KEX
#We'll see if Joe shows up here in a second, otherwise this is <UNK> <UNK>.
I'll continue with some of the details of the quarter and recap our second quarter results in each of our markets, and then turn the call over to Andy on financials.
Following Andy's comments on the financials, we'll open up ---+ well, I'll give an update on the outlook and then we'll open it up to QA.
In the inland marine transportation market our utilization ranged from mid-80% to high-80% level during the second quarter as operating conditions improved as a result of better weather, increasing our efficiency, and lowering utilization relative to the first quarter.
Utilization declined in the quarter as a result of this improved operating efficiency but also because of some decreased seasonal demand for the transportation of agricultural chemical products, as well as a return of the black oil fleet to its normal levels in the back half of the quarter as refinery turnaround activity in the Gulf Coast wrapped up.
Pricing on term contracts that renewed during the second quarter was down in the mid-single digits compared to the 2016 second quarter.
Spot prices were essentially consistent with the 2017 first quarter.
In our coastal marine transportation sector, demand for the coastwise transportation of black oil and petrochemicals was relatively stable compared to the 2017 first quarter and the 2016 second quarter.
Demand in the refined petroleum products market was lower year-over-year but flat sequentially.
We expect to see an oversupply of tank barges and barrel capacity in the coastal barge market through yearend and few short-term demand catalysts to alter the fundamentals of the market.
We continue to aggressively manage cost by temporarily idling equipment where it makes commercial sense, including temporarily laying up barges.
So coastal tank barge utilization was in the high 60% to mid-70% during the quarter.
Regarding coastal market pricing, generally spot rates remain below contract rates.
The degree to what varies based on geography, vessel size, vessel capabilities, and the product being transported.
As an example of where spot pricing was in the second quarter, spot rates for vessels in the 80,000 barrel to 100,000 barrel range in clean product service or approximately 20% to 25% lower than the second quarter a year ago.
That's the second quarter of 2016.
Pricing on both term and spot contracts was stable compared to the first quarter of this year.
In our land-based diesel engine services market, pressure pumping unit remanufacturing remains strong with the number of units at our facility for remanufactured averaging approximately 110 during the quarter, even as we increased our throughput.
Part sales associated with remanufacturing work improved modestly from earlier in the year as customers' inventories of parts have finally begun to diminish.
In terms of new equipment manufacturing, we received one frac spread order in the second quarter, the second of the year, and expected to deliver in the third quarter.
One frac spread generally consists of 20 to 28 pieces of new equipment made up of pressure pumping units and a few pieces of ancillary support equipment.
Customers continue to show interest in new frac spreads but have been slow to commit to orders.
In our distribution business, demand for rebuilt transmissions remained elevated in the second quarter surpassing our all-time high.
On the other hand, the sales of engines parts in new transmissions remained fairly weak in comparison to prior recoveries and expansions.
That being said, we are encouraged by recent customer activity, including some meaningful third quarter orders.
We are excited about the potential for combining the increased efficiency and near peak margins we saw in the second quarter with higher revenue as product sales begin to improve.
In our marine diesel engine business, performance was seasonally weaker than the 2017 first quarter and the 2016 second quarter primarily due to increased deferrals of major overhaul projects consistent with the relatively weak inland tank and dry cargo barge markets as well as the weaker coastal marine markets.
Service activity and parts demand in the power generation market was in line with the 2017 first quarter and lower than the 2016 second quarter due to a lack of new engine sales in the first half of this year.
However, operating margins were only slightly lower sequentially and improved year over year.
Andy will now walk through the financials in further detail and I'll come back for a discussion on the outlook.
Thanks, <UNK>.
In the 2017 first quarter, marine transportation segment revenue declined $47 million, or 12%, and operating income declined $37 million, or 51%, as compared with the 2016 second quarter.
The decline in revenue and operating income in the second quarter as compared to the prior year quarter was mainly due to continued lower inland marine pricing and coastal marine utilization.
The marine transportation segment's operating margin was 10.8% compared with 19.2% for the 2016 second quarter.
The inland sector contributed slightly more than 2/3 of marine transportation revenue during the 2017 second quarter.
Long-term inland marine transportation contracts, those contracts with a term of 1 year or longer in duration, contributed approximately 75% of revenue with 48% attributable to time charters and 52% from affreightment contracts.
The inland sector generated an operating margin in the mid-teens for the quarter.
In the coastal sector, many customers continued to source their barge needs in the spot market rather than renew existing term contracts.
The percentage of coastal revenue under term contracts was consistent with the 2017 first quarter at approximately 80%, primarily as a result of lower utilization and revenue for spot equipment.
The second quarter negative operating margin for the coastal sector was in the low-single digits.
In regards to our marine construction and retirement plans, we took delivery of 1 30,000-barrel inland tank barge and retired 16 over the course of the second quarter.
The net result was a decrease of 15 tank barges in our inland tank barge fleet for a total reduction of approximately 269,000 barrels of capacity.
For the remaining 6 months of the year, we expect to fold in the 9 pressure barges and 4 30,000-barrel barges from the recently closed asset purchase, take delivery of 4 additional 30,000-barrel inland tank barges and retire 10 more barges with approximately 183,000 barrels of capacity.
[Net] we expect to end 2017 with a total of 856 tank barges, representing 17.6 million barrels of capacity.
f In the coastwise transportation sector, there were no new additions to the fleet.
We sold 1 18,000-barrel barge during the quarter, ending the quarter with approximately 6.1 million barrels of capacity.
In terms of coastal fleet additions, we now have just 1 remaining barge on order.
We expect to take delivery of that 155,000-barrel ATB in the third quarter.
In our diesel engine services segment, revenue for the 2017 second quarter increased 125% from the 2016 second quarter, and operating income for the quarter was $16.4 million as compared with an operating loss of $2 million in the 2016 second quarter.
The segment's operating margin was 11.5% compared with a negative 3.1% for the 2016 second quarter.
Our land-based operations made up approximately 75% of the diesel engine services segment's revenue in the second quarter with an operating margin in the low-double digits.
The revenue composition of this quarter is largely similar to the 2017 first quarter, but we saw sequential margin improvement as we experienced improved operating leverage from high throughput.
The marine and power generation operations contributed approximately 25% of the diesel engine services revenue in the second quarter, with an operating margin in the mid-teens.
On the corporate side of things, we incurred approximately $707,000 in acquisition-related charges in the second quarter as well as about $187,000 in the write-off of deferred financing cost as a result of expanding our revolver credit facility.
Our capital spending guidance for 2017 remains unchanged at $165 million to $185 million.
We do not expect any changes to our quarterly tax rates.
Our guidance uses a rate of approximately 40% for the third quarter and approximately 38% for the fourth quarter.
For the full year 2017, our guidance uses a tax rate of 38%.
As of June 30, 2017, total debt on our balance sheet was $591.5 million, a $131.3 million decrease from December 31, 2016.
Our debt-to-cap ratio at the end of the second quarter was 19.3%, a 3.8 point decline from December 31, 2016.
As of today, after closing our asset purchase, our debt stands at $654 million.
I'll now turn the call back over to <UNK>.
All right.
Thank you, Andy.
In our press release last night, we announced our 2017 third quarter guidance of $0.40 to $0.55 per share and narrowed our full-year 2017 guidance to $1.80 to $2.10 and that's down from or narrowed from $1.70 to $2.20 per share.
But it essentially leaves the midpoint unchanged.
This does not include any impact from the acquisition of Stewart Stevenson.
But in brief, we are taking a more conservative stance on our annual guidance, lowering our expectations on the coastal marine business given the realities of the market, tempering our inland pricing expectations, but offsetting this with strength and our land-based diesel engine services market.
In the inland marine transportation market, we expect utilization in the mid-80% to low-90% range for the third quarter and full-year, a range that assumes stable demand across the inland fleet.
We look for delay days to remain low in the early part of the third quarter and gradually increase through the fourth quarter as operating conditions deteriorate with weather and potentially a more active hurricane season compared with 2016.
We are confident the supply and demand in the inland barge industry is moving towards balance.
Though we hoped it would result in modest pricing gains in the second half of 2017, we are modifying our guidance to a more conservative expectation where pricing does not improve this year.
As a result, the difference in the range in our updated guidance is dependent on tank barge utilization and contemplates flat pricing.
The downturn in the inland marine market has been one of the worst in 30 years, with pricing at unsustainably low levels.
We will be active and disciplined as we assess opportunities to grow our inland marine franchise and emerge from this cycle more efficient and better able to serve our customers.
In the coastal market on the low end of our guidance range, we contemplate \xe2\u20ac\u201c\xe2\u20ac\u201c and this includes temporarily laid up equipment \xe2\u20ac\u201c\xe2\u20ac\u201c we contemplate on the low end of the range mid-60% utilization and on the higher end of the range low-70% to mid-70% range.
We assume term and spot rate to hold steady through the end of the year and that renewing contracts reprice at spot levels.
We are guiding to full-year mid-single digit negative operating margin on the low-end and a negative low-single digit operating margin on the high end.
We are focused on aggressively managing cost in the coastal marine business until the market improves.
For our diesel engine services segment, in our land-based sector, we expect service work from pressure pumping unit remanufacturing and transmission overhauls in the third and fourth quarters to remain consistent with the first half of the year.
The new pressure pumping units from the frac spread ordered in the second quarter are expected to ship in the third quarter.
Barring a change in current trends in demand for pressure pumping horsepower in the onshore oil gas market, we expect inquiries regarding sales of new pressure pumping equipment to result in at least 1 additional frac spread order for the year.
We also expect to see some increase demand for a new product during the next 2 quarters.
Regarding Stewart Stevenson, we expect to close in the third quarter.
We are excited about the potential of combining our businesses with theirs in this very constructive market.
On our third quarter earnings call, post closing and upon the completion of a purchase price allocation study, we will be able to publish guidance for Stewart Stevenson for the remainder of 2017.
In our marine diesel markets, we do not expect any revenue improvement relative to the 2017 second quarter.
In the power generation market, we expect results that are relatively consistent with 2016, though slightly lower sequentially due to the deferrals that we are seeing by marine customers.
In summation, our second quarter 2017 results reflect a continuation of trend seen in late 2016 and in the first quarter of 2017 in all of our markets.
The inland marine business is safely and successfully meeting customer needs, while maintaining profitability in a very low pricing environment.
Though our coastal marine market faces weak market fundamentals for the near-term future, we are focused on aggressively managing costs without sacrificing our ability to respond to an eventual market rebound.
The land-based diesel engine services business has hit its stride in a healthy oil field service markets.
Our financial position is very solid with free cash flow, excluding acquisitions, expected to be comparable to 2016 and a balance sheet that provides us with flexibility.
Our debt-to-total capitalization ratio has steadily moved lower since the start of the year.
Assuming the close of the pending Stewart Stevenson acquisition and including the debt incurred from our recently closed inland barge acquisition, our debt-to-total capitalization ratio will be in the range of 26% to 28%.
So let me conclude our prepared remarks by saying, we are committed and have the balance sheet to pursue the right acquisitions for our inland marine market.
And we expect to emerge from this downturn larger and more efficient with unparalleled customer service in this industry.
Okay, Joe <UNK> has rejoined the call after we solved our technical issue.
Joe, if you want to make any comments, the line is open to you.
Otherwise, we can go to QA.
All right.
Operator, if you could open the call to questions and answers.
Well, I think let me let me say this that things are still going as we expected.
Our utilization is running 85% to low-90%s in that range, which is good.
We\
Well, hold on.
Just real quick, Greg.
Just on an EBITDA basis I think our margins are in almost the mid-teens.
So on a cash breakeven, I just wanted to make sure because you said cash breakeven.
That's a good question.
On the supply side of the inland side, we have not seen the shipyard order book grow at all.
And you ---+ typically you see it grow a little bit throughout the year.
I think at the beginning of the year we said there were about 40 barges going to be built in the inland side and the bulk of those would be for Marathon's buildings and for their own account.
We haven't seen that change.
It's still 40 barges.
I think equipment is being retired.
I know we've retired, what is it, 31 barges, Andy.
And I think maybe the retirements have been a little slower than we might have expected, but that's really hard for us to gauge because we don't have insight on who's retiring equipments.
It's just hard to tell what people are doing, but demand continues to inch up.
We are seeing the Petrochemical plants come on line, and we are talking to customers about their future needs which are growing.
Even some of these ethane straight to ethylene to straight to polyethylene plants are building barge docks and they may have some pressure cargos or some other cargos that come out of those ethylene plants anyway.
Not everything \xe2\u20ac\u201c- when you crack ethane, you still do get some other byproducts.
Now it's not as much as if you're cracking heavier feedstocks, but there's still some incremental barge demand there.
So the good news is we see that continuing.
Utilization is actually okay.
We're seeing a little pressure from, say, an undisciplined competitor that's probably pushing prices down where they don't need to be, but everything is still marching towards balance.
We're just being a little more conservative about that expectation.
Sure.
Yes, so we've purchased 9 pressure barges, 4 30,000-barrel clean barges, and 3 essentially brand new towboats in that acquisition.
The pressure barges they fill a niche for us.
We have a fairly large pressure barge fleet.
And some of these new chemical plants will have pressure-type products coming out.
So this helps us.
We've had a couple customers in particular that we do most of their business, or if not all of their business that have indicated the need for pressure barges.
So that fits very well into our portfolio at a very good time.
And, of course, the new horsepower or the new towboats, if you will, really fit nicely.
We're able to retire some old equipment that we had planned on retiring anyway.
So for us it was just one of those nice little bite size transactions that just fit perfectly into our needs.
Well, I think we'll see some legs with it because just what you just said that there's a lot of equipment that's been ignored.
And I think we're in a horsepower shortage.
And even if the rig counts kind of tempers itself like it feels like it's doing right now, the number of ducks out there, the undrilled the uncompleted wells is a huge backlog.
So I think it's got some legs or some staying power.
And unlike past cycles, I don't think it's a sharp upturn, which is good.
I think we're seeing our customers in the industry be a little more capital disciplined, very thoughtful about remanufacturing and a mix of new and remanufacturing.
I think it's a very healthy market from that perspective.
Our customers I think are being very thoughtful about how they deploy capital and how they use our equipment.
I'll also comment, there's been 2 oil company execs, I think BP said lower for longer, and Shell just said today lower forever, which I think plays to the shale plays.
If you think about all the big offshore fields and the price deck that's needed to justify big projects like that is higher than some of the shale plays.
And the shale opportunities in the U.S. have pretty decent breakeven prices.
So I think we'll see a pretty long period where shale production in the United States is the global swing producer.
I think that's not months, that's years.
So we're pretty optimistic about it, and we do like kind of the methodical discipline that we're seeing in the industry, particularly with our customer group.
No, I think, 1, we're being a little more conservative here but also, yes, we've had an undisciplined competitor in there that is in an environment where we'd normally see pricing increases, this competitor is doing what we don't think they should be doing and most of the industry doesn't.
But it's the reality, and we just thought we'd be a little more prudent with that outlook.
It's too early to call it.
But '19 is probably within the kind of range.
There is just too much equipment that came on in the last 2 years, if you will, and it just takes a lot longer to get that older equipment out.
And we're starting to see it.
We saw some older equipment retire this quarter, but we're still just long equipment.
We've also seen some kind of unusual maybe a stretch, but we've seen some refined products demand move around a bit.
As you know, up in the northeast right now, the Europeans are dumping a lot of refined product into the northeast, and you've even seen the very rare thing with the Colonial Pipeline not being full.
And I don't remember the last time I heard of Colonial Pipeline not being full.
So we've seen a little bit of that demand kind of bobble around.
I think when you look at the fundamentals of why so much capacity got built, it was in some respects in anticipation of crude moves here domestically and that triggered some of that building.
And to your point that crude's not there, and we've got the extra capacity.
But again, we've got 30-plus barges that need to retire, and I think like Kirby's doing, we're looking at our old assets and retiring them, and everybody is trying to stretch the life as long as they can and then retire it.
But in this market you will take out old equipment.
You've heard us say, it's hard to predict acquisitions.
It's all about the bid-offer spread and they've got to come together, right.
And the process of the bid-offer spread coming together keeps working and they are coming together.
It's just difficult to predict it, but I can tell you, Doug, we're looking at multiple opportunities, and they range the gamut from just small equipment pieces like we just did to the larger acquisitions.
And predicting those is difficult, as I'm sure you appreciate.
We remain disciplined.
As you know, we've always looked at things on a return on capital and make sure we can earn our return through a cycle.
So we're staying disciplined, and we think the opportunities out there, the opportunity set is growing not shrinking, and we're pretty excited about the possibilities.
But predicting them and getting them done is, it's just hard to do.
We're working hard on them.
But, as we said earlier, nobody wants to sell at the bottom.
So you've got to work that angle.
But we're actively working on both asset sales and whole companies.
So we'll see.
It's hard to say.
Yes.
Yes.
The last small acquisition we did is in our guidance, but the SS is not.
Historically, and we probably ought to get Joe's wisdom and experience involved in this discussion, but historically, when you've been above 85% and the customers and the industry think it's going to stay there, we get pricing.
So it's both the utilization and the mindset.
And our utilization has stayed in the range where we would typically have gotten in the past price increases.
And so it's a bit frustrating.
I think in the last 5 years, when we had crude by barge, people got used to utilization in the 90% ---+ between 90% and 95% but maybe have forgotten history a little bit.
But a couple undisciplined competitors can impact the market and they are.
But, again, I don't believe this is sustainable.
We know many ---+ many is probably too much of a statement, but we know several competitors that are likely in financial stress right now.
And so this situation is not sustainable.
I don't know, Joe, do you want to add any color to that or any more insight.
Maybe we lost ---+ we have technical problem again.
Okay.
All right.
I mean, <UNK>, you get the idea.
This is, again, typically, we should be able to push prices here.
But it doesn't take too many people to spoil that ability.
We do believe the particularly undisciplined competitor is in the same range as we are in terms of utilization, but they have just a little different mindset.
A little, Bill.
We lost 1 deal because of MR tanker.
But we were able to redeploy that equipment.
One of our 185s got displaced by a MR tanker.
185 is, kind of, our largest piece.
The MR tanker is, what, 330,000 barrels.
So they came down into our market and displaced one of our units.
But we were able to grab another contract with another customer with that unit.
So it has had some impact, but I would say, it's only in the margin.
Most of the MR tankers can't ---+ well, the MR tankers can't get to most of the docks that we get to.
You need barges smaller footprints to get to many of our customers' docks and terminals.
Yes.
If you have a ballast water system on your barge, you need to put a treatment system on it.
Now on the smaller barges what they may do is go to permanent ballast, but permanent ballast adds weight to the barge permanently and that reduces the amount of product that you can carry.
So there's always a tradeoff.
So you can put the system on, but that cost capital and real estate on the barge.
So it's an engineering economic balance.
And on a bigger barge, a 150,000 barrel or 100,000 barrel, you've got the real estate, you can do it, and you probably don't lose any product carrying capability.
But as you get down into the smaller barges, it gets tougher and it's a balance of do you have the real estate or do you go to permanent ballast and give up a little cargo carrying capacity.
It is.
We represent one of the key ballast water systems in our diesel business, and we have kind of the U.S.-wide franchise there.
And we've received a few orders, and you might imagine that as we as Kirby, when we install one, we're using the system that our guys represent.
So, yes, that will be incremental revenue for our diesel engine business.
