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Text: During this conference call, we may refer to certain non-GAAP or adjusted financial measures.
These statements reflect management's reasonable judgment with respect to future events.
A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2019, and in subsequent quarterly filings on Form 10-Q.
Earlier today we announced 2020 fourth quarter earnings of $0.37 per share.
The quarter's results were impacted by the COVID-19 pandemic, which reduced demand for Kirby's products and services, particularly in Marine Transportation, where we experienced low volumes and continued poor market dynamics and poor barge utilization.
Across the company, we have tightly managed costs, which has helped maintain overall Marine Transportation margins near 10%, and distribution and service margins near breakeven.
Our fourth quarter earnings also included a tax benefit as a result of the CARES Act, which Bill will discuss in a few minutes.
Looking at our segments, in Marine Transportation, the inland and coastal markets experienced challenging market conditions, with low demand particularly for the transportation of refined products, crude oil, and black oil.
Although the economy showed some modest signs of improvement during the quarter, increasing cases of COVID-19, high product inventories, and impacts from two Gulf Coast hurricanes contributed to a slight sequential decline in quarterly average refinery utilization.
During the quarter, refinery utilization averaged 77%, compared to a previous five-year fourth quarter average of 90%, and it ended the quarter at 80%.
Chemical plant utilization modestly improved 1% sequentially, but remained below 2019 levels.
Overall, for our inland and coastal businesses there were minimal spot requirements, low barge utilization, and additional pricing pressures throughout the quarter.
In Distribution and Services, fourth quarter revenues sequentially improved, benefiting from the continued economic recovery, higher product sales in commercial and industrial, and some pickup in activity in oil and gas distribution.
In the commercial and industrial markets, we experienced increased demand for parts and service in the on-highway and power generation businesses, higher product sales in Thermo King, and increased deliveries of new marine engines.
These gains were partially offset however by normal seasonality, including lower utilization in power generation rental fleet following the hurricane season, as well as reduced major overhauls in marine repair during the harvest in the dry cargo market.
In the oil and gas market activity continued to recover as many E&Ps modestly increased spending during the fourth quarter, and well completion activity improved.
Active frac crews, which bottomed around 50 in the second quarter, improved every month during the fourth quarter, and finished the year in excess of 150.
This activity improvement contributed to higher demand for new transmissions, parts, and service in our distribution businesses.
In manufacturing, remanufacturing activity was steady, and we received additional new order for environmental-friendly fracturing equipment.
In the fourth quarter, Marine Transportation revenues were $299.4 million, with an operating income of $29.2 million and an operating margin of 9.7%.
Compared to the 2020 third quarter, marine revenues declined $21.2 million or 7%, and operating income declined $3.2 million.
The reductions are primarily due to significantly reduced pricing in inland, reductions in inland barge utilization, and increased delay days as a result of seasonal weather.
Aggressive cost reductions helped to limit the impact on operating margin.
During the quarter, the inland business contributed approximately 75% of segment revenue.
Average barge utilization declined modestly into the high 60% range as a result of the second wave of COVID-19, continued weak refinery utilization in an extended hurricane season.
Long-term inland marine transportation contracts are those contracts with a term of one year or longer, contributed approximately 70% of revenue, with 62% from time charters and 38% from contracts of affreightment.
Term contracts that renewed during the fourth quarter were down in the low double digits on average.
Spot market rates declined approximately 10% sequentially, and 25% year-on-year.
During the fourth quarter, the operating margin in the inland business was in the low-to-mid teens.
In coastal, the market continued to be challenged by significantly reduced demand for refined products and black oil.
We experienced weak spot market dynamics, and some chartered equipment was returned as term contracts expired.
During the quarter, coastal barge utilization was in the mid-70% range, unchanged sequentially but down from the mid-80% range in the 2019 fourth quarter.
Average spot market rates were generally stable, but term contracts continued to renew lower in the mid-single digits.
During the fourth quarter, the percentage of coastal revenues under term contracts was approximately 85%, of which approximately 85% were time charters.
Coastal's operating margin in the fourth quarter was in the negative low-to-mid-single digits.
Moving to Distribution and Services; revenues for the 2020 fourth quarter were $190.3 million, with an operating loss of $2.9 million.
Compared to the third quarter, revenues improved $14.4 million or 8%.
The sequential improvement was primarily due to modest economic improvements and increased product sales in the commercial and industrial market.
These gains were offset by lower revenues in the oil and gas market due to the timing of pressure pumping equipment deliveries to manufacturing.
Segment operating income declined slightly during the quarter as a result of product and service sales mix.
In commercial and industrial, mostly sequential improvements resulted in increased demand for parts and service in the on-highway and power generation businesses.
Higher Thermo King product sales and the timing of new marine engine deliveries also contributed to sequential increases in revenue.
These were partially offset by normal seasonality, including lower utilization of the power generation rental fleet, and reduced major overhaul demand in marine repair.
During the fourth quarter, the commercial and industrial businesses represented approximately 78% of segment revenue.
Operating margin was in the low single digits, and was impacted by a higher mix of product and parts revenue during the quarter.
In oil and gas, revenues and operating income sequentially declined primarily due to reduced deliveries in new pressure pumping equipment and manufacturing.
This reduction was partially offset by increased demand for new transmissions, parts, and services in oil and gas distribution as U.S. frac activity continued to improve.
During the fourth quarter, the oil and gas related businesses represented approximately 22% of segment revenue, and had a negative operating margin in the mid-teens.
Turning to the balance sheet; as of December 31, we had $80.3 million of cash, total debt was $1.47 billion, and our debt to cap ratio was 32.2%.
During the quarter, we had strong cash flow from operations, of $85.1 million, and we repaid $109.8 million of debt.
We also used cash flow and cash on hand to fund capital expenditures of $18.8 million.
For the full-year, we generated $296.7 million of free cash flow, defined as cash flow from operations minus capital expenditures.
This amount was slightly below the low end of our previously disclosed guidance range of $300 million.
This guidance range contemplated a significant income tax refund related to the CARES Act of over $100 million, which was not received as expected prior to the end of the year.
We now anticipate this refund will be received during the 2021 first quarter.
At the end of the year, we had total available liquidity of $684 million.
Looking forward capital spending is expected to continue to trend down in 2021.
For the full-year, we expect capital expenditures of approximately $125 million to $145 million, which represents nearly a 10% reduction compared to 2020, and is primarily composed of maintenance requirements for our marine fleet.
As a result, we expect to generate free cash flow of $230 million to $330 million, which includes the tax refund previously discussed.
Before I close, I'd like to address income taxes.
During the fourth quarter, we had an effective tax rate benefit as a result of net operating losses, which were carried back to prior higher tax rates years as allowed by the CARES Act legislation.
In 2021, we expect our income tax rate will be around 25%.
With 2021 in the rearview mirror, it goes without saying we are all hopeful for brighter days in the New Year.
As we look at our businesses thus far in '21, we believe some green shoots are materializing.
In Marine Transportation, refinery utilization has steadily improved into the low 80% range.
Inland spot activity has modestly picked up.
And our barge utilization has bounced off of the bottom into the low to mid 70%.
Demand in Distribution and Services has continued to recover with an improving economy and more favorable commodity prices.
While all of this is encouraging, the reality is that we are still in the midst of a global pandemic.
Demand for our products and services are still near all-time lows and uncertainty around the timing of material economic recovery remains.
All of this makes predicting 2021 very challenging with a wide range of possible outcomes.
In the near-term, we expect tough market conditions to persist into the second quarter particularly in Marine Transportation where industry barge utilization is very low and we are experiencing very competitive pricing dynamics.
As well, the latest wave of COVID-19 cases has resulted in some challenges crewing our vessels particularly in coastal.
In Distribution and Service, the magnitude and timing of the recovery is dependent on economic recovery and stability in the oil & gas markets.
That been said, although we are starting the year with near term pressures and uncertainty, we are very optimistic that the second half of 2021 will be materially better.
In the meantime, we intend to remain very focused on cost control, capital discipline, cash generation, and debt reduction.
Diving into the businesses, in the inland market we expect the current challenging market dynamics to continue in the near term with gradual improvement in the second quarter followed by a more meaningful recovery in the second half of the year as demand improves.
In the first quarter, we anticipate our results will sequentially decline and be the lowest of the year.
Increased delays from normal seasonal winter weather as well as lower pricing on term contract renewals are expected to more than offset very modest improvements in our average barge utilization.
Beyond the first quarter, activity should begin to recover with an improving economy which should lead to more favorable spot market dynamics.
Even with the pandemic, new petrochemical plants are still scheduled to come online.
There has been very limited construction at new barges and significant retirement of barges are occurring across the industry.
All of this should help improve the market and is expected to contribute to a meaningful improvement in barge utilization likely into the high 80 to low 90% range by the end of the year.
With respect to pricing, we expect pressure to persist in the near term as rates typically move with barge utilization.
As a result although market conditions are looking more favorable later in the year, we expect full-year revenues and operating margins to decline compared to 2020 driven by lower average barge utilization and the full-year impact of lower pricing on term contract renewals.
In Coastal, tough market conditions and low barge utilization are expected to have a meaningful impact on 2021 coastal results, and contribute to year-on-year reduction in revenues and operating losses in this business.
During 2020, the majority of the coastal fleet operated under term contracts established a more favorable markets during 2019 and then early 2020.
These contracts helped to minimize the financial impact as demand fell throughout the pandemic.
However, with many of these contracts now starting to expire and low demand for refined products and black oil expected for a while longer.
We now expect lower overall pricing in 2021 for the coastal business.
As well, the retirement of three older large capacity coastal vessels in 2020 due to ballast water treatment requirements, and the retirement of an additional barge scheduled for mid-2021 will contribute to lower revenue and operating margin compared to 2020.
Looking at the first quarter, we expect coastal revenues and operating margin will decline sequentially due to continue weakness in the spot market pricing pressure and recent challenges crewing our vessels.
Similar to inland, we expect coastal market conditions will improve as the year progresses, resulting in higher barge utilization and reduced operating losses in the second half of 2021.
Looking at Distribution and Services, we expect a more robust economy and increased activity in the oil field will result in material year-over-year improvements in demand for much of the segment.
In Commercial and Industrial, we anticipate continued improvement in on-highway with increasing truck fleet miles and an initial recovery in bus repair demand as activity resumes -- and returned to work commences.
We also anticipate some additional growth in on highway parts sales as a result of the recent launch of our new online sales platform.
Elsewhere, demand for new installations, parts and services and power generation is expected to grow as demand for electrification and 24/7 power intensifies.
In oil and gas, we expect current improved oil prices will contribute to increase rig counts and well completion during 2021.
Industry analysts have predicted the average active frac crew count could climb back to near 200, which is a notable improvement from 2020 levels.
As a result, we expect to see higher demand for new engines and transmissions parts and services in distribution as well as increased remanufacturing activities on existing pressure pumping equipment.
With respect to manufacturing of new equipment, the current excess of traditional pressure pumping capacity across the industry will likely restrain significant orders of conventional fleets.
However, a heightened focus on ESG in both energy and industrial sectors is expected to result in increased demand for Kirby's extensive portfolio of environmentally friendly equipment throughout the year.
Overall, in Distribution and Services; we expect 2021 revenues and operating income will materially improve as compared to 2020 with commercial and industrial representing approximately 70% and oil and gas representing 30% of segment revenues for the full-year.
Although the range is dependent on the timing of a material economic recovery, we expect segment operating margins will be in the low to mid-single digits for the full-year with the first quarter being the lowest and the third quarter being the highest.
We expect a normal seasonal reduction during the fourth quarter.
To close out 2020, it was a difficult year with unprecedented challenges.
The efforts of our dedicated employees to ensure business continuity remain focused on safety and to aggressively reduce costs were recommendable.
I'm very proud of our accomplishments admits a very challenging backdrop.
Looking forward, although some near-term challenges and uncertainty remain, we're confident Kirby is in a strong position to meaningfully recover when the pandemic ease is in demand for our products and services improves.
In Marine transportation, it was only one year ago that inland barge utilization wasn't at an all-time high.
Inland operating margins were near 20% and prices were materially increasing in both inland and coastal.
Although demand has significantly declined since that time because of the pandemic industry supplies in check with very limited new barges construction in inland, no incremental capacity planning, coastal and significant retirement across both sectors.
All of this is very positive for our businesses and is expected to contribute to a meaningful tightening in the barge market once demand improves.
When you consider our inland fleet expansion over the last three years, which is approximately 40% higher on barrel capacity basis, as well as our recent efforts to improve the efficiency of our inland and coastal fleets, we believe there is a significant earnings potential in Marine Transportation.
In Distribution and Services, while managing through the pandemic and unprecedented downturn, we were very focused on improving our business during 2020.
Throughout the year, we took aggressive and proactive steps to streamline and right-size the business for the near-term, while strengthening it for the long-term, including consolidating businesses, support functions, and management teams, renewing and expanding OEM relationships and product offerings, completing the implementation of a common ERP system, rolling out a new online parts sales platform, and developing and prototyping new products for the expanding wave of electrification.
Overall, we anticipate improved result as the economy grows and oilfield activity recovers, and our efforts during 2020 will meaningfully contribute to more favorable long-term returns of this segment.
Finally, from a liquidity perspective, we generated strong free cash flow of nearly $300 million in a very difficult year, and we made significant progress in paying down debt.
We expect 2021 will be a strong cash flow year, with expectations of $230 million to $330 million of free cash flow for the full-year.
We intend to use this cash flow to pay down debt and enhance liquidity.
We're now ready to take questions.

user
q4 earnings per share $0.37.
believe improved business activity and utilization levels will occur in second half of year.
in q1, expect weak market conditions in marine transportation to continue with further pricing pressure on contract renewals.

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