Q1 2021 Kirby Corp Earnings Call
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Yeah.
Good morning, and welcome to the Kirby Corporation 2021 first quarter earnings Conference call, all participants will be in a listen only mode.
Okay.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions.
I ask that you limit your questions to one question and one follow up to ask a question you May Press Star then the one key on your Touchtone telephone to withdraw your question press. The pound key. Please note. This event is being recorded I would now like to hand, the conference over to Mr. Eric Holcomb Kirby's.
VP of Investor Relations Sir Please go.
Good morning, and thank you for joining US with me today are David who has been skewed Kirby President and Chief Executive Officer, and Bill Harvey Kirby's Executive Vice President and Chief Financial Officer.
And slide presentation for today's conference call as well as the earnings release, which was which was issued earlier today can be found on our website and Kirby Corp Dot com.
During this conference call, we may refer to certain non-GAAP or adjusted financial measures.
Conciliations and 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 and the Investor Relations section under financials.
As a reminder statements contained in this conference call with respect to the future are forward looking statements.
These statements reflect management's reasonable judgment with respect to future events.
And we're 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 the COVID-19, pandemic and the related responsive governments on global and regional regional market conditions and the Companys business.
A list of these risk factors can be found and Kirby's form 10-K for the year ended December 31, 2020, I will now turn the call over to David.
Thank you, Eric and good morning, everyone.
Earlier today, we announced a net loss of six cents a share for the <unk> 2021 and first quarter. The quarter's results were heavily impacted by the continuing effects of the COVID-19, pandemic and winter storm Yuri.
Which brought extreme cold temperatures the Gulf closed during February and virtually shut down the Gulf coast refining and petrochemical industry for the balance of the quarter.
I'd like to start by talking specifically about the major winter storm and the significant impact it had on Kirby and our customers. It is essentially pushed back our recovery a full quarter.
The storm descended into Texas, and Louisiana, and mid February, bringing with it severe cold and severe cold wave.
During the storm, the Texas electric Greg collapsed plant infrastructure and pipelines froze and business came to an abrupt halt.
Our customers facilities were forced into hard emergency shutdowns, which contributed to unit damage even beyond what typically happens with events like hurricanes were and ordinary and orderly shutdown can be planned and implemented.
As a result refinery and chemical plant utilization and production levels plummeted from.
And extended period.
And the refining complex utilization and pad three which is the Gulf coast.
Declined to 41%.
This represents the lowest level on record and EIA published data.
It did not fully recover back above 80% until the end of March and.
Petrochemicals the impact was also extensive stretching across the entire Gulf coast petrochemical complex and impacting our major customers.
Operating rates at nameplate ethylene plants in Texas declined from 86% in January to Dear, 40% in February and March.
Corresponding to a 51% decline and production and feedstock consumption.
At the height of the storm the majority of capacity and production was offline, including 75% of U S ethylene capacity.
More than 80% of U S olefins capacity, 90% of ethylene glycol production more than 80% of polypropylene production, 65% of propylene production and over 60% of a proxy resin production.
Overall, the damage was so widespread and severe and some of our largest customers have just recently restarted their plants and are not yet back to full production levels.
With this impact on our customers. It goes without saying that Kirby's businesses were also significantly impacted particularly and inland where demand and overall volumes materially declined in February and through a large portion of March.
As you would expect this had a negative impact on pricing, which had stabilized prior to the storm.
Distribution and services was also impacted by the storm with most of our locations and Texas, Oklahoma and Louisiana closed for several days contributing to reduced activity lower revenue and project delays.
Overall, we estimate the winter storm directly contributed to losses totaling approximately nine cents per share during the first quarter.
Looking at our segments and Marine transportation.
Inland market started the quarter with gradually improving demand as economic activity was improving and refinery utilization had returned to levels not seen since the summer of 2020.
However, this upward momentum sharply reversed as the winter storm set and and refineries and chemical plants, along the Gulf coast abruptly shut down.
These weak market conditions contributed to continued pricing pressure and the quarter.
With further reductions in both average term and spot.
<unk> pricing.
However towards the end of the quarter refinery utilization recovered to over 80% and most chemical plants came back online as a result, our barge utilization recovered late in the quarter and by early April it was over 80% and.
<unk>.
This improvement contributed to stabilization and modest gains.
And spot market pricing and the last few weeks.
And coastal for the quarter market dynamics were largely unchanged sequentially with continued low demand for refined products and black oil transportation.
This contributed to minimal spot requirements and low barge utilization.
And distribution and services, we experienced improved demand throughout much of the segment, which contributed to sequentially higher revenues and a return to positive operating income.
The most significant improvement came from our oil and gas businesses, which experienced increased demand as U S rig counts and Frac activity continued to recover from lows.
<unk> seen and the pandemic and.
And manufacturing incremental orders and deliveries of new environmentally friendly and remanufactured pressure pumping equipment as well as some seismic equipment contributed to the quarter's results.
And there was also increased demand for new transmission parts and service and.
Our oil and gas distribution business from major oilfield customers.
And commercial and industrial.
And the continued recovery resulted in sequential improved demand levels in our on highway and power generation businesses.
Brian repair activity also increased with higher demand from major overhauls following the dry cargo harvest season, and the fourth quarter.
These gains however were offset by reduced product sales and thermo King as a result of supply chain delays and lower new engine sales and marine repair.
When combined with closures and lower activity associated with the storm there was an overall sequential reduction and commercial and industrial revenues.
In summary.
The first quarter was tough and the freeze ultimately pushed back our recovery and a few moments I will talk about the remainder of 2021, including our more favorable outlook and the second half of the year in the meantime, I will turn the call over to bill to discuss our first quarter segment results and the balance sheet.
Thank you David and good morning, everyone.
And the 2021 and first quarter Marine Transportation revenues were 301 million with and operating income of $1 9 million and and operating margin of 6%.
Compared to the 2021st quarter Marine revenues declined $102 3 million or 25% and operating income declined $48 $8 million. The reductions are primarily due to lower inland and coastal barge utilization significantly.
Significantly reduced price and and inland and the impact of the winter storm. These.
These reductions were partially offset by the Savage inland Marine asset acquisition, which closed on April one 2020.
Compared to the 2024th quarter revenues increased slightly by $1 5 billion inclusive of increased rebuilds related to higher fuel prices.
Partially offset by a reduction and freight revenue the.
And a reduction in freight revenue included lower pricing and volume reductions as a result of the winter storm.
These were partially offset by a modest sequential increase and overall barge utilization.
Operating income declined $27 2 million largely due to the impact of significant disruptions and winter storm related volume reductions, particularly as it related to contracts of affreightment as well as lower term and spot pricing and inland.
Also contributing were seasonal wind and fog along the Gulf coast flooding on the Mississippi River and ice on the Illinois River.
Additionally, we did incur increase made and its employee costs and the quarter's results as we began to ramp up our operations and anticipation of increased activity levels. This will continue and the second quarter during.
During the quarter the inland business contributed approximately 75% of segment revenue.
Average barge utilization was in the mid Seventy's range, representing a significant reduction as compared to the low to mid <unk> range, and the 2021st quarter, but up from the high <unk> range and the 2024th quarter.
Barge utilization continued to be impacted by the effects of COVID-19, as well as reduced refinery and chemical plant volumes as a result of the winter storm.
Long term inland marine transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue with 61% from time charters and 39% from contracts of affreightment share.
From contracts that renewed during the first quarter were down and the high single digits on average.
Average spot market rates declined approximately 5% sequentially and 25% to 30% year on year. However, late in the first quarter rates stabilized and started to move off the bottom.
During the first quarter, the operating margin and the inland business was and the low to mid single digits.
And coastal our business continued to be challenged by significantly reduced demand for refined products and black oil as well as weak spot market dynamics.
During the quarter coastal barge utilization was in the mid Seventy's range, which was unchanged sequentially, but down from the low to mid <unk> range and the 2021st quarter average.
Average spot market rates and renewals of term contracts were generally stable.
During the first quarter the percentage of coastal revenue under term contracts was approximately 80% of which approximately 85% were time charters.
<unk> operating margin and the first quarter was and the negative mid single digits.
With respect to our tank barge fleet, a reconciliation of the changes and the first quarter as well as projections for the remainder of 2021 are included in our earnings call presentation posted on our website.
Moving to distribution and services revenues for the 2021 first quarter were $195 9 million with and operating income of $2 9 million and and operating margin of one 5%.
Compared to the 2021st quarter distribution and services revenues declined $44 8 million or 19% and operating income declined 8 million. These.
These reductions are primarily due to the EBIT pandemic lower oilfield activity and the winter storm with the impact to operating margin is mitigated by significant cost reductions throughout 2020.
Compared to the 2024th quarter and overall demand for our products and services steadily improved with revenues, increasing $5 6 million or 3% and operating income increasing $5 8 million.
Favorable sales mix contributed to the increase in operating income.
And commercial and industrial increased economic activity results and improved demands for parts and services and the on highway power generation and marine repair businesses.
However, lowest lower sales of thermal king products reduced deliveries of new marine engines and closures associated with the winter storms resulted in an overall sequential reduction and commercial and industrial revenues.
During the first quarter, the commercial and industrial businesses represented approximately 68% of segment revenue operating margin was and the mid single digits and benefited from favorable sales mix.
And oil and gas and improving market dynamics and the oilfield contributed to sequential increase from revenues and operating income during the first quarter.
Our manufacturing and businesses experienced sequential improvement with increased orders of new and environmentally friendly and remanufactured pressure pumping equipment for domestic markets and seismic units for international markets.
Our oil and gas distribution businesses also improved sequentially with improved demand for new transmissions parts and services from major oilfield customers.
Partially offset by facility closures during the winter storm for.
And for the first quarter, the oil and gas related businesses represented approximately 32% of segment revenue and had a negative operating margin and the mid single digits.
Turning to the balance sheet as of March 31, we had $52 billion of cash and total debt of 135 billion with a debt to cap ratio of 34%.
During the quarter cash flow from operations was $103 million, which included a tax refund of $117 million in the quarter, we repaid $120 million of debt and use cash flow and cash on hand to fund capital expenditures of $14 million at the end of the quarter, we had a total of.
<unk> liquidity of 776 million.
Looking forward capital spending in 2021 is expected to be approximately 125 million to $145 million, which represents nearly a 10% reduction compared to 2020 and is primarily composed of maintenance requirements for our marine fleet.
We expect to generate free cash flow of $230 million to $310 million and 2021.
I'll now turn the call back over to David.
Thank you Bill.
Though the first quarter was very challenging many of Kirby businesses are seeing more favorable market conditions and improving levels of demand.
I'll talk more about the anticipated recovery and each of our major businesses and a moment, but overall, we expect a sequential increase and revenues and a return to profitability and the second quarter.
That said the improvement and the second quarter will be muted due to the effect of lower pricing on contracts renewed in recent quarters as well as increased spending and anticipation of a much busier second half.
We anticipate improvement and the third and fourth quarters as the economy continues to recover.
Binary and chemical plant production continues to grow and our barge utilization improves above the 82% to 84% we've seen in April.
And the inland market with our barge utilization starting in the second quarter over 80%, most refineries and chemical plants back online and improving wetter weather conditions, we expect better results going forward.
From a macro viewpoint the economy is steadily improving and pent up demand is significant the.
The winter storm reduced product inventories and with higher commodity and product prices and increasing crack spreads the.
<unk> for our customers are becoming increasingly more favorable.
We believe this will drive increased production in the coming months, which should bode well for the inland market.
And with little construction of new barges and retirements of barge is occurring across the industry, we expect and improvement in the spot market and our barge utilization to move up into the high 80%.
Low 90% range and the second half of the year.
Market conditions are looking more favorable and spot market pricing appears to have bottomed as we are now seeing some positive momentum.
However, we expect it to take some time for reduced pricing on term contracts.
Which were renewed lower last year and during the first quarter to reset.
Overall, and the second quarter, we expect revenues and operating income will sequentially improve due to the higher barge utilization improved weather and more favorable operating conditions. However, as mentioned certain costs, including maintenance horsepower and labor are expected to increase and the second quarter.
And as operations ramp up.
Beyond the second quarter, we do expect third and fourth quarter revenues and operating income income to meaningfully improve with better spot market dynamics.
On a full year basis, and as compared to 2020, given the tough first quarter and second quarter anticipated second quarter. We continue to expect revenues and operating income will be down year over year.
The lower average barge utilization reduced term contract pricing and the impact from the recent storm are the main drivers for the anticipated year over year decline.
And coastal our outlook has not materially changed.
We expect coastal second quarter revenues and operating margin will be similar to the first quarter.
However, we do expect coastal market conditions will begin to improve and the second half of the year.
And as demand for refined products and black oil increases, resulting in higher barge utilization and reduced operating losses and the second half of the year.
Looking at distribution and services, we expect further growth and the second quarter and the remainder of 2021, driven by a more robust economy and increased activity and the oilfield.
And commercial and industrial we anticipate continued improvement and on highway with increasing truck fleet miles and some recovery and bus repair and increased part sales as a result of our new online sales platform. We also expect increased thermal product and thermo king product sales.
And in power generation demand for new equipment parts and services is expected to grow and as the need for $24 seven power becomes increasingly more important.
And marine repair although activities remained strong we do expect a year on year to a reduction in revenues, primarily due to reduced new engine sales.
And oil and gas we believe current oil prices will contribute to increased rig counts and well completions and 2021 progresses and as a result, we expect to see higher demand for new engines, and transmissions parts and service and distribution as well as increased remanufacturing activities on existing.
Pressure pumping equipment and the coming quarters.
With respect to manufacturing of new equipment.
And then test intensifying focus on sustainability and the desire and many of our customers to reduce their carbon footprint will likely result, and increased demand for Kirby is portfolio of environmentally friendly equipment. During the remainder of the year. Currently we anticipate increased sales of new electric and dual fuel pressure pumper.
And equipment as well as natural gas power generation equipment.
For distribution and services and the second quarter, we expect the economic growth anticipated manner.
Manufacturing deliveries and increased thermo King product sales will drive sequential improvements and segment revenues and operating income with margins rising into the low to mid single digits.
For the full year, our expectations have not materially changed we anticipate significant year over year growth and revenues and operating income with commercial and industrial representing approximately 70% of segment revenues and oil and grass representing the balance of 30%, we expect DNS margins will be.
And the low to mid single digits for the full year with the first quarter being the lowest and the third quarter being the highest with the expectation that normal seasonality will likely result, and some reduction in operating margins and the fourth quarter.
In conclusion, the first quarter's results were disappointing.
Although we expected lower pricing and winter weather to contribute to a sequential reduction and first quarter revenues and earnings the winter storm through us and many of our customers a curve ball.
Ultimately the storm was a disaster for the state of Texas and created significant disruptions across the industry supply chain that will likely be felt for many months to come and we do anticipate improving markets and as the pandemic eases and demand continues to rise, especially since product.
Inventories for certain refined products and chemicals have fallen significantly and a very short period of time.
Also prices for many finished goods, including refined products plastics and other consumer products are escalating at rapid rates as a result, many of our customers are working hard to ramp up production, which will ultimately be positive for our outlook. So while the winter storm pushed back our recovery looking for.
For the underlying economic outlook remains strong as a result, we firmly believe we will see improving results for the balance of the year.
Operator. This concludes our prepared remarks, we're now ready to take questions.
Thank you.
And we will now begin the question and answer session and ask a question you May Press Star then one on your Touchtone telephone. If you are using a speakerphone. Please pick up your handset before pressing the key towards volume question. Please press the pound key as a reminder, we ask that you limit your question.
So one question.
And our first question.
Comes from Jack Atkins from Stephens. Your line is now open.
Okay, great. Thank you for taking my questions. Good morning, everyone Hey, Good morning, Jack how are you doing great. David. Thanks. Thank you. So I guess, maybe if we could start on inland.
Can you help us think about the cadence of contract renewals as you move through the year because it sounds like.
And you are expecting things to get significantly better and the second half so kind of can you walk us through sort of how.
How those contract renewals or distribute and distribute to the next maybe three or four quarters.
And I guess more broadly.
And what level of utilization do you think you need to.
What level of utilization do you think you need to see before contract rate start to.
Move higher sequentially, and you start seeing more meaningful improvement and spot rates yes.
Let me take the last question first because we're there.
As of this morning, we had.
Were above 85% utility and.
And the last couple of weeks we've seen.
Bought market pricing improve a little.
That said first quarter was tough and we saw sequential decline in spot pricing and it was down sequentially, 5% on spot pricing term term contracts rollover.
Down maybe high single digit so far.
First quarter is really tough and we've got to work through that term contract portfolio.
65% of our revenues or our term contracts.
Two thirds of those rollover and about 12 months so.
To your point, we need we need contract pricing to <unk>.
To move upward.
The first the first step is really to get spot pricing moving and that's starting now and we're extremely busy.
And as you heard and our prepared remarks, there is a lot of good news out there.
Our customers across the board are returning to profitability you can see the refiners are and are making money now and the integrators are making money now.
The chemical companies are making money.
Money now and even even pressure pumper are doing better so.
Things are things are really improving refinery utility hit 89% and pad III last week.
Some of our public company refining customers said that they were going to be and the low ninety's and terms of <unk>.
Binary utilization here and the second quarter.
<unk> prices or crack spreads are.
Airlines are hiring pilots now and.
And even the CDC came out and said that cruise cruise lines could start operating in July so when we look at that and we see how much our utility has jumped up and the last few weeks.
And we're pretty constructively and more and more than pretty constructive we're downright positive our activity is growing and it's going to get re leased 40 here.
We've been hiring Mariners and we've started up our school and January in anticipation of more volumes coming our way and.
What's happening so.
And that's a long winded answer to say the utilities, improving and as you know Jack once that utility starts to get above the mid 80% pricing starts to go the other way.
And particularly given the outlook I think it.
Is going to stay that way and.
Start to ramp up now and in terms of when everything price resets.
As you know with term contracts is going to take a while right I mean, they may roll off kind of ratably over 12 months. So it'll take a while the good news is 35% of our portfolio is spot pricing and now that will move a little faster.
Okay, that's all really encouraging to hear and Youre right. The outlook is very positive I guess from my from my follow up question.
Yes, David.
And I think as we look forward.
There is a substantial amount of earnings power within your three different business lines.
And as inflation and the broader economy, though and it's been a tough 12 months I mean, how are you thinking about the long term earnings power of the business.
That really changed in your mind.
Given what's happened over the last 12 months or do you still feel like this is a business that over time can see.
Margins and the twenties.
If you can get multiple years of solid price increases.
Yes. The short answer is yes, we feel that we've got a lot of earnings leverage and we can on inland get back into.
And the kind of the 20, 20% margin.
Would tell you look second quarter is going to be muted.
We still have the low pricing that we're working our way out of and.
And as utility ramps up we're having to spend some money to get get utility back.
And it will get get some equipment off the bank. So I think second quarter margins are going to be muted.
Should be better and first quarter, but it will still be a tough quarter, but as we get into the third quarter, it's going to start to ramp I think we will see.
Inland margins into the double digits, and the third and fourth quarter.
I do think it's it's hard to predict but 2022, we could start to get and the mid teens and and higher maybe maybe in the high teens and we'll see how that all plays out.
As you know lock and lock can change and a short period of time with the economy.
I do think and inflation is a positive thing for Kirby.
Clearly wage inflation is a headwind.
But when you think about commodity inflation and deflation and general when you've got a huge fixed asset base like we do with the with our barges and they're long lived assets.
The replacement cost of debt asset base goes goes up with inflation.
And of course that makes it harder for new new supply to come in to the barge market, which is a good thing so and general inflation.
Good thing for us.
Outside of kind of wage inflation.
We are seeing some pressure on on hiring it's harder to hire people, but that said we've started.
Classes at our school here.
And at Kirby as you know we've got the only school that can issue a coast guard license to our Mariners and we've been we've started classes and January and ramping up and anticipation of what we are starting to see now.
Okay.
Yes, yes, all right on the on the inland Marine side for instance, one thing Thats happened over the last year, it's not just been hunkering down, but they rig huge strides and a lot of areas like for instance.
And when you look at it the acquisition of Savage is less SG&A and if we're just now and there was before Savage. So I think theres been a lot of steps taken there to not just focus and work with just get better. So I really do think that the actual.
And the inland Marine business is better now than it was a year ago.
Okay, absolutely thats, great to hear and thanks again for the thoughts guys.
Thanks, Greg.
Thank you and our next question comes from Randy <unk> from Jefferies. Your line is now open.
Howdy gentlemen, how's it going.
Alright, Randy how are you.
Great.
I guess, starting with DNS and nice to see that kind of back and profitability and you mentioned right continued improvement throughout the year, So which business segments for the DNS will be kind of the main driver of this improvement and also DNS business, obviously smaller now than it's been in previous years, So what kind of <unk>.
Income can it contribute maybe on a quarterly basis by the end of the year, I would think and $5 million $10 million $20 million.
Yes, so and DNS as you know we've got.
Our manufacturing business, which is largely oilfield related and then we've got the commercial and industrial.
Business.
And what we're starting to see is the manufacturing business is starting to ramp up our labor utilization and that.
And the mid to high 90% range, we're hiring people and what Thats about Randy is our customers.
Are very sensitive to their carbon footprint and we have been taking orders for environmentally friendly frac equipment for example.
Electric Frac equipment power generation equipment that drives.
Electric Frac equipment.
The inbound has been pretty good but as you know we use we don't have the percentage completion accounting. So it's kind of we can't book the revenue until.
Yes.
And it shifts so.
That's going to take a while to come come through the income statement as you've heard and our prepared remarks third quarter is going to be a little better first quarter was was the worst and I think second quarter will be better and first quarter and third quarter will be the best and then seasonality will impact the fourth quarter, but when you look at BNS and general.
Revenue year over year will be up.
Earlier in the year, we said, 10% to 30% I would tell you. It's about 20% now maybe better than that because we're getting a lot of traction with our environmentally friendly.
Equipment, and commercial and industrial we're starting to see the on highway business start to pick up our labor utilization has been improving we've been hiring there as well.
So in general, it's getting better across CNS year over year up 20% revenue margins.
This year and while this quarter were kind of low single digits I think for the year will average around 5% kind of mid single digits.
I think as we get into next year, given our cost structure is so much leaner and that business I think we will get into the high single digit margins next year.
Okay.
And then looking on the inland side turn it back to that obviously, you're very positive on inland barge utilization right with your expectation for high <unk> low <unk>, 90% later this year.
And said what are your thoughts on pricing right. When do you expect pricing to maybe reach those pre COVID-19 levels.
And then when do you expect kind of customers to go back to term and set of just keep relying on spot pricing.
Yes, yes, no I think the spot pricing starting to move now.
We're starting to see here in recent weeks.
Upward movement on spot spot contracts.
It's going to take a while before that gets into term contract pricing and renewals, but it's not far off.
We just have to spot pricing get back above contract pricing, which it will and it's starting that before you start to see the term contracts move.
The good news and you've heard US say this before when you get utility and that mid 80% range and it looks like it's going to stay there and and actually right now it looks like it's going to get even more sporty than that.
Pricing should move really really nicely in the coming quarters.
And so I'm not sure if that answers your question, but all the things are and light.
Lining up.
For for improvement now I don't think we get back to the pricing we saw pre pandemic.
For a few quarters it just takes a while.
And so like turning on aircraft carrier right.
And to get all these contracts rollover and it just it just takes time.
The average length of the term contract is probably 12 months right. I mean, we do have some multi year, but the average is 12 months and it.
Roll Ratably per quarter. So it just takes time and.
And it will happen though.
And I would tell you we're about as enthusiastic about what utilities looking like.
We've been in years, and when we say contracts over 12 months or and those are typically long term contracts, where we had a lot of value and it's a strong relationship and they haven't really been impacted with.
The volatility we've seen over the last year because of the pandemic those are long term.
Good contracts and not drags us.
Scott and then just quickly to quantify that you said and I take some quarters to get from where we are now and spot to where we were pre COVID-19, but spot levels spot prices are rising.
Are we 20% below 50% below where are we relative to pre COVID-19 levels on current spot pricing.
Yes.
Spot prices are down 25% to 35% from where they were pre COVID-19.
And Randy when you think the spot price is remember that.
<unk> for us occurs over a couple of months, so they're not there and I'll quote long, but it still takes time for them for.
For voyage trips to and and the new new new chips to begin in price and so that's why when we say were muted in the second quarter, it's simply because it takes a couple of months and order to start to transition.
Sure, Yes, these aren't five day voyages.
Thanks, so much sales.
Thank you and our next question comes from Kenn Hoekstra from Bank of America. Your line is now open.
Great. Thanks, Hey.
Good morning, David.
Just when you talk just to revisit that last question. There. When you talk about the time Utilizations moved up to 85% I just want to clarify it takes a couple of quarters for historically I think you guys had talked about some pricing to get back.
But.
I guess to dig into that you've seen those pricing competitors go away and Youre clearly seeing the market and accelerate faster and do you think it's the same timeframe as you've talked historically are.
Does the tightness and the speed of the rebound matter to get that a little quicker or is it still all dependent on the contract volume.
Yes.
All of the above really Ken.
And the speed of this thing has been surprising when you look at first quarter, where I think we averaged im looking at Eric here at 75% utility.
And he is nodding so.
And now we are at 85% right. So.
Course of essentially month, we added 10% and utility.
I think that momentum continues.
I don't know the and.
And next month, we'll be at 95% certainly not but it's pretty sporty now and.
I think the faster that utility goes up.
More.
The faster the.
Spot pricing will go is it going to be similar to what we've seen in past cycles is actually pricing may increase faster than in prior.
Cycles, just just because the snapback as being so strong.
But there is no guarantees to that.
A lot goes into pricing, but this is this is pretty good could environment right now and look across our industry, we're pretty hungry we've been.
And it's been a tough tough tough year and half and all of our competitors are have been hurting including us. So.
And then the other thing is there's been limited new construction I think.
The order book this year is essentially any new orders has been nonexistent, we understand from our poles that theres about 36 barges to be delivered this year all of those were ordered.
Essentially over a year ago, so no new construction.
Pretty sharp snapback and utility.
Lunch, a hungry hungry barge operators here that have been really suffering.
It's lining up pretty good but yes.
For me to say well, it's going to be up 25% and a quarter I don't think that's that's the case, but it should be pretty sporty.
Okay. So.
So when youre looking at the inland market fundamentals youre, not seeing any kind of and obviously you just mentioned the order books really saying.
Continued retirements, so not seeing any or how about the cost side of the equation.
Incremental costs as you mentioned.
Hugs.
Boats needed.
So the snap back to meet this.
And any update from what you are hearing from our refineries.
Yes no.
The cost structure is going up.
And I would say.
We will see.
Some wage pressure.
We will give our mariners a raise this year.
They originally deserve it to be honest, but we.
We're going to see some wage pressure a little bit.
We're seeing food, obviously and.
<unk> cost if you look at fuel costs are up.
Supplies are up.
It's still I would say is 3% to 4% kind of.
Inflation right now steel is obviously and a whole another.
All game, but we're happy with steel prices going up because it means nobody will build.
Or there'll be muted building so it will have a little.
Inflationary pressure on the cost side.
For sure but.
Pricing should definitely be able to take care of that easily.
And your second question I'm, sorry, with refiners, what are they saying, yes, there have been very positive.
<unk> spreads have come back out.
And there is we're starting to see jet fuel will come back.
And if you've flown and a while but look the leisure traveler is back.
Leisure travel is way up the business travel really hasnt come back as much yet.
So the refiners still a little hungry to see more jet fuel that said the airlines are hiring pilots.
And anticipation of a much stronger June is with some of them have said some of our refinery customers have said they are targeting 92% utility for.
90 to $92, 94% utility and kind of the second.
<unk> quarter and prepare for the summer driving season so.
And it's pretty constructive I think they had a rough time, we all had a rough time through this pandemic and.
They're happy to get back running.
I'd say the mood music from all our customers is about as positives we've seen in years to be honest.
And sets up really nice.
If I could just sneak one more and in terms of your perception of your historical perspective.
<unk> per.
Especially if I guess, just with cash recoveries I mean, how do you view. This I don't know maybe go back to 15, and 16 or anything even prior to the speed with which youre looking at on this recovery.
Okay.
Yes.
That's a great question and I would like to think that it's going to be.
Faster because it was debt.
Went down faster so it should come back faster.
It's always risky to think to say that it's going to come back faster than it has and prior cycles.
Famous words, it's different this time is how is it.
Always a dangerous thing, but look it did go down faster than we've ever seen.
I think it's.
And look 10% utility and one quarter has been pretty sharp we've net.
We're really seeing that kind of movement. So yes.
Maybe it comes back faster.
So I'm hesitant to say, it's a whole lot different this time, but.
It did go down sharply and hopefully it comes back sharply and it was one thing.
And to add on that is simply that the deep freeze was like basically that market was recovering at the end of January and then the deep freeze grow things like pad III to levels well below its ever been before for the refineries. So.
The culmination of where we and our recovery that was very nice coming up and as we had a decrease that stalled and and drove it down and the rebound off of that is pretty significant as things have recovered. So the combination of two makes it unprecedented and the line. If you just looked at our utilities and going up the slope of that line over the last bit is been pretty steep.
And when we compare and internally, we just don't see that.
Very helpful. Thanks, David appreciate the time guys alright, Thank you take care. Thanks.
And thank you and our next question comes from Jon Chapelle from Evercore ISI. Your line is now open.
Thank you good morning.
Martin David I wanted to I wanted to revisit and answered to one and Jack's questions. I believe you said and one of the prior conference calls that your operating margin and inland was approaching 20% before.
Pandemic.
But then you mentioned 22, you might see mid to high teens margins.
Slide all the positive commentary you given both on the macro and from your customers I'm. Just wondering is there anything kind of structurally changed with that business, where peak or even mid cycle margins may be lower going forward or is it just kind of a slower return to where you were early 2020, just given the depth and the duration.
And of this downturn.
Yes, it's more of the latter nothing structurally changed.
I would tell you actually our cost structure is probably the best its been and.
In recent years.
Yes look we hit pre pandemic I think one month, we hit we bumped to 20% on inland margins.
<unk>.
Should we be back to 20% and at the end of this year Boy I'd love to say so.
And <unk>.
Look we know it takes a while to roll these contracts and it's just going to take time.
It's almost a math problem more than anything else.
You got it.
It may be 20% of your contracts rolling and a quarter the fourth quarter is always a bigger quarter.
It just takes a while for the for the whole math of the whole portfolio to get the margins up and the first set of price increases won't be as much as the second set and the third set so it's it's.
Almost a mathematical problem more than anything else I wish we could jump back right to those higher margins, but as a practical matter.
It takes a while for that whole contract portfolio to roll and it does depend on how tight the spot market is and how quick and.
How sharply that goes up because we again, we have 35% spot and then we have 15% or if you take the average of the first quarter. We have another 25% that was not working so the math of that is pretty substantial so.
It's unprecedented.
Precedented for the company to see things move up.
And as fast as this could happen if it gets really tight.
Understood and then David and notice frequently comes up but maybe it's most relevant today than anytime in the recent past and youre sitting with $776 million of liquidity and you just mentioned that the entire industry has gone through and incredible period of pain and.
Someone like Youre seeing it then I'd have to imagine and others are seeing it and a much worse manner.
I feel like post some of your recent M&A brought more.
Power and house you modernize your fleet you've improved your cost structure.
Have we seen enough kind of light at the end of the tunnel, where maybe some potential sellers think okay. We're through the worst of it and and maybe it's time to throw this industry up a little more or is it still you need to see margins improve greatly and maybe asset values improved greatly.
Before there may be some natural sellers and the market.
Yes.
Think there are some opportunities even now.
Think our view would be to.
To Delever a little more.
It's more about our comfort with leverage.
And.
We're going to hurt our free cash flow estimates, we're going to Delever, a little more hit our balance sheet a little stronger.
Let margins pick up a bit, but certainly I think there is some consolidation opportunities out there.
And.
It's been another tough period for <unk>.
For all of Us.
Competitors included so.
Maybe there is some potential transactions out there.
But again near term, we want to delever, the balance sheet, a bit a bit more and I think one thing on the balance sheet. When you step back and look at I think you hit on a few points one of them is that the acquisitions was a new equipment and.
So we're in a position now where we're spending about 60% of depreciation and Capex and it's not because we were restrained and and keeping and not because we're not doing and what we should be doing it just simply that new equipment took all that pressure way. So when you step back and look at it we expect to Delever very very quickly and we are delivering very very quickly and we expect our credit metrics.
Get to where we can be very comfortable pretty quickly too.
Okay understood. Thanks, Bill Thanks, David.
And thank you and our next question comes from Greg Lewis from BT and EE.
Your line is now open.
Hey, Thank you and good morning, everybody Hey, good morning, Greg.
Yes.
Bill or David.
I was hoping you called out the nine debt charge.
Is there any way to kind of unpack that I mean, it looks like it was in primarily on the cost side, but just kind of curious as we try to fine tune.
And the margins here, how we should be thinking about that 9% yes.
As you can expect most of it was in marine and it related to it and most of it inland and partially it was due to as we step back and look at it there was some cost element and repairs because there was damage that was about.
And.
About $1 million when you added across the company, including some DNS there.
And there was a big portion of it that was related to freight trips.
The business, we were frozen in place because of the deep freeze, where we could and unload we couldnt load and we were under contracts of affreightment and that was about two thirds of it right. There. We were just simply we couldnt get rid of the horsepower and wherever and because the our customers were stopped there was nothing we could do and then there was some other.
Things like the harbor and other boats outfitted, but unable to work because of shutdowns. What we did not include and there was the loss opportunity cost so to speak.
Slow low activity.
Et cetera. So so yes, basically cost driven and was the fact that one of the causes we couldnt share horsepower, yes, let me.
And on horsepower, Greg because it's an important thing look we had probably 90 charter boats and they are great guys and we cut all the way down to about 12 charter boats tried to keep as many on as we could to keep keep them them work and.
They're a great part of.
<unk>.
What we do to deliver and.
And then we tied up probably 40% of our own boats and it just takes time to bring all of that that equipment back.
And costs and we werent hiring people during that time, so attrition was working and so when you think about horsepower and everything that goes around it.
Taking time to ramp that up and that's why we talked about muted second quarter thats, putting less margin pressure, we've got we've got to pull.
Pull boats off the banks, we've got a rehired charter boats, we've got too.
Train and hire new people, we've been running.
Debt can classes and mariner classes since the first of the year, which we did in anticipation of it but my point is this.
Again, it's just like pricing, it's going to take a while to get that up we're going to have to expense and money.
We're doing that and but it's all going and the right direction.
Okay and it sounds like at this point it is that's pretty much wrapped up.
Yes.
And not on not on the part David was talking about but the storm element, but we're going to continue to be ramping up through the second quarter alright.
Alright, Okay, Okay, perfect and then and then just another question on D&S.
<unk>.
And David I guess Im curious whats your view on how the fleet looks like and look as the pressure pumping frac fleets Lucky and I mean, clearly there's questions around some cannibalization and really you mentioned in your prepared remarks the push from.
<unk>.
How should we be thinking about that is this kind of unfolds. This year I mean, you mentioned improving margins.
Sure.
Yes.
And is arena process, where really the real benefit from this is going to have really been.
22 for you as opposed to maybe second half.
No I think we will see some and the second half 'twenty, two we'll probably better.
I think look.
Look they're running about 200 Frac spreads now is my understanding.
But they continue to advance their and their capabilities and.
They are fracking more with less equipment. So.
There is that dynamic.
That said.
One of our major customers that there is about 10% to 12% retires.
Equipment percentage of equipment retired and a year.
And I think anything new that's being added is really ESG centric.
And we're going to replace things with with either electric or dynamic gas blending.
Just to reduce the carbon footprint.
So that's playing out I think the good news for Kirby is that we have a great product offering and both electric frac and electrification of.
Of.
And the well site.
And where they are doing the completion. So we're pretty excited about debt. There is there is some marine manufacturing for sure we're starting to see that pick up a little bit.
But it's I think it's going to be a gradual bill there is still a lot of capital discipline, which is good I think it is healthy.
Both the E&P companies and the pressure pumping companies.
Our very capital disciplined so I don't think its going to be a big spike up like we saw like in 2011, and the Frac industry, where everybody is building as much as they could this is going to be more gradual more ratable more ESG focused and I think that just continues to build momentum into 'twenty two.
And.
And part of it sounds it sounds good to me thanks, guys.
Thank you.
Thank you.
And our next question comes from Ben Nolan from Stifel. Your line is now open.
Hey.
Good morning, guys.
I wanted to Hey, I wanted to ask a little bit maybe maybe on the barge supply side I. Appreciate the color you gave David on the I think you said 36 barges do you expect to be delivered this year and we always talk about barge removals and maybe an update there would be good to obviously you guys are doing some but.
One of the things that we've heard happens and weak markets and.
And maybe especially given what we saw and the first quarter is.
And as owners.
Put away our beach equipment for a little while that it starts to get a little.
Usually it's the worst equipment and that that happens two and the first place and bringing it back can sometimes be a little tricky and curious if you think that might be the case here that maybe the industry.
Ramp up of <unk> of supply might not be so easy, giving sort of a stressed balance sheets and equipment that probably need to repair it and everything else it and.
Any color around that and along with renewables.
Yes sure yes.
We don't know the precise numbers from last year, but just thinking about this year. We think 36, new builds are what we're hearing out there.
Gosh, that's just.
And kind of it.
And <unk>.
Survey by our maintenance and.
Ops guys, it could be plus or minus $5 10 of that.
But just and retirements.
We're talking 25 planned so far for 'twenty, one just for Kirby. So just kirby kind of balances at 36 out that said I think other people are doing just what you said.
And then they put some of their older worse worse equipment on the bank.
And we as an industry are still.
Suffering from very low prices so.
I think.
Muted maintenance spending and.
And some of that stuff may be scrapped.
And with scrap steel prices up a bit.
And the economic decision might drive more retirement I don't have a great feel for that I wish I wish I could get say, it's going to be 120 to 150 barges. This year just don't know.
And when things start to get sporting it's amazing how much equipment and come back.
Back into the market that said.
It's still.
Still a lot of work and get that equipment back and very expensive because as you say, we all tied up our older equipment and it tends to be the worst equipment and when it's sitting idle.
It doesn't get better and periods as you know so.
Yes, Thats, a long non answer sorry, Ben and I wish I could be more per se.
But what we do know is 36 on the order book and we're going to retire 25, we feel pretty confident about that but the bigger picture is how much actually does get cut up across the industry I'm not sure. It's certainly north of 25.
Okay.
It could be and the 100 north of a 100. It just just hard to say at this point and then it's really a combination of getting the equipment back and the actual crude <unk> and other things the supply response to demand.
It will be difficult.
And as demand spikes up it's hard to dictate it and it's hard to do have made and it's but it's also hard to accrue it and it's not just for.
Everybody.
Sure.
I appreciate that and again.
I know, it's hard to speak for them.
And the whole universe of.
Owners out there but.
The other question and my follow on here relates a little bit to coastal I know last year, David you were saying sort of.
And the as you were sort of looking towards a rebound post COVID-19.
So was maybe the area, where you thought you could see the steepest sort of V shaped recovery.
And I'm curious, if that's still sort of hold.
If you think that.
Mike might have the most the most juice of and.
And any of the areas that you look at.
Well as you know the elasticity of demand so to speak has sharpened the coastal business because.
Just bigger units of capacity a smaller fleet right.
And there is probably less than 300 coastal.
Eric.
Excuse me ATB.
Barges and less than 200000 barrels so it's a much smaller market. So when things start to move and gets 40.
It's just a longer process.
When you think about bringing new capacity and right because it takes a good book two years to build a whole new unit. So.
And when that market starts to come back at.
It will snap back.
Stronger and stay out longer it's just a much longer cycle all of that said.
As you heard and we're losing money and coastal.
Still a tough market, we're starting to see refine refined products come back so that's getting better.
With the infrastructure plan.
That could be better because that could be a lot of asphalt we move a lot of asphalt black oil products offshore.
That said there is also the overhang of one of our competitors that.
Went through bankruptcy and.
We'll see what happens to that equipment.
It's been tied up and under maintained so.
And of course, a lot of money.
And as the market, but that overhangs out there were watching it carefully.
Walnuts, shortly but I feel pretty good about the supply and demand situation and the coastal market because there is no new deliveries scheduled and it takes two years to build new equipment. So I feel pretty good about the supply and when I think about demand with refining park products coming back with.
Is the bulk of what gets moved in the coastal business.
We feel pretty good about debt.
Alright, I appreciate it thanks guys.
Thanks, Dan.
Operator, we're going to run a little long here and take one more one more caller.
Thank you.
Last question comes from Justin Bergner from T Bar Research. Your line is now open.
Thanks, David Thanks, Bill for fitting me in.
Good morning.
Good morning.
Most of my questions have been answered so just.
A quick clarification question or two and then one bigger picture question on the clarification side. When you were talking about DNS and high single digit margins next year, where you're referring to the whole segment.
Are you just referring to the commercial and industrial side, and then a second part of that clarification price.
Question was you were talking about 90% plus utilization on the manufacturing and Remanufacturing side is that just kind of given the current tight labor that you have and that would not be as tight once you brought back some labor I just seem like a high number.
Both of those.
Okay.
Yes, we were talking about the whole the whole segment on the margin and on the labor we use a lot of variable labor. There. So our job is to keep high utilization. So so it does there is volatility a little because.
Orders come and come in bunches.
We tend to run at over the last year as we realign as they've done a great job of realigning the business and managing it differently, we tend to run at a pretty high utilization.
Yes, I would say look.
And those right and when.
And we talked high single digits next year, that's for the whole segment.
The manufacturing is a little more volatile because it's more oilfield focus the commercial and industrial is a little steadier.
<unk>.
But we're seeing.
And both both sides of it book.
C&I and commercial and industrial and and the manufacturing business and also.
We've talked a little bit about it but we've got a new digital platform that we rolled out over a year of growth and thats.
And C&I, when you're you're buying industrial equipment that we sell and we represent for or Oems.
Digital platforms getting traction so.
That helps because it's a lower cost to serve using using a digital platform and so we're pretty excited about how and how all of DNS as is rolling up.
Do think we'll get back into the high single digits.
And 2022.
Okay, and then just one last big picture question.
Clearly your balance sheet is still lever and you're focused on delevering, but if you didn't have and the leverage balance sheet that you had today.
Would you be putting.
Free cash flow to work would you be continuing to consolidate.
Inland industry or would you be looking at other diversified sources of acquisition or would you be focusing on share repurchase just trying to get a sense as to you know.
And where your capital allocation priorities lie and once the balance sheet day.
Yes.
I would say continued consolidation and inland is always pretty close to the top of our.
Desire and our balance sheet strong.
But also.
Buying back stock and something we've done.
Over time.
So it's.
One of those two things.
I think.
<unk> to consolidate the inland business is a good thing because.
That's just good for the whole industry structure.
The.
And we've got 30 players and there and I would love to see it about 15 or so.
We'll see but yes.
Although thats probably another non answer but it gives you a feel for how we think about it and just so when you look at the inland acquisitions, you can see it and our numbers as I said earlier and the call.
And we make an acquisition like Savage and that we have huge synergies we ended up having the SG&A.
And actually has come down year over year for inland, which even though we added debt. So the synergies are very apparent there and generate a lot of value for us.
Okay. Thank you.
Alright.
Thank you Justin and thanks, everyone for joining us on the call today and for your interest and Kirby. If you have additional questions you're welcome to reach out to me today. My number is 700 134351 and $5 five thanks, everyone and have a great day.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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