Q2 2020 Kirby Corp Earnings Call
Good morning, and welcome to be Kirby Corporation, 2022nd quarter Earnings Conference call. All participants will be in listen only mode should you need assistance. Please signally conference specialist by pressing Sparky 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 asking questions. You May Press Star then 100 touched on telephone.
Try your question press the pound King. Please note. This event is being recorded I would now like to turn the conference over to Mr., Eric Hokum, Kirby's Vice President Investor Relations. Please go ahead.
Good morning, and thank you for joining us with me today, our David Grzebinski, Kirbys, President and Chief Executive Officer, and built Hardy Kirby's Executive Vice President and Chief Financial Officer.
Slide presentation for today's conference call as well as the earnings release that was issued earlier today can be found on our web site 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 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, including the impact of covered up to cope in 19 pandemic and the related response and governments on global and regional market conditions and the company's business.
Illicit these risk factors can be found in Kirbys form 10-K for the year ended December 30, Onest 2019, and subsequent quarterly filings on form 10-Q.
I will now turn the call over to David.
Thank you, Eric and good morning, everyone.
Earlier today, we announced 2022nd quarter earnings of 42 cents per share.
This quarter's results were heavily impacted by cobot 19 in the resulting reductions in demand for Kirby's products and services.
In addition to the effects of declining activity, we incurred charges of six cents per share.
Bad debt as a result of the bankruptcy of a large oil and gas company customer and severance costs.
During the quarter, we aggressively reduced costs across the company and focused on cash generation, resulting in decent earnings and strong cash flow despite the challenging market dynamics.
We'll talk more about the second quarter's results in a few moments.
Or pandemic pandemic response plan, which we activated in early March has successfully insured business continuity uninterrupted customer service and the safety of our employees I'm pleased to report that all of Kirby's businesses have continued to operate with.
That disruption I.
I'm proud of the resilience of our dedicated employees during these difficult times and its through their efforts that we're dealing with the challenging circumstances and ensuring continuous operations without sacrificing our commitment to safety in customer service.
Moving to our segments and marine transportation, the inland and coastal markets were significantly impacted by covert 19, and the resulting decline in demand for many of the products, which we transport.
During the second quarter refinery utilization declined sharply from 82% at the beginning of April to 68% made before gradually recovering to 75%.
At the end of June.
Chemical plant utilization also dropped to 70%.
With our customers activities levels materially reduced barge requirements in both inland and coastal dropped sharply, particularly in late May and June.
And in line, although the quarter benefited from storage requirements for crude and refined products. The magnitude of the demand reduction for movements of refined products black oil in some petrochemicals resulted in a sharp decline in our barge utilization from the low 90% range in early April.
To the mid 70% range by the end of June.
Also contributing to the lower utilization, we're better weather and reduce flooding on the Mississippi River, which contributed to a 37% sequential decline in delay days and improved efficiencies across the waterways.
There was.
A very limited spot market in the quarter and it became highly competitive as the quarter progressed with spot pricing declining.
Term contract pricing, however was stable in the quarter.
In coastal reduced consumer demand for refined products and black oil had a significant impact on the spot market.
As the quarter progress the industry experienced increased availability of 80000, 100000 barrel barges and limited barge requirements on the West coast.
As a result, our barge utilization declined from the low 80% range in April to the low 70% range in June.
There was minimal change in pricing for both spot charters and renewing term contracts.
To help minimize the financial impact of the lower barge utilization and declining revenues. We continued to take aggressive actions to lower marine transportation costs during the quarter, including significant reductions in horsepower operating costs and DNA expenses.
As a result inland operating margins increased both sequentially and year on year and coastal margins remained about breakeven despite the decline in revenue.
And distribution in services second quarter activity declined as our core markets were significantly impacted by reduced economic activity stay at home orders and low commodity prices.
Our oil and gas markets virtually stopped as the U.S. rig count dropped 50% sequentially wells were shut in and the number of active frac crews declined approximately 80%.
As a result consists of customer demand for new and remanufactured pressure pumping equipment, a wrap rated and sales of equipment parts and service slowed materially.
Additionally, one of our large oil and gas customers filed for bankruptcy, resulting in an approximate four cents per share hit to earnings.
In commercial and industrial the economic slowdown and stay at home orders significantly reduced activity levels, particularly in the on highway in power generation businesses and on highway we experienced reduced activity at our repair centers as fleet miles declined nearly 15% metropolitan areas went on.
Locked down and major tourist destinations closed.
And power generation, new orders in service demand declined sharply as many major projects were postponed.
The bright spot in this market, where the marine repair and thermo King refrigeration businesses.
Although these businesses reported sequential reductions in revenue both maintained solid activity levels throughout the quarter.
In response to these challenging market dynamics, we took further steps to realign the distribution in services cost structure, including additional workforce reductions furloughs and strict management of all discretionary cost and capital expenditures.
We expect that these efforts will be fully felt in our third quarter results.
A few moments I will talk about our outlook for the balance the year, but before I do.
I'll turn the call over to build to discuss our second quarter results in the balance sheet.
Thank you David and good morning, everyone.
The 2022nd quarter Marine Transportation revenues were 381 million with an operating income of 51.4 million and the margin of 13.5%.
Compared to the 2021st quarter, our revenues declined 6% even with the addition of Savage in the Marine and operating income improved 700000, or 1% as result of the significant cost reduction initiatives implemented during the quarter.
The revenue reductions are due to lower inland and coastal barge utilization.
Reduced fuel Rebills retirements of two large capacity coastal barges and planned shipyard activity in coastal.
During the quarter the inland business contributed approximately 80% of sub segment revenue and had an average barge utilization in the mid 80% range.
Long term inland marine transportation contracts are those contracts with the term of one year or longer contributed approximately 65% of revenue was 68% from time charters and 32% from Kong contracts of affreightment.
Term contracts that renewed during the second quarter were stable. However, as a result, a lower barge utilization across the industry spot market rates decline, approximately 5% to 10% sequentially and year on year, primarily refined products the black oil.
During the second quarter operating margin in the inland business was in the mid to high teens.
In the coastal business spot market conditions deteriorated as a result of reduced demand for refined products and black oil transportation.
These market dynamics yield sequential and year on year reductions of our utilization into the mid Seventys range.
Average spot market the term contract rates were stable during the second quarter the percentage of coastal revenue under term contracts was approximately 85% of one of which approximately 90% were term charters coastal's operating margin in the second quarter was breakeven.
With respect to our tank barge fleet, a reconciliation of the changes in the second quarter as well as projections for the remainder of 2020 are included in our in our earnings call presentation posted on our website.
Moving to distribution services revenues for the 2022nd quarter were 160.2 million with an operating loss of 14.1 million.
Compared to the first quarter revenues declined 33% with a 17.9 million reduction in operating income.
In oil and gas significant reductions in rig counts in limited fracking activity resulted in very low demand for oil and gas related products and services.
The quarter's results included approximately 3.3 million a bad debt expense related to the bankruptcy.
And oil and gas customer and 1.4 million of severance.
Commercial and industrial the impact the declining economic conditions stay at home orders results in a significant reductions in equipment parts and service demands in the on highway in power generation businesses.
Marine repair business experienced solid demand, but was down sequentially and year on year due to reduced major overhaul activity in engine sales during the second quarter, the commercial and industrial businesses represented approximately 81% of CICT segment revenue. It has an operating margin in the low single digits, the oil and gas business.
This businesses represented approximately 19% of segment revenue and had a negative operating margin.
Turning to the balance sheet as of June Thirtyth, we had $108.5 million of cash total debt was 1.64 billion in our debt to cap ratio was 35%.
During the quarter, we had strong cash from operations of 170.6 million, enabling debt repayments of 60 million.
We used cash flow and cash on hand to fund capital expenditures of 43.6 million and the acquisition of Savage for 279 million.
At the ended the quarter, we had total available liquidity of approximately 537 million.
Despite the impact of coal with 19 on our businesses Kirbys balance sheet remains strong and we have good liquidity that we expect will increase the balance of the year, we do not have debt maturities due until 2023, and we have substantial room under our debt covenants.
Capital spending is expected to trend down significantly for the balance of the year as the first and second quarters had significant regulatory shipyard expenditures in coastal for the full year, we expect capital expenditures of approximately 150 million, which were represents a 40% reduction compared to 2019 as a result.
We expect to generate free cash flow of 250 to 350 million.
Which as previously disclosed includes approximately 125 million of tax refunds as a result at the recent US cares Act legislation.
Before I close I'd like to quickly address income taxes during the second quarter, we had an effective tax rate benefit as a result of net operating losses that were carry back to prior higher tax rate years has allowed by the cares Act legislation.
We expect that the third and fourth quarters, we'll have a lower effective tax rate, 10% or less.
I'll now turn the call back over to David to discuss our outlook for the remainder of 2020.
Thank you Bill.
In the last few weeks, some encouraging macro trends have begun to emerge refinery and chemical plant utilization is slowly moving higher demand for refined products is increasing frac activity is improving and trucking fleet miles are rebounding modest.
As a result, we have started recently started to see some slight improvement in our activity levels.
Well this is positive the resurgence in positive virus cases, new government restrictions and continued high unemployment creates uncertainty is the timing of immaterial economic recovery.
Given these factors we intend to remain focused very focused on cost control capital discipline and cash generation until we see a significant improvement in activity.
In the inland market the sharp decline in demand and barge utilization that was experienced throughout may and June has stabilized in recent weeks as refinery and chemical plant utilization levels have modestly improved.
These improvements have resulted in some slight increases in conns in customer requirements, leading us to believes the inland market has reached bottom. However, with continued uncertainty surrounding the virus and material recovery for the inland market is not expected until general economic.
Activity rebounds.
With you with inland barge utilization starting the quarter in the mid 70% range, we expected our average third quarter utilization will be sequentially, lower and spot market pricing could remain under pressure until a more meaningful improvement in demand is realized.
In the meantime, we will continue to reduce costs across the business as necessary, including managing our horsepower requirements to align with demand as well as strict management of operating cost DNA expenses and capital expenditures.
Overall with average barge utilization in demand expected to be at lower levels for the third quarter, we anticipate inland revenues and operating income will decline compared to the second quarter.
Despite these near term headwinds and given that this downturn is demand driven versus supply driven we are confident that the inland business can get back on a path to normalized margins in the low to mid 20% range in a healthy and fully recovered market.
And the coastal market approximately 85% of the revenues are under long term contracts, which had minimal renewal exposure prior to the end of 2020.
Demand in the spot market is expected to remain at low levels for the near term.
In the third quarter, we will retire one additional large capacity vessel, however, reduce shipyard maintenance will help to improve the quarters overall results.
As a result, we expect third quarter coastal revenues and operating income.
We will modestly improved sequentially.
And distribution and services, we anticipate the activity in the oil and gas market will remain extremely challenged for the duration of 2020, the U.S. rig count which has declined from nearly 800 rigs in the first quarter. Two approximately 250 rigs today is expected to only slightly improved for the duration.
One of the year. Additionally, although there are reports of incremental fracturing activity expected in the second half the significant amount of spare pressure pumping capacity that exists across the industry will likely limit any material recovery in new construction and maintenance activities for the foreseeable future.
As a result, although we're seeing a slight pickup in activity now we do not expect a significant rebound in our oil and gas distribution and manufacturing businesses for the remainder of the year.
In commercial and industrial although our core businesses continue to experience reduced activity levels.
As a result of cobot 19, there have been some positive indicators and on highway and power generation sectors in recent weeks.
Sleep milestones in the nation's trucking industry have modestly rebounded from their lows in the second quarter and power generation projects, which were previously deferred are being rescheduled for the coming months.
While we hope these trends continue the ongoing spike in virus cases, and the possibility of new lockdowns and restrictions could delay the recovery.
On a more positive note, we anticipate increased seasonal utilization in the power generation rental fleet and higher activity in the thermo King refrigeration businesses during the remaining summer months.
The marine repair business is expected to be stable in the third quarter, but we'll likely decline in the fourth further due to normal seasonal factors, including the dry cargo harvest season.
We are actively managing the distribution and services cost structure, and we'll continue to make adjustments to mitigate the impact of reduced activity as necessary. Although our recent efforts were not fully reflected in the second quarter's results. We expect to realize the benefit of these cost reductions in the third quarter.
As a result, we expect that distribution services operating margins will sequentially improve in the third quarter, but still remain below breakeven.
For the full year, we expect segment margins at a loss. However, it's important to remember the DNS business requires very little capital and consequently should contribute cash flow.
For the company for the year.
In conclusion, the second quarter was very challenging.
Our activity levels dropped significantly and we had to make some very difficult, but necessary decisions to reduce costs.
Although it appears activity as bottomed and we are entering the initial phases in stages of a recovery.
Significant uncertainty remains.
And the third quarter, we expect overall earnings will be sequentially lower with inland down postal up slightly.
And losses in distribution services meaningfully less.
We are confident that Kirby is in position to deliver decent full year results. Despite the challenging backdrop.
From a liquidity perspective, our strong free cash flow generation in the second quarter enabled us to reduce debt by 60 million.
And ensure ample liquidity for these uncertain times.
We expect this trend to continue in the third and fourth quarters with thus generating strong free cash flow of 250 to 350 million for the full year.
As previously disclosed we plan to use this cash to further enhance liquidity and reduce our debt for the foreseeable future.
Operator. This concludes our prepared remarks, we're now ready to take questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your touched on telephone if you're using speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press the banking as a reminder, we ask the please limit your questions to one question and one follow up.
Our first question comes from.
John Chappell with Evercore you May proceed with your question.
Thank you good morning, everybody.
Hey, good morning, John Barnidge arm.
David I appreciate all the detail earn you provided and the outlook.
Please forgive me why desktops and mastered in into just trying to understand.
The direction of the second half of your both quarters. So at the lower end of your operating cash flow guidance range.
About $158 million and the second half and if we say 110 million or glimmering.
DNA, that's about 40 million and the second quarter was 25 million. So it's a third quarter is going to be down sequentially from the second quarter. It sounds like even your low end expectation would have a.
Decent Graham.
Sequentially in from Fourq here is that how you're thinking about it or is there still.
Risks to the fourth quarter looking.
Closer to 32.
Yes.
No yeah, that's how we're thinking about it I think.
No even as we think about inland being down sequentially.
Maybe we should have said flat to down, but but we'll see where we definitely feel like we bottomed and.
You'd activity level is starting to pick up you can see it with the.
The refinery.
Activity coming back on.
But we starting from a lower average utilization.
So that are.
Part of our.
Thought process, but when we look at cash flow obviously, the tax refund is is going to be part of it.
We benefited from in the cares Act.
But but even even beyond the tax refund, we do feel like activities is picking up.
You've heard US say this before our volumes follows GDP.
I just saw the flash on the GDP is down 32% or something like that for the second quarter I think DDB starting to pick back up we feel that we see it not only.
With the bottoming in inland.
But we see it also in our on highway and power generation and believe it or not even some some activity in the oilfield, albeit.
At a low level.
So we factored that into our kind of cash flow view, but but.
But to your point to the end of the tax refund is a big part of that cash flow.
We're forecasting for the year.
Okay, I mean comps and then look into all of them.
Yeah, Bill, saying I want to point out is that the tax refund we did receive some of it in the second quarter. The majority is in the back half of the year. So when you look at the number that we talk about of the tax refund.
A little over 30 million of it runs his teeth in the second quarter. So when you when you do your calculation just keep in mind that the full amount only part of it is in the back half a year.
Understood. Thanks, Phil.
For my follow up fee.
Our thinking about inward and maybe similarities and differences.
Sure the last longer crisis.
Financial crisis, and you were very clear. This is the demand driven not a supply driven so maybe if you could give her rewind a little bit and talk about that similarities and differences and what that tells you about the pace.
This in pricing and probably more important rule the return to quarter cord normalized margins.
Sure.
If you go back can you look at the great recession versus the great Lockdown the great recession.
It was pretty short lived them in a.
Bounced back as the economy bounce back.
Our earnings took about you know we had a dip and earnings and then I came back and the lag was.
We have probably a six month lag with with what happened with the economy again that was all demand driven at wasn't an oversupply there werent weren't a lot of.
Lot of barges floating around.
The.
The demand fell also utilization fell off but as soon as demand came back utilization came back.
I would say.
The downturn, we saw from 2015 through 2018 was supply driven and that was there were 400 extra barges in that market and.
Maybe 500.
And it just took a long time for demand to absorb it.
Cdcs grinding forwarded to the 2% to 3% it took a long time to absorb the four to 500 barges.
When we go into the Great lock down where we are now is more like the great recession than it was you know that huge overbuilding bubble that we had in the 2015 2017 range.
It's all demand driven.
No.
Prior to co bid.
I think you heard us say, we hit the highest utilization we ever had which was 90 97 plus percent.
And pricing was really on on a tear.
Right now all all of all the utilization decline we've seen has not been because supply came and it's really been all about demand destruction.
And.
Yes, it's particularly sharp and refined products and jet fuel in particular, if you want to get really specific but.
Petrochemicals to a lesser extent lesser extent, but.
It has been broad based it's it's really just about consumption and us.
That's why we're optimistic now there is some building going on in the industry you know that Brian.
The order book.
For new barges.
As a result placed before co bid.
It had about call. It 125 to maybe at the high end 150 barges coming in.
But.
Those were all ordered.
Pre co bid and probably 25 or or more work carryover from 19 that didnt get delivered and what we're hearing about.
Everybody that had order barges are many people that it or barges are trying to get.
The deliveries pushed out or even cancelled so.
Very very light new barge construction.
Net of retirements, so long way of circling back to say this is demand driven.
The feels more like that.
Great recession period, rather than.
The bubble from all the crude by barge overbuilding.
Yes.
Thanks for the entire David.
Yes, Thanks John.
Thank you. Your next question comes from Ben Nolan with Stifel. You May proceed with your question.
Great. Thanks, Hey, David Bill.
Hi.
So I.
I have a couple let me follow up on what you're just talking about there David.
Sort of comparing maybe the fleet from where it is right now too.
To maybe the last downturn, obviously, there is less on order but.
Can you maybe talk about sort of maybe the state of the.
If you know that the state of the balance sheets and the competition.
And also maybe that the ability to see supply removed from from the fleet and obviously you used the last downturn to really consolidate quite a lot, but do you think that that aspect of it maybe some supply compression.
Can happen in this downturn as well.
Yeah, I think you'll see more retirements them than we've traditionally seen last several years.
You, even when we look at Kirbys retirement plans, we've retired more barges than than we anticipated this year and we've done that just as you would expect looking at the cash flow that would be required to extend the life of a barge and saying Hey look we don't need to spend that now.
Let's let's retire that barger or put or the side.
I think every every competitors going through that same analysis I.
I would say.
Clearly kirbys liquidities.
Pretty strong.
I don't have great information about some of the smaller private players, but I would imagine they are you there liquidity is pretty stressed right now.
I think thats going on lead to more retirements or at least deferred maintenance or maybe even tying up barges and.
Having to having to spend a lot of money to bring them back later.
It's hard for me to give you any more information that because most of these companies are private.
But but I can imagine there under under some stress.
With that fall off in utilization that the whole industry Phil.
This is pretty difficult, but I think one of the things that Kirby benefits from as our horsepower structure, we were able to cut a lot of horsepower costs.
And obviously, we took a lot of cost structure.
Efforts to reduce our cost structure as well I'm sure they're doing the same.
But my guess is some of them are pretty nervous right now.
Yes, okay that makes sense.
And then.
Just sort of and maybe they category of black Swan kind of event.
You have any thoughts on the potential for.
Yes, the Dakota access pipeline is shot and what that might mean for.
More.
Business coming out of crude by barge and how you might that might impact.
Yes, the or or.
Sort of out of nowhere help.
The inland Mark a little bit.
Yes, it's funny, we're we're chuckling amongst ourselves here because we're we're wondering if this question might come up and we were we're going back and forth well is it a positive or is it a negative and we could see a case for both so I think net net it.
The non event to us.
Hey, maybe a slight negative.
But.
We'll see where it wasn't it wasn't material as we discussed the pros and cons of that shutting down.
Okay, Alright, appreciate time guys and.
Good work on cutting costs that was pretty impressive.
Hey, Thanks appreciate it.
Thank you. Our next question comes from Mike Webber with rubber research and proceeded your question.
Hey, good morning, guys how are you.
If you don't mind.
Hey, good David I wanted to dig into maybe to pricing here I know, we've talked about other by utilization already but.
In terms of in terms of what you guys guided towards it and what you talked to in Q2.
No you noted that term pricing was stable now on spot pricing enrolled over pretty significantly.
Yes, the stable term pricing, maybe falls a little bit outside the norms, what we heard kind of elsewhere in the industry. I'm. Just curious is that a function of your specific book would you expect to term prices not so kind of rolling on and with a lag relative to what you saw in the spot market.
Or maybe are you actually actively contracting term barges at the same pace now at that price point that you were.
Maybe in Q1, just a bit more color on how you think that those pricing dynamics play out as as kind of Q2 economic had kind of rolls through your book.
Yes, no goodness. Good question you know, we did see as you heard and Bill's comments the spot pricing is down 5% to 10%.
In the second quarter, we saw a little more pressure on it as we've gone through July here.
Mark our book of business hasn't we haven't felt it on the on the term pricing.
But as you would expect if this continues and we don't get that that activity ramp back up.
We will see term pricing.
Go down I think it's a combination of our book in maybe are.
Our our unwillingness to give a lot on term pricing.
I think this mark is coming back I think we bottomed we're seeing the activity utilization of course on on average is little lower at least the started this quarter.
But we've got to.
Maybe we were a bit optimistic, but we're starting to see that activity come back. So we've been we've been pretty resilient trying to hold the line a little bit.
But.
As you would expect I mean supply and demand work again, and if that if the oversupply or the lower utilization continues.
For a while longer.
And doesn't start to come back we absolutely will see term prices follow follow spot pricing.
I don't.
I don't think Thats right.
No no.
In terms of in terms that mix within within your inland book I think you're you've kind of.
Right at 65% to still hovering around two thirds of it on term what's the what's the range you would expect that to widen out too. If we did see it material drop and in turn pricing could we see that Ron I'm, sorry dropped it could we see could we.
Can we see that term that term piece kind of drop into the high Fiftys as you guys hesitate to put more.
Barges out on on term if you roll whatsoever on higher.
Actually what's happened is our term contract.
Dennis has actually gone up and would've gone up more but for Savage. So yes, I think in the first quarter, we said we averaged about 60%.
Term this quarter second quarter was about 65 so.
That is us us, losing some of the spot business, but retain right turn right. So the percentage of term went up.
And then you also double factor in that we rolled in 90 barges 90, plus barges was Savage and savages book was essentially a 100% spot so but for that our term portfolio would have been higher percentage, but let me be clear that's because.
We were getting a lot of spot equipment back during this is.
This activity downturn.
Right Okay.
Maybe just and then.
The follow up or second question not I don't think I heard you guys mentioned this but weve seen headlines around the ventilator program, you're working on with Rice and Apollo.
We saw some approvals it doesnt seem like there's much of and back to us rolling through your guidance on.
And DNS I'm, just curious how we should think about that business and.
And what impact it could have either on a short term or long term basis.
Yes, no I think it's not material impact that look thats, a low cost then ventilator, we developed it with rice.
Which was was actually do there were great to work with.
But it's a it's a ventilator that.
Probably does about 90% one of a big ventilator does remain in line ventilator, but it costs about $5000 versus 50000 and really the target market. There is for the developing world.
Yes, you can imagine you.
Just that price points better.
I will it be materially Kirby no it's.
It was just the we had believe it or not some idle engineers that weren't working on building frac equipment, so that they belong to us.
Now, but let me talk about DNS for second because.
Yeah, we had a pretty sizable loss in the second quarter I expect that to be meaningfully less we we took a huge amount of cause we restructured the business for for a smaller business going forward to in our oil and gas business I think were down we reduced our head.
By about 63%, 60% to 65%.
Really restructured the whole business completely.
So I think.
As we get some volumes back and we're starting to see a little activity and the oilfield it yes.
We're also starting to see.
Starting to see beyond highway stuff come back in the power generation. So.
I think we bottom there as well.
But to your question the ventilator really won't have an impact on any of that it's really just activity based coming back.
Sure sure Okay, great ill turn it over thanks guys.
Thanks. Thanks.
Thank you. Our next question comes from Randy given so Jefferies. You May proceed with your question.
Hi, gentlemen has gone.
Good how are you doing run.
Great So marine business.
Listen aggressively reduced color offsetting some of the reduction in revenues.
Second cost reductions Chris.
Over there increases from local starts to improve.
More specifically for the third quarter fourth quarter discrepancy operating costs, including those from closer to the one through levels are conceals.
Well I think there would be closer to the Q2 levels.
When you look at.
Lot of our cost.
A big portion of our causes horsepower you've heard us.
Use charter boats before right and we do that to as a shock absorber for demand. So we we laid off some charter boats and that's part of the cost.
And as volumes pick back up we'll we'll add charter boats back so that part is more variable, but you know the GE a name cost the cost savings that we've implemented in just across the board in terms of expense control I don't expect to see that come back. This will this will make us.
A leaner leaner machine is the world comes back.
Yeah, Rob do you have a DNA for the Marine group was down 16% as you know when we are and then did a great job and they're continuing to focus that we have new initiatives working on.
Perfect.
And then looking also at the and utilization fell to the mid 7% screens at the bottom coastal from the low 7% rooms booked for the full quarter.
Average was closer to the mid 80% room sooner on Bloomberg mid seven per cent per coastal so what are the current kind of utilization levels as of may be today.
And then also you mentioned term contract pricing on expiring contracts with stable how business that term market on are you seeing any changes in the duration of the term contracts will be bringing it into six months or extending out to 24 months.
Yes.
Well the duration of the term contracts is different for for inland and coastal I'd say inland is shorter but to the coastal you have more multi year term contracts. So that there's more length in coastal and and I think thats that's by necessity those that's bigger more expensive equipment.
So.
The whole industry pushes for longer term contracts.
But as as you as to the utilization.
Again this to restate the C., we started the second quarter in the in the 90% range and ended the quarter at.
The mid Seventys. So it averaged about 85, we started the third quarter kind of in that mid Seventys and we're starting to see.
Pickup a little bit here, just just recently.
Has it gone a whole 5% no, but we're starting to see it improve.
And similarly on on coastal we saw basically is similar thing.
We've had.
Clinton some spot equipment back to work in coastal.
But not enough to say.
Time to ring, the bell, but again its signs of activity improving.
Perfect and you won't see when you think or term contracts everyone is unique and we've talked in past calls when the prices moving up the pricing moved up slowly on term contracts in this because of the value added in in the long term relationships. So you shouldn't think of it all as a commodity type of business Theres, a big portion of it that is weird.
Late to strip driven and we in on the way optical slow and the value added we provide is pretty unique yeah, I would add one more thing and it should mention that particularly on the inland side one of the things because of the size of our fleet.
We're one of the.
One of the ones that can offer contracts of affreightment.
Instead of time charters. So again, no time charters Esix thousand dollars a day right, but contract of Affreightment is is more X dollars to move barrels a day to be took from 0.8 point B. So you know in a in a market where volumes aren't as is.
Certain at.
That those contracts of affreightment are very attractive due to certain customers. So.
I would say where's the that's an enticement that Kirby has the benefit of.
Being able to do more contracts of affreightment and then some of our our other competitors. So.
We are seeing a lot of interest in contracts of affreightment, but as you know we've always had a good that piece of Khan.
Of our portfolio and contracts of affreightment, but I would say that's a positive in this kind of environment.
Got it Okay and then just following that on liquidity at the current market.
Yeah, that's still.
The amount of kind of real quick or bid for that are you seeing most charterers are customers.
And just getting toward spot for now.
Yes, I'd say, it's a mixture there's there's some some customers that are rolling term contracts and.
Obviously, everybody always wants a lower price so too there is some of that going on.
There are some.
Term turn moves that are going to spot people are some customers are viewing.
This weakness.
As a chance to hey, look I don't need to take give length, because theres going to be fair amount of spot equipment available.
I think thats normal we saw that a little bit isn't that great recession as well.
I think thats, a normal market dynamic frame.
Got it.
Hi that makes sense well the near the same everyone and we've been it's growing curve itself youre facing.
Okay. Thanks, Randy.
Thank you.
Thank you again, if you have a question please press.
Star then one our next question comes from Greg Lutes BTG.
'cause your question.
Yes, Thank you and good morning, everybody Ami, Greg David David I guess my first question is around the.
You know I mean, obviously, it's taken a step off.
On a relative basis and I just want to understand I mean, you called out the marine repair business, specifically any kind of color you can give around that in terms of.
Maybe with the size of the marine repair business, how strong it was I mean I mean.
Maybe a little bit around the split between.
Maybe person all in and however, you referred to it as personal and commercial or just just in thinking about a right. I mean, one of the things that is a trend that we're hearing is.
Consumers are changing their spending habits and I'm just kind of curious is that part.
Thanks.
Repair business and seen on any kind of color ounce cnine as it pertains to that I think would be super helpful.
Yes, no. So so there's Greg you know, there's there's two parts to that marine repair business Theres. The industrial piece and then the the consumer piece, which would be the yacht the the wealthy.
People.
Yes on the industrial side Marine repair, it's been very strong.
I see very strong, but you know relative to the US economy has been strong and I would equate that to.
Up through.
At least through April.
Yeah, all all the industrial horsepower was working pretty regularly and they wanted to keep working.
And.
So bad businesses continue to do okay.
Even the dry cargo market as you probably are aware is done okay. So.
Thats horsepower continues to need to be repaired, we did see some some deferments of.
Type deals, but I will say its.
That those personal things I guess, if I had do a quarantine I wouldn't mind doing it on a big yacht right. So.
There are any of the.
Yes, there would be there is a bit of that dynamic. So you know just to put that business in context.
You know it.
For the year, our marine repair business.
Call it $200 million to $250 million kind of business.
And you know is still on still on that trajectory for this year even in Covance. So.
Thats been probably one of our pleasant surprises that it wasn't as impacted by Cove. It is.
As some of the other stuff the other parts of Cnine.
The on highway the truck repairs that got hit pretty hard all of bus repairs and probably the worst right I mean, if you think about.
You know disneyworld and Disneyland shutting down they don't need to maintain those buses.
The buses that go to take people from city centers to two casinos.
All that type of.
Leisure related has changed now does that come back and Thats, probably the through to your question them in is there a permanent change in consumer behavior.
I don't think so I think.
People are going to want to take your kids the Disneyworld and then.
People are going to want to gamble.
So.
You know I think if they may come back slower right because people are much more cautious with cobot.
But ultimately I do think it comes back.
Our focus really a DNS has been too.
Really right size it for for a lower oil and gas environment going forward.
The Cnine side, we have taken ounce cost since probably down 20% in terms of headcount but.
Not like 60, plus percent that we had and in that will build manufacturing side.
Okay, Great and then just still want more real quick on then maybe it's just a timing issue historically Kirby has has had.
Not a lot of cash on the balance sheet.
This quarter I mean, you built up last quarter for Savage Savages, Don you still have 100 million a cash and the balance sheet is that more of a timing issue was that more just around.
Given uncertainty or maybe we're going to be a little liquids and I'm just kind of just want to understand a little bit more about about the cash position.
Yes, so that is a bit of conservatism and just being careful at this point associated with lower risk like we're generating as you can get strong cash flow. Even now we generated 40 million in July so, but we won't go much above 100.
But it's more conservatism than anything else.
Hey, guys Hey, Thank you very much I have it have a great. Thanks.
Thanks, Eric.
Thank you. Our next question comes from Jack Atkins with Stephens You May proceed question.
Hey, good morning, everybody you've got weighed on for Jack This morning, Thanks for taking my questions.
Right.
No I wanted to kind of get your thoughts on industry utilization from here and how quickly you think we can get back to that call. It 90 plus percent level you'd do we need U.S. gasoline consumption in industrial activity take to get back to levels more like last year for that to happen or what is it.
You can see as being the catalyst for that.
Yes, I think it's like you say.
The.
It'll be interesting, though I think there is a.
There and this might get to greg's thought to that is there a changing consumer behavior. I think there are probably a lot fewer European vacations going forward at least for the next six to 12 months in a lot more driving vacations. So how does that work in terms of our.
Our mix of volumes and refine products, we'll see.
I do believe that the U.S. economy, it's not going to be a sharp b. It's.
Hopefully, it's not a bad but we're going to we're going to come back and it's going to be ratable.
It's my feeling I think that's a guess Wade.
And.
You know it may take it may take six months to or longer to get get that utilization backup into the into the area of high Eightys low ninetys. It is hard to say I really don't have a good prediction for that it is entirely.
You as the economy.
Focus that I think as GDP grows our volumes will grow and our utility will go up.
And I you get into an area I'm, just not very good at and which is predicting GDP. So.
I do believe we come back with the us economy them.
And to a lesser extent the world economy, right because some of some of the products, we do make go too.
Our customers into Latin and South America, as well as China.
Okay, Yeah definitely volume there that makes sense and then maybe just a quick follow up point of clarification, you mentioned that youve seen a bit a pickup in activity in recent weeks. Since I was wondering if you could comment on what commodity tights, you've seen that improvement in.
Yes for competitive reasons, I don't want to get to specific but you know, it's where you're seeing activity pick up right. We're we're seeing refinery utilization go up and chemical plant utilization.
Oh I get to specific in terms of trade lanes.
Great. Thanks.
Thanks.
All right Josh will take we'll take one more color. Please.
Okay. Thank you. Our last question comes from Sanjay Ramaswami with Bank of America. We proceed with your question.
Hi, Good morning, guys. Thanks, taking my question here.
Morning.
Morning.
Right.
To clarify obviously, the inland mobs into Q.
Only surprising outside the pay.
In marine.
Anyway to quantify the impact.
All of the down 15% in delay days on performance metrics and maybe how we think about decrementals going forward.
Yes, no look our margins were up in inland.
Sequentially.
And year over year for that matter.
And.
In here that that was the cost cutting that we've put in.
We do when delay days go down we do make more money on our contracts of affreightment.
You know contracts of affreightment as we've described earlier is going from point a point be at X dollars barrel.
So the better the whether those shorter that trip is in.
And then that leaves that equipment available.
To be used for future move.
I think in a in a low utilization.
Environment, that's less valuable then.
Then it would be in a high utilization market as you would expect them in the very logical.
So in terms of decrements in increments, it's hard for me to give you any any real specific is to the impact on margins.
Typically in a normal year.
With seasonality, we do see a margin decline as weather gets worse.
Even though utilization ticks up.
We make a little less money on those contracts of affreightment. So.
For example, our fourth quarter margin is usually a bit lower than our third quarter margin.
I think in this environment.
That's that's hard to say, we're not probably not getting as much benefit from the lower delay days in our contracts of affreightment, just because there's there's so much equipment available to pickup moves it it really is not adding incremental moves if you follow what I'm, saying.
Yes that makes sense.
That that sandy.
And just maybe shifting to DNS my follow up.
And I mean, you said you you've cut headcount in.
Oil and gas business by about 665%.
Can you just provide maybe a little bit more color on this restructuring.
That you mentioned, maybe talk about an environment, where the U.S. recount dot sequentially rebounded 21 item allows it to keep it somewhere in that 300 400 range.
How do you see margins thanks like rebounding.
Positive Kevin territory here, and maybe the cadence the duration of that.
Yes, hi.
Look weve.
Weve kirker structure as you would expect we are multiple facilities. We've closed some facilities we've consolidated.
Some key resources into two one area.
Weve, obviously kept.
We didn't cut off our leg, we did cut cut the fed off but we didn't tough our levo, if we still have.
The engineering and design horsepower.
Continued to.
To do business in the oil and gas space.
We just recognize that it's not going to be.
The market that it once was.
We were at one point in the market there were 450 frac spreads running.
In the U.S. market.
I think at the low it got down to about 50, Frac spreads running I think we're probably closer to 100.
Im looking at Eric every five to 985 to 90 is what he's saying.
We saw some numbers from one of the key pressure pumpers that did anticipated just to keep us production flat.
Both on an oil and gas basis, you need about 200, frac spreads running so there's a view that this market will come back and we will end up adding these frac spreads back I think the repair and replacement business will come back with that.
But again, it's at a lower base its.
It's half the number of Frac units out there.
That we had before.
But it is a commodity driven market then.
If oil prices start to really pop I'm sure that that could change one thing. We didnt add is we've also of course had to furlough a lot of people into and at the standpoint. These are people that as activity feel as activity increases we will just increased the hours. So we're we're point we're ready.
When the activity increases.
Yes, let me just had one thing Sanjay Didnt distance.
I think it's important to think about.
We're going to see and we are seeing.
Anything SG focused is really good.
So as we do talk to our customers that are surviving in this this downturn in the oil and gas sector anything that has a good environmental footprint is really positive.
You know a lot of our customers want want to look at E Electric Fracs Eve Fracs.
They're looking at.
D. GBS, which is dynamic cast blending.
Even gas turbines to drive Frac equipment.
Really a real good effort by the industry and I think this is broad based from from the investing more world.
We'll focus on carbon footprint in so anything that has some SSG component that reduces the carbon footprint.
He is getting more attention and more positive moves in and that's where people are going to be investing money now I would tell you that that's an expertise of ours, we've probably build more more he fracs than anybody else in the industry and we certainly have have converted.
A number of frac spreads over to the two dual fuel and gas burning.
To increase the number the amount of natural grass that can be burn on frac units. So.
That is that is one little sliver of good news in in a pretty challenged industry right now.
No that's great.
Great color on that thanks.
Thanks, Doug.
Thanks, Eric Thanks Sunday and thank you everyone for your interest in Kirby and for participating in our call. Today. If you have any additional questions or comments you can reach mean directly today 713435154 or five. Thank you everyone have a great day.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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