Kirby Corp (KEX) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Kirby Corporation 2017 Fourth Quarter and Full Year Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. With me today are Joe Pyne, Kirby's Chairman; David Grzebinski, Kirby's President and Chief Executive Officer; and Bill Harvey, Kirby's Executive Vice President of Finance.

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 included in our fourth quarter earnings press release and is available on our website at 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, and 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 31, 2016 and in Kirby's subsequent quarterly report on Form 10-Q for the period ended September 30, 2017.

I will now turn the call over to Joe.

Thank you, Eric, and good morning to everybody. Yesterday afternoon, we announced 2017 fourth quarter earnings of $3.87 per share. These earnings included a one-time deferred tax reevaluation benefit of $4.51 per share, which comes as a result of recent tax form legislation, and is partially offset by nonreoccurring after-tax charges of $1.18 per share, including impairments of coastal vessels, severance and early workforce retirements.

Without these items, our fourth quarter earnings would've been $0.54 per share. Fourth quarter results compared to our guidance range of $0.40 to $0.55 per share for the fourth quarter, and $0.60 per share reported for the 2016 fourth quarter.

During the quarter, in the marine tank barge utilization remained at elevated levels that were similar to what we experienced in the third quarter after Hurricane Harvey. Favorable commodity prices for our customer's products and new petrochemical capacity, both contributed to higher demand for tanks -- tank barge transportation.

Despite this, the existence of a few aggressive competitors and excess industry barge capacity did little to improve to press spot market pricing. As we look forward, economists are projecting that 2018 will see the largest GDP growth since the start of the downturn. With much of our petrochemical demand ultimately tied to consumer nondurable goods, and expectation is for 30 new petrochemical plants scheduled to complete in the next 2 years, we have a favorable long-term outlook for this business.

In the coastal market, fundamentals remained challenging during the quarter as more barges transitioned from term contracts into the spot market and our utilization rates ranged in the low to mid-60% level for the second consecutive quarter.

During the quarter, we proactively impaired and early retired a number of our older coastal barges and tugboats. We believe this action is necessary not only to help restore an early balance into the market, but also to improve our profitability going forward. The distribution at service segment experienced consistently strong demand for our products and services, particularly in our land-based business. While the U.S. rig count declined approximately 2.5% sequentially, growing drill but not completed well inventories and a shortage of working pressure pumping horsepower grow -- increased orders for remanufacturing and new pressure pumping units as well as overhauled and new transmissions. To capitalize on this growing demand, we moved quickly to integrate Stewart & Stevenson, which immediately led to new contract wins, higher sales and improved deficiencies. With the industry calling for $2 million to $4 million of additional working pressure pumping horsepower in the next 1 to 2 years, we are well-positioned to benefit from this growing market. But a bit more ratably than prior cycles as our customers remain focused on capital discipline over growth.

In our Marine distribution and service business, we have started to see a modest turnaround in demand for new engines and overhauls, following a prolonged deferral of the fleet maintenance program. We expect this trend to continue into 2018 as customers can no longer afford to defer critical overhauls of their fleets. In summary, while parts of the marine transportation segment remain challenged, the inland business should begin to improve in 2018 as the industry rightsizes and consolidates. We intend to participate in this rationalization as the opportunity to further expand our franchise in this difficult market are excellent. Retiring some of our older coastal marine vessels removes much of our fleet overhang, while reducing age profile and improving the efficiency of the fleet.

Our distribution and service business has never been stronger. While our legacy business has already -- was already a leader in the overhaul and new construction of oilfield equipment. The integration of Stewart & Stevenson further enhances our capabilities as a manufacturer and provider of critical components to the oilfield, both domestically and abroad. This combination has certainly positioned our segment well with the current environment of improving oil prices.

I'll now turn the call over to David to discuss our segment results and our guidance for 2018.

Thank you, Joe. Good morning, everyone, and thank you for joining us. In our 2017 fourth quarter, our marine transportation segment revenue was $330.4 million, which is a decrease of $25.8 million or 7% compared to the 2016 fourth quarter. Operating income declined $30.2 million or 51% to $28.9 million. The declines were mainly due to lower-term contract pricing in both marine markets and lower coastal marine spot pricing and utilization. The marine transportation segment's operating margin was 8.8% compared with 16.6% for the 2016 fourth quarter and was negatively impacted by approximately $0.04 per share of severance and early retirement costs.

In the inland marine transportation market, our barge utilization ranged in the low to mid-90% level, aided by favorable commodity pricing and new petrochemical capacity and also by normal seasonal weather.

During the quarter, operating conditions were challenged by wind, fog and lock delays along the Gulf Coast as well as infrastructure and water level delays, primarily on the Ohio river. Demand for transportation by inland tank barge in the quarter was higher than the fourth quarter of 2016. The inland sector contributed slightly more than 70% of marine transportation revenue during the 2017 fourth quarter. Long-term inland marine transportation contracts, those contracts with the term of 1 year or longer in duration, contributed approximately 75% of the revenue with 51% attributable to time charters and 49% from contracts of affreightment. Contracts that renewed during the first -- fourth quarter were down in the mid- to high single digits compared to the 2016 fourth quarter. Spot contracts rates were consistent with the first 9 months of 2017. However, we did see a very slight price improvement on the low end of the spot market toward the end of the year.

During the fourth quarter the inland sector generated an operating margin in the mid-teens and wasn't adversely impacted by severance costs and some early workforce retirements.

In our coastal marine transportation sector, the oversupply in the industry was further exacerbated in the 2017 fourth quarter as more new equipment entered service and demand remained muted.

Additional term contracts also expired, placing more of our barges in the spot market, including temporarily laid-up barges, Kirby's coastal tank barge utilization was in the low to mid-60% range during the quarter. Revenues from the coast wise transportation of refined product and black oil were lower compared to the 2016 fourth quarter, while revenues from the transportation and petrochemicals were higher. Revenues were also negatively impacted by a force majeure event at one of our key customers' facilities.

Regarding coastal market pricing, year-over-year contract prices have dropped below spot rates as operators try to lock in guaranteed cash flow and higher utilization.

Pricing, of course, is contingent on various factors including geographic location, vessel size, vessel capabilities and the product being transported. As an example of where spot pricing was in the fourth quarter, rates in the $80,000 to $100,000 barrel range in clean service were approximately 15% lower than the fourth quarter year ago. Compared to the 2017 third quarter, sequential pricing on both chairman spot contracts was stable. The percentage of coastal revenue under term contracts was consistent with the first 9 months of 2017 at approximately 80%, mainly as a result of lower revenue from equipment trading in the spot market. As Joe mentioned, we took proactive action to impair and early retire underutilized coastal vessels during the quarter. In total, we retired 11 barges, many of which would have required ballast water treatment system installations in the next few years and we retired 21 tugboats. These vessels will be scrapped or sold into international or noncompeting markets. We also further reduced our shore side employee base, including early retirements, which resulted in one-time severance expense during the quarter. These actions will improve both our utilization and our profitability going forward. In the fourth quarter, the negative operating margin for the coastal business was in the high single digits, including the severance expenses and early workforce retirements.

With respect to our tank barge construction and retirement plans, we took delivery of 130,000 barrel inland tank barges and retired 8 over the course of the fourth quarter. The net result was a decrease of 7 barges in our inland fleet for a total reduction of approximately 100,000 barrels of capacity.

During 2017, we've retired 53 tank barges, closing the year with 841 barges, representing 17.3 million barrels of capacity.

In 2018, we expect to take delivery of 130,000 barrel inland tank barge in the first quarter. We also expect to retire or return to charters 30 barges with approximately 450,000 barrels of capacity. On a net basis, before any acquisition, we expect to end 2018 with a total of 812 barges, representing 16.8 million barrels of capacity. In the coastalized marine sector, the early retired barges had a total capacity of approximately 830,000 barrels, and had us end the year with approximately 5.4 million barrels of capacity.

Our recent coastal belt cycle concluded in the 2017 third quarter, and we do not plan to build or take any delivery of any new barges in 2018.

Moving on to our distribution and services segment. Revenues for the fourth quarter were $377.7 million. Operating income for the quarter was $34.5 million, and this compares with operating income of $1.3 million in the 2016 fourth quarter. The segment's operating margin was 9.1%, including $0.02 per share of severance and early retirement expenses. This compares with 1.7% for the 2016 fourth quarter. The significant increase in our year-on-year financial performance can be attributed to our land-based operations and the incremental contribution from Stewart & Stevenson.

During the quarter, our land-based manufacturing businesses saw a strong demand for the new construction of petropumping units and higher sales of new transmissions, engines and parts. Early integration efforts also contributed to higher revenues and profits, as we were able to deliver additional new units that otherwise would not have been possible due to labor and capacity constraints.

Additionally, our land-based businesses experienced a steady backlog for the remanufacturing of pressure pumping units and transmission overhauls.

During the fourth quarter, the number of units on premises for remanufacturing remained elevated at levels compared to the third quarter. Though it did decline in December, as we approached the holidays and customers inventories of cold stacked equipment started to decline. Demand for rebuild transmissions was also steady, but was down compared to the third quarter due to vendor supply constraints and a higher mix of new transmission orders.

Rental and service revenues from standby power generation remained elevated in October, as a result of hurricane-related demand in Texas and in Florida. This business returned to normal operating levels in November and December.

In our Marine base distribution and services business, revenues and operating margin performance improved year-over-year and sequentially, primarily due to increased orders for medium speed engine overhauls in our inland markets and higher demand for parts in the Gulf Coast offshore drilling market. Service activity in the power generation market was slightly higher sequentially in year-on-year, primarily due to the timing of major projects. Operating margins in the marine distribution services business were in the low double digits during the fourth quarter.

Turning to the balance sheet. As of December 31, 2017, total debt was $992.4 million, a $269 million increase versus the end of 2016, mainly as a result of the Stewart & Stevenson acquisition. Our debt to total cap ratio at the end of the fourth quarter was 24.2%, a 1.1% increase from December 31, 2016.

At the end of last week, on January 26, our debt was approximately $970 million.

I will now discuss our guidance for the first quarter and full year 2018.

In our press release last night, we announced our 2018 first quarter guidance of $0.45 to $0.65 per share and full year 2018 guidance of $2.50 to $3 per share. These guidance ranges include the benefit of a lower effective tax rate of $0.08 or $0.12 per share for the first quarter and $0.40 to $0.50 per share for the full year.

Overall, we expect our 2018 tax rate to average 24.5%. Our first quarter guidance includes a $0.05 to $0.10 per share temporary negative impact in our distribution and services segment related to the adoption of a new revenue recognition standard that limits percent of completion revenue accruals and is the primary reason for the wider quarterly EPS range. This new standard will result in revenue accrual timing differences during the first quarter for certain new pressure pumping unit orders. Full revenue recognition on these orders will be delayed until they are completed, with delivery currently expected in the second quarter. We do not expect this new standard to materially impact our full year results. In the inland marine transportation business, we expect our utilization to be in the low to mid-90% range, which is similar to what we experienced in the fourth quarter, with normal seasonal weather patterns across the year.

We expect that continued industry tank barge retirements, minimal new tank barge construction, industry consolidation and higher customer demand, together will yield improved overall utilization compared to 2016 -- 2017. As such, we will likely see modest mid-single digit pricing improvement in the second half of 2018, if not sooner. The low end of our guidance range assumes no inland pricing improvement in 2018 and the high end assumes mid- to high single digit pricing improvement in the second half of the year. We expect our revenue mix to be similar to 2017, with term contracts representing approximately 75% of our revenue, with the balance coming from the spot market.

In our coastal market, considering the early retirements of barges during the 2017 fourth quarter, we expect our utilization to be in the low to mid-80% range for both the first quarter and the full year.

Our guidance range considers pricing on coastal market contracts renewing, declining in the 10% to 15% range relative to 2017 levels, with the majority occurring in the first quarter.

Overall, we expect operating profit in our marine transportation segment to be slightly down year-on-year, with reductions in our inland business, driven primarily by the lagging effect of prior contract renewals including a major contract which renewed lower in -- the beginning of 2018, being offset by modest pricing improvement in the second half of 2018 and lower costs in our coastal business. Will these cost savings in coastal will be impactful? We do still anticipate that our operating margins in this business will remain negative throughout 2018, ranging in the low to mid-single digits.

For distribution and services segment, we expect continued strong demand for our land-based products and services, tied to the oil and gas industry, which represents approximately 60% of distribution and services revenue. While rig counts are only expected to increase modestly in 2018, expanding drill but uncompleted well inventories in North America are expected to contribute to oilfield activity growth in excess of 10%, with much of this related to completions-oriented products and services. This plays right into our well house with our expanded pressure pumping manufacturing and services businesses.

As Joe mentioned, analysts are predicting that another 2 million to 4 million horsepower of pressure pumping capacity is needed in North America over the next 1 to 2 years. We believe this represents an additional 15% to 25% of horsepower needed over current working horsepower in the market.

We are all -- we are comfort -- confident that with our newly expanded scale, large customer base and improved efficiencies, we will meaningfully participate in these incremental opportunities. However, it is possible that this growth could be somewhat constrained by declining availability of new engines, transmissions and parts, as many of our vendors supply chains are challenged.

In our marine distribution and services market, we expect improved results in 2018 as maintenance deferrals are no longer sustainable.

To that end, we anticipate higher demand for new diesel engines, overhauls and spare parts as we progress through the year. Our power generation business is expected to be relatively consistent with 2017 levels.

Overall, we're expecting operating margins in our distribution and services segment to be in the high single digits during 2018. Our capital spending for 2018 is expected to be $195 million to $215 million. This includes approximately $75 million in progress payments on new marine vessels, including 6 5,000 horsepower coastal tugboats announced last year as well as 15 new inland towboats of varying horsepower range. Approximately $100 million to $115 million is associated with capital upgrades and improvements to existing inland and coastal marine equipment, including ballast water treatment systems for coastal vessels as well as some facility improvements. The balance largely relates to rental fleet of new machine marine equipment and facility improvements in the distribution and services segment. We expect the new 15 inland towboats to be delivered over a period of 3 years, with 5 2,000 horsepower vessels being delivered during the third and fourth quarters of 2018.

These 15 towboats are expected to cost approximately $30 million to $35 million, and they will replace older and less efficient vessels that we retired or sold during the fourth quarter, which did result in a $4.3 million loss on sale.

In conclusion, we entered 2018 with optimism in our marine transportation businesses. Demand for inland barges is expected to remain high and we believe at pricing inflection will occur in the second half of 2018, if not sooner. We are poised to take advantage of our strong balance sheet to pursue appropriate acquisition opportunities and emerge from the industry downturn stronger and more efficient in the inland tank barge market.

Coast ways, we have done our part to rationalize the industry's fleet and improve our profitably going forward, but we need the industry to mirror our actions. If others will follow our lead, an accelerated balance can be restored to the struggling market. Our distribution and services segment has considerable opportunity ahead of it for profitable year-on-year growth. The acquisition of Stewart & Stevenson has proven very successful to date and with additional cost synergies and improved efficiencies to be gained, this segment will likely be a bright spot in 2018. We intend to capitalize on all of these opportunities and as we do, we will remain steadfast in our unwavering commitment to safety, customer service and return on capital.

This concludes our prepared remarks on the fourth quarter and our guidance. But before we go to question and answers, I'd like to briefly discuss a few other items. First, please mark your calendar for Kirby's 2018 Analyst Day to be held in Houston, the evening of Monday, May 14, throughout the day, Tuesday, May 15. The purpose of this event is to showcase our marine transportation operations and to help you better understand our growing distribution and services business.

More information will be forthcoming in the coming weeks. Second, as some of you are aware, Brian Carey, who has been leading our Investor Relations efforts for the last year, will be rotating back into our distribution and services business in the next couple of weeks. Brian will be working as part of our service operations leadership team, helping with the integration of Stewart & Stevenson into the Kirby organization.

Going forward, the IR function will be led by Eric Holcomb, who recently joined Kirby from Baker Hughes as our new VP of Investor Relations.

I'd like to thank Brian for his dedicated service during the last year and wish him all the best in his new role as well as welcome Eric to Kirby. And finally, I'm pleased to announce that Bill Harvey joins Kirby, effective today, as our Executive Vice President of Finance, and he will become our new CFO later this month after the 10-K is filed. Bill has more than 14 years of experience as a CFO primarily in the energy and paper industries. He's a chartered financial analyst, he has an MBA from the University of Toronto and a BS in mechanical engineering from Queen's University. Please join me in welcoming Bill to Kirby.

Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from Gregory Lewis of Crédit Suisse.

Welcome, Eric, good luck, Brian. And -- so David, as we look at the inland market, if you could talk a little bit about that, it looked like inland revenue spiked up sequentially. But as we look forward, it seems like contract resets and roll-offs are going to continue to put downward pressure on the inland business. So I'm just, kind of, trying to connect the dots and what got Q4 inland utilization higher. But as we think about roll-offs, it sounds and looks like you've -- it sounds like inland revenues going forward should be going down.

Yes, Greg. First, in the fourth quarter you saw inland utilization is up and it spiked up right after Hurricane Harvey. But frankly, its maintained a higher level of utilization. We've been in the 90% to 95% range all through the fourth quarter and that's carried off -- on into January. Now some of that is temporary, as you know, with weather and lock delays and whatnot, that's temporary and we've also had a customer or two that had some plan upsets which added demand. But we've seen our pickup improved and also these chemical plants coming on has increased in volumes. And then just a general market environment with hard crude prices and higher refined product prices has helped our customers and we're just seeing more volumes. So some of the pickup in utilization is temporary, but another portion of it, a good portion of it, seems to be more sustainable, which, frankly, gives us some optimism as we look to a pricing inflection. As you heard in our prepared comments, we saw a little pickup in spot pricing in the -- at the end of the fourth quarter. And frankly, that's carried into the first quarter with the bottom end of the spot market starting to pick up a little bit on pricing, which is good. So in our guidance, as you know, we put an inflection happening midyear '18. That -- it may happen sooner, but as you know, we said that might happen in '17. So we're being a little cautious before calling a term but we're certainly a lot closer. And if this demand continues to hold, it could be pretty good. But to your question about contracts, almost all of our major contracts have reset and we're basically reset through '18. But as you know, Greg, that has a full year effect when you average in the revenue and the pricing declines that, when we renewed the contracts in 2017 happened. So I would say most of our contracts are -- have reset and there's only a very tiny bit that need to reset in '18. So I think we're largely behind that and we're looking at inland margins and what -- marine margins, essentially, that are flat year-over-year through '18.

Okay, great. As then just, as we shift over to DNS, it looks like the Riemann business was more steady than accelerating. I guess, Joe talked about the fact that the, the installed fleet base of pressure pumping equipment is expanding. Is part of that reason for the steadiness in rebuilding the lack of or the delays in the supply chain where it's just difficult for you guys to get your hands on equipment that you need to do these rebuilds?

Yes, that's part of it. We've -- certainly a lot more busy in our land-based distribution, and services business continues to build, but we are seeing our OEM vendors delivery times and lead times stretch out. So I think the market does need 2 million to 4 million more horsepower. What will constrain that growth is the supply chain. So that's all in our guidance, but I would say this, when you -- we got a lot going on in the quarter as you could tell with the tax rates and revenue recognition and the addition of Stewart & Stevenson and the growth in the land-based business. But one way to maybe cut through all that noise is if you look at Kirby's EBIT for 2017, it was around $200 million. And if you look at our low end and high end of our guidance, it implies about $240 million in EBIT in the low end and $285 million in the high end. So we've got the growth happening and clearly, the land base is a big part of that in 2018. If the supply chain works really well, we'll certainly be closer to the high end. If it's more constrained we could be in the middle or even on the low end. But we'll see that our vendors are ramping up their capacity as best they can and everybody's working towards it. I am encouraged that our pressure pumping customers and even their customers, EMP customers, have a little more capital discipline. So the cycle's more ratable than it has been in the past. We're just seeing a little more discipline. And if you listen to Halliburton and Schlumberger's capital expanding -- expenditure plans, they're essentially flat year-over-year. So we're actually encouraged by that, it means that it could be a more ratable cycle that has longer legs.

And David, let me just add that the remanufacturing side of the -- should be a more ratable business. It should last really through the cycle. The pure manufacturing side will be a little more volatile, but we're hopeful that degree remanufacturing side will be steadier.

Our next question comes from Michael Webber of Wells Fargo.

David, I wanted to follow-up on inland first and then move to coastal. But kind of along the lines of Greg's question, if we think about the fact you did -- most of your business is, as we price at this point and when you're guiding to slightly lower year-on-year EBIT, that's really just the annualization of, kind of, that bottomed out pricing. Can you may be go to a number on, on a percentage basis, may be what the actual tail of your portfolio looks like on the marine trans business that actually hasn't repriced? And maybe how much of that would actually, kind of -- the remainder there would get -- how much of that would get -- actually get repriced in the first half of the year?

Yes, it's very little. As a matter of fact I -- it's pretty small. Almost every major contract is repriced through '17. And of course, as you heard in the prepared comments, the first part of '18 we have a major one repriced. So there's really very little that's going to reprice in 2018. We're pretty much through.

Okay, that's helpful. And then just, maybe on coastal. Just curious, after you guys are done, I guess, I just think, S&S, when you look at the coastal market, I guess my question is twofold. One, is there a scenario in which you think about the coastal market and consolidation, in the same way you thought about the inland market, just given the fact that the spaces, you're starting to see some capacity come out, I know, I am sure you guys have a bunch of old ATBs that have been lingering for the better part of the decade, but eventually those will start to come out. So just curious whether that's a nonstarter for you or whether that's something you would entertain and then have a core area there when you think about that market, the BLS, bread spread seems like it should be starting to support some longer haul movements for some larger assets up and around Florida? Just curious have you see any uptick there?

Yes, well on the coastal side, we did an early retirement and impairment of the assets, which we think is a good step to bringing that market back into balance. We need some of our competitors to do the same and I think when you start looking at ballast water treatment, they will do the same. So we could get back in the balance sooner with the coastal market. But in terms of consolidating, we're about to come out of the bottom of the -- we certainly reached the bottom of the inland market and we're about to come out of it. So our focus, really, is on inland consolidating acquisitions now. I do think it'll be a while before we'd consider a coast-wise consolidating acquisition. Our real preference would be to do an inland one now. But I think the news is positive in the coast-wise market. As you said, the Brent WTI spread helps. We're hearing that more MNR -- MR tankers are booked up. There's been a little tick up in utilization here recently. I think some of that's cold weather in the Northeast, that's certainly helping. Our steps to take out capacities helping. And as you mentioned, OSG, I think they've got some plans to retire some older equipment and others need to do the same. So we're constructive, we're doing our part and we need the others in the industry to do their part and we feel that ballast water treatments going to help them get to that decision point.

Our next question comes from Jack Atkins of Stephens.

So David, I guess, just going back to the contract renewal cadence that you're referencing earlier. If we think about not a lot of contracts being repriced in 2018, but the guidance is expecting, I think if we said that the upper end, midpoint upper end, mid- to upper single digits, in terms of contractual rate renewals, is that -- I guess I'm just trying to understand where those -- where that incremental pricing is coming from, if you don't have a lot of contracts that are renewing this year?

No, let me be clear, Jack. I'm sorry if I was confusing on that. The -- we have a group of contracts that reprice every year. And then we have a group of spot contracts that are repricing real time. And then we've got some longer-term pieces. As you've heard us discuss, 35% of our portfolio is multiyear and then another probably 30%, 35% reprices annually and then we've got the spot piece that remains. And what I didn't say this very clearly but the current low pricing, our contracts had mostly reflect the current low pricing that we see throughout the market. As that group of contracts reprises in 2018, there -- if there is an inflection point, we will see some of that in 2018. Does that help?

No, it does, it does. I thought there was a good shot that renewed annually, I just wanted to make sure, I think everyone's on the same page there. So that definitely makes sense. And then for my follow-up question, just kind of sticking with inland for a moment. What -- where do you think industry utilization sits right now? I mean you guys have sort of been trending, it seems like at the upper end of the industry, really, this entire down cycle, because of the quality of your assets and operations. But do you feel like the industry is trending at, call it, mid-80s or so, or maybe even higher than that. And if so, why you think it's taking so long to actually start to get priced? Because it seems like historically, at this level of utilization we would have already begun to see contractual pricing recover.

Yes, no, good question. Utilization, our utilization, as I said, was 90% to 95%. I think the industry is a little below that, may be mid-80s to high-80s, maybe even low-90s. And as you heard, at the end of the fourth quarter we saw a little bit of spot pricing improvement on the low end and that's kind of continued here into January. So what has to happen is you have to have the sport pricing increased before you can started getting the contract pricing up. And it's just too early to call that right now. Some of it, as I said, in my earlier comments is weather-related and temporary with some plant disruptions, but if this continues it could be very constructive. It's just too early to say that, and we need spot pricing to continue to strengthen for the contracts to start renewing higher.

David, let me just add that there is another component of pricing and that's confidence. The market has to have confidence that they think that the pricing is going to stick. And that, based on utilization rates and industry utilization rates, I think if you maintain these rates, you're going to see the confidence to begin the move rates. So that's encouraging.

Our next question comes from Jon Chappell of Evercore.

One more on the coastal side. If the market's 22 million barrels, say, if you guys 5.4 million barrels, about a quarter of the market share. And you've done your part by taking out about 4% of the fleet. What's your estimate for the overcapacity? How much needs to be removed kind of industry wide to get you to that balance of utilization, where you can see an inflection in pricing?

Yes, I -- this is just an estimate but I would say 1.5 million to 2 million barrels of capacity needs to come out. We did 830 million -- 830,000 barrels. So it's and we're kind of a quarter of a market, as you say. So if others do their part we could get back in the balance a lot sooner than we had originally thought.

And I'm sorry is that 1.5 to 2 inclusive of your 830,000, or is that in excess of that?

In excess, yes.

Okay, got it. And then finally, and this is something that I think we revisit may be every 6 months or so. But I think as in Joe's prepared remarks, actually, 30 new petrochemical plants waiting to come online in the next 2 years or so. It seems like we're -- that petrochemical buildout continue to get pushed out to the right, whether it was energy prices or just a couple of investments, et cetera. But we seem a lot closer now. So as we get closer to the ramp-up of these plants. Is there any better clarity as to liquids versus pallets and what these new plants -- these plants and their nameplate capacity may mean for inland barge demand?

Yes, we're getting closer. We're having more detailed discussions around our potential barge moves, particularly with some of our customers that we've got multiyear agreements with. We're getting more specific about their barge needs. I don't want to get into too much detail because it's customer specific. But yes, we're getting into more detailed discussions about the barge moves, which is actually pretty exciting. Now again, it's hard to -- if you asked me how many barges is it going to be, that's really hard for me to say. I just know GDP is going to be 3% and this chemical is going to add something to it. It's a pretty big increase in the chemical plant capacity, but it's still hard to nail down the liquid side of it. When we look at the derivative plants that have been announced, roughly 40% will go into derivative plants, the ethylene, and then 60% will go into pallets or plastics. So it's just really tough to get more specific than that. We're not trying to avoid getting specific it's just -- it's still hard to nail it down to the number of barges. But I will say this, and we've seen it in methanol, we've picked up the number of methanol barges. We're moving, we're seeing some other barge moves, a little bit in some of the other trade lanes. And we're having definitive discussions with some of our major customers about their needs. So that's kind of where we are. I know you'd like us to say it's x100 barges, but it's still too difficult to say that, Jon.

Our next question comes from Randy Giveans of Jefferies.

So clearly, your press release on the call covered a lot. So I'm -- just a few quick questions. Last quarter, you said S&S contributed $0.03 per share to 3Q '17 earnings. What was that contribution for 4Q earnings?

Yes, it was -- it's about $0.06.

Okay. And is that a good run rate going forward?

Yes, well you can analyze that and then add a little bit for growth and add a little bit for synergies. But again, we're merging those businesses with our land -- our two land-based businesses at United and S&S and it's going to be more and more difficult for us to breakout S&S. So what you'll hear us start to talk about is, in distribution and services, about 60 of it -- 60% of its oil and gas and we'll try and give you a feel for that going forward. Another 20% will be marine and power generation and the remaining 20% will be commercial and industrial. And we'll probably talk to that, if you think, 60-20-20 in terms of revenue split. And then the margins in each of those splits are manufacturing or excuse me, oil and gas is more like mid- to high single digits and the other two segments are more high single digits in terms of margins. So as you think about building out a model, you might start thinking about it that way, because as we merge the businesses, we're going to run them seamlessly. We saw in the fourth quarter, we were able to share orders and manufacturing capability between S&S and United. And we were, frankly, able to capture more inbound because of our ability to do that. And as you would expect, we're putting them together, looking for synergies and finding them. So it's just going to be harder and harder to talk about S&S specific.

Secondly, so I'm looking at the Marine Transportation business, I think your last announced acquisition was back in June for $16 million-or-so. So clearly, Kirby's been a buyer in the downturn over the past years. So just asking, why has there been this lack of acquisitions, I guess, over the last 6 or 7 months.

Yes, I -- typically and Joe can give you the history here on all the acquisitions. But typically, you have to be emerging from the bottom of the cycle. Nobody really wants to sell at the bottom of the cycle. And we are -- as we've said in our earlier calls, we're in discussions. I -- frankly, I'm not at liberty to talk about any acquisitions at this time. But typically, you have to be coming out of the bottom in order to get these transactions going. Joe, would you mind sharing some history there and your thoughts around that?

David, I think you said it correctly. This isn't something that you go to the store go to the shelf and take an acquisition off the shelf. These are -- these negotiations sometimes take years. There are a lot of different factors that look at -- that come to bear when a seller is deciding to sell. I think the only thing that I would, I guess, add to David's comments is that we still think that the environment is excellent for a further rationalization in the business and we're clearly going to be a participate -- participant in it.

Sure. I'm sure some of these smaller operators are not really keen to let go of their last 2 or 3 barges, so makes sense.

Our next question comes from Kevin Sterling of Seaport Global.

Brian, congrats on your new role. David, let me ask that the pricing question, if you don't mind, maybe a little differently, you guys always give great color, you always do a good job answering. But as we think about 2017, we thought pricing would go up and it's on the inland side and it never really materialized and even now we think it might increase in the back half of '18. But as I look at the dynamics in the inland business, we have, it seems to me, we have a couple of operators, a few operators, that are trafficking in the spot market, that are pressuring pricing, that are pricing well below contract rates or even pricing well below than where they need to be. My question to you is, what needs to happen to get them to change their behavior? It seems to -- it seems like they've been acting this way for some time they haven't changed yet. Maybe what do we need to see that will get these guys to change their behavior and, essentially, price more rationally?

Yes, well, I think, not to be competitor specific, but one or two of the aggressive competitors has termed up things. We're happy for that, and we glad they turned up at lower rates. And we're starting to see a little movement at the low end of the spot market. So I think that's a good sign. It indicates that the market's a little tighter across the board. Some of the aggressive guys are termed up. They don't have as much spot equipment to go out and pressure the market. And frankly, with the utilization having picked up, it's good to have scarce barges. Being barge short here helps everybody's mindset. So I think it's marching toward where we want it to be. Kevin, it is just -- it's just too soon to say that we're there. I think having some of the aggressive guys termed up is definitely what needs to happen and what we think has begun to happen.

And then switching gears to coastal, David. Looks like in your outlook, you guys are calling for, roughly, I guess, low-80s utilization in coastal and that's almost a 20% improvement from where we are today. I guess my question is, how do we get there? I know you guys have retired some equipment or scrapping some equipment pulling it off the water. But how do we get to that low-80s utilization in coastal and particular, if other operators don't follow your lead, can we still get to the low-80s. If you guys are the only ones that are scrapping equipment.

Well our utilization jumped basically because we took out the 11 barges. So -- and we've got a pretty good portfolio of customers and feel pretty good about keeping our utilization for the year in that 80% to 85% range. I think other competitors are going to do the same. It's just a fact that they've got to bring these older vessels in for shipyards. They're going to be looking at ballast water treatment. So I think there will be more scrapping and the whole industry's utilization will tighten up. Hard to say when, but again, where -- we did our share, may be a little more than our share and I'm getting more optimistic about the coastal business. But it's still going to be painful. We're not -- you heard our guidance for coastal this year. But it's certainly feeling a little better.

Is coastal at the same dynamic that we're seeing in England, where you've got a few operators that are just trafficking in spot market and really pricing aggressively when they don't necessarily need to be, the similar dynamic?

Yes, but not as bad. I think everybody -- what's happening is, it's really painful for these big units to be idle, so people will push down contract prices just to lock them up and keep cash flow moving. It's a little different in the inland market. The increments of capacity in the inland market are smaller and less painful and they're not working. So you can chase little spot deals. I think in the coast-wise market, people want term contracts just because the spot moves can be hundreds of miles away and there's a lot of, to reposition for a spot move is very costly. So I think that's what's made the pain in the coast-wise markets more acute, because there's a rush to try and get contracts -- term contracts.

Our next question comes from Justin Bergner of Gabelli & Company.

2 quick clarification questions. Of the 11 coastal barges that you guys are pulling out of service, you mentioned that ballast water treatment was an issue for a number of them. Approximately how many of the 11, sort of, were due or soon to be due for ballast water treatment versus those that were retired for other reasons?

I don't have that right off on the top of my head. I think it's 2 or 3.

2 or 3 had the ballast water issue and the others didn't?

Right.

Okay. And a second clarification question, I just want to make sure I understood exactly what you meant when you said that the spot market was improving on the low end, so if you could just clarify what that means?

Yes, really, what it -- our spot pricing is usually a little higher than the markets. And so when I say low end, I see aggressive guys going after aggressive -- spot business aggressively. So we've seen the -- kind of the low end of deals done and the spot market come up.

Okay, that's very helpful. And then lastly, your press release mentions competitor consolidation as a potential favorable driver for the inland barge market over the coming year. Are you suggesting that there are other players that are also trying to consolidate the inland barge market? Or was that just meant to refer to your own ambitions primarily?

Well, certainly, our ambitions, but there are some other competitors out there that have fairly decent balance sheets. And for example, we know one of the shippers, a major oil company that has their own barge fleet. They bought a series of barges from one of our other competitors. So they're actually helping consolidating. Now they're buying it for their own book of business, not to compete with us. But -- so that's even better. But there are other couple well, a reasonably capitalized competitors that I'm sure would be looking for consolidation opportunities as well. But primarily, we're the -- we've been the biggest consolidator in the industry. And from my perspective, any consolidation is good. The more rational approach is to have a fewer and fewer competitors, right? I mean, that's -- in any business that's better. But there are still, as you know, 40-or-so players in this market, used to be a lot more than that, but as time marches on, that list will get smaller and smaller and that's just good for any business, as you know.

Okay, Andrea. We'll take one more.

Our next question is from David Beard of Coker & Palmer.

David, I always wanted to get your thoughts in terms of what you think for the industry's supply demand, in terms of the order book and scrapping. And then correlated to that with the 30 barges you are returning. Do you expect those to trade in the spot market, or will some of those be scrapped or what's your thoughts there?

Yes, well, in terms of inland supply and demand, we believe supply, rough estimate about 50 to 60 barges will be built in 2018. The vast majority of those will be 10s and we understand that one of our competitors is building a series of about 40 barges for direct replacement, they've got some older -- old barges that they're retiring. So there is, as I said, 50 to 60 barges being built in 2018, but the vast majority for replacement. So we're not too worried about that, I don't think it adds to the overhand. It's just a replacement. In terms of what our returning chart of barges is, I think that's just normal noise in the market. And to be honest, I don't know what the charter will do with those barges, but they'll have to adjust and find out what they do with them. I don't know whether they'll come back to compete or not, but it's something to watch. We may change our mind and keep the barges if things tighten up, but that's our plans as of now.

All right, good.

David, I'm sorry, let me come back to that, I just got handed a note here. Actually the 30 that are going away are not all chartered, it's only about 5 of those who are chartered and 25 are owned. So those would be cut up. I apologize for that.

Okay. Thank you, everyone, for your interest in Kirby Corporation and participating in our call today. If you have any additional questions or comments, you can reach me directly at (713) 435-1545, or Brian Carey at (713) 435-1413. Thank you, and have a nice day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.