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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Kirby Corporation’s 2020 First Quarter Earnings Conference Call. [Operator Instructions] 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 Grzebinski, Kirby's President and Chief Executive Officer; 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 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 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 $0.59 per share, which excludes several one-time items totaling of $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 health care workers and first responders who are dealing with this crisis on the frontlines.
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, enhance PPE and medical protocols, limited mariner interaction with shore side personnel, modified crude 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 Stewart & Stevenson subsidiary have worked together with Rice University to design a prototype low cost ventilator. This project has moved with rapid speed, going from designed 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 shut down 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. However, 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 large market. Since the onset of COVID-19 in the US, 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 Thermo King refrigeration 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've made some tough but necessary decisions to further realign this segments 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 oilfield, 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 realized a tax benefit of $50.8 million or $0.85 per share. Under the recent U.S. 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 $0.85 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 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 Cenac 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 affreightment.
Term contracts that renewed during the first quarter were r 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 approximate 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, a 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 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 and 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 approved $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 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 31, total debt was $1.7 billion and our debt-to-cap was 35%. We also had cash totaling $321 million, a portion of which we use 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 have significant regulatory shipyards expenditures in coastal. As of this week, we had available liquidity and 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 boat 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. Well, 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% from the levels seen in the first quarter.
In that downturn in 2008, 2009, the utilization decline negatively impacted our inland margins - in inland margins by approximately 3 percentage points. But it did take a period of time for margins to fall, as we've benefited from the cost savings as our charter boat count decline 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% 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 and extended shipyard periods for some of Kirby's larger capacity vessels.
As previously announced, Kirby's retirement of four [ph] aging coastal barges which is planned to occur starting in the second quarter, as well as anticipated activity reductions in coastal - and 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 19.
With oil inventories rapidly growing, and increasing calls for well shutdowns across the US, 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 frac fleets working in the US 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 Thermo King refrigeration businesses are expected to remain relatively stable for the near term.
The most significant impacts in this market are expected to be on the - 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 endeavour to maintain segment margins at a small loss to breakeven 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 D&S business requires very little capital. Despite reduced earnings expectations as a result - as a result of our actions, we believe the D&S 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 lock outage on the Illinois River helping.
In D&S, 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 in 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 million 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.
[Operator Instructions] Our first question or comment comes from the line of Ken Hoexter from Bank of America. Your line is open.
Great. Good morning. Dave, Bill and Eric, all the best in these trying times. Maybe I could jump in to 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 how, you know, what kind of margin impact this could have?
Yeah, sure. 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 the - what we had in 2019, which was a record. So we’re very, very pleased with the first quarter. Utilization was kind of in the mid-90s and you know, in couple days it spiked up above to 97% or so.
You know, we've seen a little pullback, maybe 5% or so in utilization, but pricing has been holding here in April which is pretty good. And there's one or two deals that maybe didn't get – that did decline a little bit, but mostly it's held firm.
Part of what's helping there is storage, Ken, where we're seeing some storage opportunities. 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.
If used ‘08 or ‘09 as of one proxy for this you know, we saw - as I said in my prepared comments, volume decline of about 10% and it took about a year, but we lost about 3 percentage points in margins - in margin.
Now we just don't 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 you know, 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 here that I think refinery utilization bumped up about 2% this week, which you know, at least has gone in the opposite direction. And just looking at Houston traffic, we're starting to see a pickup.
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.
Last year we can say the same for traffic up here and the first thing everybody knew is getting their car because it's 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 there - is that a mix of S&S in United? Is it all one or the other? Are you closing off? 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. That's the whole segment, Ken, so includes 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 that was a triggering event as you looked around the world. This is – if we see oil prices a negative for a period and you see the oilfield 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 the oilfield 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, Ken, that had no impact in D&S, like KES, the engine systems as it stands alone in the Thermal King for instance is a business that has had no impact on the oilfield and so none of those - nothing was done in those areas of course.
All right. Appreciate the time. Thank you.
Thanks, Ken.
Thank you. Our next question or comment comes from the line of Jon Chappell from Evercore ISI. Your line is open.
Thank you. Good morning, everybody.
Hey. Good morning, Jon.
David, the 60% term in the business is at a little bit the lower end of your historical range. As you think about going forward and 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%, what would that pricing mix do to the margin of that business?
Yeah. Well, typically in a healthy market the 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 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, you know, typically spots above term in a decent market or in a stable market, and that's the case right now. So you know, we actually feel pretty good about where we are with our contract portfolio right now.
Right. And then for the follow up you mentioned the slight uptick in refinery utilization, which we've noted as well, I mean, don’t want to make a trend off one week. [ph] But petrochemicals are obviously at a much bigger part of your mix. So have you heard anything similar or maybe any signs of optimism from your petrochemical customers? Obviously no knows the timing of your shut down, but it seems like there is more and more momentum behind reopening. So just any commentary from the big petrochemical guys and when we may see an uptick there similar to the refinery system?
Yeah. You know, it's a mixed bag, as we talked to our chemical customers, 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. 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, 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? The more they run - the higher utilization, the more efficient they are. They just need demand to come back. But no real anecdotes 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.
Just it's you know, 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 - to call that.
Yeah, okay. I understand. Thank you, David. Be well.
Take care, Jon.
Thank you. Our next question or comment comes from the line of Jack Atkins with Stephens. 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, 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. You know, 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 you know, I guess I'm just trying to think about you know, what - how is that number reflecting sort of what's happening in terms of underlying demand for services? It sounds like there is - 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?
Yeah. You know, it's bouncing around is the way I would say it. We were kind of mid 90s and dropped sometimes high 80s, low 90s bouncing around. Every day is a little different. You'll get inbound inquiries for true moves, you get inbound inquiries for some storage and it's you know, in 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 just - it literally bounces week-by-week.
But you know, the base load is still pretty good. And part of that as you mentioned is our contract construct. We've got pretty decent contract support through there. You know, it's - 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 we wouldn't see any margin degradation, because 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 a 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.
That that makes sense and I appreciate that additional context there. I guess for my follow up question, maybe if we could shift gears to D&S for a moment. You know, I think it's encouraging that you guys are talking about running around break even 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 D&S segment. What's left in terms of your capabilities on the oil and gas side after these cost reduction actions? And you know, I guess as you – David, as you sort of think about this segment moving forward, does oil and gas have a place within D&S in the future or 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. What you just said is smaller, but more - perhaps more profitable business. Let me back up a bit and put D&S 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.
With the with the rig count dropping 65%, 70% and we've heard estimates that the number of working frac spreads will go from about 250 to 275, down to maybe 50 to 100 working frac spreads. So you know, it's very clear there's not going to be a lot of new manufacturing and frac equipment and probably very little maintenance is 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 that's why we did the impairment to be honest. You know, what we're our goal is for all of D&S 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 in 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 and we've seen a little pull back 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. And you know, we're going to just run it as tightly as we can. And 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 you know, that that - 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 do we do something with KDS in general? I don't know, but clearly given our carrying value now we've got more optionality.
Okay. Thank you for the time.
Thanks, Jack.
Thank you. Our next question or comment comes from the line of Michael Webber from Webber Research. Your line is open.
Hey. Good morning, guys. How are you?
Hey. Good morning, Michael.
David, I wanted to touch base on the comp you threw out from looking at '08 and ’09 and that's – and you've kind of thrown out to the - in the past, kind of two of the recent troughs and try to get a better sense of scale here. And if I look at - if I look at what happened in inland or marine brand rather in '08, '09 and that 10% slide, that was off of a higher base because it was entirely inland at that point as opposed to kind of broader mix of services.
If I apply that to where we're at and 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 is that - how realistic do you think that is over the next 6 to 9months? And then a follow up…
Yeah, I'm not sure, I have followed you on that Mike.
If I take 10% off of your most recent peak margins, you're talking about something in the low single…
Let me be clear, 10% revenue right or volumes, only 3% decline in margin. So sorry, if I wasn’t clear on that.
Yeah, that’s fair. If I look at the ‘14 to ‘16 cycle you know it actually works out to about, a little bit more than 10%, about 12%, 13% when you get to early ‘17 and you look at 2008, 2009, a little bit more resilient there. But again that was a different business mix. So that 10% on a margin basis seems at least relative to the most recent cycle seems - seemed appropriate. I'm just curious whether you think that's in play here. And I guess I can layer in my follow-up. I know that these cycles are all different, but you know, the initial impacts right, we kind of saw a lag quarter - kind of a lag effect this quarter, right, where you saw some slowing. Quarter-to-date, Q1 results were actually very strong. I'm just curious how that - you know, maybe the early inning how this feels relative to both ‘08 and ‘09 and then yeah, the ’14, ‘15 comp, which again, looks like it's probably the most comparable?
Yeah, I would say, 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 right now we're seeing things like storage that are kind of helping put a floor on how far utilization is going down. 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 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 rolling lockdown.
Yeah, you know, it's probably the big difference in the 2015 time that cycle when we've 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 they're also 260 barges brand new coming in here, you know, it's half that in terms of number 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, but…
That’s clear. Like to talk on it offline. I did want to ask about the storage trade and we've seen some mineral operators offering barges on storage and I'm just curious what the pricing is like on that kind of business? My understanding its happening on a single barge basis, so you're talking about pricing in a couple of thousand dollars as opposed to the 7500 you'd be looking [indiscernible] So I am just curious, what kind of quality - you kind of assess the quality of that storage business versus just simply kind of soaking up capacity on like a last resort basis?
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. Thanks, guys.
Thank you.
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. Yeah, David just following up on the storage question. Clearly, it's something that is happening. You know, but not talking about pricing, but is there any way to quantify. - I guess, I have a couple questions around that and if that one is, I wondered, is there any way to think about that duration of these storage contracts, like in the - in some markets you get three month transaction, six month transactions, are these like - how would you kind of classify them in terms of duration?
And then – and I don't know if you even had 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 is options to expand 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 in coastal, but it's been more inland focused. And I think that's because the increments and capacity are pretty low and you 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, you know, crude is certainly one of them. Those are really contango plays and those can be three months to six months long. You know, some of the product storage ones, whether it's chemical or other refined products they could be as short as one month, going up 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 I think that's pretty good. It will 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 in – or at least some of the fleet to get kind of get through this kind of soft patch. And then 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 upriver are still happening, regardless of COVID-19. So any kind of update there. And then have we started to see barges beat position in regards to that lock closures that's - Ay kind of update on that should have an impact this summer?
Yeah. No. To my knowledge that lock - that lock maintenance is still on schedule and still going to occur and we're starting to position some moves for that outage, just starting a little early.
Okay. But that's something that we should see kind of happened throughout the quarter?
Yeah, probably towards the end of the quarter you'll see more of it. Yeah, we think, it could absorb up to 100 or so barges, so it's meaningful.
Yeah, absolutely. Okay, guys. Thank you very much for the time.
Take care, Greg.
Thank you. Our next question or comment comes from the line of Randy Giveans from Jefferies. Your line is open.
How are you gentlemen. How's it going?
All right, Randy. How are you doing?
Good, good. So we're hearing, obviously, a multiple kind of Jones Act tanker fixtures for floating storage in even some international voices. So how is that impacting the coastal market and what is your expectation for the kind of coastal utilization and even pricing here in upcoming quarters?
Yeah. Good question, Randy. You know, our utilization has 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. And 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, 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 MRs it's generally better for our coastwise business.
All right. And then switching over to D&S. Your press release stated 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 DN& operating margin at breakeven levels?
Yeah. It was hard for me to get too specific there and not because I'm trying to avoid it, it's just - it's so dynamic right now. But we had - we thought our oil and gas revenue for D&S would have been about 35% of total revenue. Clearly that's going to fall significantly from there. You know, when you look at ‘19 versus ’20, it could be 75% lower versus ‘19 levels, so you know, maybe you can play with the numbers there. Eric and follow up with you on that.
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 the oil and gas opportunities there.
That said, again, as I said earlier, commercial and industrial, but for COVID it was marching up nicely and we're pretty excited about the diversification benefits of C&I. expanding. But we'll see. Follow up with Eric and maybe he can give you some more detail or how to frame those costs and revenue opportunities.
Okay. No problem with it. Thanks for the time.
Thanks, Randy.
Thank you. Our next question or comment comes from the line of Ben Nolan from Stifel. Your line is open. Mr. Nolan, you may need to un-mute your phone.
Hi. This is Frank Galanti for Ben. Thanks for taking my question. I wanted to follow up on the D&S business impairments, were those kind of kitchen sink type write-downs? Is it kind of safe to expect, unless the world gets kind of materially worse than what you laid out, that there'd be no more write-downs in the D&S business?
I don't paraphrase kitchen sink. It's a pretty rigorous exercise with the right - with the right people involved. So we will go through the whole fair value exercise as a third party in that. We are very comfortable with where we ended up. We're very comfortable that the write-downs are the right amount for the present circumstances and - 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 a kitchen sink type of write-downs.
That's fair. I guess, that's more representative, but that's fair. Then kind of moving on. I want to ask about the barge supply. You had mentioned in the call - in the prepared remarks that it should be supply coming on, it should be lower than the last barge recession. Has it - has there been any changes with the current weak market conditions around the barge ordering or any changes in expectations to barge supply?
Yeah. I don't have real current data. You know, our last 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 because of the - what's going on in the world, steel prices are declining, et cetera. So we know new barge pricing is down.
But you know, I think you can look at the large public barge manufacturing company and I think they sit on their call that the 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. You know, we feel pretty good about the supply picture on barging.
Great. Thanks very much for the help.
Thank you.
We'll take one more call.
Yes, sir. Our next question or comment from the line of Bill Baldwin from Baldwin Anthony Securities. Your line is open.
Thank you. Appreciate it you taking me in here. I wanted to ask Dave, when you made the Cenac 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 integrating the horsepower is going about as good as the Cenac, better than or slower than. How would you describe that?
Yeah, I would say it's going as good if not better than the Cenac integration. You know, their horsepower to barge ratio is low - a little lower than our average horsepower to barge ratio. So we have already picking that up. It's working well, I would say it's similar to Cenac, but maybe a little better.
You know, every acquisition we learn a little more about how to do it better, right. And we’ve been very, very pleased with – well, with both acquisitions to be honest Bill. It fits really well in our equipment and great mariners and great people across the board from shoreside on. And 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.
I mean, let's say, to get a "normal demand environment?" How long will it roughly take Dave, to get - begin to realize some of the synergies on the integration of the –with the horsepower into your fleet?
Yeah. We…
Is that something that's realized right upfront? Or does that take price over for longer period of time…
No, it takes - I'm just - to throw a number out there, 6 to 9 months. I'd say we’re a little in front of that, even given with social distancing right now. he - our teams are - it's amazing how well they're performing given this environment. I mean, it’s just incredible. So I would say we’re a little faster than that 6 to 9 month normal integration process.
Just one quick follow up Dave. I know some companies due to the virus have had some staffing issues due to absenteeism and so forth. Has that been anything that's affected your vessel personnel, vessel staffing?
No at all. Our mariners have stepped up. They've been working with us. Crew changes, we stretched out crew changes a little bit. We’ve asked people to drive a little longer and we’ve had no absenteeism and just the way it’s all worked out, we’ve been very fortunate. We’ve only had handful of COVID cases in the company. That’s with 6000 employees. So we’ve been very fortunate and – 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 any doubt at all, somebody has a fever or whatnot, we quarantine people and of course, we’ve continued to pay them through that. So we’ve had no crewing issues, but I want to just credit the team for that because it truly remarkable.
Congratulations to the team and to the management. That’s outstanding.
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 at 713-435-1545. Thanks, everyone. And stay well.
Ladies and gentlemen, this conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.