Kirby Corporation
Q2 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Welcome to the Kirby Corporation 2015 Third Quarter Earnings Conference Call. My name Eric and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now like to turn the call over to Sterling Adlakha. Sterling, you may begin.

[Sterling Adlakha:]

Thank you Eric and thanks everyone who is on the call for joining us this morning. With me today are Joe Pyne, Kirby’s Chairman; David Grzebinski, Kirby’s President and Chief Executive Officer; and Andy Smith, Kirby’s Executive Vice President and Chief Financial Officer. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our Website at kirbycorp.com in the Investor Relations section under financial highlights. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management’s reasonable judgment with respect to future events. Forward-looking statements involve risks and uncertainties. Our actual results could differ 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, 2014, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

[Joe Pyne:]

Thank you, Sterling and good morning. Yesterday afternoon we announced third quarter earnings of $1.04 per share; in the middle of our $0.95 to $1.10 per share guidance range. That compares with $1.34 per share reported for the 2014 third quarter. During the 2015 third quarter, our marine transportation tank barge fleet continued to experience high equipment utilization levels despite an industry wide decline in the transportation of crude oil. In the inland marine market utilization remained at the 90% to 95% level. We experienced strong customer demand particularly for the transportation of the petrochemicals and refined products. Crude oil barges continued to be cleaned out of crude oil bottoms but we believe this trend is beginning to bottom out however the availability of these barges in the market place continued to have some negative effect on contract renewal pricing. On the coastal market, utilization also remained in the 90% to 95% range and contract renewal price continued to increase. As expected we had a significant number of vessels in the shipyard during the quarter which impacted both revenue and earnings. On a year-over-year basis our Diesel Engine Service segment remained under pressure. In our land based division, we continued to work through a very challenging environment. In the marine and power generation business, that's our legacy business, it continues to perform well except to that part of the services the Gulf of Mexico oil service market. Before turning the call over, let me take a moment to recognize our newest board member Ann Maria [indiscernible]. Ann Marie brings a wealth of experience and knowledge about national and global supply chain and logistics, safety management and extensive leadership experience in the midstream and downstream energy business. Kirby management team looks forward to working with Ann Marie as we leverage her knowledge to continue to grow and create shareholder value. I will now turn the call over to David.

[David Grzebinski:]

Thank you, Joe and good morning. I will hit some key points in the quarter and then turn it over to Andy for some detail and then come back for an outlook. In the marine transportation segment our inland marine barge demand remains in the 90% to 95% range. Long-term inland marine transportation contracts, those contracts with the term of one year or longer in duration contributed about 80% of revenue for the 2015 third quarter with 55% attributable to time charters and 45% contracts of freight. Pricing on the inland marine transportation term contracts that renewed during the third quarter was down in the low to mid single digits. Our spot contract rates remained at or above term rates. However the spot market is dynamic. So we see, on occasion, our competition offering equipment below our term rates. Unique to Kirby, most of our spot opportunities are with existing term customers. In our coastal marine transportation sector, demand for the coastwise transportation of refined products, black oil and petrochemicals remained consistent with the first half of the year. However we have seen some increase in our spot exposure what we attribute to increased uncertainty in the market by our customers driven by uncertainty around crude oil supplies. During the third quarter approximately 80% of coastal revenues were under term contracts. Kirby's coastal equipment utilization remained in the 90% to 95% range. With respect to coastal marine transportation pricing, term contracts that renewed during the quarter increased in the low to mid single digit percent range. In our diesel engine services segment, our marine diesel and power generation markets experienced stable demand in most regions of country, except for the Gulf of Mexico oil service business where services for supply vessel and offshore rigs declined. Our land-based Diesel Engine Services market remains challenging. Demand for serviced parts and distribution has remained relatively consistent with levels experienced in the 2015 third quarter, but there remains little demand for new manufacturing of pressure pumping equipment. We will continue to aggressively address cost in this business. During the 2015 third quarter we continued to execute on our share repurchase authorization buying approximately 892,000 shares for $63 million or an average share price of $70.97, subsequent to the end of the quarter through this past Tuesday we repurchased approximately an additional 292,000 shares at an average price of $64.62. October's purchases brought total repurchases for the year to over 2.9 million shares or approximately 5% of shares outstanding. Currently our unused repurchase authorization is 1.8 million shares. I will now turn the call over to Andy to provide some detailed financial information, and again I will come back and discuss the outlook.

[Andrew Smith:]

Thank you, David, and good morning. In the 2015 third quarter, marine transportation segment revenue declined 7% and operating income declined 16% as compared with the 2014 third quarter. The decline in revenue in the third quarter as compared to the prior year was primarily due to a 38% decline in the average cost of marine diesel fuel as well as some impact from inland contracts renewed at lower rates throughout the year. The marine transportation segment's operating margin was 22.4% compared with 25% for the 2014 third quarter. The inland sector contributed approximately 70% of marine transportation revenue with the coastal sector contributing 30%. Inland marine weather was seasonally normal but operating conditions were challenging due to high water early in the quarter and scheduled logged closures along the Gulf intercoastal water way which contributed to a 40% year-over-year increase in the Lay bays in a declining 10 mile. Despite these challenges and the pricing pressures that Joe and David mentioned, the inland sector generated an operating margin in the mid to high 20% range for the quarter. The third quarter results for inland marine also reflected the anticipated year-over-year negative impact of $0.03 per share for higher pension expense, reflecting actuarial changes to mortality table and a lower discount rate. In the coastal sector we experienced heavy shipyard activity in the third quarter as anticipated and mentioned on our July conference call. With a 38% decline in fuel prices and a number of vessels in the shipyard, revenue in the coastal sector declined both year-over-year and sequentially. Pricing on the contracts renewing during the quarter continued to improve as David mentioned; additionally we shortened the depreciable lots of some assets in our coastal fleet which were coming up for shipyards in 2016 and the estimated cost of extending their lives did not make sense. This resulted in a combined $3.5 million increase in depreciation expense and dry dock amortization for the quarter. This change post higher maintenance expense during the quarter in addition to ongoing impacts from higher wages, depreciation and deferred dry dock amortization led to a year-over-year decline in the coastal sector operating margin which was in the low double digit. Without the additional depreciation and the deferred dry dock amortization expense mentioned above, the margin would have been in the mid teens. During the 2015 first nine months, we took delivery of 35 new tank barges and when combined with the six pressure barges purchased in the first quarter, increased capacity by approximately 560,000 barrels. The number of barges we retired including returned charter barges totaled 25, removing approximately 370,000 barrels of capacity. We also transferred one coastal 30,000 barrel tank barge that was working inland, back into the coastal fleet. The net result was an addition of 15 tank barges to our inland tank barge fleet, and approximately 160,000 barrels of additional capacity. In the 2015 fourth quarter, we expect to take delivery of three 30,000 barrel inland tank barges with a total capacity of approximately 90,000 barrel barges. Combining these additions with our current plan of seven retirements in the fourth quarter it will result in approximate capacity at year end of 17.9 million barrels, a reduction of 70,000 barrels from our current capacity. In the coast wide transportation sector construction of the four coastal articulated tank barge and tugboat units continues to progress with the first unit of 185,000 barrel 10,000-horsepower ATB expected to be delivered in inland service later this year. Our second new offshore vessel, also 185,000 barrel ATB is likely to deliver in mid 2016. We continue to expect delivery of the third and fourth vessels, both 155,000 barrel ATBs in late 2016 and mid 2017 respectively. In our press release last night we also announced shipyard contracts to build two 4900 horsepower coastal tug-boats and a new 35,000 barrel offshore chemical tank barge. The new offshore chemical barge will enter service under long term contract with an existing customer upon delivery which is expected in early 2017. Moving onto our Diesel Engine Services segment, revenue for the 2015 third quarter declined 51%, and operating income decreased 72% compared with the 2014 third quarter. The segment’s operating margin was 4.9% compared with 8.6% for the 2014 third quarter. The marine and power generation operations contributed approximately 40% of the Diesel Engine Services revenue in the third quarter with an operating margin in the low to mid double digits. The operating margin was impacted by approximately 700,000 of severance expense incurred in the third quarter as we continue to address cost across our whole organization as appropriate. Our land-based operations contributed approximately 60% of the Diesel Engine Services segment’s revenue in the third quarter with breakeven operating income. During the 2015 third quarter Kirby signed an asset purchase agreement to sell United Engine Compression. The transaction was expected to close in 2015 fourth quarter and based on the structure of the agreement and current levels of working capital the sales price is expected to be approximately equal to the book value of the net asset sold. On the corporate side of things, our cash flow remained strong during the quarter, which helped to fund our marine construction plans and $63 million of treasury stock purchases during the quarter. Subsequent to the quarter we purchased an additional 292,000 shares for $18.9 million. Any future decision to repurchase stock will be based on a number of factors including the stock price, our long term earnings and cash flow forecast as well as alternative opportunities available to deploy capital including acquisitions. We have raised our 2015 capital spending guidance slightly to a range of $320 million to $330 million including approximately $70 million for the construction of 38 inland tank barges and three inland tow-boats, expected to be delivered in 2015 and approximately $100 million in progress payments on the construction of the new coastal equipment. The balance of $150 million to $160 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities, as well as diesel engine services facilities. Total debt as of September 30th stood at $810 million or a $2 million increase from June 30th of this year and a $93 million increase from our total debt of $717 million at December 31st, 2014. The increased debt since year end 2014 was primarily due to the acquisition of the six pressure barges in the 2015 first quarter and treasury stock purchases during the first nine months of the year. As of today, our debt stands at $819 million. Our debt-to-cap ratio at September 30, 2015 was 26.4% compared with 24% as of December 31, 2014. I’ll now turn the call back over to David.

[David Grzebinski:]

Thank you, Andy. In our press release last night, we announced our 2015 fourth quarter guidance of $0.93 to $1.03 per share and for the 2015 full year, guidance of $4.10 to $4.20 per share. With respect to the inland transportation market, our fourth quarter guidance reflects an assumption that there could be continued modest pricing pressure in our inland marine transportation market. We are assuming normal seasonal weather patterns for the remainder of the quarter and utilization remains in the 90% to 95% range. In the coastal market the difficulty in permitting terminals on the west coast to get crude to water coupled with the length and magnitude of the declining crude prices has injected some uncertainty in the coastal market place. This has resulted in some reluctance among certain customers to extend term contract. This uncertainty will likely lead to an increase in the number of coastal vessels operating in the spot market while a further impact from lower crude prices is possible, the coastal refining complex across the country continues to show strong demand for crude by water. Further demand for refined products, the sector's biggest product trade, continues to be quite strong and should continue as we go into the heating oil season along with the East Coast. Also Kirby has the largest fleet of asphalt equipment and given the low price of crude oil combined with additional infrastructure spending we are seeing signs of an increase in asphalt demand. So for the fourth quarter we believe our utilization will continue to be in the 90% to 95% range. For our Diesel Engine Services segment, in our land based sector, we expect the market to remain extremely challenged for the remainder of the year. Additionally, capital spending levels of many of our customers have been even further constrained from earlier this year and the low end of our guidance contemplates a more material operating loss in the land based portion of this business in the fourth quarter. In our marine diesel and power generation markets, we continue to expect this business to perform similar to the second and third quarters although we expect revenue on profit to be down slightly due to weakness in the Gulf of Mexico oil field services market. We also expect that earnings from these markets in the fourth quarter will be sequentially weaker due to normal seasonality. Before we turn the call over to questions, let me also briefly address the outlook for Kirby beyond this year. We are currently in the process of preparing our budget and we will provide 2016 guidance during our fourth quarter earnings call in January. As you know a lot can change in the next few months, and so it's still too early to provide earnings guidance for next year. That said, 2016 will be challenging. We believe utilization for inland equipment should remain in the 90% to 95% range but pricing will likely continue to reflect the uncertainty in the market, principally driven by lower crude oil volumes. With lower domestic production of crude oil particularly the Eagle Ford and Utica shale basins, we are seeing a continued decline in inland barges carrying crude oil. However, we currently estimate that the industry has somewhere between 250 barges to 300 barges actively moving crude oil today. This is a significant decline from an estimated 550 barges at the peak of crude oil barge activity. Consequently we expect the pressure on inland pricing to begin to subside in the short to medium term as the number of crude barges in service continues to decline to a less significant number and new refined products, black oil and chemical volumes continue to grow. On the coastal side we believe utilization should remain above 90%; but the coastal term to spot ratio to decline. This is as shippers become a little more comfortable that their volumes can be handled with the existing fleet. Consequently pricing on contract renewals may increase at a slower rate. The potential slowing in coastal pricing and the change in spot-term mix would make maintaining older equipment more difficult for the industry and should result in the retirement of older vessels in the industry fleet. We do expect a number of other positives to develop next year. We intend to have new customer contracted coastal 185 barrel ATBs in operation, one by the end of this year and the other mid 2016. Both of these barges will provide incremental earnings to our coastal business. Additionally as the oil field service industry continues to defer maintenance on the industry wide pressure pumping feed, a backlog of needed repairs and/or replacements will continue to build. As such we can potentially see some improvement in our land based diesel engine business in 2016. Despite this period of uncertainty, our cash flow has remained and should continue to be quite strong. We continue to invest in maintaining our inland and coastal equipment and will continue to look for attractive opportunities to invest capital whether in our own facilities through potential acquisitions or through share repurchases. Operator that concludes our prepared remarks. We are now ready to take questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Barnes from RBC Capital Markets. John, please go ahead.

[John Barnes:]

First, David, around your comments concerning and maybe this goes to Joe as well. Joe you made the comment at the very beginning. It felt like you were beginning to see the bottom in terms of the number of vessels feel like you were beginning to see the bottom in terms of the number of vessels, I guess converting from crude service and Dave I understand where you're coming from in terms of just the sheer number of vessels has declined but it still seems like 250 to 300, is a pretty fair number. Number one why do you think we're seeing the bottom there? Why wouldn’t the remainder of those convert? And number two if they do, does that make your guidance around pricing too conservative and could be could be worse than what you're looking for?

[David Grzebinski:]

Yes John, they may well come out of crude service but the industry's absorbing and we're still very utilized across the industry. So, it's just becoming a smaller and smaller number so that overhang will dissipate if you will and confidence in the market in the utilization will continue to increase which should make this bottom-end pricing start to turn. Now the timing is the question but clearly the number of barges in crude service is gotten smaller and smaller and clearly the industry is absorbing because our utilization across the board is pretty strong still.

[Andrew Smith:]

Yes and David let me just add that you followed us for number of years and know that we were always a little careful with respect to the proliferation of the crude oil because it’s a movement that is fungible and it’s high volume and it fits very well in pipelines and having said that there are areas that barging in fact as does play a role, either pipelines aren't there or the type of crude oil that condensate is not as fungible as it is in other places. So there's always going to be a need for event [ph] coastal barging of crude oil but it’s going to be capped, it's not going to be, there is optimistic scenario which we never believed that produced almost 600 barges in trade.

[John Barnes:]

Okay, alright that makes sense. And then just your outlook on the coastal side, and I give where you are coming from in terms of maybe the change in makes between spot and contract but number one

[David Grzebinski:]

Yes, John let me answer that in two parts here. Right now we believe the industry fleet, it has about 47, maybe 45 to 47 ATBs or wire barges that are older than thirty years and that's pretty old that's on a base of 260 approximately and now I'm talking barges less than 200,000 barrels. So that's a pretty big number in terms of percentage about 20%, just less than 20% of the fleet that should retire and that's actually helped pricing and should help pricing over the time as that equipment comes out. The crude offshore is interesting because there is still lot of movements out there and I think there would be more if you could, for example on the West Coast get some of these terminals that our customers would like to get built to move crude to the coast and then move it to their refineries. So now it's relatively positive from that perspective and the refineries continue to run very heavily. And with respect to our ATB contracts, we do we have 2185 there are contracted for multi years and they'll be coming out as I said in late 2015 and mid 2016. The 2155 are not contracted but we are in an active discussions with customers and that's proceeding forward. Clearly the customer base does like newer equipment I mean if you got to choose between older equipment and newer equipment they gravitate towards the newer equipment for obvious reasons. So that that kind of circles back to the first point is that these 47 older barges or 45 to 47 older barges will get displaced ultimately.

[Operator:]

And our next question comes from John Chappell from Evercore ISI. John, please go ahead.

[John Chappell:]

Thank you, good morning guys. David, thanks for the first glimpse at ’16 [indiscernible] and I think that's very important. Along those lines and one difference I noticed between last quarter and this quarter was last quarter you'd mentioned that spot pricing in the inland barge business was above term, this quarter it seems like there is almost parity. So, from your experience when you get that almost parity now between spot and time charter term, what is that kind of foreshadow going forward as far as like the magnitude or duration of any softness in pricing? Did the spot you get significantly below term, to have that catch up? Or once you get the parity, does that kind of indicate you are getting close to bottoming in terminals?

[David Grzebinski:]

Yes. I think it's probably closer to the latter but it's been bouncing around. We've seen spot prices above our term contract rates but we have seen some of our competitors dip down and take spot moves below our term contract rate. So I think that's all a function of absorbing kind of these returned crude oil toes. So it is may be too soon to call a bottom here but at some point things start to look a little more positive.

[John Chappell:]

And the same type of things now seems to be developing in the closer site as well as you starting talk about crude and uncertainty, things you have been talking of last twelve months in line. Is there any way to kind of gauge what percentage of the coastal fleet is intruding and could potentially move over too, they cleaned up move over to the refined product business and maybe just compare those two businesses, October 2014 with inland in with October ’15 coastal and what that may indicate as far as pricing there?

[David Grzebinski:]

On the coastal side, we estimate about 5% to 6% of the coastal fleet is moving crude now. So it's a relatively low number. We have seen refined products moves pick up as refinery utilization ramped up and they've done expansions. You can see it in vehicle miles driven and kind of the light vehicle sales numbers. The lower crude prices reflected in lower gasoline prices is driving that demand. So as some of the crude moves, our coastwise have tapered off, the refined products have picked up, again our estimates that the coastwise fleet. Again, this is below 200,000 barrels, we think it's around 6% of the fleet. So it's not that meaningful. It still can have an impact. I circle back to the comment I made earlier though is on the West Coast for example if you could get some of these terminals in place, there would be more crude moves out there. So the refineries like the crude and wanted. So it’s a little different dynamic than on the inland side, where pipelines have taken some of the crude moves away.

[Operator:]

And our next question comes from Jack Atkins from Stephens. Jack, please go ahead.

[Jack Atkins:]

Good morning guys, thanks for the time. So, David, I really appreciate your commentary around the 2016 outlook initially but when we think about the various puts and takes in your business and you guys clearly know what those are heading into next year the additional coastal barges coming in and all that sort of stuff. When we think about directionality and understate you don’t want to give guidance for ’16 and I am not asking for that but do you think that earnings next year will be up versus 2015? I am just trying to understand are we looking at up year or down year next year?

[David Grzebinski:]

Jack, we're just not ready to declare. There are too many moving pieces around and we're just not prepared to opine on that yet.

[Jack Atkins:]

Okay, I understand David. And then when we think about your core chemical business that's held up very well along with the refining market over the course of last 12 months but we continue to hear negative data points around the industrial economy and the economy in general. Can you maybe talk about what's driving the strength in that chemical market and I guess as you look out into the second half of 2016, do you feel like you'll start seeing those incremental volumes come on from all of those CapEx we're seeing invest in the space?

[David Grzebinski:]

Well I think what's really driving the petrochemical business is the low cost feedstock position and our ethane is still advantaged. We've had propane actually come in and out of advantage for the chemical group. So that feedstock advantages, it really puts US chemical business in a globally competitive position and we've seen our chemical customers work on incremental capacity increases. There are as you know over $100 billion in projects along the Gulf Coast that are well under the way. We have a list of all the ones that have started construction, I would say good portion, good 70% of them are permitted and under construction. So those chemical plants will come along in the next, maybe 2 to 4 years, various stages. So that’s what it's about, it's really about that incremental capacity coming on from our chemical customers because they are feedstock advantage here in the United States.

[Operator:]

And our next question comes from Douglas Mavrinac from Jefferies. Doug, please go ahead.

[Douglas Mavrinac:]

Thank you, operator. Good morning guys. I just had a couple of questions also on the market. First, David as it pertains to the idea that the inland markets for barges moving or it may be maybe bottoming. Can you relate to us or remind us kind of how many barges were operating in the crude oil market say 4or 5 years ago before this big surge in U.S. production even occurred because the U.S. production U.S. production story hasn't rolled over that dramatically but it seems like a lot of barges have been taken out. I am just trying to get a sense for how many barges were operating in the oil market before the boom even occurred? And how do we compare to that right now?

[David Grzebinski:]

Yes, 5 years or 6 years ago there are probably very-very few larges if any and may have been close to zero. There was some heavy Canadian crude moves off and on. And as you heard Joe's comment earlier that was one of the reasons we kind of shied away from it because we viewed crude is best moved in the pipeline. So as all these shell plays came up, they couldn't get it in the pipeline, the pipeline didn’t exist. So there was a big ramp up and then consequently pipelines did come on, the freeway twin the [indiscernible] and that's taken the volume down. And now we've got production declines as well. But there are places like Utica where it's going to be very difficult to get pipelines out of the Utica down to the Gulf Coast. So there are actually maybe kind of the floor here where there will continue to be the need for barges on the inland side to move crude and compensate, just because logistically you can't get pipelines everywhere.

[Douglas Mavrinac:]

Right. So that's kind of what I'm thinking. You do have a base level of production that exists so that you may not go back to where you were but you're going to be higher than you were. So therefore you need an increased level over what you had back then. So that’s helpful and then just my follow up, as it pertains to kind of the current market, obviously you guys are very busy both inland and coastal utilization levels to north to 90%. And so clearly sentiment is weighing on the pricing especially on the inland. At what point the sentiment start to look at 2017 and starts to look at this is what's coming on the Peckham side and so all of the uncertainty, all of the concerns, all of my ability to kind of press pricing to the downside is kind of run its course and now maybe sentiments start to change. So from your experience about how far in advance of the actual volume setting do you starts seeing that shift in sentiment? Especially given that the underlying fundamentals utilization levels are still very-very strong?

[David Grzebinski:]

Yes, I mean you've hit on the key point here. The shippers and the competitors have confidence that this kind of stabilized and demand is going to continue to be such that things will be tight, it's kind of that forward view. I don't know if there's any good rule of thumb as to timing. Once the confidence starts to emerge that or the concern on the shipper side that maybe there won't be some spot availability, a better term up is when prices do start to move and in terms of a key timeframe, that's hard to predict but you can see it happening if these return crude barges keep getting thinner and thinner and there are fewer-fewer of them and not all of them go out but demand for the other products that we move and our competitors move at some point there will be a concern that the equipment is not going to be available and people will start to want to term up and that's when you get that confidence, that's when you're going to start seeing the prices. Sorry I can't predict that, I wish we could that would make our life a little easier but it's starting to feel better in that regard. Joe, is there anything you'd like to add to that?

[Joe Pyne:]

I think that's right. I mean it should bit of anomaly to have utilization rates above 90% and not have pricing power. And the reason that you don’t is a lack of confidence within the industry that those utilization levels are going to be sustainable. But also I think that the curvy utilization levels are probably above at least some of the operators out there so they have more availability. I think that once the confidence level shift to the point that when I have a spot piece of equipment I can book it and I don't have to worry about it being idle for a period of time then you'll get the sentiment to move prices back to higher levels. I sense that that as the shift at a crude oil of any inland sector begins to taper off, we are sensing it's beginning to taper off, you are going to begin to get more confidence in the market and more confidence that pricing is going to be stabilized and you're going to see some pressure to increase rates. That hasn't happened yet but I think that we're kind of bumping along the bottom and when that happens and then I think everybody will feel better.

[Operator:]

And our next question comes from Kevin Sterling from BB&T Capital Markets. Kevin, Please go ahead.

[William Horner:]

Good morning guys, this is actually William Horner on for Kevin. David, thanks for taking my questions. I want to stick on the coastal comments for a second here and with that the shift in stock capacity, obviously it's been a little more insulated as a result of the capacity constraints. So trying to get a handle on when did you start seeing some of these ATBs looking for a home? Was it relatively steady shift through Q3, or have we seen an celebration in capacity in recent weeks?

[David Grzebinski:]

Yes, I think it's been fairly steady here through the quarter. I get to shippers, it just getting a little more confident that there's going to be some availability but it's still pretty tight market there. I mean you saw we had we price increases in the quarter.

[William Horner:]

Right, absolutely. And I guess sticking with the uncertainty in the market, you highlighted in your comments, the west coast and terminal permitting issues with regards to the longer term confidence that were there any markets in particular where you saw some of this capacity shows in the near term? Was it in the Gulf or the Northeast or?

[David Grzebinski:]

Yes, mostly the Gulf, William. There are some moves that some barges that were kind of taken out of crude service and coastwise barges taken out of crude service given some of the production declines and then some newer MR equipment being available and absorbing some of that but again less than around 6% of the market where we consider our market the 200,000 and below is in crude So it's not quite the overhang that you saw in one side.

[Operator:]

And our next question comes from Kelly Dougherty from Macquarie. Kelly, please go ahead.

[Kelly Dougherty:]

Hi guys, thanks for the questions. Just taking on coastal, can you talk to us about some of the similarities and differences between coastal and then I guess I'm trying to get out is there anything different structurally our customer-wise, from a capacity perspective anything like that that would give us comfort that what we saw in inland market isn’t going to manifest itself and coastal as well. And then follow up to that. What percentage of your coastal business is up for renewal in 2016 that you might think could switch over into spot versus term?

[David Grzebinski:]

Yes, Kelly it is different than inland. First of all the equipment is just not as fungible right in the inland crude trade it was almost all 30,000 barrel barges, all fairly similar, reasonably cheap to clean amount. In the coastwise business, the 260 barges in less than 200,000 barrels they range anywhere from 30,000 barrels up to 200,000. And so it's a mixture they're not as fungible. Certainly the cleanout cost just given the size is much more significant. So that fungibility makes a difference and the other thing is there's just fewer competitors. You have seen in our IR material, we have 40+ competitors on the island side and some of them jumped into crude and then when you look at the coastwise side it's 15 competitors. So it's a little more concentrated market that helps there's a little more discipline and you haven't seen kind of the irrational behavior that you saw on the inland building side, there is a little more discipline and frankly it's because the equipment's a lot more expensive and the quantities are bigger and it's just a tougher business.

[Kelly Dougherty:]

That's helpful. And then am I correct in thinking that there were no or very few multi-year contract renewals this year and is it fair to assume that the majority of them renew in 2016? I'm talking on in the inland now. And if so shouldn't that be beneficial from a pricing perspective because I imagine there's going to none pricing benefits that you guys bring to the table for some of these larger customers?

[Andrew Smith:]

Hi Kelly. This is Andy. We had a typically normal year for us, obviously all of our spot contract has pricing exposure but of our 80% of our term contracts, about a half of that renews every year and of the remaining have about a third of that renews every third year. And that's typical that’s about what we'll see next year.

[Operator:]

And our next question comes from Steve Sherowski from Goldman Sachs. Steve please go ahead.

[Steve Sherowski:]

Good morning. I think you heard earlier you said earlier that of the 250 to 300 inland barges that are currently in crude service, they are primarily servicing either Utica or Eagle Ford crude is that true? And if it is, can you just break out the percentage of what's an Eagle Ford versus Utica?

[David Grzebinski:]

Eagle Ford is also includes Permian. It's really the Gulf Coast move were you load, perhaps in Corpus Christi and then take it up to Houston or Port Arthur on the Intercoastal Waterway. So it's not just Eagle Ford that some of the Permian comes by pipeline to Corpus Christi. And then the Utica, of course Utican Marcellus is condensate that's up in the West Virginian and Ohio areas and it comes down the river. I don't know the rough split. I would say maybe 50-50 but I don't I don't have a good number on that.

[Steve Sherowski:]

Fair enough do you have any updates on your views on crude oil exports and how that could impact both coastal and inland businesses?

[David Grzebinski:]

I'm sorry can you repeat the question.

[Steve Sherowski:]

Just the potential for crude oil exports; do you have an updated view just given the fact that it's been in press with increasing frequency recently, you have the exports to Mexico or at least swaps to Mexico now allowed, do you have any updated views on just how this could potentially impact your inland or coastal businesses if the ban is ever lifted?

[David Grzebinski:]

First let me comment on whether the ban gets lifted. It did pass the House. Senate hasn't really done anything with it yet. But I think the current administration has been pretty clear that they veto it. So I think before you get crude exports, it would probably take a change in the administration. That said, we don't know if it's going to be positive or negative. There are factors that could be positive and factors that could be negative on crude oil exports. Let me just run through a couple of them real quick. If you had crude oil exports, there is a case that WTI Brent spread would collapse and you trade at parity and that may cause some of the moves to the East Coast to change. They would probably import more Brent. I think we're seeing some of that now, but we still get coastal moves with imported Brent on the East Coast because it's easy comes in the tanker and then it's lighted by barges. But it could move some things around. I think on the Gulf Coast, one of the potentials is you would export the light crude and import heavy crude to the Gulf Coast refineries. You will recall that the Gulf Coast refiners are set up to crack the heavier crude. That could be a negative in moving as much light WTI around on the Gulf Coast. But then again it could be a positive because the heavier feedstock slate would have more by-products which would likely result in some additional moves. And I guess the final factor would be hedges; that more volume across the system, there would just be more liquids on the system, because even if it went for export, it may come into a terminal. We may get a chance to touch it before it goes for export. It's just more liquids on the water would be a potential. So it's a mixed bag. We are not sure if it be a net positive or a net negative on crude exports. But we'll see. I think it -- I don't think in the near term that will happen. But if it does, we're not exactly sure that it will be positive or negative.

[Operator:]

And our next question comes from John Mims from FBR Capital Markets. John please go ahead.

[John Mims:]

So Dave, let me ask you on the inland side. Do you have a sense -- I appreciate your utilization is looking to stay in the 90s and I understand that there may be some crude conversions that slide into non-crude service, but outside of that do you have an industry utilization number? But I'm thinking about, is there a shadow barge fleet that's tied up right now that when things start to improve you could have that kind of leak out and push the pricing recovery out farther than people may expect?

[David Grzebinski:]

We don't have good numbers there, we just kind of know a little bit about what's out there but we don't have good insight to all of our competitor fleets. As Joe said their utilization maybe a little bit lower than ours. But I don't know how material it is. We don't have perfect information there, John. But our guess is that the industry maybe slightly lower than Kirby's.

[John Mims:]

During the last big downturn it dropped down to around 80, or did it break below 80?

[David Grzebinski:]

I think it was a round 80. There may have been a period where it dropped below, but I think it was around 80.

[Joe Pyne:]

It was slightly lower than 80, David. I think the lowest it got was 78% for a very short period of time, in early 2009.

[John Mims:]

That's helpful and then let me ask you on the M&A front. So at the beginning of the month, American commercial launch announced today, about AEP, and then there is some liquid. It's mainly dry barges there but still big acquisition, platinum kind sort of doubling down on the industry; so a few questions there. One, your thoughts on industry valuations, if things are coming more in line as to where you would be more active, there's been any material change there too with these two? I mean these are two big barge lines. Combining, is there any anticipated change in the competitive environment from what you see? And then three, do you have any updated thoughts on the potential to diversify into the dry side especially if -- we've got a few years of potentially as of prices, kind of flat to maybe down on the liquid side. Does diversifying into that dry side to compete more with ACL, and others making more sense here?

[David Grzebinski:]

Let me take one at a time. In terms of acquisition pricing, there's still, there's always a bit off or spread but, look, business has gotten tougher. I mean it's not as much fun as when everything is going up. So conversations have been little more frequent, a little more constructive. We still may need a little more time. But the conversations have gotten more constructive. But as, John, it's really hard to predict acquisitions. We don't want to forecast any for sure. Now in terms of change with ACL buying AEP, I think it was a great deal for them. AEP really only had 40 liquid 10,000 barrel barges that were all leased in. I think they are building another 40, so I think they will have a total of 80. And again they weren't even owned by AEP. But the biggest part of AEP fleet of course was the dry cargo fleet which. So that took ACL's position in the dry cargo fleet up quite a bit. They essentially doubled their dry cargo fleet. So I think it’s a nice acquisition for ACL. As to whether we'd be interested in dry cargo, typically we have shied away from dry cargo; we find it a little more volatile, less ratable than the liquid side. And we wouldn’t pursue a dry cargo. We never say, never, but I don't think we'd pursue a dry cargo acquisition in and of itself, but if we were to buy a competitor's liquid fleet and they had some dry cargo barges, we may well keep the dry cargo fleet and run it. But inherently, we don't like the volatility of the dry cargo fleet. It gets moved around a little more with grain, grain harvest and other things whereas the liquid volumes tend to move more in line with GDP and the customers profitability may go up and down. Our liquid customers' profitability may go up and with commodity prices but the volumes are fairly steady. So that's a long winded answer, John. Hope that answers your three questions.

[Operator:]

And our next question comes from Ken Hoexter from Merrill Lynch. Ken, please go ahead.

[Ken Hoexter:]

Last quarter you talked about reducing assets in the land based diesel Services segment. Can you update on the progress there? And then similarly on the marine side, margins are taking a bit of a hit year-over-year. Is there more to do internally there or is that all price related?

[David Grzebinski:]

Yes, land based diesel, you have heard Andy's comments that we sold the compression business. Earlier this year we sold the bucks kind of small product line out of there, so we are focusing on the core and united the core distribution spare parts and service business as well as that core manufacturing, re-manufacturing business. There may be some other things we could do there, but right now we are really focused on taking our cost in that core business and getting it prepared for the inevitable rebound in some demand. In terms of margins in the marine business -- yes, the margin decline really is price, the price just kind of rolls through the bottom line. We have taken out some cost, reduced a little bit of headcount, really through attrition more than anything else. But we are constantly looking at cost there. But as pricing does kind of flow right through to the bottom line.

[Ken Hoexter:]

On the pricing on the dry [indiscernible], not the coastwise barges, but the other ones that you run for services on offshore basis. Is there pricing pressure on that because when we combine the coastwise trade it look like pricing is down and you said modest increase, that's why I just want to understand to know if there is a mix of vessels that you don’t talk about much? Or are we seeing kind of pricing down on that? Or what is the utilization now of those six assets?

[David Grzebinski:]

Those are our sugar. We've got basically two coastwise barges, sometimes three barges, moving sugar and a couple of barges moving coal. Those are in long term contracts, both of them. So there is not a lot of price volatility there. You do have utilization volatility, particularly some of the sugar trade is on a kind of a contract of affreightment, so when weather impacts that fleet, it impacts us. And so weather can pull that around. I am not sure what you are looking at in terms of pricing.

[Andrew Smith:]

Ken, this is Andy. If you look at the revenue coming or getting into the revenue coming out of our coastal business, remember that we had much lower fuel pricing this quarter as well as the heavy shipyard cycle and that the operating income line had another effect that you need to take into account is roughly at $3.5 million incremental. Depreciation and amortization effect; for the shortening of the depreciable lives of some assets that we're getting, quite frankly long in tooth and we're going to have a very heavy shipyard cycle, or expensive shipyards coming up that we shortened and essentially have it written down. So that's affected margins in the quarter. Is that what you are looking at? I don’t think that's pricing.

[Operator:]

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

[David Beard:]

David, when you talked about pricings still being under pressure for next year, should we still think about sort of a 2% or 3% price decline? Is that kind of what you are feeling is going to roll into next year?

[David Grzebinski:]

Yes, again it's hard to forecast. We just don’t know. A lot depends on this kind of sentiment changing as the industry deals with fewer and fewer barges in crude. So I don’t want to give you a forecast on where rates are going. It's just, there is some uncertainty there and we don’t know. We're just calling it down. And refinery utilization and other things next year can change some things for the positive. If these refineries continue to do, not Greenfield, but brownfield type expansion and then the chemical guys continue to do their expansions, that demand should have an impact. Now the timing of all that with respect to the crude barge absorption is what makes it difficult to predict where pricing could be next year.

[David Beard:]

And then just switching to the fleet of crude oil barges, the 250 to 300, I know you have mentioned most of them in the last call had moved out of that trade, and there was a certain base level that couldn’t move because of volumes and also couldn’t move because of the types of equipment. Can you give us your thoughts there, and how many of those 250 to 300 still couldn’t move out of the trade?

[David Grzebinski:]

We don’t know. We really don’t know. I would say some of the Utica stuff probably doesn’t go away. There is always a caviet, right, I mean that low enough oil price, people will shut in production or as decline curves take place they just won't drill anything newer or produce anything new. So it's hard to say, but we've looked at some data that says even in the mid 40s some of these fields have pretty good IRRs, 15% after tax type of IRRs. Some of them would definitely continue to produce. It's hard to say how much is the floor there, but there is a floor I think.

[Operator:]

Our next question comes from Kelly Dougherty from Macquarie. Kelly, please go ahead.

[Kelly Dougherty:]

I just wanted to follow up on the M&A discussion and how much leverage do you guys have the ability to take on and would you be willing to take on some leverage for buy backs if you didn’t find any attractively priced acquisitions in the near term?

[David Grzebinski:]

Yes, Kelly, that's I mean again you -- say before we look at all of these things in a very similar way. We run a DCF and based on the different choices for capital allocation available to us in the short term. That's kind of how we make our decisions. We're a 26% debt-to-cap. So we've got plenty of ability to lever up. In the past this company has been -- going way back to the Hollywood acquisitions even over a 50% debt-to-cap and then the recent, after the sort of big cycle in 2010 - 2011, was over 40%. So plenty of capacity available. Yes, Kelly, we believe we could stay probably investment grade if we went up to 50% but we had kind of a debt repayment plan that we outlined to the rating agencies. So we would be pretty comfortable there. And you made a good point. It's at Kirby, we've always, and I will ask Joe to chime in here, too, we have always looked at our capital allocation and we kind of look at it. It makes sense what to do. Sometimes you build equipments, sometimes you buy acquisitions when you can them done at reasonable prices and other times you buyback your stock and yet other times you can get pay down debt. And over the years it becomes pretty obvious what's the appropriate thing to do. That said this kind of environment in our history and I don’t want to ask Joe to comment on that. This is when we typically see some opportunities. Joe, do you want to add anything?

[Joe Pyne:]

I think that's right, David. If you look back to how we built Kirby, it was during periods of uncertainty. We've just come through up a very good period in this business and when you do that you have operators with sense that it's going to go on forever. But in fact it's not. This business still is cyclical. We tried to take some of that cyclicality out with effect to the market shift we pursue and how we structure our contracts. But it takes to deflating the balloon a little bit to get people back on kind of a realistic page and nobody likes earnings that are going relay, perhaps except for me because I see it as a great opportunity continuing to consolidate this business to make Kirby stronger. I think consolidation in the business is positive, we mentioned the ACL - AEP acquisition, I think that's going to be long term positive for the business. You will have in the future, I think, larger companies with more stake; a much more rational market. We already have a more rational market than we had 35 to 40 years ago when I entered the business. So I will look at this period with some excitement. I think that we're going to actually have some good discussions with operators that recognize that the wind doesn’t always blow in one direction.

[Operator:]

And we have no further questions at this time.

[David Grzebinski:]

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

[Operator:]

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.