Kirby Corp (KEX) 2007 Q3 法說會逐字稿

Good morning. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the Kirby Corporation third quarter earnings conference call. (OPERATOR INSTRUCTIONS) 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 8-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. Good morning. Yesterday we reported our third quarter earnings of $0.64 per share, compared to the $0.48 per share reported for the same period of 2006, making this the 15th consecutive quarter that our earnings have exceeded the same quarter of the previous year.

During the third quarter and the first nine months of 2007, marine transportation demand remains strong and our tank barge capacity was essentially fully utilized. Our diesel engine service segment continued to experience strong demand for service and parts sales in both the medium-speed and high-speed sectors. We also continued to see strong utilization rates in the markets that we serve, the petrochemical market, black oil and refined products market.

In the agricultural chemical area, and this is a relatively small part of what we do, fertilizer movements into the Midwest strengthened during the quarter, in fact have been strong almost all year, driven by increased corn production in the Midwest.

Contracts renewed during the quarter in the 8 to 10% area over the same period of 2006 and spot rates, as you compare spot rate increases second quarter to third quarter this year, we're up 3 to 4%. And we would anticipate that the spot rates will continue to trend up over the fall and winter this year and in the spring.

During the quarter we operated an average of 255 boats, 3 more than the second quarter and 13 more than the same period in 2006. During the first nine months of this year, we've taken delivery of 3 new towboats and we purchased 3 used towboats and generally the availability of charter horsepower is continuing to improve consistent to what we thought would happen.

In the area of crewing, we continue to make progress. The third quarter was really the first time that crewing levels in our fleet have returned to the pre-Katrina, pre-Rita levels. We're likely -- or a least we think we're going to make our goal of adding 50 new pilots to our system this year. We do believe that crewing will remain a challenge, but it's not going to be the challenge that is has been the last couple of years.

Our marine transportation segment improved its operating margins to a record almost 23% for the third quarter compared to 19.6% last year. Several factors contributed to higher operating margins in this area. Continued strong demand including a strong fertilizer market, which is frankly very incremental to this business and favorable contract and spot rate increases, as well as some additional operating efficiencies from the ability to add some additional horsepower and of course, good weather and reasonably good order levels over the summer.

The third quarter results for the diesel engine business reflect a strong demand for service and parts in the majority of our markets. Revenues in our high-speed sector increased 10% over the second quarter of this year. But remember, we added revenues from Saunders Engine and Equipment Company which we purchased in July. Our diesel engine business third quarter operating margins were 15.5% compared with the 15.3% earned the same period the year before.

I'll come back at the end of this call and at least the prepared remarks part of the call and talk about the fourth quarter, but now let me turn it over to Norman.

Thanks, Joe. As Joe said, we continued to benefit from strong marine transportation and diesel engine services markets during the quarter. Marine transportation revenues increased 14% over the third quarter of 2006, on higher volumes and pricing and as Joe said, we reported a record of 23% operating margin.

Ton miles in the third quarter were 8% higher than the third quarter a year ago, based mainly on agricultural chemical and refined products movements on the Mississippi River, which involve longer distances than movements on the Intercoastal Canal. Our barrel capacity was about 2% above last year and was almost fully utilized during the quarter and we operated 13 more towboats than we did in the third quarter last year.

Weather during the quarter was generally good and navigation delays were 20% lower in the second quarter of this year, but 20% higher than third quarter last year, mainly because of low water on the Ohio River this fall and temporary delays due to hurricanes Dean and Umberto and tropical storm Erin.

On the diesel engine services side, the high-speed diesel service business this quarter represented $25 million out of the total $61 million of diesel engine services revenue in the third quarter. You might recall the high-speed group was formed from four acquisitions made in 2006 and 2007 and those were Global Power Systems, Marine Engine Specialist, P&S Diesel Services and Saunders Engine and Equipment Company.

Kirby generated $81 million of EBITDA in the third quarter, a 29% increase over last year, and the EBITDA margin was 26.9% compared to 23.8% for the 2006 third quarter. And marine transportation EBITDA margin was 30.7%, up from 26.9% a year ago. Diesel engine services EBITDA margin was 17.2%, up from 16.8% in the 2006 third quarter.

Capital spending for the first nine months totaled $123 million and included $57 million for new barge and towboat construction and $66 million primarily for upgrades to our existing fleet. Our 2007 full-year capital spending guidance remains in the $150 to $160 million range.

During the first nine months of 2007, we spent $62 million on acquisitions, including $12.4 million on the acquisition of Saunders in July, for a combined capital spending and acquisitions total of $185 million. During the quarter we lowered our debt to capitalization ratio from 35.6% at June 30th to 31.3% at September 30th. And our average cost of debt for the quarter was 5.9%. And as last quarter, about 60% of our $334 million of outstanding debt as of September 30 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. During the 2007 first nine months, we took delivery of 22 barges with a total capacity of 560,000 barrels and 3 - 2100 horsepower towboats. We anticipate delivery of 5 barges with 110,000 barrels of capacity and 2 - 1800 horsepower towboats in the fourth quarter. Our total projected capital spending for the new equipment in 2007 is $67 million and our total fleet capacity is projected to increase 320,000 barrels or approximately 2% net of retirements.

For 2008, we anticipate delivery of 25 barges with a capacity of 590,000 barrels and 7 - 1800 horsepower towboats. The estimated cost of the new equipment is $83 million. We expect this new capacity to increase our total fleet capacity in the 1 to 2% range after consideration of anticipated requirements. We will address our 2009 anticipated construction program at our 2007 year-end conference call in late January.

I also want to advise our shareholders and investors that I will be establishing a stock sale plan in accordance with SEC rule 10B51 in which I and my family trust will sell up to 1.3 million shares of Kirby stock. I am 65 years old and my investment advisors are advising me to continue to diversify my investment portfolio. I currently own approximately 2.8 million shares and after the sale I will have approximately 2.8% ownership in Kirby. I plan to remain active as Kirby's Chairman and to work with Joe and the Kirby Management team to continue to create value for our Kirby shareholders.

I will now turn the call back over to Joe.

Thank you, Berdon. Yesterday afternoon we also announced our fourth quarter guidance of $0.53 to $0.62 per share, a 30 to 41% improvement when you compare it to the $0.44 per share in the 2006 fourth quarter. For this year, we raised our earnings guidance to a range of $2.23 to $2.28 per share, again, 25 to 27%, depending on where you are in the range, above the $1.70 results of last year.

The outlook for Kirby going into the fourth quarter and for what we can see into 2008 remains positive. We do read the papers, so we're certainly aware of the published economic concerns, but all we can tell you is what we see in our business and hear from our customers. Currently our inland tank barge markets continue to remain very strong and we're receiving no negative feedback from our petrochemical and refining customers regarding the volumes we carry.

We also anticipate our diesel engine service sector to remain strong.

As we have historically done, we'll discuss our 2008 earnings and capital expenditure outlook in our fourth quarter earnings press release and conference call, which is scheduled for the end of January.

Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS)

Operator, if the mic is still open, I want to correct a misstatement. I said that our fourth quarter guidance was $0.53 to $0.62. It's actually $0.57 to $0.62 per share. Thank you.

Jonathan Chappell with JP Morgan.

Joe, I wanted to address the supply side of the industry. You said, and you've said for the last couple of years it's been the best industry dynamics you've seen since the early 1980s and I think part of the reason for that was pretty limited potential capacity additions. How does the US Jones Act shipyard capacity look for building barges right now? Has it changed at all? And are you concerned at all about some new competitors maybe shifting out of the dry segment into the wet segment and adding more potential capacity?

Let me address the capacity addition question first. The tank barge industry fleet is a mature fleet and there's going to have to be some significant replacement building, which is going to have to occur in the next several years. So I think short-term, medium-term we're not particularly concerned about it.

You know, long-term you're always concerned about too much capacity. This is a supply and demand business. But having said that, most of the industry lived through the oversupply of barges in the '80s and I think they're mindful of the consequences of that. In addition to that, the fleet's just a lot more mature today than it was back then, so if there's some overbuilding in future years, I think it will correct itself pretty quickly.

Now, with respect to competitors moving out of the dry business and focusing more on liquid, you know, you can't stop that. The liquid side of the business is strong. But I would tell you it's not as simple as just showing up with barges. There are relationships, infrastructure, crewing and boat issues involved in being successful in the business. So, you can't avoid competition and we will just adjust to it. I don't think it's something that you need to worry about for at least two or three years, because the ability to add capacity in those kinds of fleets is, frankly I think pretty limited, particularly given the maturity and condition of the fleets that are going to be added to.

And my follow-up just regards fuel, which is probably something I should know the answer to. But obviously the cost of fuel has been rising. Can you talk a little bit about what percent is hedged, how you can push it through to customers or fuel surcharges? You would think in this rising fuel price environment it would be pretty tough to set an all-time record margin high, buy you guys have done that.

Yes. Thank you for the compliment. But we really addressed making our business fuel neutral, 30 years ago by having embedded in our contracts fuel adjustment clauses. Not surcharges. These are mechanisms that adjust revenue up and down based on the price of fuel. So we're pretty efficient having the market pay for it.

Having said that, there is a lag, because these adjustments are made either monthly or quarterly and depending what fuel is doing within the quarter of the month will determine whether you're ahead or behind.

Todd Maiden with BB&T Capital Markets.

A quick follow-up. You had mentioned guidance of Q4 deliveries, I guess 5 barges and 2 tows and then 2008 of 25 barges and 7 tows, did I hear that correctly?

That's correct. In 2008 - 25 barges with a capacity of 590,000 barrels and 7 - 1800-horsepower tow boats.

Okay. And of that, what is incremental and what is replacement?

It's 1 to 2% incremental in the barges after consideration of the anticipated retirements.

That is a good example of what I'm talking about. A lot of replacement building needs to occur.

Right. Okay and any future plans or talks about I guess expansion beyond your typical waterways, either East or West, has there been any discussion of that?

East or West meaning East Coast or West Coast?

Correct.

Well, the East Coast system is really a de minimis system. You can almost count the number of inland tank barges on one hand. The West Coast, the only really navigable waterway that has any tonnage on it is the Columbia Snake River system. Not saying that we'd never go out there, but you know, that's not really synergistic to our Mississippi River Gulf Coats system. So, you'd have to have a compelling reason to do it.

Natasha Boyden with Cantor Fitzgerald.

Can you give us a quick update on what you're seeing on your refined petroleum side? You know, we've been hearing all sorts of talk about refinery utilizations and that sort of thing. How is that business going?

It's very strong. Gasoline inventories are down almost 14 million barrels over where they were last year. Implied demand is up. Inventories in the Midwest, again, down. It's very strong, Natasha.

Excellent. This is very good to hear. Next, I want to get a quick update on ethanol. I know you said it's not a big part of your fleet and if it ever does become that, it's a long way in the future. Are you seeing any change there or is it sort of -- is interest slacking off?

It may be a little incremental more volume, but again, we put it in the context of the four markets we're in -- chemicals, refined products, black oils and agricultural chemicals. And even the smallest segment is agricultural chemicals and it's a relatively de minimis part of what we do. 4% of what we do is agriculture chemicals and ethanol is less than a percent. So it doesn't mean much right now.

And let me just add that if there's significant amounts of ethanol moved on the river system, we're certainly going to get our share, but as importantly, it's just going to continue to keep pressure on barge utilization.

Alex Brand with Stephens.

This is actually George, calling for Alex. Norman mentioned the debt to capital went from 35% to 31%. I guess can you comment on maybe a target range you'd like to be in and in addition to that kind of maybe give a little color on the acquisition pipeline and what that looks like right now?

Actually, we're below our target range. We are such a steady cash generator that we generate quarter after quarter more cash than we need to put back in our business to maintain our capacity. We've even generated more than maintaining plus our additions of additional capacity. We would feel really comfortable because of our coverage ratios and [stead-ins] that cash flow to be in the mid-40s, frankly. As you know, we are an investment grade rated company and I think the rating agencies would feel comfortable in those areas. So really when we acquire companies our debt to capitalization goes up and then immediately starts coming down again. I'll let Joe address the M&A pipeline.

I mean, acquisitions are just kind of part of our strategy and we are continuing to pursue acquisitions, mindful of how much we pay for them. And I would characterize the pipeline as fairly typical.

Thank you for that. And my follow-up kind of to John's comment about margins being near the high end of the historical range or at least in the past 38 years, it seems like you're incrementally adding more towboats than you are barges, which seems like it would make you more efficient with your fleet. Is there room for that margin to go higher as you add more towboats?

Well, I think it helps, because it allows us to squeeze more capacity out of our existing barge fleet. Which when you add boats you're adding cost too. Just kind of focusing on margins for a minute, what we have historically said and George, you've listened to this when you've been with us, is that we thought that margins could be north of 20%. They are now north of 20%. And what we said last quarter was that if these fundamentals remain in tact, there's no reason why you can't see margins drift into the mid-20s. I think the issue is how long are the fundamentals going to remain there? We certainly don't see anything at the moment that concerns us. But I don't think mid-20 operating margins are -- just given the capital risk, the operating risk, are unreasonable.

Ken Hoexter with Merrill Lynch.

Could you just talk a bit about what kind of rate do you see the overall market growing? I'm just wondering if you're looking to add 1 to 2% net capacity, is that kind of the rate you view the market going at? Do you think you're still focused on maybe increasing share a little bit? Do you let some share leak if the market's going a little bit faster? Thanks.

I wish my answer could be a perfect answer. This is about a GDP growth business and our individual building into the market is designed to kind of maintain our market share. The 2% estimate in 2008 has as much to do with shipyard capacity restrictions and some delays that we've incurred principally in a Gulf Coast yard that we're using that pushed 2007 deliveries out into 2008. But we don't think that -- let me make this point. We think that a good way to get into trouble is adding capacity that goes beyond kind of the growth in the market. Kirby has been very disciplined over the years not to do that. We have been a consolidator, buying capacity. We think that that's a better way to do it. When you aggressively try to gain market share by building capacity, you do so with expensive tonnage and you risk getting ahead of yourself. So, our building programs are going to be modest and typically kind of market share driven -- current market share driven and we're going to look to grow our market share more by acquisition and by capacity additions.

Okay, great. And then I guess just secondly on the rate side, you kind of mentioned contracts were up 8 to 10%, spot up 3 to 4% at the beginning of the call. Can you breakout what percent of the business is contract, what percent is spot? And I think you said you expect spot to increase into the fall. Are you talking about normal seasonal pick ups or are you looking at inventories are a little light right now, you might see them move to pick up some inventories, particularly at some of the oil -- on the oil side?

Ken, what happens in the winter and spring is that we get less efficient, so it takes more barges to move the same amount of cargo. So if you have flat demand or slightly growing demand, you're going to have a tighter market in the late fall through the spring, because you're just not as efficient.

Let's see, the first part of your question was--?

Was on the rates, just the split in contract and spot.

And again, this is probably more than you want to hear. But the opposite happens in the summer. You get more efficient, creating more capacity so you typically see spot rates a little lower in the summer than you do in the fall, winter and early spring.

We said at the beginning of the year that we thought the year would see kind of low single-digit spot rate increases year-over-year and high single-digit contract price increases and the year is pretty much playing out that way.

Okay, so just to conclude then, so it's not because of an inventory increase in demand because of those light inventories, it's just kind of the normal seasonal trend you're talking about?

It is. And if we get inventory on top of that, then it will be a real tight market.

Chaz Jones with Morgan Keegan.

I guess before I start off here, congratulations on a nice quarter. One question here I had was, there's been some discussion out there that some legislation could get passed to maybe make the harbor maintenance tax a little bit more amicable for port movement within the US. I'm just kind of curious, if some legislation does get passed, what type of impact that might have on Osprey and your container on barge business as it relates to import activity?

Chaz, it's certainly not going to hurt it. We're an inland -- principally inland mover of containers. Anything that stimulates that business is good for Osprey.

Okay. And then the follow-up question was just, you've done a lot of acquisitions on the engine services side of the business. Have you taken any steps to consolidate any of those locations or facilities out there?

We have. We have consolidated several of the global facilities and we're working on marine engine specialists. But yes, we're looking at how -- if we have duplicate facilities, how we can merge them so that they're more efficient.

Daniel Burke with Johnson & Rice.

Just a couple of specific questions left. First of all, following up on questions knowing that inventory levels have been in decline, I was wondering, it looks as though propane and propylene inventories from the Gulf Coast are at sort of 5-year lows right now and we wonder what impact that had, if any, on your pressure barge segment? I know there's a pretty typical seasonal trend to inventories in that segment, but didn't know if there was anything you could give us there.

Well, it will just continue to keep pressure on that market. Now remember, a lot of that is moved by pipeline. But you know, we get our share.

So maybe to generalize it and to back up, a destocking trend, whether it's fuel, oil or refined products, propanes, propylene, is generally one that you regard as a positive, Joe, for future business trends?

No. I would say low inventories, we regard as positive. Destocking actually reduces the amount of transportation. So short-term it can be a negative. But we'd much rather see lower inventories than higher inventories, because it reduces the risk of that destocking.

Okay, that's fair. And then to follow-up a question on the diesel services business, Global Power, I'm curious if you could address the performance there. My understanding is it's sort of a Gulf Coast focused business. It seems like Gulf of Mexico oil and gas related activity levels have been dipping lately. I was wondering if you could give us an update on trends at that business a little more specifically?

Sure. Well firstly, it's performing maybe a little better than expectations. Yes, it has a heavy exposure to the oil service business, but when we bought Global it was our intention to diversify it so that we could provide the high-speed engine service to customers that were already performing medium-speed engine service with. And that's happened.

We also diversified it with respect to acquisitions, the Saunders and Marine Engine Specialist acquisitions were principally transportation marine focused acquisitions. We are mindful that the Gulf of Mexico was slower in the summer. Now some of that, we think -- and you're closer to this than we are -- we think is going to improve this fall. Apparently some service companies deactivated equipment in the face of potential storms and are now reactivating it. There has been a migration of drilling out of the Gulf and the boats that service that drilling equipment follow the equipment and we follow the boats. So, we're able to continue to maintain that equipment, even when it's not there. This is a long answer.

And finally, we're encouraged by the recent lease sales in the Gulf. They were brisk, they were significant and over half of them were on the Shelf, which we think bodes well for equipment actually coming back into the Gulf, which is positive for that business.

(OPERATOR INSTRUCTIONS) David Yuschak with SMH Capital.

Dow Chemicals' CEO was on CNBC this morning indicating he's beginning to see some headwinds in North America. I was just kind of wondering, you know, his comments versus what you'd said earlier, Joe, where you thought that none of your customers were seeing that. I'm just wondering if maybe he's kind of suggesting maybe it's more end markets than what you guys are seeing in the way of activity, because Dow is a customer of yours?

Yes, David. I think all you've got to do is read the press and come up with headwinds in North America. And as I've said in previous conferences or teleconferences, that we think that volumes actually can slow down a little bit, we're going to be okay because of the supply and demand dynamic in our business. But you know, for what we see in talking to customers including Dow, with respect to their volumes, they're indicating that they think their volumes are going to be fine.

Now of course I didn't listen to the interview, but in their press release, which we did read, they were reasonably positive with respects to volumes in North America. Where they were negative was in the margin area because of the high price of crude oil and to a lesser extent, natural gas. So he may have been talking a little bit about that too.

I think too, if I was to characterize what he said, I think he's hinting that it could be there, but I don't think he's suggesting yet that it's anything other than maybe just making an early observation is kind of what I was coming away from it. That's why I was kind of curious since Dow is one of your customers, is it more maybe an end market that he's looking at versus -- might be about second level derivatives and stuff.

Their end markets are down. As you get it closer to the market where they call performance chemicals that are resins and things like that, are down. That's more driven by housing and that kind of thing. But we're not seeing it. And the other thing that you're seeing in this country is new exports, which is also positive.

That's kind of interesting to see an export, because three years ago we talked about how the chemical industry on the Gulf Coast was going to go away because a cheap dollar can change that.

Well, the chemical business in the United States is never going to go away. That's a debate for another day, but I certainly don't want that hanging out there.

No, that's for sure. That was an argument made and lost a few years ago. One other question, as I look at your capital structure, because it does look like you maybe paid down upwards of $15 million maybe Norman, in the quarter on your debt?

Yes.

If you just do some reasonable back of the envelope types of assumptions for next year, you guys could come in with no acquisitions and decent capital spending budgets for next year and year-end you could be looking at a 20% debt to capital ratio, which is below what you bottomed at this last cycle about 26% before business began to get better. 20% would be kind of, I would think, below your comfort level, wouldn't it, as far as debt to capital and does that maybe suggest that if there is nothing in the way of acquisitions out there that share buybacks become more relevant just because maybe acquisitions are maybe a little more expensive? Because again, that debt to capital ratio, to you guys I think would be extraordinarily low.

Well, it's not that we haven't been doing anything. Let's see, in the last 18 months, what are the acquisitions? A couple hundred million. As I indicated earlier, we think that the acquisition pipeline is still there. Share repurchases are always an option. As you know, David, since 1995 we bought 20 million shares back in. And we think that that's a good use of capital, but we're still encouraged by the acquisition pipeline. Our debt to total capital was up, what a little north of 35%.

About 25 I think is where it bottomed.

It's a tribute to just strong cash flow that gets it back down in the low 30s.

That's why I would think at 20% you wouldn't want to probably go there. You'd have to assume you're going to be doing something with the cash.

Right.

Anja Soderstrom with Maxim Group.

You were talking about your acquisition strategy before and we are wondering what potential opportunities you see in the secondhand market on barges?

Well, I think buying individual barges is going to be difficult. This business is different than the Deep Sea business, which my guess is you're more familiar with. Most of the acquisitions that we've made are businesses, you know, barge companies that have fleets that we've bought. And over the years we've bought a number of them. I think that we're now on our 28th inland tank barge acquisition. We continue to look for fleets that are for sale and there are some out there. The issue is more pricing, you know, how much you pay does make a difference.

Thank you for that. And also, could you give me some color on your seasonal challenges going into the fourth quarter?

The seasonal challenges? Yes, the principle challenge in this kind of business is weather and water levels. Certainly in our fourth quarter guidance we've put typical weather conditions and water level conditions into that guidance.

Fog.

Yes, fog is the other. That's part of weather. So, first quarter we'll do the same as we forecast our performance in the first quarter, which we're not going to talk about until January. We'll put what we think will be typical operating conditions into that forecast.

There are no further questions at this time.

Thank you for participating in our call and your interest in Kirby Corporation. If you have any additional questions or comments, please give me a call. My name is Steve Holcomb and my direct dial number is 713-435-1135. And we wish you a good day.

That concludes today's conference call. You may now disconnect.