Q4 2019 Earnings Call
[music].
Good morning, and welcome to the Kirby Corporation, 2019 fourth quarter and full year earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist bypassing the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow up.
Ask a question you May press Star then one I know touchtone phone to withdraw your question. Please press the pound.
Please note this event is being recorded.
I'd now like to turn the conference over to Mr., Eric Holcomb, Kirbys, Vice President 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, It's like 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.
This conference 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 reserve 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 and 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 adjusted fourth quarter earnings of 58 cents per share.
This excludes one time charges of 53 cents per share, including oilfield related inventory write downs and severance on a GAAP basis, we reported earnings of five cents per share for the 2019 fourth quarter.
For the full year GAAP earnings were $2 in 37 cents per share excluding the onetime charges 2019 earnings were $2, a 90 cents per share, which compares to 2018 earnings of $2, an 86 cents per share.
Today I want to discuss three acquisitions with the most significant being the signing of a definitive agreement to purchase the marine transportation fleet of Savage inland Marine for approximately 278 million in cash.
The purchase of Savages fleet, which includes 90 tank barges in 46, Towboats is an excellent strategic fit with Kirbys inland Marine business I'll discuss more about the Savage acquisition and a few minutes.
We also purchased a small barge fleeting operation in Lake Charles Louisiana During the fourth quarter Lake Charles is an area that has experienced significant petrochemical expansion in the last year with more new projects planned in the future.
With this acquisition, we improve our inland fleet in capabilities in this critical market and we will be better able to service our customers growing barging needs.
And distribution and services, we purchased convoy servicing company in early January for $40 million convoy is the primary supplier of thermo King refrigeration equipment, and services and parts and Northern Texas and Colorado This significantly expands our geographic.
Distribution territory with this OEM.
[laughter] looking at the fourth quarter, our inland Marine transportation business results declined relative to a good third quarter as our operations where slowed by seasonal impact.
Wind in fog, along the Gulf Coast.
Well overall delay days increased 33% sequentially, our route weather related delays more than tripled and this significantly affected our efficiencies and profitability.
Additionally, chemical plant refinery chemical plant and refinery utilization levels softened a bit during the quarter due in part to extended.
Turnarounds.
Also as announced on our third quarter conference call, we had higher planned barge maintenance, which contributed to higher operating expenses.
Relative to the third quarter.
That said.
The inland business is very strong and I will discuss more about what we're seeing in the market during my outlook comments.
In coastal market fundamentals were good with our barge utilization in the mid 80% range throughout the quarter the market experience limited availability of large capacity vessels, particularly in the Atlantic and Gulf Coast regions.
And this resulted in tight market conditions and continued pricing increases on renewing contracts.
Additionally, several several of our barges, which had been trading in the spot market have now entered into new term contracts.
And distribution in services revenues and earnings declined relative to the third quarter as our oil and gas customers curtailed their activity in spending levels.
The impact was felt in our distribution distribution business, which experienced reduced demand for new transmissions and overhauls parts and service as well as in manufacturing, where there were a lack of borders and weak demand for remanufacturing.
Although we believe oilfield activities activity levels will modestly recover in 2020 and pent up demand is growing the timing of a recovery for these businesses remains unclear.
During the quarter, we implemented additional workforce reductions.
And we also adjusted the valuation of certain oil field and pressure pumping related inventory to align with current market conditions well. These decisions were difficult. We believe these actions were necessary to rightsize our business.
In summary, the fourth quarter had some challenges. Despite these headwinds we have ensured that kirbys long term earnings power remains intact.
The inland market remains strong fundamentals in coastal are improving and we continue to strengthen our inland fleet through acquisitions.
Pent up demand is growing in the oil and gas market and our recent actions rightsize the segment for near term, while maintaining our ability to benefit from the inevitable market recovery.
And a few moments I'll talk more about the Savage acquisition and our outlook for 2020.
But before I do I'll turn the call over to Bill to discuss our fourth quarter segment results and the balance sheet.
Thank you David and good morning, everyone before I review our segment results I want to provide additional details on the onetime charges, we incurred the 2019 fourth quarter.
In total we recorded pretax charges of 40.3 million or 53 cents per share.
The most significant charge relates to oil field in pressure pumping inventory write downs totaling 35.5 million or 47 cents per share, including several rigs, which were constructed by steward and Stevenson prior to our acquisition in 2017.
The remaining charge relates to workforce reductions, which resulted in severance and early retirement expenses totaling 4.8 million or six cents per share.
These charges are included in the segment results of which 3.3 million relates to distribution in services and 1.5 million relates to marine transportation.
Turning to our segment results in the 2019 fourth quarter Marine Transportation segment revenues were 402 million within operating income of 54.5 million and an operating margin of 13.6%.
Compared to the same quarter in 2018. This represents a 5% increase in revenue and a 2% increase in operating margin.
The increases are primarily due to higher pricing in our inland marine acquisitions.
Compared to the third quarter.
Revenues declined 3% and operating income decreased by 18 million.
These reductions are largely attributable to increased delay days and the impact on demand of lower refinery and chemical plant utilization.
Additionally, relative to the third quarter, we had increased planned shipyard maintenance in both inland and coastal.
And the inland business revenues were approximately 7% higher than the fourth quarter of 20 Deane.
Due to our recent acquisition into crude pricing.
Compared to the third quarter inland revenues declined slightly as a result of increase weather delays and lower refinery in chemical plant utilization.
During the quarter the inland business contributed approximately 78% of marine transportation revenue long term inland Marine transportation contracts are those contracts with the term of one year or longer contributed approximately 60% of revenue was 62% from time charge.
Orders and 38% from contracts of affreightment.
Term contracts that renewed during the fourth quarter were higher in the low to mid single digits and spot market rates increased in the mid single digit rings year on year.
During the fourth quarter, the operating margin in the inland business within the mid teens and included 1.1 million of onetime severance and retirement expense.
In the coastal business fourth quarter revenues were unchanged year over year with higher pricing and barge utilization being offset by retirements of coastal vessels that occurred in 2019.
Compared to the third quarter revenues declined approximately 7% as a result, the planned shipyard maintenance and seasonal activity reductions in Alaska.
Tight market conditions resulted in several barges being placed into new term contracts during the quarter and contributed to utilization in the mid 80% range.
With regards to pricing although rates are contingent of various factors such as geographic location vessel size vessel capabilities and the products being transported in general average spot market rates improved approximately 10% year on year and term contracts renewed higher in a range of fee.
5% to 15%.
During the fourth quarter the percentage of coastal revenue under term contracts was approximately 85% of which approximately 85% were term time charters.
Coastal's operating margin in the fourth quarter was in the mid to high single digits and was favorably impacted by lower operating expenses, which were partially offset by onetime severance and retirement expenses of 400000.
With respect to our tank barge fleet, a reconciliation of the changes in the fourth quarter and full year 2019, as well as projections for 2020 is included in our earnings call presentation posted on our website.
Moving to distribution services.
Revenues for the 2019 fourth quarter were 253.9 million with an operating loss of 2.7 million, excluding severance charges of 3.3 million distribution and services operating income was 4.6 million.
Compared to the 2018 fourth quarter revenues declined approximately 25% with operating income down 30.9 million, primarily due to lower activity in our oil and gas related businesses.
This was partially offset by higher power generation and commercial marine sales.
Sequentially revenues were unchanged overall, but segment operating income was lower as a result of lower activity sales mix seasonal reductions of backup power utilization in severance.
And our oil and gas market revenue and operating income were down year on year due to reduced oilfield activity levels, which resulted in low demand for new and remanufactured pressure pumping units.
New and overhaul transmissions and engines as well as parts.
In the fourth quarter, the oil and gas related businesses represented approximately 47% of distribution services revenue and had an operating margin than the negative.
Mid to high single digits in which included 3.3 million of severance expense.
And our commercial and industrial market compared to the 2018 fourth quarter revenue increased as a result of improvements in power generation commercial marine and on highway businesses.
Compared to the third quarter revenues declined modestly primarily due to seasonal reductions in rentals of standby power generation equipment and sales of thermo King refrigeration units.
These reductions were partially offset by increased sales of new marine engines.
For the fourth quarter, the commercial industrial businesses represented approximately 53% of distribution and services revenue and had an operating margin in the mid single digits.
Turning to the balance sheet as of December 30, Onest total debt was 1.37 billion and our debt to cap was 20.9% during the quarter. We used cash flow from operations to fund 64.1 million of capital expenditures and to purchase the inland barge fleet in company in Louisiana.
During the quarter, we paid down 65 million in debt as of this week, our debt balance was 1.37 billion.
I'll now turn the call back over to David to discuss our guidance for 2020 and the Savage acquisition.
Thank you Bill before I discuss our guidance for 2020 I'd like to comment more on today's announcement regarding the purchase of savages inland Marine Transportation fleet.
Leverages fleet consists of 90 inland tank barges with approximately 2.5 million barrels of capacity.
And they have 46 inland towboats the majority of savages fleet conducts towing operations on the lower Mississippi River system and the Gulf Intercoastal waterway using about 78 barges with an average age of approximately 10 years. The remaining barges are used in Abe.
Hunkering business, along the Gulf Coast.
This actually acquisition will further improve our ability to service customers lower the average age of our fleet and reduce future capital expenditures. It is a perfect strategic fit.
Additionally, the Savage Bunkering business, which has significant operations in New Orleans expands our existing operations beyond Texas, and Florida, giving us the ability to service bunker customers and this important Gulf coast Port.
The purchase price of approximately 278 million will be financed through additional borrowings on our revolver and we expect the deal to close late in the first quarter subject to normal closing conditions and regulatory approvals.
And 2020, we expect this acquisition will be modestly accretive to Kirbys earnings.
Taking into consideration integration and maintenance cost inherited contracts.
Time needed to integrate the fleet and interest expense.
Beyond 2020, as we realize the benefits of anticipated synergies. This acquisition will provide significant enhanced earnings power for Kirby.
With respect to agree our guidance in our press release. This morning, we announced our 2020 guidance of $2.60 to two to $3.40 per share.
Our guidance range contemplates continued growth for inland marine, including a contribution from Savage flat to modest growth in coastal and year on year reductions and distribution and services.
Our capital spending for 2020 is expected to be between 155 and 175 million.
And it includes requirements for this average fleet.
This range represents a year on year Capex reduction of approximately 30% to 40% and our free cash flow generation should be very strong in 2020.
Looking at our segments and Marine transportation, we expect the inland barge demand that inland barge demand will remain robust throughout 2020, driven by modest increases in GDP and additional volumes from new petrochemical capacity coming online.
As a result of these factors, we expect our barge utilization rates will remain strong in the low to mid 90% range during the year and that term contracts are expected to continue to renew higher together with the anticipated contribution from Savage, we expect inland revenues will increase.
Yes in the low double digit to mid teens range compared to 2019.
In coastal we expect strong customer demand and tight market conditions throughout the year, which will contribute contribute to continued pricing increases on term contracts.
With many of our spot market barges recently placed into new term contracts, we anticipate that our barge utilization will be in the mid to high 80% range throughout the year.
However, as previously announced Kirby plans to retire for coastal barges in 2023 of watch or large capacity vessels that would have required new ballast water treatment systems after shipyards.
Which we determined would not yield inadequate adequate return on capital.
Additionally, we currently anticipate reduced activity in our coal transportation business during 2020.
These factors combined will have an impact on the full year in coastal and are largely our and are expected to largely offset improved pricing and utilization.
As a result, we anticipate the coastal revenues will be flat to modestly higher year on year.
Overall and Marine transportation, we anticipate the 2020 revenues will increase in the high single digits to the low teens.
Year on year, we expect the marine transportation operating margins should improve into the mid teens for the full year with inland in the high teens in coastal in the low to mid single digits.
With regards to quarterly performance, we anticipate the first quarter, we'll have the lowest contribution of the year due to normal seasonal factors as well as significant planned shipyard maintenance in coastal.
Quarterly results should improve beyond the first quarter.
Moving to our distribution and services segment, we expect that oil and gas activity levels will remain limited in the near term.
Although we expect pressure pumping activities will increase in 2020 and excess of industry capacity in ongoing customer fleet rationally rationalization initiatives will likely restrained significant increase in manufacturing orders.
We do anticipate that incremental sales in our oil and gas distribution business will improve relative to fourth quarter 2019 levels as the year progresses.
In our commercial and industrial markets, we anticipate growth in our on highway businesses and in the industrial markets, including the contribution from the combo acquisition to our Thermo King business.
Overall in distribution and services, we expect 2020 revenues will be down 12% to 17% compared to 2019 with commercial and industrial representing approximately 65%.
Of segment revenues for the full year.
The lower end of our guidance range assumes continued weakness in the oil and gas market.
The high end assumes manufacturing activity approve improves with incremental orders for new and remanufactured pressure pumping units and higher service and sales.
In oil and gas distribution.
Segment operating margins are expected to be in the low to mid single digits for the full year with the first quarter being the lowest.
Not a wrap things up 2019 was a good year with strong growth in marine transportation, although the year presented many challenges for distribution and services, we have taken the necessary actions to adjust to changing market conditions and delivered.
Positive earnings and significant.
Free cash flow for 2019.
In inland Marine we posted near double digit growth in revenues and strong margin improvement in 2019, Despite historic flooding and the demands of integrating a major acquisition in 2020, we are poised to repeat this with continued growth and the anticipated closing of Savage.
Once the acquisition is complete our fleet business portfolio and workforce will better will be better able to service our customers than at any point in our history.
We continue with continued strong demand expected inland marine is positioned to deliver meaningful increases in revenue and earnings for the foreseeable suit future.
In coastal.
Our actions to reduce cost and improve the efficiency of the fleet have begun to pay off and we've had three consecutive quarters with positive operating margins. The market has improved significantly barge utilization is increasing and prices are moving higher industry capacity is expected to remain tight in the coming years.
Although our forward barge retirements in 2020 will impact our financial performance near term, we expect improving returns in the coming years.
And distribution services, while the oil field continues to present some challenges we're confident that pent up demand is growing and a recovery is inevitable in the meantime, we've taken the necessary actions to reduce costs and rightsize our operations.
In commercial and industrial to come convoy acquisition and the other assets efforts to grow our business is internally will provide additional diversity stability and earnings power for the segment in 2020 and.
Thereafter.
And finally, we took significant steps in 2019 to strengthen our balance sheet and improve our financial flexibility.
In 2020, we expect to generate significant free cash flow with strong marine operations positive contributions from distribution and services and reduce cap capital expenditures.
Debt reduction will be our top priority.
Although we could take advantage of some acquisition opportunities if they align with our strategy and create positive returns for our company and our shareholders. Operator that concludes our prepared remarks, we're now ready to take questions.
Thank you to ask a question you will need tapas style one on your telephone to withdraw your question pest upon key please standby, while we compile the kinda avastin.
Next question comes from Randy given with Jefferies. Your line is now open.
How do you gentlemen, how's it going.
Good morning, Jim Good morning, Randy.
Thanks, So yeah first congrats obviously on the Savage acquisition, New Orleans is a great place for Bunkering business I might be a little biased, but for the acquisition what is the EBITDA contribution kind of on a full year run rate and then for the inland tank barges what percentage of days are those 90 barges contracted for this year.
Just trying to get a sense of how large and maybe how quickly the earnings uplift will be from that acquisition.
Yes sure.
Well look at.
As you noted the state the obvious. This is this is right in our wheel house it fits perfectly within Kirby.
The bulk of those 90 barges are on the Gulf coast in the lower Mississippi River system, so they fit perfectly into our fleet.
There'll be some significant synergies.
As we integrated and have the ability to better service our customers.
With with the higher likelihood of having.
Prior cargo compatibility.
For moves so it fits perfectly in into Kirby.
We think the revenue contributions.
A little more than $100 million.
We paid in the high on a trailing EBITDA basis we.
We paid in the high Nines when you factor in.
Synergies will be.
We'll be in the kind of the sevens in terms of EBITDA multiples. So it's pretty much standard for us.
We're very very pleased with it I think there utilizations fairly high right now and.
We're excited to have them as part of Kirby they are.
It's a young fleet very well maintained very well run.
We're getting some excellent short staff and we're getting some excellent mariners with with the acquisition and frankly, we're delighted to have this acquisition coming to us.
Okay sounds good and then.
Secondly, your press release mentioned DNS revenues declining 12, so I think 17%. This year can you break that out between oil and gas and non oil and gas and then kind of more detailed what's the current backlog for the kind of oil and gas pressure pumping manufacturing and services.
Yeah.
Let me try and put some context around what's happening in DNS and what's in our guidance.
Look the in the fourth quarter, we saw our customers not only curtailed their capital spending, but they cut opex the cut maintenance spending.
Thats on sustainable they're gonna have to come back and do some maintenance work.
But there are very driven to to show free cash flow and cash flow.
So when we look at 2020, we had to Bookended. So.
If you take 2019 and DNS, we made about $70 million.
Now we did generate a lot of free cash flow, probably 125 million and free cash flow in 2019 out of that business, but.
So we made 770 million in in 19, but as you saw in the fourth quarter and DNS. We were essentially breakeven. So if you say those are the the bookends for 2020 and what do we think we think on the low end of our guidance, we're going to be somewhere in the middle of that maybe on the lower.
The lower side the middle.
Because we just don't know how many.
Next Reds and oilfield activity will will come to fruition that said in January we're hearing.
Frac crew utilizations up about 4%. So we just tried to bookended from the high end into to the low end.
If the Frac market comes back.
That that would get us to our high end the low end is assuming.
One of the.
Halfway between those two bookends, maybe a little less than half way.
In terms of backlog, we we don't disclose that but as you might imagine there were there almost no orders for new equipment in the fourth quarter.
Sure and then I guess finally, your non oil and gas revenue you do expect that to increase 20 to whatever analytics, yeah. We sure do if you.
In our prepared comments, we said commercial industrial be about 65% of DNS revenues, which is.
From about 45%, yes, when you look at the on highway we expect.
GDP plus something growth and you look at power generation that market is still.
Growing a lot of people need backup power generation when you look at marine and our marine engine repair.
That is growing nicely with with all the activity on the in London, and even in offshore oil and gas it seems to be picking up a little bit in terms of engine repair so.
Yeah, commercial and industrial is growing next year.
The big swing factor is what happens in manufacturing.
Sure understandable why thanks again.
Thanks, Randy Thanks, Randy.
Our next question comes from Jack Atkins Stephens, Inc. Your line is now open.
Jack you there.
Hey, David can you hear me now yeah, we got it okay, sorry I was on.
So I guess just to start off and thank you for taking my questions.
Well it has people kind of scratching their head. This morning with the guidance is we're kind of looking now for the third you're in a row at about.
$3 and earnings at them at the midpoint and it's a fairly wide guidance range wider than you guys typically provide but we seem to have a.
Strong in approving inland business coastal seems to have found a footing and is on the upswing.
Obviously DNS is.
Is a challenge, but seems to have stabilized there.
From what you guys have sat in the actions you've taken and we've had three large acquisitions that anyone so.
Yes, as you sort of think about.
Well the business as we move sort of move forward here, what is what's holding holding the earnings power back because.
I think a lot of people are sort of expecting things to begin to really take a step forward given given the leverage in the marine business if that if that makes sense.
No I think you summarize the guidance very well.
Look inland is is improving.
You look at our prepared comments, we've got nice revenue growth in inland.
Continued margin growth.
The whole industry and inland is 90% to 95% utilized.
So as you saw we had pricing increase on term contracts that renewed in the fourth quarter, we think thats going to continue so it inland is not holding us back if anything it's it's.
It's advancing nicely and on target and clearly these acquisitions are going to.
Continue to provide earnings Leverages as we go forward.
Coastal.
You know that found flooding of I think thats, a nice way to say it. We did have we are going to have three large units retire in 2020.
And but.
As those retire utilization will tighten up even more.
And we would expect coastal continued to see pricing improvements I think we had a anywhere from 5% to 15% pricing improvements on term contracts that renewed and coastal and the fourth quarter, so that looks positive.
The real drag is the manufacturing side of distribution in services.
In the first half of 2019, we had a lot of orders we were executing so we had good results there.
And.
The issue really is we do we don't know how many new orders for new Frac equipment will occur in 2020, we know there is pent up demand we know there they're working the equipment very very hard the equipment out there that's that's working.
And that's really driving the wider range and and quite frankly, the lower results.
If we repeated 2019 and made 70 million and DNS.
We'd be.
Well above the top end of our range, but we just have to handicap it Jack and.
Thats, what we tried to do okay. Okay got you. Okay. Thank you for that David and I guess for my follow up.
It it's been really encouraging to see you guys do.
These consolidating acquisitions within inland.
And I guess.
As we've been reading in the press the last.
Few weeks the number two player in the inland markets is contemplating a restructuring here.
I guess my question view is how do you think that that's going to play out and what impact that have on Kirby as you look out over the next next couple of years.
Yeah.
Look.
Yeah, It's no secret the Hcl has is been.
Very highly levered.
In part that's.
The private equity ownership model.
Yeah, I think they've they've done.
Very well into the management team there is.
When you are highly levered, they're doing everything they can to take care of their customers around the business as best we can it's just too much leverage.
I think if they go into a bankruptcy situation that will give them some relief.
What it means for us or the industries, it's hard to say, it's probably best for me not to speculate.
Understood. Thanks again for the time.
Thanks Jack.
Thank you. Our next question comes from Jon Chappell with Evercore ISI. Your line is now open.
Thank you good morning, everyone.
Hey, good morning, David I wanted to I think jacks, asking the right questions and if you allow me I just want to use my two to dig in a little deeper first on the oil and gas side I think it's clear how you explained.
Of the worst case scenario the lower end of your guidance range, but you said that through the severance cuts and inventory write downs, you've kind of right size the business for the challenging environment. If you were to go into a kind of continuation of the Fourq you run rate well into 2020.
Is there more rightsizing that could be done because it feels like the low end of the guidance range as it relates to oil and gas would indicate a negative margin throughout the year as opposed to a breakeven which is maybe explained in the press release.
Yes, you're absolutely correct.
But let me put what we've done in context, when you look at DNS.
We've taken out somewhere between 500 and.
550 to 600 employees very very painful.
In our manufacturing business, we've reduced head count by about 50%.
You know.
Could we do more would we do more.
We think we've got it about right.
You know at some point this mark is going to recover and we want the ability to respond.
But clearly if.
If activity doesn't pick up we'd have to do some more but I think we've right sized hasn't got about right. Now we are doing some other things too to take out some cost and hopefully that'll come.
Principally a movement among one of them is putting everybody on the same computer system, which.
We had these disparate businesses on different computer system. So what we're going to be able to share resources, and importantly share inventory and things like that so we're not standing still we're work into to improve the business at its core.
But I do think we've right sized did about right.
If if.
We get more of the fourth quarter and that looks like it's going to continue throughout 2020, then we may have some more to do.
Okay that makes sense and then for my follow up on the inland business. This is maybe me just being a bit of a broken record, but the high teens guidance for 20, you've come out of this bottom pricings recycling contracts are renewing you have a younger more modern fleet you have more in house power and we have a recent track record.
2012 to 2016 with margins in the mid Twentys.
One would think it could be that or better. So why are we still looking for high teens.
Didn't 20, and when can we get to that 20 plus percent margin run rate on a business. It seems to be kind of all systems go right now.
Yes, good question.
When we put our our forecast together, it's it's an average for the full year. So that includes.
Well, the first quarter, which is typically a lower margin and then the fourth quarters, a little little higher than first quarter, but it's generally lower.
So when we look at the margin profile, it's an average for the full year I.
I think third quarter, we'll we'll we'll peers that 20%.
But if things continue as we expect.
With the pricing increase.
Yes, we will get above 20 for a full year average.
We're just.
Putting together, what we think for 2020 just now.
But all the signs are there with continued utilization in the mid to high night excuse me the low to mid 90% for the industry.
Plants continue to come online.
Building of new equipment seems seems.
Kind of steady at low low levels. If you look at net adds would probably Ed 75 barges to the industry. This this year in 2020, and that's about a 2%.
The increase in barge count, which is in line with GDP. So as we look at it inland should stay.
Pretty much in the same utilization range, maybe get a little tighter as is the plants have more demand. So we should be getting towards the end into the twentys, we need to be there.
To justify if all the capital we've got deployed I think the whole industry.
Needs to be in that range to to justify.
The capital in the service we're providing.
So I hear you and we're on that steady climb.
We're just kind of given you the view of the average of the margin for 2020.
Alright, Thanks, a lot for the information David.
Thank you. Our next question comes from Michael Webber with 11 Research. Your line is now open.
Hey, good morning, guys how are you.
Well, thanks, Michael how are you.
Good.
One of the kind of pivot away from from margins I think John kind of hit it.
The.
Just to dig in on on Savage.
At night, and a half to 10 X. EBITDA.
And I think like 100 million Bucks revenue on a mid.
Mid teens margin, you're looking at five to six cents accretion per quarter.
One is is that in the ballpark and then and then two and the not an asset 10, x. for new capacity error for Savage, where does that compare to new capacity.
And it is that where you think market should be for for.
For the inland fleet.
Yeah.
Let me put in context from replacement capital standpoint, the Savage when you look at all the assets.
That we get with with the Savage acquisition the replacement costs is probably 460 million.
Now if you discount that for some of the age.
We're paying below discounted replacement value.
So we feel pretty good about that.
Yes, nine and a half.
To 10 EBITDA on a trailing.
Ranges is look it's pretty full price, but with synergies were down in our our sevens.
The accretion won't come until we get the synergies and that's going to take us the better part of 2020 to get that we may get some towards the end of the year.
So that's the context that we look at it.
To your.
Perhaps some answer in a different question, but.
Where do rates need to be to justify capital for newbuilds, they need to be 20% higher.
Newport, New a new 30000 barrel barges is about $3 million and when you put.
You put the tow boats and with it.
To get a justified.
Return, a 10, 10% type return rates have to be 20% higher.
And I think the industry knows it thanks.
We're all we're all.
Trying to justify our capital and the additional expense that's that's coming through regulations. For example, we've got as you know inspected towboat sub chapter M. That's adding a lot of cost to to the industry. So.
Theres cost pressures and the equipment costs really.
Drive the need for for higher pricing.
And I think that has to happen over time otherwise.
We'll never be able to really replace equipment.
As things were out like on another way to look at it is that.
For the Savage acquisition with the with the synergies we get a 12% return on capital and if you look at a building new we just can't get there. So this is the way that here in the 12 return that's what drives the sheer numbers sort of triangulate, how we think of it too and you could do with the other way to just like a return on capital.
Yes, I appreciate that.
I don't want to beat a dead horse here, but if I, if I kind of thinking about the context of not an FX on EBITDA using synergies are going to get to the the 12% return on capital, you're referencing and I dovetail that with whatever what else is doing this morning trying to reconcile the guide versus where the market seems to be trending and I look at historical results 20 2030.
In 2014, 2015, youre generating considerably less on the all set aside in the mid Thirtys I think sometimes some of the high teens and earning in the around for 40 share and the biggest delta between then and now it's going to be.
New capacity, it's been added on the inland side.
As well as on on the DNS side, but on the inland side as well.
And I'm just I'm, just trying to dig into the synergies that are the need to be recognized to get to that return hurdle.
And if I look at it within the context of historical results and the guide into a tight market. It would suggest that those synergies aren't there I'm just trying to I'm trying to I'm trying to reconcile those two Sony any any any help enable mindful clarity would be helpful. Well, Michael when we say synergies as economies of scale and when we first integrate we have double man and we have a lot of things that has.
To happen this year to do it right.
And that puts costs in for the first year. So the synergies happened quickly, but there is additional costs that coming on top of it and I hear you about the return I mean in the end what is price will continue to continue to move up in order to in that's that's the other factor costs have gone up in the industry.
We have to get our the revenue up to.
Let me also put it in context of 2014, if you take.
Pricing on term contracts in 2014 versus where they are today.
Pricing in 2014 is probable it was probably about.
15% to 20% higher.
In 2014 than it is now on term contracts. If you take a two barge tow for example.
14, the average contract price was was at least 15% above where it is right now so we still got room to grow here.
It has to happen.
Okay. So if you allow sneak one more in.
In terms of the Bunkering business in the in the Gulf.
Is there a scenario where you guys would entertain.
Expanding that either coast, where there's a bit of distress and some pricing pressure.
Okay.
Short answer is yes, there's there's a scenario as you know we look at it our industry in anything that floats, we get interested in.
But let me be clear I said it in our prepared comments, we need to de lever now of course, we just did another large acquisition, but to put that in context, we bought snack last year in.
Basically our free cash flow paid for snack, we would hope our free cash flows going to be a lot higher this year than it was last year and.
We should be able to de lever and get our balance sheet back where we like it. So we can can look at.
Acquisition opportunities.
Thanks, guys.
Thanks, Michael.
Thank you next question comes from Ben Nolan with Stifel. Your line is now open.
Okay can you hear me.
And I Havent had a good yeah I thought was going to be next.
So I have well my first question relates assorted to Savage, but also just sort of too.
The broader business it was just doing the.
Kobo to barge comparison, and you know is pretty close to two wanting you guys like to say that you can do three to one.
But at the same time, you're still building new Towboats, how should we think about that capacity or are you overpowered at this point are getting close to overpowered or.
Well why continue spend capital on the on new toes. When you can go on the market by things like passing and effectively get excess capacity or power.
Yes, well this.
Let me be clear this does help us spend less capital we're getting a younger fleet helps bring the average age of our towboat fleet down that said.
Our customer base.
Is requiring younger and younger tow boats. So when you look at the average age of October hopefully we have to bring it down there are some customers that won't use tow boats that are older than 25 years old.
Actually there are some that won't even use them if they're older than 15 years old. So we have to take out some of our old horsepower, but I will say that.
I'm doing a savage reduces the need to replace a lot of that that horsepower. So.
It's just one of those things where you got to look at all the horsepower and the requirements of our major customers for age and so we'll continue to build.
Some replacement horsepower, but this acquisition actually slows how much we have to spend.
When you look at our Capex guidance, you can tell we've reduced it by 30, 40%.
Versus last year versus 19 and that will.
That will drive significant free cash flow and Oh by the way just as a reminder, we have our own small shipyard here in Houston area right next to our facility, where we can build our own tow boats.
Slow ratable basis, and that keeps our capital cost down as well.
Got you Okay. That's that's a helpful color.
And then changing gears for my follow up.
Just curious on there is small I know just $40 million, but on the convoy acquisition.
I appreciated that sort of increases your geographic footprint.
In that product and probably also deemphasize the oil and gas for de asked a little bit.
But im just in terms of capital allocation.
You know that business it looks like does I don't know about convoy in particular, but.
The industrial side of DNS does high single digit.
Kind of margins, where as you know spending that same capital either.
And the inland or maybe even in the coastal to the extent that it's continuing to improve seemed like it sub.
Hi return.
Proposition is there some sort of is special.
Economies of scale or synergies or something that you think are really important.
That that add to the value that acquisition when thinking about where the dollar SCO.
Yet there.
Your precisely correct. There is some scale that we get with that acquisition. We had we had a southern part of Texas in our Thermo King business. This gives us the northern part so now our thermo King businesses 100 million type.
Revenue type business and it.
It's it's a very solid contributions and it's relatively stable. So theres a lot of benefits to it and there are synergies there.
But to your broader point, we'd much rather deploy capital and in our Marine business. This was just a perfect little tuck in fit great with with our existing thermo King business and it is non oilfield to your point, which helps diversify the revenue in.
In DNS. We also one other aspect of it is the EBITDA multiple purchase that will better than what weve, lower and as well the capex needs going forward affair.
So from our point of view was a nice fit without any ongoing capital needs.
Okay. All right helpful. I appreciate it thanks guys.
Thank you.
Next question comes from crack Lewis.
Your line is now open.
Hey, Thank you and good morning, everybody.
Hey, good morning, Greg.
David I, just wanted to touch a little bit more broadly on on the market I mean, youre talking about margins.
I mean, I guess as I think about it seems like were.
Maybe four to six quarters into the upcycle in inland.
And I'm just kind of wondering if you could go back and look at previous upswings in the market.
As is anything are you seeing anything that's different or is it kind of this is what this is typically how.
A recovery looks on any kind of color around that I think will be helpful.
Yeah, I would say this is a more normal cycle.
I think the 2012 to 2014 cycle was very sharp up because of all the shale crude that came onto the market and it came on quickly.
There weren't the pipeline so it it snapped up probably faster than.
Our other prior cycles. If you go back into the 2000 coming out of the 2000 2003 barge recession. If you will that that upcycle took the five to seven years to play out.
And it this is probably more normal it's more ratable.
You are seeing our contract.
Contracts renew in the kind of.
Low to mid and.
Single digit range, and that's kind of more normal more ratable.
Back in that 2013 2014 timeframe.
Things got so so tight with with all the crude coming on you'll recall, we used to run about 150 barges in the industry and crude and it got up to 550 in that 13 14 timeframe. So that was probably the anomaly and how it.
How fast it went up.
This is more steady slow rise in and that's frankly, what we like because you don't get the the the fast.
Fast money so to speak building new barges. This is you're going to see a more ratable market you won't see a bunch of people building.
Equipment on specs, so we kind of like this slow and steady grind up.
Now would we like to.
To get there faster and stay there longer sure. But this is this is a more normal cycle.
Okay, and so like one I mean, and just touching on Bill's comments about.
Finding.
Which was 12% return return on capital.
Clearly right now you guys are well below that.
For for other parts of.
For the core company.
Just kind of curious.
As we think about it.
We've heard a lot about distress in the market.
Don't know why Savage sold but clearly they were out you guys have done some consolidation.
What type of.
It is 12 kind of the high hurdle rates. So is this I mean, when we view that the company is this kind of a high single digit.
10% pipe I mean, what.
Clearly you guys want to generate ice returns as possible what kind of are you targeting and what do you think is reasonable as we look out over the next on idle no one two years.
Yeah.
Look our cost of capital probably 8%.
Plus or minus a little.
We target 12%.
Over the life of the equipment, we buy so you got to think about it in terms of.
30 year lives.
And you also have to look at it on an after tax basis.
Clearly.
With bonus depreciation if you will.
The tax attributes of the this equipment are pretty good and so when we when we look at our investments we look at it as a discounted free cash flow as you know.
We think we should be targeting 12%.
Typically we are realizing little lower than that but I would say that's very cycle dependent in endpoint dependent when when you look at it but.
But our our hope would be.
Throughout the cycle, we average.
10% or better return on capital, but that's you know these cycles are long and one of the things that we have is if you. If you look at our three different businesses. If you will DNS.
So stool and inland there, they're all different in terms of cycle I would say DNS and very short cycle.
The inland business is kind of medium cycle and then the coastal business is very long cycle because of the way equipment comes in and out of that business. So.
But when you put it all together our hope would be through the cycles in each business, we earn above a double digit cost of capital.
Return on cost of cap.
No it.
Our other competitors and stuff you, obviously see there's been some plant pain, whether it's on the inland side you've seen.
You are seeing pain with with some of our larger competitors on the coast wise size, you're seeing some pain.
As well with some of our competitors that's.
That should tell you where we are in the cycle. We're in the early innings of the both the coastal and the inland cycle in my mind.
There.
Their financial stress is an indication of that.
Yeah, I mean, I guess, what I'm wondering is slowly I mean, clearly you have a diverse customer base you have the pet Chem players you have the more energy players.
As part of what's going on it it's just maybe filtering through the barge business. I mean, you see first hand in the in the in the DNS side of the business, where it's all about capital discipline and capital disciplines, making all decisions.
Is it possible that that's filtering into excellent.
Yes no.
Okay.
Well it well now.
No but.
But clearly.
With the financial stress, there and the additional cost of doing business in the inland business in particular with sub chapter eminent inspected towboats.
Stronger bedding requirements from our major oil field oil customers.
Stronger environmental compliance, which is a good thing all these are good things, because they're making our industry better, but they add a lot of cost so.
I think that cost is making it more difficult for all of us in the barge business too.
To to get returns and so we have to get pricing up to justify this business and I think that is permeating itself through the business I think.
All of our barge competitors are struggling with hey, we've got to recover these cost of doing business.
And so to that extent, it's probably adding some more capital discipline to the industry I know, that's a long convoluted answer but.
I think everybody is focused on trying to to justify.
They're expenditures and get returns on what their spending.
No that was super helpful guys, Hey, everybody. Thank you for the time.
Hi, Thanks. Thank you all right to all we're going to we're going to run a little longer going to take one more call and then we'll wrap it up.
Thank you.
Our next question comes from Justin Bergner with GE Research. Your line is now open.
Good morning, David Good morning, Bill Thanks for fitting me in.
Good morning.
First off the guidance range of 80 cents I mean that compares to the guidance range of 50 cents entering last year. I guess, you sort of has similar 500 basis point range for DNS revenue.
When you were entering last year as you do entering 2020, so so what sort of drives the broader range in the guide given that the DNS revenue range is similar.
Well it it is DNS in the variability in DNS, it and we think the.
The variability actually has grown a little bit because of what's going on in terms of the manufacturing business.
We when we saw the fourth quarter and.
Manufacturing new manufacturing orders.
Were essentially nonexistent and and they cut.
Opex spending it obviously made is as we thought through 2020.
Take a little more cautious view.
With our range.
Okay. That's helpful and then just secondly.
On the coastal side, the lack of forecasted margin improvement in 2020 versus 2019 Im not sure I fully follow that I understand the lack of material revenue guide retired barges, but with pricing up it would seem like there should be some margin improvement there versus where you finished 19.
I think that part of that they were high capacity nice margin vessels and just they were at the end of life and when you put back to Didnt, having to put ballast water treatment.
With that with the short period of life that was left it didn't make any sense. So they were good margin contribution the remember a lot of our businesses under term contract that has to renew through the year. So we see an upper progression everything getting better, but we did lose some some a good margin contributors.
Great. Thank you for taking my question, so or will lose through the year.
Thank you adjust.
Thanks, Justin.
Thank you. This concludes today's question and answer session I would now like to turn the call back over to ask how come for any closing remarks.
Alright, Thank you dwell and thank everyone for participating in our call. Today. If you have any additional questions or comments feel free to reach me today at 713435154 or five thanks, everyone have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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