Kirby Corp (KEX) 2007 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Kirby Corporation 2007 First Quarter Earnings Call.

[OPERATOR INSTRUCTIONS]

Thank you. Mr. Holcomb, you may begin your conference.

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 Nolan, 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 in non-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 judgment with respect to future events. Forward-looking statements involve risks 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, 2006, filed with the Securities and Exchange Commission.

I will now turn the call over to Joe Pyne.

Thank you, Steve. The 2007 second quarter and our first six months produced record results for Kirby, making it the 14th consecutive quarter that our earnings exceeded the same quarter of the previous year. Late yesterday, we reported our second quarter earnings of $0.56 a share compared to the $0.44 a share reported same period last year.

During the second quarter and the first half of 2007, rig transportation demand remains strong and tank barge capacity was tight, creating an excellent environment for pricing our services. We operated an average of 252 towboats during the quarter. That compares to 241 towboats operated second quarter 2006.

The diesel engine service segment continued to experience strong demand for service and parts sales in both the medium-speed and high-speed sectors. Operating income for the diesel repair group was 6% less than the 2007 first quarter, which was expected.

First quarter benefited from seasonal work for upper Mississippi River and Great Lakes customers. That part of the system essentially closes down because it ices over. During the second quarter, strong utilization in our petro chemical, black oil and refined products market continued and our agricultural chemical business also strengthened.

Contracts renewed during the second quarter in the 7 to 9% range over the second quarter of 2006. Stock market pricing was higher, again, in the second quarter than the first quarter. Effective January 1, where we have multi-year contracts, these contracts escalate specifically for labor and the -- and typically at producer's price index. And those rate increases are in the 4% range.

Since the hurricanes of 2005, we have been commenting on the fact that Kirby, as well as the entire inland marine transportation industry, has been short of both the vessel crews and towboats. Kirby has been addressing these issues aggressively as we need to, and we're making slow progress in alleviating crew and towboat shortages.

As I stated earlier, we operate at an average of 252 boats during the second quarter, four more than the first quarter of this year and 11 more than the 2006 second quarter. During the first half of the year, we took the liberty of three new towboats and we purchased three used towboats. The shortage of towboats is gradually getting better, but we're still, on a day-to-day basis, a little short of power.

During the first half of this year, we added 17 pilots to our system, the result of our pilot training school and training effort. And we expect to add, in 2007, approximately 50 pilots. We have currently 79 pilot trainees in our training program. Remember, it takes 3 to 5 years for a new deckhand to advance into the Wheelhouse; that's best case. And having a pilot's license is not the final objective. It takes another 6 to 12 months to post them and be comfortable that they're fully qualified to transport our cargo safely.

Additionally, we have approximately 150 tanker men trainees in our training school. I mention this because it's the single most important factor in our industry's ability to add capacity. As the industry adds capacity, it has to match that capacity with its ability to produce qualified pilots and tanker men.

Our marine transportation segment improved its operating margins 21% during the second quarter. Several factors contributed to the higher operating margins, including strong demand, favorable contracts, in-spot market rate increases, some operating efficiencies, and a strong fertilizer market, that business being fairly incremental to us.

We're pleased with our continued progress expanding our margins, but I do want to caution you to focus on our year-to-year progress and not on the quarter-to-quarter progress.

Turning to the diesel engine service segment, the 2007 second quarter reflected the accreted acquisitions of Global in the June of 2006, followed by Marine Engine Specialists in July of 2006. As expected, revenues in the median-speed sector were down 12% from the first quarter due to kind of normal seasonal slow down in the upper Mississippi River and Great Lakes area.

Overall, service activity and part sales remain strong in the median-speed sector. In the high-speed sector revenues were down 7% in the second quarter compared to the 2007 first quarter, primarily due to lower but more normal activity levels in the Gulf Coast oil service industry. Remember that this industry is coming off a significant construction effort repairing the damage of the 2005 hurricanes.

Our diesel engine service operating margins improved to 16% in the second quarter as compared to 15.2% first quarter and 15% second quarter '06. Higher service rates at part pricing implemented both in 2006 and the first half of 2007, coupled with strong labor utilization as we integrate those businesses that positively impacted our diesel engine service results and the operating margin.

We also completed, last week, our acquisition of Saunders Engine and Equipment Company. We had noted that in a press release earlier this month. This acquisition continues to expand our service area footprint for the high-speed engine group and it's consistent with the strategy that we've talked about, which is to expand our service in this sector geographically and continue to grow the diesel engine business.

I'm going to now turn the call over to Norman for his comments.

Good morning. As Joe stated, we continued to benefit from strong marine transportation and diesel engine services market during the second quarter. Marine transportation revenues increased 13% over the second quarter of 2006 on higher volumes and pricing and reported a 21% operation margin in that segment.

Ton miles in the second quarter were 7% higher than the second quarter of 2006, primarily due to higher black oil and agriculture chemical movements on the Mississippi River, which involve longer distances and movements on the intercoastal canal. Our marine transportation segment was almost fully utilized during the quarter, and our barrels capacity was 4% higher than last year.

We also operated 11 more towboats than we did in the second quarter of last year. Although we had better weather conditions than in the first quarter of this year, we had 31% more navigation delays than in the second quarter of 2006.

On the diesel repair side, the high-speed diesel repair business, which was formed from three recent acquisitions, Global Power Systems, Marine Engine Specialist and P&S Diesel Service, generated $23 million of revenue out of the total diesel engine services revenue of $58 million in the second quarter. We generated $75 million of EBITDA in the second quarter, a 31% increase over the second quarter of 2006. And the EBITDA margin was 25.9% compared to 23.4% last year. Marine transportation EBITDA margins were 29.2%, up from 26.1% a year ago. And our diesel engine services EBITDA margins were 17.7% in the quarter, up from 16.2% in 2006.

Capital spending for the first six months totaled $96 million, which included $49 million for new barge and towboat construction and $47 million primarily for upgrades to our existing fleet. Our capital spending will be lower in the second half. We have increased full-year capital spending guidance from a range of $134 to $145 million to a range of $150 to $160 million for 2007, primarily due to additional anticipated progress payments on our 2007 and 2008 barge and boat construction contracts.

During the first half of 2007, we spent $49 million on acquisitions for a combined capital spending and acquisitions total of $145 million. Kirby's debt to capitalization ratio impacted by the capital spending and acquisitions, increased from 32.9% at December 31st to 35.6% at June 30th. Our average cost of debt for the second quarter was 5.9% at approximately 52% of the total $384 million of debt outstanding as of June 30th was hedged against interest rate fluctuations with an interest rate collar and interest rate swaps.

I'll now turn the call over to Berdon.

Thank you, Norman. Our 2007 new construction schedule consists of 30 new tank barges, 22 of which are 30,000 barrel barges and eight are 10,000 barrel barges. The new tank barges are a combination of new capacity and replacement barges.

The 2007 schedule also includes the construction of seven new towboats. During the 2007 first half, we took delivery of 15 of the 30,000 barrel barges, three 10,000 barrel barges and three 2,100 horsepower towboats.

In June 2007, we signed contracts for the construction of two 1,800 horsepower towboats for delivery in 2008 at a cost of 6.1 million. We currently have orders for 10 1,800 horsepower towboats, four for delivery in 2007's second half and six in 2008.

I will now turn the call back to Joe.

Thank you, Berdon. I want to talk about what we think we're going to see in the third quarter. Our guidance for the third quarter is $0.53 to $0.58 a share. Depending where you are in the range, that's a 10 to 21% improvement when compared to the $0.48 per share earned the third quarter of last year.

For the year, we've raised our earnings per share guidance to a range of $2.05 to $2.15, a 15 to 20% increase when you compare it to the $1.79 per share earned in 2006. With respect to our business levels, we assume that they're going to remain strong and see really nothing that suggests otherwise with capacity essentially utilized. We added a net credit of 41,000 barrels of capacity at 2006. And we anticipate that over the year we'll add another 480,000 barrels of capacity in 2007. The additional barrels represent about 3% of our capacity for 2007.

With respect to the additional engine service business, we expect business levels to also remain strong and with the acquisitions in the last year of Global Power Systems, Marine Engine Specialists, P&S Diesel and Saunders, our customer base should continue to grow as we're able to offer our customers more single-source services for their diesel engine requirements.

In conclusion, the outlook for the supply and demand drivers for the tank barge and diesel engine service business remain very favorable. Our strategy has been consistently long-term focused and that strategy, we believe, continues to service us well. We have a very experienced management team, been in this business a long time, focused on what we know well, and our goal is to continue to provide our service with the best maintained fleet operated by the best trained and safest personnel in the business.

We also intend to continue to grow Kirby through acquisition in both our core businesses and, when appropriate, continue to add additional capacity.

Operator, we'll open the call up for questions. We just ask the participants to limit your questions to one question and a follow up so that we can be more inclusive to those that want to ask questions.

[Operator Instructions] Your first question comes from the line of Alex Brand.

Good morning, Alex.

Good morning, Joe. This is Kevin Sterling. How are you?

Hi, Kevin.

Very good great quarter. I just wanted to -- you made mention at the beginning of the call, and I'm sorry if I didn't get it. Did you mention how much your contract rates were up in the second quarter and spot rates?

Yeah, we said that contract rates were up 7 to 9% and that contract rates were higher. They were up about 4% over the first quarter, which is, I think, consistent with where we think they're going to trend this year, which is kind of that low double digit increases for spot rates.

Okay. Great. Thank you. And I guess, kind of, you talk about petro chemical and black oil demand being strong. Are your customers still feeling pretty good about the economy and their business levels for the back half of this year and maybe as we look into '08?

They are. They're still very optimistic. Yeah, even with the automobile and housing issues. Now, you can go around the chemical business and find chemical companies that are more affected as a service, one business more than perhaps others do. But in terms of our volumes, we're not seeing any tapering off of the volume demand out there, nor is it being suggested by any of our customers that we're going to see declines in volumes.

Okay. Great. I'll ask one more question and then I'll pause. Your diesel margins are very good right now. Do you think over the next 3 to 5 years as you gain efficiencies and do [Bolton] acquisitions that these margins can get higher?

Yeah. That's a great question. We've been giving it a lot of thought. I think what we're prepared to say is that this should be kind of a high-team margin business over time. So I think we do have some more room in that area. It's going to come from continuing to work on cost and efficiencies, making sure that we're managing our utilization labor well. But margins, we think, can get a little stronger.

And your next question comes from the line of John Barnes with BB&T Capital Market.

Good morning, fellows.

Good morning, John.

A couple of questions here. First, in the diesel business, I just want to get a feel for where do you think the franchise stands now? Are you kind of -- do you feel like with these last couple of acquisitions you've rounded out your franchise and your footprint and you're kind of done, or do you think that there's more to do in terms of building out the footprint on a going forward basis?

Oh, there's more to do, John. And you're building a platform that can get, frankly, a lot bigger. We've been focused, since Global, on kind of rounding out the high-speed footprint, service footprint, and we've got a ways to go there. After Global we bought, let's see, three other companies, Saunders being the last one, but we have more to do there. Then you have a very interesting platform that, I think, you can continue to do a lot with.

And, you know, in terms of -- in terms of that business -- you know, the barge business was so good this quarter, Joe, that I don't really have any questions on the barge side, and so I'm going to stick with diesel. The diesel revenue was a little lighter than I was looking for. That's more me trying to get comfortable with understanding the business and understanding the seasonality and those types of things. Is there something that impacts the seasonality of that business? I mean, can you just kind of give us a little more feel of, you know, what -- when does the bulk of the business really happen? You know, is there a busy time when you are going to see a bit of a slowdown in revenue and then it kind of creeps back up later? And is there any seasonality in the margins of this business as well?

Well, John, it varies by business sector, but the median-speed business is typically always stronger in the first quarter. The reason is -- I alluded to this or actually said it, but the Midwest essentially freezes. So anybody that is doing maintenance on equipment up there tries to do it in the first quarter when it's tied up. You also tend to defer -- operators defer maintenance on the latter part of December, you know, into January because they just don't want to work over Christmas.

The other thing that contributed to lower revenue was some timing of part sales in the nuclear business, also on the east coast. With respect to the Gulf of Mexico, the Gulf of Mexico represents probably close to 40% of this business now if you look over both the median-speed and high-speed sector. That is a little slower. And slow is really not the right word because it's slow when you compare it to unusually high levels of activity coming, kind of, out of the 2005 hurricanes, in particularly, in the reconstruction effort.

So what you're saying is that it's getting -- it's getting to kind of more typical business levels. We don't -- as we kind of look out for the rest of the year we're not concerned about anything. We think the business is going to be fine. High-speed business typically is a little stronger in the summer months or second and third quarter. The median-speed business, typically stronger in the first quarter.

Okay. Very good.

And your next question comes from the line of Jeff Fidacaro with Merrill Lynch.

Hi. Good morning.

Good morning, Jeff.

Joe, just going back to on the barging side. Can you talk a little bit -- you have seen contract rates now pick up from the 4% to 6% level, the 6% to 8% and now we're seeing 7 to 9% type increases. How does that speak to capacity? How tight has capacity been? And what do you see as far as your competitors adding supply at this point? And have you seen any new supply being built at shipyards?

Well, I would tell you that the escalation contract prices were kind of as anticipated. We expected the velocity of contract rate increases to continue to increase. We think the velocity of spot rates are actually going to moderate a little bit, and I would argue that that's a good thing. I think spot rates 20 or more percent year-on-year increases is not long-term healthy for the business. And, frankly, we're more interested in the contract market anyway. About 75% of our business today is contracted. Spot market is an indicator, it's a leading indicator, but we think that as long as it's continuing to rise, that's positive.

With respect to equipment additions, the industry is still constrained with respect to the amount of equipment that it can build. We're not seeing anything that concerns us. I mean, certainly Kirby's success in the tank barge business has gotten a lot of attention and others look over the fence and say, Gosh, I'd like to have some of that. But the truth is it's just not as easy as that. This is a business. It's power intensive and people intensive and infrastructure intensive. You've seen the infrastructure that Kirby has down in the Houston area.

I don't think that we're terribly concerned about anything at this point. The volumes will support additional capacity, and the kind of capacity that people are talking about the next particular years doesn't particularly concern us.

And just a quick follow up. It looks like you increased your pilot trainees from about 65 last quarter to 79 in this quarter. Can you give us a sense of -- just look at today, how many boats might you be short on any given day? And does that pilot class of 79, I think you said you expect 50 new pilots for the total in 2007, does that fulfill your new builds on towboats that you expect to be delivered?

Yeah, and that's why the aggressive training effort because we're adding power. On an everyday basis, we're probably five to ten boats short, could use five to ten boats more. And we're adding capacity. When you add capacity on the canal, every two barges you build, you need at least a boat. Depending on the movements, you might need a boat per barge. So it's very power intensive and you have to have the qualified pilots in place to move it. You get paid to move it. You don't get paid just to sit there.

So we're trying to stay ahead of the came. And, you know, our projections are that we can meet our internal crewing requirements with some turnover. Our turnover actually is improving, has improved year over year, but there will be some turnover, some retirements, which is why we're aggressively training people.

And your next question comes from the line of Chaz Jones with Morgan Keegan.

Hey, good morning, Berdon, Joe and Morgan.

Good morning.

Congratulations, by the way, on an outstanding quarter. Diesel engine services certainly seem to be the flavor of the day, and I guess I won't deviate from that. But just kind of thinking out loud, I'm curious as that grows in scale if it's getting valued appropriately. And I guess my question there would be, is the return on capital that you're generating in your diesel engine services division much higher than what you are on barge transportation? And ex-acquisition is the organic growth opportunity significantly higher in diesel engine services than in marine transportation?

Chaz, typically the return on capital is going to be higher because it doesn't require a lot of capital until you go out and by something.

Sure.

And when you make $100 million acquisition like we did with Global it's going to -- and we're targeting 12% return, you're going to drag the natural return on capital down a little bit, but over time that will correct itself. So its returns have been traditionally better than the barge returns.

With respect to organic growth, I would tell you that it's better than GDP organic growth story, but I don't think it's 3 times as good as the barge business. It does have, kind of, good 4, 5, 6% organic growth in it, but we also have opportunities to grow it through acquisition, and we're going to pursue that also.

Okay. And then maybe a follow up on marine transportation. I know that certainly you guys have talked for years about attaining a 20% unit margin in that business; certainly you blew through that here in the corner. You know, just kind of maybe get your thoughts on can it continue to improve from what we saw on the second quarter over the near term, maybe not sequentially but just maybe looking out here the next 12 months and certainly at full utilization, what would drive that? Is it just additional pricing? Maybe if you can just kind of help us there, Joe.

Yeah, it's -- some of it is pricing, some of it is just better leverage. As you add equipment, you're not adding a lot of G&A associated with that equipment. So the incremental margins are better. Yeah, I think the margin trend will continue until the economy turns on our we add too much capacity, and I don't see either one of those on the horizon as we speak.

What we've been saying, Chaz, I think probably the last couple of years about margins, is that we expect it during the cycle that they would be north of 20. Yeah, how much higher they go will depend on the length of the cycle. But, you know, they should trend higher. I would again note, as I noted in my remarks, don't look at operating margins on a quarter-to-quarter basis because there's going to be some things that drag the m around a little bit. I don't want everybody to be too sensitive to kind of the subtle changes between quarters. Look at it on an annual basis. And you can go back to 2004 and see kind of a steady rise in operating margins north of 100 basis points a year, and I just don't see anything that suggests that that's going to change for awhile.

Thanks. I appreciate the commentary as always, guys.

Thank you. Your next question comes from the line of Alan Mitrani with Silver Lake Assets.

Hi. Thank you. I just wanted to know, it seems as if the credit markets are tightening up for a lot of companies and you're in a very good competitive position. And a lot of the dry goods companies have had -- dry bulk goods companies -- have seen some pricing come in as you expected. Can you tell us; maybe, is this the time to be more aggressive then with acquisitions with your stock at highs and your access to capital better than most? Let's talk about where you see acquisitions over the next couple years and whether you think there's something, or a couple of properties that may come to market good prices.

Well, of course when business is good, everybody believes that it's going to go on forever and valuations creep up. So the challenge in any acquisition scenario is to buy at reasonable prices with projections that are realistic. I would tell you that we've made in, what, the last 12 months $180, 190 million in acquisitions. We continue to have opportunities out there. We were cautious in our approach. The Saunders acquisition was the 40th acquisition that we've made since the mid-80s, so acquisitions are certainly part of our strategy.

As for using our stock, we frankly prefer not to do that. We have in the past where the deal was big enough so that it would jeopardize our investment-grade rating, reduce stock, or in particular instances where the seller wanted the stock, but we prefer to use that and we have plenty of dry powder -- Norman, you might want to comment on that -- with respect to using debt. And the debt that we do have, most of it's hedged and there's lots of opportunity to borrow.

We are investment grade credit, which is unusual in the marine transportation business. And from our prospective the credit markets are still very much open, very strong, and it's easier to tap into credit when you need it. We've got a lot of unused capacity in our revolving credit facilities. That is really not a big issue.

Great. Thank you very much.

You're welcome.

Your next question comes from the line of David Yuschak with SMH Capital.

David Yuschak. David Yuschak. Gentleman, good morning.

Good morning.

You guys keep chugging along and along the canal and keep turning the profits. Question for you, Joe, though, I'm thinking -- reflecting back on what you had said earlier in your statement about the infrastructure you've got there and the capacity and the capabilities and with your additions you're putting on stream, is it possible because of the vastness of your infrastructure that with even good business conditions industry wise, that you can be taken market share?

From other modes of transportation, David?

No, maybe from other re-transportation firms. Just because you've got the stuff nearby compared to others who maybe have to move their barges and stuff. I'm just curious if it's market share from others because you've got the scope to be there when you need it.

Well, I think everybody is fully utilized so it's going to be difficult to take a lot of market share, simply because nobody has the equipment to do so.

Would it be fair to say, though, then that maybe you're getting the pick of the businesses out there then, the better margin business?

Well, we hope so.

Because you've got the stuff there when somebody needs it, but you can kind of -- with tight capacities, generally speaking, firms do have a choice as to what business their willing to take versus not taking. If the infrastructure is that strong, I'm just kind of curious --

This is where it helps. It helps in terms of flexibility, in terms of utilization of power and reduction in cleaning costs and in the overall cost area. Our infrastructure and flexibility allows us to provide a service that, you know, is very hard if not impossible to replicate. And our customers count on us to provide that service, and we're very focused on trying to do that.

Have you guys got any idea, too, about when you may be making a decision on your 2008 capital budget?

Yeah, we're doing that now. We can -- I think we can probably give you some insight with respect to construction in 2008. Norman, do you want to do that?

Sure. We haven't -- we don't have any -- we have options and we anticipate under these options that we're right now going to build 23 new towboats --

No, tank barges.

Sorry, tank barges. Fifteen 30,000 barrels barges and eight 10,000 barrel barges. And as Berdon indicated, we've got probably eight tow boats that will be delivered in2008. The total cost of that is going to be about $70 million.

Okay. So that's going to back -- that will be off quite a bit then. On the preliminary basis anyway right now compared to what you've done in the last couple of years, more in line with the rate of depreciation, probably a little less than depreciation then maybe?

Yeah, that just, I think, prices the towboats and barges built. There's some additional progress payments, aren't they, that bleed in from 2008, or is that the number?

It can go both ways.

Both ways, yeah, so we're at $70 million.

So it's give or take a little bit, but we're going to be down quite a bit then from, I guess, 2007, 2006 period then?

Yes.

Is what you're thinking right now?

Yes.

It will be more than 2006, a little bit less than 2007.

Right. Yeah. Let me think. That's it for right now. If I'm going to have a question, I'll get back in queue.

Thank you.

At this time, sirs, there are no further questions.

Okay. We're good. We appreciate your interest in Kirby Corporation and for participating in our call. If you have any additional questions or comments, you can please give me a call. My direct dial number is (713) 435-1135. And we wish you a good day.

Thank you, sir. This concludes today's conference. You may now disconnect.