Kirby Corp (KEX) 2004 Q3 法說會逐字稿

Good morning. My name is Ashley (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Kirby Corporation third-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Holcomb, you may begin.

Thank you for joining us this morning. With me today is Berdon Lawrence, Kirby's Chairman; Joe Pyne, the President and Chief Executive Officer of Kirby; and Norman Nolen, our Executive Vice President and Chief Financial Officer.

During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirby.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 judgment 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 in Kirby's annual report on Form 10-K for the year ended December 31, 2003, filed with the SEC. I will now turn the call over to Joe.

Thank you, Steve. In our press release yesterday afternoon, we reported our 2004 third-quarter results of 53 cents per share on earnings of 13.3 million and revenues of 173.4 million. The results were in line with our earnings guidance range of 50 to 54 cents per share, and this compares with the third quarter of '03's results of 46 cents per share. Remember our earnings guidance allowed for the closure of McAlpine Lock and some increase in fuel costs. All in all, the quarter was solid and about as expected.

Now during the third quarter of this year, petrochemical volumes and black oil volumes remained strong. Refined product volumes were typical for the summer months. Our liquid fertilizer volumes, on the other hand, were weak, as we had anticipated. This part of the business, the fertilizer market, will improve this quarter, this quarter being the fourth quarter.

Our 2004 third-quarter results were negatively impacted by approximately 2 cents a share as a result of Hurricane Ivan, which made landfall on September 16 just to the east of Mobile, Alabama. Unfortunately, hurricanes which enter the Gulf of Mexico are disruptive regardless of where they come ashore. The initial projected path of Ivan was from New Orleans to the Florida Panhandle. Most petrochemical plants and refineries in the projected path closed. Additionally, Kirby had to move equipment out of the projected path of the storm, disrupting our distribution system and causing us to incur repositioning costs.

Also, the U.S. Corps of Engineers closed McAlpine Lock on the Ohio River for major repairs for a two-week period in August. We knew this was going to happen and factored this into our earnings guidance. We estimate the net impact on this closure lowered Kirby's third-quarter results by approximately 1 cent per share, better than the initial estimate, which was higher, in the 2- to 3-cent-per-share range.

The rising cost of diesel fuel during the quarter also negatively impacted our results. The average price per gallon of diesel fuel consumed was $1.16 for the third quarter, compared to an average of $1 for the first six months of '04. The higher fuel prices lowered our results by about a penny a share; but again, this was factored into the guidance that we gave for the quarter. Pricing continues to improve, improved during 2004 third quarter. Contracts were renewed in a range of 2 to 4 percent. Spot rates were up 4 to 5 percent for the quarter.

Turning to the Diesel Engine Segment, third-quarter results benefited from our earlier acquisition of Walker Paducah. The power generation market also benefited from direct parts sales to power customers, and the rail market was stronger, again because of direct sales to customers in the rail market. The segment's Gulf Shore oil service market and both the east and west coast marine markets remained weak, as they had been for most of the year, although we do anticipate some strengthening in the fourth quarter.

In April of this year, we purchased a one-third interest in Osprey Line for $4.2 million. Osprey is a provider of container-on-barge feeder services. Osprey is the leader in this container-on-barge business. The container-on-barge service is very complementary with Kirby's existing inland marine transportation distribution system, as well as our existing customer base.

For the first nine months of '04, Osprey's revenues were 10.3 million, a 29 percent increase compared to the 8 million reported for the same period of '03. For comparative purposes, Osprey's revenues last year were 11.7 million for the year.

I will come back and comment on our outlook for the fourth quarter and the full year, and Berdon will brief you on our ongoing tank barge construction program. But before doing that, I'm going to turn the call over to Norman to discuss the financial highlights of the quarter.

Thanks, Joe. Kirby's cash flow remained strong in the 2004 third quarter, with EBITDA of 38.7 million, which is a 10 percent increase over the third quarter of 2003. For the first nine months of 2004, EBITDA increased to 109 million, a 12 percent increase over 2003.

Capital spending was 75.8 million for the first nine months of this year, which included $32 million for new tank barges, $43 million for upgrading our existing fleet. During the first nine months, we also spent $11 million on acquisitions, and that included a little over $4 million for our one-third interest in Osprey Line; $5.8 million for Walker, the diesel engine service operation in Paducah, Kentucky; and 1.1 million for a couple of preowned ammonia barges.

Our total capital spending for 2004 is projected, excluding acquisitions, between 90 and $93 million, which is a slight increase from our previous 85 to $90 million projection. The new projection includes 16 petrochemical barges and 10 black oil barges at a cost of $42.5 million. The increased capital spending guidance reflects higher steel prices, progress payments on barges scheduled for delivery in 2005, and the timing of capital upgrades on existing equipment.

Our debt to capitalization ratio declined to 37.7 percent at September 30 compared to 43.1 a year ago, which reflects continued cash generation in excess of fleet maintenance requirements. At September 30, we had no bank debt outstanding and we had $18 million of cash investments. Our priorities for excess cash generated continue to be acquisitions, debt reduction, and stock repurchases.

The average cost of our debt was 5.3 percent in the third quarter and 5.2 percent for the first nine months of 2004. We currently have $250 million of ten-year floating-rate notes outstanding, and we have hedged 150 million of that amount with interest rate swaps to protect against interest rate movements. I will now turn the call over to Berdon.

Good morning. I want to update you on our ongoing tank barge construction program, a program designed to replace older petrochemical and refined product tank barges, as well as black oil tank barges that will be retired. For the petrochemical and refined products market during the first nine months of 2004, we placed into service 14 30,000-barrel capacity tank barges, with two scheduled for delivery in the 2004 fourth quarter. The purchase price of these 16 tank barges is approximately 26 million.

For the black oil market during the first nine months, we placed into service six 30,000-barrel capacity tank barges, with four tank barges scheduled for delivery in the 2004 fourth quarter. The cost of these 10 black oil tank barges is approximately 18 million.

In August, we entered into a contract for the construction of six 30,000-barrel capacity tank barges for use in the petrochemical and refined products markets. We expect delivery of these six barges over a seven-month period starting in 2005's second quarter. The total purchase price of these six barges is approximately 11 million, subject to escalation or de-escalation of steel prices.

Also in August, we entered into a letter of commitment for the construction of 20 double-hull 10,000-barrel capacity tank barges for use in the petrochemical and refined products market. Under the terms of the letter of commitment, delivery of the 20 barges is scheduled for June through October 2005, and the total purchase price is approximately 16.5 million, subject to the escalation or de-escalation of steel prices.

We are very comfortable with our barge replacement program, as it is designed to maintain our various fleet sizes and provide seamless service to our customers. I will now turn the call back to Joe.

Thanks you Berdon. Yesterday afternoon, we announced our 2004 fourth quarter guidance of 50 to 54 cents per share. This compares with 45 cents per share we earned in the 2003 fourth quarter. Our 2004 fourth-quarter earnings guidance anticipates a continued strong petrochemical markets, our black oil products market remaining firm, and normal fourth quarter midwest-bound gasoline volumes. As I said earlier, we do expect the liquid fertilizer market to improve, and of course, our guidance is subject to the weather conditions that normally we face in the fourth quarter. The wild-card in this estimate is probably weather.

For the 2004 year, we revised our earnings per share guidance upwards to $1.94 to $1.98 per share, which is a 16 to 19 percent improvement, depending on where we are in the range, when you compare our projected earnings to the $1.67 per share we earned in 2003.

The tank barge market continues to be in good shape, with rising demand and a customer base which is much healthier than it has been in a long time. Kirby should continue to perform well. Fortunately, we have yet to see any measurable effect on our business due to high energy costs. We do have some lingering concerns for high crude oil and gas prices on the economy and our customers' profitability. Thus far, our customers and the economy appear to be doing just fine. We would be more comfortable, however, with lower energy costs. I do think Kirby is well positioned to doing well in a sustained high energy price environment, but could do even better if energy returned to the levels which demand appears to support.

I also want to note before opening the conference call up for questions is that Kirby, for the fourth year in a row, was listed as one of Forbes' 200 best small companies. We are very pleased to be named again to this list.

Operator, we will now open the call up for questions.

(OPERATOR INSTRUCTIONS) Alex Brand of BB&T Capital Markets.

Thanks. Good morning, gentlemen. I guess let me start by asking you, Joe, if you agree with my characterization of the quarter. It looks to me like you, as you said all along, the second half of the year would begin to show some of the real pricing improvement as that got more and more built into your contracts. And it looks like that is what happened in Q3, and absent the sort of exogenous factors in the quarter which maybe affected your asset utilization a little bit, the quarter and the pricing environment particularly appear to be playing out exactly like you expected. Is that a fair characterization?

Yes, I think it is, Alex.

Now, I think you said pricing continued to be at the 2 to 4 percent on contracts, which is what you had seen before, and spot up four to five. Is that a slight deterioration from where spot had been, or is that just because we're coming up against to tougher spot comparisons from last year?

Actually, for the quarter, I think that is pretty good. I think we said for the year, in our last conference call, that pricing was up 8 to 10 percent over 2003 levels. So that it is an additional 4 to 5 percent.

Okay, that helps. Now can you give some color, Norman, on the sale that was reflected in the equity in earnings? Does that change the way that we should think about modeling that line item going forward?

No, Alex, because that really was not a significant contributor to the equity and earnings. The biggest piece in that line item is a joint venture that we have running coal offshore from Mountain (ph), Mississippi over to Florida to a power company, and the terminal that was involved in the sale was a very small contributor to that line.

Okay. And Norman, obviously, your cash flow continues to be fantastic. And as you think about '05, and maybe you have not done the budgeting yet, but would CapEx for '05, should it -- absent acquisitions, of course, should it be continuing to creep up? It that the right way to think about CapEx spending as we move into next year?

We have not done the budget yet, Alex, but I think that is probably not a bad first out of the box guess.

Okay, great. Good quarter. Thanks a lot.

Chaz Jones of Morgan Keegan.

One thing I am trying to get a better grasp on here is I know that you said the hurricanes and the locks together were about 3 cent negative on earnings. Is there any way to give us a sense, in terms of utilization or ton miles, what type of impact they had on the quarter? Would we have seen ton miles increases at a similar level in that 8 percent range, perhaps, in the first and second quarter, here in the third quarter, as opposed to the 5.4 percent that you reported?

The truth is that we have not focused on that, but I think that that is not an unreasonable assumption. The McAlpine Lock closed the Ohio River for a couple of weeks, and there are a lot of ton miles that move through that lock.

And Chaz, that is located at Louisville, so that shuts down a big part of the Ohio River.

And the hurricane -- it really was tremendously disruptive. It caused operations east of Morgan City to cease, really, for at least two, three days.

Right. I guess I was just trying to get a better gauge on where demand really was X those factors, but okay. Just maybe talk a little bit about capacity here. The Inland Marine Division posted a 17 percent operating margin, which is the best we have seen here in a couple years, despite the hurdles in the quarter. And I am maybe wondering are you comfortable with where the fleet capacity is in growing the business through rates and utilization, or are we getting to a point where maybe there are some opportunities at these higher levels of margins to add to the fleet. Or are you just still focusing on adding through acquisitions?

That is a good question. Business is clearly better. We think that demand for tank barges at points in the year exceeded the number of barges out there. The 20 additional 10,000-barrel barges that Berdon talked about does add some capacity in the 10,000-barrel fleet. It is capacity that we think we need to respond to customers' requirements and to, frankly, take advantage of some opportunities that we have not been able to take advantage of in that market because we just have not had the capacity.

We are going to be careful, though, in adding capacity to the fleet, because we are fully aware that this is a supply and demand game, and once a barge is built, it is there. We do not think the current building programs, or to the extent that that is a real concern; but having lived through what Berdon and I and others here having lived through the 1980s, we know what it's like when there are more barges out there than there is business. We just try to impose a discipline on ourselves and we hope the industry imposes a discipline on itself, that it does not get overly excited and remains rational.

Okay, great. And I did not hear you mention this. Are we still running about a 70/30 mix on the contracts spot exposure in the business?

Yes.

Okay. Do you foresee that changing at all or are you fairly happy with where that continues to remain?

We're comfortable with that mix. I don't think it is going to change materially.

Lastly here, just trying to get maybe a better sense on how you feel about the economy. I know you made some comments there, Joe. Are your customers, with the energy prices doing what they're doing, still as comfortable about the outlook in '05 as perhaps maybe they were six months ago?

We are not hearing any pessimism out there. And those that talk about it publicly -- for example, the Dow Chemicals and the Lyondells -- remain optimistic, even at these high energy price levels. Having said that, we are testing new ground here, and we would like to see energy decline because we think that it is better long-term for the economy and it makes the products that our customers produce even more competitive. That really was the reason for the comment. We think that we are okay, but this is the first time that we have seen crude oil prices in the $55-a-barrel range.

Okay, I will let somebody else have it. Congratulations on good quarter, despite some of the obstacles that you had to overcome.

David Yuschak of Sanders Morris Harris.

Let me first say, gentlemen, with a 66 percent increase in delay days year-over-year, you were challenged. I always appreciate when management does do well in tough environments, and you certainly produced some good results -- with that 66 percent increase in delay days, so congratulations on the numbers.

Just a couple of things here, though. As far as capital spending for 2005, do you have any idea about what kind of numbers you may be talking about on a preliminary basis?

No, David, I had responded earlier, we have not done our budgeting yet. But I think it was Alex that asked the question, would we expect a slight creep upward. And I would say that probably is not an unreasonable estimate, although we just haven't gotten all of our capital spending forecast all together yet.

On your press release, you indicate that your active capacity 16.4 versus 16 a year ago, but you have retired -- inactive is the offset there. And I think, Joe, you had indicated with some of the new expansion that your capacity actually may be a net-net increase versus your retirements or inactives.

Yes.

Do you have any idea what kind of actual number of increased capacity that might be?

It is not going to be that significant. If all that capacity was considered excess, it would be about 200,000 barrels. But it is not going to be all excess. Some of it is going to be replaceable.

Okay. And then ACL, in their plans for re-emerging from bankruptcy, submitted a five-year financial plan. One of the things they commented in this financial plan was that they intended to shrink their dry-cargo fleet while maintaining their tank barge fleet. But the comment they made in there was that their focus was going to be on maximizing the profitability of its core business rather than pursuing growth strategy.

With that in mind, have you seen any reason at all to think that ACL right now, because they have had a factor in the pricing environment, are you seeing any initial efforts here to see them focus on that maximizing the profitability of its core business yet?

David, I think -- the answer is no, but it is still early. They certainly have some challenges in front of them, which would be aided by a more profitable business. What we hope to see is a business that is priced appropriately to the market. We think that that is in their strategic advantage to do. And we think that that will be an aid to continuing to keep the barge business in a healthy pricing environment.

Obviously. But them wanting to maintain their tank barge fleet does suggest that that is going to be a focus to get their cash flows going. Because when you take a look at their financial forecast, it isn't all that robust at producing cash right now. Maybe it results in something better in 2005.

That's right. But they will also be aided by a very strong grain market this last quarter. We wish them great success, that they are healthy and profitable, because they are a big player out there. We think that a healthy, profitable ACL is really good for the business.

Another question on the cargo container potential. There was a report a couple weeks ago about how bad the congestion still remains on the West Coast about cargo containers coming into the country. Houston, I think, is the fifth-largest cargo container market and they are under a major expansion. You have done something in Memphis right now as far as expanding your capabilities to deliver into that market. How is that doing at this point in time, on an early view of the Memphis expansion?

It is doing well. We have incurred some start-up costs, which we anticipated, but the service is established. We are moving barges regularly, on a weekly basis, from Memphis to New Orleans. We have also targeted Chicago, and we are either currently operating out of Chicago or about to. Certainly the service is within -- if it hasn't started, it is within a week of starting.

The other thing that Osprey has done, which we think is very exciting, is we now have a small ship in service in the Gulf of Mexico. The interest in that ship is significant. And our plan is to start an offshore liner service to various ports within the Gulf, and we fully expect that that is going to be successful.

So Osprey is moving forward. The interest that we are getting from our customer base is excellent, and we are getting them to use the service. The service is reliable. It has proved itself reliable. The growth rates are very attractive, about 30 percent year-over-year. And we think that that business, although a very, very small part of what we do, is a great opportunity to grow revenue and make some money.

How long has the ship you said been servicing out there in the Gulf Coast for (multiple speakers)?

It just came aboard -- it came aboard this month, David.

Okay. So it is just another step of an investment process that suggests that you continue to build that platform.

That ship is actually chartered, so we didn't buy it. But it is a great test for a new service. The ship is a more reliable platform than what has been typically used out there, which is offshore barges.

Given the congestion that the West Coast has had on cargo containers, these kind of investments you are doing an Osprey certainly suggest that you may be (indiscernible) alleviate that position. So we will just continue to watch it, but it certainly suggests to us that your initial results are proving to be very fruitful. So congratulations on that and congratulations on a good quarter.

Jon Chappell of JP Morgan.

A couple quick questions. I know the hurricanes had some lingering impacts on oil and gas production in the Gulf. Is there any look lingering impacts on your fourth-quarter results, either from a cost or a revenue side?

That is a good question. We're kind of looking around the table here. We don't think so. We don't think any material effect, Jon.

One of the other issues from the third quarter was the fuel. I'm just wondering if you could give us some insight as to what you're budgeting for fuel costs in the fourth quarter, when you look at that guidance range you provided?

Fuel was up sharply in September. We are paying $1.50, $1.60 a gallon, and most of that was in late September. Some of it is in October. The cost is going to be somewhere in the mid-$1.50 area. What happens is, the contracts are escalated on a monthly or quarterly basis, and most of the increase occurred in September, then you go into October at a higher fuel basis. And we think that most of that happened.

We will have to see where fuel ultimately settles out, because there's some anomalies that appear to be working their way through the two oil (ph) -- that is essentially what we burn, is two oil. It is also used for heating oil up in the Northeast. And there is overall shortage of two oil, which may drive two oil higher than the prices of crude oil currently suggests. But we will just have to see.

Is there any substitution availability for you, or do you have to use the two oil?

Yes, we have to use it.

My final question was also a commodity price question. When Berdon was going through the cost for those letters of commitment you signed in August, he had said dependent upon steel prices. Do you do any steel price hedging when you place these contracts?

Truth is, we have not found anybody that is willing to hedge it. A lot of the steel manufacturers don't even honor their contracts. If you know how to hedge steel, let us know, because we are interested and worrying about it, but we have not found anybody that is willing to do it yet.

That's all I have. Thanks a lot.

Doug (indiscernible) of Jefferies & Co.

This is Magnus Fyhr. Congratulations -- a good quarter. Most of my questions have been answered. I guess just one on the balance sheet and I guess the cash flow going forward. I guess you do have a lot of opportunities out there, but any thoughts on maybe start paying a dividend?

We talk about dividends frequently at the Board level. We still believe that there are opportunities out there to use the cash for accretive acquisitions, so our focus is still in that area. At some point, the opportunities may not be as good and we will have to reconsider it. But for now, we are still focused on growing the business.

And those opportunities, do you see them -- with the potential expansion on containers, where do you see your best opportunities -- still in your core business or new areas?

It's still in the core business. There are certainly going to be opportunity at Osprey. But we think that at least in the immediate future, they're going to be in the barge business and the diesel engine business.

Very good, thanks.

Brad (ph) Macosko of Lord Abbett.

Nice quarter. Could you -- I maybe missed the beginning of the call a little bit. Could you talk more about the agriculture and the fertilizer market? I would just like to understand how you look out and are able to feel comfortable that that business will improve in the fourth quarter and then I assume into next year.

Greg, it is really driven by customers' demand. And we are seeing bookings in October/November significantly higher than we have all year. And the inventory levels are low in the terminals that service the Midwest and the Rio Grande Valley. And the grain season is upon us, and there seems to be demand for products, so we are seeing mostly imports, frankly. And the demand for barging services is going to be driven by imports and the need to distribute them.

Okay, good. And then with regard to margins in the Diesel Engine Services business, those looked reasonably good. Do you expect those to improve going forward or what are we looking for there?

When we talk about that business, we say that we really think it should be a mid-teen margin business, and we just have not gotten there. It is certainly better than where it was four years ago, four or five years ago, when we were talking about a 6 to 7 percent margin business. We just need to continue to work on cost in that business where we can. We need to get some pricing, and the business needs to continue to consolidate. We think all of that is going to happen and margins should continue to trend up. It may not be year-to-year perfect, but the trend should be up.

Okay, good. And the same with regard to the Marine Transportation. Clearly those have improved nicely on price etc., but obviously the current 17 percent or so includes some of the problems that you identified in the quarter. On a longer-term basis, where should we look here?

Again, we think that a healthy business is going to see margins in the high teens/low 20s, and that those margins are going to need to be sustainable so that you can get a rational forward replacement of fleet. Margins have been as high as 18.9 percent in 2000, and we were approaching what I would tell you is a relatively healthy business. And of course, they dropped pretty dramatically when we went into this industrial recession, and we are now fighting our way back. But it is high teens/low 20s. That is the answer.

The point being that you expect to exceed the margins that you have hit at a peak historically.

Yes.

Okay. And then finally, just so I understand, that interest in the liner in the Gulf of Mexico, that is part of the Osprey business. That will be a similar movement of containers, etc.?

This is just the little ship?

Yes.

It is. It is an Osprey operation.

Where will that -- that will go between ports on the Gulf of Mexico?

It's going to be a U.S. flag operation, and it's going to run, likely, Brownsville, Houston, Houston into Florida, and then retrace itself. We are still working on defining exactly where it is going to go. But the objective is to start a liner service that customers get excited about and then build on that.

Okay, good. Thank you.

(OPERATOR INSTRUCTIONS) A follow-up from David Yuschak of Sanders Morris Harris.

I think you said earlier in your comments that you had $18 million of cash on the balance sheet. Is that correct?

Yes.

You don't usually have cash on the balance sheet. You always pay off debt or do something with it. With the real (ph) cost of that capital that you have on that ten-year note, with no principal payments, when would you even think about paying down that note if you wanted to, given maybe potential that the cash will continue to build?

Fourth quarter of 2004.

So you can start to pay it off in 2004 -- this last quarter?

The reason that you have never seen cash until now is that we have now repaid all of our bank revolving credit debt. And when we had the revolving credit debt, literally, if cash came in one day week, we could pay down our debt. On our long-term debt, we can only repay at the end of each quarter. So our cash is built up and we anticipated paying down on that debt so that we won't have cash on our balance sheet at the end of the year.

I understand that. That's why with the bank credit, it made sense to do. But I'm just wondering with that cost of capital being so cheap, is that still a desirable effect -- your best use of money is to pay down the debt on a go-forward basis on that bullet, just because the rate is so attractive?

Debt may be cheap, but it still costs more than what we are earning on our cash. And we have $150 million revolving credit that is totally unused that we can draw on at any time. And we can expand that very easily up to another $75 million over that. So we have a very comfortable position in terms of credit available, and we just want to -- on a very short-term basis, as well as long-term, minimize our financing costs. And cash still does not earn as much as we pay for the debt.

It was just more of a sense of, if there's some sense of urgency to use the cash if you were not going to pay down that note, that I was trying to bear in on. One other question. On that liner service, Joe, that is not protected under the Jones Act as far as competition from foreign flagships, is it?

It is.

I wasn't sure about that or not.

Any movement within U.S. ports or U.S. territories is protected.

Okay. I just wasn't sure whether that (indiscernible) foreign competition, but it sounds like that's a very interesting possibility then. Thanks.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Thank you for joining us this morning and for your interest in Kirby. If you have any additional questions, you can give me a call. My direct-dial number is 713-435-1135. And we wish you a good day.

Thank you for participating in today's teleconference. You may now disconnect.