Q2 2019 Earnings Call
Good morning, and welcome to the Kirby Corporation 2019 second quarter earnings Conference call.
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I would now like to turn the conference over to Mr., Eric whole Colm Cobiz VP of Investor Relations. Please go ahead.
Good morning, and thank you for joining US with me today are David Grzebinski, Kirbys, President and Chief Executive Officer, and Bill Harvey Kirby's Executive Vice President and Chief Financial Officer, a slide presentation for today's conference call as well as the earnings release that was issued earlier today can be found on our website at Kirby Corp Dotcom.
During this 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 managements reasonable judgment with respect to future events forward looking statements involve risks and uncertainties and our actual results could differ materially from those anticipated as a result of various factors.
A list of these risk factors can be found in Kirbys Form 10-K for the year ended December 31 2018.
I will now turn the call over to David.
Thank you Eric and good morning, everyone earlier today, we announced second quarter revenue of 771 million and earnings of 79 cents per share.
This compares to 2018 second quarter revenue of $803 million and adjusted earnings of 78 cents per share.
Although revenues were down 4% year on year adjusted earnings per share were flat with a nearly 40% increase in marine transportation operating income offsetting the impact of reduced distribution and services results.
We will discuss the second quarter in more detail in a moment, but before we do I want to first discuss our announcement that we are lowering our 2019 earnings guidance range to $2.80 to $3.20 per share.
Although we believe we have strong momentum in marine transportation reduced expectations for the second half in our oil and gas distribution and services businesses.
And the extensive delay days in inland marine throughout 2019 will impact our full year.
In distribution and services, although our previous guidance range.
Contemplated some downside in the second half of 2019.
The pace of new orders maintenance activities and part sales have slowed considerably.
Discussions for new and remanufactured pressure pumping equipment orders continue however, it is clear that many of our customers are intensely focused on free cash flow and returns and as such are operating at very reduced levels of spending.
Well this is not good news for 2019, we do believe this level of spending will ultimately create a more ratable market and less volatility in 2020 and beyond.
Additionally, with limited new builds re manufacturing and maintenance activities ongoing today. We believe this lull in activity is creating pent up demand.
Well completions activity has slowed in 2019, our Kentucky, our customers continue to work through equipment incredibly hard with minimal investment and maintenance being performed today. This should benefit our manufacturing and re manufacturing businesses in the future.
Despite improved performance in our marine transportation businesses year to date, the financial impact from poor weather high water conditions and closures of key waterways in 2019 has been significant.
This year, we have experienced extensive periods device and fog and we are currently in the midst of the most prolonged period of flooding and high water conditions on the Mississippi River and heard tributaries in modern history.
Further lock maintenance and infrastructure projects throughout our network have significantly slowed operations and the Houston ship channel, which is important to our operations has experienced extended periods of delays in closures.
Year to date through June we have incurred more than 7900 delay days.
Which represents an 86% increase compared to the first six months of 2018.
We estimate that these conditions and incremental delays have cost inland marine about 10 cents per share thus far in 2019.
And although.
The high water conditions are improving.
We expect the high water will continue.
Into mid August .
So the guidance reduction is primarily due to what we are experiencing in the oil and gas markets, but there is also a component related to the marine operating environment.
Moving back to the second quarter.
In inland Marine we experienced a solid rebound and financial performance.
Following a slow start in the first quarter.
Strong customer demand improved pricing.
And consistent barge utilization rates in the mid 90% range all contributed to more than a 30% improvement in operating income compared to the first quarter.
As previously discussed our inland operations, particularly our contracts of affreightment or heavily affected by significant delays in this quarter, which were nearly double the second quarter of 2018.
The impact is evident in our ton miles, which declined 5% year over year, Despite an 8% increase in barges and a 9% increase in barrel capacity.
In addition to the effects from high water and lock issues. We were also delayed and impacted by a temporary closure of the Houston ship channel due to a storage.
Fire a storage facility fire ultimately, we estimate that the poor operating conditions and extensive delays negatively impacted inland second quarter earnings by approximately five cents per share.
And coastal we reported sequential financial improvement with an 11% increase in revenues and reduced shipyard maintenance contributing to positive operating income.
During the quarter, we experienced good customer demand and a tighter market for larger capacity vessels.
Overall, our barge utilization levels increased into the mid 80% range with higher usage on our equipment working in the spot market.
Spot market pricing was flat compared to the first quarter, but we did experienced mid single digit pricing increases on term contract renewals.
In distribution and services as we indicated results were challenged by widespread reductions in customer spending.
Within the oil and gas sector with only a few new orders booked.
Minimal maintenance and service activities performed and reduce part sales.
We implemented cost reduction initiatives during the quarter and we will continue to adjust our business as needed to limit the impact.
In commercial and industrial we experienced a sequential increase in revenue and operating income primarily due to additional deliveries of backup power systems in our power generation business. The marine sector was stable during the quarter.
In summary, Marine transportation had a good quarter strong sequential gains were realized in inland despite extensive delays.
And challenging operating conditions and coastal returned to profitability.
Although distribution and services executed well on its backlog.
Slowing activity in the pace of new orders were worse than anticipated and we have revised our full year guidance.
Down as a result.
In a few more moments I'll provide more details about our outlook, but before I do I will turn the call over to bill to discuss our second quarter segment results and the balance sheet.
Thank you David and good morning.
In our Marine Transportation segment second quarter revenues were $404.3 million with an operating income of $53.2 million in an operating margin of 13.2%.
Compared to the same quarter of 2018. This represents a 7% increase in revenue and a 39% increase in operating income.
Compared to the first quarter revenues increased $36.2 million or 10% and operating income increased by $17.8 million or 50%.
In the inland business revenues increased 8% year on year due to increased customer demand improved barge utilization.
Increased pricing and the contribution from acquisitions.
These were partially offset however by the impact of a 92% increase in delay days compared to the 2018 second quarter.
Compared to the first quarter inland revenues increased 10%, primarily due to the synnex acquisition and higher pricing.
Long term inland marine transportation contracts.
Are those or are those contracts with a term of one year or longer contributed approximately 65% of revenue.
With 63% attributable attributable to time charters and 37% from contracts of affreightment.
Term contracts that renewed during the second quarter were on average higher in mid to high single digits.
Spot market rates increased sequentially in the low to mid single digit range.
Compared to the prior year spot market rates were approximately 15% higher on average.
During the second quarter, the operating margin in the inland business was in the mid teens, although it was adversely impacted by the effects of the high delay days on our contracts of affreightment.
In the coastal business second quarter revenues increased 3% year over year, driven by improved barge utilization and higher pricing.
Compared to the first quarter revenues improved 11%, primarily due to seasonal activity in Alaska.
Higher barge utilization.
And reduce shipyard maintenance on several large vessels.
Our barge utilization improved into the mid Eightys.
With regards to pricing although rates are contingent on various factors such as geographic location.
Vessel size vessel capabilities and the products being transported in general term contracts renewed higher in the mid single digits in average spot market rates improved 10% to 15% year on year.
During the quarter the percentage of coastal revenue under term contracts was approximately 80%.
Of which approximately 85% were time charters.
Coastal's operating margin in the second quarter was slightly positive.
With respect to our tank barge fleet.
At the end of the second quarter. The inland fleet had 1067 barges, representing 23.7 million barrels of capacity.
We expected in the end the year with 1063 inland barges, representing 23.7 million barrels of capacity.
In the coastal marine market during the quarter, we sold one barge and returned one small charter barge with a combined capacity of 165000 barrels.
At the end of the quarter, we had 49 coastal barges with 4.7 million barrels of capacity.
We do not expect further changes to the coastal barge fleet during the remainder of 2019.
Looking at our distribution and services segment.
Revenues for the 2019 second quarter were $366.7 million with an operating income of $23.1 million.
Compared to the 2018 second quarter revenues declined approximately 14%, primarily due to lower activity in our oil and gas related businesses.
This was partially offset by higher sales and power generation.
Compared to the 2019 first quarter revenues declined 3% and operating income declined $14.5 million again, primarily as a result of reduced activity in the oil and gas related businesses.
These declines were partially offset by higher revenues in power generation.
During the second quarter. The segment's operating margin was 6.3% and was unfavorably impacted by the reduction of higher margin oil field related revenues and increased sale sales of lower margin power generation equipment.
In our oil and gas market revenue and operating income were down compared to 22018 second quarter due to softening of activity levels, which resulted in lower demand for nearly all our products and services, including new an overhaul transmissions.
Engines, and parts as well as new and remanufactured pressure pumping units.
Similarly, compared to the 2019 first quarter revenue and operating income declined with reduced demand for overhaul transmissions parts and pressure pumping unit manufacturing.
In the second quarter, the oil and gas related businesses represented approximately 55% of distribution and services revenue and had an operating margin in the mid single digits.
And our commercial and industrial market compared to the 2018 second and 2019 first quarters.
Revenue and operating income increased primarily due to growth in our power generation business.
In the second quarter, the commercial and industrial businesses represented approximately 45% of distribution services revenue and had an operating margin in the mid single digits.
Turning to the balance sheet.
As of June Thirtyth total debt was 1.59 billion and our debt to cap ratio was 32.4% during the quarter, we paid down approximately 73 million in debt.
We remain focused on repayment of debt for the remainder of 2019 as of this week, our debt balance was $1.55 billion.
I'll now turn the call back over to David to provide additional details about our outlook.
Thank you Bill.
As previously discussed.
This represents a 50 cent.
We did reaffirm our capital spending guidance to have $225 million to $245 million in the press release earlier today.
Looking at our segments.
In Marine Transportation, we expect the inland market will remain tight with our barge utilization rates in the mid 90% range.
With solid customer demand modest increases in GDP additional petrochemical capacity scheduled to come online and new Permian crude pipelines, bringing additional volumes to the Gulf Coast. We believe activity should remain strong for the balance of this year and through 2020.
As well we experienced a recent hurricane along the Gulf Coast earlier in the third quarter.
However.
Improved efficiencies generated by better weather and increased pricing should yield modest sequential improvement.
And revenue and operating margin for our inland business in the third quarter.
In the coastal market, we expect utilization will remain in the low to mid 80.
Percent range for the remainder of 2019 with revenues and operating margins in the third quarter expected to be similar to the second quarter.
And the fourth quarter, However, increased shipyard activity on several large vessels and the seasonal end to activity in Alaska will result in reduced revenue and operating income.
Overall and Marine transportation for 2019, we now expect revenues to increase in the mid to high single digits year on year with operating margins in the low double digits to mid teens range.
For our distribution and services segment I've already largely covered the second half outlook for the oil and gas sector.
In our commercial and industrial markets, we expect revenues to decline in third quarter, primarily due to reduced large power generation system installations.
Additionally, as water conditions on the inland waterways improve we expect reduced service activity in our marine and our marine repair business.
It is likely that much of the available towboat horsepower will be needed in the dry cargo area to catch up from months of delays.
These reductions should be partially offset by higher utilization and in our power generation rental fleet during the summer storm season, along the Gulf Coast.
In total for distribution and services, we expect third quarter revenue to decline in the mid teens percentage range compared to the second quarter with reduced deliveries of pressure pumping and backup power generation equipment being the main drivers.
Operating margins are expected to be slightly down sequentially with ongoing cost reductions keeping margins relatively stable.
For the full year, we expect revenues to decline in the high single digits year on year.
The revenue compensate composition for the full year is expected to be approximately 55% oil and gas related and 45% commercial and industrial related.
Operating margins are expected to be in the low.
In the lower end of the mid to high single digit range.
Overall for our full year guidance, the lower end assumes further weakness in the distribution and services oil and gas market, including limited demand for engines transmissions and parts reduced volumes of transmission overhauls and minimal orders for new and remanufactured pressure pumping equipment.
The high end assumes meaningful improvement in inland marine operating conditions and further pricing momentum. It also assumes some improved contribution from the distribution and services oil and gas related businesses, including incremental orders for pressure pumping equipment and re manufacturing as well as greater volumes of transmission overhauls and equipment and parts sales.
Now to sum things up overall, we had a good second quarter.
As we look forward, despite near term spending cuts and uncertainty in the oil field. We remained excited about kirbys long term outlook and earnings potential.
And inland Marine we put our strong balance sheet to work during the downturn.
We have the largest youngest and most efficient fleet in our history and our results are starting to show the benefits.
With continued strong demand on the horizon and current pricing momentum inland Marine is positioned to continue to deliver increases in revenue and earnings as the market recovery continues.
And coastal our actions to right size, the fleet improve horsepower efficiency and reduced our cost structure structure have paid off as evidenced by the return to profitability in the second quarter.
And the fourth quarter, we will have several vessels in the shipyard for majors, some of which are being brought forward to ready the equipment for new contracts and 2020.
With most of our large capacity major shipyards behind us by the end of this year, we anticipate higher term contract renewals in coming quarters and coastal should be in a position to be more consistently.
Delivering positive earnings in 2020.
Shale oil and gas are a significant contributor to the worlds energy supply.
And we believe it will be so for the next few decades, the near term minimal levels of investment in maintenance activities on existing equipment.
Is unsustainable and this trend will reserve reverse at some point.
Fleet operating efficiencies and reduce environmental footprints.
Pipelines from the Permian are expected to start coming online soon and when they do completion activity should route ramp up.
Leading capabilities and experience in high efficiency.
Electric and noise, reducing fracturing equipment. Furthermore, our wide OEM distribution territory.
Covers the majority of the us oilfield.
This places us in a firm position to capitalize on increased sales and service of engines and transmissions and parts.
Well the inherent near term may be challenging I firmly believe that our shareholders will be rewarded nicely in the coming years.
Operator that concludes our prepared remarks, we're now ready to take questions.
We will now begin the question and answer session.
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The first question comes from Ben Nolan with Stifel.
Your line is now open.
Great.
Thank you operator and.
Good morning, David Milner corn.
My first question relates to the DNS side of the business and.
I think we.
And the market has expected there to be a slowdown coming there given what's going on in the oil patch.
My question relates to sort of how you're thinking about that business strategically right here is it.
It given that it's a little slower now would you expect it to get better you just kind of battening down the hatches and waiting for the store and blow over.
Is there a shift to maybe do a little bit more international business or something like that.
Is this something where you might look to be opportunistic Mike like you do in the barge business and find submitted it.
Yes.
Potential acquisition target that that can weather the storm to the same extent you can just curious how you're thinking about it again.
Yes.
Good good set of questions Ben.
We believe as I said in our prepared remarks that is.
Shale phenomena. If you will is going to last for a few more decades.
And.
We are positioned strategically pretty strong in that business. So its really at this point, it's battening down the hatches as you said, we're we're we're cutting costs as you would expect.
Eliminating discretionary spending.
We've reduced head count in the manufacturing.
Areas in our in and around.
Pressure pumping by about 22%.
So far year to date.
We're going to batten down the hatches keep this business.
As profitable as we can and do your other part of your question, we continue to grow our commercial and industrial sides of the business.
Backup power generation continues to grow it's got a nice healthy healthy growth profile.
As the world becomes more and more data intensive backup power becomes more and more important.
So were investing manpower into those.
Those areas around commercial industrial.
So.
We're kind of happy with the portfolio as it is you may see us look for a tuck in acquisition that beefs up.
Some part of that business may be in the commercial industrial area.
In terms of buying more pressure pumping capabilities kind of in this downturn, which would be more of our playbook.
I would say, we don't need to we've already got the largest non captive manufacturing capability in the industry, we're where we need to be.
Our two manufacturing facilities ones in Oklahoma and one's in Texas.
Our our re man capabilities in NRT.
Our sites around the us our strategically positioned so.
I think what we have to do is weather this storm watch our cash flow.
Make the appropriate business adjustments and be ready for.
The inevitable rebound.
And we do think Thats coming you can look at.
At the Permian pipeline situation, there's there's a number of pipelines coming on at the end of the year I think two at the end of year, maybe third and third in the first quarter of next year or the first half of next year plus there is a couple natural gas pipelines coming on so if you assume.
A flatter oil price, which is a dangerous assumption I understand.
All things being equal Permian profitability should get better because the takeaway infrastructure is going to be there and thats going to reduce their cost profile and improve their netbacks. So.
Given where we are in world oil.
Situation I think.
It should be better.
If not in 20, certainly somewhere in and around there.
So we're pretty happy with the portfolio as it is is the short answer.
Okay. Thanks.
And then real quick just as my follow up as it relates to the weather related things both in the first quarter and down in the second quarter and even a little bit in the third quarter just curious.
For all of your chemical customers and everybody else.
Is there some degree of pent up inventory or something else that needs to move that as things normalize you could actually see a little bit of a spike in activity or something like that or is this simply them finding maybe an alternative more expensive means of transportation and.
And there shouldn't be any outsized.
The level of sort of short term recovery activities.
Yes, there may be a little there is some pent up demand.
But.
So we're working with our customers to meet their their plant feedstock needs in their plant takeaway needs.
Yes that is the weather has helped the utilization in the industry, probably 2% to 3%.
So.
Yep post the pent up demand work off you could see utilization dip a little but I will say this that the industry is basically fully utilized there's almost no spare capacity out there.
So we do need a little relief on that.
It's it's been very very tight.
But look this weather this weather will pass we're hearing mid.
Mid maybe even late August when the when the high water situation will will.
Come down.
And we'll get back to more normal weather.
This has just been an abnormal year.
The good news in my mind is that the demand side.
Is solid.
Our customers have invested billions in new plants in new facilities in expansions.
The feedstock situation that they have is feel sustainable they are getting low low price natural gas that that helps run their plants and converts into some of the petrochemicals.
Clearly the.
The light crude coming out of the shale is also a good feedstock source. So when you look at.
The the demand side of our our barge picture, it's pretty robust we've got a good feedstock position for our customers theyve been investing a lot.
And it should should be good for a while.
Great I appreciate it thanks, Dave.
Thanks Ryan.
Thank you.
And our next question comes from Greg Lewis with BTI.
Your line is now open.
Yes, Thank you and good morning, everybody.
Hey, good morning, Greg.
David I mean, you touched on it a little bit.
In terms of.
Industrial distribution services doing okay, just kind of curious.
As we think about CNS beyond the oil and gas side of the business.
Yes.
Different types of power generation you pleasure marine.
I was reading that the pleasure marine business has been kind of soft here.
And just thinking about that those businesses are tied the tide. The GDP or are you seeing anything or or how are how are those businesses sort of in DNS. The non oil and gas business is holding up and as we think about the revised guidance did those any of those businesses have any impact to the to the guidance.
Now, they're pretty steady there.
GDP I would say, let's take them in a couple of pieces here I would say in backup power generation that continues to grow that's growing faster than GDP.
It's been.
It's all about the data centers and the need for for 24 seven power.
When you look at the marine repair business the marine engine.
Repair business, that's actually been stronger year over year now when we go into the third quarter on the marine business, what's going to happen is.
Because the dry cargo.
Our business has been.
So impacted greatly by this high water situation.
When we get a little better river conditions.
They're going to put their all their horsepower to work move and Vin grain and other commodities on the river system. So we forecast a little bit in the third quarter a decline in our marine.
Engine repair business just because.
We know our customers and they are telling us that theyre going to going to work hard to catch up. There is there is a lot of pent up demand on on dry cargo movements.
So that's that's a little bit.
The impact in in our diesel marine business, but thats more short term.
As you look at the strength in the inland barge market.
And.
Also the offshore barge market and offshore we're seeing a little bit on the offshore oil and gas too.
The diesel marine businesses.
Is probably going to continue to grow at GDP, maybe plus a little bit.
I think mining.
Which is part of our commercial industry and that's that's down a little bit with the global global economic concerns.
Pleasure pleasure craft has actually been pretty stable for us.
These are high net worth individuals as you know and.
So far it's been stable.
I would worry about that a little bit in an economic downturn.
So.
It's it's pretty much.
GDP, plus maybe a little bit in that commercial and industrial sector.
Okay, Great and then just just one more for me on on on the DNS as it pertains to oil and gas and and you touched on it in your prepared remarks, I guess, that's why I'm going to talk about it a little bit, but you mentioned you Frac ing and clearly you guys have benefited from that.
In 2019.
How should we I mean at least or should I say, how are you thinking about the absorption of this of these units and then bigger and then I mean, it might be still early in the game to understand this fully but how are you thinking about the life cycle for revenue for.
For the for Kirk Steward, and Stevenson or United How are you thinking about that lifecycle for the frac units versus say a conventional unit like how should we be thinking about that are trying to model that.
Yes, good very good question. So frac is getting a lot of attention right now and look it's good technology it.
It saves the MP company, some diesel costs because natural gas is so cheap.
So there is some attractiveness there and it does have a.
A lighter maintenance profile right big diesel engines have a heavier maintenance cycle than a big gas gas turbine now that said if the gas turbine goes down it it's a very expensive proposition, but let me put the fracking context, theres, probably about 440 frac spreads out in the industry right now roughly call. It 400 to 450 in that Zip code.
And I would say there are 13 to 15 eat frac spreads out there. So it's still a relatively small number.
I do see it growing but.
Probably in the next 10 years, it could get to 10 too.
10% to 20% in the market, but that I think thats going to take some time, there's also new tech other new technologies out there.
Where where they're doing gas blending with diesel and making some pretty good progress, but theres a lot of different technologies out there that are working everyday to lower the cost profile for our pressure pumping customers and their customers the MP customers.
So.
In that context, the fracs important.
We're we're heavily involved as you know it was one of the key participants.
We jointly develop equipment together and it's it's been pretty good for us.
But remember its probably.
Less than 5% of the equipment out there now and it's still got a long way to go before it's it's meaningful.
Perfect. Okay, guys, Hey, Thank you very much for the time.
All right. Thanks, Rick.
Thank you.
And our next question comes from Michael Webber with Wells Fargo. Your line is now open.
Hey, good morning, guys how are you.
Good morning, good morning.
Hey, David I wanted to follow up follow up a bit on DNS.
So.
I guess one around expectations it.
If I kind of dovetail Gregs question is on the Frac with the guide it seems it seems a bit like you guys thrown in the towel for back half expectations.
And if I think about.
The past 12 to 18 months I know there were a couple of larger refrac orders that kind of came in that insulated your your backlog a bit more than the market would have expected and I think you mentioned there are 13 to 15, the frac spreads out there I believe about half of them are yours, and so I'm just trying to think about I guess, maybe the follow up is going to Gregs question in terms in terms of that business and how it evolves.
Do you think you can develop a position within that the frac market to where it provides a degree of insulation within your office business going forward.
Or is that too optimistic do they could be if you're talking.
No 10% to 20% in the market in five to 10 years, and you're still clipping half of that that could that could be a nice differentiator to your DNS business, but I don't know if that's sustainable.
Yeah I don't.
Look we will we will participate we're clearly one of the key providers in in the Frac space does it insulate us from some like this this big guide down.
Maybe a little bit it certainly helped us a little bit this year with the Frac orders.
But I don't know that it's it's a game changer.
You know, we look frankly, we.
We were surprised by the level of the spending cuts by our customers and it's never good to be surprised but look we took action.
You know and became increasingly obvious and we've cut costs.
But I would say this it's not like 2015, and 2016, where everything stopped I mean, the rig count is still relatively high to where it was back in 15 and 16.
We know our customers are working the equipment and we're hearing that many of them are like boy, we're wearing out our equipment and we also heard from a number of the bellwethers that.
Equipment is.
Trading out very quickly right now so yes, I think this is more of a pause rather than a big 15 or 16 downturn and.
Particularly if these when these pipelines coming back.
If the oil price doesn't collapse.
The profitability of the Permian has got to go up just because of the takeaway capacity reduce the cost to get the product to market.
Gotcha.
All right that's helpful and see how it develops over the next couple of quarters clears.
As it pertains to inland.
The inland market and your business in particular is going to fall through seems two or three quarters now in a row of kind of historical water issues.
Pricing is that a pretty for that at a very firm level, but it's kind of it's still improving it seems like it kind of a linear clips and we would expect.
Kind of the second half of that March to the peak level pricing you'd start to see spot pricing stirred gapping higher.
Particularly given the supply dynamics that seem pretty favorable inland market for the next couple of years I am just curious what do you think that's a fair characterization of how you would expect spot pricing to potentially.
In a move towards kind of really kind of peak levels.
Or do you think it will be a bit more orderly as well and is that something you would expect you think is feasible for 2020.
Yes, I think it will be more ratable I don't think we will see spikes.
I would say this you say peak pricing, but.
The the cost of doing business has gone up and it continues to rise. The one you know this is Michael that the cost of new barges is up.
Part of that's the steel price, we're seeing labor pressure as it is most of the United States right, we're pretty much in full employment, we're having to give.
Pretty healthy way wage wage increases.
And then there is the cost of compliance as you're aware.
They are sub Jeff DRAM, which is inspected towboats and that adds a whole know that layer of cost to the industry. So we are getting.
The prices on a relative basis to two prior cycles are moving up but they need to move up in order to get.
Even higher to get to justify new build frankly, there is some newbuilding now but.
The current prices you can't get that return on capital it needs to move probably another 20% to 30% higher too.
To justify a return on capital on new equipment. So.
I would factor that in and that thinking a.
The.
The peak pricing has to go higher just because the absolute cost of doing business is risen.
Sure for all the reasons I just discussed.
Gotcha, So think of it almost like it might go to look at revenue yield effectively.
Okay. All right that's helpful I'll turn it over thanks guys.
Hey, Thanks, Mike.
Thank you and our next question comes from Ken Hoexter with Bank of America Mailings. Your line is helping.
Hey, good morning.
If I could just kind of dovetail on Mike's question. There just so it's coming to set up is great on the margin side. Your best in years. It sounds like noted mid ninetys utilization pricing going up.
I just want understand though Dave you are saying that you don't see the industry now committing more capital to build assets, even with with the direction that we're heading.
Yes.
Yes, let me clarify a good question good follow up question.
Our for replacement.
Not really new incremental growth.
Yeah think of it this way we have been in a downturn for four years and we're just starting to get some positive free cash flow and our.
Positive cash flow.
And many of our competitors need to build some replacement equipment.
We know.
It is not appropriate for me give you a list of competitors are building replacement.
Equipment, but that's a big part of the build and.
When you when you look out beyond this year it it's basically drying up.
We're not hearing much of an order book beyond.
There are some that will deliver in 2020, but when you start looking out into late 20 and into 21. The order book is pretty minimal and that's because the pricing still needs to go higher to justify incremental new capital.
For growth.
I do think the replacements.
Kind of you have to do it.
They are working the equipment and they've got stuff retiring in there and they are going to have to replace it and that's a big part of this year's order book in my mind.
Great. So you gave a lot of great detail out front in terms of what's going on in the inland and coast Wise, maybe just talk a little bit more about the coast wise, you talked about rates kind of coming or I'm, sorry margin.
Finally, turning positive here.
Bounce up in the third quarter, but sounds like a pull back in the fourth quarter given some of the.
The maintenance that you saw maybe talk how are rates doing and in light of that and then I and then maybe the outlook into 20 as as we now have fixed I guess some of the overcapacity.
Yeah, well, yeah that that overcapacity as is been correcting itself as you've heard US say people are retiring equipment, we're seeing more of that ballast water treatment is impacting that a little bit. So it's gotten tighter, particularly in the larger capacity vessels.
150000 barrel up.
Capacity vessels are actually pretty tight right now.
You know in the 80 to 100000 barrels or even the fifties, it's it's still a little loose.
But what we are seeing is more utilization.
Demand continues to grow supply's been contracting we saw sequential spot pricing was flat, but year over year, its up 10% to 15% and then more importantly, his term pricing it's been up mid single digits year over year. So we're hoping that cadence grows.
But where we are seeing a pretty tight larger barge market. So.
As we look into 2020.
As we said in the prepared marks remarks, we've got these shipyards at the end of this year.
But we will have all the big bigger units done by the end of this year and 20 should be a little better because we won't have some big shipyards. We we did pull pull a couple forward to help with the customer contract.
As you would expect us to do.
So.
I would just say, it's much more constructive than it's been and probably three to four years. So we're.
We're really pleased with with the direction is heading.
Great appreciate the top comment thanks, Thanks, Ken Thanks.
Thank you and our next question comes from Randy given with Jefferies. Your line is now open.
And gentlemen, how's it going.
All right Randy how are you.
Good good.
Two quick questions for me. So in recent years you know your full year guidance range has been around 30 cents. Following the Twoq results. Obviously this year to 40 cents. So if you can kind of touch on why that kind of a wider range than normal also can you break out the range by in the inverse coastal versus DNS meeting is the vast majority of the range based on uncertainty in the DNS business.
Yeah.
Well I think last year.
At this time, we were about a 40% gap.
Hi, the low two but but I hear you know look look our portfolio is just more diverse. So there's just more moving parts. So in the last several years weve.
We've kind of widened out a bit.
The inland barge market is always been pretty ratable and.
You know, adding coastal it's got a little more variability.
Adding adding the DNS businesses and growing those get a little more variability. So we felt we had to to widen our range a little bit we didn't narrow it we were 50 cent range, we've narrowed it to 40 cents this quarter.
Yeah, I wouldn't read too much into that Randy and then in terms of the the guidance.
Clearly the DNS oil and gas business, where these big Frac spread orders can it can move the needle.
Is part of that variability.
There's also.
A big spare parts piece that kind of the book and ship that happens.
Went when the.
When our customers are spending on on quick repairs and maintenance so that variability is a little more than than we've had historically.
I think we said this earlier.
There are so focused on cash flow right now.
We've just seen a dearth of well a lack of orders.
Now that's not really sustainable sooner or later, they're going to run out of other equipment to cannibalize.
And they're also going to.
Have to repair some stuff and replace it the other thing I would add is is the revenue recognition.
New standards has added volatility.
Think of it this way under the new Rev Rec Rev Rec.
Rules, if we ship a frac spread.
The last week of a quarter or if it slips into the first week of the next quarter, we just.
That's a pretty big swing in terms of earnings and Rev. Rec. So.
I'd like to beat up our accountants here internally the accountants have made it harder not easier to explain the business.
Sure. That's fair So would you say, maybe 30 cents of the 40 is DNS.
We don't really look at it that way Randy we look at the whole business. So I wouldn't want to point to any one particular area of the business.
Oh, that's there so certainly some near term headwinds that possibly longer term tailwinds on that side.
Switching gears to inland how is that integration of the scenic acquisition been progressing and as those barges rolled off contracts or maybe one or two years ago, how much have the new spot or even termites on those barges improved and your exploration kind of for future exploration repricings here in the coming months.
Yeah. Good question the.
The the physical in integration has gone extremely well.
One we have been delighted with the quality of the equipment and more importantly, the quality of the Mariners in the team that joined US from snack, we've got top notch salespeople top notch operations people top notch Mariners it's been.
It's been a great.
Great addition to Kirby in the integration has gone extremely well.
Now to your contract question. They did have a big they were pretty heavily contracted and they had a number of multi multi year contracts.
And you can imagine.
Not their fault, but at the time that they put those contracts and into place.
They were at much lower levels, and it's just going to take a while to roll off.
Unlike Hickman Hickman rolled off quickly there were much shorter term contracts snacks got longer term contracts. So.
You heard us say when we when we got snack that it wouldn't be accretive to this year.
And thats still still pretty much true but.
Getting into 2020, some of those contracts roll off and it should get more constructive.
But.
That's not to detract from the acquisition, it's been it's been a tremendous acquisition and.
Again, we couldn't be happier with.
With the quality of people and assets, we got there that the assets are in really good shape and we've been been delighted.
Sure.
All right well that's it for me thank you.
Thanks for answering.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Jon Chappell with Evercore. Your line is now open.
Thank you good morning, yes.
John .
David just wanted to follow up a bit on on innovating first.
You mentioned in the press release pricing spot pricing is up 15% year over year. So if we kind of aggregate back from the trough.
Well, how far we up from kind of trough level pricing how much of that is transition then into terms. So maybe.
What inning are you in transitioning the spot uplift into marketing term to market.
Yes, we still have a.
Let me answer the second question first we still have a pretty big as you heard and bills number we we still have a lot of spot equipment.
And then as the market tightens.
We will start to see the customers look to term things up as they as they worry about investability were starting to feel that now.
But theres still a fair as you heard in our numbers a fair amount of equipment, it's a large percentages in spot, but we are seeing.
More and more term.
Demand.
That said.
Your first question spot pricing is probably up.
We do a quick math here.
Yep.
20%.
Plus from from the trough, maybe maybe 25%.
If you just take a unit toe for example, it's up more but.
Some of those.
Trough unit to prices were just.
Really really low the lowest of the low we're probably up 30% from the low as the low but on average probably up 20% maybe 25 from from the average low.
On spot term is just starting to move.
We have seen that it didnt go as low as the trough in bright spot.
So.
It's just started to rise as you know it.
You need spot pricing above term for a while.
For those term prices to start moving and as you heard where our term pricing on the inland size up mid to high single digits and that's continuing to March forward as term contracts roll off.
Okay. So that probably then the transition so the second question, which is the margin.
It's still in the mid.
Maybe the high teens, which is off the bottom, but if we go back and look historically.
The majority of the years or the last two decades, you been well into the 20% range. So you need that term pricing then to really get the margin.
Moving significantly is there something else that's required to move the margin significantly and then maybe just a third part as a follow up on your answers before the labor tightness that you've talked about does that maybe put a ceiling on the potential margin upside.
The inland in this recovery.
Yes.
Look I think if you adjust for high high water and some other things.
We were probably in the high teens this quarter and in margins and.
Yeah, we would definitely get back to the Twentys we are seeing.
Labor pressure, but we see that kind of every cycle to be honest.
Now the other costs.
Sub chapter M. and some of those other costs will have to.
Two.
In order to keep the margins profile as in past cycles, we will have to have higher higher highs so to speak.
But your precisely right when.
In order to get those margins really moving we've got to get term pricing up and that's starting to move if you think about our book of business over 60, almost 65, almost 70% of what we've got is terms. So those term contracts have to roll to get.
To get up into that 20% range I fully believe we'll get there and.
Fully thing.
I do believe we'll get to.
Higher highs this cycle.
Just just.
Because one when we look at at the leverage points, what we have and the cost savings given our fleet size.
We'll be able to transfer that into higher margins I think to me it would be easier factor in is just the fact these acquisitions have a lot of synergies in them and you look at our SGN a in that group and how it's being spread over more units.
We have some cost pressures, but it's being for at least for us as some of its being offset by the economies of scale.
Okay. So then just just to be clear, though so weather normalizes knock on wood, you're seeing the action in the term you said you are fully confident you'll get there is 20% margin handle.
Early next year is sometime in 2020 at an average of 2020 or are we still kind of too early in the innings, but think about it on the near term horizon.
Yes, I don't want to give guidance for next year is the problem here.
Hi, Matt.
I would say.
We're marching towards having.
That level of margin.
Through most of next year, but it.
I would.
The timing could be mid.
Mid 2000 Twenty's or.
But but.
When you think average we're not prepared to give that yet we just we need to.
To look at how our contracts are going to roll off.
I am not trying to be too cute here. It's just we got to look at the contracts that are going to roll off in the next 12 months and how they how they pencil out.
But.
I think Directionally. What you said is correct that we're we're getting closer and closer to that 20% plus margin and.
I think all things being equal we should be on a path to get there next year.
He will say you ought to think your wording was correct. It's not too early to think about it. We just haven't we're just not to just it's just too early to put it into guidance for next year, yes.
Completely understand thanks, David Thanks, though.
All right, Joe I will take one more one more color.
Thank you and our final question comes from Jack Atkins Stephens. Your line is now open.
Great. Good morning, guys and Eric Eric Thanks for squeezing me in here.
Just just a follow up on on John's question, there on marine margins.
For for a moment, David or Bill if you care to chime in as well I guess can you help us think through incremental margins at at inland Marine when I think about.
The revenue growth looking forward it seems to be most of that's going to be price driven because your utilization levels pretty high.
How should we think about incremental margins on on price I guess that you've got some inflationary costs, but I would I would imagine it will be fairly high it looked like it was close to 45 or 50% in the in the second quarter. Despite the high water issue. So if you could just kind of help us think through incremental margins at inland marine that'd be helpful.
I think you pointed its price will flow right through.
We do have some pressures on inflation.
There is inflation pressures, but again, that's a piece of it.
There Thats a piece of the puzzle we are offsetting as I mentioned, when we look at ourselves we look at ourselves and we look at our SGN as a percentage of revenue et cetera, it's been pretty well controllable what isn't controllable are actually going down in relative terms for inland marine what we with the factor that we can't control is some additional costs that you get with compliance and other things in operations, but.
The price flows almost directly to Jack.
But.
Bill is it safe to assume that.
Incremental margin level that you saw in the second quarter, even though it was hampered by.
Hi, water issues, I mean that that's kind of how we should be thinking about it.
Kind of going forward so yes.
Now be careful you.
Yes.
You're looking at it sequentially.
I'm looking at year over year Incrementals.
Oh year over year Incrementals, Okay, I thought yes.
'cause sequentially. It is about 50% incremental margins I don't know what they are year over year.
But.
Look the pricing is as you know Jack is very high incremental margins right I mean, it's it's.
Hi.
Hi.
70, 80% just pricing.
When we get that so.
The only offsets really are kind of the operations costs and.
Pricing it just it almost falls straight to the bottom line.
But let us do some work maybe maybe Eric can get back to you on some saying better thoughts on incremental yes.
I wasn't really thinking year over year, Jack but so that's a that's a different perspective I think on the M&A side I know what went down year over year, but we tend to focus more on discrete cost elements and overall, but it's a good question. Okay. That's that's helpful Bill and David. Thank you and then just last one for me.
You know I I would be curious to get your take David I know you talked little bit about M&A on that on the DNS side, but.
What's your appetite for M&A on on the inland side of the of the house I know that there is at least one of your larger competitors. That's still under a lot of pressure financially. We're just just be curious to get your take on.
You guys have done a number of larger deals here over the last several years do you still have an appetite for further consolidation.
In the inland market, if an opportunity or two were to become available in the next 12 to 18 months.
Short answer is yes, I mean, you know last week, we like inland assets.
It's probably when we do acquisitions is probably the.
The easiest one for us to integrate.
So we're always looking always interested I will say this you know our debts as bill said, 32.4% debt to total cap, that's a little higher than we'd like we are paying down debt rapidly.
And we will continue to pay it down until we get an opportunity, but if we have a big opportunity or an opportunity in the near term, they're probably have to be some equity involved.
As you know Jack we covet, our investment grade rating.
But we also.
Look I love.
By an inland assets, so it'd be a balance.
But as you know, it's also very hard to predict acquisitions and we are always disciplined about how we go about valuing them. So.
So long way of saying you know of course, we'd we'd look at.
Further consolidation for us it just didn't make sense for us, but our balance sheet, we'd be very thoughtful about how we deploy that.
Okay totally understand thanks again for the time this morning guys.
Thank you.
All right. Thanks, Jack and thank you everyone for participating in our call today. If you have any additional questions or comments you can reach me today at 713435154 or five thanks, everyone and have a good day.
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