Kirby Corporation (KEX) Q3 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Kirby Corporation Third Quarter 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sterling Adlakha. Please go ahead.

Thank you, Andrew. Thank you everyone for joining us today 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, 2015 filed with the Securities and Exchange Commission. I will now turn the call over to Joe.

Thank you, Sterling and good morning to everyone. Yesterday afternoon, we announced third quarter earnings of $0.59 per share versus our guidance range of $0.50 to $0.65 per share. That compares to $1.04 per share reported for the 2015 third quarter. Inland marine tank barge utilization during this quarter was in the low to mid-80% range. The weaker levels of utilization, at first, materialized in July, which we discussed on last quarter's call, persisted throughout the third quarter, with some incremental improvement due to weather and some modest volume increases driven by a series of customer supply change disruptions occurred. Pricing remains at depressed levels. In the coastal market, barge utilization was also in the low to mid-80% range. Utilization continues to be impacted by the amount of equipment trading in the stock market, which adds some idle time exposure. Our outlook for this market remains cautious as the industry fleet contends with additional supply that's coming online over the next year and as it rationalizes older, less commercially viable equipment. In our land-based diesel engine service business, service activity levels have improved in the remanufacturing area, and we think this new level of activity is providing a signal for market improvement next year. However, currently, demand for parts and components remains depressed. With low port volumes, we were not yet able to cover all our fixed costs, though we have reduced the loss run rate from earlier this year. We have also not received any orders for new pressure pumping equipment, although we are beginning to have inquiries. The market recovery is still in its infancy, but we believe that it has begun. In our marine and power generation diesel engine business, the oil service market along the Gulf of Mexico remains depressed as customers continue to defer maintenance. We did see business improvements in the Midwest and in our power generation market. In summary, as our guidance implies, the fourth quarter will be another challenging quarter for Kirby. It is, however, encouraging that there are some signs of stability in the marine transportation market and across our diesel engine service markets. Frankly, it's hard to see how pricing in the inland market could get much worse. In the case of our land-based diesel engine business, an upturn in service activity has caused us to begin to add employees to meet the demand for remanufacturing frac spreads. In our marine diesel engine market, the markets we service may not get much better soon, but they're also not going to get much worse. And finally, in our coastal marine transportation business, we continue to look for opportunities to take out costs and improve operating efficiencies as the market adjusts to the additional tonnage and lower crude oil volumes. I'll now turn the call over to David.

Thank you, Joe, and good morning to those on the call. I'll begin today with a summary of quarterly results in each of our markets, then turn the call over to Andy to walk through the financials. Following Andy's remarks, I'll address our guidance range before turning the call over to question-and-answers. In the inland transportation market, our utilization was in the low to mid-80% range during the quarter. The relatively sharp drop in utilization that we first experienced in July continued through most of the third quarter, with some periods of better utilization when weather conditions were less favorable and for a brief period during product supply disruptions, including the brief outage that occurred on a portion of the Colonial Pipeline. In response to the lower utilization, we reduced our average towboat count by approximately 6% in the third quarter. For the industry overall, weak utilization increases the likelihood that we will see a more rapid number of retirements and a decline in new equipment construction across the industry. This will facilitate an overall rebalancing in the market. Additionally, many of the temporary factors contributing to weak utilization are likely to subside over the next few months. Moving on to pricing. Pricing on term contracts that renewed during the third quarter was down on a mid- to high single digits. Spot rates fell sequentially, and were at or below term contract rates during the quarter. However, spot rates have flattened out, particularly towards the end of the quarter, and has remained flat into the first part of the fourth quarter. Operating conditions during the quarter were seasonally normal. However, it's worth noting that historical levels of flooding in Louisiana drove a brief period of operating disruptions along the Gulf Coast. The impact from the flooding to our operations was minimal. In our coastal marine transportation sector, demand for the coastwise transportation of black oil and petrochemicals was relatively stable, while refined products demand was weaker due primarily to weak demand in the Northeast despite a very brief improvement during the Colonial Pipeline outage. Coastal tank barge utilization continued to decline, primarily due to the ongoing trend of equipment moving off of term contracts to trade in the spot market. Utilization was in the low to mid-80% range during the quarter. Coastal market operations were briefly interrupted along the Gulf Coast and East Coast due to Coastal market operations were briefly interrupted along the Gulf Coast and East Coast due to disruptions from Hurricane Hermine. With respect to coastal market pricing, term contracts that renewed during the third quarter increased very slightly low single digits. However, it was only a very few older contracts that renewed in the quarter. Spot pricing did fall below contract pricing during the quarter. In our diesel engine services segment, as has been the case all year, in our marine diesel engine business, the Gulf of Mexico oil services market remained at historically depressed levels. We also continued to experience major maintenance deferrals by our customers in many regions of the country. The Midwest marine market was an exception as maintenance demand improved there. Additionally, demand in the power generation market was strong during the quarter. In our land-based diesel engine services market, the sale of engines, transmissions and parts in our distribution business remained at very low levels. Likewise, we have not had orders to manufacture new pressure pumping units. However, we did see a material increase in order activity for pressure pumping service and remanufacturing. Before I turn the call over to Andy, let me briefly address an incident involving a Kirby vessel that occurred earlier this month. On October 13, the tugboat Nathan E. Stewart was pushing the DBL 55, an empty 55,000- barrel ATB, and it went aground on the inside passage on the West Coast of Canada. The tugboat is submerged, and some of her fuel tanks were compromised. We have responded to the fuel spill. The cleanup is essentially complete and we are commencing the salvage operation on the tug now. This incident is very unfortunate, but it is insured and we expect only to incur the incident deductible. I'll now turn the call over to Andy to provide some detailed financial information before I finish with a discussion on the outlook.

Thank you, David and good morning. In the 2016 third quarter, marine transportation segment revenue declined $59 million or 14%, and operating income declined $38 million or 41% as compared with the 2015 third quarter. The decline in revenue in the third quarter as compared to the prior year quarter was primarily due to lower inland marine pricing and utilization, lower coastal marine utilization and a 17% decline in diesel fuel prices. The decline in operating income was driven by the same factors, partially offset by a reduction in inland towboats and savings from a reduction in force earlier in the year. The marine transportation segment's operating margin was 15.4% compared with 22.4% for the 2015 third quarter. The inland sector contributed approximately 2/3 of marine transportation revenue during the 2016 third quarter. Long-term inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 80% of revenue, with 52% attributable to time charters and 48% from affreightment contracts. The inland sector generated an operating margin in the high teens for the quarter. In the coastal sector, the trend of customers electing to source coastal equipment from the spot market over renewing existing contracts continued. However, the percentage of coastal revenue under term contracts was consistent with the first nine months of the year at approximately 78% as a result of lower utilization in revenue for spot equipment. The third quarter operating margin for the coastal sector was in the high single digits. Turning now to our marine construction and retirement plans. During the 2016 first nine months, we received 27 barges from the acquisition of SEACOR's inland tank barge fleet, took delivery of three newbuild barges, transferred one 30,000-barrel barge from coastal service to inland service and retired or returned to charterers a total of 48 barges. The net result was a decrease of 17 tank barges in our inland tank barge fleet for a total reduction of approximately 21,000 barrels of capacity. In the fourth quarter, we expect to take delivery of two 30,000-barrel inland tank barges, with two additional 30,000-barrel tank barge deliveries shifting into 2017. Also in the fourth quarter, we expect to retire or return to charterers an additional six barges with 77,000 barrels of capacity. On a net basis, we expect to end 2016 with 877 barges with approximately 17.9 million barrels of capacity or roughly the same level we finished the third quarter and down slightly from our barrel capacity at the end of 2015. In the coastwise transportation sector, during the third quarter, we retired a small 9,000-barrel harbor barge and ended the quarter with approximately six million barrels of capacity. In the fourth quarter, we expect to take delivery of the first of two new 155,000-barrel ATBs, with the second 155,000-barrel ATB and the coastal chemical barge both expected to be completed in early to mid-2017. Moving on to our diesel engine services segment. Revenue for the 2016 third quarter declined 34% from the 2015 third quarter, and the operating income declined 17%. The segment's operating margin was 6.1% compared with 4.9% for the 2015 third quarter. The marine and power generation operations contributed approximately 46% of the diesel engine services revenue in the third quarter, with an operating margin in the mid-teens. Our land-based operations contributed approximately 54% of the diesel engine services segment's revenue in the third quarter, with a modest operating loss. On the corporate side of things, our 2016 capital spending guidance remains in a range of $230 million to $250 million, including approximately $10 million for the construction of 7 inland tank barges, 5 of which are to be delivered in 2016; approximately $100 million in progress payments on new coastal equipment under construction, including our new coastal ATBs, two 4,900-horsepower coastal tugboats and a new coastal petrochemical tank barge. The balance of $120 million to $140 million is primarily for capital upgrades and improvements to existing facilities and equipment. In addition to our capital spending guidance, during the first half of 2016, we spent $85.5 million on the acquisition of the SEACOR inland tank barge fleet, $13.6 million to acquire a leased coastal barge from the lessor and $26.5 million to purchase 4 coastal tugboats. Total debt as of September 30, 2016, was $726 million, a $49 million decrease from December 31, 2015. Our debt-to-cap ratio at September 30 was 23.3%, a 2.1-point decline from December 31, 2015. And as of today, our debt stands at $740 million. I'll now turn the call back over to David.

Thank you, Andy. In our press release, we announced our 2016 fourth quarter guidance of $0.45 to $0.60 per share, which translates to a narrower full year 2016 guidance range of $2.47 a share to $2.62 a share. In the inland marine transportation business, we expect utilization in the low to mid-80% range at the low end of our guidance range and mid to high-80% range at the high end. During the quarter, we saw very few delays throughout the system and also a delay in refinery, a decline in refinery operating rates. However, we did experience some short periods of tank barge utilization improvement from weather events and customer supply disruptions. We think that provides some support for our view that some of the utilization decline since July is temporary. However, we have yet to see any consistent utilization strengths. Although we are seeing spot market pricing that has flattened out, spot rates are no longer declining, and we believe they are at levels that are at or below cash breakeven for much of the market. Frankly, these rates are unsustainable and will go up. In the coastal market, on the low end, our guidance range contemplates utilization in the low 80% range. On the high end of guidance, we are expecting flat pricing on contract renewals and utilization in the mid-80% range. Additionally, Hurricane Matthew impacted our operations for 2 weeks in October and caused us to shut down operations for a short period of time along the Eastern Seaboard. This hurricane is expected to have only a modest fourth quarter earnings impact on our coastal results. For our diesel engine services segment in our land-based sector, we expect to incur a small operating loss for the fourth quarter at the midpoint of our guidance range and to breakeven in the land-based market at the high end of our guidance range. This market continues to improve, and service volumes continue to grow with some new inquiries for new equipment. In our marine diesel markets, we do not expect any improvement in the Gulf of Mexico oil service market this year. In the power generation market and in our other marine diesel engine services market, we expect fourth quarter results to reflect a normal quarter-over-quarter seasonal decline, which generally leads to an operating margin in the low double digits. In closing, we entered the last quarter of the year with a strong financial position. Despite the market challenges that we are dealing with and the investments we have made in upgrading and expanding both our inland and coastal fleet, Kirby's debt-to-capital ratio is the lowest it has been in two years. While the exact timing of recoveries in our markets is still unclear, we do believe the inland market will come into supply and demand balance some time in 2017 and pricing will inflect. Also, we believe the land-based diesel business has bottomed and will begin to recover in 2017. Finally, we have the financial strength to not only weather the cycles, but to grow and improve our market position throughout them. Operator, that concludes our prepared remarks. We are now ready to take questions.

[Operator Instructions] The first question comes from Jon Chappell of Evercore ISI. Please go ahead.

Thank you, good morning guys.

Hey, good morning Jon.

David, a lot of commentary about unsustainably low pricing, pricing is about to bottom in inland. To the extent that you can, can you just lay out a little bit how you're looking at the supply-demand balance for next year? Like how many barges are on order relative to typical years? What the outlook is for scrapping? Is demand GDP or GDP plus or minus for any reason? And then also as part of that, can you just explain a little bit how the pricing kind of filters through the P&L? If pricing were to bottom in 1Q, how long does it take to actually filter through all your term contracts and have the final impact on the P&L statement?

Yes, sure. Let me start with supply. As you know, when spot rates are at or close to cash flow breakeven, it's pretty painful. And what you see in that environment is companies start to accelerate their retirement. They look at some of their older equipment and it's coming up for a shipyard and they say, "Goodness, there's no way we're going to spend the cash to extend that life for another five-year period." So they begin to retire it. And we're starting to see some aggressive retirements. I think the last time we talked, we were talking about Kirby's retirements around 39 barges this year. I think we'll probably end up with about 54 retired this year. So we're retiring more barges. The industry is retiring more barges. And it's just a matter of good economic discipline and stewardship. Some of our competitors don't have the economic wherewithal to actually make the investment to extend the lives, so they're almost forced to retire. So we think we'll see a good number of retirements this year, and that's happening now and it should carry into next year. I think the order of magnitude, I think, in past histories, we've seen up to 150 to 200 barges retired in any 1 year. If you think about our utilization being somewhere right now between 80% and 85%, maybe closer to 85%. You're 5% from kind of the high 80s where you need price increases. So 5% of the industry is probably around a little less than 300 barges and maybe 250. And if you get some retirements, that will get the utilization up without any demand growth. Now we do have demand growth, which I'll come back to in a minute. On the shipyard side, the new construction, basically, it's nonexistent. There may be a handful of barges. As you heard Andy's prepared comments, we shifted some barges that we're going to deliver this year into next year. So I think it's probably a handful of barges that get built next year, maybe two handfuls. But - so from a supply standpoint, it looks pretty good. On a demand standpoint, we still have pretty good market outside of crude oil. If you look at chemicals, everybody knows, the chemicals continue to increase, albeit the construction of all the new plant is probably a bigger impact in 2018 because those projects tend to flip to the right, as you know. But then in refined products, black oil, all those, the macroeconomic trends are fairly positive. You can look at vehicle miles driven. They continue to grow, albeit at a slower pace here of late. But the general demand picture is pretty good. So I think demand will also require some more barges. I think utilization in the industry is maybe a little low because we've had some inventory disruptions and some bloated inventories. And frankly, we've had really good weather. You can look at our delayed days and see that. They're very, very much lower than normal. So from a supply-demand standpoint, I think things should come into balance in 2017, and that will drive pricing. These spot contracts are pretty brutal right now, and frankly, they are unsustainably low. Now with respect to earnings, I mean, you've heard us say this before. We have contracts that roll over kind of ratably through the year. And as they roll over in at lower prices, that has a full year effect in the next year. So that will be an impact as the contracts have essentially renewed lower this year, that there will be a full year effect next year. I don't think that's a surprise to anybody but it's just a matter of math. I don't know if that answered your question, but on this one.

No, very well. No, incredibly thorough. Thank you. So that sounds like the opportunity. And then just for my followup on the risk side with coastal. What's the potential or how much more could potentially move to spot? What's the risk from, I guess, a very precipitous decline in the MR [ph] market to kind of cannibalize your cargoes? And then how can you - how much more can you right size the cost structure in the coastal business if the demand side were to be pressured next year?

Yes. Well, in the coastal market, as we've been saying, we've got a situation where you've got new tonnage coming in. I think there's about 14 new units that will be delivered in the next 18 months or so, brand-new ATB barge units coming into the market. And there are probably around 40 older barges that are at retirement age or be it actually probably have been extended longer than they should that need to come out of the market. But as you know, you'll work older tonnage as long as you can until you can't. So there has to be a little pain to drive that older tonnage out. I think that's starting to happen. I think it will happen and that may take a couple of years to play out as that the excess or the new equipment is absorbed and the older tonnage comes out. We've seen, because of the excess coming in, that customers are not too worried about having availability. So there's been a drift towards taking a chance in the spot market. Clearly, the spot market is more difficult for us. You get periods of lower utilization. Because of it repositioning barges is on our nickel in that case. And so it's a bit painful. You see that. You saw our - Andy's comments on our margins there. But, I think longer term, it will come back into balance because that old tonnage has to come out and will come out as you come into a shipyard. As you know, the shipyards for these coastal units are very much more expensive than the inland one. So, there's a natural tension that should encourage retirement.

Right, that's very helpful. Thanks so much David.

Yes, thank you, Jon.

The next question comes from Gregory Lewis of Crédit Suisse. Please go ahead.

Yes, thank you and good morning, gentlemen.

Hey, Greg.

I guess I'll open this up to either David or Joe. And, really, my question is, clearly, Kirby is always in the market looking at M&A transactions, but just as we've looked through previous periods of time, I mean, you guys have alluded to the fact that the market is kind of at the bottom. Do we need to see the market start to improve before maybe we can see a pickup in M&A or can we see sort of down cycle-ish type acquisitions?

Yes. Let me give a quick comment and I'll turn it over to Joe to give his comments. The people, nobody wants to sell at the bottom right, Greg? I mean, you don't want to sell at the bottom. You want to maximize your price if you're a seller and that's normal. I think there are some people in the market that in this environment, if you had levered up at 4x EBITDA and when things were really good back in 2012, 2013 and we've - you see this kind of pronounced downturn that we've had, those debt-to-EBITDA multiples get really stretched, and there may be some people in trouble. Hard to say, we don't have insight to their financials because a good many of them are private. But by and large, I would say that nobody wants to sell at the bottom. But some people maybe feel like it's still time to sell. I'll turn it over to Joe. He's got a lot more history on how these cycles play out.

I think David has it about right. The kind of sales that you would see here is either a company that owns a barging business in addition to something else that just says that we want to deploy capital. So let's sell the barge operation. You saw that with respect to SECOR recently. And you may see some of that in the next year. The four sales are typically bank-driven, and we'll just have to wait and see if any of that happens. What David is talking about are really operators that go through the cycle that's painful. They realize that they're vulnerable, they're getting to the point in their lives that they're thinking about doing other things and they're just looking for an opportunity to capture some additional value that may not be there at the bottom of the cycle. So if you look at Kirby's historical acquisitions, they typically have heard as we came out of a recession, not in the middle of it.

Okay, great. And then just, David, on your comments about diesel engine services, you kind of gave some guidance, when could we see and, I guess, what needs to happen for diesel engine services on the land side to get back to breakeven? It seems like we're kind of in that period of where we're getting there. I mean, it sounds - I mean, any sort of guidance you could give around that?

Sure. We're getting closer every day. Let me characterize it this way, Greg. Our customers and the number of remands that we have in the shop for service are growing every day. It's a bigger number. But the initial wave of remands, if you will, are customers that are coming with kind of their better fleets that just needs some maintenance or they think it's easy to fix to get it running again. And they say, "Okay, bring it in." And let's say, "Let's just get it running." And by the way, if you have any major components that need to be replaced or some parts that need to be replaced, please use our inventory first or they demand that we use their inventory first. They have extra spares and stuff. So even though we're getting an increasing amount of remands, the parts and rebuild componentry that goes with normal remands is still developing as our customers work off their own inventories first. But every day, we're getting closer to working that off, and I think you'll start to see us get parts and major component flow through, which will add to our ability to absorb fixed cost and be above breakeven. We're getting closer every day, and the signs are very encouraging from what we're seeing. Our customers are coming to us with very large fleets, trying to get them back into service. They are, of course, still coming out of the bottom, so they're trying to minimize their spend at this point. We're working with our customers to help them do that, get their service going and build a long-term supply chain maintenance partnership. And that's happening very, very well. We're pretty excited about how that's headed.

Okay guys, hey thank you very much for the time.

Thanks Greg.

The next question comes from Jack Atkins of Stephens. Please go ahead.

Hey, guys, good morning. Thanks for the time.

Hi Jack.

Hey Jack.

So just kind of going back to an earlier question, I think it was Jon's question, around sort of the - how we think about these inland contracts repricing and sort of how that flows through the P&L? Is there a way to think about these inland contracts repricing and sort of how that flows through the P&L. Is there a way to think about sort of how those contracts are dispersed throughout the year? Is it sort of - do they renew sort of ratably when you think about your contractual book of business or are they sort of levered to one part of the calendar or the other? Is there a way to kind of think about that?

Yes, Jack, this is Andy. So in any given year, about 70% of our book of business reprices. And splitting that down, about 50% of it is term contracts and 20% of it is spot. Spot, obviously, is pretty quick, and it sort of is ratable throughout the year. And the term contracts, I would say, for the most part, in any given year, are pretty ratable as well. I wouldn't say that we favor 1 quarter to another in terms of what reprices.

Okay. Okay, that's helpful, Andy. And then, Andy, I guess, this one is for you as well. But when you think about initial CapEx plans, I understand you're still in your budgeting process. But I just sort of think about, we're just trying to think about how we should be looking at maybe CapEx expectations for next year. If you can sort of give us some insight to that, I think that would be helpful?

Yes. Again, we're still going through our budget, as you said and without really sort of holding ourselves to a guidance number, I would say that, typically, our maintenance capital, and next year, it looks like it's probably a maintenance capital-type year, is in the 150- to 175-type number.

Okay, okay, great. Thank you.

Thanks Jack.

The next question comes from John Humphreys of Bank of America Merrill Lynch. Please go ahead.

Good morning, gentlemen. Thanks for taking my questions. I just kind of wanted to get into the calculation of utilization and margin, obviously, eroded pretty far this quarter, if you could just sort of walk me through. I saw some of your commentary around spot activity increased idle time, if I can get sort of an understanding of the mechanics that really pressured margins and is it solely tied to utilization and then kind of what we can look for to see margins return to levels we've seen in the recent past? Thanks.

John, I'll start and then I'm going to turn it over to Andy maybe he can put some quantity - quantify it a bit. But as you know, pricing is almost a direct hit to margin, right? I mean, as pricing falls, it does impact margin pretty quickly. Right away on spot and then on contracts, it takes a while to roll through from a full year effect. But utilization also has a pretty big impact. You can see, if you look at our second quarter of this year and third quarter, we had a decline across the board and utilization on the inland side that was on the order of 5% to 10%. And, I mean, you could see, if you look at the core - the sequential decline from second quarter to third quarter, how that utilization has a pretty big drive in terms of earnings power. Andy, anything there?

Yes, John, well, I would split that - I would split my answer up into the inland side and the coastal side. And on the inland side, I would say that when you see utility fall, because of the way that we manage our horsepower, we do have some levers we can pull, and we did in the third quarter. Now they're not immediate, but over time, we were able to get rid of some charter boats and some costs. So as you saw margins fall in the inland side, they don't fall necessarily sort of dollar for dollar with the fall in utility - the revenue impact of the fall in utility. On the coastwise side, as you see pieces of equipment move from term contract to spot business, where they are less well utilized, that utility - because, generally, you're talking about 1 piece of horsepower to 1 barge, that utility kind of falls pretty dramatically to the bottom line. So you can see the impact of utility on the coastwise side being a little bit more significant in your margin than you see it on the inland side.

Great. That's very helpful. And then just sort of a followup to - on that utilization is, with the sort of increased capacity in the Corn Belt, I think you've referred to this being more of a 2018 factor. We've heard some commentary that a lot of the new capacity additions in nitrogen fertilizer coming online is aimed at displacing imports any commentary there around how that would impact your business?

Yes, no, not really. I'm not sure it would be a big impact. Yes, I don't - we're pulling up some information here for a second. But on the Ag side of things, it's pretty low for our inland business. It's less than 5% and we here for a second. But on the Ag side of things, it's pretty low for our inland business. It's less than 5%. And we do move ammonia up and down the river. I think that probably won't be impacted much by any of the import changes. So I would say we can do some more research on it, but I don't think it's going to be a material impact to us, John.

Well, it still needs to be moved. If it's imported, it needs to be moved and if it's made domestically, it needs to be moved.

Great. Yes. And I saw that it is a small piece. We just saw some recent commentary we had with some people out in the region. That's it from me. I really appreciate it gentlemen.

Okay, thanks John.

The next question comes from Doug Mavrinac of Jefferies. Please go ahead.

Thank you, operator and good morning, guys. How are you all?

Hey, Doug.

Hey, Doug, good.

Yes so, my question pertains to, I guess, 2017. And, David, on your commentary, you gave very good guidance and visibility as far as where current utilization levels are and why you expect them to increase into the mid-80% range heading into next year. And clearly, there's a lot of debate about the timing of the petchem ramp up next year, the order of magnitude of how much of that stuff makes its way into barge. So my question is, trying to get visibility about the impact on utilization levels next year of that, which clearly that's a bit of a ways out. But I would imagine you guys are having conversations at this point with some of your petrochemical customers about what some of their barge needs are for next year. So based on those conversations, and, obviously, without getting too specific, can you help us frame how we should expect utilization levels to evolve next year? If you're heading into 2017 in the mid-80% range, how we should expect utilization levels to evolve and what maybe type of levels we could possibly hit next year?

Yes. Let me take that in pieces here. I think a big part of the utilization drop-off we've seen in the third quarter has been temporary in nature. One, as we said, the delay days are very low with good weather. Dock delays have been down considerably. The number of locks and dams that were under repair and slowing things down was minimal. So that temporary-type utilization will come back, and we're going to have bad weather in the fourth quarter. We always do. We've had some refinery inventory issues. I think that's self correcting now. We're in the refinery maintenance season. So inventories are going to kind of right size, and things will get back into a more normal flow of things, so some of those temporary utilization things will come back. It's maybe into the fourth quarter and into the early part of '17. I think the longer-term utilization growth will come as, as we talked about earlier, the supply coming out and no new supply coming in the retirement. And then I think you get towards the end of 2017 and early 2018 before you start to see the chemical build-out and start-up of plants having an impact. We're in discussions with many of our customers about their needs. It's still a ways out, but it's going to start probably towards the end of '17. I wouldn't hazard a guess to the actual number of barges as a percent utilization. We do know - look, if it's an ethane plant - ethane-driven - ethylene plant going to polyethylene, we know there's not a lot of barge moves. But if it goes from ethane to ethylene and then to some downstream derivatives, whether it's glycols or EDC or whatnot, there can be a significant number of barges. A lot of that's still being held closely to their breasts by our customers for trade secret reasons. We're getting a feel for it. Some of them are talking to us. Others are pretty quiet about it. But again, I think that's late 2017. And the bulk of the new ethylene start-ups will be in 2018.

Got you. That's very helpful, David. And then my followup question. In one of the earlier questions when you were talking about your engine diesel services and even in your commentary when you talked about seeing the material increase in pressure pumping remanufacturing and service, I would think that, that wouldn't happen in a vacuum. I would think that some of that equipment is coming back to work. Rig count is picking back up. Then at some point, one would expect that to translate into additional volumes making their way on to a barge. Is that thinking correct? I mean, it seems like it's kind of a thing that if some of the equipment comes back to work, it should make its way on to a barge. So how should we think about what has been obviously a negative downdraft on barge volumes over the last couple of years maybe starting to actually not hurt anymore but maybe starting to help at some point in 2017 or 2018?

Yes, I think that's a possibility. We've always said this, that crude is best moved in a pipeline and that's where it'll end up. I do think what we are seeing now portends that you'll see more crude volumes coming out of the shale plays. We know that's going to happen. But ultimately, it'll end up in a pipeline. We could get some demand from the shale plays if things continue to improve, but it's not something that we think is - should be bet - we wouldn't bet a bunch of equipment on. If it helps tighten it up, that would be great. I mean, we saw what it did 2012 to 2014, but then that overhang is what we're dealing with now. I would say this, the number of barges moving crude right now is roughly the same as it was last quarter, right around 140 barges. So it seems to have stabilized. But the long-term trend is crude should be moved in a pipeline. I think part of the problem with new pipelines coming on is they're going to want 20-year off take agreements. So there is a scenario where you could see some barge volume come back. It's not something that we're betting on now.

Right, okay great, very helpful, thank you, David.

The next question comes from Mike Webber of Wells Fargo. Please go ahead.

Hey good morning guys, how are you?

Good morning, Mike.

And David, I just wanted to go back to a couple of your earlier comments, I guess, one on rationalization and then following up on margin. But I think you mentioned 2017 being potential inflection point and seeing some of the older capacity come out of the market and helping you define balance in terms of pricing. I guess my question is, what degree of confidence do you have in 2017 being that period? If we look across most of the marine spaces and even maybe kind of even coastal as a comp, we still see 45-year-old ATBs that are trading in a market that have gone through 2 or 3 cycles. So it tends to - it seems like it tends to take a bit longer than kind of a 12-month rationalization period. So I'm curious how you think about that on the inland side and then what the great confidence you have in it being 2017 versus 2018 or 2019.

Yes, I think your comments are generally correct. On the inland side, rationalization can happen a lot quicker. It's pretty easy to take out a 10,000-barrel barge. It's a lower capital amount. It's easier to tie them up or to cut them up and sell them for scrap. Your point is taking on the ATBs. These are bigger units. There's a high capital base. And if you can keep them working and they're long in the tooth, they're fully depreciated, it's a pretty good deal. So it has to be painful in order to take them out. And that's why I said on the coastal side, they could take a couple of years for that to play out as those 14 new ones come in and the 40 come out. Now on the inland side, as you've seen, we upped just in the last - since our last call from planned retirements in inland of 39 to 54 this year alone. So yes, it's a pretty direct economic question to any operator, and they - it can rationalize pretty quick. So I think you'll see pretty hefty retirements in the inland side.

Yes, Mike, this is Andy. I would just add - only add to that, that while we don't have perfect visibility into what other industry participants are retiring, we do have relatively good visibility into what's being built. And so this year, again, if you look at our net retirements of 49 barges, the industry as a whole is only building just a little under 100, if you net our 5 out of it. So we're retiring almost half of what is being - we're retiring ourselves almost half of what is being built this next year. And then as you go into year, we think the shipyard order book right now is less than 10. So I think, really, supply and demand just through attrition and lack of new capital will be sort of a help to us over the next year or two.

Great. No, that's helpful and just to follow up on non operating margin. I'm trying to kind of consolidate a couple of the comments. If I look at what you guys put up in Q3, I believe it's, just looking at our model, the lowest since - the lowest consolidated operating margin since 2008. And when we go through - when we look at that history, you realize that, that's - you go back far enough and that's pre K-Sea, right? So that's not necessarily you're looking at kind of inland margin versus kind of a consolidated operating margin today. So at 15%, if I think about the inland market taking a major letdown in July, right, so you've got another six or seven months or more of kind of rolling over that 80% of COA or time charter business onto a lower spot market on the inland side and then mid-single-digit market - margins on the coastal business, with 72% of that market on time charter, and yet it's a roll-off and considerable supply headwinds still facing the coastal market, would it stand to reason that your consolidated operating margin should remain under pressure through at least the next 9 to 12 months?

Yes. I mean, you heard my earlier comments about the full year effect of pricing rolling over, putting pressure on margins. I think - yes, I would say Andy's comments that inland margins in the quarter were up in the high teens, just below 20%. So, I mean, I don't disagree with what you're saying. We will have margin pressure high teens, just below 20%. So, I mean, I don't disagree with what you're saying. We will have margin pressure for the next while as these contracts have rolled over and we get that full year effect. And the inflection point is -- in terms of pricing, when does pricing inflect, and then it takes some time for that pricing to roll through to come back into the margins on a full year basis.

Okay, now that's helpful. I appreciate it guys. Thanks for the time.

The next question comes from Kelly Dougherty of Macquarie. Please go ahead.

Hey guys, thanks for the time. Not to be too skeptical, but have you actually started to see these accelerated retirements happening or are we just assuming that even more difficult conditions will finally spur them? Because I kind of feel like we've been expecting that for a while. So what - if you are seeing them happen, hopefully, what do you think finally precipitated that or is it just a certain number of quarters of the pain and people finally start to make a move or do you have any insights maybe into the industry shipyard schedule? So we can kind of think, okay, x percent of the vessels has to come up to getting more money put into them. So that's a good proxy for how much should come out over the next few months.

Yes. Let me break your question. Is your question more about coastal or is it on inland?

More about...

On inland?

Yes.

Yes, in the inland, we have seen people retiring equipment. We - you can fly around the - or drive around the Houston ship channel and see equipment is coming out. We - or you heard our accelerated retirement schedule. I think the same is happening in the coastwise business. It's just starting. I mean, I think both Wayne [ph] and OSG have been public about retiring coastwise equipment. We're going to retire some coastwise equipment. We have retired a couple bigger units. So I think it's happening, and it's - I don't think it's just us.

Do you have any kind of sense of what the shipyard schedule might look like or is there any way to figure that out, where we could kind of think of that as a good proxy of what might continue to come off over the next few months?

Yes - no, I think in the shipyard schedule, most of the 2016 deliveries have happened on the inland side. As Andy said, there's probably less than 10 contracted for delivery next year on the inland side. On the coastwise side, we know that there's 14 newbuilds. Actually, Sterling can give you that list, if you want. He knows what they are by unit. Yes, I don't think any new contracts for new tonnage on the coastwise business have been let in the last quarter or so. And I don't know if anybody really adding to the inland fleet. I had a conversation with an inland shipyard earlier this week, and he basically was moaning that he had no inbound orders at all. So...

Yes - no, I'm sorry. What I meant with shipyard, I meant the vessels that have to go back in for the coast guard mandated. That's a point where, yes, you got to make a decision, hey, do you want me to put a couple of hundred thousand dollars more into this or just scrap it?

Yes. Yes, it's a 30-month cycle, so maybe the best way to think about it is every - little less than every 3 years, every ship has to come - or every ATB or tug has to come into the shipyard. It's a 30-month cycle, so you can take the fleet. There's about 290 barges out there. You would say 90 to 100 come into the year - into the shipyard every year as a rough - that's a rough proxy. I would just add 1 thing, too, is we've got the ballast water treatment system that has to come in, and that's going to be a capital cost of $1.5 million to $2.5 million for every - in addition to every shipyard. So that's a pretty big headwind if you've got older tonnage.

Yes, David, I think Kelly is also asking about the inland equipment, which has the same cycle, inspected every 2.5 years, dry-docked at least every five years. So if you do the math, the population of tank barges, you can get the kind of the period where those decisions are going to be made.

Okay, great. No, that's helpful. And then is there just a way to think about, right, if spot utilization -- or spot moves on the coastal side kind of stayed at 78%? Do you have - I mean, this isn't the easiest question to answer. But any sense of what that might move to in 2017? I have to imagine there's a certain percentage of customers that's just not going to operate in the spot market, even if capacity looks a little bit more readily available. But anyway, kind of help us put some orders of magnitude around how much might actually translate into a spot move potentially.

Yes - no, I'm sorry. How much of the coastal will translate into a spot move?

Yes, I mean, I imagine that some of the coastal business is just probably going to be under contract just because it's the nature of that business. Is there -- or maybe I'm wrong. But how much do you think really might be at risk to move over to the spot market as we look into 2017?

Yes, that's hard to quantify. Yes, I think it's a bit of a dance with the customers in that they will try and term you up at a very low rate if they can. And if they can't, they'll say, "Well, let's just stay in the spot market." So it's - we're reluctant, too, to term up at rates that are extremely low. So it's a bit of a give and take. So it's really hard for me to predict and give you - be more quantitative than that.

Okay, thanks very much, guys.

Thank you, Kelly.

Thank you, Kelly.

Excuse me, this is the conference operator. I see that we are at the bottom of the hour now. Is there time for one more question?

Yes, operator, we'll take one more.

Thank you. And that question comes from David Beard of Coker & Palmer Sentusma [ph]. Please go ahead.

Yes, it's David Beard, thanks guys for fitting me in. Two questions kind of big picture, the first just on the mix of spot and contract. Is Kirby more sensitive now to an improving rate environment when it should improve relative to utilization of pricing or are we really going to see utilization move first and then pricing lag?

Yes. Utilization has got to move first before you can get the pricing. But one of the things, having a larger spot exposure is kind of what you want when pricing is really low, so that as pricing comes up you're able to get pricing back up for your book of business. But we do need to your point, you do need the utilization to come before the pricing. And typically, on the inland side, if you're north of 85%, kind of in the high 80% range, and the customers believe it's going to be that way for a while. You get to an environment where you can get a little pricing momentum.

Okay. No, that's helpful. And then just to go back to the capital allocation question and the acquisition. And I really want to sort of loop in the share buyback. And I know it's a little bit of a circular argument. But you know, you bought back stock at a higher level, business got worse. I can see you not wanting to buy back stock if you're going to make an acquisition. Then again, if business gets better next year, who's going to sell? So who would be buying back stock? So I know we're in a little bit of a circular argument, but I'd just like to kind of walk us through how you're thinking about that capital allocation issue, especially as you're in maintenance mode next year and the free cash flow builds.

Yes. Well, David, we certainly like our stock at these prices and if we bought it at higher levels, you can imagine we like them at these lower levels. I would say this though, one of our first priorities in terms of capital deployment is a consolidating acquisition in our core businesses and clearly, we like to do that. It sets the company up for long-term growth. So that tends to get the higher priority. And you can't be in the market buying back stock if you're looking at material acquisitions and even if you don't know whether they're going to happen or not. So I think that's understood. There's times when you can be in the market and times when you can't. But we're glad we've got the balance sheet we do. We're - as you saw, we're down 23% debt to total cap. That's a good position to be in, in a market like this. We're - this is where our capital discipline and our financial strength become a pretty good strategic tool.

Now that's very helpful. I appreciate it. Thanks for the time.

Thanks, David.

Operator, we're done with Q&A. You want to close out the call?

Yes, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.