Kirby Corp (KEX) 2004 Q1 法說會逐字稿

Good day and welcome to the Kirby Corporation to announce 2004 quarter results teleconference. All participants will remain in a listen-only mode until the Q & A session.

To ask a question, depress * 1. At the request of the company this conference call is being recorded for replay purposes. I will now turn the call to the conference host, Mr. [Inaudible] you may begin.

Thank you for joining us this morning. With me today is Berdon Lawrence, Kirby’s Chairman, Joe Pyne, the President & CEO of Kirby and Norman Nolen, our Executive Vice-president & CFO.

During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the no-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirbycorp.com in the investor relations section under non-GAAP financial data.

Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management’s reasonable judgments with respect to future events. Forward-looking statements involve risk and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found on Kirby’s annual report on form 10K for the year ended December 31, 2003, filed with the Securities Exchange Commission.

I will now turn the call over to Joe Pyne.

Thank you Steve.

In our press release yesterday, we reported our 2004, first quarter results of 36 cents per share earning $9m on revenues of $157.3m. The results were at the top-end of our published guidance of 30 to 36 cents per share - - published in January. Results compare with a net earnings of 28 cents per share for the 2003 first quarter.

During the quarter, volumes improved in all our markets except for the nitrogen-based fertilizer markets - - that’s the solution market. Now, we are very encouraged by this.

Kirby’s utilization as well as the industry’s utilization was excellent for most of the quarter. We believe the improved petro-chemical volumes are tied to improvements in the economy.

Our strong black oil volumes were certainly helped by a number of refineries that were down for maintenance during the quarter, but also by strong crude oil prices and the refining industry’s objective of getting everything of value out of a barrel of crude oil.

Refined product volumes were also driven firstly by a shortage of distillate in the mid-west and then by gasoline inventory building for the summer driving season.

Nitrogen-based fertilizer, except for anhydrous ammonia was weak all quarter. Distributors are using their inventories, which were high going into the spring planting season first and will only accept deliveries after those inventories are somewhat depleted.

The [Inaudible] transportation operating margin was 12.5% for the first quarter, an improvement over the 11% reported same period last year. First quarter always has operating margins lower than other quarters because of the weather effect on the barge industry.

This quarter was a difficult quarter for weather, with navigating delays only 9% less than the record delays reported in the 2003 first quarter, which included some significant delays caused from the repair of a key lock located on the golf country coaster water way.

Remember also, because of the way we account for coastal towing, our margins are approximately 1% less than our historic margins.

Our diesel engine service segment during the first quarter 2004, benefited from a strong Great Lakes market and a continued rebound in our - - in the industry’s mid-west [Inaudible] market.

Operating income was slightly higher in 2004 than 2003, even given that revenues were lower. I’ll comment later on our outlook for the second quarter - - second quarter in the full year and Berdon will brief you on two acquisitions consummated this month but firstly, I’ll turn the call over to Norman who will discuss the financial highlights for the quarter.

Thanks Joe.

Kirby’s cash flow remains strong in the 2004 first quarter, with EBITDA of $31.7m, which is a 19% increase over the $26.8m generated in the first quarter last year.

Capital spending totaled $24m for the quarter and that included $9.5m for 5 new tank barges and $14.5m for upgrading our existing fleet. We also purChazed two pre-owned ammonia tank barges for $1.1m during the quarter.

We reduced debt by $4.9m, which lowered our debt to capitalization ratio to 39.6% at March 31st, compared to 47.2% a year ago. Our projected total capital spending for 2004 remains at $85m to $90m and that will include 16 new petrochemical barges and 10 black oil barges at a cost of approximately $41m. Our all in average cost of debt was 5.3% for the 2004 first quarter which is a little lower than the 5.4% that we averaged in the previous quarter in 2003 fourth quarter.

At the end of the first quarter we had a $150m of our $250m floating rate debt issue hedged against market rate increases with interest rates swaps. Since the end of the quarter we have extended $50m in maturing swaps for a further 5 years at an all in fixed rate of 5.19% which will shield the company from the effects of rising rates. I’ll now turn the call over to Berdon.

Thank you Norman and good morning. This month we consummated two acquisitions. We purChazed a diesel service operation and parts inventory of Walker Faduka Corp, a subsidiary of Ingram Barge Company for $5.8m in cash. This purChaze is an excellent fit to our strategy of enhancing and growing our diesel engine service operation through both owned synergistic acquisitions. This addition expands our ability to offer improved service to our customers in the Midwest at a time when we believe the Midwest market is improving, driven by strong demand by inland dry cargo barge customers.

We also purChazed a 1/3 interest in Osprey Line, a provider of container on barge feeder service for $4.2m. Osprey is the leader in this expanding marine transportation market on the Gulf Coast in inland waterways. The container on barge service is very complimentary with Kirby’s existing inland marine transportation distribution system and our existing customer base.

We believe this will be a significant future growth opportunity over the next 5 – 10 years and one that will develop into a key component of the US transportation system as it has already done in Europe. Kirby is in excellent financial position to take advantage of additional growth opportunities in our core inland tank barge business and boat towed opportunities in our diesel engine services businesses. It is our intent to continue to position Kirby to be the most flexible and efficient tank barge operator and diesel engine services company in the US. I’ll now turn the call back over to Joe.

Thank you Berdon. Yesterday afternoon we announced our 2004 second quarter guidance of 50- 54 cents per share. This compares with 48 cents per share we earned in the 2003 second quarter. Our 2004 second quarter earnings guidance anticipates a continued strengthening in our petrochemical market, our black oil markets continuing to remain firm and a seasonally strong river refined products markets in anticipation of this summer. We do not expect a normal spring agricultural chemical bill this year due to the continued high Midwest inventories. For the year, our earnings per share guidance remains at $1.85 to $1.95 compared with $1.67 earned last year.

Now with respect to rate increases, as I said in our January investor conference call our 2004 forecast was not based on rate increases as much as volume increases. We expect volumes to increase first which we are seeing in fact now, followed by the ability to get reasonable rate increases. We are very encouraged by the current chemical refined products and black oil volumes which are driving the current high industry utilization rates and we are also encouraged by the general level of optimism which is being expressed by our customer base. Operator, we are now ready to open the call up to questions.

Thank you. If you would like to ask a question please press *1. You’ll be prompted and call your names first, to cancel your question then you press *2. Once again that’s *1 to ask your question, *2 to cancel. Our first question comes from Chaz Jones, Stephens Inc.

Morning Chaz

One I was just curious, are you experiencing any freight divergence from the railroads that’s measurable at all, I know that Union Pacific has had some service problems here recently and indicated that they shifted some freight to truck and was just curious if maybe you’d seen any trickled down effect of that in your business?

But in the tank barge business it’s very hard to say. Generally chemical volumes that can go by barge are already going by barge. We didn’t see significant divergence frankly when the UPSP came together and created enormous problems, particularly in the Houston area several years ago. Now Osprey maybe seeing a little, there’s certainly of---certainly getting more calls but that involves the movement of containers and not chemicals.

Right Okay, okay fair enough. Just looking at the ton/mile increase was up nicely 80.1% and I know you indicated that a portion of that was related to the C-river acquisition but kind of giving it the main outlook here Joe can we kind of expect given what we know right now that that should kind of maybe stay in the mid single digit as we kind of look out for the rest of the year.

The ton/miles growth?

Yes the growth in ton/miles

Yes as you compare it to last years ton/miles?

Exactly

Yes I think so Chaz. The industry utilization rates were up. We’re coming into bad weather. Yeah we would expect that it would continue to be strong as compared to the same periods last year. A mean, this isn’t a perfect science of course there is going to be some bumps in that along the way but we should see compared to last year more volumes move.

Okay, okay. And then Joe its kind of like you indicated that you know, aside from the price in that escalator that you have on the contracts that volumes hadn’t really gotten to the point yet that you’ve been able to get some significant pricing increases on contract renewals, is that fair?

Yeah and if you remember our call in January we really didn’t forecast much price increase over the year. Now having said that, utilization rates are very strong right now and yes they’re sustainable which we think they are, then we think that the rate increases will be achievable. The kind of rate---we’re already seeing spot rates up across most of our markets and that contract renewals or our renewing generally at the better prices but they’re still modest.

Okay

And modest I would say you know around 2% plus or minus a percent.

When you talk about utilization levels being strong Joe are we talking about high 80s type utilization levels.

Yes, yes if not better.

Okay and then last question and I’ll let somebody else have it. You know, you kind of done two acquisitions here that were outside of the actual tank barge side of your business and maybe if you could just kind of give some general comments on that acquisition environment on the tank barge side of your business.

We still believe its---the environment is good. We think that consolidation will continue in this business. We don’t comment on kind of the immediacy of any one particular acquisition but we do talk about the environment and I think the environment is still favorable. You might want to weigh in on that burden also.

Yeah I think there’s still a number of opportunities out there Chad we were just very pleased that we were able to go ahead and do the Walker boat yard and Osprey but we continue to work on our core business also.

Yes our focus is still on growing the tank barge business and the diesel engine business. The Osprey opportunity is just a fascinating play this fits so well with our distribution system in a market that we believe has some significant growth potential.

Okay I appreciate (inaudible) guys I’ll let somebody else have a crack at it.

Our next question comes from Alex Bran with VB&C

Thanks guys.

Morning

Good morning. Let me start with pleasantly surprised on revenue trends and or volume trends and it sounds like you feel like there’s some sustainability to that, so I assume that will bode well for later in the year and hopefully for pricing. I guess the surprise for us was the on the cost side it didn’t look like you got as much as sort of the operating leverage that we would expect. There’s something unusual that’s going on there or is this just sort of an annual escalation and then it can more level off for the balance of the year?

Yeah the first quarter is always going to be weather affected and you’re going to see more power in the system to move the volume which drives up cost. You’ll also see in the first quarter things like wage adjustments, that kind of thing. I think Alex, and we’ll get Norman on the way in on this, but I think it’s more in that area that affects the cost part of the business.

Yeah we had some - - in comparing 2004 to 2003, we had wage increases in 2004 that we didn’t have in 2003 until the middle of the year, we also had higher bonuses levels and in 2004 than 2003, but generally I think that, you know, you’re - - the thing that’s harder to measure is the effects additional costs we have related to weather which change from year to year. But I don’t think we’re going to be more weather affected than any of the other modes of transportation, that you follow Alex.

The most significant issue though it was higher, would be the wage related costs.

Now, you talked a little bit about pricing Joe, and I think last quarter you had said that your guidance for the year was fairly conservative, in assumed pricing. I think you generalized but you said 2% to 4% would be a good assumption, are you still remaining fairly conservative and just kind of, waiting for the volumes to get to a more significant level?

The answer is yes. Well with this qualifier - that industry utilization rates are excellent and if sustainable, we’re optimistic that pricing will be achieved, but in terms of the year forecast, we’re not prepared to change that, we’re still with the 185 to 195 forecast.

Okay. and just one final question, on utilizations can you characterize that in some way, I know its difficult but I’ve heard you before kind of talk about it in terms of high 80s was and that you could get there and that you know, once you got to sort of a 90% utilization then you got pricing power.

Great.

Is that kind of what you’re seeing?

Yeah, it is what we’re seeing

Okay.

The only reason you don’t have pricing power is the sustainability but if we continue at these utilization rates through the quarter into the summer, I think there would be a lot of confidence amongst the - - well within the industry and pricing will be achievable.

Great, thanks a lot guys.

Alright.

Our next question comes from Jon Chappell with JP Morgan.

Good morning.

Morning Jon.

When you talked about the second quarter guidance you gave pretty good details regarding four different divisions within marine transportation and as we look forward to the second half, I’ll assume you’re still optimistic about Petra chemicals, refined will be seasonal, black oil, you know stay solid, but is the ADD Chemicals (ph) business a kind of turn around story for the second half of the year or do you expect that to remain, you know, these below normal levels that we’re seeing in the first half?

No, we think that we’ll see a strong second half, its going to be compressed, its - - I think last year we saw almost all the volume move in about four months. What’s happening is - - last year the volume move filled the available capacity, so we went into the spring with high inventories, and now you’re using those inventories. And what we may be seeing frankly is instead of two seasons, we may be seeing a one season business, and that season being mostly in fall.

Okay.

The farm economy is very strong and, acreage is up, farmers are making money, we think that they’re going to apply fertilizer, the fertilizer that was made domestically we think for the most part is going to be imported and we should get our share of the volumes that need to be moved.

Okay. And then just a follow-up on the expansion plans, you know, clearly with American Commercial Lines and the bankruptcy proceedings that appeared to be an opportunity for you to add significantly into your fleet in fell swoop, I just read recently that they sold an interest they in something South America to pull them out the bankruptcy are you hearing anything new on American Commercial Lines.

No the only thing that we hear is - - is really what you hear, I don’t think that the sale of Latin American operation is going to be the one thing pulls them out of bankruptcy, they had the exclusive right to file a plan of reorganization by the end of May, and you know, we expect them to file that plan, we’re not sure what is going to contain. Other than that, we’re - I don’t think we’re hearing anything more than you’re hearing.

Okay, alright, thanks a lot Joe.

Our next question comes from John Walthausen, with Paradigm Capital.

Yes, good morning and congratulations on a good quarter.

Well thank you.

I guess I was - - couple unassociated questions, with steel prices high is that encouraging people to remove aging barges from the fleet and basically scrap them faster than would be normal.

Yeah, I think that the high steel prices do two things, it encourages people to scrap idle barges, and you’re seeing some of that in the tank barge industry, you’re seeing a lot of it in dry cargo business. The second thing it does is it causes to pause in placing ship yard orders for barges and I think that you’re see going forward that the backlog for building barges and U.S. is ship yards is diminishing quickly. So there’s not the press to build equipment until people think they understand which way the price field is going.

Right and with regard to the 26 that we have on order for this year, are we vulnerable to price adjustments for steel or

(multiple speaker)?

The barges that we’re currently building are fixed price contracts, so the price of steel is fixed.

Right okay that’s excellent. Now in regard to the Osprey investment, I guess as one third owners, do we have a management responsibility in that operation and could you describe what that is?

Well the business is going to managed by Rick Couch, who is the founder of the company and his staff, there some back office services that we will likely end up providing. And with respect to Osprey using our power of course we’ll manage all of that but other than the back office services and some help in marketing the business because Osprey and Kirby have in many instances the same customer base, in particularly the U.S. petrochemical companies that are exporting products that will help in the marketing area. And the other thing that we’re going to do is assign a Kirby person to help Rick Couch market, manage and frankly to learn more about the business.

Okay that sounds great and then if I may in terms of understanding the impact of the wage increases on the first quarter. When I looked at the income statement I see those in the cost of transportation or is that in the selling and administrative and operating?

You’ll see it in both you’ll see it shore wages in the cost of transportation and you’ll see shore base increases in G&A.

Okay that’s helpful and then when I look at corporate expenses which are higher than they were running last year is that the higher bonus accruals that we’re talking about primarily in there?

Yes higher bonus accrual salary, professional fees and medical cost a range of things but the salaries and bonuses are the big two.

And the highest bonus accruals is that based on being ahead of plan or how does that work in---unless you start accruing it during the year?

We have an objective we accrued towards to that objective if we don’t achieve the objective that bonus is your last.

Right and I take it objectives have been consistent with the guidance that you’ve shared with us?

Yes that’s right.

Thank you very much.

Our next question comes from Natasha Boyden with Sidonti.

Hi there gentlemen, how are you?

Fine thanks.

Good I didn’t know if my questions have been answered, I just want to say touch on the diesel engine service segment (indiscernible) forgotten. Reported lower revenues but slightly operating income it still looks like gulf coast and the east coast are weak can you give us some more color on that, where you see improvements, where you see continued weakness or anything?

Yes we take the East Coast is in fact gonna improve that the weakness in the first quarter was driven more by the inability to make equipment available for maintenance, so that should correct itself once the market allows it - that’s driven by a strong market on the east coast. The gulf coast is principally an oil service driven market that, that business continues to be weak, we’re trying to refocus that business a little bit on the other parts of the oil service business that go beyond the gulf coast. We would anticipate that the recent addition of the mid-west Walker boat yard piece is going to help the Mid-West and we’re encouraged by the fact the – in the drag cargo market that appears to be on mend and approving.

There’s been a lot of maintenance to follow up there and we should get our share of that. And we do look frankly at some growth in that business this year.

Okay is that the growth you mentioned is that primarily from the Walker Aquisition or you see some organic growth along?

No I think that there should some organic growth this year.

Okay thanks very much, great quarter again.

Thank you.

Our next question comes from Bill Baldwin of Baldwin Anthony Securities.

Good morning Joe can you just color on how spot rates are looking verses a year ago as far as their rates are getting year over year?

Yes Bill it’s going to depend on the market but in the chemical black oil sectors, 5% to 10% above where they were a year ago. Refine products is about plaid I think now we think that markets’ going to be strong this year so there maybe some ability to gain on spot prices in the refine products part. With respect to agriculture chemicals that’s really not a spot business that’s principally (indiscernible) the pricing unfortunately hasn’t change because that business is so miserable.

And Norm I guess this will be for you but as far as looking out going forward here and the rest of the year, SG&A was up I guess something like 12-13% in the first quarter. What was the guidance for the remaining portion of the year on SG&A are they going to continue to rise you think faster than revenues or should it slow down some what?

I think - move to that increase we said was salary increases and bonus -- so that should level off you won’t see increase like that on a quarter by quarter basis, Bill.

Okay thank you very much.

Sure.

Our next question comes from the David Yuschak with Sanders Morris Harris.

Congratulations gentlemen on a fine quarter.

Thank you David.

A question I got for you – earlier Joe you said in the call you know (indiscernible)I’m assuming you’ve already discussed it, I apologize I had to jump off to another call but you’ve indicated to your outlook does not suggest any price increase of any magnitude in your guidance is all bases on (indiscernible). As we’re one month into the second quarter things should seasonally pick up. Does suggest that maybe prices are still lagging where you thought it would be because I would think that volumes are already doing what we hopefully think they should be doing in the second quarter. Utilization should really being to crank up to where you can a little bit more visibility on that price.

Yes David what I said was when we were talking about the year in January and getting the assumptions that went into the $1.85, the $1.95 earnings guidance range for the year, that we didn’t assume a lot of pricing, we assume more volume than pricing. And that’s really what we’re seeing right now. We’re seeing that the volumes are up and the utilization is up. And that if this is sustainable we believe that we’re going to get some pricing.

Some of the – you indicated in the press release that you were getting some relief on pricing that doesn’t sound like you have adequate enough for your – as far as your review of the current situation.

Yes well we’ve been under some significant pressure really over the last three years of – with our cost going up and really not having the ability to pass that on to our customers. Our customers are more optimistic, their margins are reversing at least in the chemical business what was a almost 10 years margin squeeze the refining industry in this business is in the country appears to be very healthy. There is a big debate on whether there is enough of it.

So we think that the relative help of our major customers with the exception of frankly is the fertilizer manufacturers is – it is improving. And our volumes are improving, industry utilization is up, we should be able to get something through. The issue is, is it sustainable? We believe it is. So if you’re going to look for pricing I think look for it kind of at the latter part of the year. And that’s really consistent with what we said in January.

Now when you mention sustainable is that some of issues you had with some of your customers as you review contract renewals, is some question where this kind of price is going to be sustainable given the out look for the economy. What ever other issues you may be looking at?

Yes I think it’s your view on the economy. Is this economy going to continue to grow? You can get a number of views but I think the consensus is that yes it is. And you know certainly the petrochemical business reflects that growth in the economy and that additional volume drives utilization and utilization will ultimately drive pricing.

As you look into the summer then is it your expectations that you should begin to see spot rates – I mean and would you be able take more out of the contract markets and spots market if you can’t reconcile some of these as you indicated last quarter that’s what you were going to do.

Yes.

Would you still be following that course? And are you shifting some of that mix already?

It may be shifting a little bit but, yes the answer is yes.

But has it shift much from that 730 at this point in time. If it did, something else shift into the spot.

That’s correct. You know that’s what happens, you begin to press rates where you are not successful you don’t renew a contract in the equipment is in the spot (indiscernible) market.

Is there any particular lumpiness in contract negotiations as you through the year where you got more contracts on an annual basis come up for renewal at any particular point. Can you maybe give us a sense of that so we can get a feel for what percentage of the contracts could lead to be particular available to renewal at higher prices should things get tighter.

Yes David it’s pretty ratable with respect to the business that renews and it renews at different times of the year. Is there one particular period that more concentrated than the other? The consensus here is, not really.

And then one other question Joseph on the diesel thing, you commented earlier about the (indiscernible) thing. Are you taking any cost out of there to make that thing even more efficient too or is just more strictly a function of volumes in the market as acquisition (indiscernible)

We produced man power.

So you should see some benefit there out of that acquisition on the man power part of it as far as operating margins.

Yes.

So it did not become a function of volumes?

Yes utilization, correct.

Alright thanks.

Sure.

Once again it’s * 1 if you have a question or comment. At this sir I show no further questions.

Thank you for your participation in our conference call. If you have any additional questions or comments you can please – you can give me a call. My direct dial number is 713-435-1135 and we wish you a good day.

And that concludes today’s teleconference. You may disconnect and have a great day.