Kirby Corporation (KEX) Earnings Call Transcript & Summary

Good morning, and welcome to the Kirby Corporation's coronavirus webcast hosted by Stephens. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jack Atkins, managing director and transportation analyst at Stephens. Sir, please go ahead.

Thank you, and good morning, everyone, and thank you for joining us on today's call with the Kirby management team. With me on the call are David Grzebinski, Kirby's President and Chief Executive Officer; Bill Harvey, Kirby's Executive Vice President and Chief Financial Officer; and Eric Holcomb, Kirby's Vice President of Investor Relations. We will start today's call with some prepared comments from David, and then we will have a Q&A session. Before we begin, I'd like to turn the call over to Eric for some opening remarks. Eric?

Thanks, Jack, and thanks, everyone, for joining us today. As a reminder, statements made in today's 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 our recent Form 10-K for the year ended December 31, 2019. With that, I'll turn the call over to David.

Thanks, Eric. Good morning, everyone, and special thanks to Jack and Stephens for hosting today's call. Look, it goes without saying that a lot has changed in recent weeks with this coronavirus outbreak and the steep decline in oil prices. So we here, at Kirby, just like all of you, are working hard to best understand what's happening in our markets, how best to deal with the coronavirus and how it will impact our business going forward. Well, we certainly don't have all the answers. We thought it would be beneficial to have a call now to tell you how we're responding, one; but, two, to give you a current view of what's going on in our businesses. First, I want to assure all our shareholders that we're taking all the necessary precautions to ensure business continuity and the safety of our employees and associates during these times. As you would imagine, Kirby has extensive, well-planned and detailed processes for events such as waterway emergencies, hurricanes and pandemics. In light of the recent events, we did enact our pandemic response plan a few weeks ago. As of today, well, and most of last week, all nonessential employees are working from home, and none of our employees have tested positive for coronavirus. We do have some quarantined employees just as a precaution, and we are actively safeguarding the welfare of our mariners and our field employees. As it stands today, our crisis team meets daily. And we work hard to keep the businesses operating, while retaining our focus on safety and customer service. I think everybody's doing that right now, but I'm happy to report that our businesses are all operating right now. So I'd like to shift now to discuss what is happening in our segments, and I'll start with Distribution and Services. It goes without saying that this segment will be adversely impacted by the recent decline in oil prices. Oil and gas activity has already started to decline, and many of our oilfield customers and their E&P customers are cutting CapEx plans for 2020. In response to these pressures, we have implemented a significant workforce reduction, both in our manufacturing business as well as in our distribution business. While these decisions are always difficult, we recognize that this market is unlikely to return soon, and these reductions are necessary. Our outlook for the oilfield-related portions of distribution and services was very low coming into this year. However, given the current reduction in demand, we have taken and will continue to take the necessary steps to reduce costs in this business. In Marine Transportation, the market remains very strong, and our utilization levels have been in the 95% range in recent weeks, although it has been influenced to some degree by difficult weather conditions and lock outages. Nonetheless, we're seeing a very strong market. While we do expect to see some reduced demand, particularly for crude and some refined products like jet fuel, it will be from a very tight operating environment. Although it's very tough to predict the full impact of the coronavirus in a recession, we think our Marine Transportation businesses are well positioned to weather these potential depressed market conditions. We anticipate that our volumes could decline, but we believe, as in past cycles, that our marine customer contracts and our variable cost structure will help to minimize the impact on the company. On the liquidity front, as a reminder, at year-end, our $850 million revolving credit facility was undrawn. We do expect to close the $278 million Savage Inland Marine acquisition in the coming weeks, and we did repay a $150 million note in February. So once Savage closes, we expect our liquidity will be in excess of $425 million. As well, we have a very substantial cushion in our bank facility covenants. In summary, we expect free cash flow in 2020 to be significant, even assuming a poor economic climate. And we will direct that free cash flow to reducing debt and increasing liquidity. Jack, that concludes my prepared remarks. Happy to get to questions.

Well, great, David, thank you for those opening remarks. And let me just start here with a couple of questions on your various businesses. I think it would be helpful for folks to get a sense for how a slower macroeconomy would impact your different business lines. And maybe let's start with inland, given its size and importance to the overall organization. It's encouraging to hear that inland activity remains strong. And if I'm not mistaken, there are some factors that should support utilization into this summer, like lock closures -- like the closure of the Illinois River, for example. So first, could you remind us what portion of your business is under long-term contracts within inland? And then second, could you talk about how a slowdown in underlying economic activity could impact the major end markets for your inland business, specifically, petrochemicals, refined products and crude oil?

Sure. Well, like in my prepared remarks, I said we're -- we've been 95% utilized. Actually, this morning, we were 97% utilized, which is -- frankly, is about as busy as I've ever seen it. So right now, I think -- right, currently, we're seeing our customers make sure their supply chains are in good shape. And when you think about their supply chains and running their plants and the economic ramifications of having to shut down a plant or not have the supply are pretty huge, and barging is a small cost of that to ensure the supply chain. So it's great right now. We're very busy. But to your point, an economic slowdown can happen. And we do expect also some crude barge demand to decline. But let me step back to the big picture. What we saw in '08 and '09, that was the last big economic recession in the U.S. We saw volumes fall about 10%. But we were able to actually cut our costs. We cut a lot of towboat and horsepower during that year and in '09. And actually, we're able to maintain our margins. And it wasn't until the following year where we saw a little dip in margins in our business. And that's due to the contract nature. So to your question, in the inland business, we're 60% to 65% long-term contracts. And by long term, I mean, more than a year, a year or more and with the balance being spot. But please remember that a lot of the spot contracts are 3 or 6 months, even some of them are 9 months. In our coastal business, we're more like 85% term contract. So that contract portfolio is helpful, pretty strong, with, as you might imagine, pretty high creditworthy customers. So we do believe it insulates us in the short run, for sure, because it takes a while for those contracts to roll off. Hopefully, this coronavirus economic impact is short-lived, but we'll see. I should probably talk about crude. You would expect that there would be some downturn in crude barges moving. I think -- not paradoxically, but back in -- at the beginning of 2015, when we started a very long 3-year downturn in the barge market, our barge market, there were about 550 barges moving crude oil, and there were a lot of barges being built. I think that year, there were 260 or 270 new barges coming to market. And we got down to the bottom of the market in 2018, where there were about 130 barges moving crude. So we had to absorb 400 barges or so plus barges in that market. And that's what prolonged the downturn. We're starting from a different point now. I think there's about 300 barges in the crude market, 50 of which we're moving. And -- but the good news is there's not a lot of new equipment coming on. So if we see it go back down to the low number of barges moving crude to about 130, you'd see about 150 barges or so that would probably have to be redeployed out of crude. To put that in context, that's probably 4% of the fleet. So just barging of crude could impact about 4% utilization across the industry. Now as you mentioned, the Illinois River is going to close this summer for a good long time. Our estimate right now is that will probably absorb about 100-plus barges as our customers position barges on the river before its closure. And that should last, I believe, Eric, was it July through August or...

October.

July through October, sorry. So that's kind of the backdrop, Jack.

Okay. That makes sense. So just a couple -- actually, several follow-up questions here on inland. To what degree does a much lower oil price and narrow, if not inverted, potentially Brent WTI spreads impact crude oil trading activity and the demand for crude oil barges within the inland segment?

Yes. Typically, when we've seen WTI and Brent collapse, that spread collapse, we do see less crude moving around. There's usually an arbitrage there. As we look at where it is right now, there's still a pretty decent gap on a percentage basis, with crude down at $20, a 10% gap in that spread is pretty big spread, actually. So it looks like $2 was pretty thin, but as a percentage basis, that's pretty big. It does -- in my mind, when that gap closes, it makes Brent more attractive to run the refineries. And there's less arbitrage opportunity for our customers. So hard for me to say, put it to a full number. But right now, it seems like that Brent WTI spread is holding at least in percentage terms.

Okay. Got you. Got you. And then the second follow-up question on inland. Some of your customers have already announced CapEx cuts for this year and, I guess, as they're looking forward potentially as well. Does that change the amount of incremental petrochemical activity that could come online either this year or next? And then, I guess, just from a bigger picture on petrochemical demand, could you just speak to how you think your petrochemical customers might react from a production perspective just given what's -- all the dislocation in the oil and gas markets?

Yes. Well, first, the new construction, you can look at what's happening in Pennsylvania. And Shell's building a big petrochemical facility there. It's probably halfway built. But basically, Shell and the state of Pennsylvania shut down the construction. So at the very least, that's going to be postponed, the start-up of that plant, because of what's going on. Now my view is, once they've started construction, they'll complete the plant. And I believe Shell said that they would. They're just complying with the requirements of the state of Pennsylvania, and to protect construction workers and whatnot that are building the plant. I do think if they've started the plants, they'll continue to build them. I think the ones that are looking for permits, I would imagine they'd put those on delay until things settle out and the U.S. economy settles out, and the world economy for that matter. As we talk to some of our customers, we're seeing them cut back their European refineries and plants first. We haven't heard much in terms of most of our customers cutting back U.S. refinery and chemical plant runs. We do know on the West Coast, they're cutting back some. I think P66 announced that they were cutting some back. And we heard Marathon was cutting one of its refineries back a little bit. But so far, we haven't seen a big downturn in terms of refinery runs and petrochemical plant capacity. My guess, and this is a supposition on my part, that these U.S. plants are some of their most efficient plants, and they would cut down elsewhere in the world first. But look, make no mistake, if this U.S. economy goes into recession, and we may already be there, they will probably cut down their volumes. And that's why I gave that context around the 2008, 2009 volume decline. But right now, we're not seeing it. Right now, we're, as I said, about as busy as I've ever seen it. And we'll hope that holds until we flatten the curve and turn it the other way.

Absolutely. Makes sense. Okay. And another follow-up question here on inland. Granted it's only been a couple of weeks, but -- and to your point, utilization rates remain very, very strong. But the news flow from a macro perspective has only been more challenging over the last couple of weeks, but have you noticed any change in tone at all as it relates to contract discussions with your customers?

No, not at all. Not at all. And actually, pricing is not only holding, we've seen a tick up a little bit in pricing. So yes, I think everybody wants to have their barges available is the way I would say. Right now, I mean, look, this can all change, but right now, it's pretty strong.

Got it. Got it. Makes sense, and that's great to hear. Okay. Last follow-up on inland. Do you have any large multiyear inland contracts that are coming up for renewal in the second half of this year that might be repriced in a more challenging operating environment if we do see a tougher macro?

No, not any more normal -- any more than normal, I would say. We do have one multiyear that has an option for the customer to elect, but I wouldn't characterize it as some huge issue. It feels like a normal cadence in terms of as we look at the contract renewals at the back half of the year. But there is one that it's an option, I would characterize it, rather than a full-blown renewal.

Okay. Understood. As it relates to the coastal business, David, what are you seeing there in terms of demand? And then what portion of that business -- if I remember correctly, you said it was at a very high level, but could you just remind us what portion of that business is under long-term contract? And any sort of help on the duration of those contracts? How long do they typically last?

Yes, we're about 85% contracted there. We have a handful of units that are multiyear. But the vast majority are 1 year in nature. That contract portfolio feels pretty good right now. The market's still very tight offshore in the blue water space. But look, it's a new environment. We'll see. A lot of the refined products are moved around offshore. Just to put that -- refined products would be gasoline, diesel and jet. That's about 40% of the volumes moved around offshore. Now jet fuel is only about 4% of what we move offshore. We have seen that declining. But so far, it's holding. Gasoline and diesel are holding fine. When you look at Kirby's entire portfolio on refined products, it's only about 19% of what we move, with jet being about 1% on the inland side and probably 4% on the coastwise side. So as we look at it right now, we're very busy offshore. The contract portfolio's pretty strong. And again, we haven't really seen much in terms of volumes come down.

Okay, got it. Got it. On the coastal market, are there currently many assets either in the broader industry or for Kirby that are moving crude oil currently?

No, not many. We think there are 3 in the 195,000 barge market or below 3 moving crude. We have 1 and there are 2 others. So crude is typically in the Jones Act space, moved on MR tankers and not really in our space so much.

Okay, got it. Is there an opportunity in either inland or coastal to store crude oil or refined products, either for your barges or for barges in the broader industry?

Yes is the short answer, but right now, we don't have the equipment available. But clearly, they can be used for storage. And of course, if you're storing large amounts, you'd want an MR tanker for storage rather than a barge. But they have been used for storage in the past, and we have that capability and, frankly, are happy to do it.

Okay, got it. Within Distribution and Services, clearly, that's going to be the most impacted of your businesses in the nearer term. You referenced additional cost reduction actions that you're taking there. Do you believe that this segment will -- it will be a drain on cash for the company this year?

No. Look, we're working every day. You can tell we're taking serious cost-cutting actions. We're working every day to keep that business around breakeven from a P&L standpoint. We're going to have to address the cost. Clearly, I think if we can do that, it won't be a cash drain. It may actually contribute a little bit of cash. But our goal is to do that. We're going to work hard to do that. It's going to be painful, to be honest, but we've got great people there working on it every day. And we know what we want to achieve, but right now, we think it will not be a cash drain in the company at all.

Okay. That's great to hear. Just kind of with another follow-up here on D&S, if I could, for a moment. I think the risk to your oil and gas customer base is fairly obvious. But can you talk about the components of your industrial and commercial customer base? And sort of what's the sensitivity to that business as it relates to a contraction in the broader U.S. economy?

Yes. We'll take it -- in commercial and industrial, we'll take it in pieces. We've got the marine diesel engine repair, where we repair towboats. We've got power generation, backup diesel power generation. We've got on-highway, where we repair trucks, boat transmissions, engines, and refrigeration equipment on grocery trailers. Let me take each one of those by themselves. First, I would say the marine repair business is pretty good based on what's going on in the inland market and the coastwise market. Our industrial marine repair guys are very busy. We do, do yacht repairs, and we do some repairs for the coast guard. The coast guard repairs are doing -- are going well. But that pleasure craft repair business will probably take a hit. We've got some jobs underway, but you can imagine that, that might take a hit. But the rest of that marine repair business is really strong right now, and we hope it stays that way just because of what's going on in the industrial markets. And clearly, the coast guard's going to need its vessels running. If you move over to power generation, we'll see. You could see new projects take a delay. If you're a business right now, you probably don't want to start putting new powered -- backup power generation. But that said, many of us, and we have it, it's a critical part of our business to make sure that we have power 24/7. So we'll see how that plays out. So far, it's okay, but you might imagine that some of these projects get delayed. And then the on-highway side, that will -- we'll have to watch, see how that plays out. With the economy right now, it's okay. People are still driving trucks. We -- as you can see, we've got to get groceries and supplies to all these different businesses to keep the supply chain going. But again, if the U.S. economy goes down hard, you would expect some of that repair business to go down a bit. But right now, it's holding up okay. And then we've got some other little things in commercial and industrial, but they're not as material as those 3 parts that I just described.

Okay. Got it. Got it. David, I guess, 1 or 2 last follow-ups here on marine. Do term contracts and then contracts of affreightment both provide the same level of downside support in the event of a slower demand environment?

Yes. There's multiple types of contracts. So day rate contracts are basically take-or-pay. Those are pretty good. They're really like time charter, where they pay x thousand dollars a day. But in contracts of affreightment, we do have a take-or-pay component of it. It's usually... there's a minimum volume clause that's in there. So in other words, it's -- contracts of affreightment, as you know, are point A to point B, x dollars a ton or x dollars a barrel. But we usually have, on those contracts, minimums. In other words, it will be at least these many thousands of barrels moved or thousands of tons moved. So they do have a take-or-pay component even though it's a contract of affreightment.

Okay. Got you. And just quickly following up on that, but is it safe to assume that given the high levels of utilization, those affreightment contracts have been running above the minimums?

No. Actually, with weather, as you've heard us in the past, in the weather months, heavy weather months, those contracts of affreightment get stuck waiting on weather. And there, in the first quarter, we've had some pretty rough weather here, high water as well as fog and wind. So this is not any different than normal for us, right? The winter months, the contracts of affreightment don't perform as well because we don't move as much, because we have to wait. And the time charters really do well for you in the winter months. And the summer is when we see the contracts of affreightment do really well. That's no different than what we're seeing right now.

Okay, got it. Shifting gears a bit here, David. In the event that inland revenue comes under some pressure here from lower volumes in the weeks or months ahead, just depending on what happens with the broader macroeconomy, what can you guys do to mitigate the impact of those lower volumes on your margins?

Yes. Well, we have, as you know, with our horsepower, which is the towboats, we charter in a lot of our towboat horsepower. And we have the ability to shed that horsepower if demand falls. And I'll give you an example. At the end of 2008, we probably had 100 charter boats chartered in. Kind of by the summer of '09, we were down to 55 or so, 50, 55 charter boats. And that actually allowed us to cut a huge amount of costs out of the system. And then by '10, we were -- we ramped it back up. Right now, we've got about 90 charter boats. So we have the ability to cut charter boats if we need to. Right now, we don't. We're very, very tight. So -- but that's probably the #1 thing we could do in terms of shedding costs. Obviously, we can do other things, as every business does, in terms of cost control, cut back discretionary spending. We'll cut back CapEx, too, if we need to. Right now, you've probably seen that our CapEx forecast is a lot less than it was last year. Bill, what's our CapEx?

Yes. Our range we gave, Jack, if you remember, was $155 million to $175 million, down significantly from last year, and we'll be at the lower end of that range and looking -- can we move it down any further?

Okay, great. Great. Okay. So David, if I think back over the last 10 years, and you just referenced this to some degree, but we've seen 2 major contractions in the inland market. One was related to that '08, '09 recession, where you guys saw a fairly sharp falloff in demand. And then the second one was that 2015 through early 2018 contraction, where demand for you guys actually held up okay, but pricing came under significant pressure. If I go back and look at your margins on the inland side, they held up much better in the broader U.S. recession than they did in that '15, '16, '17 time frame. And I think a lot of that's because you guys can manage capacity, to your point a moment ago. Granted there are a lot of unknowns out there right now about what's in front of us, but do you guys feel like this is more of an '08, '09 type situation or more like a '15, '16, '17 time frame? Just trying to get a feel for what do you think we're walking into with the understanding that there are a lot of unknowns out there?

Yes, I think it's absolutely more like an '09 -- '08, '09 thing. That was driven by the U.S. going into recession. '15, '16 was all about too much capacity. I think, Eric, you said there were 260 barges that came into the system in 2015. And there were just so many new barges coming in. Right now, I would say, I think, Eric, it's 130, we think, is on schedule to be delivered this year. I wouldn't be surprised if some of those don't get postponed and pushed into next year. And then if we do have a recession, you can imagine retirements would go up. So the net add of new barges this year, I'd be surprised if it's 50 to 75, which -- so when I look at that, it feels a lot more like '08, '09 versus '15 when we were trying to absorb 400 extra barges that hit the market. So that's a view. We'll see how sharp down the U.S. economy goes this year.

Okay, got it. And then, David, when we talk about what this means for the overall industry, given that we're only 18-plus months removed from a 3.5-year recession in the inland market, do you think that this could present additional consolidation opportunities for you guys over the next couple of quarters? Or how should we be thinking about the ramifications to the broader market?

Well, certainly, it could open up some opportunities. Obviously, there's some highly levered competitors that we have. But our focus right now is going to be in delevering and derisking ourselves as much as possible. Bill, why don't you describe kind of your view of free cash flow and what we'll do with that free cash flow in the interim?

Sure, David. And Jack, on the liquidity front, as David mentioned in his prepared remarks, pro forma -- if you take the Savage acquisition of $278 million and the $150 million private placement we repaid in February, our year-end balance, we had an undrawn credit line of $850 million, pro forma those 2 events and our liquidity would have been $422 million at the end of the year. And if you remember, we repaid early all the amortizations from under our bank line, so there's no other debt coming due until 2024. So we think we're in a good starting position. But don't forget, the most important thing is Kirby historically generates strong free cash flow at all points in the cycle. And you can look back to 2008 and '09. And as we mentioned earlier, Jack, our capital spending this year, we have had a preliminary range, $155 million to $175 million, which is well below our $225 million of depreciation and amortization. So we expect significant cash flow in 2020. And even in a poor environment, we would be directing that to the borrowings under the credit facility and enhancing our liquidity, which leads to your point, Jack, that as that happens, if opportunities arise later down the road, we'll be ready.

Yes. I guess when I think about free cash flow, Jack, we've got that slide that shows our operating cash flow in our deck. And it shows our CapEx. If you look last year, we had over $500 million in operating cash flow and $225 million or so in CapEx. So we had pretty good free cash flow. And then if you look at 2020, a good portion of our cash flow obviously comes from the marine business. And CapEx, we've got cut back to $155 million to $175 million, and I think we'll be on the lower end of that range. But if we have a similar cash flow kind of year of, say, $500 million, we got over $300 million of free cash flow this year even if -- and we don't have a forecast for this, but even if it was off $100 million, and we were down to $400 million in operating cash flow, we'd still have a couple hundred million in free cash flow. And we feel pretty good about that. That gives Kirby a lot of strength and puts us in a pretty good position.

Yes, one thing I forgot to mention, too, Jack, as I think about it, we talked about cushion under our bank -- under our covenants in our bank facility, I just want to stress that we only have -- we have 2 covenants. One of them's EBITDA to interest. And we have to be a minimum allowed of 2.5. And for last -- at the end of last year, we were 8.8. So when you have -- our interest expense last year was about $55 million, probably won't go up much. So we have a lot of room there. And the other covenant is a debt-to-cap of -- to be maximum allowed of 60%. And I think you know those numbers. That's -- we've got lots of room there.

And just to follow up on that, Bill. I think at the close of 2019, you were at a 28% debt-to-cap. Is that right?

Yes. Even pro forma -- yes, 28%, 29% and pro forma Savage, we would be slightly above that, but 31%, 32% depending on our cash flow in the first quarter.

Okay, okay. That's great. As I think through my remaining questions, you guys hit on a lot of them there with those final comments. So I think that wraps up my prepared questions. David, I'll hand it back to you for any closing comments. Thanks again for the time this morning.

Yes. No, thanks, Jack. Thanks for hosting this. I'd like to close the call by thanking everybody for your interest in Kirby. And in these difficult times, I give you my best wishes to be safe and take care of your loved ones. And of course, all Kirby employees and customers and suppliers, please stay healthy. Shareholders, please stay healthy. Everybody, stay healthy, and Godspeed. We'll get through this.

Okay, great. Thanks, David, Bill and Eric, and thank you, everyone, for participating in the call today. If you have any additional questions or comments, feel free to reach out to me at [email protected]. Thank you very much, and have a great day.

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