Kirby Corp

NYSE:KEX

Earnings Call Transcript 2017-Q4

[Operator]

Good morning and welcome to the Kirby Corporation 2017 Fourth Quarter and Full Year Earnings 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 Mr. Eric Holcomb, Kirby's VP of Investor Relations. Please go ahead.

[Eric Holcomb, IR]

Good morning and thank you for joining us. With me today are Joe Pyne, Kirby’s Chairman; David Grzebinski, Kirby's President and Chief Executive Officer and Bill Harvey, Kirby’s Executive Vice President of Finance.

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 included in our fourth quarter earnings press release and is available on our website at www.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 and our actual results could differ materially from those anticipated as a result of various factors. A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2016, and in Kirby’s subsequent quarterly report on Form 10-Q for the period ended September 30, 2017.

I'll now turn the call over to Joe.

[Joe Pyne, Chairman]

Thank you, Eric and good morning to everybody. Yesterday afternoon, we announced 2017 fourth quarter earnings of $3.87 per share. These earnings included a one-time deferred tax revaluation benefit of $4.51 per share, which comes as a result of recent tax form legislation and is partially offset by non-reoccurring after tax charges of $1.18 per share, including impairments of coastal vessels, severance and early workforce retirement. Without these items, our fourth quarter earnings would have been $0.54 per share. Fourth quarter results compare to our guidance range of $0.40 to $0.55 per share for the fourth quarter and $0.60 per share reported for the 2016 fourth quarter.

During the quarter, Inland Marine tank barge utilization remained at elevated levels that were similar to what we experienced in the third quarter after hurricane Harvey. Favorable commodity prices for our customers’ products and new petrochemical capacity, both contributed to higher demand for tank barge transportation. Despite this, the existence of a few aggressive competitors and excess industry barge capacity did little to improve depressed spot market pricing.

As we look forward, economists are projecting that 2018 will see the largest GDP growth since the start of the downturn. With much of our petrochemical demand ultimately tied to consumer nondurables goods and expectations for 30 new petrochemical plants scheduled to complete in the next two years, we have a favorable long-term outlook for this business.

In the coastal market, fundamentals remain challenging during the quarter as more barges transition from term contracts into the spot market and our utilization rates ranged in the low two to mid-60% level for the second consecutive quarter. During the quarter, we proactively impaired and early retired a number of our older coastal barges and tub boats. We believe this action is necessary, not only to help restore an early balance in to the market, but also to improve our profitability going forward.

The distribution and service segment experienced consistently strong demand for our products and services, particularly in our land base business. While the US rig count declined approximately 2.5% sequentially, growing drilled but not completed well inventories and a shortage of working pressure pumping horsepower drove increased orders for remanufacturing and new pressure pumping units as well as overhauled new transmissions. To capitalize on this growing demand, we moved quickly to integrate Stewart & Stevenson, which immediately led to new contract wins, higher sales and improved efficiencies. With the industry calling for 2 million to 4 million of additional working pressure pumping horsepower in the next one to two years, we are well positioned to benefit from this growing market, but a bit more ratably than prior cycles as our customers remain focused on capital discipline over growth.

In our marine distribution and service business, we have started to see a modest turnaround in demand for new engines and overhauls, following a prolonged deferral of the fleet maintenance program. We expect this trend to continue into 2018 as customers can no longer afford to defer critical overhauls of their fleets.

In summary, while parts of the marine transportation segment remain challenged, the Inland business should begin to improve in 2018 as the industry rightsizes and consolidates. We intend to participate in this rationalization as the opportunity to further expand our franchise in this difficult market are excellent. Retiring some of our older coastal marine vessels removes much of our fleet overhang, while reducing the age profile and improving the efficiency of the fleet.

Our distribution and service business has never been stronger. While our legacy business was already a leader in the overhaul and new construction of oil field equipment, the integration of Stewart & Stevenson further enhance our capabilities as a manufacturer and provider of critical components to the oil field both domestically and abroad. This combination has certainly positioned our segment well for the current environment of improving oil prices.

I’ll now turn the call over to David to discuss our segment results and our guidance for 2018.

[David Grzebinski, President and CEO]

Thank you, Joe. Good morning, everyone and thank you for joining us. In our 2017 fourth quarter, our marine transportation segment revenue was 330.4 million, which is a decrease of 25.8 million or 7% compared to the 2016 fourth quarter. Operating income declined 30.2 million or 51% to 28.9 million. The declines were mainly due to lower term contract pricing in both marine markets and lower coastal marine spot pricing and utilization. The marine transportation segment’s operating margin was 8.8% compared with 16.6% for the 2016 fourth quarter and was negatively impacted by approximately $0.04 per share of severance and early retirement costs.

In the Inland marine transportation market, our barge utilization ranged in the low to mid-90% level, aided by favorable commodity pricing and new petrochemical capacity and also by normal seasonal weather. During the quarter, operating conditions were challenged by wind, fog and lock delays along the Gulf Coast as well as infrastructure and water level delays primarily on the Ohio River. Demand for transportation by Inland tank barge in the quarter was higher than the fourth quarter of 2016. The Inland sector contributed slightly more than 70% of marine transportation revenue during the 2017 fourth quarter.

Long-term, Inland marine transportation contracts, those contracts with a term of one year or longer in duration, contributed approximately 75% of the revenue with 51% attributable to time charters and 49% from contracts of affreightment. Contracts that renewed during the fourth quarter were down in the mid to high single digits compared to the 2016 fourth quarter. Spot contracts rates were consistent with the first nine months of 2017, however, we did see a very slight price improvement on the low end of the spot market toward the end of the year. During the fourth quarter, the Inland sector generated an operating margin in the mid-teens and wasn’t adversely impacted by severance costs and some early workforce retirements.

In our coastal marine transportation sector, the oversupply in the industry was further exacerbated in the 2017 fourth quarter as more new equipment entered service and demand remained muted. Additional term contracts also expired, placing more of our barges in the spot market. Including temporarily laid out barges, Kirby’s coastal tank barge utilization was in the low to mid 60% range during the quarter. Revenues from the coast wise transportation of refined products and black oil were lower compared to the 2016 fourth quarter, while revenues from the transportation of petrochemicals were higher. Revenues were also negatively impacted by a force majeure event at one of our key customer’s facilities.

Regarding coastal market pricing, year-over-year, contract prices have dropped below spot rates as operators try to lock in guaranteed cash flow and higher utilization. Pricing of course is contingent on various factors, including geographic location, vessel size, vessel capabilities and the product being transported. As an example of where spot pricing was in the fourth quarter, rates in the 80,000 to 100,000 barrel range in clean service were approximately 15% lower than the fourth quarter a year ago. Compared to the 2017 third quarter, sequential pricing on both term and spot contracts was stable. The percentage of coastal revenue under term contracts was consistent with the first nine months of 2017 at approximately 80%, mainly as a result of lower revenue from equipment trading in the spot market.

As Joe mentioned, we took proactive action to impair and early retire under-utilized coastal vessels during the quarter. In total, we retired 11 barges, many of which would have required ballast water treatment system installations in the next few years and we retired 21 tug boats. These vessels will be scrapped or sold into international or non-competing markets. We also further reduced our shoreside employee base, including early retirements which resulted in one-time severance expense during the quarter. These actions will improve both our utilization and profitability going forward.

In the fourth quarter, the negative operating margin for the coastal business was in the high-single digits, including severance expenses and early workforce retirements. With respect to our tank barge construction and retirement plans, we took delivery of one 30,000 barrel Inland tank barge and retired eight over the course of the fourth quarter. The net result was a decrease of seven barges in our Inland fleet for a total reduction of approximately 100,000 barrels of capacity. During 2017, we retired 53 tank barges, closing the year with 841 barges, representing 17.3 million barrels of capacity. In 2018, we expect to take delivery of one 30,000 barrel Inland tank barge in the first quarter. We also expect to retire or return to charters 30 barges with approximately 450,000 barrels of capacity. On a net basis, before any acquisition, we expect to end 2018 with a total of 812 barges, representing 16.8 million barrels of capacity.

In the coast wise marine sector, the early retire barges had a total capacity of approximately 830,000 barrels and had us end the year with approximately 5.4 million barrels of capacity. Our recent coastal build cycle concluded in the 2017 third quarter and we do not plan to build or take any delivery of any new barges in 2018.

Moving on to our distribution and services segment, revenues for the fourth quarter were 377.7 million. Operating income for the quarter was 34.5 million and this compares with operating income of 1.3 million in the 2016 fourth quarter. The segment’s operating margin was 9.1%, including $0.02 per share of severance and early retirement expenses. This compares with 1.7% for the 2016 fourth quarter. The significant increase in our year-on-year financial performance can be attributed to our land based operations and the incremental contribution from Stewart & Stevenson.

During the quarter, our land based manufacturing businesses saw a strong demand for the new construction of pressure pumping units and higher sales of new transmissions engines and parts. Early integration efforts also contributed to higher revenues and profits, as we were able to deliver additional new units that otherwise would not have been possible due to labor and capacity constraints. Additionally, our land based businesses experienced a steady backlog for the remanufacturing of pressure pumping units and transmission overhauls. During the fourth quarter, the number of units on premises for remanufacturing remained elevated at levels compared to the third quarter.

Though, it did decline in December as we approach the holidays and customer’s inventories of cold stacked equipment started to decline. Demand for rebuilt transmissions was also steady, but was down compared to the third quarter due to vendor supply constraints and a higher mix of new transmission orders. Rental and service revenues from standby power generation remained elevated in October as a result of hurricane related demand in Texas and in Florida. This business returned to normal operating levels in November and December.

In our marine based distribution and services business, revenues and operating margin performance improved year-over-year and sequentially, primarily due to increased orders for medium speed engine overhauls in our inland markets and higher demand for parts in the Gulf Coast offshore drilling market. Service activity in the power generation market was slightly higher sequentially and year-on-year, primarily due to the timing of major projects. Operating margins in the Marine distribution services business were in the low double digits during the fourth quarter.

Turning to the balance sheet, as of December 31, 2017, total debt was 992.4 million, a $269 million increase versus the end of 2016, mainly as a result of the Stewart & Stevenson acquisition. Our debt to total cap ratio at the end of the fourth quarter was 24.2%, a 1.1% increase from December 31, 2016. At the end of last week, on January 26, our debt was approximately 970 million.

I will now discuss our guidance for the first quarter and full year 2018. In our press release last night, we announced our 2018 first quarter guidance of $0.45 to $0.65 per share and full year 2018 guidance of $2.50 to $3 per share. These guidance ranges include the benefit of a lower effective tax rate of $0.08 to $0.12 per share for the first quarter and $0.40 to $0.50 per share for the full year. Overall, we expect our 2018 tax rate to average 24.5%.

Our first quarter guidance includes a $0.05 to $0.10 per share temporary negative impact in our distribution and services segment related to the adoption of a new revenue recognition standard that limits percent of completion revenue accruals and is the primary reason for the wider quarterly EPS range. This new standard will result in revenue accrual timing differences during the first quarter for certain new pressure pumping unit orders. Full revenue recognition on these orders will be delayed until they are completed with delivery currently expected in the second quarter. We do not expect this new standard to materially impact our full year results.

In the Inland marine transportation business, we expect our utilization to be in the low to mid-90% range, which is similar to what we experienced in the fourth quarter with normal seasonal weather patterns across the year. We expect that continued industry tank barge retirements, minimal new tank barge construction, industry consolidation and higher customer demand together will yield improved overall utilization compared to 2016 -- 2017. As such, we will likely see modest mid-single digit pricing improvement in the second half of 2018, if not sooner.

The low end of our guidance range assumes no Inland pricing improvement in 2018 and the high end assumes mid to high single digit pricing improvement in the second half of the year. We expect our revenue mix to be similar to 2017 with term contracts, representing approximately 75% of our revenue with the balance coming from the spot market. And our coastal market, considering the early retirement of barges, during the 2017 fourth quarter, we expect our utilization to be in the low to mid-80% range for both the first quarter and the full year. Our guidance range considers pricing on coastal market contracts, renewing declining in the 10% to 15% range relative to 2017 levels with the majority occurring in the first quarter.

Overall, we expect operating profit in our marine transportation segment to be slightly down year-on-year with reductions in our Inland business, driven primarily by the lagging effect of prior contract renewals, including a major contract which renewed at the beginning of 2018, being offset by modest pricing improvement in the second half of 2018 and lower costs in our coastal business. While these cost savings in coastal will be impactful, we do still anticipate that our operating margins in this business will remain negative throughout 2018, ranging in the low to mid-single digits.

For our distribution and services segment, we expect continued strong demand for our land based products and services tied to the oil and gas industry, which represents approximately 60% of distribution and services revenue. While rig counts are only expected to increase modestly in 2018, expanding drilled but uncompleted well inventories in North America are expected to contribute to oil field activity growth in excess of 10% with much of this related to completions oriented products and services. This plays right into our wheelhouse with our expanded pressure pumping manufacturing and services business.

As Joe mentioned, analysts are predicting that another 2 million to 4 million horsepower of pressure pumping capacity is needed in North America over the next one to two years. We believe this represents an additional 15% to 25% of horsepower needed over current working horsepower in the market. We are confident that with our newly expanded scale, large customer base and improve efficiencies, we will meaningfully participate in these incremental opportunities. However, it is possible that this growth could be somewhat constrained by declining availability of new engines, transmissions and parts as many of our vendor supply chains are challenged.

In our Marine distribution and services market, we expect improved results in 2018 as maintenance deferrals are no longer sustainable. To that end, we anticipate higher demand for new diesel engines, overhauls and spare parts as we progress through the year. Our power generation business is expected to be relatively consistent with 2017 levels. Overall, we're expecting operating margins in our distribution and services segment to be in the high single digits during 2018.

Our capital spending for 2018 is expected to be 195 million to 215 million. This includes approximately 75 million in progress payments on new marine vessels, including six 5,000 horsepower coastal tug boats announced last year as well as 15 new Inland towboats of varying horsepower range. Approximately, 100 million to 115 million is associated with capital upgrades and improvements to existing Inland and coastal marine equipment, including ballast water treatment systems for coastal vessels as well as some facility improvements.

The balance largely relates to rental fleet, new machinery and equipment and facility improvements in the distribution and services segment. We expect the new 15 Inland towboats to be delivered over a period of three years with five 2000 horsepower vessels being delivered during the third and fourth quarters of 2018. These fifteen towboats are expected to cost approximately $30 million to $35 million and they will replace older and less efficient vessels that we retired or sold during the fourth quarter, which did result in a $4.3 million loss on sale.

In conclusion, we entered 2018 with optimism in our marine transportation businesses. Demand for Inland barges is expected to remain high and we believe that pricing inflection will occur in the second half of 2018, if not sooner. We're poised to take advantage of our strong balance sheet, to pursue appropriate acquisition opportunities and emerge from the industry downturn stronger and more efficient in the Inland tank barge market. Coast ways, we have done our part to rationalize the industry’s fleet and improve our profitability going forward. But we need the industry to mirror our actions. If others will follow our lead, an accelerated balance can be restored to the struggling market.

Our distribution and services segment has considerable opportunity ahead of it for profitable year-on-year growth. The acquisition of Stewart & Stevenson has proven very successful to date and with additional cost synergies and improved efficiencies to be gained, this segment will likely be a bright spot in 2018. We intend to capitalize on all of these opportunities and as we do, we will remain steadfast in our unwavering commitment to safety, customer service and return on capital.

This concludes our prepared remarks on the fourth quarter and our guidance. But before we go to question and answers, I'd like to briefly discuss a few other items. First, please mark your calendar for Kirby's 2018 Analyst Day to be held in Houston in the evening of Monday, May 14 throughout the day Tuesday May 15. The purpose of this event is to showcase our marine transportation operations and to help you better understand our growing distribution and services business. More information will be forthcoming in the coming weeks.

Second, as some of you are aware, Brian Carey who has been leading our Investor Relations efforts for the last year will be rotating back into our distribution and services business in the next couple of weeks. Brian will be working as part of our service operations leadership team helping with the integration of Stewart & Stevenson into the Kirby reorganization. Going forward, the IR function will be led by Eric Holcomb who recently joined Kirby from Baker Hughes as our new VP of Investor Relations. I'd like to thank Brian for his dedicated service during the last year and wish him all the best in his new role as well as welcome Eric to Kirby.

And finally, I'm pleased to announce that Bill Harvey joins Kirby effective today as our Executive Vice President of Finance and he will become our new CFO later this month after the 10-K is filed. Bill has more than 14 years of experience as a CFO, primarily in the energy and paper industries. He is a chartered financial analyst. He has an MBA from the University of Toronto and a BS in Mechanical Engineering from Queens University. Please join me and welcome Bill to Kirby.

Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] Our first question comes from Gregory Lewis of Credit Suisse.

[Gregory Lewis, Credit Suisse]

And so David, as we look at the Inland market, if you could talk a little bit about that. It looked like Inland revenue spiked up sequentially. But as we look forward, it seems like contractor resets and roll-offs are going to continue to put downward pressure on the Inland business. So I'm just kind of trying to connect the dots and what got Q4 Inland utilization higher, but as we think about roll-offs, it sounds and looks like -- it sounds like Inland revenues going forward should be going down.

[David Grzebinski, President and CEO]

First, in the fourth quarter, you saw Inland utilization is up and it spiked up right after hurricane Harvey, but frankly, it's maintained a higher level of utilization. We've been in the 90% to 95% range all through the fourth quarter and that's carried on into January. Now some of that is temporary as you know with weather and lock delays and whatnot, that's temporary and we also had a customer or two that had some plant upsets which added demand, but we've seen a pickup in crude and also these chemical plants coming on as increase in volumes and then just a general market environment with higher crude prices and higher refined product prices has helped our customers and we're just seeing more volume. So some of the pickup in utilization is temporary, but another portion of it -- a good portion of it seems to be more sustainable.

What frankly gives us some optimism as we look to a pricing inflection as you heard in our prepared comments, we saw a little pickup in spot pricing at the end of the fourth quarter and frankly that's carried into the first quarter with the bottom end of the spot market starting to pick up a little bit on pricing, which is good. So in our guidance, as you know, we put an inflection happening mid-year ’18. It may happen sooner, but as you know we said that might happen in ’17. So we're being a little cautious before calling a turn, but we're certainly a lot closer. And if this demand continues to hold, it could be pretty good.

But to your question about contracts, almost all of our major contracts have reset and were basically reset through ‘18. But as you know Greg, that has a full year effect when you average in the revenue and the pricing declines that when we renewed the contracts in 2017 happened. So I would say most of our contracts have reset and there's only a very tiny bit that need to reset in ’18. So I think we're largely behind that and we're looking at Inland margins and what Marine margins essentially that are flat year-over-year through ’18.

[Gregory Lewis, Credit Suisse]

And then just as we shift over to DNS, it looks like the reman business was more steady than accelerating. I guess Joe talked about the fact that the installed fleet base of pressure pumping equipment is expanding. Is part of that reason for the steadiness in rebuilding the lack of or delays in the supply chain where it's just difficult for you guys to get your hands on equipment that you need to do these rebuilds?

[David Grzebinski, President and CEO]

Yeah. That's part of it. We are certainly a lot more busy in our land based distribution and services business, it continues to build, but we are seeing our OEM vendors’ delivery time and lead time stretch out. So I think the market does need 2 million to 4 million more horsepower. What will constrain that growth is the supply chains. So that’s all in our guidance. But I would say this, we got a lot going on in the quarter as you could tell with the tax rates and revenue recognition and the addition of Stewart & Stevenson and the growth in the land based business, but one way to maybe cut through all that noise is if you look at Kirby's EBIT for 2017, it was around 200 million.

And if you look at our low end and high end of our guidance, it implies about 240 million in EBIT in the low end and 285 million in the high end. So we’ve got the growth happening and clearly the land base is a big part of that in 2018. If the supply chain works really well, we’d certainly be closer to the high end. If it's more constrained, we could be in the middle or even on the low end, but we will see. Our vendors are ramping up their capacity as best they can and everybody's working towards it. I am encouraged that our pressure pumping customers and even their customers, the E&P customers have a little more capital discipline, so the cycle is more ratable than it has been in the past. We’re just seeing a little more discipline and if you listen to Halliburton and Schlumberger’s capital expenditure plans, they're essentially flat year-over-year. So we're actually encouraged by that. It means that it could be a more ratable cycle that has longer legs.

[Joe Pyne, Chairman]

And David, let me just add that the remanufacturing side of it should be a more ratable business. It should last really through the cycle, the current manufacturing side will be a little more volatile, but we're hopeful that the remanufacturing side will be steadier.

[Operator]

Our next question comes from Michael Webber of Wells Fargo.

[Michael Webber, Wells Fargo]

David, I wanted to follow up on Inland first and then move to coastal, but coming along the lines of Greg’s question, if we think about, most of your businesses have retracted at this point and when you're guiding to slightly lower year-on-year EBIT, that's really just the annualization of kind of that bottomed out pricing. Can you maybe put a number on, on a percentage basis, maybe what the actual tail of your portfolio looks like on the marine trans business, it actually haven't repriced. And maybe how much of that would actually kind of -- the remainder there would get -- how much of that would actually get repriced in the first half of the year?

[David Grzebinski, President and CEO]

Yeah. It’s very little. As a matter of fact, it's pretty small. Almost every major contract is repriced through ’17. And of course, as you heard in the prepared comments, the first part of ’18, we had a major one reprice. So there's really very little that's going to reprice in 2018. We're pretty much through.

[Michael Webber, Wells Fargo]

And then just maybe on [indiscernible], just curious after you guys are done, I guess, digesting S&S, when you look at the coastal market, I guess my question is two-fold. One, is there a scenario in which you think about the coastal marketing consolidation in the same way you thought about the Inland market, just given the fact that the space is, you're starting to see some capacity come out. I know, she has a bunch of all ATBs that have been lingering for the better part of a decade, but eventually those will start to come out. So I’m just curious whether that is a nonstarter for you or whether it's something you would entertain and then kind of as a corollary to that, when you think about that market, the LNS seems like it should be starting to support some longer haul movements for some larger assets up in around Florida. I'm just curious are you seeing any uptick there.

[David Grzebinski, President and CEO]

Well on the coastwise side, we did an early retirement and impairment of the assets, which we think is a good step to bring in that market back in the balance. We need some of our competitors to do the same. And I think when you start looking at ballast water treatment, they will do the same. So we could get back into balance sooner with the coastal market, but in terms of consolidating, we’re about to come out of the bottom of the -- we certainly reached the bottom of the Inland market and we’re about to come out of it. So, our focus really is on Inland consolidating acquisitions now. I do think it'll be a while before we'd consider coastwise consolidating acquisition. Our real preference would be to do an Inland one now. But I think the news is positive in the coastwise market. As you said, the Brent WTI spread helps. We're hearing that more MR tankers are booked up. There's been a little tick up in utilization here recently. I think some of that's cold weather in the northeast that’s certainly helping. Our steps to take out capacity is helping and as you mentioned, OSG, I think they've got some plans to retire some older equipment and others need to do the same. So, we're constructive. We're doing our part and we need the others in the industry to do their part and we feel that ballast water treatment is going to help them get to that decision point.

[Operator]

Our next question comes from Jack Atkins of Stephens.

[Jack Atkins, Stephens]

So David, I guess just going back to the contract renewal cadence that you were referencing earlier, I mean if we think about not a lot of contracts being repriced in 2018, but the guidance is expecting, I think if you, up around midpoint -- up around mid-upper single digits in terms of contractual rate renewals. Is that -- I guess I'm just trying to understand where that incremental pricing is coming from if you don't have a lot of contracts that are this year.

[David Grzebinski, President and CEO]

No. Let me be clear, Jack. I'm sorry if I was confusing on that. We have a group of contracts that reprice every year and then we have a group of spot contracts that are repricing real time. And then we've got some longer term pieces, as you've heard us discuss 35% of our portfolio is multi-year and another probably 30%, 35% reprices annually and then we've got the spot piece that remains. And what -- I didn't say this very clearly, but the current low pricing, our contracts have mostly reflect the current low pricing that we see throughout the market. As that group of contracts reprices in 2018, if there's an inflection point, we will see some of that in 2018. Does that help?

[Jack Atkins, Stephens]

It does. Thank you. I thought there was a good chunk that renewed annually. I just wanted to make sure, I think that was on the same page there. So that definitely makes sense. And then for my follow-up question, just kind of sticking with Inland for a moment, where do you think industry utilization sits right now. I mean you guys have sort of been trending, it seems like at the upper end of the industry, really this entire downcycle because of the quality of your assets and operations, but do you feel like the industry is trending at, call it, mid-80s or so or maybe even higher than that and if so, why do you think it's taking so long to actually start to get price, because it seems like historically, at this level of utilization, we would have already begun to see contractual pricing recover?

[David Grzebinski, President and CEO]

Good question. Our utilization as I said was 90% to 95%. I think the industry's a little below that, maybe mid-80s to high-80s, maybe even low-90s. And as you heard, at the end of the fourth quarter, we saw a little bit of spot pricing improvement on the low and that’s kind of continued here in to January. So what has to happen is you have to have the spot pricing increase before you can start getting the contract pricing up. And it's just too early to call that right now. Some of it, as I said in my earlier comments, is weather related and temporary with some plant disruptions. But if this continues, it could be very constructive. It's just too early to say that and we need spot pricing to continue to strengthen for the contracts to start renewing higher.

[Joe Pyne, Chairman]

David, let me just add that there's another component of pricing in that and that’s confidence. The market has to have confidence that they think that the pricing is going to stick. And that -- based on utilization rates and industry utilization rates, I think if you maintain these rates, you're going to see the confidence to begin to move rates, so that's encouraging.

[Operator]

Our next question comes from Jon Chappell of Evercore.

[Jon Chappell, Evercore]

One more on the coastal side. If the market is 22 million barrels, if you guys get to 4 million barrels about a quarter the market share and you've done your part by taking out about 4% of the fleet, what's your estimate for the overcapacity? How much needs to be removed in the industry? Why did get you to that balance of utilization where you can see an inflection in pricing?

[David Grzebinski, President and CEO]

Yeah. This is just an estimate, but I'd say 1.5 million to 2 million barrels of capacity needs to come out. We did 830,000 barrels. So -- and we're kind of a quarter of the market as you say. So if others do their part, we can get back in to balance a lot sooner than we had originally gone.

[Jon Chappell, Evercore]

And I'm sorry, was that 1.5 to 2 inclusive of your 830,000 or is that in excess of that?

[David Grzebinski, President and CEO]

In excess. Yeah.

[Jon Chappell, Evercore]

And then finally and this is something I think we revisit maybe every six months or so. But I think it was in Joe’s prepared remarks actually, 30 new petrochemical plants slated to come online in the next two years or so. It seems like that petrochemical build up continue to get pushed out to the right, whether it was energy prices or just investment et cetera, but we've seen a lot closer now. So as we get closer to the ramp up of these plants, is there any better clarity as to liquids versus pellets and what these new these plants in their nameplate capacity may mean for Inland barge demand.

[David Grzebinski, President and CEO]

Yeah. We're getting closer, we're having more detailed discussions around potential barge moves, particularly with some of our customers that we've got multi-year agreements with, we’re getting more specific about their barge needs. I don't want to get into too much detail because it is customer specific, but yes, we're getting into more detailed discussions about the barge moves, which is actually pretty exciting. Now again, it's hard to -- if you ask me how many barges is it going to be, that’s really hard for me to say. I just know GDP is going to be 3% and this chemical is going to add something to it. It's a pretty big increase in the chemical plant capacity, but it's still hard to nail down the liquid side of it.

When we look at the derivative plants that are being announced, roughly 40% will go into derivative plants, the ethylene and then 60% will go into pellets or plastics. So it's just really tough to get more specific than that. We're not trying to avoid getting specific. It's just -- it's still hard to nail it down to the number of barges. But I will say this and we've seen it in ethanol. We’ve picked up the number of methanol barges we're moving, we're seeing some other barge moves a little bit in some of the other trade lanes and we're having definitive discussions with some of our major customers about their needs. So that's kind of where we are. I know you like us to say, it’s ex-100 barges, but it's just still too difficult to say that, John.

[Operator]

Our next question comes from Randy Giveans of Jefferies.

[Randy Giveans, Jefferies]

So clearly, your press release and the call covered a lot. So just a few quick questions. Last quarter, you said S&S contributed $0.03 per share to 3Q 17 earnings. What was that contribution for 4Q earnings?

[David Grzebinski, President and CEO]

Yeah. It was about $0.06.

[Randy Giveans, Jefferies]

Okay. And is that a good run rate going forward?

[David Grzebinski, President and CEO]

Yeah. Well, you can annualize that and then add a little bit for growth and add a little bit for synergies. But again, we're merging those businesses with our two land based businesses at United and S&S and it's going to be more and more difficult for us to break out S&S. So, what you’ll hear us start to talk about is in distribution and services, about 60% of it is oil and gas and we'll try and give you a feel for that going forward. Another 20% will be marine and power generation and the remaining 20% will be commercial and industrial and we'll probably talk to that.

If you think 60-20-20 in terms of revenue split and then the margins in each of those splits are manufacturing or excuse me oil and gas is more like mid to high single digits and the other two segments are more high single digits in terms of margin. So as you think about building out a model, you might start thinking about it that way because as we merge the businesses, we're going to run them seamlessly. We saw in the fourth quarter we were able to share orders in manufacturing capability between S&S and United and we were frankly able to capture more inbound because of our ability to do that. And as you would expect, we're putting them together, looking for synergies and finding them. So it's just going to be harder and harder to talk about it S&S specific.

[Randy Giveans, Jefferies]

Secondly, so looking at the marine transportation business, I think your last announced acquisition was back in June for $68 million or so. So clearly Kirby has been a buyer in the downturn over the past years. So just asking why has there been this lack of acquisitions I guess over the last six or seven months.

[David Grzebinski, President and CEO]

Typically and Joe can give you the history here on all the acquisitions, but typically you have to be emerging from the bottom of the cycle. Nobody really wants to sell at the bottom of the cycle. As we've said in our earlier calls, we're in discussions. Frankly, I'm not at liberty to talk about any acquisitions at this time, but typically you have to be coming out of the bottom in order to get these transactions going.

Joe, would you mind sharing some history there and your thoughts around that?

[Joe Pyne, Chairman]

David, I think you said it correctly. This isn't something that you go to the store, go to the shelf and take an acquisition off the shelf. These negotiations sometimes take years. There are a lot of different factors that we have to look at that come to bear when a seller is deciding to sell. I think the only thing that I would -- I guess add to David's comments is that we still think that the environment is excellent for a further rationalization in the business and we're clearly going to be a participant in it.

[Randy Giveans, Jefferies]

Some of these smaller operators are not really keen to let go of their last two or three barges. So make sense.

[Operator]

Our next question comes from Kevin Sterling of Seaport Global.

[Kevin Sterling, Seaport Global]

David, let me ask the pricing question if you don't mind maybe a little differently. You guys have always given great color and you always do a good job answering, but as we think about 2017, we thought pricing would go up and this is on the Inland side, it never really materialized and now we think it might increase in the back half of ’18, but as I look at the dynamics in the Inland business, we have -- it seems to me we have a couple of operators, a few operators that are trafficking in the spot market that are pressuring pricing that are pricing well below contract rates or even pricing well below where they need to be. A question to you is what needs to happen to get them to change their behavior. It seems like they've been acting this way for some time and they haven't changed yet. So maybe what do we need to see that will get these guys to change their behavior and essentially price more rationally.

[David Grzebinski, President and CEO]

Yeah. Well I think not to be competitor specific, but one or two of the aggressive competitors has termed up things. We're happy for that, but they’ve turned up at low rates and we're starting to see a little movement in the low end of the spot market. So I think that's a good sign. It indicates that the market's a little tighter across the board, some of the aggressive guys are termed up. They don't have as much spot equipment to go out and pressure the market and frankly with the utilization having picked up, it's good to have scarce barges. We barge short here helps everybody's mindset. So I think it's marching toward where we wanted to be, Kevin and it’s just too soon to say that that we're there. I think having some of the aggressive guys turned up is definitely what needs to happen and what we think has begun to happen.

[Kevin Sterling, Seaport Global]

And then switching gears to coastal, David, it looks like in your outlook, you guys are calling for roughly, I guess, low-80s utilization in coastal and that's almost a 20% improvement from where we are today. I guess the question is, how do we get there? I know you guys have retired some equipment or scrapping some equipment, pulling it off the water, but how do we get to that low-80s utilization coastal in particular if other operators don't follow your lead, can we still get to the low-80s, if you guys are the only ones that are scrapping equipment?

[David Grzebinski, President and CEO]

Well, our utilization jump basically because we took out the 11 barges. And we've got a pretty good portfolio of customers and feel pretty good about keeping our utilization for the year in that 80% to 85% range. I think other competitors are going to do the same. It’s just the fact that they've got to bring these older vessels in for shipyards. They're going to be looking at ballast water treatment. So I think there will be more scrapping and the whole industry’s utilization will tighten up. Hard to say when, but again, we did our share, maybe a little more than our share and I'm getting more optimistic about the coastal business, but it's still going to be painful. We're not – you heard our guidance for coastal this year, but it’s certainly feeling it a little better.

[Kevin Sterling, Seaport Global]

Okay. And is coastal, is it the same dynamic that we're seeing in Inland where you've got a few operators that are just trafficking in the spot market and really pricing aggressively when they don't necessarily need to be that similar dynamic.

[David Grzebinski, President and CEO]

Yeah. But not as bad. I think every -- what's happening is it's really painful for these big units to be idle, so people will push down contract prices, just to lock them up and keep cash flow moving. It’s a little different in the Inland market, the increments of capacity in the Inland market are smaller and less painful and they're not working. So you can chase little spot deals. I think in the coastwise market, people want term contracts, just because the spot moves can be hundreds of miles away and there's a lot of -- to reposition for spot move is very costly. So I think that's what's made the pain in the coastwise markets more acute, because there's a rush to try and get contracts -- term contracts.

[Operator]

Our next question comes from Justin Bergner of Gabelli & Company.

[Justin Bergner, Gabelli & Company]

Two quick clarification questions. Of the 11 coastal barges that you guys are pulling out of service, you mentioned that ballast water treatment was an issue for a number of them. Approximately, how many of the 11 sort of are due or soon to be due for ballast water treatment versus those that were retired for other reasons?

[David Grzebinski, President and CEO]

I don't have that right off the top of my head. I think it’s two or three.

[Justin Bergner, Gabelli & Company]

Two or three had the ballast water issue and the others didn't?

[David Grzebinski, President and CEO]

Right.

[Justin Bergner, Gabelli & Company]

And a second clarification question, I just want to make sure I understood exactly what you meant when you said that the spot market was improving on the low end. So if you could just clarify what that means.

[David Grzebinski, President and CEO]

Our spot pricing is usually a little higher than the markets and so when I say low end, it’s the aggressive guys going after aggressive spot business aggressively. So we've seen the kind of the low end of deals done and the spot market come up.

[Justin Bergner, Gabelli & Company]

And then lastly, your press release mentions competitor consolidation as a potential favorable driver for the Inland barge market over the coming year. Are you suggesting that there are other players that are also trying to consolidate the Inland barge market or was that just meant to refer to your own ambitions primarily?

[David Grzebinski, President and CEO]

Well, it’s certainly our ambitions, but there are some other competitors there that have fairly decent balance sheets and for example, we know one of the shippers, a major oil company that has their own barge fleet. They bought a series of barges from one of our other competitors, so they're actually helping consolidate. Now, they're buying it for their own book of business, not to compete with us, but -- so that's even better. But there are other couple -- well reasonably capitalized competitors that I'm sure would be looking for consolidation opportunities as well, but primarily we've been the biggest consolidator in the industry. From my perspective, any consolidation is good. The more rational approach is to have fewer and fewer competitors, right, in any business that's better. But there is still, as you know 40 or so players in this market, used to be a lot more than that. But as time marches on, that list will get smaller and smaller and that's just good for any business as you know.

[Operator]

Our next question is from David Beard of Coker Palmer.

[David Beard, Coker Palmer]

David, I always wanted to get your thoughts in terms of what you think for the industry supply demand in terms of the order book and scrapping? And then the corollary to that with the 30 barges you’re returning, do you expect those to trade in the spot market or will some of those be scrapped or what's your thoughts there.

[David Grzebinski, President and CEO]

Yeah. Well in terms of Inland supply and demand, we believe supply, rough estimate about 50 to 60 barges will be built in 2018. The vast majority of those will be tens and we understand one of our competitors is building a series of about 40 barges for direct replacement that got some old that old barges that they're retiring. So, there is, as I said, 50 to 60 barges being built in 2018, but the vast majority for replacement. So we're not too worried about that. I don't think it adds to the overhang. It's just replacement.

In terms of what our returning charter barges, I think that's just normal noise in the market. And to be honest, I don't know what the charter will do with those barges. But they will have to adjust and find out what they do with them. I don't know whether they will come back to compete or not, but it's something we’ll watch. We may change your mind and keep the barges if things tighten up, but that's our plans as of now.

David, I’m sorry. Let me come back to that. I just got handed a note here. Actually, the 30 that are going away are not all charter and it's only about five of those are chartered and 25 are owned. So those would be cut up. I apologize for that.

[Eric Holcomb, IR]

Okay. Thank you, everyone for your interest in Kirby Corporation and participating in our call today. If you have any additional questions or comments, you can reach me directly at 7134351545 or Brian Carey at 7134351413. Thank you and have a nice day.

[Operator]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.