Kirby Corporation (KEX) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Kirby Corporation 2015 First Quarter Earnings Conference Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sterling Adlakha. Sterling, you may begin.

Thank you, Ellen, and thanks, everyone, 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 www.kirbycorp.com in the Investors Relations section under Non-GAAP Financial Data. 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.

Okay. Thank you, Sterling, and good morning. Yesterday afternoon we announced first quarter earnings of $1.09 per share. This compares with $1.09 per share reported for the 2014 first quarter and near the middle of our $1.05 to $1.15 per share guidance range. During the 2015 first quarter, in our Marine Transportation inland tank barge fleet, utilization remained in the 90% to 95% range as the market continues to experience good customer demand. However, pricing weakness made it difficult to get better pricing on contract renewals and encouraged the tone of uncertainty which we're currently seeing. In the coastal market, utilization also remains in the 90% to 95% range. Mid- to high single-digit coastal contract pricing increases were indicative of a tight market. Our challenge this quarter isn't pricing or utilization but more in planned equipment outages for maintenance. In our Diesel Engine Services segment, revenue increased over last year but operating income was down. The Marine Diesel Engine Service segment experienced some weakness, as you would expect, in the Gulf of Mexico oil service market. With respect to our land-based Diesel Engine Service business, we are working in a very challenging market environment. Our Distribution business, which includes orders for parts, transmissions, engines, was relatively strong in the quarter and contributed to the year-over-year revenue growth we experienced. In addition, we continue to work through backlog orders for new pressure pumping equipment. However, severance expenses and lower margins are impacting our profitability. I'll now turn the call over to David.

Thank you, Joe, and good morning. In our Marine Transportation segment, as Joe indicated, during the first quarter, our inland marine barge demand was stable with equipment utilization in the 90% to 95% range. Long-term inland Marine Transportation contracts, those contracts with a term of 1 year or longer in duration, were at 80% with spot at 20%. Of the term contracts, 56% are time charter and 44% are contracts of affreightment. Pricing on inland Marine Transportation term contracts that renewed during the first quarter were flat to very slightly down. Spot contract rates were generally in line with contract pricing. Over the course of the quarter, we did see several instances where spot contract pricing, primarily through brokers, dipped below contract levels. I'll discuss inland marine pricing in more detail when I provide our outlook towards the end of the call. In our coastal Marine Transportation sector, equipment utilization remained in the 90% to 95% range, as Joe indicated. And during the first quarter, 85% of the coastal revenues were under term contracts. Demand for coastwise transportation of refined products, black oil and petrochemicals remained consistent with the fourth quarter. With respect to Coastal Marine Transportation pricing, term contracts that renewed during the first quarter increased in the mid- to high single-digit range, as Joe indicated. In our Diesel Engine Services segment, our Marine Diesel and Power Generation markets experienced stable demand in most regions of the country but there was some weakness in the Gulf of Mexico oil service market. In the land-based Diesel Engine Services market, while orders for new parts and equipment were pretty good in the first quarter, we have seen that demand weaken significantly in recent weeks. During the first quarter, we continued to work through backlog of 2014 orders for new pressure pumping equipment. However, customers continued to delay delivery of orders during the quarter and much of that backlog is now pushed into 2016. Several projects which experienced delays and production issues last year completed in the first quarter, and as such, negatively impacted margin. As a result of this and the weak outlook for the market, we have taken aggressive measures to cut costs. Since the beginning of the year, we have reduced the staffing level in the manufacturing area by about 40%. Additionally, we are structuring the business to be able to ramp up and down more efficiently. Having said that, the delays to our backlog, combined with the lack of inbound orders and a reduced near-term outlook for the distribution portion of the business, have further reduced our expectations for contribution from this business. I will comment more later in the call during my comments on the outlook. Before turning the call over to Andy, let me make a brief comment about our share buyback program. During 2015 first quarter, we repurchased 1.25 million shares for $98 million or at a price -- average price of $78.27. Since our last call with you, we repurchased 178,000 shares at an average price of $75.88. Currently, our unused repurchase authorization is 3.5 million shares. I'll now turn the call over to Andy to provide some detailed financial information and then I'll come back to finish a discussion on the outlook.

Thank you, David, and good morning. In the 2015 first quarter, Marine Transportation segment revenue declined 4% and operating income declined 1% as compared with the 2014 first quarter. The inland sector contributed approximately 70% of Marine Transportation revenue with the coastal sector contributing 30%. Our inland sector generated an operating margin in the mid-20% range, and the coastal sector generated an operating margin in the high teens. Overall, the Marine Transportation segment's operating margin was 22.9% compared with 22.4% for the 2014 first quarter. The decline in Marine Transportation segment revenue in the first quarter as compared to the prior year was primarily due to a 34% decline in the average cost of marine diesel fuel, which is largely passed through to our customers, albeit with some lagging effect. Following normal seasonal patterns, we typically experience difficult weather in the first quarter. Late in the 2015 first quarter, weather challenges were particularly acute with high winds and fog along the Gulf Coast and icing on the Illinois and Upper Ohio Rivers. Despite these challenges, inland marine delay days, while slightly above our 5-year average, were down 18% as compared to the 2014 first quarter, a quarter where we experienced more severe icing and high water conditions in the Midwest as well as high winds and fog along the Gulf Coast. Also, the first quarter results did reflect the anticipated year-over-year negative impact of $0.04 per share for higher pension expense, reflecting actuarial changes to mortality tables and a lower discount rate. We noted in our January call, our 2015 results will be negatively impacted by an estimated year-over-year increase of $0.15 per share from pension expense and $0.24 per share from increased depreciation and amortization, the result of capital additions and capital upgrades in 2014 and expected capital additions in 2015. David will discuss our second quarter and full year guidance in a minute, but let me comment on fuel. Our second quarter guidance reflects an estimated $0.03 to $0.05 per share temporary sequential impact from the decline in fuel price as compared to 1Q '15. Some of our contracts allow us to directly bill customers for the cost of fuel. In others, we have escalators which are designed to pass through the cost of fuel. Those escalators are most effective when fuel price changes are gradual. Diesel fuel prices have swung from a very high point to a very low point in a very short period of time and have recently increased some off of the lows. In this environment, our escalators are not perfect in passing through recent increases. We have seen this situation a few times in our history, and as prices stabilize, we should see the negative impact ultimately reverse. During the 2015 first quarter, we took delivery of 21 new tank barges with a total capacity of approximately 310,000 barrels. We also purchased from a competitor 6 pressure barges which added approximately 100,000 barrels of capacity. We retired 6 inland tank barges, removing approximately 100,000 barrels of capacity. The net result was an addition of 21 inland tank barges to our fleet constituting a net increase of approximately 310,000 barrels. Of the 21 inland tank barges delivered, 16 were 10,000-barrel barges and 5 were 30,000-barrel barges. For the remaining 9 months of 2015, we expect to take delivery of 14 additional 10,000-barrel inland tank barges and 4 additional 30,000-barrel inland tank barges. Including retirement, we expect to add net capacity of approximately 490,000 barrels over the course of the year, leading to year-end capacity of approximately 18.3 million barrels versus 17.8 million barrels at the end of 2014. As I mentioned earlier, in March we purchased 6 16,000-barrel inland LPG pressure barges for $41.3 million from a carrier who has decided to exit the pressurized cargo transportation business. In the coastwise transportation sector, construction of our 4 coastal articulated tank barge and tugboat units is proceeding as planned, with the first unit, a 185,000-barrel 10,000-horsepower ATB, expected to be delivered and in service in the 2015 fourth quarter. Our second new offshore vessel, also a 185,000-barrel ATB, is currently ahead of schedule and looks likely to deliver at the very end of this year or early next year. We continue to expect delivery of the third and fourth vessels, both 185,000-barrel ATBs, in late 2016 and mid-2017, respectively. I also want to reiterate something that we've previously mentioned regarding the coastal fleet operating expenses. Deferred drydock expenses are drydock costs that are capitalized and amortized over the time between drydockings, generally a 30- to 60-month period. This expense ramps up as equipment obtained via acquisition goes into drydock until the entire acquired fleet goes through a full regulatory shipyard cycle under Kirby ownership. As such, our deferred drydock amortization in 2015 is expected to result in approximately $5 million of additional expense compared to 2014. Moving on to our Diesel Engine Services business. Revenue for the 2015 first quarter increased 9% while operating income decreased 31% compared with the 2014 first quarter. The segment's operating margin was 5.3% compared with 8.3% for the 2014 first quarter. The marine and power generation operations contributed approximately 30% of the Diesel Engine Services revenue in the first quarter, with an operating margin in the low to mid-teens. Our land-based operations contributed approximately 70% of the Diesel Engine Services segment's revenue in the first quarter, with an operating margin in the low single digits. This operation incurred a pretax severance charge during the first quarter that totaled $1.2 million. As David mentioned, we let go of approximately 40% of the manufacturing workforce during the quarter to better reflect our anticipated production schedule in this difficult market environment. In March, Kirby completed the sale of a loss-producing land-based Diesel Engine Services product line to a strategic buyer for approximately $9.5 million. The sale resulted in a small pretax gain that roughly offset the severance expense I just mentioned. The product line was expected to have a slight negative, but not material, impact on operating income in 2015. On the corporate side of things, our cash flow remained strong during the quarter, which helped to fund our marine equipment construction plan, the acquisition of the 6 pressure barges and $98 million of treasury stock purchased during the quarter. The stock purchases were a combination of the completion of the $100 million stock repurchase program we started in the 2014 fourth quarter and open market repurchases. With respect to any further repurchases, we will continue to evaluate all available potential uses of capital. And as you know, at times, and for various reasons, we are precluded from being in the market. Any future decision to repurchase stock will be based on a number of factors, including such limitations, the stock price and our long-term earnings and cash flow forecast as well as the alternative opportunities available to deploy capital including acquisitions. We have revised our 2015 capital spending guidance to a range of $315 million to $325 million including approximately $75 million for the construction of 39 inland tank barges and 3 inland towboats expected to be delivered in 2015 and approximately $95 million in progress payments on the construction of the new ATBs. The balance of $145 million to $155 million is primarily for capital upgrades and improvements to existing inland and coastal marine equipment and facilities as well as Diesel Engine Services facilities. The $15 million increase in the range was primarily due to timing of payments for the construction of the ATBs and offshore shipyards which were accelerated into 2015 from 2016 to accommodate customers' needs. Total debt as of December 31 -- total debt as of March 31 was $819 million, a $102 million increase from our total debt of $717 million on December 31, 2014. The increased debt was primarily due to the acquisition of the 6 pressure barges and treasury stock purchases during the quarter. As of today, our debt stands at $809 million and our debt-to-cap ratio at March 31, 2015 was 26.9% compared with 24% as of December 31, 2014. I'll now turn the call back over to David.

All right. Thank you, Andy. In our press release we sent out last night, we announced our 2015 second quarter guidance of $0.95 to $1.10 per share, and this compares with $1.31 per share earned in the 2014 second quarter. For the full year of 2015, we lowered and widened our guidance to $4.10 to $4.40 per share as a result of the uncertainty we are seeing in the land-based Diesel Engine Services business and the inland Marine Transportation markets. Let me discuss the marine outlook first. In the inland Marine Transportation market, pricing over the remainder of 2015 will likely be impacted by our customers' expectations of how much oil is produced and will need to be shipped by barge domestically and consequently, whether the industry is in an over or undersupplied position. Before I discuss our guidance in a little more detail, I want to provide some general observations regarding the inland marine barge market and our company's performance. After 4 straight years of improved earnings, the market has forced a pause in our record financial performance. Last year, we saw record inland transportation rates, record earnings and record revenue. Because of some uncertainty in crude oil volumes and a large number of 30,000-barrel barges built during the last several years, industry-wide utilization in the 30,000-barrel barge market is being impacted and rates are under some pressure. Some barges moving Bakken and Canadian crude have been released and the industry is redeploying them, but the utilization concern is pressuring price. Utica volumes are absorbing some of this supply. So much of the market's pricing choppiness is anticipating a change in market dynamics rather than accurately pricing in the supply and demand levels that we see today. We think that the market will strengthen once crude oil prices stabilize and any excess barge capacity is absorbed by barge demand from increased refined products and chemical volumes. This is not a collapse in the market but more of a pause, which has put the brakes on new construction in the inland tank barge market, which is a very positive reaction, and it gives the market some breathing room. Our second quarter guidance assumes normal weather patterns for our Marine Transportation markets with utilization remaining in the 90% to 95% range for both our inland and coastal equipment. However, utilization in our inland fleet could trend towards the lower end of that range for both the quarter and as the year progresses. The coastal market remains healthy and our outlook is for mid-single-digit price increases. However, during the second quarter, our coastal fleet will be negatively impacted by heavy planned shipyard cycle. This is also true for the full year as we have moved several 2016 planned shipyards into this year to accommodate customers and to better match the timing of their volume needs. In our inland markets, our guidance assumes we will experience some price weakness as 2015 progresses. Currently, spot prices are generally in line with contract rate levels but have dropped below contract levels on occasion. So far in the second quarter, we have seen some term contracts renewed down low single digits. Consequently, we remain cautious with our 2015 pricing expectations for the inland sector. Our low end of the range encompasses more deterioration than we are currently seeing and expect, but due to uncertainty, we've broadened our range. Let me move to the outlook for our Diesel Engine Services group. In our land-based sector, given the significant decline in the price of crude oil and resulting oilfield capital spending reductions, customer-driven requests to delay orders have pushed much of our remaining backlog for new pressure pumping units into 2016. Additionally, the outlook for sales of parts, engines and transmissions has deteriorated beyond our earlier expectation. We now expect the land-based Diesel Engine Services business to generate a small quarterly operating loss through the remainder of 2015. In our marine diesel and power generation markets, we continue to expect this business to earn an operating margin in the low double digit percent range for the remainder of the year, although we do expect some revenue and profit impact due to the weakness in the Gulf of Mexico oil services market. For the company as a whole, the difference between the low end and high end of our guidance range is related to the variability in the land-based Diesel Engine Services market as well as how utilization and pricing trend in the inland marine market. The low end of the guidance range could be characterized by what we view as a weaker-than-expected outcome in each of our Diesel Engine and Marine Transportation markets. The low end of our guidance range for both the second quarter and the full year does not seem likely, but it is possible if our markets were to significantly deteriorate. While our 2015 earnings guidance is lower than 2014, we expect our cash flow to remain strong, combined with lower CapEx, could provide additional free cash flow for potential acquisition opportunities and share repurchases. In summary, 2015 has presented us with a number of market-based challenges. However, our balance sheet is strong, our debt-to-cap ratio is right at 27%, and as I mentioned, we expect our cash flow to remain strong in 2015. As such, we are very well positioned should any market weakness or disruption open up good investment opportunities including acquisitions and share repurchases. Operator, that concludes our prepared remarks. We are now ready to take questions.

[Operator Instructions] The first question is from Gregory Lewis with Crédit Suisse.

David, you touched on this a little bit about -- clearly there's some crude 30,000-barrel barges rolling off contract upriver and have been coming down to Houston. Do we have any sense for how many, I guess idle, crude barges are sitting around Houston? And have we started to see some of these equipment being moved into the working fleet already?

Yes, the short answer is yes. Most of it is being absorbed. It's the pause while it gets redeployed that's putting pricing pressure. And it's also the outlook that we believe that the crude market -- crude production will decline. But let me address it with some numbers. There were about 500 to maybe 600 barges in crude, maybe 550 on average, and that's declined about 100 to 150. We think it's about 375 to 425 in the crude market now. So there has been a redeployment of crude barges. Some of that -- the Bakken, as I mentioned in my prepared comments, the Bakken and Canadian have declined. But some of the barges have been redeployed up into the Utica and bringing that down river. But the market's absorbing it. But what's overhanging the market in terms of pricing is -- given a $50 crude price and the rig count cutting -- coming down from 1,800 to 900, the market is expecting a decline in crude production volumes. So that's kind of the overhang that's pushing down pricing.

Okay, great. And then I also wanted to touch on the -- you -- I think Andy, and you also mentioned it was the 6 pressure barges for LPG that were acquired. Is this something that -- is this -- do we think this is an opportunity where we could see some growth? Or is this market kind of -- is there any opportunities to grow this business organically as we look out over the next 1 to 2 years? And how big is this market right now?

Well, we -- this is an opportunity. I mean, this is where you get a little market noise and a competitor decides to exit and we took advantage of that opportunity. That's one of the things we've always done is when a customer -- excuse me, a competitor is ready to move, our balance sheet is ready to move. So we were able to pick up these barges that were essentially new, they're a couple of years old. Because it's a good long-term market for us and we like the pressure barge market and we've got growing customer demand. So it's a great opportunity and one we hope we see more of as time goes on.

Your next question is from Jack Atkins with Stephens.

So I guess, just to kind of start out, the reduction at the midpoint of the guidance, I think it was about $0.35 from midpoint-to-midpoint. Just sort of curious when we kind of break it down between changes to the outlook in the marine business versus changes in the outlook to the Diesel Engine Services business. And then how much of the pull forward of the shipyards and the impact of oil played -- the decline of diesel prices play into that too? Just trying to put some brackets around all that.

Yes, Jack, this is Andy. I would say that it's about a 50-50 split between Diesel Engine Services and Marine. And Diesel Engine Services, the vast majority of that is in the land-based. Marine again, shipyards being pulled forward has an effect on our coastwise business and then some of the -- what we're anticipating in terms of rate pressure affects the remainder of the business later in the year.

Okay. And then just to follow-up on that, Andy, if I could for a moment. I mean, it sounds like you're pulling the shipyards forward. Could you quantify the impact that has on earnings for this year? And then secondly, you talked about a higher amortization expense associated with maintenance at Coastal. Is that something that you would expect to repeat in 2016? Or is this really just an abnormally high number for 2015, I guess?

No, I mean, that's a number that's been growing over the years as we acquired assets and we've been doing these shipyards, these regulatory drydockings. And it'll -- it's grown a bunch over the last couple of years, first of all. But it should start to moderate somewhat and start to level off. On the shipyards, we've probably pulled, I would say, $4 million or so forward from '16 into '15.

The next question is from John Barnes with RBC Capital Markets.

A couple of things. In terms of United in this business going forward, I mean, you've owned this thing, for what, about 4 years now and, I guess, you've been in through a couple of down cycles in this business already, and it tends to bring with it more volatility than what we're kind of used to in the marine business and even the other Diesel Engine business. Can you just talk a little bit strategically about the outlook for this going forward? Given that it does bring this varying degree of volatility, is it something you're comfortable continuing to own? Or what's kind of your strategic view of this business going forward?

Sure, John. We clearly don't like the market environment we're in right now. And when we bought United, we knew it would be susceptible to oilfield cycles. And as you know, our strategy then and now was to mitigate some of that volatility by focusing on the more stable repair and parts and service business. But what we've seen here in this market particularly is a dramatic decline, you've had the rig count drop from 1,800 to 900. We've had the -- crude oil price drop in half essentially. And, frankly, some of our customers are in some financial stress right now. So it is a really acute down cycle, certainly more than we would hope for or have expected. But we're committed long term to get our service offerings where they need to be to mitigate some of the volatility. But also, as I commented in our prepared remarks, we're looking and streamlining the organization so we can ramp up and down more effectively going forward.

Okay, all right. And I guess next on the -- your commentary around the shipyards and maybe less orders of liquid barges. I guess there's been some discussion that one of the shipyards converted a liquid line over to a dry line. Two things, one, can you give us a sense for how many barges do you think -- liquid barges do you think the shipyards could produce this year given maybe some other's modifications? And then, if this continues for, say this year and next year, as you approach kind of that uptake in liquid volumes with some of this petrochemical build out, I mean, do you believe that the industry is actually underinvesting in equipment at this point if we see less orders given kind of the transitory nature of the market right now?

Yes, maybe. The interesting thing is, is one thing that the crude volatility has done in this anticipated volume decline in crude is it's stopped the order book build for liquid barges. It really hasn't changed since October of last year and those are contracts so people can't cancel them, effectively. But the new build order book as of October of last year is about 180 barges and that really hasn't changed. So nobody's building barges, which is very good. And as you know, we typically have a retirement of 100 to 150, some years 175, barges. So we should be -- it's a good environment. And we do know that the petrochemical volumes are coming online. We're actually starting to see it now. The big planned builds are 2017 and 2018. But we're already getting volumes in petchems that are helping to absorb any excess capacity. It's -- particularly, methanol is one area that has come onstream here recently. So I think it's great if we're short a few barges at the end of the year or next year as things develop. We believe that pricing will stabilize and go up again as new demand for refined products moves and petrochemical moves -- come onstream. So...

The next question is from Kelly Dougherty with Macquarie.

I just wanted to kind of maybe take a higher level view. And do you think -- how long do you think it takes the private company's valuation expectations to ratchet down. Just wondering if your peers still have lofty evaluation expectations even with increasing on certain inland pricing outlook? And how long maybe it needs to stay like this before those levels come in? And then I just imagine, when they do, you guys are ready to move pretty quickly, is that fair?

That's very fair. That's why we keep our balance sheet the way we do. So we can move quickly when the opportunities do. Kelly, that's a good question. The pricing expectations, certainly when the market's choppy, get more reasonable. Typically, you need longer periods of pain before they get really realistic about price expectations, but certainly they're headed in the right direction right now. And as you know, we're ready to move and we're always looking. And one good thing about Kirby is the industry knows that we're the logical buyer in most cases. So we're always optimistic on acquisitions. But as you know, it's hard to predict.

Okay, I appreciate that. And then just maybe another timing question. Can you give us a sense for how long it might take the market to absorb this excess capacity? I know there's a bit of a self-correcting mechanism in that something like 20% are older than 30 years and 13% are older than 35. How long does it take people to start to seize those older barges out once the pricing starts to turn down? Just thinking maybe when we can start to see an improvement from a pricing perspective?

Yes, it's hard to predict. But we would expect crude volumes to decline here as the year progresses and that will put some pressure on utilization, which is why we're adjusting our guidance. But as that pressure comes, if you've got old barges, they go to the back of the line, so to speak, from a customer's perspective and they're harder to deploy. So maybe we'll see some more retirement. But in terms of how long it takes for that excess capacity if it comes on to be absorbed, it's hard to predict because we are seeing, as I mentioned just a few minutes ago, that refined product volumes are growing and petchem volumes are growing. So it could be towards the end of the year but that's a real hard thing to predict.

The next question is from Ken Hoexter with Merrill Lynch.

David, you talked about getting rid of 40% of the staff at the manufacturing side. And you talked about maybe being able to ramp up or down a bit quicker. Can you tell us what you're doing aside from just getting rid of the staff that enables you to ramp back up quicker? Or what are you doing here within the business? And within that answer, are -- I guess maybe following on John's question before, what are the synergies you still see on the United portion, or the manufacturing portion of that with the rest of the business? Or is that something that is not core to Kirby?

Yes, let me take that in phases here. We are -- in terms of ramping up and down quicker, what we're doing is working on our supply chain and working with outsourcing some pieces so that you can lay them off and bring them on a little differently but that takes some management. But on the internal side, what we're doing is focusing on the core mechanic group so that they can take on lower skilled assemblers and bring them up to speed quickly, and then when we have to, lay off lower skilled assemblers. So it's really developing that core mechanic strength. And, frankly, that's one of the areas where we can have some synergies is in the Marine Diesel Engine Mechanic space, our legacy space, we've got very strong mechanics. So there's some cross knowledge that can happen between our mechanics' space and we can try and lever that. I don't know if that answered your question.

That answers definitely a part of it. And then can you talk about the synergies within the core business?

Within the core...

Well, I guess, do you still see -- the manufacturing? Do you still see manufacturing as a core part of Kirby given the large swings and the impacts it's had on the business?

Well, I understand your question now. Yes, but we would prefer to be much more focused on remanufacturing because that's a higher skilled level, should have higher margins. The manufacturing is certainly more volatile. So our focus will be build that remanufacturing business, take some manufacturing opportunities but never sacrifice remanufacturing and service opportunities for the manufacturing opportunities.

Okay. And if I can do, I guess, a follow-up on a different subject. It would be in the -- going back to the kind of a couple of questions here on capacity. And I guess, I want to follow up on Kelly's last question on the scrapping side. Do you still see that -- I guess, is the industry -- I know you said the order book hasn't changed much. But given that the fleet is newer, I guess, over the past -- since we went through the phase of eliminating all the late-night vessels and now, you've got a really new fleet, are you seeing scrapping still at those levels? Or is it dramatic -- you mentioned 100, 150, is it really slowing now because the fleet is newer? I'm trying to figure out what is going on with that size of the fleet now given the pricing pressure you're seeing in the market?

Yes, no the scrappage rates actually for the last 4 years have been down, more closer to that 100. There was -- back in the '09, '10 time frame, the scrappage rate was closer to 200. So the scrappage rate has actually come down a little bit. So we're not forecasting it to increase a whole lot. But when there's pressure in the market and you come into a shipyard with an old barge and you say, "Wow, it's going to cost me $0.5 million to extend the life of this barge for another 5 years." And you just say, "Well, that doesn't just make sense." It really comes down to an economic decision and that puts some pressure on it. Now there are still 600 or so older barges in the system that could come out over time. You are right that the building in the last 4 years has skewed the average age down a little bit but there's still quite a few older barges out there.

The next question is from Kevin Sterling with BB&T Capital Markets.

David, with the weakness on the inland side you're seeing, do you think that could spill into coastal? Or at this point is coastal rather insulated?

Yes, coastal is still pretty good. We -- as I said, the crude that's been pressured on the inland side has been more Canadian and some of the Bakken. But the Bakken is still cheap to go to the coast for the refiners on both the East Coast and West Coast. And then, importantly, the Eagle Ford is still very cheap and our coastwise equipment is really taking Eagle Ford cross-Gulf to the refineries on the Gulf Coast. And our belief is that with the Eagle Ford being competitive, even at these levels, we'll still see that doing pretty well.

I got you, makes sense. I guess the Eagle Ford is competitive just given its location to Corpus Christi and the Houston Ship Channel, is that right?

Yes. Well, not only that. But if you look at breakeven curves from an E&P standpoint, from an exploration standpoint, that's some of the cheapest crude out there. It -- also the Utica, which is of course inland focused. But Utica is more about getting liquids -- well, they're getting gas. But you're right, the Eagle Ford is some of the lowest-cost to produce crude out there. And you've got a new phenomena coming out, which is refracking of wells, which is very cost effective and you're starting to hear more about that. I don't know that the volumes are significant yet. But it is another cost mitigating effort that the industry is undertaking.

I got you, makes sense. And for my second question. David, you talked about your pumping backlog being pushed into 2016. Can that be canceled? I'm sure you guys have penalties in place for canceling an order. But have you seen any orders cancel? And if we continue to have this volatility in crude, what are your expectations regarding maybe potential cancellations in 2016? Are your customers talking about that with you?

Kevin, this is Andy. And we've said this before, but our terms and conditions are pretty much market within the industry. And while customers do have the option to cancel, they generally are on the hook for any items which have been ordered and delivered and any work that's been done. We prefer to work with a customer and to -- we delayed some of that equipment rather than push them towards making a decision on it right away. Again, we're in this for the long-term. We want to make sure that we work with our customers and take a long-term view of it. So while there is some risk to it, we think that most of the stuff that is going to be canceled probably has been already and the stuff that's deferred is going to ultimately deliver.

Your next question is from John Chappell with Evercore ISI.

Joe or David, I'm just trying to get a better sense for the potential duration. You've talked about the pricing in the inland barge business kind of every way possible I think. But I guess, one other way to maybe ask about it, and I understand there's still a lot of uncertainty here, but as the contracts, the term contracts start to renew, can you talk about maybe how staggered the contracts are? Have they been basically isolated from a lot of kind of the mid-2014 contracts in the kind of pressure environment? And can you see kind of more acceleration as those contracts start to renew back half of this year or early 2016?

John, this is Joe. Just to make a couple of observations. This is very different than 2008 and '09 where you had a collapse in the market, collapse in volumes and a rapid deescalation in prices. And in that environment, you'll remember that the 2010 year, which was the year that the business started recovering, was actually a lower year than 2009. And the reason that was is that -- is it -- the way we structure our contracts, they renew over the year, and as pricing pressure increased in 2009 and as they rolled over into 2010, you saw the impact in '10. This is different, utilization has not collapsed. What you have is a -- you have really almost an attitude of concern, where operators looking at equipment being returned from crude oil service and trying to redeploy that equipment and also believing that these crude oil prices, the volumes are going to be down in the latter part of the year, are putting pressure on prices. And that's going to happen. It's moderate pressure, it's not the kind of pressure we saw in 2009. I think that once the market sees that the equipment can be redeployed, as the additional volumes that David talked about, refined product volumes that there's -- people are driving a lot more, they're buying bigger cars, bigger trucks, that was a more significant part of our business 10 years ago than it has been more recently. Seeing those volumes come back is going to absorb capacity and then you have the $100 billion that's being invested in the chemical business. So I don't think there's anything dire at all, there's nothing wrong with the business. You just have a pause in pricing that -- and some slight pressure on pricing that has occurred, but from historically high levels. And when this thing turns, it could turn pretty quickly and you could be back on an upcycle a lot quicker than you think. But we just need to kind of work through this malaise that's out there and get the market balanced. I think you will -- we talked about scrapping, I think you will see some scrapping. They're not -- we're not building 30s, we're building some 10s. But we need the 10s for the chemical business. So I don't think there's anything wrong, it's just an uncertainty in this business makes operators want to kind of lock away their equipment and shippers take advantage of that.

For my follow up, if I could just dig a little deeper there, too. How sensitive are the discussions around, I guess, the prevailing narrative of the week? It seems like oil prices have bounced pretty significantly off the bottom, or it does seem to have. And I guess, that's part of the volatility and I guess, that feeds into uncertainty as well. But it would appear to me that maybe there's a bit more optimism for those customers as opposed to the complete dire state of shock that they are in when the price of the barrel had troughed a few months ago. So has there been any change whatsoever in the conversations or discussions? Have we bounced pretty hard off the bottom right now or just all kind of wait and see for the second half of the year?

I don't think that there is a sense yet that the pricing -- that oil pricing is sustainable. And you hear views all over the place. I'm sure you're firm has a view. The one thing though that is important to remember is that these fields produce at different economics. And you have Eagle Ford and Utica, for example, that are lower economics than some of the other fields. I think there is a consensus that says that for volumes to be maintained at current levels, or increased levels that you need higher prices. And that's a price that stretches across all fields, so some fields will produce at these prices just fine. And fortunately, we've been very careful picking the customers that we want to work for and actually servicing the fields that have economic sense. I mean, we've been -- you remember when we started talking about crude oil, we said we were going to be careful and very specific with respect to who we were going to put this equipment for because we ourselves were concerned about the long-term prospects of volumes growing forever. Having said that, I think that what I'm hearing is that the business is stable with some slight growth when oil is somewhere between 65 and 75.

Yes, you're certainly starting to get back in the range with WTI at 58% and Brent up at about 65%. But you do have the rig count decline. So you're going to have to see that stabilize and start to move back up a little before you'll see or get comfortable with production volumes. And I think that's part of the dynamic that's in here.

The next question is from Michael Webber with Wells Fargo.

This is Donald Robbins stepping in for Mike Webber. Can you quantify the general easing in rates and demand in the inland barge segment? And I guess, to a lesser extent, the coastal barge segment, given its insulated nature and longer-term contracts? And then overall, with production declines beginning to manifest themselves in 2015, how would this impact your expectations for rates as you try to secure charters for the ATBs in the second half '15?

Yes, let me break that into 2 pieces. On the inland side, pricing we're -- as I've mentioned, we've seen some term contracts in the second quarter price down low single digits. So we built some of that into the remainder of the year and maybe up to the mid-single digits. But we'll see. I think the low end of our range we think is pretty draconian. And we're not really seeing that right now. But we're being cautious and we've widened our guidance because of that caution. I think on the coastwise sector, it is a different dynamic in its supply takes a long time to come on. It takes 2 years to build some of these coastwise pieces of equipment. And they're -- we're pretty busy there and, again, we haven't seen volumes of crude fall off on the coastwise business. I guess it's always a possibility but we're not seeing it, we don't anticipate it. So right now, our view of coastwise pricing is mid-single digits for the year. Does that help? Does that answer it, Don?

All right. Yes, that's great. And could you just give us some color around the share repurchases? I mean, you said you have 3.5 million shares of variables as of the 29th, should we expect similar volumes in Q2 compared to Q1? Or how do you view that moving forward?

We don't telegraph what we're going to do repurchasing wise. It's one of the many things we look at when we have various uses of capital, including acquisitions, and sometimes you get precluded from being in the market because you're looking at something for example. So it's just best for us not to comment on our acquisition or share repurchase plans.

The next question is from David Beard with Iberia.

Just a clarification and maybe a little bit of a drill down. First, you mentioned about half the weakness is related to the marine segment. Is that just isolated to the black oil product or has that spread to petrochemical?

Well, yes, pricing is -- yes, it's being caused by the crude oil portion of it. But as those barges are redeployed and some of them were clean barges so they could be redeployed into other trade lanes, it puts pressure kind of across-the-board even though it is isolated to the crude side.

That's where I was going at. It really would have to be a clean tanker that could switch, otherwise the heated ones can't. Can you quantify at all how big -- of the 550 barges, how many were clean and how many have switched into the petrochem trade?

No, I can't quantify it off the top of my head. But let me think about it for a second. Let us get back to you, David, on that. Probably half of that 500 were clean barges, and that's just a rough estimate.

All right, we can follow up on that. And then just to drill down on your black oil fleet, is most of that weakness -- or is there any way to quantify the weakness between what's happening in black oil and petrochem? And my follow up to that is going to be, are those barges still profitable? And really what I'm doing is taking your pretax $15 million and trying to see if you spread this amongst the barges are they still profitable or marginally profitable or what happens to derive that number?

Yes, we're still very profitable. You got to remember, we're at record rates and rates have been going up for 4 years, so this is just a slight pullback. So we're still very profitable at the rates we're getting. I mean, you could see, our margins are still mid-20s for the marine business and even with this weakness, margins are still going to be okay.

Okay, and that would even be for some of the crude oil barges, they're still profitable but it seems like a bit less than before, quite a bit less in that segment?

Right.

The next question is from John Barnes with RBC Capital Markets.

Just 2 quick follow ups. Andy, on your comments about the deliveries versus the cancellations at United, how long can those -- can the backlog be deferred? How much farther out can it be pushed?

I mean that's really a customer-to-customer relationship-type discussion, John. So I mean, we can just sort of decide that on a customer-to-customer basis. And when we've got a good customer, a good long-term customer, we'll let them defer them out. If it's someone that we think is not going to be a long-term customer then we'll probably play our hand a little harder.

Okay, all right. And then, David, your comment that there were still about 375 barges, I guess, in crude oil service and your commentary around maybe production continuing to trend down the balance of this year. Do you have a feel for how many more of those you would expect to come out of crude and need to be absorbed into another service?

It's hard to say but crude oil production won't disappear, right? I mean, it -- and maybe it's another 100 barges but that's really hard to say. John, let me just reiterate a little bit of what Joe said but add some color here. There's nothing fundamentally wrong with the business. Pricing has been at historical highs. We do expect these crude oil volumes to decline. But offsetting that is crude is coming off the bottom, it will come back. Building has paused and that's good. We do have $100 billion of petchem plants coming on. We're already seeing some things like methanol come on, refined product volumes are growing and miles driven are going up, you can look at the EIA data. So again, nothing is fundamentally wrong here. This is just a pause. And pricing will stabilize and go up again. And if it's 100 barges more that they have to come out, we'll absorb that easily.

The next question is from Kelly Dougherty with Macquarie.

Just want to see if we can delve a little bit into the nuances of some of your customer conversations and how you might be thinking about volume. I know about -- 4 big customers make up about half of your inland business. So just wondering how pricing conversations are going maybe with that core group versus some of your other customers? And then if there's any concerns about some key customers moving some volume away from Kirby, if your competitors suddenly have barges available and they tend to be generally at lower prices than what you usually charge?

Yes, we -- well, and there's not a big difference between smaller customers and bigger customers. And to be honest, we fight every day to make sure our service is at the highest levels we can every day and there's always somebody nipping at you. So I don't think the dynamic in this environment is any different than it's always been between big customers and large customers.

And Kelly, let me just make an additional observation. If we -- and this is a historical observation, we don't have really issues with volume. Customers want to do business with Kirby for a host of very good reasons, flexibility, safety, financial strength, relationships. So I'm not concerned about losing business to other companies. You may have to adjust prices a little bit, but we typically, as we free up capacity, we take business from others. It's not the other way around. So that's not a concern.

Okay, great. So it seems like it's just more really kind of the setting the price expectations appropriately from a utilization and a volume perspective you guys are pretty comfortable given everything that's going on in the backdrop?

Yes, that's right.

Operator, I think that's all the time we have.

Okay. I'll turn it back to Sterling for closing remarks.

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.

Thank you. Ladies and gentlemen, this concludes today's conference. You can for participating. You may now disconnect.