Kirby Corporation (NYSE:KEX)
Bank of America Merrill Lynch Global Transportation Conference Call
May 17, 2012 11:30 ET
Joe Pyne – President and Chief Executive Officer
Dave Grzebinski – Chief Financial Officer
So, up next, we've got Kirby Corporation. With us today from the company, we have got Joe Pyne, President and Chief Executive Officer and Chairman as well and Dave Grzebinski, Chief Financial Officer and in the audience is Greg Binion, President and Chief Operating Officer.
Kirby is about a $3.5 billion market cap company, just about $2 billion in sales. As you know, they provide inland tank barging for industry chemicals, petroleum products, agricultural chemicals. The company has been quite acquisitive over the past year with United and K-Sea Partners which are exciting new legs to the story for Joe to tell us about. With that, I am going to turn it over to Joe and appreciate your coming once again. Thank you.
Thanks (Chin). I am going to deviate a little bit from the presentation. We'll go through the presentation quickly, so there is hopefully it will be sometime for questions, after we are finished, but there is some volatility in our stock this morning, which I want to address. We had issued an 8-K to shed that we were going to use this opportunity, because it's webcast to give a little more color on our earnings for the year.
And I think that with that news that was issued maybe a half hour ago, the people jump to some conclusions. It maybe they shouldn’t have. So, I am going to just review kind of our latest perspective on our annual forecast, which we have set at $3.85 to $4.05 a share. And this forecast assumes continued improvement in the inland tank barge business and in our legacy marine diesel engine business, essentially flat performance with respect to K-Sea, now Kirby Offshore Marine, adjusted for some seasonality that's in that business and some deterioration in our United Engine business in the second half of the year principally in the manufacturing area and part of this deterioration will be partially offset by our implementation of the remanufacturing initiative that we have to remanufacture our service equipment.
And we think the risk to this guidance this year is in the K-Sea or Kirby Offshore Marine area and United. Our United guidance assumes a reasonable flow of frac equipment coming into infra repair. And based on what we know today, these assumptions appear to be reasonable, but frankly we are basing our estimate on what our customers are telling us, not on firm contractual commitments, but our customers are pretty positive on the demand that they see for re-manning, essentially at a frac equipment. With respect to K-Sea or KOM, the Kirby Offshore Marine, the market is slowly improving. This is not unexpected. However, there are two potential risks this year that I want to know. We have some short-term burden mostly finished this quarter in the timing of removing G&A from their business model. We have estimated that most of the G&A savings would be achieved in the first quarter, but it now occurs that we'll have some of these costs continuing through the second quarter. This isn't a significant event. And the other area of concern is with Kirby Offshore Marine's maintenance had practices and these are practices that we inherit and we bought this company in July of 2011.
As we brought the equipment into the shipyard and reviewed their maintenance standards – their standards are not those that Kirby practices in its inland and it's inherited to offshore business. We now believe that we will have to spend some additional money on this equipment more than we forecasted in our 2012 forecast.
We are in the process of conducting a very thorough review of this issue, which should be complete by mid-June and we may need to comeback and adjust our guidance based on the additional cost that we are going to incur. But as I said earlier on a positive note, I think that K-Sea's market is continuing to do better and this maintenance ketchup is really a one-time issue, we'll get it behind us. So, what is always mean because I don't want this be misinterpreted, I mean, frankly, I don't think that we know with any specificity, but I do think that we could say that this is – this could potentially be something like $0.01 or $0.02 to may be $0.09 or $0.10 adjustment to the forecast with respect to the K-Sea maintenance issue. I wanted to get that out and now I am going to very quickly go through this presentation and then allow you to ask questions.
Okay, with respect to our businesses were two businesses, marine transportation and diesel engine services, you can see the business mix, market cap based on a $61 stock price of about $3.4 billion tax about Kirby where the largest inland and costal barge operator, size matters. About 75% of our inland businesses under contract, 25% stock on the offshore side, it's a 60-40 mix, it's our intention to move this business up with respect to its contract exposure. In the diesel engine business, we are the national footprint and we manufacture and remanufacture world service equipment and we've grown this business through acquisition, the aggregation of 29 marine acquisitions, 16 diesel engine acquisitions.
You just look at the marine acquisitions, you are not going to recognize many of these, but there are shipper fleets that you will recognize. We bought Exxon's fleet, Dow Union Carbide, then a couple of others. And this looks at the diesel engine acquisitions. With respect to revenue growth, a strong consistent revenue growth over 16% since 1988, earnings growth about 15%. Drilling down into the marine sector, this is the – our operating sectors, the inland waterway system of the United States, and then of course the East, Gulf and West coasts, and in Alaska, and Hawaii with respect to our coastal business.
Facts about the barge business we're in the tank barge business on the inland side. There is a larger dry cargo sector we are not in that with the exception of four dry cargo units that move coal from Louisiana to Florida offshore. On the inland side, excuse me, on the coastal side of the business in the market that K-Sea is in, there is about 270 barge use and we own 58 of those.
For a liquid operator, of course, the Jones Act protects the business from foreign competition. You can move barge use around. They are really not exposed to economic obsolescence and it’s an environmentally friendly way to move cargos around. In terms of the drivers of our business, this looks at the marine transportation business as a whole, 52% chemicals and then followed by refined products black oil and agricultural chemicals you can look at the drivers on the right. Of course, safety matters, because we were reported what we carry and we think we do a very good job in this regard.
Looking at the inland tank barge business supply, pretty stable, last three years the fleets mature. I think that there is going to be replacement building required that we are – I've been seeing that over the last year – over the last several years and not too concerned about supply at this point. The volumes are growing and the industry really needs some additional volume to handle the volumes that they carry.
In terms of size matters size gives you some advantages that probably just don’t have more backhaul opportunities, because of the cargos you control, because of the power that you have in your system. You have a lot more flexibility taking power in and out matching total size with the horsepower that's available. They are just a number of things that we can do that smaller operators can’t. This looks at who is in the business. This is the inland side of the business. It’s a business we think that’s going to continue to consolidate and that we hope to play a role in this consolidation.
Moving on to the coastal business we are principally in the refined products business. The fleet that we control of 3.8 million barrels of capacity I went through the operating areas a little earlier. We think this business is continuing to improve as I noted at the – in my opening remarks. And one of the things that makes us comfortable about this business is by regulation 8% of the fleet is going to have to be removed by the end of 2014. So, it should naturally move to balance and as volumes increase that balance could be achieved even sooner. We spoke that kind of who is in the business, again, we think that there is consolidation opportunities here and we are going to be a player with respect to that consolidation.
On the diesel engine side of the business, 75% land-based, 20% marine, small sector is the power generation and nuclear and industrial engines. These are the engines that are used in commercial applications medium and high-speed engines, you can recognize the manufacturers that are on the right. With respect to the land-based oil service market, really shale gas or shale and – well, oil and gas extracted from shale deposits is a energy game changer for the U.S. Hydraulic fracing is relatively new technology to extract energy from shale deposits. We participate in both making equipment that is new to be applied to this business, but we think the real sweet spot is actually the overhaul repair and remanufacturing of this equipment. Then what appeals to us about that is that the overall cycle because of the potential use of this equipment is about price what it would be in our traditional marine market. So, we think that it's great – great opportunities in this area for diesel engine sector.
This looks at where the shale deposits are? I think probably most of you have seen this before and this is just a great schematic that kind of drives home the point that most of this happens well below the water table, where you have problems with water table, it's with the well case. And we think that the regulations although they will be probably tightened in this business, we are certainly not going be the extent – to the extent that is going to do anything material to it. With respect to the outlook, I went through the outlook at the beginning of the presentation. So, I am not going to grow on that and I am going to have turned it over to David to quickly go through financial highlights and we will open it up for questions.
Thank you, Joe. I'll run through this fairly quickly. This is – these are the earnings from last year 2011 versus 2010. Just one real quick comment, a lot of this was driven by acquisition in both the inland – excuse me, the marine sector and the diesel engine services sector with United. First quarter, these are first quarter results again acquisition-based plus some strength in the inland barge business. So, you can see the increases there year-over-year. These are our margins. The yellow line represents the marine transportation segment margins; red line, the diesel engine services margins.
Just two quick comments here. On the marine transportation margins, you'll see the last economic down cycle that began in 2000 kind of ended for us in 2003, we troughed around 15% margins. This last cycle is much sharper or much shorter. We troughed around 20%, we had a quarter that you dropped below 20%. And then it’s come up from there, very short cycle. What you see in 2011 is the effect of K-Sea Transportation acquisition in much different point in its cycle. So, its margins are a little lower. And so that’s actually pulling down the average a little bit for our inland marine margins. Inland marine margins are probably in the mid 20% range now.
If you look at the red line, diesel engine services, pretty stable around 10% margin. This – our EBITDA per share give you a feel for the cash flow generation capability of the company and this – it's better illustrated here. The green bars are the cash from operations, the gold bars or yellow bars if you will are our capital expenditures. We have just completed a pretty substantial reinvestment in our fleet. So, our capital spendings went up in 2011 and 2012. We – in the last 4 or 5 years, we have taken the average age of our fleet down from 24 and change in terms of years to, I think, this year will drop below 17 years on average age. So, we have reinvested in the fleet quite a bit. And that’s driven our capital expenditures.
This is our debt-to-total cap. You can see it's up a little bit here this last year and that was due to the acquisitions and we are slowly paying that down with our free cash flow. This just says that our balance sheet is pretty strong and we are single A minus at Standard & Poor's, Baa3 at Moody's, plenty of balance sheet capacity to do acquisitions, pretty good financial shape.
With that, I'll turn back to Joe.
Okay, thank you, David. There are some thoughts to leave you with consistent long-term success creating value here at Kirby very senior experienced management team. We run the business conservatively on the M&A side, 75% of our business is in contracts year longer, coastal side, a different place in the cycle, 60% of this business is under contracts a year or longer, but it's our intention to continue to move this up.
And with respect to petrochemicals, which is about 70% of the volumes that we move on the M&A side of the business. 70% of domestic petrochemicals go into consumer non-durables which are things that are used on a everyday basis and generally a lot more exempt from the economy than the durable side, which is going to be driven by kind of housing and automobiles.
And the diesel engine business got a great footprint in the markets that we think we need to be in. Strong financial position, investment grade rated balance sheet, strong cash flow, and a number of acquisitions which we think are going to added for the future completed in 2011. Joe, I think we will stop there and open it up for questions.
Joe, let me just stop, thank you for presentation. Let me start off with your guidance and outlook obviously. So, when you talk about $0.02 and $0.10 with some parameters on that, is that solely due to the K-Sea maintenance issue or is there something with the core business that you are throwing in there as well?
No, I think the – the core business is fine. Inland tank barge business, strong volumes continued to be strong. Pricing really about where it was when we talked about it at the end of the first quarter, utilization still in the low to mid 90% range. With respect to the heritage diesel engine business, the Gulf of Mexico is coming back that was more high-speed engine story which is used in the exploration of oil and gas in the Gulf of Mexico. That high-speed business has been stronger this year that it was in 2011. The United, I think that it – I think the new orders dropped off I think more rapidly than we thought they would, but there appears to be strong demand to remanufacture equipment that's in the market and we are being told that this demand is going to continue and I think United's performance is going to be based on how well we implement that remand plant.
I think the difference since the last time we publicly talked about our earnings is this lingering concern for the equipment standard that we need to have at K-Sea to have a product that is reliable and everybody is comfortable with. Remember with respect to K-Sea that this was in an MLP that was struggling and we did anticipate some maintenance catch up, but we get to know the equipment, as we bring to the shipyard, it needs a little more attention than it got at least over the last three or four years. But again, these are not perpetuating things. These are things that you can fix with targeted amounts of money and capital and you get it behind you and then you are in much better shape that going forward.
So, two things on that, one would be to your statement if it's not perpetual, but yet if you've got dozens of these barges and they are constantly coming off to go into the yards to be looked at within FDA continual investment? And then if it's CapEx, why is it impacting $0.02 to $0.10 versus so operating expenses?
Some of that will be CapEx and some of that will have to be expensed.
That’s why it’s such a wide range and what we need to do in the next couple of weeks is to determine exactly what’s going to be CapEx and what is expense, now maintenance is an ongoing thing. But in terms of replacing coding systems that deteriorated that you’d hope that would be in better shape. Those things are things that are completed and behind you. So, I don’t see it perpetuating once it’s behind you.
On the diesel engine services side, it sounds like you were saying the move to the (indiscernible) will take a little bit of time, the fall-off and did I hear you are at the fall-off on the manufacturing side is occurred a little bit faster. Is that part of the guidance as well as is it really just the…
No, our guidance – our regional guidance is assumed, some deterioration in United and they fit if it wasn’t for K-Sea, we would not be revising or warning that we potentially could revise the annual guidance. So, the guidance is has more to do with K-Sea now, it can frankly if United was a strong as it was in 2011, I’m not sure we have to revise the guidance for K-Sea.
It’s the deterioration of United, which I wouldn’t say that we anticipated, but we certainly we’re concerned about it. So that we factored that deterioration at least some deterioration and to the lower end of the range and is that – the deterioration that is occurred is consistent with what the lower end of the range would look like.
So, the deterioration in the United would have to do with the lower end of the range and then with K-Sea, it’s now $0.02 to $0.07 beyond that.
That’s the way you should look at it.
Okay. United, I’d say since you acquired it ran up maybe even faster than you’d anticipated just on the phenomenal performance last year. And yeah, essentially you’ve closed on it. Can you see with the number of rates being pulled out? Can you see a decline occur maybe even faster than you anticipate on the manufacturing side?
On the manufacturing side, yes, I think so, I think what’s happened is the rotation from exploring for natural gas to exploring for oil has caused that industry to pullback and shortly reduced the amount of capital expenditure that they are going to put into business until they figured out what the real requirements are. Now, having said that, that’s based on the natural gas in the $2 range and I don’t think anybody believes it’s going to stay there. So, what we think we are seeing is a just a pass and we are saying it 6 to 12 months, but that’s just a good estimate at this point. But it certainly not the end of CapEx and but I think the other thing the people makes a mistake as they look at the oil service business particularly with this specific collapse in energy prices is you typically get a collapse in both oil and natural gas. Here you have oil and natural gas bifurcated from historical ratios, historically they traded on a BTU basis of about 6 to 7 to 1. Here, you have a crude oil still in the 90s and gas in the 250s. On any kind of historical basis, you'd be talking about crude oil in the $20 range. There is plenty of incentive to drill crude oil. It just isn't that much incentive right now to drill for natural gas, but that’s temporary, it's going to change as soon as natural gas increases in price.
I have got a bunch of questions. So, let me see if there are any from the audience on the (indiscernible). Any questions, please.
Okay. Just for a clarification, the first part of your question was that a question on our coastal business or generally about our marine transportation business.
Okay, okay for the webcast, really two questions, one dealing with the strategy with respect to the length of term contracts. The second question with respect to natural gas prices as they affect chemical feedstocks. With respect to the first question, we think it is probably too early to be looking at extending contracts much more than the year. Now sometimes, you don’t have the complete control over there. But we think that there is both additional pricing in the inland business and certainly additional pricing in the coastal business. We would like a higher contract mix in the coastal business, but I think going wrong in both those areas would be too early. And with respect to the natural gases, the feedstock it's been a real game changer for the U.S. petrochemical business. Essentially, it's turned the business that wasn’t globally competitive to one that is globally competitive and expanding and where you’re seeing additional capacity announced and being built. So, it has enormous positive affect on the U.S. domestic chemical business.
So, just sticking with the coastal business there, what do you have to doing in terms of K-Sea to get, we’ve talked on the conference about your utilization obviously that barge side being in the mid 90s or low to mid 90s on the coastal business more in the 70s. Can that business getup up to those levels as there something that you can do to K-Sea to adopt that business is that trending with customers or is that just the standard for that type of operation.
Well, I think it will naturally – you should see utilization increases by the capacity that has to come out. That could be hurried along by volumes coming back, remember that refined products volumes in the U.S. were down significantly. You still have very high unemployment and you still have relatively anemic growth. But as growth improves and unemployment decreases, gasoline consumption we think will rise anything that K-Sea can do specifically, I think build the things that we're doing for our sale continue to improve reliability of the fleet to make the service offering as attractive as you can make it to the customer base.
So, I hear the beep, let me put a one more add to which is when you acquired K-Sea and United, you noted that you might be K-Sea out as a separate business, so you could see the path given that these troubles are kind of extending at K-Sea maybe even beyond what you thought. Is there a possibility that you might think about breaking it out. So, you can continue to see the strength on the domestic side or operationally if you combine them so much that Greg will likely might break them up.
Well, I don’t – I wouldn’t characterize what we're saying at K-Sea is troubles extending. I would tell you that market is about as we predicted. I think the differences that we saw between when we bought K-Sea and today had to be – have to do with maybe a little different service model that is – was a little less line organization kind of operationally-oriented and we've made those changes and I think we are on track there. And in current little more maintenance then we thought we would. Whether we'll break them out, we're certainly going to give you lots of color on the conference calls, but we would prefer to look at this business as barging and from a customer perspective. If you got a barging requirement either inland or coastal, you're going to come to Kirby and we'll take care of it. And in many, well at least in some instances, you can put at inland barge or coastal barge get it moved. So, we'll see some of that. So, we'd like to think of it is marine transportation and I think at least for now, we will just give you the color and not break it out.
Wonderful, Joe, Dave, Greg, I appreciate you taking the time. We are now going to lunch, which will be downstairs and across an exterior hallway to the restaurant. So, look forward to seeing at lunch.
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