Kirby Corporation

Good morning, and welcome to the Kirby Corporation's 2020 First Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press the pound key. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Eric Holcomb, Kirby's Vice President of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us. With me today are David Grzybinski, Kirby's President and Chief Executive Officer at and Bill Harvey, Kirby's Executive Vice President and Chief Financial Officer. A slide presentation for today's conference call as well as the earnings release that was issued earlier today can be found on our website at kirbycorp.com. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are included in in our earnings press release and are also available on our website in the investor relations section under financials. As a reminder, 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 and our actual results could differ materially from those anticipated as a result of various factors including the impact of the COVID-19 pandemic and the related response of governments on global and regional market conditions and the company's business. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2019, and subsequent quarterly filings on Form 10-Q. I will now turn the call over to David.

Thank you, Eric, and good morning, everyone. Earlier today, we announced 2020 first quarter adjusted earnings of 59 cents per share, which excludes several one-time items totaling $4.74 per share. On a GAAP basis, we reported a net loss of $4.15 per share for the first quarter. We'll talk more about the first quarter and the one-time items in a few moments. First, and most importantly, I'd like to express my sincere sympathy to all of those that have been affected by the present pandemic, and I hope all of you and your families are safe and well. My deepest gratitude goes out to all of the healthcare workers and first responders who are dealing with this crisis on the front lines. I'd like to start today by discussing our response to the virus and the impact it is having on our businesses. All of Kirby's businesses have been deemed essential. Therefore, our boats, barges, distribution, and service operations have continued to fulfill their roles transporting and providing essential goods and services. Kirby had in place a pandemic response plan designed to ensure business continuity, uninterrupted customer service, and for the safety of our employees. We activated our plan in early March, and through the dedication and commitment of our employees, all of our businesses have continued to operate despite the challenging circumstances. During this crisis, we have implemented many safeguards to protect our employees, including working remotely where possible, enhanced PPE and medical protocols, limited mariner interaction with shoreside personnel, modified crew change, timing, and modified procedures. We also immediately quarantined employees as a precaution whenever risks of potential exposure were identified. Further, in an effort to support the fight against the virus, a team of engineers from our Stuart and Stevenson subsidiary have worked together with Rice University to design a prototype low-cost ventilator. This project has moved with rapid speed, going from design to prototype in a matter of weeks. and we are currently awaiting emergency use approval from the FDA. In summary, I'm extremely proud and humbled by the dedicated Kirby employees who have stepped up during these challenging times to ensure continuous operations without compromising safety or customer service. Looking at our segments in marine transportation, although the first quarter was impacted by near-record delay days in inland and planned shipyard maintenance and coastal, the year started strong with high barge utilization, robust customer demand, and improved pricing. Throughout March and the first part of April, activity remained very tight, and our inland barge utilization surpassed the mid-90% range as many of our customers readied their supply chains, reallocated products, and secured storage. However, as the national shutdown and stay-at-home orders slowed the economy, many refineries and some chemical plants have cut production, and our barge utilization has declined in recent weeks. In distribution and services, first quarter activity was stable, with a slight improvement in transmission sales and service to oil and gas customers, and in manufacturing, we constructed some new pressure pumping units. As oil prices collapsed in March, our customers responded by cutting their 2020 capital spending budgets dramatically, and activity levels in our businesses were reduced. And commercial and industrial activity levels were good in the first quarter, particularly for our marine repair business, which benefited from a very active barge market. Since the onset of COVID-19 in the U.S., Nationwide stay-at-home orders have curtailed demand, especially in our power generation business, which has significant operations in some of the major metropolitan areas hardest hit by the pandemic. We also experienced activity reductions in our on-highway business, particularly related to bus transportation. However, our thermorefrigeration business has continued to see steady activity levels supporting grocery supply chain distribution systems. In response to the expectations that oil and gas markets will not rebound anytime soon, we have made some tough but necessary decisions to further realign this segment's cost structure. Recent actions include workforce reductions, furloughs, and reduced work schedules. We are limiting discretionary spending, reducing capital expenditures, and consolidating facilities. In a few moments, I'll talk more about how we think COVID-19 could impact our businesses for the balance of the year. But before I do, I'll turn the call over to Bill to discuss our first quarter results, our liquidity, and the balance sheet.

Thank you, David, and good morning, everyone. Before I review our segment results, I want to provide a little more detail on the first quarter's one-time items. As a result of the sharp decline in oil prices during the first quarter, uncertainty surrounding COVID-19, and a weak longer-term demand outlook for the oil field, we recorded a $433.3 million before tax, or $5.59 per share after tax, non-cash impairment of goodwill, intangible assets, long-lived assets, and inventory related to our distribution and services segment. We also realize the tax benefit of 50.8 million or 85 cents per share. Under the recent US CARES Act legislation, Kirby can carry back net operating losses generated in 2018, 2019 and 2020 to offset against taxable income generated in the higher tax rate years of 2013 through 2017. The 85 cent benefit relates to the carry back of net operating losses from the 2018 and 2019 tax years. In 2020, this will also lower our effective tax rate to approximately 15%. Turning to our segment results, in the 2020 first quarter, marine transportation revenues were $403.3 million with an operating income of $50.7 million and a margin of 12.6%. Compared to the same quarter in 2019, This represents a 10% increase in revenue and a 43% increase in operating income. The improvements are primarily due to a 13% increase in inland revenue driven by the SINAC acquisition and higher pricing. Compared to the 2019 fourth quarter, revenues were stable with increased inland barge utilization being offset by increased shipyard activity. Operating income decreased by $3.8 million sequentially, primarily due to the near record delay days in inland and the impact of shipyards on coastal revenues. During the quarter, the inland business contributed approximately 79% of segment revenue and had an average barge utilization in the low to mid-90% range. Long-term inland marine transportation contracts, or those contracts with a term of one year or longer, contributed approximately 60% of revenue with 65% from time charters and 35% from contracts of a fragment. Term contracts that renewed during the first quarter were higher in the low single digits. Spot market rates increased in the mid-single digit range sequentially and year-on-year. During the first quarter, the operating margin in the inland business was in the mid-teens and was adversely impacted by poor weather conditions, high water and significant lock outages. In the coastal business, market conditions were good, resulting in a barge utilization in the low to mid-80% range. With respect to pricing, average spot market and term contract rates improved to approximately 10% to 15% year-on-year. During the first quarter, the percentage of coastal revenues under term contracts was approximately 85%, of which approximately 90% were time charters. Coastal's operating margin in the first quarter was in the low single digits and was impacted by planned shipyard activity. With respect to our tank barge fleet, our reconciliation of the changes in the first quarter and full year 2020, as well as projections for 2020, are included in our earnings call presentation posted on our website. Moving to distribution and services, revenues for the 2020 first quarter were $240.7 million, with operating income of $3.7 million. Compared to the 2019 first quarter, revenues declined approximately 36%, with a $33.9 million reduction in operating income. This was primarily due to lower activity in our oil and gas-related businesses. In commercial and industrial, the contribution from the recent Convoy Thermo King acquisition was partially offset by COVID-19-related demand reductions in the power generation in on-highway markets. Sequentially, revenues declined 5% with reduced oil and gas manufacturing deliveries and COVID-19-related demand reductions in commercial and industrial being partially offset by the revenue contribution from the Convoy Thermo King acquisition. Despite the revenue decline, segment operating income improved $6.4 million as a result of improved sales mix and lower costs. During the first quarter, the oil and gas businesses represented approximately 33% of segment revenue and had an operating margin in the negative mid-single digits. The commercial and industrial businesses represented approximately 67% of segment revenue and had an operating margin in the mid-single digits. Turning to the balance sheet, as of March 31st, total debt was $1.7 billion and our debt to cap was 35%. We also had cash totaling $323 million, a portion of which we used to fund the $278 million Savage Inland Marine acquisition, which closed on April 1st. During the quarter, we used cash flow to fund capital expenditures of $49 million, the acquisition of convoy for $40 million, and the purchase of three inland pressure barges under construction by another operator for $20 million. Capital spending will trend down significantly for the balance of the year as the first quarter had significant regulatory shipyards, expenditures, and coastal. As of this week, we had available liquidity in cash of approximately $435 million. Our balance sheet is sound, and we have good liquidity that we expect will significantly increase the balance of the year. We do not have debt maturities due until 2023, and we have substantial room available under our debt covenants. We also plan to reduce capital expenditures to a level at or below the lower end of our previous guidance range of $155 million to $175 million for the full year. As well, during the year, we will carry back NOLs to obtain tax refunds of approximately $125 million. I'll now turn the call back over to David to discuss our outlook for the remainder of 2020.

Thank you, Bill. In our press release this morning, we announced that we are withdrawing our 2020 full-year guidance. There are many unknowns surrounding COVID-19, including the duration or possible recurrence of stay-at-home orders, the magnitude of the US and global recession, and the depth of demand destruction for our products and services. This is an unprecedented situation that changes by the day. You can be assured our management team is focused on taking the actions necessary to manage this situation and to protect the well-being of our employees, our customers, our suppliers, and our shareholders. Looking at our segments, in marine transportation, declining consumer demand for refined products has resulted in many refineries reducing or, in some cases, idling production. As of this week, refinery utilization has declined into the 60% range, which compares to rates in the 90% range earlier in the year. We have also seen a modest decline in U.S. chemical plant utilization, albeit the most significant reductions have occurred in other parts of the world. With these developing trends, our barge utilization levels have declined. and we expect this will likely continue as economic activity remains at reduced levels. Despite these challenging circumstances, we believe that our marine transportation business is well positioned to deal with this environment. In inland marine, there are a number of factors that should help to mitigate the reduction in our activity levels. First, looking at the industry, barging is an essential service and provides considerable flexibility to the industrial supply chain. For example, we are currently seeing a significant number of opportunities for crude and refined product storage, and some of our customers are also seeking to use barges to relocate various products to different geographies. Further, upcoming locked maintenance projects, including the full closure of the Illinois River this summer, will create some additional demand for barges. On the supply front, We believe new barge construction for 2020 is limited, with approximately 130 barges believed to be on order or under construction throughout the industry. This is very different from the last downturn, which saw more than 260 barges enter the market in 2015. With the industry typically retiring 75 to 150 barges each year, we expect minimal net barge additions for 2020. Within Kirby, the long-term nature of our customer relationships and our term contracts will help to protect our revenue stream. As well, many of our spot contracts are multi-month in length and often six months or more. With respect to costs, we are aggressively implementing cost-saving measures across the business, including managing our horsepower to align with demand and ensure our bulk utilization is maximized. Lastly, as you are aware, we closed on the acquisition of Savage at the beginning of April. To date, this integration is going extremely well, despite some challenges being presented by COVID-19 and social distancing. We are aggressively pursuing cost synergies, integrating our fleets together, and I expect that Savage will have a favorable contribution to earnings this year. Overall for Inland, while there are currently many unknowns and circumstances are changing by the day, If this downturn is similar to the 2008-2009 downturn, we could see a decline in barge utilization of approximately 10 percent from the level seen in the first quarter. In that downturn in 2008-2009, the utilization decline negatively impacted our inland margins by approximately three percentage points. But it did take a period of time for margins to fall as we benefited benefited from the cost savings as our charter boat count declined and it took time for the term contract portfolio to roll. In the coastal market, we do expect revenues and barge utilization to decline in the coming quarters. However, approximately 85 percent of coastal revenue is under a long-term contract, which will help to insulate the business from material reductions in revenue. Since the end of March, reduced demand for refined products has resulted in an increase of available barges in the industry. As a result, Kirby's spot barge utilization has declined slightly. Additionally, labor constraints in the shipyard industry as a result of COVID-19 have resulted in some delays in extended shipyard periods for some of Kirby's larger capacity vessels. As previously announced, Kirby's retirement of four aging coastal barges which is planned to occur starting in the second quarter, as well as anticipated activity reductions in coal transportation, will have an adverse impact on the full year for coastal. In distribution and services, we expect that activity in the oil and gas market will be extremely challenged for the duration of 2020 and likely through most of 2021, with many of our customers cutting their capital spending by 50% or more as compared to 2019. With oil inventories rapidly growing and increasing calls for well shut-ins across the U.S., analysts have predicted that onshore rig counts could decline to as few as 250 to 300 rigs, representing a 65% reduction from 2019 levels. In this environment, the active frack fleets working in the U.S. could decline to as little as 50 to 75 fleets, which corresponds to a reduction of 75% or more as compared to 2019 average. With this backdrop, we expect our oil and gas distribution and manufacturing businesses will see minimal activity levels in 2020. In commercial and industrial, we expect that our businesses will see some reduced demand as a result of the recessionary environment. However, the commercial marine and trucking repair markets as well as the thermal king refrigeration businesses are expected to remain relatively stable for the near term. The most significant impacts in this market are expected to be in the on-highway sector with reduced demand for bus repair, particularly in our markets in the Northeast and at major tourist destinations in Florida. We also expect that power generation will be impacted as customers defer spending for these large capital-intensive projects. Kirby is actively managing the distribution and services cost structure, and we continue to make adjustments to reduce the financial impact of COVID-19 and low oil prices. In the near term, we expect the second quarter will be the most impacted as it will take some time to fully implement our cost savings and restructuring plans. For the full year, we will endeavor to maintain segment margins at a small loss to break even levels. But it will be dependent on the state of the economy and the magnitude of activity reductions in commercial and industrial. However, it's important to remember that the DNS business requires very little capital. Despite reduced earnings expectations as a result of our actions, we believe the DNS segment will not be a cash drain for the year. In summary, Kirby is well-positioned to manage through the impact of coronavirus. Our pandemic preparedness and history of handling emergency situations like hurricanes and waterway emergencies allowed us to quickly implement business continuity plans throughout our operations, and focus on the safety of our employees. We have a strong marine transportation business with solid term contracts and a cost structure that can be quickly adjusted to changing market conditions. Although activity has declined in recent weeks, customer demand remains sound for now, with storage needs and an upcoming major lockoutage on the Illinois River helping. In DNS, we have taken We have and are taking swift and aggressive actions to adjust our cost structure for low oil prices and falling demand. We will continue to manage our costs to counter the impact of any further activity and revenue reductions. From a cash flow perspective, we are in a very strong position with ample liquidity. Kirby has a proven history of generating free cash flow throughout the cycle. We believe we have clear line of sight to $250 to $350 million in free cash flow generation this year, which we will use to enhance liquidity and reduce our bank debt. Operator, this concludes our prepared remarks. We are now ready to take questions.

Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press the pound key. As a reminder, we ask that you please limit your questions to one question and one follow-up. Our first question or comment comes from the line of Ken Hexter from Bank of America. Your line is open.

Great. Good morning, Dave, Bill, and Eric. All the best in these trying times. Maybe I can jump into the inland. First quarter is typically your low margin for the year, and so you're talking about being in the mid-teens, up from the low to mid-teens a year ago. Can you talk about your thoughts on scale of impact given utilization falling to the low 90s, maybe given your historical experience, Dave, on your thoughts on what kind of margin impact this could have?

Yeah, sure. Well, good morning, Ken. I hope you and your family are all well in these crazy, surreal times. Yeah, so we had a pretty good first quarter in Inland given the weather and delay days that we had. If you look at the number of delay days, it was pretty close to what we had in 2019, which was a record. So we were very, very pleased with the first quarter. Utilization was kind of in the mid-90s, and, you know, a couple days it spiked up to 97% or so. We've seen a little pullback, maybe 5% or so in utilization, but pricing's been holding here in April, which is pretty good. There's one or two deals that maybe did decline a little bit, but mostly it's held firm. Part of what's helping there is storage, Ken. We're seeing some storage opportunities there. And, you know, with all the dislocations, there's just a lot of supply chain moving around. So, you know, if things were to hold right now, if this was the bottom, to say it another way, you know, we may not see any margin decline at all. And, in fact, as the weather gets better, we could see margins improve from this point. But that's a big if. And, you know, you saw us – pull our guidance, because we just don't know how long this is going to go on, how deep it will go. You know, if you used 08 or 09 as one proxy for this, you know, we saw, as I said in my prepared comments, a volume decline of about 10 percent. And it took about a year, but we lost about three percentage points in margin. Now, we just don't know, you know. If it goes deeper, it could be like the 08-09. If it goes through the end of the year, it could even go further than that. But conversely, if this is the bottom, maybe we don't see much decline at all in terms of margin. It's just hard to say. One encouraging piece of news we did hear that I think refinery utilization bumped up about 2% this week, which, you know, at least it's going in the opposite direction. And just looking at Houston traffic, we're starting to see it pick up. So it's just really hard to say, Ken, but, you know, we kind of like where we're at right now given the circumstances, but we just don't know how long this is going to last and how deep it will go.

That's true. We can say the same for traffic up here, and the first thing everybody can do is get in their car because they're not going to get on general commutation. Thanks for that, Dave. But maybe I could follow up, I don't know, for you or Bill, just for my follow-up question on the write-down. Looking at the scale of what you paid for S&S in kind of that same range as the $433 million write-down, is that a mix of S&S and United? Is it all one or the other? Are you closing ops? Maybe you can kind of I know you wrote down some inventory. Maybe you can detail a little bit about what you're doing with the non-cash write-downs.

Yeah, no, that's the whole segment, Ken. So it includes the United and S&S, and we did it the normal way. You start with fixed assets, go through... intangibles, and then to goodwill. So it really is a combination of everything. We determined there was a triggering event as you looked around the world. We see oil prices at negative for a period, and you see the oil field as it was and as it is. It was the right thing to do to look at the, and we brought in a third party, but to look at the segment and write down the assets.

Yeah, I mean, when you look at the outlook for for the oil field sector for the next, well, certainly for 2020 and probably well through 21. We just felt that it was prudent to look at that carrying value.

Yeah. I would say that there are parts of the business, of course, that had no impact in DNS, like KES, the engine systems is It stands alone, and Thermo King, for instance, is a business that had no impact on the oil field, and so nothing was done in those areas, of course.

All right. Appreciate the time. Thanks, guys. Thank you.

Thanks, Ken. Thank you. Our next question or comment comes from the line of John Chappell from Evercore ISI. Your line is open. Thank you. Good morning, everybody.

Hey, good morning, John.

Good morning. David, the 60% term in the Inland business is a little bit at the lower end of your historical range. As you think about going forward in the uncertainty, do you think that it continues to kind of fade lower as customers may be reluctant to sign term contracts in the current environment? And if that were to be the case, if you were to get to around 50% term, 50% spot, what would that pricing mix do to the margin of that business?

Yeah. Well, typically in a healthy market, spot pricing is above term, and that's the case right now. But to your point, we're about 60% term. That's a little lower than historically we would have been about 75% term. But, you know, I'll be honest, a lot of our spot deals are – you know, three, six, nine-month deals, so they're a little longer. What happened, as you're aware, is that the accounting changed, and anything a year or longer, people have any lease or contract a year or longer, you have to put it on your balance sheet. So many, many people now try and get under a year in terms of what they contract for. So there's a little bit of artificial... artificial things going on in terms of what's actually term versus spot. Many of those spot deals are a little longer. But to your question, typically spots above term in a decent market or in a stable market, and that's the case right now. So we actually feel pretty good about where we are. with our contract portfolio right now.

Great. And then for the follow-up, you mentioned the slight uptick in refinery utilization, which we've noted as well. I mean, you don't want to make a trend off one week. But petrochemicals are obviously a much bigger part of your mix. So have you heard anything similar or at least maybe any signs of optimism from your petrochemical customers? Obviously, no one knows the timing of these shutdowns, but it seems like there's more and more momentum behind reopening. So just Any commentary from the big petrochemical guys on when you may see an uptick there similar to the refinery system?

Yeah, you know, it's a mixed bag. As we talk to our chemical customers, you know, anything with consumer packaging, just because everybody's buying individual wrapped things nowadays, consumer packaging and all the chemicals that go into that are very strong products. Obviously, anything that goes into disinfectants or alcohol-type things are pretty strong. What's been very, very weak is anything related to the auto sector. As you would expect, you know, basically nobody's ordering. So it's a mixed bag. We've seen some chemical volumes pull back. You know, they want to run as much as we want them to run, right? You know, the more they run, the higher utilization, the more efficient they are. You know, they just need demand to come back. But, you know, no real antidotes to share but that. It's just a mixed bag. We have seen a little pullback in chemical volumes, but by the same token, there's a lot of supply chain disruption and that's causing some moves and some storage opportunities as well. It's literally a day-to-day thing as we watch things change. But like you prefaced, we are starting to see signs of things coming back to life, but I think it's just too soon to call that.

Yeah, completely understand. Thank you, David.

Be well. Take care, John.

Thank you. Our next question or comment comes from the line of Jack Adkins with Stevens. Your line is open.

Hey, guys. Good morning. Thanks very much for taking my questions.

Good morning, Jack.

So, David, I guess maybe quickly just start with the inland business for a moment. You know, if we can kind of go back to that 90% utilization rate, which I think is probably much better than folks feared in terms of what you've been seeing over the last couple of weeks. To what degree is that maybe being inflated a bit by the fact that you've got a lot of your business under contract? Or I guess I'm just trying to think about how is that number reflecting sort of what's happening in terms of underlying demand for services? It sounds like there's quite a bit of storage activity that's taking place as well. So just trying to kind of put all the bits and pieces together to kind of understand what's happening in the underlying business today. Okay.

You know, it's bouncing around is the way I would say it. You know, we were kind of mid-90s and dropped, you know, sometimes high 80s, low 90s, bouncing around. Every day is a little different. You'll get inbound inquiries for true moves. You'll get inbound inquiries for some storage. And it's... And some of those storage deals will come and go based on Contango or whether they're storing it for future use or just as a financial play. And it literally bounces week by week. But the base load is still pretty good. Yeah. And part of that, as you mentioned, is our contract construct. You know, we've got pretty decent contract support through there. You know, Jack, I wish I had more to tell you. It's day-to-day. As I said earlier, if this was the bottom, we'd feel pretty darn good right now because, again, You know, we wouldn't see any margin degradation if this was the bottom. We just don't know if it is, right, and how long this will last. You worry about, you know, we start opening up, and then we get a spike back up in number of cases, and then we go back to lockdown. You know, I'm hearing this called, instead of the Great Recession, they're calling it the Great Lockdown. And we just don't know. But there are signs of life here. We're seeing it in Texas. You know, I know some states are opening up and others are still locked down. So it's really hard to say what the underlying volume demand will do from this point.

No, that makes sense. And I appreciate that additional context there. I guess for my follow-up question, maybe if we can shift gears to DNS for a moment, you know, I think it's encouraging that you guys are talking about running around breakeven still there despite all the challenges that you're facing really across that business, maybe a slight loss. We'll see. But, you know, I guess if we could kind of for a moment step back and talk about, you know, how you view the future for the DNS segment. You know, what's left in terms of, you know, your capabilities on the oil and gas side after these cost reduction actions. And, you know, I guess as you, you know, David, as you sort of think about this segment moving forward, does oil and gas have a place within DNS in the future or, you know, is the plan to kind of think about this as being a smaller but, you know, profitable and less cyclical industrial and commercial levered business, you know, when we think about 2021 and beyond?

Yeah, I would say it's more the latter of what you just said, a smaller but perhaps more profitable business. Let me back up a bit and put DNS in some more context here. You know, commercial and industrial, we had thought would be about 65% of revenue this year with 35% oil and gas. I mean, clearly oil and gas is going to be rough business. With the rig count dropping 65%, 70%, and we've heard estimates that the number of working frack spreads will go from about 250 to 275 down to maybe 50 to 100 working frack spreads. So it's very clear there's not going to be a lot of new manufacturing of frack equipment and probably very little maintenance as some of these pressure pumping companies fight for survival. So, you know, we're very intellectually honest about the outlook for the oil and gas sector, and, you know, that's why we did the impairment, to be honest. You know, our goal is for all of DNS during this very trying year will be to be kind of slight loss to break even on a P&L standpoint and cash flow positive, slightly cash flow positive. So you might expect that there's small loss on the oil and gas side, but commercial and industrial should have some operating profit. We are seeing, prior to COVID, we had seen commercial and industrial growing. It's been doing well. Our thermal king business there is growing. We have a small acquisition. Power generation was doing okay. We've seen a little pullback on that right now because people are deferring major capital projects. But the marine repair business, the old KES business, is doing very well right now, given the activity in the barge business. So as we put it all together, commercial and industrial, slight profit, offsetting some losses in that oil and gas business. We're going to just run it as tightly as we can. It's painful because we've had to lay off a number of people and we're consolidating some facilities and doing some furloughs. That part's painful, but we've got to do that to get this to where it needs to be. Longer term, Do we exit the oil and gas part of it, or, you know, do we do something with KDS in general? I don't know, but, you know, clearly given, you know, our carrying value now, we've got more optionality.

Okay. Thank you again for the time.

Okay. Thanks, Jay. Thank you. Our next question or comment comes from the line of Michael Weber from Weber Research. Your line is open. Hey, good morning, guys.

How are you? Good morning, Michael. David, I wanted to touch base on the comp you threw out from, you know, looking at 08 and 09. And you've kind of thrown out two of the, in the past, kind of two of the recent, you know, recent drops to try to get a sense of scale here. And if I look at what happened in inland, or Marine France, rather, in 08 and 09, in that 10% slide, that was off of a higher base because it was entirely inland at that point. as opposed to kind of a broader mix of services. If I apply that to where we're at or where we kind of peaked at the most recent cycle, we're talking about something in the very low single digits on a margin basis. So how realistic do you think that is over the next six to nine months? And then I'll follow up with it.

Yeah, I'm not sure I – followed you on that, Michael.

If I take 10% off of your most recent peak margins, you're talking about something in the low single digits.

Let me be clear. 10% revenue or volumes. Only 3% decline in margins. Sorry if I wasn't clear on that.

Yeah, that's fair. If I look at the 14 to 16 cycle, it actually works out to about a little bit more than 10%, about 12%, 13% when you get to the early 17. And you look at 2008, 2009, a little bit more resilient there. But again, that was a different business mix. So the 10% on a margin basis seems, at least relative to the most recent cycle, seems appropriate. I'm just curious whether you think that's in play here or And I guess I can layer it in my follow-up. You know, I know that these cycles are all different, but, you know, the initial impacts, right, we kind of saw a lag border, kind of a lag effect this quarter, right, where we saw some slowing quarter to date. Q1 results were actually pretty strong. I'm just curious how that, you know, maybe the early innings, how this feels relative to both 08 and 09 and then, you know, the 14-15 comp, which, again, looks like it's probably the most comparable. Yeah.

Yeah, I would say, you know, how does this feel from 08, 09? I would say the refinery cutbacks were faster this year than they were in that 09 period, which actually may be healthier for the overall situation. But, you know, but right now we're seeing things like storage that are kind of helping put a floor on... how far utilization is going down. You know, that's helping the whole industry, to be fair. You know, ultimately, that stuff in storage is going to have to move again. So it's just really hard to say, you know, how parallel 08 and 09 is to this. You know, 09 came back pretty strong. towards the end. I don't know how strong we'll come back from this because I worry about just kind of a rolling lockdown. It's probably the big difference in the 2015 time, that cycle when we pulled back. There was a bunch of new barges coming in. You know, that's when crude prices collapsed in 2015 and all the pipelines came on. But there are also 260 barges brand new coming in. Here, you know, it's half that in terms of number of barges. And I would think the retirements would be a little higher this time. So a lot of moving parts. I'm sorry I'm not being more helpful here, Michael.

Well, that's fair enough. I could follow up on it offline. I did want to ask about the storage trade. And, you know, we've seen some of the operators offering barges on storage. And I'm just curious what the pricing is like on that kind of business. My understanding is that it's happening on a single barge basis. So you're talking about pricing and, you know, a couple thousand dollars as opposed to the $7,500 you'd be looking at for a two-barge and a tow schematic. So I'm just curious, the pricing. What kind of quality? Can you kind of assess the quality of that storage business versus just simply kind of soaking up capacity on like a last resort basis?

Yeah. Well, I think it's probably not appropriate for me to discuss pricing directly, but I would say, you know, that storage business is as good as our normal business in terms of margin.

Okay. All right. I'll turn it over. Thanks, guys.

Thank you. Thanks.

Thank you. Our next question or comment comes from the line of Greg Lewis from BTIG. Your line is open.

Yes, hey, thank you, and good morning, everybody. I hope everybody is staying safe and staying sane. Yeah, David, just following up on the storage question, you know, clearly it's something that is happening today. not talking about pricing, but is there any way to quantify? I guess I have a couple questions around that. One is, is there any way to think about the duration of these storage contracts? In some markets, you hear three-month transactions, six-month transactions. How would you classify them in terms of duration? I don't know if you even have this information, but Is there any way to tell what type of cargoes are, like any kind of thoughts around the cargoes on these barges? And then is this something where there's options to extend those kind of contracts? And is this just inland, or are we seeing some opportunities in coastal as well?

Yeah, let me take your last question first. It's been... All inland so far, it's been some inquiries on coastal, but it's been more inland focused. And I think that's because the increments of capacity are pretty low and you've just got a lot more flexibility given the fungibility of the barges and whatnot. But to your question, we're seeing storage opportunities across products. Crude is certainly one of them. Those are really contango plays, and those can be three months to six months long. Some of the product storage ones, whether it's chemical or other refined products, they can be as short as one month going out to six to nine months. It runs the gamut, and you might imagine that some of these have options to extend because if they don't have places to go, at the end of those, you know, shorter duration things. But I would say they range anywhere from one to six months on average. And, you know, I think that's pretty good. It'll help with this period of suppressed demand.

Yeah, I mean, that sounds like you're kind of locking in a decent amount of the fleet, at least some of the fleet, to get kind of through this kind of soft patch. And then just... kind of following up on that train of thought. I mean, yes, I mean, I'm assuming that the lock, the scheduled lock closures, um, up forever are still happening regardless of COVID-19. Um, so any kind of update there? And then have we started to see barges be positioned, um, in, in regards to that lock closures? That's it. Any kind of thought update on that? Cause it should have an impact this summer.

Yeah, no, uh, we, we, To my knowledge, that log maintenance is still on schedule and still going to occur, and we're starting to position some moves for that outage. Just starting. It's a little early.

Okay. But that's something that we should see kind of happen throughout the quarter?

Yeah, probably towards the end of the quarter. You'll see more of it. Yeah, we think it could be... It could absorb up to 100 or so barges. It's meaningful. Yeah, absolutely.

Okay, guys.

Hey, thank you very much for the time.

Take care, Greg.

Thank you. Our next question or comment comes from the line of Randy Givens from Jeffries. Your line is open.

Howdy, gentlemen. How's it going?

All right, Randy. How are you doing?

Good, good. We're hearing, obviously, of multiple kind of shown decks. tanker fixtures for floating storage and even some international voyages. So how is that impacting the coastal market, and what are your expectations for kind of coastal utilization and even pricing here in the upcoming quarters?

Yeah, good question, Randy. You know, our utilization is dipped in coastal. You'll recall that about 50% of our volumes are refined products in coastal, so we've seen – We've seen our spot utilization drop a bit in the coastal business. You'll recall we're about 85% term contract and 15% spot. In the last week or so, we've seen our spot utilization dip as those refined product moves have slowed down. We are not seeing storage opportunities there as of yet. Again, it's The inland has more fungibility, and it's easier to get prior cargo compatibility, et cetera. So we haven't really seen the storage opportunities. Now, to your question about MR tankers, I think the busier they are, it typically helps our ATB market because the MR tankers don't drop down into our size area and compete against us. So the busier the MR is, it's generally better for our coast-wise business.

Sure. All right, and then switching over to kind of DNS, you know, your press release stating you're aggressively reducing costs there. Can you quantify this for 2020, and what kind of oil and gas and then non-oil and gas revenue assumptions are you assuming when you're targeting that full-year DNS operating margins at break-even levels?

Yeah, it was hard for me to get too specific there, and not because I'm trying to avoid it. It's just so dynamic right now. But we thought our oil and gas revenue for DNS would have been about 35 percent of total revenue. Clearly, that's going to fall significantly from there. When you look at 19 versus 20, you know, it could be, you know, 75% lower versus 19 levels. So, you know, maybe you can play with the numbers there, or Eric can follow up with you on that. You know, oil and gas is just going to be hammered. You can imagine, you know, if you were an E&P company and you got nowhere to put the crude, why you'd go ahead and complete a well So we're being sober about, you know, the oil and gas opportunities there. That said, again, as I said earlier, commercial and industrial, but for COVID, you know, was marching up nicely, and we're pretty excited about the diversification benefits of, you expanding, but we'll see. Follow up with Eric and maybe he can give you some more detail on how to frame those costs and revenue opportunities.

Okay.

No problem.

We'll do. Thanks for your time.

Thanks, Randy. Thanks.

Thank you. Our next question or comment comes from the line of Ben Nolan from Stiefel. Your line is open. Mr. Nolan, you may need to unmute your phone.

Hi, this is Frank Galantian for Penn. Thanks for taking my question. I wanted to follow up on the DNS business impairments. Were those kind of like kitchen sink type write-downs? Is it kind of safe to expect that unless the world gets kind of materially worse than what you laid out, that there'd be no more write-downs in the DNS business?

Well, I don't paraphrase it as kitchen sink. It's a pretty rigorous exercise with the right people involved. So we go through the whole fair value exercise as a third party and that. We're very comfortable with where we ended up. We're very comfortable that the write downs are the right amount for the present circumstances. But it's definitely not kitchen sink. It's just everything. I don't want to make it look like we're, I don't want anybody to believe that we would do kitchen sink type of write downs.

No, that's fair. I guess I was more representative, but that's fair. Then kind of moving on, I wanted to ask about the barge supply. You had mentioned in the call and the prepared remarks that it should be – supply coming on should be lower than the last barge recession. But has there been any changes with the kind of current week marking conditions – around barge ordering, any changes in expectations to barge supply?

Yeah, I don't have real current data. You know, our last kind of survey and thinking about the number of orders, we think there are 130 barges scheduled for delivery in 2020. We do know that barge pricing has declined, you know, because of what's going on in the world, steel prices are declining, et cetera. So we know new barge pricing is down, but I think you can look at the large public barge manufacturing company, and I think they said on their call that new barge orders in Q2 are going to be minimal. You would expect that. In this environment, every company is trying to preserve cash because they just don't know what's in front of them. So I would imagine capital expenditures, at least for the near term in the second quarter, are going to be minimal. So as we look at it, 130 for delivery this year, 75 to 150 retirements, we feel pretty good about the supply picture on barging.

All right, great. Thanks very much. That's all I had.

All right, Howard, we'll take one more call.

Yes, sir. Our next question or comment comes from the line of Bill Baldwin from Baldwin Anthony Securities. Your line is open.

Thank you. Appreciate you fitting me in here. I wanted to ask, Dave, when you – made the Senac acquisition or any acquisition for that matter, you have, I'm sure, some inefficiencies in terms of integrating the horsepower into your existing fleet. I was just going to try to get a feel. Do you think the integration of the Savage fleet into the Kirby fleet as far as integrating horsepower is going as good as the Senac, better than or slower than? How would you describe that?

Yeah, I would say it's going as good, if not better, than the SYNAC integration. Their horsepower to barge ratio is a little lower than our average horsepower to barge ratio, so we're already picking that up. It's working well. I would say it's similar to SYNAC, but maybe a little better. Every acquisition, we learn a little more about how to do it better, right? Right. And we've been very, very pleased with both acquisitions, to be honest. They fit really well in our equipment and great mariners and great people across the board from shoreside on. And And, you know, the horsepower synergies are, to your point, some of the best synergies we get, and we're really excited about where that is with Savage right now.

How long does it take? I mean, let's say given normal, quote, normal demand and desire, but, you know, how long does it roughly take, Dave, to begin to realize some of the synergies on the integration of the, you know, with the horsepower into your fleet? Is that something that's realized right up front, or does that take place over a longer period of time?

No, it takes, you know, just to throw a number out there, six to nine months. You know, I'd say we're a little in front of that, even given with social distancing right now. You know, our teams are amazing how well they're performing given this environment. I mean, it's just incredible. So I'd say we're a little faster than that six- to nine-month normal integration process.

Just one quick follow-up, Dave. I know some companies, due to the virus, have had some staffing issues, absenteeism and so forth. Has that been anything that's affected your vessel personnel, you know, vessel staffing?

You know, not at all. Not at all. Our Boy, our mariners have stepped up. They've been working with us, you know, crew changes. We stretched out crew changes a little bit. We've asked people to ride a little longer. And we've had no absenteeism. And, you know, just the way it's all worked out, we've been very fortunate. We've only had a handful of COVID cases in the company. and that's with 6,000 employees. So, you know, we've been very fortunate, but that's a credit to our entire team, both on the vessels and shore staff, making sure we keep social distancing, use masks. We use quarantine very effectively. If we have any doubt at all, somebody has a fever or whatnot, we quarantine people, and, of course, we've continued to pay them So we've had no crewing issues, but I want to just credit the team for that because it's truly remarkable.

Well, congratulations to the team and to the management. That's outstanding to hear that.

Well, thanks, Bill.

Thank you.

All right. Thanks, Bill. Thanks, Bill. All right. Thanks, Bill. Thanks, Howard. And thank you, everyone, for your interest in Kirby and for participating in the call today. If you have any questions or comments, feel free to reach me today, 713-435-1545. Thanks, everyone, and stay well.

Ladies and gentlemen, this conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you.