution services revenue and had an operating margin than negative low single digits.
And our commercial and industrial market compared to the 2018 third quarter revenue and operating income increased primarily due to higher service levels in the marine repair business as well as growth in our power generation business.
Compared to the 2019 second quarter revenues declined as a result of reduced installations of large backup power systems at low single digit all pretty margins.
Operating income was stable however, as this reduction was offset by lower costs.
In the marine repair business results declined as our customers were very busy following many months of disruption due to high water conditions as well as lower new Marine engine sales in the third quarter, the commercial and industrial businesses represented approximately 55% of distribution services revenue.
And had an operating margin in the high single digits as we benefited from lower costs.
Turning to the balance sheet.
As of September Thirtyth total debt was 1.43 billion and our debt to cap was 29.8%.
During the quarter, we paid down more than 160 million in debt and we remain focused on the repayment of debt as of this week our debt balance was 1.39 billion.
I'll now turn the call back over to David to to provide additional details about our outlook.
Thank you Bill.
I will now discuss our updated 2019 guidance, which has been narrowed to $2.80 to $3 per share.
Looking at our segments in Marine Transportation, we expect customer demand will be stable during the fourth quarter with some potential upside from continued growth in petrochemical moves as new Gulf close plants come online.
Operating conditions are expected to seasonally deteriorate in the fourth quarter with the onset of winter weather and some temporary disruptions from lock closures along the Gulf Coast.
Gulf Intercoastal waterway and on the Illinois River.
Overall, we anticipate the inland market will remain tight with our barge utilization in the low 90% range.
With respect to cost, we anticipate sequentially higher operating expenses as a significant number of barges acquired and recent acquisitions are scheduled for maintenance during the fourth quarter.
Overall.
During the fourth quarter, we expect inland revenues will be relatively stable as compared to the third quarter with operating margins in the high teens.
And the coastal market, we expect stable demand and barge utilization in the mid eighties for the fourth quarter.
As highlighted last quarter, we will have a significant amount a major shipyard activity in the fourth quarter with seven vessels scheduled.
Of which six our large capacity vessels.
This will have a negative impact on revenue and operating income during the fourth quarter.
Together with the seasonal reduction in Alaska activity coastal revenue is expected to sequentially declined 5% to 10% with operating margins in the negative low single digit range.
For our distribution and services segment, the fourth quarter is expected to remain challenging.
And the oil and gas market, we expect our customers will remain intensely focused on limiting spending through the end of the year.
That mine.
We expect minimal new orders for new manufactured and new remanufactured pressure pumping equipment.
However, we continue to work on existing orders, which are expected deliver and the back half of the quarter.
Given this timeline there is risk that some of these units could be delayed into the 2021st quarter.
The impact of a potential delay is factored into our low end of our guidance range.
In oil and gas related distribution, we expect sales of new equipment, including engines transmissions in parts as well as service and overhauls, we'll continue to be soft and down sequentially.
And our commercial and industrial markets, we expect revenues to sequentially declined in the fourth quarter, primarily due to low utilization in our power generation rental fleet as the summer storm season, along the Gulf Coast ends.
Marine repair business is expected to be relatively stable.
In total for distribution and services, we expect fourth quarter revenue to be flat to modestly down compared to the third quarter with a challenging oil field and reduced utilization of power generation rental equipment being the major drivers.
Operating margins are expected to be breakeven to slightly positive in the low single digit range.
Overall for our full year guidance range, the lower end assumes possible additional weakness in the distribution and services oil and gas businesses.
This includes some potential delivery delays of new pressure pumping equipment into 2020, very limited orders for re manufacturing and minimal demand for engines transmission and parts.
The high end assumes continued good operating conditions and marine and inland barge utilization into the mid 90% range.
The high end also assumes some improvement in contribution from the distribution and services oil and gas related businesses.
Now to sum things up overall, we had a good third quarter. Despite challenges in our distribution and services segment inland and coastal both executed well delivering significant year on year and sequential improvement in earnings.
In the fourth quarter, we will have increased maintenance and marine transportation as well as continued oilfield weakness in distribution and services. However, we remain very positive about kirbys long term outlook and earnings potential and inland Marine we've successfully completed an integrated several key.
The acquisitions during the last two years, adding over 30% more barrel capacity to our fleet.
These have made a significant contribution and we expect the inland market to continue to be strong.
With improved demand as the result of new petrochemical capacity under construction inland marine is well positioned for the coming years.
In coastal our strategy to invest in modern equipment rightsize, the fleet and reduce our cost structure has begun to pay off in recent months, we've witnessed a growing desire by customers to extend contracts or term up spot spot equipment at improved rates, giving us increased confidence that this.
Market is trending upward.
With a number of industry vessels expected to retire in the coming years, including a few of ours in 2020.
And limited new capacity under construction, we believe the coastal business is set to see multiple years of continued improvement.
And distribution and services, although the oilfield presents challenges in the near future. We remain optimistic about the long term outlook for our oil and gas related businesses.
The current lack of investment in maintenance activities on existing equipment is unsustainable.
And we believe this activity will rebound.
Additionally, although the industry does not currently need new pressure pumping capacity there is a need for replacement horsepower, which will improve operating efficiencies and reduce environmental footprints.
With the major oil the major integrated oil companies continue to invest in shale, we expect shale to play a key role and world energy supply for the foreseeable future.
The steep decline curves and new pipelines from the Permian coming online completion activities will sell cycle backup.
Kirby is well positioned to capitalize on these opportunities when they arise in the meantime, we will continue to make adjustments as needed.
To align our operations with the market conditions.
Elsewhere in distribution and services, the non oilfield commercial and industrial businesses have grown significantly and have provided a solid margin contribution for the segment. As we look forward. These businesses are expected to continue to grow with increasing demand for backup power generation equipment.
As well as some growth in our marine and industrial distribution businesses.
And finally, we've taken significant steps to improve our balance sheet earlier in the year, we've put in place New bank lines enhanced our liquidity for the coming years, and we paid down more than $260 million in debt. Since March. This is the equivalent of paying for the.
Question.
In less than six months.
With continued strength in inland and improvement in coastal we expect to generate significant free cash flow in the coming year positioning us well for additional debt reduction and giving us more financial flexibility to take advantage of any additional acquisition opportunities that may arise.
Operator. This concludes our prepared remarks, we're now ready to take questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press the pound.
As a reminder, we ask that you. Please limit your questions to one question and one follow up.
Our first question comes from Ken Hoexter with Bank of America. Your line is now open.
Great Good morning, Hey, Dave fail and Eric.
Dave just great detail on the fourth quarter and nice job on the quarter at Marine, but maybe just that you kind of just started to at the end there take a step back and look into 2020, maybe talk about the market structure for inland now that you've consolidated as you mentioned a couple additional carriers and you're coming out of the downturn are you seeing peers building assets again are you seeing new.
Maybe talk about the timing of the new facilities, you just mentioned coming online in the Gulf.
To kind of see the scale of that that ramp as we look into 2020 after the maybe a little bit a step back here in the fourth quarter.
Yes sure.
Yes, let me start with supply and demand outlook.
Essentially in the in real quick worded. It continues to to look good there's not a lot of new supply coming on for 2019 I.
I think last quarter, we said there were about 200, we expected delivery in.
For 2019.
The current numbers actually 150, theres been delays in delivering that equipment because.
The shipyards have had a lot of rain and winner type whether that's pushed it out so 50 of the barges we expected to hit in 2019 are moved up to 2020.
And then when you look at retirements, we think.
At least half of the those.
Those 150 that will deliver this year will be for replacement.
So you know from a supply and demand standpoint, we're pretty positive because the demand is growing faster than than supply of course, you've got the risk of a recession next year, but if you exclude that things are looking pretty good and even with the recession. All these new chemical plants to your point are coming along.
Yeah I think.
The Big Hsas will unit.
In Lake Charles is expected to be completed.
By the first quarter of 2020.
With three of their seven units starting up now.
So we're pretty excited about that.
Formosa has a.
A cracker that starting up here the second half.
And there's probably about six others that are going to come online here in the second half or the first part of 2020.
So you know that that bodes well for demand.
Yeah. So.
The way, we think about as GDP plus something demand.
Maybe that plus is 2% to 5%.
So even with a little supply growth, we feel pretty good the other thing I'd say about supply growth as their belden. This this equipment at pretty pretty heavy prices for new barges, so they need higher rates to justify.
Higher barge rates to justify the cost of that new equipment. So when we look at that and put it all together I think.
2020.
Should be pretty good.
We hit we just hit 20% margins. This quarter, we will have a little pullback in the winter weather months.
Winter weather quarters here, both in fourth and first but.
We're on track for continued.
Continued improvements in marine next year on the inland side for sure.
Got it sounds great.
And then I guess, maybe to do the same thing on on the oil and gas part of of DNS.
As you talk to your your main customers are they.
Beyond just their discussions of a rebound are there are there kind of timing of contracts, maybe your thoughts on on how thats panned out over the past in terms of timing.
Yes, no. Good good question I think.
Couple of thoughts here.
I'm sure you saw a bunch of the announcements this week.
Many of our pressure pumping customers are.
Laying up and cutting up and pairing old old capacity I think.
Just our estimate this week alone they've announced about 1.5 million imports power, that's being cut up and impaired.
That's great news for that industry that brings that supply and demand back in the balance couple of the the major the largest pressure pumping companies said they expected the first quarter activity to pick up I think nobody's really expecting a lot activity in the fourth quarter and in fact, we we think it will look.
Line, but.
Look there's pent up demand that pent up demand growing not not shrinking.
As we look at maintenance activities you could you can only cut back on maintenance for so long.
We saw our Remands go way down.
This quarter and what we're hearing from them next quarter, there will be down, but thats unsustainable absolutely has to come back.
And the great thing about nuke, new equipment, it's more efficient.
And we're hearing the majors continue to want to invest in fact, one of the major.
Big integrated oil companies said that they saw decades of growth in shale.
They said that this week so when we look at the activity and talk to the customers I think you'll see a rebound next year, it's hard to predict which quarter that rebound will come but.
Couple of our customers said first quarter the activity level, we'll go back up I don't know how far it goes up but it's going to that's going to be better than it's been in the fourth quarter and the third quarter for sure.
Great appreciate dominant.
Hey, Thanks again.
Thank you. Our next question comes from Jack Atkins with Stephens. Your line is now open.
Hey, good morning. Thank you David Thank you Bill Good morning, guys Lorna Jane.
Born and so I guess, if we could start with.
DNS for a moment.
David in the press release in your prepared comments, you talked about a workforce reduction there.
Do you expect to sort of fully see the benefit of that in the fourth quarter or if not sort of whats the timing of that in terms of helping out some of the profitability. There and then are there are there opportunities as you look at your just broader cost structure DNS outside of a workforce reduction to maybe.
Find some other cost levers to pull in 2020 that can help support profitability there.
Above the sort of the fourth quarter run rate level.
Yeah, No look good workforce reductions as you know are tough.
But when we look at what we've done year to date to.
In the oil and gas business, we've reduced probably 35% to 40% the workforce we also.
This quarter added reduce work schedules cutting back from the 40 hour weeks.
That's helping but.
Look when we looked at third quarter, we gave guidance and talked about we didn't give quarterly guidance, but we've talked about what we thought would happen in the third quarter. We had said we thought sequentially revenue to be down about 15% well in actuality was down about 30%. So when we look at the fourth quarter, we know.
No activities going to be less.
Than it was in the third quarter budget exhaustion and other things you've heard those phrases.
So we know that's happening so thats part of our kind of our fourth quarter discussion.
But when you started going into next year. These lower cost structures should start to pay off.
The problem, we've got really in the fourth quarters is just not a lot of activity.
But.
We're taking the right the right measures.
I think theres some other stuff, we're working on you've heard us talk about the.
Putting all of our ERP systems on one system, we're well underway on that that should should complete kind of mid next year and theres going to be a lot of savings with that lot of cost savings and I think it think about it this way, we'll be able to share inventory between all our locations because it will be on one one.
One system, so we'll be able to take more costs out just on that kind of stuff inventory shifting manufacturing around the when when you've got available capacity.
So we're pretty excited about that.
Particularly as activity and this pent up demand starts to come back.
Got you. So so it sounds like there's maybe more to come on the cost side and that will add to the operating leverage on the upcycle. Okay Gotcha.
Shifting gears to to the coastal market for a moment for my follow up question.
Can you talk about supply demand dynamics, there I think it's very interesting customers are coming to you looking to term up.
Business now.
As you look out to 2020 I know you're going to wait to give guidance in January but we're operating in the third quarter at a.
High single digit operating margin at coastal things are obviously recovering very quickly there.
What's realistic sort of think about in terms of broad strokes for 2020 your for already.
At a high single digit level in terms of the third quarter.
Yeah, well third quarter was it was a good quarter for for coastal for sure, but as you as you heard we've got.
Some major shipyard starting in the fourth quarter Thats going to take us back to a loss in coastal.
Some of those shipyards will carry into the first quarter, but then there will be over.
So that's a positive us it.
One of the negative side, we do have some retirements next year, but thats a short term negative into long term positive right. We're going to will retire I think three vessels next year and.
That that will hurt a little bit from a revenue and operating income standpoint, but it will help in terms of supply and demand because we're seeing supply and demand tight right now and as we pull those units out and others to that that theres. Some other of our competitors retiring equipment as that happens the market's going to get tighter.
So it's hard to predict we're not prepared to give guidance yet but.
I will lose a little revenue from from the retirements, we have but the market structure is getting tighter and were terming up stuff. So.
It's a little too early to call next year, but.
It's looking pretty constructive we like what we see.
Okay. That's great that's great. Thanks again for the time.
Thanks Jack.
Thank you. Our next question comes from Jon Chappell with Evercore. Your line is now open.
Thank you good morning.
Morning.
David if I could start with inland.
Hitting 20% margin in the third quarter was I think we talked about in the last conference call. We were kind of hopeful for maybe second half of next year, so much earlier than expected.
Trying to get a sense of how temporary some of these fourth quarter issues are whether it be the higher than expected maintenance on your own fleet.
Or the maintenance on the locks sequentially things moving down somewhat as expected, but are these should we kind of Moody's is one time events and and having the fleet.
Kind of prime didn't positioned for continued recovery in 2020 or is there some carryover into early next year on both of those.
Yeah, well I think it's more the latter were not carry over it.
The seasonality most of this is temporary maintenance.
Cycles and based on.
When it was built and when the annual shipyards are or excuse me the regulatory shipyards and with with the acquisitions. We've done there is pretty big hit here in the fourth quarter, a little bit carrying over into the first quarter, just because of the timing of when.
The acquired companies build that equipment. The other thing is the seasonality in the fourth quarter, whether starts getting getting rough and then the first quarter is usually the worst in terms of the weather.
When we look at our third quarter.
The weather was really good.
After we got passed the high water.
We took out a lot a lot of cost extra horsepower costs, if you will and.
That really helps margins and I would say.
That will continue next year.
Yes, but for the seasonality. So I think it's more what you said early in your and your question.
It's mostly temporary.
Normal seasonality.
And a little bit of it is just the timing of regulatory shipyard so.
No that the structure of the inland markets is very good right now.
Our utilizations in the 90% range right now we were in the mid nineties.
Nineties.
In the third quarter, and the fourth quarter will drop down a little bit maybe.
Excuse me in the ended the third quarter drop down a little bit, but that's because of the weather fourth quarter will go back up probably as the weather chews up some of the utilization.
So didn't just to be clear to me, taking all seasonality out of it and obviously it tends to peak in the first quarter the impact to seasonality that is theres. No reason to think that the two to 20 wouldn't look similar to know if not better than the Threeq you have 19.
Third third quarter is always the best quarter is when the weather is the best suit, but I would say if you look at third quarter. This year in third quarter next year I'd be.
I would expect third quarter next year, given pricing and everything we're seeing in a market it should be better than this third quarter. So just year over year and the way things are progressing.
The tightness in the market.
Pricing should continue to increase and the price increases that we've gotten throughout this year will carry into a full year next year.
So.
It's it looks pretty favorable from Mark from where we're sitting right now great and then second question, maybe a different way to ask Jack's first question, which I think is very important.
I think your message to that question was that your.
Proving the cost structure, so that your prime really well in the DNS recovery when that eventually comes but maybe just think about another way, let's say it doesn't eventually come or at least not in the near term horizon is there a path to profitability, even if the demand doesn't pick up in the next six to 12 months is there more costs.
What you've done so far has that does that take some time to filter in just trying to think about the ability to keep.
Some positive margin.
If the narrative continues to be very poor.
No I think absolutely let me.
Let me put.
Distribution services kind of in a little context here.
You about 45% of our revenue.
Is in commercial industrial which is non oilfield related.
So 55% oilfield related but when you take distribution and services year to date.
We've generated over $100 million of free cash flow.
You know this businesses is different than our pressure pumping customers and MP customers business right. Their business is very capital intensive ours isn't.
We're in the equipment supply in equipment repair business in the oil and gas. So so when you look at the structure of that what it means is our capex year to date in distribution services was $12 million. So.
When you when you generate operating cash flow of over 100, almost $120 million. It that that all flows to the bottom line and we get free cash flow. So it's.
It's noisy right because of what's going on in the oil field, but remember our capital requirements are pretty small so we do generate free cash flow.
To the earning side, yeah, we think with the base of.
Commercial industrial we should be positive earnings.
Next year, even even the.
Even in this oil and gas market.
And if it were to continue into next year.
Okay. That's very helpful perspective, Thanks, a lot David.
Thank you. Our next question comes from Mike Webber with Weber Research. Your line is now open.
Hey, good morning, guys already.
Hey, well, Mike how are you.
Good.
David I wanted to hear on first on some follow up on the other minor question Vineland pricing.
Admin there are lot a lot of factors that kind of go into the Q4 guidance and give a bunch of color on an already but.
We just look at how spot inland pricing trended during the quarter.
And then I guess the impact of where that spot momentum is.
On the Q4 guide I know theres, some seasonal weakness in that guidance, but seasonal weakness probably wouldn't baked into begin with the it's.
I'm going to be selective.
I think that guidance beginning of the year I'm. Just curious how are you seeing inland pricing trends throughout the quarter on a spot basis.
And then how the competitive dynamics are set up right now in terms of.
Capacity coming back into the market following the seasonal weather patterns from from H, one whether that's been a little bit sloppy, that's kind of contributed to kind of the Q4 weakness.
Not yet on them on the marketing.
Yes, no spot pricing was was flattish in the third quarter, but contract prices, we're renewing up.
When I say spot pricing I mean sequentially. It was flat year over year. It was up kind of 15, 15%.
But frankly, that's pretty normal in in a good weather quarter like we had in the third quarter.
You've heard us say this before Mike.
We usually lose as an industry about 2% to 3% utilization when the weather is really good and that's what happened you heard our utilization was in the mid Ninetys filter the low ninetys. That's that's all about weather so when you're trying to push price increases and you get a good weather quarter, it's tough because you've got a little.
More available little more barge availability, so the the impetus or the or the the tailwinds to get those price increases slowdown, but as as weather comes on that utilization will tighten up and we believe spot pricing will continue.
It's kind of trend that we've had all year long.
But the that's good question. It I don't think it's it's new capacity coming on this this was just better weather things move and better. There was there was a little more barge availability. So the multi the upward price momentum on spot kind of slowed and flattened out I think it'll it'll come back.
As we get.
Tighter here in the fourth and first quarter.
Okay. That's helpful. And then I guess the follow up what kind of along those lines.
Yes, a couple of competitors and one margin in particular.
That are in varying degrees of distress.
It might be coming to ahead over the next couple of quarters, how should we think about the utilization of those kind of that those chunks and capacity and whether they're not those or whether or not as are fully utilized today are not would have would be the primary driver to whether that's capacity entering the market or exiting the market. If there were some sort of.
Some sort of restructuring or some sort of some bigger event at one of those one of those entities I'm. Just curious how you think about market dynamics within that context of.
Capacity at our entering or leaving with a major competitor restructuring.
Yes.
Lots of pins on the restructuring and what would it happens right if its a.
It's a liquidation it could.
Capacity could actually come out, but most most of the time reorganization they want to keep everything running.
So I think their equipment or or most of the most of the industry's equipment is that at roughly the same utilization as we have so.
I.
I don't see that really changing to be honest.
I think.
In in any kind of reorganization. The bankruptcy courts are are usually trying to keep your business going so I don't really see any change there I mean, if it got really bad and that was a forced liquidation that might actually help but yeah, I don't think debt that would happen.
Yes.
It was not good to talk specifics, but.
Everybody's trying to do do the best they can.
To keep keep their entities going and.
Yes, I don't think it'll change the utilization is the short answer.
You know who knows what happens.
And I'm talking broadly across our competitors.
Yes, there is still possibilities for acquisitions, but.
Given that the markets a little better right weve seen pricing come up price expectations tend to go up when that happens.
But you know as Bill told you we paid down a lot of debt and if you look at our revolver right now its undrawn just 850 million dollar revolver, that's totally available for us. So if there is some acquisition possibilities out there.
You know us if it makes sense for Kirby we'd do it.
But I'm not I'm not predicting one at all right now because the markets much better and.
Typically when we see a better market the price expectations for acquisitions Scopes goes up.
Okay. That's very helpful. I appreciate it thanks.
Thanks.
Thank you. Our next question comes from Randy given with Jefferies. Your line open.
Hi, gentlemen has gone.
Very good are you Randy good good I'd say, a following the cost cutting the head count reduction facility consolidation or what is the current utilization for your oil and gas manufacturing and then it sounds like there isn't much backlog remaining for new building equipment, but how does the service contract backlog last is that six month.
The year three years five years.
Yeah, let me take that in pieces right.
Look oil and gas Utilizations pretty low it's probably in the sixties to seventies.
We typically like to run the lot higher than that as you would expect.
What we are working on his maintenance and we've got some.
Some old orders that were still working through.
Keep in those guys busy.
But when you look at how much of its maintenance.
It's probably 50 50 now if I had to put a number on it but I'll tell you know we expected more re man.
Activity in the third quarter.
And it was about to.
50 to 75, maybe even greater than 75% lower than we than we anticipated in the quarter they've cut back on the re man and their maintenance spending.
I think there's an acute pressure on them to show free cash flow.
But as we talked about I don't think that sustainable there's there's a lot of pent up demand being built right now around you should think of that business is highly variable cost. So utilization is a little less important from our point of view, the 39% workforce reduction in manufacturing.
Lines, we're trying to line up.
The variable cost to wait activity, we have and we do have fixed costs don't get me wrong, but there is much different than some other industries.
Sure and then in terms of the kind of service contracts do some of those extend into 2021 and beyond.
We have we have service contracts I don't know if they go into 2021, but there were theres always service contracts in place.
Alright, and then I guess from a second question following up on possible acquisitions are you solely focused on inland or is there any appetite for coastal and maybe even a bolt on DNS acquisition.
Yeah. The short answer is yes, we look at everything.
In terms of.
The ones that we get the most synergies from its inland first obviously we.
We are pretty good inland acquisitions, we always like them, because it's very easy to integrate I'd say very easy.
Our operations guys worked very hard to integrate them.
From a crewing standpoint.
And quality of equipment, but we always tend to prefer inland, but that that said, we'll we'll look at any acquisition in our space I would say it on on the oil and gas side, we're happy with our platform. The way. It is we wouldn't we wouldnt unless it's it's just like.
An incredible deal we wouldn't go anywhere.
We we don't need to add anything on on oil and gas.
You might see as add a little bit on on commercial and industrial but in terms of priority as Bill said, we've been focused on paying down debt to getting ready to go for the four for potential recession.
But if if an acquisition comes comes along we'd love and inland one certainly look at a coastal one.
And or maybe a commercial industrial one not likely to look at an oil and gas type one we're happy with that platform now and frankly, it's pretty ugly in that business right now anyway.
But.
Predicting acquisitions, Randy as you know is difficult.
All I can tell you is we've got the financial.
Capability to do.
You know up to a sizable acquisition.
And we'll stay price discipline as we always do.
Sounds good like the marine rebound over the last few quarters hopefully the Astros rebound. These next few nights.
The last year.
Thank you. Our next question comes from Ben Nolan Stifel. Your line is now.
Yeah, Thanks, Hey, guys.
Hey.
Well, let me start with my first question and and it does it relates to DNS and you've talked a little bit on some of the other questions about sort of the cost cutting and then came.
What I want to try to understand a little bit as if I'm looking back relative to the last time that that business was pretty challenged.
Operating margin to dip too.
Loss of about 3% or something but that was pre SNS acquisition.
It.
Is there a low water Mark do you think that big going forward come Hell or high water you can key.
Those operating margins positive now with the the way the business is structured currently.
Yes.
I think so when you go back to those last years, the rig count got below 400, right now the rig counts and 800 and they are still operating.
Equipment, and so we still are getting some maintenance and we're getting some replacement.
When it when that rig count up below 400, everything kind of stops and now so the.
That that was what drove the losses there but back then we didnt have this big commercial and industrial business. You know as is I think bill said in his prepared remarks, 45% of our revenue in the in the quarter was was commercial and industrial and that continues to grow we're seeing nice growth there.
And that had I think in the third quarter, we had nine.
Excuse me high single digit margins and.
That that that margin profiles, usually mid to high single digit so.
With growth in that kind of margin profile, we think commercial industrial even in a very ugly oil and gas market.
Keeps DNS profitable.
And of course, we're we're not standing still if if the oil and gas market gets worse will take more cost cutting actions, but again I think youre going to see some activity come back when you look at the very big pressure pumping comment pressure pumping company comments they.
The two of the biggest one said that they felt first quarter activity would be up.
From from the levels, we see now so we're we're not overly negative about next year.
And we do think we'll stay positive.
Active year to date out of this out of the commercial industrial side of the business. It's generated about 32 million of operating income and if anything it's not it's actually got a little better recently, so we expect that that will be a good.
Ballast so to speak on on the business.
Okay. Thanks.
For my second question.
On the coastal side of the business. Obviously, there was rates are getting better and I understand the guidance for Fourq you, but.
If you look out going forward.
And.
Kind of back profitability sounds like you expect rates continue to improve in that business to trend higher is it.
Exclusively are solely on the back of supply rationalization or is there any level of demand growth that you're saying that.
Yeah, I would say most of it is supply rationalization, we are seeing GDP type growth.
In terms of demand I mean, it's a look what's GDP now call. It 2%, it's not not a huge number so it's really on the back of supply.
Contraction, which again, we've been foreshadowing this with ballast water treatment and as this older equipment.
Gets retired I think theres still a 14 or so.
Pieces of offshore Bluewater equipment, that's that's 30 years old.
25 to 35 years old so we know more it's coming out and as we talked about we've got three units coming out next year.
And as ballast water treatment continues to be implemented I expect more of that 14 retired.
So you know it as we look at it the supplies going to continue to contract even if somebody wanted to build a new unit now it's a two year process. So it tends to.
Take a long time for supply to come back there, which is a good thing.
And you know absent a recession I would think demand continues to build.
Kind of in that 2% to 3% per year.
Right now I appreciate it bill.
David Thanks.
Yes. Thank you.
Thank you. Our next question comes from Greg Lewis with BTI G. Your line is now open.
Yes, Thank you and good afternoon, everybody and good morning.
Good morning.
David a question for you so I mean clearly.
Pricing and inland has been getting better.
Sequentially every year for a while now.
Knowing that you guys don't you're limited in what you can disclose around pricing is there anyway, you could kind of put some context around where we are in terms of pricing versus maybe where we were last cycle in terms of.
Much more upside or or I mean could we see in pricing any kind of context around that I think would be helpful.
Yeah, I would say in general.
We've seen cycles last.
Kind of five years long cycle might be seven years in in that context, we're probably in the third inning to use a baseball analogy.
It's.
It's going to take awhile, particularly.
Ill take a while to get to peak pricing is what I mean over the it'll be a longer cycle.
And it needs to be.
Higher cycle, just given the in terms of pricing just given the cost of new equipment the cost of compliance.
Yeah.
Rates rates still heavily to go ways to go.
Yeah, I think what could be rail it is probably the.
The corollary question and that would be a recession.
I don't know if we're heading into recession, but even if we got into recession.
I think it would be short live because.
It's just the market structure just needs continued pricing.
And I don't see.
I see the market getting more discipline not less discipline.
As we look around what's going on.
Okay, great. Okay. So a lot more slowly on and then just one more just switching gears over to two DNS.
Realizing now going back to when you.
Pre SNS you had United is there any kind of.
Difference between what we're seeing in this down market versus what we've seen in previous down markets I mean.
As you could have conversations with customers, how they're thinking about it I mean have there been lessons learned in kind of across the.
CNS value chain in terms of.
Now companies are positioning themselves or is it kind of yep looks just like the last down cycle.
No I honestly believe in talking to customers. They really are a lot more focused on return on invested capital returning capital and I think thats healthy. So is it different this time on those are horrible words right to always.
Run from those words, but it does feel like.
The there is a difference now they're very focused on this return on capital I think frankly, it's because the financing.
The the easy money is requiring or is gone away and there's a required return now so I think that's probably what's different is.
The financing of some of these.
Independent MP companies is gotten tougher and also the financing for for some of the smaller pressure pumping companies have gotten tougher so that.
That discipline of debt so to speak is driving a more intense return on capital focus, which I think is very positive.
We like seeing that.
Because what it what will happen in what we're seeing happened as is.
They want the newer equipment, that's that's higher horsepower more efficient Scott more technical bells, and whistles and frankly, that's plays into Kirby strength, that's that's where we can play really well.
So as I think about is a different this time, yeah, a little bit because of what I just articulated.
And it's.
Sure. It will continue to cycle, but I don't think it will be as violent going forward just because of this is due disciplined that's happening.
Perfect. Okay, guys say, thank you very much for the time.
Thank you.
Thank you. Our next question comes from Justin Bergner with GE Research. Your line is now open.
Oh, good morning, David Good morning, Bill.
Good morning.
First off when you were talking about term contract pricing being high are you referring to year on year, they're actually actually sequentially.
A year on year.
That's what I thought and then I think you talked about demand, having the potential to grow GDP plus 2% to 5% maybe on the inland side. If I heard you correctly. If so is that sort of more of a post 2019 event because clearly you know supply only grew about 2% to share with 150 delay.
It varies in the market seem to stall in terms of tightening in the sort of second half of this year, just any clarity there would be helpful.
No yes, the growth is coming from the all the new petrochemical plants and refinery expansions that are going on I think that you've you've seen us talk about the $150 billion of new plans, but but I wouldn't say demand stalled at all.
What would happen here with with.
Spot pricing sequentially is just.
As a pause because we had better weather and there was more barge availability, because better weather, usually and better whether we get 2% to 3%.
Drop in utility and that's what happened in.
You get a little drop and utility it's harder to push prices up.
I think utilities going to tighten here as we get the kind of the cold front in the fourth quarter, whether coming coming on so I wouldn't say, there's a there's a pause Justin I would say I wouldn't say theres, a a slowdown I would say, it's just a pause.
Okay, Great and then just lastly on the DNS side or any of your competitors in the oil and gas side and financial distress to I mean did the current week operating conditions present, an opportunity to gain share.
Competitor have to exit part or all of its business.
Yeah, I think you're seeing a little bit of that it I think there's there's the halves in the have nots in.
And that pressure pumping group I think there's a bunch of smaller players it'll end up being consolidated we did see one big consolidation.
We've seen.
Heard antidotes of some people wanting to get out of the business.
So I think you're going to see consolidation in the pressure pumping area I think thats healthy.
And will lead to the better market dynamic.
The bigger players will be able to to invest more properly and for longer term sustainability. So we think.
Again, the market structure is getting better year with this focus on on.
Return on invested capital.
Thank you.
Okay. Thanks.
Alright, Daniel we have time, we'll take one more call or one more question.
Thank you. Our final question comes from Kevin Sterling with Seaport Global Your line is now.
Good morning, Thanks for squeezing me in here.
Hey kit.
So I'm not going take living in Virginia, and I will take pity on you asked rose I mean that.
So David can I am dive into cost a little bit more I know you talked about supply.
Rationalization, there, but it seems like we're seeing a little bit of a pickup in demand is any of that related to IMO 2020, very soon increasingly bunkering activity is that could that drive potential demand in coastal.
Yes, it could a little bit but.
As we look at IMO 2020.
It probably help us in our Bunkering business, because you'll have more more types of fuel that you bunker with so we'll end up having to use more barges in the industrial have to use more barges as they do bunkering.
But in terms of coastal I'm not sure.
It's going to impact our coastal business much.
Well, we're still talking to customers and trying to figure out what's going to happen everybody's kind of worried about what will happen with diesel prices, what will happen with heavy fuel prices and what kind of dislocations will happen.
Our refinery customers I would say our spending a lot of money on there.
On their turnarounds right now, it's a big turnaround season right now.
As they try and prepare for IMO.
It's going to be interesting to watch im not sure how much change there will be and if there is changed my view is it will be temporary because if they're becomes a price dislocation.
More people will will install scrubbers and that will bring the price back in the line.
My guess is is the realignment of that will be quicker rather than slower.
You know IEC economic incentives were really well so as we think about IMO from a coastal standpoint, we don't we don't think it will have much effect to our business.
Okay. Thanks, and lastly on coastal can you remind us do you still have some equipment tie it up in coastal and if so you have the coastal market continues to improve would you and tie that equipment.
At least from your competitors may have some of their equipment still tied up as well.
Yeah that we do have some tied up not a lot.
And I do believe that's true on our competitors too.
Look there's a cost of bringing it back off the off the bank.
And then.
That that could be an impediment for some of that tied up equipment to come back, but I don't think it's a it's a meaningful amount.
And because you might imagine most of that type of equipment on the older side. So my view is more likely to be retired than it is.
Brought back in service.
Okay. Thank you so much I really appreciate your fit me, but fitting me in here then thanks have a good.
Thanks, Kevin.
Thank you. This concludes our question and answer session I would now like to turn the conference back over to Mr., Eric Holcomb for any closing remarks.
Alright, Thank you Daniel and thank you everyone for joining US today, if you have any additional questions or comments feel free to reach me.
713435154, or five thank you everyone have a good day.
The conference has now concluded.
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