Kirby Corporation (KEX) Earnings Call Transcript & Summary

All right. Well, we're going to start a couple of seconds early because I'm sure we'll need it. But the -- next up, we have Kirby Corporation, who for many of you guys don't need introduction, so I won't belabor it. But with this, David, on my right, the CEO; and Bill on my left is the CFO. And David will take it from here. So...

Thanks. I'll blow through it real quick so we get to Q&A. We have our companies in 2 primary businesses, Distribution and Services and in Marine. We're the largest in both of those here in the United States. We've built them by acquisitions, and I'll talk a little bit more about each business here in a few minutes. These are the number of acquisitions we've done in the marine space, I think, 35 or so -- 37 maybe. We tend to be the consolidator in the marine space, particularly in the Inland Barge business. I'll tell you more about that business in a minute. Similarly, in Distribution and Services, we've grown that business through acquisition. These are a list of our acquisitions, including one of the larger ones we've done, Stewart & Stevenson back in 2017. When you look at our revenue growth, it's compounded at about 9%. Most of that's -- well, the vast majority of our products move kind of GDP -- with GDP. The inorganic growth has been through acquisitions. Earnings growth, just a little less than that over a 20-year period. We do have a strong emphasis on safety. You can imagine working in the marine environment, moving hazardous cargo. It's probably the most important thing we have that we focus on in our company. We do -- we are focused on ESG. We've got a -- for those interested, we've got a sustainability report in our -- on our website, and we can go to -- we dive into all that we're doing in ESG. Let me talk about the marine transportation business in some more detail. This is our highway system, if you will. The yellow lines, if you will, are the Mississippi River and all of the tributaries around here. The red line at the bottom on the Gulf Coast is the Intracoastal Waterway. Essentially, we can move a barge full of petrochemicals from Pittsburgh, all the way down to Brownsville to get into Mexico without changing barges or anything. So it's an extensive inland waterway system, but we also operate on the Gulf Coast, East Coast, West Coast, and then Alaska and Hawaii with large units, what we call our blue water business or coastal business. We're #1 in both in terms of market share, both in inland, we're about 27% if you use barge count. And coastal if used barrel capacity, we're #1 with about 22%. Demand drivers. This pie chart at the top, the green is petrochemical. About a little over half of what we move in our Marine business is petrochemical, that's growing at GDP plus something, and I'll talk about that in a second. Black oil is about 23% of what we move. Black oil, think, asphalt, heavy crude oil, bunkers -- ship bunkers that's growing about GDP, maybe a little less because ship bunkers seem to be coming down a bit. Refined product. That's about 19% of what we move. That's jet fuel, diesel and gasoline, that moves along with the U.S. GDP. And then ag chemicals is up and down with the ag -- with the crops in the United States, generally grows along GDP. So this is a map that's got a bunch of words on it, but it's a map in the United States and each call-out boxes, a group of petrochemical plants or refineries that are being built or expanded here in the United States. Hard to see it, but the green ones have come online recently. The red ones are under construction and the blue ones have been announced, not yet permitted. So this is helping that big piece of pie, that 54%, the green piece of pie grow at GDP plus a little. Whether it's plus 1% or 2%, we're not sure, but it's certainly giving us some extra volumes to move. These are some specific chemicals that have grown and are projected to grow. Methanol being the largest there at the bottom is growing quite handily right now. This is just to give you a feel for some of the chemical growth. These are the other products that we move on the inland waterways. And you can see there's a lot of growth there when you look at those petrochemical plants that are coming online. Diving in the inland market, this is the barge count in the inland market. You can see it's -- it grew a lot between 2011 and 2014, and that was all about shale. Shale coming on and putting crude on barges. And then what happened is pipelines came on in 2015 and demand stalled, and we had a little flat spot in the industry. Kirby, we're the largest. We benefit from our scale. We're better able to service our customers because we're more likely to have a towboat and the barge in the right place at the right time with a prior cargo that's compatible with the future move. So scale really does help us service our customers. This is a kind of the makeup of our fleet and what we do with it. The largest portion is in petrochemicals, as you would expect, with 140 -- with 828 barges in petrochemicals and refined products. The rest is in black oil, pressure products and ammonia. These are our competitors. You can see with 1,053 barges, we're the largest, almost 2.5x American Commercial Line, who, by the way, just declared bankruptcy as our nearest competitor. And then there you can see Savage Inland Marine, down 2/3 of the way down on that first box. We just announced the signing of a definitive agreement to acquire them. So their 90 barges will become part of our company when we close. This is probably the most complicated chart, but one that explains how we think about doing acquisitions. The bar chart -- the bars -- the blue bars are the industry barge count. The same as that line charter just showed. The dark blue portion of that is Kirby share. You can see our shares growing. Right now, we're about 27% market share. Once we complete the Savage acquisition, we'd be about 30%. The red line on this chart shows the average age of our barge fleet. You can see the average age is down to the lowest. That's good for future maintenance costs. The younger your fleet is the less maintenance costs you have. And then the gray shaded areas are barge recessions when we had negative pricing when supply and demand get out of whack and we lose pricing leverage. The call-out boxes are our acquisitions, and I think the takeaway from this is, we tend to buy in during barge recessions at the bottom of the market. And that's why we keep our balance sheet strong, so that we can move when we can get reasonable prices for the assets that we want to buy. This is the Savage acquisition's details, the 90 barges, young fleet and towboat and barge fleet, so we're very excited about it. It will be slightly accretive this year. We've got some integration costs that we have to absorb. We have to roll them into our fleet, and it's going to take us a while to get the synergies. It'll be very accretive one, very accretive. It will be certainly more accretive in '20-'21. This gives you a little feel for how we've increased our operating leverage during this 4-year down cycle that we had. We went -- kind of at the end of 2017, we had 841 barges; with Savage, we'll be over 1,100 barges, 36% increase or, can't read it, 38% increase in barge count. But barrel count, the barrel capacity is up about 50%. So we're excited as this cycle continues a slow steady march. This operating leverage should be great for our earnings profile. This shows the margins of our inland business. We've not broken this out, but we decided to do this to give you a feel for the nature of the cycles. You can see there are some very long cycles which we like, which if you look at from 2003 to 2009, that was a long cycle slow grind up in margins. We like that because when you have a slow grind, you don't get a speculative building. You don't get a lot of new equipment. The cycle from 2011 to 2014 was a little more rapid and started at a higher base. And so that encouraged a lot of building. And you saw that chart where we had a lot of building between 2011 and 2014. We don't want the building, so when you look at this cycle that we're in now, we're coming out of the bottom. You can see margins are on that same trajectory that we had in the 2003 to 2009 cycle. That's what we'd like. We don't see anything from a supply and demand standpoint that says that this won't continue to grind higher as it did in that 2003 and 2009 cycle. This basically says -- summarizes what I just said. Diving in the Coastal market, you can see the assets are much bigger, much more expensive. It's a much longer cycle versus the inland side. And when you look at our competitors, these are a list of all our competitors. The bars are the number of barges. The green line is barrel capacity. You can see we're the largest in terms of barrel capacity. When you look at the age profile of the coastal fleet, it's much older than the inland fleet. There's a big number of barges in the 10 to 15 years age range, which means that this market should continue to grind higher and because it takes a long time to bring in new equipment, and this older equipment needs to come out. So from a supply and demand standpoint, we think it looks like several years -- multiple years of upside as these old pieces of equipment come out. Diving into our Distribution and Services business. You can see these are our locations all around the U.S., but mainly in the oilfield area in the central part of the U.S. and then on the water for our marine, diesel repair business. We do represent in the distribution side, these brands. For example, Allison Transmission were the largest distributor of Allison transmissions. Similarly with MTU, we're the largest distributor of MTU engines in the United States for the -- in the world for that matter. But we represent all these engine and transmission and industrial equipment companies. We're a distributor, we're an authorized repair center for these brands. When you look at the end markets that we serve, about 65% of what we think we'll deal in 2020 is what we call commercial and industrial, that includes power generation, on-highway mining, specialty equipment rental and marine. The 35% of that pie chart is oil and gas. And as you know, that's going through a pretty tough time. Our customers have curtailed their spending, both from a capital standpoint and OpEx and that's impacted our guidance. This would guide into each of the businesses a little more within commercial and industrial, marine, it tells you about that power generation and on-highway. Similarly, in oil and gas, we do manufacturing, we make frac spreads. We're the largest noncaptive manufacturer of frac spreads in the world. As you might imagine, that business has been severely impacted by the downturn in pressure pumping here in the United States. We are starting to see a little life in this quarter, but nothing to get too excited about just yet. In Distribution, we do distribute spare parts throughout the oil and gas industry. This gives you a feel for the size of each manufacturing, about 20%, very heavily weighted to oil and gas. But even on Distribution, our spare parts and distribution is pretty heavy on oil and gas. I won't go through this. This is our guidance for 2020, a pretty broad range at the low end. Assumes a continuation of a very tough oilfield market. At the high end, we think there's some bounce back in the oilfield market. And it also includes a continue, nice, easy pace up in margin progression with our marine business. This shows our EBITDA of share. We generate pretty good cash flow. Here's another way to look at it. The light blue bars are cash from operations. The dark blue bars are capital expenditures. You can see our capital expenditures for 2020 are down, and our operating cash flow should be up year-over-year. So we should generate pretty healthy free cash flow this year. That's our debt-to-total cap. You can see it's down a bit. But with Savage, we'll be back up to -- with the Savage acquisition, we'll be back up to kind of 32%, 33% debt-to-total cap. We are investment grade. We're one of the only investment-grade companies in either the marine space in the U.S. or the Distribution and Services space. And that concludes my remarks. Ben?

Great. Thank you, David. I know there's going to -- there's a lot of questions, but I'll -- since I have the microphone, I'll go with the first one. Is -- and this reflects the question that I get all the time, and I'm sure you do, too. So we'll get it out of the way. The -- I'll put it this way. So if you were to -- knowing what you know now, and looking, let's say, 3, 5 years into the future, what does Kirby look like with respect to its disparate businesses and so forth?

Yes. I would say we will continue to grow our marine business. We're happy with distribution and services, the way it is now. It's got a good platform. We'd want to stabilize that a little more. You will see commercial and industrial grow with power generation, in particular, a lot of people are adding backup power -- everybody needs power 24/7 now for data and computer reasons. So if you look at KDS, it would kind of grind slower at GDP. We probably wouldn't add much to that. Marine will continue to do acquisitions, both inland and offshore. By preference, we like inland better. That just fits into our model much better. So I would hope we still have 30 competitors out there. I'd like to see us do -- in 5 years, do a few more acquisitions. We'd like to do that. So that I would imagine, we'll be more heavily weighted to marine in 5 years. And D&S should be a little more stable because we'll have grown more of the commercial and industrial.

All right. Well, I got my 1 question. So I have a lot more, but -- so don't feel pressured because I can get -- yes, Barry.

[indiscernible]

Sure. Yes, the capacity utilization on the inland side for the industry is between 95 -- well, excuse me, 90% and 95%. I think this morning, Bill and I were looking at, we're about 94% this morning. Pretty tight conditions, which is good. We obviously need that for pricing increases. But I think the industry is pretty fully utilized right now. That's on the inland side. Offshore, I would say, the industry is about 85% to 90% utilized, probably on the higher end of that range. We're continuing to get price increases there. I think last quarter, we were in the high single-digit in terms of term contracts we removed. So both businesses are pretty well utilized. Supply and demand is pretty much in balance. When we look at supply growth -- well, demand growth on inland, probably GDP plus a little because of petrochemicals. When we look at supply growth in inland, it's probably around GDP. We think there's going to be about 150 barges built in 2020. And maybe half of those are retired. So net adds about 2% to 3%, which is what we need to keep supply and demand in balance. On the Coastal side, I don't see much new supply at all coming on. And in fact, some of the older barges need to come out. So I would expect supply contracts in 2020, I know, we're retiring 3 units, and I believe a few other of our competitors are retiring units. So I would expect supply and demand on the Coastal side to tighten up a little more in utilization to get into the low 90s. So a pretty good time right now. I think these -- the supply and demand cycles are in good spot, and they're on a multiyear upswing in terms of where we need to go with pricing.

Just a follow-up. Again, for both [indiscernible] where are the rigs now relative to [indiscernible]

Yes. Well, let me try with inland first. If you want a double digit return, let's call it, a 10% return on capital on the inland side, you'd need 20% to 25%, maybe even as high as 30% higher pricing to justify building new capacity right now. That's if you're disciplined with your capital. Clearly, we have some competitors that still build, but most of the building we understand that's going to occur in 2020 is for replacement. On the Coastal side, pricing needs to be at least 30%, if not higher, higher, to justify new builds right now.

[indiscernible]

Yes. For those who don't know, American Commercial Barge Line filed for bankruptcy protection. It wrote down about $1 billion in debt. Gives them a new lease on life, so to speak. They've recapitalized the company. We think it's going to be business as usual. We continue -- ACLs has been a good player in the market. I think this gives them a new lease on life. But when you look at their financials and bills dug into them on -- in the filings, they are still pretty highly levered and probably -- I think, I don't know the precise number but probably over 4x EBITDA. So they've still got to be a good actor. We don't think there will be much change at all. The new owners could look at asset sales. If they do, of course, Kirby, we look at basically anything in our industry that becomes available. So we look at that, but it's hard for me to say right now. I would say, if you ask me to handicap, it will be business as normal.

All right. Well, good. So to the extent that you guys have built the company on acquisitions and rolling out things. Two part question here. So number one, what is the -- what's the current environment? Obviously, you just bought Savage. And specifically, I'm talking on the marine side here. Is there an active group of sellers in the market? And then secondly -- and Bill, we had this discussion last night that you guys have, let's call it, a secret sauce in a way that it's not so secret, it's economies of scale that enable you to generate better margins. Could you maybe talk through what that economies of scale looks like and relative to somebody that might have 90 barges like Savage? What's the margin difference we're leaving?

Yes. Well, clearly, we'd like to continue consolidating the business, but first still from a concentration standpoint, there's still 30 competitors out there. Some of them are very small. And to your question, it is getting more difficult to do business in our environment. For all the reasons you would expect, environmental compliance is a big part of that. Age requirements from our customers, they're requiring younger equipment and then they're inspecting the equipment much more thoroughly. Some of our customers have absolute age requirements where they won't use a vessel that's over 25 years old. And then you've got Subchapter M, which is a coast guard rule that requires towboats to be inspected. And that's taking up the level of expense that companies have to spend to keep them compliant. So the cost of compliance, the cost of insurance, cost of labor, cost of the customer vetting requirements continues to climb. So I think smaller competitors are -- it's tough, because you get -- it's hard to spread those costs over a small fleet. So I think you should see further consolidation in the inland industry. I think it's needed. We're still too many players in this. And does that mean there's something imminent? No. I think things are getting a little better, so now owners are probably more likely to hang on and wait it out. Yes, the second part of your question. I apologize...

Yes. No, just -- how are you able to...

Oh, the margin. Yes, it's really our ability. Our margins are higher for a number of reasons. One, we can spread the fixed costs out over more vessels, one; two, the way we manage our horsepower, our towboats, is very efficient. We have really good systems that allow us to do that. So we're more likely to be able to move towboats around to keep the cost down than anybody else. And when you look at insurance spreading the fixed cost, our horsepower management, we're able to get probably 3% to 5% more margin than most of our competitors. Bill, do you want to add anything to that?

I would just add that when we -- as we've had input from the other lenders in that who show -- who lend to private competitors because most of our competitors are private, so we don't really know their margins, unless we have to be looking at acquiring them. We see that the people have published indices, and that's what David said, 3% to 5% margin increment. Well, our margin is relative to their, seems to be pretty standard over every year. And I think that comes to, as David says, just the fleet, the economies of scale, ability to serve customers without having to do cleaning, because we're more likely to have a barge that has had a similar product. So we have some economies of scale in a network fashion, that really helps us. And when we bring companies in, we can put those -- we can get those synergies.

[indiscernible]

Yes, let me get back to that. There's a chart. Yes. Well, one, I think supply and demand are such that we should continue to grind higher for the next foreseeable future, whether it's the next 5 years or not, remains to be seen. What could derail that demands falling off, certainly, a global recession or even a U.S. recession could derail it. But outside of that, when I look at our customers and their plant expansions and the U.S. economy, we should have GDP-plus growth for a while. And then when I look at supply growth, I see supply growth looks to be right around GDP, maybe a little less than GDP. So when I look at that, I think our pricing increases should continue to grind higher in the mid-single digits. And typically, that could add 150 to 200 basis points in margin a year as long as we contain our costs and work on our cost structure, which, of course, we will try and do. So in terms of the baseball analogy, I think we're in early innings, kind of, second inning, maybe, third inning. And it feels like the 2003 cycle, where it was a long, steady grind up. That's kind of our view right now.

[indiscernible]

Yes. Our CapEx is $155 million to ...

$155 million to $175 million of CapEx.

And D&A?

D&A will be approximately same as last year, I don't see any change.

All right. Well, I have 30 seconds left, so well, what should I pick here. So I'll do this just real quick because it's been topical. Well, actually, this came up last night. At what point do you have the size and incremental growth is a little bit less meaningful that you consider becoming a dividend payer and maybe appealing a little bit more to value investors?

Yes, I would say once we're unable to do any more inland consolidation. Right now, we're at 30 -- with Savage, we're at 30% market share. When you look at the concentration in the Herfindahl Index, which the Justice Department uses, we think we can get to 40%, 45% market share before it would become a Justice problem. And you got to remember, we're also working for big multinational companies, right, Exxon. We're not working directly for consumers. These are the Exxon, Shell, Dows of the world. So we think we could get into that 40% market share and maybe mid-40s. And then we pretty much have to be shut down from doing much more. And then I think a dividend would make a lot of sense. We may get to a size where a dividend might make sense before then. We certainly, Bill and I discussed it with the Board, every Board meeting. So something we do look at.

All right. Great. Well, I really appreciate you taking the time to come up and come to Florida. It's a real trial, I'm sure.

Thank you.