Kirby Corp (KEX) 2015 Q3 法說會逐字稿

Welcome to the Kirby Corporation's 2015 third quarter earnings conference call. My name is Eric, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Sterling Adlakha. Sterling, you may begin.

Thank you Eric. And thanks everyone who is on the call for joining us this morning. With me today are Joe Pyne, Kirby's Chairman, David Grzebinski, Kirby's President and Chief Executive Officer, and Andy Smith, Kirby's 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 the 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 SEC under Financial Highlights. 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 Form 10-K for the year-ended December 31st, 2014 filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you Sterling. Good morning. Yesterday afternoon we announced third quarter earnings of $1.04 per share. Near the middle of our $0.95 to $1.10 per share guidance range. That compares with $1.34 per share reported for the 2014 third quarter. During the 2015 third quarter our Marine Transportation tank barge fleet continued to experience high equipment utilization levels, despite an industry-wide decline in the transportation of crude oil. In the inland Marine market utilization remained at the 90% to 95% level. We experienced strong customer demand particularly for the transportation of petrochemicals and refined products. Crude oil barges continue to be cleaned out of crude oil bottoms, but we believe this trend is beginning to bottom out. However, the availability of these barges in the marketplace continued to have some negative effect on contract renewal pricing.

On the coastal side of our business utilization also remained in the 90% to 95% range, and contract renewal prices continued to increase. As expected we had a significant number of vessels in the ship yard during the quarter, which impacted both revenue and earnings. On a year-over-year basis our diesel engine service segment remained under pressure. In our land-based division, we continue to work through a very challenging environment. In the Marine and Power generation business, that's our legacy business, it continues to perform well, except for that part that services the Gulf of Mexico oil service market.

Before turning the call over let me take a moment to recognize our newest Board Member, Anne-Marie Ainsworth. Anne-Marie brings a wealth of experience an knowledge about national and global supply chain logistics, safety management, and extensive leadership experience in the midstream and downstream energy business. The Kirby Management team looks forward to working with Anne-Marie, as we leverage her knowledge to continue to grow and create shareholder value. I will now turn the call over to David.

Alright. Thank you Joe, and good morning. I'll hit some key points in the quarter, turn it over to Andy for some detail, and then.com back for an outlook. In the Marine Transportation segment our inland Marine barge demand remains in the 90% to 95% range. Long-term inland Marine Transportation contracts, those contracts with a term of one year or longer in duration, contributed about 80% of revenue for the 2015 third quarter, with 55% attributable to time charters, and 45% contracts of affreightment. Pricing on the inland Marine Transportation term contracts that renewed during the third quarter was down in the low to mid-single-digits.

Our spot contract rates remained at or above term rates. However, the spot market is dynamic, so we see on occasion our competition offering equipment below our term rates. Unique to Kirby most of our spot opportunities are with existing term customers. In our coastal Marine Transportation sector, demand for the coast-wide transportation of refined products, black oil, and petrochemicals remained consistent with the first half of the year. However, we have seen some increase in our spot exposure, which we attribute to increased uncertainty in the market by our customers, driven by uncertainty around crude oil supplies.

During the third quarter approximately 80% of coastal revenues were under term contracts. Kirby's coastal equipment utilization remained in the 90% to 95% range. With respect to coastal marine transportation pricing, term contracts that renewed during the quarter increased in the low to mid-single-digit percent range. In our Diesel Engine Services segment, our Marine diesel and power generation markets experienced stable demand in most regions of the country, except for the Gulf of Mexico oil service business, where services for supply vessels and offshore rigs declined.

Our land-based Diesel Engine Services market remains challenging. Demand for service parts and distribution has remained relatively consistent with levels experienced in the 2015 second quarter, but there remains little demand for new manufacturing of pressure pumping equipment. We will continue to aggressively address costs in this business. During the 2015 third quarter we continued to execute on our share repurchase authorization, buying approximately 892,000 shares for $63 million, or an average share price of $70.97.

Subsequent to the end of the quarter through this past Tuesday, we repurchased approximately an additional 292,000 shares at an average price of 64.62. October's purchases brought total repurchases for the year to over 2.9 million shares, or approximately 5% of shares outstanding. Currently our unused repurchase authorization is 1.8 million shares. I will now turn the call over to Andy to provide some detailed financial information. And again I will come back and discuss the outlook.

Thank you David, and good morning. In the 2015 third quarter Marine Transportation segment revenue declined 7%, and operating income declined 16% as compared with the 2014 third quarter. The decline in revenue in the third quarter as compared to the prior year was primarily due to a 38% decline in the average cost of Marine diesel fuel, as well as some impact from inland contracts renewed at lower rates throughout the year. The Marine Transportation segment's operating margin was 22.4%, compared with 25% for the 2014 third quarter. The inland sector contributed approximately 70% of Marine Transportation revenue, with the coastal sector contributing 30%.

Inland Marine weather was seasonally normal but operating conditions were challenging, due to high water early in the quarter, and scheduled lock closures along the Gulf Intercoastal Waterway, which contributed to a 40% year-over-year increase in delay days, and a decline in ton miles. Despite these challenges and the pricing pressures that Joe and David mentioned, the Inland sector generated an operating margin in the mid-to-high 20% range for the quarter. The third quarter results for inland marine also reflected the anticipated year-over-year negative impact of $0.03 per share for higher pension expense, reflecting actuarial changes to mortality tables, and a lower discount rate.

In the Coastal sector we experienced heavy shipyard activity in the third quarter, as anticipated and mentioned on our July conference call. With the 38% decline in fuel prices and a number of vessels in the shipyard, revenue in the coastal sector declined both year-over-year and sequentially. Pricing on contracts renewing during the quarter continued to improve as David mentioned. Additionally we shortened the depreciable lives of some assets in our coastal fleet, which were coming up for ship yards in 2016 and the estimated cost of extending their lives did not make sense. This resulted in a combined $3.5 million increase in depreciation expense and dry dock amortization for the quarter.

This change plus higher maintenance expense during the quarter in addition to ongoing impacts from higher wages, depreciation and deferred dry dock amortization, led to a year-over-year decline in the coastal sector operating margin, which was in the low double-digits. Without the additional depreciation and deferred dry dock amortization expense mentioned above, the margin would have been in the mid-teens. During the 2015 first nine months we took delivery of 35 new tank barges, and when combined with the six pressure barges purchased in the first quarter, increased capacity by approximately 560,000 barrels. The number of barges we retired including returned charter barges totalled 25, removing approximately 370,000 barrels of capacity. We also transferred one coastal 30,000-barrel tank barge that was working inland back into the coastal fleet. The net result was an addition of 15 tank barges to our inland tank barge fleet, and approximately 160,000 barrels of additional capacity. In the 2015 fourth quarter, we expect to take delivery of three 30,000-barrel tank barges, with a total capacity of approximately 90,000 barrels. Combining these additions with our current plan of 7 retirements in the fourth quarter, will result in an approximate capacity at year end of 17.9 million barrels, a reduction of 70,000 barrels from our current capacity.

In the coastalized transportation sector, construction of our four coastal articulated tank barge and tugboat units continued to progress, with the first unit, a 185,000 barrel 10,000-horsepower ATB, expected to be delivered and in service later this year. Our second new offshore vessel also a 185,000-barrel ATB is likely to deliver in mid-2016. We continue to expect delivery of the third and fourth vessels, both 155,000-barrel ATBs in late 2016 and mid-2017 respectively. In our press release last night, we also announced shipyard contracts to build two 4,900-horsepower coastal tug boats and a new 35,000 barrel offshore chemical tank barge. The new offshore chemical barge will enter service under long-term contracts with an existing customer upon delivery, which is expected in early 2017.

Moving on to our Diesel Engine Services segment, revenue for the 2015 third quarter declined 51%, and operating income decreased 72% compared with the 2014 third quarter. The segment's operating margin was 4.9%, compared with 8.6% for the 2014 third quarter. The Marine and Power generation operations contributed approximately 40% of the Diesel Engine Services revenue in the third quarter, with an operating margin in the low to mid double-digits. The operating margin was impacted by approximately $700,000 of severance expense in cured in the third quarter, as we continue to address cost across our whole organization as appropriate.

Our land-based operations contributed approximately 60% of the Diesel Engine Services segment's revenue in the third quarter, with breakeven operating income. During the 2015 third quarter Kirby signed an asset purchase agreement to sell United engine's compression. The transaction is expected to close in the 2015 fourth quarter, and based on the structure of the agreement and current levels of working capital, the sales price is expected to be approximately equal to the book value of the net assets sold.

On say corporate side of things our cash flow remained strong during the quarter, which helped fund our Marine construction plans, and $63 million of treasury stock purchases in the quarter. Subsequent to the quarter we purchased an additional 292,000 shares for $18.9 million. Any future decision to repurchase stock will be based on a number of factors, including the stock price, our long-term earnings and cash flow forecasts, as well as alternative opportunities available to deploy capital, including acquisitions.

We have raised our 2015 capital spending guidance slightly to a range of $320 million to $330 million, including approximately $70 million for the construction of 38 inland tank barges and for inland tugboats expected to be delivered in 2015, and approximately $100 million in progress payments on the construction of the new coastal equipment. The balance of $150 million to $160 million is primarily for capital upgrades, and improvements to existing inland and coastal marine equipment and facilities, as well as Diesel Engine Services facilities.

Total debt as of September 30th stood at $810 million, a $2 million increase from June 30th of this year, and a $93 million increase from our total debt of $717 million at December 31st, 2014. The increased debt since year-end 2014 was primarily due to the acquisition of the six pressure barges in the 2015 first quarter, and Treasury stock purchases during the first nine months of the year. As of today our debt stands at $819 million. Our debt-to-cap ratio at September 30, 2015 was 26.4%, compared with 24% as of December 31st, 2014. I will now turn the call back over to Dave.

Okay. Thank you, Andy. In our press release last night we announced our 2015 fourth quarter guidance of $0.93 to $1.03 per share, and for the 2015 full year guidance of $4.10 to $4.20 per share. With respect to the inland transportation market, our fourth quarter guidance reflects an assumption that there could be continued modest pricing pressure in our inland marine transportation market. We are assuming normal seasonal weather patterns for the remainder of the quarter, and utilization that remains in the 90% to 95% range. In the coastal market the difficulty in permitting terminals on the West Coast to get crude to water, coupled with the length and magnitude of the decline in crude prices, has injected some uncertainty in the coastal marketplace. This has resulted in some reluctance among certain customers to extend term contracts.

This uncertainty will likely lead to an increase in the number of coastal vessels operating in the spot market. While a further impact from lower crude prices is possible, the coastal refining complex across the country continues to show strong demand for crude by water. Further, demand for refined products, the sector's biggest product trade, continues to be strong, and should continue as we go into the heating oil season along with the East Coast. Also, Kirby has the largest fleet of asphalt equipment, and given the low price of crude oil combined with additional infrastructure spending, we are seeing signs of an increase in asphalt demand. So for the fourth quarter, we believe our utilization will continue to be in the 90% to 95% range.

For our diesel essential services segment in our land-based sector we expect the market to remain extremely challenged for the remainder of the year. Additionally capital spending levels of many of our customers have been even further constrained from earlier this year, and the low end of our guidance contemplates a more material operating loss in the land based portion of this business in the fourth quarter. In our Marine diesel and power generation markets, we continue to expect this business to perform similar to the second and third quarters, although we expect revenue and profit to be down slightly, due to weakness in the Gulf of Mexico oilfield services market. We also expect that earnings from these markets in the fourth quarter will be sequentially weaker due to normal seasonality.

Before we turn the call over to questions, let me also briefly address the outlook for Kirby beyond this year. We are currently in the process of preparing our budget and will provide 2016 guidance during our fourth quarter earnings call in January. As you know, a lot can change in the next few months, and so it's still too early to provide earnings guidance for next year. That said 2016 will be challenging. We believe utilization for inland equipment should remain in the 90% to 95% range, but pricing will likely continue to reflect the uncertainty in the market, principally driven by lower crude oil volumes.

With lower domestic production of crude oil particularly in the Eagle Ford and Utica shale basins, we are seeing a continued decline in inland barges carrying crude oil. However, we currently estimate that the industry has somewhere between 250 to 300 barges actively moving crude oil today. This is a significant decline from an estimated 550 barges at the peak of crude oil barge activity. Consequently we expect the pressure on inland pricing to begin to subside in the short to medium term, as the number of crude barges in service continues to decline to a less significant number, and new refined products black oil and chemical volumes continue to grow.

On the coastal side we believe utilization should remain above 90%, but the coastal term to spot ratio to decline. This is as shippers become a little more comfortable that their volumes can be handled with the existing fleet. Consequently pricing on contract renewals may increase at a slower rate. The potential slowing in coastal pricing, and the change in spot term mix, would make maintaining older equipment more difficult for the industry, and should result in the retirement of older vessels in the industry fleet. We do expect a number of other positives to develop next year. We intend to have new customer contracted coastal 185,000-barrel ATBs in operation. One by the end of this year and the other mid-2016. Both of these barges will provide incremental earnings to our coastal business.

Additionally, as the old field service industry continues to defer maintenance on the industry-wide pressure pumping feed, a backlog of needed repairs and/or replacements will continue to build. As such, we could potentially see some improvement in our land based diesel engine business in 2016. Despite this period of uncertainty, our cash flow has remained, and should continue to be quite strong. We continue to invest in maintaining our inland and coastal equipment, and will continue to look for attractive opportunities to invest capital, whether in our own facilities, through potential acquisitions, or through share repurchases. Operator, that concludes our prepared remarks. We are now ready to take questions.

Thank you. (Operator Instructions). And our first question comes from John Barnes from RBC Capital Market. John, please go ahead.

Hey. Thank you. Good morning, guys. Thanks for taking my question. First, Dave, around your comments concerning, and maybe this goes to Joe as well. Joe, you made the comment at the very beginning that you felt like you were beginning to see the bottom, in terms of the number of vessels I guess converting from crude service. And Dave, I understand where you're coming from in just the sheer number of vessels has declined, but it still seams like 250 to 300 is a pretty fair number. Number one, why do you think we're seeing the bottom there? Why wouldn't the remainder of those convert, and number two, if they do, does that make your guidance around pricing too conservative, and could it be than what you're looking for?

Yes, John. They may well come out of crude service, but the industry is absorbing them, and we're still very utilized across the industry. So it's just becoming a smaller and smaller number, so that overhang will dissipate, if you will, and confidence in the market and the utilization will continue to increase, which should make this bottom in pricing start to turn. The timing is the question, but clearly it's the number of barges in crude service has gotten smaller and smaller, and clearly the industry is absorbing it, because our utilization across-the-board is pretty strong still.

Okay. And David let me just add, that you have followed us for a number of years and know that we were always a little careful with respect to the proliferation of crude oil, because it's a movement that is fungible, and it's high volume, and it fits very well in pipelines. Having said that, there are areas that barging in fact does play a role, either pipelines aren't there, or the type of crude oil or condensate is not as fungible as it is in other places. So there's always going to be a need for inland and coastal barging of crude oil, but it is going to be capped. It's not going to be this optimistic scenario, which we never believed, that produced almost 600 barges in the trade.

Okay. Alright. Alright. That makes sense. And then just your outlook on the coastal side. And I get where you're coming from, in terms of maybe the change in mix between spot and contract, but number one, your comment about, maybe it becomes a little bit more difficult to leave older equipment out there. Can you remind us, your estimate as to what percent of the fleet would be classified as old enough to potentially be up for retirement now? And then number two, is there any risk to the ATB contracts you have in place now, given this change in customer behavior, or does it put any additional pressure on the ability to get contracts for the other two ATBs, where I think you don't have an agreement in place now? Thanks.

Yes. John, let me answer that in two parts here. Right now we believe the industry fleet has about 47, maybe 45 to 47 ATBs or wire barges that are older than 30 years, and that's pretty old. That's on a base of 260 approximately, now I'm talking barges less than 200,000 barrels. So that's a pretty big number in terms of percentage, about 20%, just less than 20% of the fleet that should retire, and that's actually helped pricing, and should help pricing over time as that equipment comes out. The crude offshore is interesting, because there are still a lot of movements out there, and I think there would be more if you could for example on the West Coast get some of these terminals that our customers would like to get built, to move crude to the coast, and then move it to their refineries. So it's relatively positive from that perspective, and the refineries continue to run very heavily.

With respect to our ATB contracts, we do have the two 185s there contracted for multi years, and they will be coming out as I said in late 2015 and mid-2016. The two 155s are not contracted, but we are in active discussions with customers, and that's proceeding forward. Clearly the customer base does like newer equipment. I mean if you have got to choose between older equipment and newer equipment, they gravitate towards the newer equipment for obvious reasons, so that kind of circles back to the first point, is that these 47 older barges, or 45 to 47 older barges will get displaced ultimately.

And our next question comes for Jon Chappell from Evercore ISI. Jon, please go ahead.

Thank you. Good morning, guys.

Good morning, Jon.

David, thanks for the first glimpse at 2016 to the extent that you could. I think that's very important. Along those lines and one difference I noticed between last quarter and this quarter, was last quarter you had mentioned that spot pricing in the inland barge business was above term. This quarter it seems likes there are almost at parity. So from your experience, when you get that almost parity now between spot and time charter or term, what does that kind of foreshadow going forward, as far as like the magnitude or duration of any softness in pricing? Does the spot need to get significantly below term to have that catch up, or once you get to parity, does that kind of indicate you're getting close to bottoming in terminals?

Yes. I think it's probably closer to the latter, but it has been bouncing around. We have seen spot prices above our term contract rates, but we have seen some of our competitors dip down, and take spot moves below our term contract rate. So I think that's all a function of absorbing kind of these returned crude oil toes, so is it maybe too soon to call a bottom here, but at some point things start to look a little more positive.

Okay. And the same type of themes seem to be developing on the coastal side as well, talk about crude and uncertainties things we have been talking about for the last 12 months in inland. Is there any way to kind of gauge what percentage of the fleet, of the coastal fleet is in crude, and then could potentially move over to, get cleaned up and move over to the refined product business? And maybe just compare those two businesses October 2014 with inland with October 2015 coastal and what that may indicate as far as pricing there?

Yes. On the coastal side, we estimate about 5% to 6% of the coastal feed is moving crude now. So it's a relatively low number. We have seen refined products moves pick up, as refinery utilization has ramped up and they have done expansions. You can see it in vehicle miles driven, and kind of the light vehicle sales numbers, the lower crude prices reflected in lower gasoline prices is driving the demand. So as some of the crude moves coast-wise have tapered off, the refined products have picked up. Again, our estimate is that the coastwise fleet, again, this is our below 200,000 barrels. We think it's around 6% of the fleet. So it's not that meaningful. It still can have an impact. I will circle back to a comment I made earlier, though, is if on the West Coast, for example, if you could get some of these terminals in place, there would be more crude moves out there. So the refineries like the crude and want it, so it's a little different dynamic than on the inland side, where pipelines have taken some of the crude moves away.

And our next question comes from Jack Atkins from Stephens. Jack, please go ahead.

Good morning guys. Thanks for the time.

Morning, Jack.

So David, I really appreciate your commentary around the 2016 outlook initially but when we there I about the various puts and takes in your business, and you guys clearly know what those are heading into next year, the additional coastal barges coming in, and all that sort of stuff, when we think about directionality, and I understand you don't want to give guidance and for 2016, I'm not asking for that. But do you think that earnings next year will be up versus 2015? Just trying to understand, are we looking at an up year or down year next year?

Yes. Jack, we're just not ready to declare that. There are too many moving pieces around, and we're just not prepared to opine on that yet.

Okay. I understand, David. And then when we think about your core chemical business, that's held up very well along with the refining market over the course of the last 12 months. But we continue to here negative data points around the industrial economy, and the economy in general. Can you maybe talk about what's driving the strength in that chemical market, and I guess as you look out in the second half of 2016, do you feel like you will start seeing those incremental volumes come on from all of this CapEx we're seeing invested in the space?

Well, I think what's really driving the petrochemical business is the low cost feedstock position. Ethane is still advantaged, we've had propane actually come in and out of advantage for the chemical group. So that feedstock advantage is, it really puts the US chemical business in a globally competitive position, and we have seen our chemical customers work on incremental capacity increases, there are as you know, over $100 billion in projects along the Gulf Coast, that are well under the way. We have a list of all of the ones that have started construction. I would say a good portion, a good 70% of them are permitted and under construction. So those chemical plants will come along in the next maybe two to four years, various stages. So that's what it it's about. It's really about that incremental capacity coming on from our chemical customers, because they are feedstock advantaged here in the United States.

Our next question comes from Doug Mavrinac from Jefferies. Doug, please go ahead.

Thank you, Operator. Good morning guys. I just will a couple of questions also on the market. First, David, as it pertains to the idea that the inland market for barges moving oil may be bottoming. Can you relay to us, or remind us kind of how many barges were operating in the crude oil market say four or five years ago, before this big surge in US production even occurred? Because the US production story hasn't rolled over that dramatically, but it seems like a lot of barges have been taken out. So I'm just trying to get a sense for how many barges were operating in the oil market before the boom even occurred, and how do we compare to that right now?

Yes. No. Five years, six years ago there were probably very, very few barges, if any, it may have been closer to zero. There was some heavy Canadian crude moves off and on. And that, as you heard Joe's comment earlier, that was one of the reasons we kind of shied away from it, because we viewed crude as best moved in the pipeline. So as all of these shales plays came up, they couldn't get it into pipeline, because the pipelines didn't exist, so there was a big ramp-up, and then consequently pipelines did come on. The Seaway Twin and the Flanagan South, and that's taken the volume down, and now we have got production declines as well, but there are places like the Utica, where it's going to be very difficult to get pipelines out of the Utica down to the Gulf Coast. So those there actually may be kind of a floor here, where there will continue to be the need for barges on the inland side to move crude and condensate. Just because logistically you can't get pipelines everywhere.

Right. See, that's kind of what I'm thinking is you do have a base of production that exists today that you may not go back to where you were, but you're going to be higher than you were, so therefore you needs an increased level over what you had back then. So that's helpful and then just my follow-up. As it pertains to kind of the current market obviously you guys are very busy both inland, coastal, utilization levels north of 90%, and so clearly, sentiment is weighing on the pricing, especially on the inland. At what point does the sentiment start to look at 2017, and start saying look, this is what is coming on the petchem side, so all of the uncertainties, all of the concerns, all of my ability to kind of press pricing to the downside has kind of run its course, and now maybe, sentiment starts to change. So from your experience, about how far in advance of the actual volumes hitting do you start seeing that shift in sentiment? Especially given that, the underlying fundamental utilization levels are still very, very strong?

Yes. I mean you hit it on the key point here is the shippers and the competitors have to have confidence that it's kind of stabilized, and demand is going to continue it to be such that things will be tight. It's kind of that forward view. I don't know if there's any good rule of thumb as to timing. Once the confidence starts to emerge, or the concern on the shippers side that maybe there won't be some spot availability, the better term up is when prices do start to move, and in terms of a key time frame boy, that's hard to predict, but you can see it happening. If these returned crude barges keep getting thinner and thinner, and there are fewer and fewer of them, and not all of them go out, but demand for the other products that we move and our competitors move, at some point there will be a concern that the equipment is not going to be available, and people will start to want to term up, and that's when you get that confidence, that's when you're going to start seeing the prices. Sorry I can't predict that. I wish we could. That would make our lives a little easier, but it's starting to feel better in that regard. Joe, is there anything you would add to that?

I think that's right. I mean yes, it's a bit of an anomaly to have utilization rates above 90% and not have pricing power, and the reason that you don't is a lack of confidence within the industry, that those utilization levels are going to be sustainable, but also I think that the Kirby utilization levels are probably above at least some of the operators out there, so they have more availability. I think that once the confidence levels shift to the point that when I have a spot piece of equipment I can book it, and I don't have to worry about it being idle for a period of time, then you will get the sentiment to move prices back to higher levels. I sense that as the shift out of crude oil in the inland sector begins to taper off, we're sensing it's beginning to taper off, you're going to begin to get more confidence in the market, and more confidence that pricing is going to be, going to stabilizes you likewise and you're going to see some pressure to increase rates. That hasn't happened yet, but I think that we're kind of bumping along the bottom, and when that happens, then I think everybody will feel better.

And our next question comes from Kevin Sterling from BB&T Capital Markets. Kevin, please go ahead.

Good morning, guys. It's actually William Horner on for Kevin.

Hi William.

David, thanks for taking my questions. I want to kind of stick on the coastal comments for a second here ,and with the shift in spot capacity. Obviously it's been a little more insulated as a result of the capacity constraints. So trying to gets a handle on when did you see start seeing some of these ATBs looking for a home? Was it relatively a steady shift through Q3, or have we seen an acceleration in capacity in recent weeks?

I think it's been fairly steady here through the quarter, and I guess the shippers are just getting a little more confident that there's going to be some availability, but it's still a pretty tight market there. I mean you saw we had price increases in the quarter.

Right. Absolutely. And just I guess sticking with the uncertainty in the market, you highlighted in your comments, the West Coast and terminal permitting issues with regards to that longer-term confidence, but were there any markets in particular where you saw some of these capacity shifts in the near-term? Was it the Gulf or the Northeast or--?

Yes. Mostly the Gulf, William. There are some barges that were kind of taken out of crude services and post wise barges taken out of crude service. Given some of the production declines, and then some newer MR equipment being available, and absorbing some of that, but again, less than, or around 6% of the, what we consider our market, the 200,000 and below is in crude. So it's not quite the overhang that you saw in the inland side.

And our next question comes interest Kelly Dougherty from Macquarie. Kelly, please go ahead.

Hi guys. Thanks for the questions. Just sticking on coastal can you talk to us about some of the similarities and differences between coastal and inland? I guess what I'm trying to get at, is there anything different structurally or customer-wise, from a capacity perspective, anything like that, that would give us comfort that what we saw in the inland market isn't going to manifest itself in coastal as well? And then follow-up to that, what percentage of your coastal business is up for renewal in 2016, that you might think could switch over into spot versus term?

Yes. Kelly, I mean it is different than the inland. First of all, the equipment is just not as fungible, right? In the inland crude trade, it was almost all 30,000-barrel barges, all fairly similar, reasonably cheap to clean them out. In the coastwise business, the 260 barges in less than 200,000 barrels, they range anywhere from 30,000 barrels up to 200,000 barrels, and so it's a mixture they're not as fungible. Certainly, the clean out cost just given the size is much more significant. So that fungibility makes a difference, and the other thing is, there are just fewer competitors, right? You have seen in our IR material we have 40-plus competitors on the inland side, and some of them jumped into crude, and then when you look at the coastwise side, it's 15 competitors. So it's a little more concentrated market. That helps. There's a little more discipline, and you haven't seen kind of the irrational behavior that you saw in the inland building side there. It's a little more disciplined. Frankly, it's because the equipment is a lot more expensive, and the quantities are bigger, and it is just a tougher business.

That's helpful. And then am I correct in thinking that there were no or very few multi-year contract renewals this year, and is it fair to assume that the majority of them renew in 2016, I'm talking on the inland side now, and if so, shouldn't that be beneficial from a pricing perspective, because I imagine there are some non-pricing benefits that you guys bring to the table for some of these larger customers?

Yes. Hey Kelly. This is Andy. We had a typically normal year for us. Obviously all of our spot contract has pricing exposure, but of our 80% of our term contracts, about half of that renews every year, and about, of the remaining half about a third of that renews every third year. And that's typical. That's about what we'll see next year.

And our next question comes from Steve Sherowski from Goldman Sachs. Steve, please go ahead.

Hi. Good morning. I think you said earlier that of the 250 to 300 inland barges that are currently in crude service, they're primarily servicing either Utica or Eagle Ford crude, is that true? And if it is, can you just break out the percentage of what's in Eagle Ford versus Utica?

Yes. Yes. Eagle Ford also includes Permian. It's really the Gulf Coast move, right? Where you load perhaps in Corpus Christi, and then take it up to Houston or Port Arthur on the Intercoastal Waterway. So it's not just Eagle Ford. Some of the Permian comes by pipeline to Corpus Christi. And then the Utica, of course Utica and Marcellus is the condensate that's up in the West Virginia and Ohio areas that comes down the river. I don't know the rough split. I would say, maybe 50/50, but I don't have a good number on that.

Fair enough. And do you have any updates on just reviews on crude oil exports, and how that could impact I guess both coastal or inland businesses?

I'm sorry. Can you repeat the question?

Just the potential for crude oil exports. Do you have an updated view, just given the fact that it's been in the press with increasing frequency recently, you have the exports to Mexico or at least swaps to Mexico out. Any updated views on just how this could potentially impact your inland or coastal businesses, if the ban is ever lifted?

Yes. Well, first let me comment on whether the ban gets lifted. Getting it did pass the House, the Senate hasn't really done anything with it yet, but I think the administration, the current administration has been pretty clear that they would veto it, so I think before you get crude exports, it would probably take a change in the administration. That said we don't know if it's going to be positive or negative. There are factors that could be positive and factors that could be negative on crude oil exports. Let me just run through a couple of them real quick.

If you had crude oil exports there's a case that the WTI Brent spread would collapse, and you would trade at parity, and that may cause some of the moves to the East Coast to change. They would probably import more Brent. I think we're seeing some of that now, but we still get coastal moves with imported Brent on the East Coast, because it usually comes in the tanker and then lightered by barges, but it could move some things around. I think on the Gulf Coast one of the potentials is you would export the light crude, and import heavy crude to the Gulf Coast refinery. You will recall that the Gulf Coast refineries are set up to crack the heavier crude. That could be a negative in that you're not moving as much light WTI around on the Gulf Coast, but then again it could be a positive, because the heavier feedstock slate would have more by-products, which would likely result in some additionally moves.

And then I guess the final factor would be hey, just that more volume on the system across the system, there would just be more liquids on the system, because even if it went for export, it may come into a terminal, we may get a chance to touch it before it goes for export. Just more liquids on the water would be a potential. So it's a mixed bag. We're not sure if it would be a net positive or a net negative on crude exports, but we'll see. We'll see. I don't think in the near-term that it will happen, but if it does, we're not exactly sure that it will be positive or negative.

Okay. Alright. Thank you.

Thanks, Steve.

And our next question comes from John Mims from FBR Capital Markets. John, please go ahead.

Alright. Thank you, good morning everybody.

Morning, John.

Good morning. So Dave, led me ask you on the inland side do you have a sense, and I appreciate your utilization is looking to stay in the 90s an I understands there maybe some crude conversions that slide into non-crude service, but outside of that do you have an industry utilization number? I'm thinking about is there a shadow barge fleet that's tied up right now, and that when things start to improve you could have that kind of leak out and push the pricing recovery out farther than people may expect?

Yes. We don't have good numbers there. We just kind of know a little bit about what's out there, but we don't have good insight to all of our competitors' fleets. As Joe said, their utilization may be a little bit lower than ours, but I don't know how material it is. We don't have perfect information there, John. But our guess is industry may be slightly lower than Kirby's.

Right. During the last big downturn it dropped down to and 80, or did it break below 80?

I think it was around 80. There may have been a period where it dropped below, but I think it was around 80.

Yes. It was slightly lower than 80, David. I think the lowest it got was 78% for a very short period of time in early 2009.

Alright. Thank you. That's helpful. And then let me ask you on the M&A front, so the beginning of the month American Commercial Lines announced that they bought AEP, and there's some liquid, it's mainly dry barges there, but still a big acquisition, platinum kind of sort of doubling down on the industry. So a few questions there. One, you're thoughts on industry valuations, if things are coming more in line as to where you would be more active, if there has been any material change there? Two, with these two, there are two big barge lines combining is there any anticipated change in the competitive environment from what you see? And then three, do you have any updated thoughts on the potential to diversify into the dry side, especially if we have got a few years of, potentially of prices kind of flat to maybe down on the liquid side? Does diversifying into that dry side to compete more with ACL and others make more sense here?

Yes. Let me take them one at a time. In terms of acquisition pricing, there's always a bit off of spread, right, but look, business has gotten tougher, right? I mean it's not as much fun as when everything is going up. So conversations have been a little more frequent, a little more constructive. We still may need a little more pain, but the conversations have gotten more constructive, but as you know, John, it's really hard to predict acquisitions. We don't want to forecast any for sure.

Now in terms of a change with ACL buying AEP, I think it was a great deal for them. AEP really only had 40 liquid 10,000-barrel barges that were all leased in. I think they were building another 40, so I think they will have a total of 80, and again, they weren't even owned by AEP, but the biggest part of AEP fleet of course was the dry cargo fleet, which that took ACL's position in the dry cargo fleet up quite a bit. They essentially doubled their dry cargo fleet. So I think it's a nice acquisition for ACL.

As to whether we would be interested in dry cargo, typically we have shied away from dry cargo. We find it a little more volatile, a little less ratable than the liquid side, and never say never, but I don't think we would pursue a dry cargo acquisition in and of itself, but if we were to buy a competitor's liquid fleet, and they had some dry cargo barges, we may well keep the dry cargo fleet and run it, but inherently we don't like the volatility of the dry cargo fleet. It gets moved around a little more with grain harvests and other things, whereas the liquid volumes tend to move more in line with GDP, and the customers profitability may go up and down, our liquid customers' profitability may go up and down with commodity prices, but the volumes are fairly steady. So that's a long winded answer, John. I hope that answers your three questions.

And our next question comes from Ken Hoexter from Merrill Lynch. Ken, please go ahead.

Great. Good morning. Hey Joe, David and Sterling, last quarter you talked about reducing assets in the land based diesel fuel services. Can you update on the progress there? And then similarly on the Marine side margins are taking a bit of a hit year-over-year, is there more to do internally there or is that all price related?

Yes. Land based diesel, you heard Andy's comments that we sold the compression business earlier this year, we sold the Bucks, kind of a small product line out of there. So we're focusing on the core, at United the core distribution spare parts and service business, as well as that core manufacturing, mean manufacturing business. There may be some other things that we could do there, but right now we're really focused on taking out costs in that core business, and getting it prepared for the inevitable rebound and some demand. In terms of margins in the Marine business, yes the margin decline really is price. Price kind of rolls through the bottom line. We have taken out some costs, reduced a little bit of headcount, really through attrition more than anything else, but we're constantly looking at costs there. But as you know, pricing does kind of flow right through to the bottom line.

Great. Thanks. Dave, on the pricing on the dry side, not the coastwise barges but the other ones that you run for services on an offshore basis, is there pricing pressure on that? Because when we combine the coastwise trade it looked like pricing is down, and you said modest increases, so I just want to understand, because I know there's a mix of vessels that you don't talk about much. Are we seeing kind of pricing down on that, or what is the utilization now of those six assets?

Yes. Those are our sugar, and we've got basically two coastwise barges, sometimes three barges moving sugar, and a couple barges moving coal. Those are in long-term contracts, both of them, so there's not a lot of price volatility there. You do have utilization volatility, particularly some, the sugar trade is kind of a contract of affreightment, so when weather impacts that fleet it impacts us, and so weather can pull that around. Yes, I'm not sure what you're looking at in terms of pricing.

Yes, Ken. This is Andy. If you're looking at the revenue coming, or getting into the revenue coming out of our coastal business, remember that we had much lower fuel pricing this quarter, as well as a heavy shipyard cycle, and that the operating income line another effect that you need to take into account is roughly a $3.5 million incremental depreciation and amortization effect for the shortening of the depreciable lives, for some assets that were getting quite frankly long in the tooth, and we're going to have a very heavy shipyard cycle, or expensive shipyards coming up that we shortened, and have essentially written down. So that has affected margins in the quarter, if that's what you're looking at. I don't think that it's pricing.

And our next question comes from David Beard from Coker Palmer. David, please go ahead.

Good morning, gentlemen.

Morning, David.

When you talked about pricing still being under pressure for next year, should we still there I about sort of a 2% or 3% price decline? Is that kind what you're feeling is going to roll into next year?

Yes. Again, it's hard to forecast. We just don't know. A lot depends on this kind of the sentiment changing, as the industry deals with fewer and fewer barges in crude. So -- I don't want to give you a forecast on where rates are going. There are some uncertainties there, and we don't know. We're just calling it out. And refinery utilization and other things next year can change some things, for the positive, right? If these refineries continue to do, not Greenfield but brownfield type expansions, and then the chemical guys continue to do their expansions, that demand should have an impact. Now the timing of all of that with respect to the crude barge absorption is what makes it difficult to predict where pricing could be next year.

Right. Right. And then just switching to the fleet of crude oil barges, the 250 to 300. I know you had mentioned most of them in the last call had moved out of that trade, and there was a certain base level that couldn't move because of volumes, and also couldn't move because of the types of equipment. Can you give us your thoughts there, and how many of those 250 to 300 still could move out of the trade?

Yes. We don't know. Really don't know. I would say, some of the Utica stuff probably doesn't go away. Now there's always a caveat, right? I mean at low enough oil price, people will shut-in production, or as the decline curves take place they just won't drill anything new or produce anything new. So it's hard to say, but we've looked at some data that says even in the mid-40's, some of these fields have pretty good IRRs, 15% after-tax type of IRRs, so some of them will definitely continue to produce. It's hard to say how much is the floor there, but there is a floor, I think.

And next Kelly Dougherty from Macquarie. Kelly, please go ahead.

Hey. Thanks far taking my follow-up. I just wanted follow up on the M&A discussion, and how much leverage do you guys have the ability to take on, and would you be willing to take on some leverage for buybacks, if you didn't find any attractively priced acquisitions in the near-term? Thanks.

Yes. Kelly, I mean again, you have heard us say before we look at all of these things in a very similar way. We run a DCF and based on the different choices for capital allocation available to us in the short-term, that's kind of how we make our decisions. We're a 26% debt-to-cap, so we have got plenty of ability to lever up. In the past this Company has been, going way to be the Hollywood acquisition even over 50% debt to cap, and in the recent, after the sort of big cycle in 2010-2011 was over 40%. So plenty of capacity available.

Yes. Kelly, we believe we could stay probably investment-grade if we went up to 50%, but we had kind of a debt repayment plan that we outlined to the rating agency, so it would be pretty comfortable there, and you make a good point. At Kirby we've always and I will ask Joe to chime in here, too, we have always looked at our capital allocation, and you kind of look at it makes sense what to do. Sometimes you build equipment, sometimes you buy acquisitions when you can get them done at reasonable prices, and other times you buy back your stock, and yet other times you pay down debt. And over the years it becomes pretty obvious what the appropriate thing to do. That said, this kind of environment, and our history, and I'm going to ask Joe to comment on that, this is when we typically see some opportunities. Joe, do you want to add anything to that?

I think that's right, David. If you look back to how we built Kirby, it was during periods of uncertainty. We have just come through a very good period in the business, and when you do that, you have operators sense that it's going to go on forever, when in fact it's not. This business still is cyclical. We try to take some of that cyclicality out with back to the markets that we pursue, and how we structure our contracts, but tank is deflating the balloon a little bit to get people back on a realistic page, and nobody likes earnings that are going the wrong way. Perhaps except for me, because I see it as a great opportunity to continue to consolidate this business, to make Kirby stronger. I think consolidation in the business is positive, we mentioned the ACL-AEP acquisition, I think that's going to be long-term positive for the business. You will have, and in the future I think with the larger companies, with more at stake, a much more rational market. We already have a more rational market than we had 35 or 40 years ago when I entered the business. So I look at this period with some excitement. I think that we're going to actually have some good discussions with operators that recognize that the wind doesn't always blow in one direction.

Thanks guys. I appreciate that color.

And we have no further questions at this time.

We appreciate your interest in Kirby Corporation, and for participating in our call. If you have additional questions or comments, you can reach me directly at 713.435.1101. Thank you, and have a nice day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.