Kirby Corp (KEX) 2016 Q1 法說會逐字稿

Good morning and welcome to the Kirby Corporation 2016 first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Mr. Sterling Adlakha. Please go ahead.

Thank you, Carrie. Thank you, everyone, for joining us this morning. With me today are Joe Pyne, Kirby's Chairman; David Grzebinski, President and Chief Executive Officer; and Andy Smith, Kirby's ExecutiveVice-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 www.KirbyCorp.com, in the Investor Relations section 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 from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's 10K for the year end the December 31st, 2015, filed with the Securities and Exchange Commission. With that I will now turn the call over to Joe.

Thank you Sterling. Good morning. Yesterday afternoon we announced first quarter earnings of $0.71 cents per share, including severance charges of approximately $0.06 cents per share, versus our guidance range of $0.75 to $0.85 cents her share. That compares with a $1.09 per share reported first quarter last year. In the marine tank barge utilization during the first quarter remained in the 90% to 95% range. The supply overhang from garbage clean data crude oil service and put into other trades over the past 12 to 18 months continued to have some impact on pricing.

However, we think the trend of barge cleaning out of crude oil service into clean service has slowed significantly. And we believe that industry utilization levels have modestly improved. Additionally, we have not seen an increase in the inland tank barge order book for 2016, which is now at low levels. Should the trends we have seen in April continue for another couple of months, our outlook for this business will continue to improve.

In the coastal sector of our business, utilization remains stable, with barge utilization in the high 80% to low 90% range. Market is in relative balance, even with additional spot exposure. Average pricing on contract renewals of the coastal equipment increased during the quarter. Part of this increase was the result of price adjustments of legacy contracts which were below market rates.

Also influencing our results in this business is the amount of equipment trading in the spot market, which has idle time exposure. In our land-based diesel engine service business, market conditions deteriorated further than we envisioned when we provided guidance in January. There have not been many positive signals in the oil service market. There has been an accelerating decline in U.S. oil production, which has led to cannibalization -- at least some can cannibalization -- to existing U.S. pressure pumping capacity, which should create future demand.

However, without more tangible improvement, the prudent thing to do is to aggressively reduce cost in this business. Market is simply been far worse for longer than I think anyone in the market anticipated, as evidenced by recent earnings in Capex revisions by several large oil service companies.

In the marine power generation business, our marine diesel engine business; the oil service market which services the Gulf of Mexico remained depressed. And we experienced customer deferrals, of major maintenance projects throughout all of our marine engine service locations during the quarter. This is not unusual when you get in this kind of environment. This broad impact on a marine market speaks to the uncertainty of not only the oil service business, but also the dry cargo market that the inland side of the business services. And in some respects, the general economy.

In summary, we find ourselves in the midst of a very challenging environment in both our marine and diesel engine businesses. At the same time, we have seen some encouraging trends in our marine markets, particularly the inland market where pricing seems to have stabilized. I will now turn the call over to David.

Thank you, Joe, good morning, everyone. Let me start with a quick comment on our recent cost savings actions and then move to first quarter results across our businesses. Our cost-cutting efforts included a reduction in force that was implemented in February. We reduced head count and corporate staff, marine shore side staff, and diesel engine personnel. These reductions led to severance costs of approximately $0.06 cents a share.

The staffing reduction was the most visible cost-cutting action during the quarter, we have several teams dedicated to streamlining cost structure across the Company and in improving customer service. It is our belief that as conditions across our markets improve, we will be positioned to improve market share in each of our businesses while simultaneously improving profitability.

Turning now to a summary of first quarter results. In the marine transportation segment, our inland marine barge demand saw modest sequential improvement, as utilization stayed in the 90% to 95% range throughout the quarter. During the quarter, high wind and fog impacted operations along the Gulf Coast and high water on the Mississippi River system led to delays and added horsepower requirements. The direct cost associated with these challenges were partially mitigated by contract clauses that protect us from navigation delays, particularly as it relates to high water.

On a clearly positive note, we think the number of barges transitioning from crude oil into other services slowed dramatically. We believe the industry fleet-wide number of barges and crude service, currently just under 175, virtually unchanged from earlier in the year. The industry has absorbed a large number of barges from both new destruction and displaced crude movements during the past year to 18 months, and is very close to tightly balanced. Nevertheless, pricing on our inland marine transportation term contracts that renewed during the first quarter were down in the single digit range.

Average contract pricing was skewed lower by repricing of some longer-term contracts. Excluding these contracts, a more representative indication of pricing on inland contract renewals was down in the low single digit percent range on a year over year basis. Spot contract rates were roughly in line with contract rates during the quarter, and were flat sequentially with the 2015 fourth quarter.

However, in April, we did see some firming in the spot market from market lows. In the inland marine market, we continued to see growth, modest growth, in demand for Petro chemicals and refined products transportation with crude oil demand relatively flat with the 2015 fourth quarter. The black oil market, meaning heated products, excluding crude oil, was weak throughout the quarter, largely due to commodity price volatility.

But utilization in our black oil fleet recovered toward the end of the quarter and into April. In our coastal marine transportation segment, demand for the coaswide transportation of refined products black oil and Petro chemicals remained consistent with the 2015 fourth quarter, and tank barge utilization continued to be relatively strong. With respect to pricing, term contracts that renewed during the first quarter increased by a double digit percentage on average. However, this pricing was skewed by the renewal of a couple of small legacy contracts with rates that were significantly below market levels.

Excluding those contract renewals, renewals on coastal equipment contracts were essentially flat. In our diesel engine services segment as Joe mentioned, our marine diesel and power generation markets experienced widespread deferrals of major maintenance projects across all of our marine diesel engine operating regions. While there is some possibility that these deferrals could lead to higher business levels later this year, our assumption is that that will not happen. Particularly if the inland dry cargo barge and Gulf of Mexico oil service markets do not improve.

In our land-based diesel engine services market, our ability to maintain break even profit levels with our current staffing was dependent on maintaining a steady level of parts and component sales and a modest amount of remanufacturing activity. A view which we garnered from close co-ordination with our major customers. However, as the first quarter progressed, orders for parts and components declined precipitously. Projected spending levels from our major customers for the full year 2016 for parts and component sales were revised down by over 50%. On the service side of the business, the year began with some incrementally positive indicators as customers requested to remanufacture portions of their fleets, with the opportunity to remanufacture larger portions of their fleet as the year progressed.

However, financial stress and uncertainty around consolidation opportunities among our customer base has resulted in almost all remanufacturing being placed on hold for the near term. As we work through these challenges and await an inevitable improvement in the market, we want to strike a balance between maintaining the capability to respond to demand when the market turns, and a cost structure that is appropriate for the current market. The volatility of the market and opaqueness of the outlook make this difficult.

So we thought it prudent to assume these tough conditions persist through the remainder of this year, and consequently we reflected that until our forecast. I will now turn the call over to Andy to provide some detailed financial information before I finish up with a more detailed discussion of the outlook.

Thank you, David. Good morning. In the 2016 first quarter, remain transportation segment revenue declined 10% and operating income declined 20% as compared with the 2015 first quarter. This decline in revenue was primarily due to a 38% decline in the average cost of marine diesel fuel, lower inland marine contract pricing, and an increase in available spot market days for some of our offshore marine equipment.

The marine transportation segments operating margin was 18.4% compared with 22.9% for the 2015 first quarter. The inland sector contributed approximately two-thirds of marine transportation revenue during the 2016 first quarter. Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 80% of revenue, with 55% attributable to time charters and 45% from refreightment contracts.

As David mentioned, our utilization was above 90% throughout the quarter, and the inland sector generated an operating margin in the low 20% range for the quarter. In the coastal sector, utilization during the quarter was in the high 80% to the low 90% range. The trend of our customers electing to source coastal equipment through the spot market versus renewing term contracts continued in the first quarter as we saw coastal revenue under term contracts drop slightly from the 2015 fourth quarter to 78%.

The first quarter operating margin for the coastal sector was in the low to mid-teens. As mentioned in the press release s night, we incurred an approximate $5.6 million or $0.06 cents per share in severance expenses during the quarter. Of this amount, approximately $0.03 cents per share was in our inland marine business, approximately 1% per share in our coastal marine business, and approximately 1% in our marine and diesel businesses; with the remainder split between the land-based diesel and Kirby Corporate Office.

Turning now to our marine construction and retirement plans. During the 2016 first quarter, we took delivery of three new tank barges and we retired a total of 16 barges. The net result was a reduction of 13 tank barges to our N1 tank barge fleet, or approximately 278,000 barrels of capacity. Also during the quarter, we committed to build an additional four 30,000-barrel tank barges for delivery in 2016 to meet our existing fleet needs and attractive pricing.

For the remaining nine months of the year, we expect to take delivery of these four inland tank barges and retire or return an additional 18 barges with 235,000 barrels of capacity. On a net basis, before giving effect to the additions from the C-corp fleet, we expect in 2016 with approximately 17.5 million barrels of capacity; a reduction of approximately 400,000 barrels from the end of 2015.

In mid-April, we closed on the acquisition of C-corp's fleet of twenty-seven 30,000-barrel inland tank barges. Additionally, one 30,000 barrel tank barge and one inland tow boat are under construction and are expected to be delivered before the end of the quarter. Including these additions to our inland fleet, we expect to end 2016 with a total of 18.4 million barrels of capacity. In the coastalized transportation sector, we expect delivery of our second new 185,000-barrel ATB in mid-2016. The first of two new 155,000-barrel ATBs should deliver in late 2016.

Our second 155,000-barrel ATB and a coastal chemical barge are expected to be completed in 2017. Our 2016 coastal equipment capacity plan includes a single retirement of an 80,000-barrel tank barge in the second quarter. On a net basis, we expect to end the year with 6.3 million barrels of capacity; an additional 260,000 barrels from the end of the 2016 first quarter.

Moving on to our diesel engine services segment, revenue for the 2016 first quarter declined 52% from the 2015 first quarter, and we had an 806,000-dollar operating loss for the segment. The segment's operating margin was negative 1% compared with 5.3% for the 2015 first quarter. The marine and power generation operations contributed approximately 60% of the diesel engine services revenue in the first quarter, with an operating margin in the low double digits. Our land-based operations contributed roughly 40% of the diesel engine services segment revenue in the first quarter, with a negative operating margin in the high teens.

On the corporate side of things, we raised our 2016 capital spending guidance range by $10 million to a range of $230 million to $250 million to account for the additional four and one tank barges we expect to build this year. Our capital spending guidance for the year includes approximately $10 million for the construction of seven inland tank barges to be delivered in 2016, approximately $100 million in progress payments on new coastal equipment, including one 185,000-barrel coastal ATB to two 150,000 coastal ATBs, tugboats and petro chemical tank barge.

The balance of $120 million to $140 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities as well as diesel engine services facilities. In addition to capital spending guidance for the year, we used $88 million in cash in April of this year for the purchase of C-corp's 30,000 barrel inland tank barge fleet.

During the 2016 first quarter, we continued to execute on our share repurchase authorization buying approximately 35,000 shares for $1.8 million, or $52.53 cents per share. The stock price, in our estimation, continues to offer compelling long-term value. We will continue to evaluate share repurchases in concert with other capital allocation opportunities. Currently our unused repurchase authorization is approximately 1.4 million shares. Total debt as of March 31st, 2016 was $712 million, a $63 million-dollar increase from December 31st of 2015. Our debt-to-cap ratio of March 31st was 23.5%, compared with 25.4% the end of last year. As of today, our debt stands at $783 million. I will now turn the call back over to David.

Thank you, Andy. In our press release, we announced our 2016 second quarter guidance of $0.65 cents to $0.75 cents per share. And for the 2016 full year, guidance of $2.80 to $3.20 per share. Our guidance for the year reflects our 2016 first quarter GAAP earnings per share of $0.71 cents which includes $0.06 cents per share of severance charges.

As we mentioned earlier, the significant change in our outlook is related to the land-based diesel engine business, which we now expect to incur quarterly operating losses for the remainder of the year. With that overview of the changes to our guidance, let me also briefly address the primary factors in the guidance range for each of our markets.

In our inland marine transportation market, as mentioned in our press release last night, the inland market showed some tangible signs of improvement in April with utilization improving, particularly for 30,000-barrel tank barges, and competitor spot pricing in the spot market improving from previous month. Refined products and chemical volumes have been strong, with the black hole market seeing renewed strength in April following a tough first quarter. While we are encouraged by these developments, we are cautious in extrapolating the impact for the rest of the year.

At the low end of our guidance, our guidance factors in spot and contract renewal pricing include declines of low single digits and tank barge utilization in the high 80% to low 90% range. At the high end, we are assuming year over year pricing stability going forward and utilization in the 90% to 95% range. We are assuming normal seasonal weather patterns for the remainder of the year.

In the coastal market, on the high end of guidance, we are expecting flat to slightly higher pricing on contract renewals and utilization in the high 80% range. On the low end, our guidance range contemplates a deterioration in coastal rates with pricing declines on contract renewals in the low single digit percentage range, and utilization in the mid 80% range.

For our diesel engine services segment in our land-based sector, although oil prices have improved somewhat, it has not yet translated to an improved outlook. The improvement may come in the second half. But with lower spending levels seen in the first quarter, we felt it prudent to adjust this portion of our quarterly and full year guidance. We will continue to evaluate market conditions and adjust the cost structure as necessary to meet current and projected levels of demand.

But a balance, but must balance the lack of volume in today's market with the outlook for a market recovery as oil prices continue to increase. Where we fall within our guidance range this year, will partly hinge on whether we see an improvement in activity in the second half of the year. In our marine diesel and power generation markets, we expect the weakness in the Gulf of Mexico oil service market to persist for the entire year. There is some possibility that major maintenance projects deferred by customers in the first quarter, could drive better performance later this year, but our base case assumption is that those deferrals will not lead to firm orders until 2017.

So in summary, our balance sheet and cashflow are in great shape, giving us the flexibility to do acquisitions and share repurchases. The marine business is stable with the inland markets poised for improvement and with a bright outlook for Petro chemical volumes. Diesel engine services is weak, but with growing pent up demand. In the diesel engine businesses it is not a question of if the markets will come back, but a question of when. Operator, that concludes our prepared remarks. We are now ready to take questions.

Thank you. We will now begin the question and answer question. (Operator Instructions). As a reminder, we ask you limit your questions to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mike Webber of Wells Fargo. Please go ahead.

Hi. This is Donald Bogden stepping in for Mike. Good morning, gentlemen. Thank you for taking my call.

Good morning.

My first question is on the inland barge order book. It seems we are coming down to peak levels seen in 2014, 2015. You mentioned previously the potential for negative growth this year. Could you give some updated color on that? I know you put numbers out; what your expectations for inland barge growth this year, next year are?

Yes. Right now as we look at the orders, and many of the orders for delivery in 2016 were placed last year. We think it is around 100 new barges, but what we do not know is the number of retirements that may occur this year. You heard in Andy's prepared remarks that we are retiring a number of barges. We believe some others are going to retire older equipment, as well. Also in that number of new barge builds that we expect this year; the vast, well, not the vast majority, but over half are probably 10,000-barrel. Those we know, many of them were placed early in 2015 or in 2015. So kind of a carry over. So it does look reasonably good on the new build additions given that will we expect retirements usually to be in the 75 to 150 barges retired a year. Sometimes they go north of that.

Got you, thank you for that. And my follow-up is on utilization in the inland segment. It seems to be holding up better than the coastal segment. What do you think the primary driver is there? Is that mostly a function of all off in crude exports out of Corpus Christi adversely impacting the coastal market, or are there other factors at work there?

Yes. The inland market, what we have seen is basically demands picked up. The inland market has absorbed a lot of barges, with both new builds and returned cleaned up barges from crude service over the last 18 months. And that -- as we mentioned the crude kind of, the number of crude barges being returned is essentially stopped. So with the demand pick up, utilization has tightened up. That is what we have been seeing. You saw our utilization was in the 90% to 95% range for the quarter, which is pretty good. That is really all about demand. On the coastwise side, demand is relatively in balance. It is not a lot different than we are seeing on the inland side.

Got you. Good to hear there is some green shoots emerging. Thank you for your time, gentlemen.

Thank you, Donald.

Our next question comes from Kevin Sterling of BB&T Capital Markets. Please go ahead.

Hey. Thank you, good morning, gentlemen.

Good morning, Kevin.

David, I can follow up on that utilization question. Can you remind us how much of your business on the inland side is time charter versus contract of a fright freightment and spot?

Yes, Andy has got the specifics.

Yes, so term contracts on inland are 80%, Kevin. With 50% of those being time charter and 45%, I am sorry, 55% and 45% being contract of a fragment.

Okay. When you guys talk about utilization, 90%, 95% range, do you look at it differently versus time charter versus contract of freightment and spot?

No. That is just outright barge utilization, Kevin.

Got you. David, obviously talked a little bit about spot strength seen in April. What do you think is driving that? It sounds like more demand. In March I think we started seeing the spot market strengthen a little. That may have been due to some high water barges out of position, lock closures, et cetera. Do you think this movement we are seeing in April is a little bit more real, if you will; and do you think it will continue? Because as I recall last year, we had a little bit of a head (inaudible) in the spot market, so maybe talk about what you are seeing now and why it might be different from last year? Or maybe it is not.

No, Kevin. Good question. It is hard to extrapolate one month. Clearly weather was a bit of it. Weather sometimes tightens up utilization. What will we felt was demand was up a little bit here. And there is demand for the spot barges. There is a bit of a scarcity in the number of available barges because of that additional demand. That brought spot pricing up off its lows, which was good to see. But to your point, you do not want to, we do not want to be overly aggressive in extrapolating that, but it is an encouraging sign.

Ok. Great. Thanks so much for your time this morning.

Thanks, Kevin.

Our next question comes from John Barnes of RBC Capital Markets. Please go ahead.

Thank you. Good morning. Thanks for taking my questions. First, on the new coastal barges, you are taking delivery of, took delivery of -- I know those additional barges came with contracts. Based on what you have seen in the coastal markets, have you been forced to revisit those contracts? Has there been any change in the terms initially struck?

No, Kevin. There have not. Those contracts, yes. I am sorry. John. Sorry about that.

No worries.

No. Yes, no, there is been no change. The initial, we have 185 come out, one of the 185s come out at the end of the year. She is under a long-term contract. There have been no changes to her terms at all. We have another one coming out mid this year and she is under a long-term contract, as well. And there are no changes to those contract terms at all.

Any update on contracts for the other two on order?

No. We are working actively with some customers, talking to them about those two barges. The first one is Andy indicated comes out the end of the year. The other one is 2017. We are in active discussions on those two barges.

Ok. All right. And then, looking at the diesel engine business as a whole, you know, obviously we know the pressure points on the land-based side. It now seems like the core business, especially from maybe the offshore business is a bit under pressure. You know, you incurred a modest loss in the quarter. I know you have taken a tremendous amount of cost out of that business. Is there any more to do there, you know, that gets this thing back to break even on a consistent basis; or you know, at this point is it really about having to get, you know, some business activity pumping back through there?

Yes. It is more of the latter. John, we have taken in the land-based united business, we have taken our head count from 950 employees around, down to in the 300s. So we have taken a lot of cost out. What we are trying to balance is being prepared for the inevitable upturn. The amount of pent up demand for maintenance on frack equipment is substantial. So you do not want to cut too deep. You got to be able to respond to customer demand that we believe will be inevitable. So we are trying to balance that. You know, you keep looking at your cost structure every day. And we will continue to do that.

We just felt it prudent to kind of take down our estimate on the land base business. That is the key part of this our guidance change here, is all about that land business. This did not feel prudent to forecast kind of a rebound towards the end of the year at this point. Maybe we see it. Maybe we do not. But we did not want to fight it all year long.

All right. Is there one macro data point on the land based side that you look at? Is it the rig count number? If we were thinking about it, we obviously do not have, you know, we are not privy to your internal discussions with customers, but if there was that one data point, you know, that would suggest stabilization or something, is it rig count? What is it that you look for?

Yes. Land base rig count is probably the most obvious one. Now that said, there are anywhere from 3,500 to 4,000 ducts, which is drilled but uncompleted wells. Basically, they drilled the holes they have not fracked them. So you could get, with this oil price rebound you could get some of those ducts, if you will. They could drive some pressure pumping utilization, which would clearly help our business because we think the state of the pressure pumping fleet is in pretty poor repair. You know, they have been cannibalizing it and some of the cold stack fleets really are not even operatable.

The short answer to your question, the rig counts, most obvious one, but there is this phenomena of drilled but uncompleted wells out there that may give us some advance business before the rig count rebounds.

Very good. I appreciate that color. Thank you so much for taking my question.

Thanks, John.

Our next question comes from Gregory Lewis of Credit Suisse. Go ahead.

Thank you, and good morning.

Good morning, Greg.

David, in the prepared remarks again on the call, you talked about in regarding the coastal business that you are just seeing more of the equipment go on to the spot market. It sounds like it is just on the margin. What do -- do you have any thoughts of what is driving, the unwillingness of customers to sort of take those, you know, longer term charters? The other question I wanted to ask is, when a coastal vessel is in spot, what is a typical duration of a spot voyage?

Yes. Let me take that in two parts. First, a spot voyage can be anywhere from one month to six months. For us, anything spot is less than a year. You can have, you know, one month, three months, six months, nine months voyages or contracts that we consider spot. But in terms of what will we think is driving it, is there is a number of new builds coming out. And you know I think customers, given the uncertainty with commodity price volatility and the number of new builds coming out, are kind of waiting to see. They do not feel like they are going to have a problem finding equipment.

Now that said, as you know, there is a number of barges -- we think it is over 40 -- that are 30 years or older that need to come out of the market. And they will come out. It is just -- it is a matter of the timing between the new builds coming in and the old barges coming out.

Ok. My follow-up is going to be on the diesel engine service business. If you think about, you know, during the, I guess, two years ago, during the peak, it sounded like remands, the remand jobs were going anywhere from $500,000 to upwards of $600,000 a day for a unit. Where has that pricing sort of trended now? If I had, you mentioned a lot of cannibalized pieces of equipment. If I want to remand one of those in this market, what sort of pricing am I looking at?

It is so variable, Greg. I think the issue is, what do they cannibalize if they just took the fluid ends off or if they took an engine off and put an engine on another frack spread, it would be, it would depend. Now, if, you know, they are just sitting there not maintaining them at all, it could be substantial and you could see, you know, north of that $500,000 a unit. Some of them may be very small in terms of what it needs to get them back into operation. But others could be quite substantial.

Ok. Guys. Hey great, thank you.

I know that is a non-answer, Greg. The short answer is probably we do not know. But it is going to vary depending on what they cannibalized.

That is what I was trying to understand. We have been hearing there is varying degrees of what an idle frack spread looks like. Some, you are left with the actual truck and others where to your point, there has been one or two, maybe three things taken off. I wanted to see if you had more color than that. Hey, guys, thanks for the time.

Thank you, Greg.

Our next question comes Doug Mavrinac of Jefferies. Please go ahead.

Thank you, Operator, good morning, guys.

Good morning.

Good morning, David. I just had a couple of follow-ups. First, it has been very helpful when quantifying the exposure and the inland of marine transportation market, how many barges were in the crude oil market. My question is when you look at the coastal business, things are obviously holding in well there. Can you give us some sort of sense of how many assets, or what proportion of your coastal assets are either directly or indirectly involved in the crude oil trade?

Yes. Good question. I think coast-wise, there were -- it was probably similar to the level in terms of percentages that we saw in the inland side. I think the market peak coastwise business had probably 15% of the barge fleet in crude. Now we think it is less than 5%, as well. You know, at our peak, we had probably 10% of our fleet in crude. Now it is, you know, it is a tiny 2% or so, 2% or 3%.

So the coastwise has rationalized actually a lot less, a lot less impact than the inland side. Because you have seen the coastwise has absorbed the larger barges coming out of crude. And pricing has been relatively stable. In fact, up most of last year. So, you know, in the coastwise business, it has been tighter. Tighter in terms of balance.

Guys, that is helpful. We have been seeing narrowing pricing differentials along the Gulf Coast. I was curious how much more of an impact that can have on you guys' business. My follow-up has to do with a similar theme. Kind of trying to quantify downside exposure on the diesel engine services side. This may be less quantifiable. In terms of your guidance changes, do you view kind of your guidance now as far as being, this is a kitchen sink type of a number. We are expecting operating losses, and so that is really kind of the worse we think it is going to get? How can you anecdotally describe how you view your engine services guidance going forward?

Yes hey Doug, this is Andy. In terms of our guidance, certainly from the mid point of our prior range to the mid point of our current range, you know, in the broadest of strokes, that was due to the severance in the first quarter. The changes in our outlook for the land based diesel engine services business. From that point to sort of the lower end of our range, I would say there is some, an additional modest losses or incrementally modest losses out of that business. But we have pretty much taken a pretty dim view for the full year and are not too willing to bet on the calm too much there.

Got you. That is very helpful. Thanks for the time. David and Andy.

Thanks.

Thanks.

Our next question comes from Jon Chappell of Evercore ISI, please go ahead.

Thank you, good morning, guys.

Hey. Good morning, Jon.

David, I want to ask about a couple of follow-ups on the coastal side. Just how the competitive landscape is changing as more of your equipment enters the spot market, and as more of these new builds start to deliver. Is there going to be a significant shift in, you know, kind of the upper hire hierarchy of who is in that business? And how may that impact kind of the pricing over term contract, also the spot market?

I think roughly speaking, the order, if you will, of the 15 or so players in the market will be roughly the same. I do not think there is going to be a big shift between who is the third largest and the sixth largest. I think everybody has kind of added capacity kind of in proportion to their fleet size. You saw, we have added, we will have added when we complete the new builds here, we will have added five new barges on a basis of 70, right? So, you know, that is kind of proportionate to our size. If you look at our competitors, they have done a similar things.

Do you think the kind of shift to spot becomes more of a permanent issue with the new capacity coming on, or at some point does it normalize?

I think it will normalize. Actually, you will go back -- as the older capacity comes out, you will go back to more term. I think this is a transitional time in terms of spot versus contract.

For my second question, the C-corp acquisition was very well timed. Quite interesting, too; because you have been out of the market for a couple of years in the inland business as values ran away. You maintained your discipline. Obviously, C-corp was not a pure play in this business, and had far more exposure to businesses that have hammered of late. Especially the offshore supply boat business. Was this kind of a one-off, maybe a stressed sale, just kind of right place right time, or is this foreshadowing asset values are pulling back to the level where they are kind of in your sweet spot and you can be more aggressive on the rolling up of the business?

Yes. You would probably have to ask C-corp some of those questions. I would not say it was a stress sale. They are very opportunistic in terms of the of deploying cash to beaten down sectors. That may be something they are doing. You should probably ask them that.

From our view in terms of pricing, given what we have been going through in the inland market, you know, pricing gets more reasonable. The price expectations become more reasonable. And that is a good thing. As you know, Jon, it is really tough to predict acquisitions. We are always talking to people. There are some people that may have a little more stress in terms of leverage than others.

But predicting that and predicting an acquisition out of that environment is difficult. You know, I think our view is as you know, just maintain our discipline. People know we will pay a fair price. And we are going to keep our discipline and keep talking to the players. If something happens, that is great. But we are not going to chase things. I do think given what we have gone through in the inland market, things are more reasonable in terms of price expectations.

That makes sense. Thanks a lot, David.

Thanks, John.

Our next question comes from Jack Atkins of Stephens. Please go ahead.

Good morning, guys. Thanks for the opportunity to ask a question.

Good morning, Jack.

I think the April commentary is encouraging on the inland side. As you are talking to your customers, are they taking notice of that, and at what point do you think more positive sort of trend we have been seeing the last several weeks, last month or so could translate into better contractual rate renewals? Do you think that is a couple of months away? Later this year? Just sort of curious about how you guys are thinking of the cadence of that?

It is difficult to say. It is hard to extrapolate. Our customers are some of the most sophisticated companies in the world. They know what is going on. And they see, they see it. They are probably seeing the same thing we are seeing, which is demand, demand is up a little bit. Now, whether that carries through the remainder of the year and grows, remains to be seen. It is just really, you know, difficult to predict. So we want to be cautious in extrapolating it.

What we do know the chemical, Petro chemical build out is continuing. There is a good number of these Petro chemical plants that are well underway in terms of construction. Maybe some of the volatility has slowed some of them down, or maybe even one or two cancelled. But we do see the Petro chemical buildup coming, 2017 and 2018 which, you know, should add demand. Whether it is a short term, you know, inflexion point here or not remains to be seen. The longer term volume trends are good.

That is good to hear. Then just a quick follow-up item. With fuel moving back up a little bit here, can you remind us how fuel impacts your PNL? Is it more of a pass-through? When you have inflexions higher or lower, how does that impact your near-term profitability?

Yes, there are a couple of different ways. One, in a lot of our business it is a pass through, Jack. But on some of our contracts we actually have escalation clauses and those lag a quarter. What you can see is, you know, a bit of a mismatch when your revenue gets reset and when your costs have changed. So as we see that, you can have a bit of friction. But, you know, again with fuel going up, we would expect in the second quarter, our cost might rise a bit ahead of our revenue which would then reset going into the third quarter.

Ok. Great. Thanks again for the time, guys.

Yep.

Thanks, Jack.

Our next question comes from [Kelly Dockerty] of Macquarie. Please go ahead.

Good morning, guys. This is Chris Bloom on the line for Kelly. Thanks for taking the question.

Good morning.

So you guys talked about retirements and the need for some of the barges to come out. I was wondering if you could give us some cooler, if you have seen whether or not your peers started this accelerated retirement that they currently have in operation? And if not, what do you think will spur this acceleration you are looking for?

Let me talk in terms of the inland side and the coastal side. You know, inland -- what happens is, in the inland side in particular when you are getting to the inspection cycle and the mandated inspections that have to happen, you bring a barge into the shipyard. And you kind of get an estimate of what it takes to extend its life another five years.

You kind of do the math with the current prices. You say, well does that make sense? Can I get that capital back? Given what we have gone through here recently, those older barges get harder to justify and that triggers kind of the retirement. We have seen this in past cycles where the retirements get pretty heavy.

You know, we kind of expect them to be the heavier side than they have been for the last couple of years for sure. The coastwise business, some of these assets are over 30 years old. I think the count, last count was 45. We are over 30 years old. And then the coastwise environment, that is getting pretty old.

We, Kirby, have retired some of our older assets recently in that space. I think our competitors are going through the same thought processes that we are in terms of, you know, extending very old coastwise barges. As you know, they are much more expensive than inland barges. Extending their life is that much more capital. I do not know if that helps with an answer there, Chris.

No, absolutely. I appreciate the color. That was my only question. I thank you guys for your time this morning.

All right. Thanks, Chris.

Our next question comes from Steve Sherowski of Goldman Sachs. Please go ahead.

Hi, good morning. On the coastal side, to the extent crude is causing weakness relative to inland, how much of that is being driven by crude oil exports just versus lower production in sale taxes?

Steve, we do not think coastwise is really being impacted by crude. I think most of the crude coastwise moves have migrated out already. And that occurred basically through last year while pricing was stable to up. So I think on the coastwise side, what has been offsetting the crude all last year was refined products continuing to rise. I think you probably have seen some of the macro statistics going up on other positive trends there. I do not think crude has been a factor on the coastwise business as much as it has been on the inland side.

Got you, ok. And then I guess a few months back there was speculation just given mid-stream equity markets that a lot of companies, a few companies that are in the barge business were looking to divest non-core assets. Has that cooled off just given market improvement over the past month or so?

Yes. It is hard to say. There are a handful, probably six, seven MLPs that have marine assets. I would view some of them, their marine assets are not core to their business. But others may view it as core. It is hard to say. Clearly when the high yield markets closed off to them, that may have made them think about it a little.

I know in terms of issuing equity, it was not the best time to do it. You know, I think it varies by the different MLPs. Some are very strong, some are smaller and less able to weather this. We will see. As we have said in the past, Steve, it is really difficult to predict acquisition possibilities. Clearly we stand ready to take any assets they view as non-core.

Got it. Thank you.

Our next question comes from Ari Rosa of Bank of America. Please go ahead.

Good morning, gentlemen. Just first question, I wanted to ask about the C-corp acquisition and what your expectations are there, in terms of the contribution that could have, and expectations in terms of integration?

Yes. For the remainder of this year, we are looking for accretion from that deal at today's rates of about $0.03. On an annual basis it is probably mid single digits; again today's rates. As rates improve, that will improve, as well. Integration wise, it is pretty well integrated into our fleet already.

Okay. That is helpful. Sounds like not too many speed bumps from that. Just to kind of take a step back, bigger picture. Thinking about capital management, I was a little bit surprised to see the Capex budget going up given some of the challenges you guys have outlined. Could you talk billion how you are thinking about capital management given the environment? And if it is really just a matter of positioning for an upturn?

Yes, typically in our capital deployment, we tend to be in the market when other people are not. But, I would not read a lot into the Capex. We had an opportunity to buy a few barges at a decent price. And they fit into our retirement plan as we phase out some equipment. It is kind of our normal operating mode, if you will.

Yes. Just to add on a bit there. If you add it up, we are adding seven barges this year through capital expenditures on the inland side. We are retiring 31. So again with the trend that will we think we will see in the industry this year, probably some retirements and very little building. I think we are right in line with that.

Got it. Ok. That is helpful. If I can sneak one more in there. Did you guys have any weather impacts on the first quarter along the coast, particularly the Texas-Louisiana region?

Yes, no, weather was there. We saw some fog and high winds and some high water that impacted us throughout the quarter. Some of that was covered, we had navigation and high water clauses in some of our contracts. Some of the cost associated with that is in our, was covered. But, there was some cost associated with it. It is kind of in our numbers. I would not call it something material enough to call out. Maybe it was a penny or two. But it has kind of been our numbers.

Ok. Great. Thank you.

Our next question comes from David Beard of Coker Palmer, please go ahead.

Good morning, gentlemen.

Good morning.

Obviously a lot of questions have been asked. I would just like to shift to capital allocation. Obviously you guys like to do acquisitions first. Relative to debt or share buyback, could you give more color there? Is there a level of debt you are comfortable with? How should we think about allocating capital between debt and share buyback?

Yes, I mean -- and again our story on this has always been consistent. We believe there is a time to look at M&A. There is a time to be building equipment, a time to pay down debt, and a time to buy back shares. We are certainly, our capital expenditure program is pretty limited this year with the exception of what was committed for in the past on the offshore side.

You know, we will still sort of look at all the M&A opportunities we can. Between that, we will evaluate where we are in the market, whether or not a share buyback makes sense versus debt repayment. We do not generally give sort of any kind of guidance about which one we are going to do.

Ok. Fair enough. And would you care to talk about any type of capital spending needs for next year? I know it is just early. But any color you can give there would be appreciated.

Yes, I mean look. Based on what we have committed to date, our Capex should decline somewhat as we take delivery of these barge or offshore units. Again, as you rightly point out, it is early. Our plans can change. Depending upon what goes on in the market. But right now you should see directionally our Capex go down year over year, all things being equal.

Good. Thank you, I appreciate the time.

Thanks, David.

Our next question comes from Bill Baldwin of Baldwin Securities. Please go ahead.

Good morning.

Good morning, Bill.

Can you offer any color as to what you think the prospects are for your land-based remand business being able to do more and more business with (inaudible) and the Haliburtons; the top level companies, and that pumping business.

Bill, those two are generally are our largest customers. And they do a lot of their own remanufacturing. What we do is tend to help them with parts and some product, but we are definitely working with them on a regular basis. As I said, they are kind of our largest two customers. So I think as they pick up their spending, that should translate to more business for us.

But I think as we have seen with the quarterly calls in the oil service space, it has been tough. I do think, you know, ultimately the remand business and the pent up demand from this cannibalized and idled equipment will come through for all of the pressure pumpers. They are going to have to do something to get their fleets in better repair.

I know from, you know, past conversations on the call that, you know, you definitely have a strong engines and parts business with these fellows. But I was also thinking you had done some work for them in the remand area, getting your nose under the tent here in the last year or so.

Yes.

I know the remand business obviously has better margins for you than the parts and engine action. I am just wondering if you think there is an opportunity to increase your penetration of the remand business with those companies?

Yes. Clearly we are -- we have people on site, I will not mention which ones specifically, with some of these larger guys that are on site doing service work for them. Clearly, we have not been shy about saying they should outsource any remand or even manufacturing they do. That will be good for us. Certainly an effort we are undertaking, Bill.

All right. With your reconfiguration of your facilities in Oklahoma City, I guess, you mean you consider yourself really in good position to be able to handle that business if it were to come your way.

Yes. Absolutely. Our new facility is state of the art. The response from our customers has been, has been very encouraging. Frankly, I think we will take some share as we come out of this, because frankly we are better capitalized than many of our competitors in this area.

This could be a great opportunity for you to be able to do that. Which I know is your long-term goals in that business is to become their premiere provider of services.

Exactly.

You kind of made the anecdotal comment, I believe, David, on the last call that things did not feel right to you when you were talking about the inland marine market out there. Could not put your finger on it. I just wondered anecdotally what you would say today regarding that same issue.

Yes. Bill, you are right. What we were trying to get a feel for was there something going on in the economy that just did not feel right the economy was weaker, and that inventories were up, and trading patterns were a little different. That seems to have worked itself out.

I think, you know, just talking and listening to our customers, you know, inventories are where they need to be given what they are seeing. I think, you know, in the ethylene markets, what we are hearing is all positive. That kind of sorted itself out. I think clearly the crude price kind of stabilizing a bit. It is still volatile, but it is kind of in a more reasonable range lately, has taken some uncertainty out of the system.

Yes, that feel we had that may be something was going on in the economy that we were missing and that unease we had it never completely goes away, as you know, but it has certainly improved. We feel better about it. Certainly listening to our customers, it is been more positive in the near term.

Very good. Thank you for your time.

Thanks, Bill.

Our next question is a follow-up from Mike Webber of Wells Fargo, please go ahead.

Thanks for taking my follow-up. I will be quick. In the inland barge segment, do you have the percent breakdown across the industry between Pet chem petroleum product and crude and black oil? Are we back line in more historic norms that were pre-shale boom? And I realize these numbers can at times be tough to ballpark, but any color around that would be helpful.

Yes. I think, you know, if you look at our business. You know, we are probably around 50%. This is not total barge, inland and coastal around 50% pet chem. When you look at inland, which was your question, our pet chem volumes are around 67%, 68%; and black oil, which is around 20%. The rest is refined products and chems. That is us. We are probably stronger in pet chems than most of the industry. I would say the industry is probably south of 50% pet chems.

Okay. Then, do you think the rest would be evenly split between refined and the black oil industry, or refined is generally a larger market share than some of your peers?

I would think so. Yes, short answer is yes. That is a good characterization of it.

Thank you. That takes care of my last question. Thanks again for your time.

Thanks, Donald.

This would conclude our question and answer session. I would like to turn the conference back over to Mr. Sterling Adlakha for closing remarks.

Thanks, Carrie. We appreciate your interest in Kirby Corporation. If you have additional questions or comments, you can reach me at 713-435-1101. Thank you and have a nice day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day!