Kirby Corporation (NYSE:KEX)
Credit Suisse Energy Summit Conference Call
February 9, 2012 1:10 pm ET
Joe Pyne - Chairman and CEO
Steve Holcomb - VP, IR
Greg Lewis - Credit Suisse
Good afternoon, everybody, and thank you for being here. I'd like to introduce Kirby Corporation. They're actually new to the Vail Energy Conference. They're doing some interesting things on the inland river barge business as well as diesel engine service business, which touches various aspects of the oil service industry. We have Joe Pyne and Steve Holcomb. And with that, I'll turn it over to Joe.
Thank you, Greg. Just delighted to be able to talk about Kirby at an energy conference. So that's new and exciting for us. So thank you for the opportunity to do this. Kirby is in two businesses. We're in the marine transportation business, moving a lot of energy around, and we're also in the diesel engine service business. I'm going to come back and talk about both these businesses further in the presentation.
Just some facts about Kirby, we have a market cap of a little less than $3.8 billion, enterprise value around $4.5 billion. More facts on Kirby, Kirby is the largest inland tank barge operator in the U.S., also the largest coastal barge operator for barge sizes of 185,000 barrels or less. This is a business that where size maters or some economies of scale that a company like Kirby enjoys that smaller competitors do not enjoy.
About 75% of the inland business is under contract, a year or longer in duration, 55% of that is time charter. On the coastal side of the business, about 60% of the business is under contract and 90% of that is time charter. Our diesel engine service area, an area that we've expanded significantly last year, has a national footprint. It is in the service, distribution and parts business for medium and high-speed engines. It also manufactures or assembles equipment for oil service work, principally for land based applications. On the manufacturing side it's making these high-pressure hydraulic fracking pumps, cementers, nitrogen systems, that kind of equipment.
Kirby has been a consolidator in the industries that it's in, an aggregation in total of about 45 separate acquisitions. This lists the marine acquisitions. Most of these you won't recognize other than the shipper fleets that we bought, Exxon, Dow, Union Carbide, those types of fleets. And then the activity in the diesel engine business, the last was by far the biggest, United Holdings located in Oklahoma City.
We've enjoyed strong revenue growth. This revenue growth goes back into the late 80s, since 1988 over 16% compounded on an annual basis and then with respect to earnings per share, 15% of earnings growth. Now, moving to the marine transportation business. This is the kind of the areas that we operate. We operate on the inland waterway system of the United States; 12,000 miles of navigable waterways. There isn't a system like the inland waterway system anywhere in the world.
About 80% of the chemicals in the United States are manufactured in two states, Texas and Louisiana. And on a total transportation basis about 60% of what we do is in the chemical area. So about two-thirds of our inland fleet is heavily concentrated in the Texas, Louisiana area, and the rest of it is up on the Mississippi river and its tributaries. And then with respect to our costal fleet, KC transportation has the largest geographical footprint. It operates on the three coasts and it also has operations in Hawaii and Alaska.
Just some facts about the barge business. This business has a large footprint. Kirby in this business is principally a liquid operator. We have a small dry cargo sector of this business, but it really is de minimis when you look at our total revenues. It is protected by the Jones Act, very little obsolescence in the business. This is not the kind of business that you wake up and somebody has invented something that changes the equipment that's used in the.
Basic barge design, basic tug design is the same as it was 30, 40 years ago. Of course barges are mobile. On the coastal part of our business, we can move a barge from the East Coast to the Gulf Coast very easily. We can shift a barge from a canal movement under the river really without much effort also. And the waterway system is an environmentally friendly way also to move things around. Our carbon footprint is the lowest of all modes of transportation.
Looking at the demand drivers, as I said about 60% of what we do is in the petrochemical area that's followed by black oil, refined products and agricultural chemicals. This looks at really the drivers for both the costal and inland sector with respect to chemicals, really driven by consumer durable non-durable goods.
The thing about chemicals is about 70% of domestic chemical production goes into consumer durables, which makes it a little more indifferent to the cycles that other things that people move around are more exposed to. Because of who we work for and what we use or what we carry, safety is a major concern. It's something that we think we're really good at. We think we also lead the industry in that area.
Just drilling down to the inland tank barge business, on the supply side there is about 3,100 tank barges operating in the industry. This is a fleet that does have some age to it. About a third of it is in excess of 30 years old. There is some significant replacement ahead of it. Just one of the reasons that we're not all that concerned about the number of barges that are being built and/or had been built in 2011 or 2012. We think with retirements and capacity expansion, principally for chemical cargos and crude oil coming out of South Texas that the capacity that's going to be added in 2012 will be absorbed easily.
I mentioned that size matters. Kirby enjoys some economies of scale that smaller operators do not have. A part of it is the cargos that we control, give us backhaul opportunities, the way we manage our power. The way we can increase or decrease towboats that we have on charter without incurring significant costs when we increase them or incurring significant costs as we decrease them, gives us some significant advantages in this business.
There is also less cleaning. In the chemical business, there's a lot of cleaning. The larger the fleets you have, more bottoms you have of the compatible cargos, you can just load over it. This looks at who's in the inland tank barge business. We're the largest. There are still some shippers in this business. They're indicated in red. We think it's a business that's going to continue to move to consolidation. And we plan to play a part in that.
Moving on to the coastal sector of our business. We operate in this sector with 59 tank barges. This is principally engaged in the carriage of refined products and crude oil. We operate on all the coasts in Alaska and Hawaii. We think with respect to this business that it's had a different point in the cycle, certainly, than the inland tank barge businesses, inland tank barge utilization rates in the low-to-mid 90% range. We are on the coastal side. It's a little more seasonal and utilization will range from a low of about 75% to the low 80s.
We think that as capacity comes and as some of the volumes come back driven by an improved economy that this business will move to balance. As I look at this business, I'm reminded of what the inland tank barge business looked like. And I think that many of the characteristics in terms of supply and demand that exist here exist in the inland tank barge business. It's not a next quarter story, it's a several year story, but we're very comfortable that it's going to move in the right direction.
This looks at who's in the business. It's a little less fragmented than the inland tank barge business, but we think that there are opportunities to consolidate in this area. And again, we plan to be part of this consolidation process.
Moving on to the diesel engine side of the business, about 75% of this business is land based followed by marine and then power generation. The land based is principally servicing the oil service business, kind of engine that we work on or the medium speed and high speed engines. You know all the names almost household names at this point, Caterpillar, Cummins, John Deere. And we are also worked on the transmissions and reductions gears that connect the engine to a pump or a shaft or a propeller in a marine application.
With respect to the land based side of the business, I think that the energy play and deep shelf formations for gas and oil certainly are what's driving this business. There's been an enormous amount of horsepower added, principally for high-pressure fracking of shelf formations.
Since 2008, the amount of horsepower is moved from about 7 million horsepower to 14 million horsepower. We think that this offers a significant opportunity for company like United and Kirby to services equipment. We have a very good service model for marine engines which are essentially the same engine, which we intend to apply in this area.
And that we do have a manufacturing element to this business about 55% of the land based revenue is in the manufacturing area, so our hopeful returns to move this more of a service parts distribution play for us unless on manufacturing. It's not that we won't manufacture assemble oil and fuel equipment, we just want to do less of it and service more of it.
This looks at the shale plays. Now, for people that come to energy conferences, they've seen these maps before, but when you're presenting to most people that have a transportation bias, this is all new. There is a lot of stuff to go after in the U.S. It's very encouraging, the success that we've had recovering oil and natural gas partially for energy independents but also it plays very well to the businesses that Kirby is in. This, of course, is just a diagram of how fracturing works. And again, for this group, I'm not going to go through it.
And to our outlook, with respect to the first quarter or guidance is $0.87 to $0.93. Marine transportation is the assumptions kind of in that guidance is that it's going to continue to be strong on the inland side of the business. With respect to our coastal business, it's going to about what its' been.
With respect to the diesel engine business, we think that the backlog at United which is actually more than where it was at this point of last year is certainly going to take us low through the year. The backlog does not fill the entire year, but we still are pretty optimistic that we're talking to enough people about enough different things that it's going to be pretty secure. With respect to our year guidance, we've published 385 to 405 to share.
I'm going to run through the financial highlights. With respect to revenue, our revenue at 2010 compared to 2011 was up 67%. Net earnings 57% and earnings per share 55%, so a very strong 2011 for Kir0by.
Looking at operating margins, marine operating margins are recovering nicely. Am I point out that with respect to these margins K-Sea Transportation is in these marine margins, K-Sea's margin were for the fourth quarter in mid-to-high single-digit area where Kirby's inland margins are in the mid-20's.
We think that as K-Sea's business improves, you'll see margins move up in a Kirby model probably in the high teens to low 20s over the next couple of years.
Diesel engine margins were flat, but again there was a heavy manufacturing component with the addition of United Holdings in these margins. Service margins last year were up a little bit. At their peak, they were in the 15%, 16% range. Manufacturing margins we think typically will be in the high single-digit range.
This looks at EBITDA per share growth, strong EBITDA in 2011, $7.95 per share. I think as you look at Kirby, this is probably maybe the most important slide in the whole presentation. Our operating cash flows are the green line. The CapEx is the yellow line. In the last couple of years, we've had more significant CapEx requirements. When we get through this year, 2012, your maintenance CapEx drops significantly. And we're going to be in position of producing very, very strong cash flows.
To the point, as you look at our debt to total cap ratio, you can see it's moved down consistently over time where it jumps up as when we buy something. And of course, it jumped up last year with debt to total cap in the 35% range. But if you project our free cash flow and just apply it to debt, we'll be debt-free sometime in 2014. That's how strong the cash is going to be. Now, I don't expect that that's going to happen, because I think there are acquisition opportunities that we're going to take advantage of between now and then.
We're an investment-grade rated company. Again a capital intensive business gives us access to capital and others don't have access. And when they do, it's lower rates. We've $250 million revolver with $95 million outstanding. We'll pay that off this year. We have a private placement in place that again comes due early next year and then a five-year unsecured bank loan which financed KC transportation. We have the ability to pay off when we have the cash flow to pay it down.
With respect to why Kirby is an attractive investment, let me just leave you with some thoughts. Very long-term successful history of operating and consolidating the businesses that we're in. We have a management team that has been with Kirby in excess probably on average of 20-plus years in the operating end of the business achieving more.
We run the business prudently, keeping a good percentage of our business under contract year or longer. This takes some of the cyclicality out of the business. Our most significant commodity, approximately 70% of that is consumer non-durables which have far more resistance to economic cycles than other things.
With respect to the diesel engine business, we have a national footprint. We're in the areas that we need to be, marine and land-based, maintaining the engines that are used in applications in those areas. Very strong cash flow. I think we've been very disciplined with respect to how we buy things. There are periods where we'll just step out of the market if we think that prices are more expensive than we think they should be.
Really the way we run the business is we want to get a 12% return on the capital we have over the business cycle. Our acquisitions are not driven by revenue or earnings per share. They're really driven by achieving that return and getting a little growth in revenue.
In 2011, we made several acquisitions that we think positioned ourselves for the future and also have a growth potential
in the markets that they service.
Actually that's all we have for the presentation. Do we have time for some questions?
Greg Lewis - Credit Suisse
Is there any questions in the audience? I guess I would just start off with one. You look at your diesel engine service business as being, right now about 35% of revenues, as you look out over the next 12 to 24 months, where do you think that can trend. Is that going to sort of be consistent around that 30% to 40% or do you think there is potentially more upsides to sort of build that out?
There is certainly upside to add to it but I think our focus is going to be more in the marine transportation area. Because we have a inland and coastal operation that already have significant market share. And we have the ability to build in that transportation sector or franchise that is equal to none. We already have probably the highest market share, almost any transportation company with the exception maybe UBS. And we think that, with the right environment we can do a lot more of those areas.
Having said that, I've been in the business long enough to know that you got to take things as they come. So if there is in the opportunities in the engine area, we'll have to look at those too but the focus is going to be marine transportation.
Greg Lewis - Credit Suisse
And just to that for real quick, in terms of thinking about acquisitions, you talked about pushing your net debt capital down to about zero in 2014, when you think about the cash that's going to be available. You mentioned the inland, it sounds like really you think that there is going to be opportunities in the coastal business in the next call it 12 to 24 months, is that sort of fair? And how much consolidation opportunities you think that are there?
I think there are a number of them. And the reason that I'm more encouraged in the coastal areas because they are in the different part of the recycle. The prices are more reasonable and the capital is more likely to get your return over the cycle. Inland is at 90% to 95% utilization rates, so those assets are pretty expensive right now.
Greg Lewis - Credit Suisse
All right, well, thank you very much for your time.
Yes, thank you.