Good morning, and welcome to the Kirby Corporation's acquisition of Higman Marine conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. We ask that you limit your questions to one question and one follow-up. To ask a question, you may press star and then one on your touchtone phone. To withdraw your question, please press star, then two. 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.
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 of Finance. During this call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at www.kirbycorp.com in the Investor Relations section under Financial Highlights. Also available on our website is a slide deck that was posted along with today's press release as reference material regarding Kirby's acquisition of Higman Marine. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable belief 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 will now turn the call over to David.
Thank you, Eric, and good morning, everyone. Last night, we announced the signing of a definitive agreement to purchase substantially all of the assets and businesses of Higman Marine for approximately $419 million in cash, which we intend to finance through additional borrowings. Higman has a proud 100-year history and has talented employees that operate a well-maintained fleet from five locations along the Gulf Coast. Higman's fleet primarily moves petrochemicals, refined petroleum products, crude oil, natural gas condensate, and black oil on the Mississippi River System and the Gulf Intracoastal Waterway. They do this for large, midstream, and global integrated oil companies, many of which are Kirby customers already. Higman has one of the youngest fleets in the industry, which consists of 159 inland 30,000-barrel tank barges with a total capacity of 4.8 million barrels.
Higman also owns 15 older tank barges with a capacity of 450,000 barrels, which we will scrap. The average age of the tank barge fleet we will retain is only 7.3 years. Approximately 80% of this barge fleet is clean, with the balance primarily comprised of heated black oil barges. Higman also owns 75 inland towboats, comprised predominantly of modern 2,000 horsepower vessels that have an average age of 8 years. The acquisition of these towboats will allow Kirby to avoid significant future capital expenditures to replace older units that were recently retired or are expected to be retired in the coming years. Overall, we believe this is an excellent strategic acquisition for Kirby as we begin to emerge from the industry downturn. We maintain a positive view on the inland tank barge market and expect improvement in 2018.
Key market drivers, including GDP growth of 3% or more, favorable commodity prices, and new petrochemical capacity coming online, are all expected to contribute to higher demand and improve utilization rates across the industry. The acquisition of Higman's modern and efficient assets nicely complements the Kirby fleet and adds scale to our core business. This will give us more flexibility to ensure that we can meet our customers' needs. I'll now turn the call over to Bill for a few financial details.
Thank you, David, and good morning. I'd like to start by giving some more details on the deal valuation and its impact on our earnings in the coming year. I'll finish by discussing our financing plans. In 2018, we estimate that the Higman fleet will contribute approximately $130 million-$150 million in revenue, but that will vary depending on market conditions and the timing required to improve Higman's operating utilization. Using a 5-year earnings history and factoring anticipated cost synergies, which we estimate will be approximately $10 million-$12 million, the purchase price represents a 6.5-7.5 EBITDA multiple. While purchase price allocations are not final, overall, we expect this acquisition will be neutral to Kirby's 2018 earnings.
The combination of inherited low price contracts, the current lower utilization rates of Higman's fleet, and anticipated short-term maintenance requirements will impact this year's performance. However, depending on the time and the magnitude of an inflection in the inland market, there is a possibility of positive earnings contribution in 2018. We intend to finance this acquisition through additional debt. The additional borrowings will have a modest impact on our debt-to-capital ratio, taking it from about 24%-28%. However, Kirby remains committed to maintaining our investment-grade ratings and retaining a conservative capital structure through the cycle. As such, we intend to prioritize deleveraging with our free cash flow. We expect this deal to close during the first quarter, subject to normal closing conditions. We'll provide more information, including the final details of the acquisition, on our next earnings conference call in April.
I'll now turn the call back to David.
Thank you, Bill. We're excited to add Higman's fleet and its employees to the Kirby family. We're confident that this acquisition is well-timed, as the inland market is starting to show signs of improvement, and we expect that it will contribute long-term value to Kirby. We also believe this will help rationalize the industry and ultimately allow us to better serve our customers in the inland barge market. In our coastal business, we made the difficult decision to do our part in addressing fleet overcapacity, as well as reducing the age of our own fleet. This will yield significant benefits in the future through better reliability, enabling Kirby to be well positioned to meet our needs, to meet the needs of our customers. The acquisition of Stewart & Stevenson last fall and its integration with our existing distribution and services business was well-timed for the current cycle.
It enhanced our capabilities and scale, expanded our geographic footprint, and stabilized the volatility of the segment. All in all, Kirby is well positioned for the future. We have made some difficult decisions with respect to adjustments in the fleet to improve age and reliability, and we've made several strategic acquisitions, which should significantly enhance our core businesses and ultimately improve shareholder returns in the future. With that, we'd like to open up the call for questions and answers. Operator, can you please open the line?
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, we ask that you please limit your questions to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Webber, Wells Fargo.
Hey, good morning, guys. How are you?
Hey, good morning, Mike.
Hey, David, if I take... I know you put the EBITDA multiple on the deck, but if I take a look at your fleet and kind of break that down on a EBITDA per inland barge basis, I know that's kind of a fuzzy number, how would the current Higman fleet compare to what we would see as kind of an average number for Kirby in 2017? I guess both in terms of whether the younger fleet age maybe would get that number higher for what you're acquiring, and/or whether there are any contract or charter overhangs on that fleet that might be slower to roll than what you've got in your existing book. So any color as to how we think, could think about that on a kind of a per barge basis.
Sure. Yeah, well, let me just talk holistically first. You know, the industry has been in a severe downturn with spot pricing, basically at cash flow breakeven. So you can imagine, if some of those prices were contracted, you know, it's pretty low. In other words, the EBITDA is pretty low. So, if you think about Higman and their contract portfolio and rolling it into Kirby, it's the first year is gonna be pretty tough. And Bill outlined that with extra maintenance costs that we're gonna have to do and some other things and getting their utilization up.
So when we put all that together, you know, kind of coming off the bottom with trough EBITDA, it's about a 14x, kind of 18x EBITDA multiple, if that, if that helps at all. That's for their fleet. So it's again, they're coming off the bottom, so it's gonna take some time. Now, when you put it into the context of EBITDA per barge, ultimately, when we integrate the horsepower and work to optimize the horsepower structure of both companies, we should approach a similar EBITDA per barge, if you will, that we've experienced at Kirby because of our ability to manage horsepower.
Right. Okay. Yeah, I'm just trying to normalize it. It's helpful. And then just as-
But let me be clear, Mike. It's gonna take a while to do that.
Sure, sure. Okay. And, you know, I know this, you know, the idea of rolling up, you know, some of your larger competitors has been on the front burner for a while. You know, the deal, you know, pushes your, you know, your net debt a bit higher, but you're still, you know, well below industry norms. So I'm just curious, you know, when you look at what you've done in the past year, you know, would you characterize, you know, your position now as one where you're focused on, you know, primarily focused on digesting what you've already acquired, or would you consider yourself open to continue rolling up the market?
No, I think your former statement's the correct one. We're still integrating the Stewart & Stevenson acquisition.
Yeah.
And, you know, we'll have some work to integrate Higman into the Kirby family. So our focus will be on integration, and of course, we'll generate good free cash flow, so we'll use that to deliver some and-
Mm-hmm.
- get the balance sheet in shape for the future. But, you know, our focus will be on integration of both those acquisitions. They're still ongoing at Stewart & Stevenson. But you know, we do these acquisitions fairly well. We've-
Mm-hmm.
We've done a number of them and kind of have a playbook, but it does take time.
Okay, great. I'll turn it over. Thanks for the time, guys.
Thanks, Mike.
Okay. Next question comes from Jack Atkins with Stephens.
Hey. Hey, guys. Good morning.
Good morning, Jack.
So just a couple of follow-up questions here. You know, when we think about sort of the, the mix of contract versus spot at Higman, David, and then, the customer base, you know, and overlap, there and geographic overlap, could you kind of walk us through that? It sounds like they're mainly Gulf Coast, but just sort of curious if there's overlap from a customer perspective and how that contract versus spot mix breaks out.
Yeah, they're about 60% contracted.
Okay.
So, there's some room, and but their customer base is largely the same customers. So, you know, pretty much we do business with principally the exact same customers. It'll... There are a couple different ones that we haven't done a lot with, but it's generally the same customer base.
Okay. That's great. And then-
Yeah, and yeah, you had asked about, you know, where they do business. Look, they've got a lot of thir-
Yeah.
These are all 30,000-barrel barges, a lot along the Gulf Coast, which fits really well with the Kirby operations, and should be a nice integrating possibility there to put our two fleets together. It gives us great scale and an enhanced ability to service our customers.
Great. And then, just following up, David, on your comment around, you know, the potential for this to lower your CapEx needs over the next several years, you know, as you integrate their towboats into your fleets. When you think about those 75 towboats that you're acquiring in the transaction, you know, how much CapEx related to tow horsepower do you think that's going to push out for you guys?
Yeah, the Kirby towboat fleet is very well maintained, so our average age is actually higher than the industry average. You know, we're closer to 30 years in average age. So we were, as you heard in prior calls, we were embarking on a new build program to build new towboats and retire some of these older boats, even though they're operating quite well. But, you know, there's only a practical age limit. So what Higman does for us is we get a much younger towboat fleet that we can integrate with our towboats, and that should defer replacing many of our older barges and stretch that capital spending out into the next 5-10 years, instead of bunching it up here in the near term.
Right. That's right. So when you think about that, the purchase price in your mind, when you're allocating, you know, effectively pulling forward some of that CapEx to today, I mean, that seems to be pretty attractive. So just sort of curious how you're breaking that out between the business you're acquiring versus potentially the CapEx you're pulling forward.
Yeah, it's hard to be very specific, Jack. What we'll do is we'll integrate their towboats into our horsepower management process, and that'll allow us to look at some of our older equipment and retire it and not miss a beat and not have to expend the capital. It's hard to quantify it.
Mm-hmm.
You know, you saw in our quarterly press release, we were spending about $30 million-$35 million on new towboats. So that, and that was for 15. So if we had to replace, you know, 75 towboats in our fleet, you know, you can do the math. It's a pretty large number. Now, that said, we've got barges that we're gonna need to push as well. So, it's a combination of deploying the horsepower with the optimal number of barges. They- Higman typically ran two barges per towboat. Kirby tends to average about three throughout our system, if you look at the whole system. So we'll be able to manage the horsepower to defer capital on the new towboats.
Now, it's hard to quantify it, but it's in the tens and twenties of millions of dollars, Jack.
Well, that's great to hear, and congratulations on this transaction, guys.
Thanks, Jack.
Okay. Next question comes from Kevin Sterling with Seaport Global Securities.
Good morning, Kevin.
Echo my sentiment. Congrats on the acquisition. You guys were busy on a Super Bowl night.
Well, sorry about that. We-
Did you even get to watch it?
Unfortunately, we did not, but,
Okay. Well, I won't tell you who won, okay?
... But, no, congrats. I, I believe you guys have been talking to Higman for a while, so congrats on getting across the finish line.
Yeah, thank you.
Yep. So, let me touch base here. David, you mentioned some of their low-priced contracts. What's the duration of some of those? What's the typical duration of some of their contracts, and when will the majority of those reprice?
Yeah, I mean, you can imagine that most contracts are about a year in nature.
Okay.
So it takes time.
Yep. Yeah. Okay, and, with, with Higman, because, you know, obviously, have a relatively young fleet, which is attractive, but were they over-levered, so to speak? I guess, had they kind of built extensively? Seemed like they may have built extensively the past couple years, and, had they, they maybe got a little bit over-levered. How much debt are you guys assuming? I guess, is the ultimate question.
Well, no, yeah, it's a cash, a cash-free, debt-free transaction, so, you know, the, the purchase price doesn't... We, we don't inherit any debt with it. Yeah, you know, the... Look, it's been tough times in the inland barge business, as you know, for the last three years. It's gotten pretty skinny, and they had a lot of, lot of, building in the, in the last, as you can tell, last eight years. And so, you know, they got a little stretched, but, to be fair, it's, it's been a brutal market. And, as, as, you know, Joe Pyne and I've been saying on our conference calls for the last year or so, you know, rates got unsustainably low, and, and it was, you know, it's tough on, a number of players, Higman included.
Yep, yep. So, just one last question, if you don't mind, David. Are there more Higmans out there like this, you know, as the market potentially turns? I know you guys have always said, you know, you tend to ramp up in acquisitions when the market starts turning. Now, maybe if you could comment in general terms, how your pipeline looks and, you know, and opportunities out there. Historically, if I can remember correctly, when you guys have done acquisition in the past, usually, it's almost like rapid fire. A couple come, and almost leads to this, you know, multiple acquisitions. I'm just curious kind of what your pipeline looks like today now that you've got one-
Yeah
across the finish line.
Well, this, this is a fairly sizable one.
Okay.
So, it's gonna take us a while to digest it. There may be other opportunities out there, but you know, we've got to get this one integrated, then we've got to delever. But you know, we're always looking, but you know, our first priority here will be to integrate and pay down a little debt. But you never know what the future holds, but our current plans are to do just that, integrate and delever.
Okay, great. Well, that's all I had. Congrats once again, and when you do get to watch the game, I will tell you it was a very good game.
Yes. Take care.
Take care. Thanks.
Thanks.
Next question comes from Ken Hoexter with Bank of America.
Good morning. Hey, David, Bill. So just on the... I guess, let me just get a clarification up front. You mentioned the 6.5-7.5 times EBITDA versus the 14 times. Was the 14 times on 2018 and the 7 times on average earnings over the past few years? I just want to understand the difference between the two numbers that you threw out.
Exactly, exactly. If you take the last 5 years and factor in some synergies, it's 6.5-7.5, and if you take 18 and what we expect, it's around that 14 times.
Perfect. Thanks for that. And then the utilization catch-up, David, is that just kind of taking the time on renewing the contracts, or is there some more maintenance on tugs? Just want to make sure this isn't another, I don't know, when you got into K-Sea, and you kind of looked at their—I remember when you looked at the barges, it required some more CapEx over time.
Yes.
But, it, you know, it sounds like this is still a younger fleet, so I don't know if, if there was underinvestment, given the market you were talking about, or, you know, how do you, how do you think about the utilization catch-up?
Yeah, no, they're, as I said, they're only about 60% contracted. They do have a number of barges tied up. They're young, but they're, you know, when you tie up equipment, it, there's some cost to bring them off the bank, and we factored that in. That's in Bill's comments, some extra M&R spending. But we've inspected most of their equipment. It's in pretty good shape. There is some M&R catch-up, but it's nothing like what we saw at K-Sea. To your point, this is relatively young equipment. So, you know, their utilization's lower than ours. It'll take a while to get it into our system and get the utilization up to our levels.
Part of that will be determined by how quickly we can get it off the bank and what our customer demand is. But it's gonna take some time, and that's part of what Bill was referring to as we look at 2018.
Would you have considered them to be one of the aggressive prices on the market, or is that just, as you mentioned, on the leverage or overextension?
You know, they were somewhat aggressive, but certainly, by no means, the most aggressive in the market.
All right. I appreciate the insight and time. Thank you.
Yeah. Thanks, Ken.
Next question comes from Randy Givens with Jefferies.
... Hey, yeah, thank you. Congrats again on the acquisition.
Thanks, Randy.
What was your cash balance as of, I guess, last week?
Our unused bank line was $380 million. We had very minimal cash.
Got it. And then to source of financing for the remaining 100 or so, or 50 or so?
We're looking at all alternatives right now.
Got it. Okay, all my other questions are answered. Thanks so much.
Hey, thanks, Randy.
Next question comes from Gregory Lewis with Credit Suisse.
Yeah. Hey, guys, thanks. Yeah, I guess first the Eagles, and now this. So hey, it's been an exciting 12 hours. I missed part of the call. But I mean, David, I did catch something that you said about the tugboats, how they had been running. Higman been running two per tug, and you're running three. How much of that do you think is inefficiency, or how much of that is just the fact that you guys have a lot of 10,000-barrel barges?
Yeah, it's probably more of the latter, but, you know, we... Horsepower management is something we spend a lot of time on. Higman generally just did unit tows and ran their fleet through unit tow. But, of course, we'll mix those 30,000-barrel barges into our line haul system and as well as our unit tow business. So it'll give us an average higher barge-to-towboat ratio, which actually helps profitability, as you know, because the towboat is where all the real costs are, and the customers are paying really for the barge capacity. So, as we integrate it into our system, there'll be some natural pickup in terms of towboat efficiency, as we use the barges across our system.
Okay, great. And then, I guess, on Slide 2, you talk about the acquisition being accretive in 2019. And once again, I apologize. Did you walk through the scenarios in terms of what we need for either utilization on the Higman fleet or pricing on the fleet to get it to be accretive?
No, we didn't. You know, right now, it's kind of break even and neutral to the year. But if our integration goes a little better, maybe there's some upside, or if this inflection that we're expecting in the inland fleet happens sooner or is a higher magnitude, it could be better and accretive this year. We're just kind of looking at what we've got now, and this is where we think it'll land at this point. But there is potential upside, Greg.
Okay. And then just for one, I'll squeeze it in. So is the utilization at Higman similar to the utilization at Kirby? Like-
No, yeah, it, no, it's below. It's, you know, it's well below ours, but that's okay. That's an opportunity for us.
Yeah, that's, yeah, I would think that's good. That's better than... Okay, perfect, guys. Hey, thank you for squeezing me in.
Thank you. Thanks, Greg.
Next question comes from Justin Bergner from Gabelli & Company.
Oh, good morning, David. Congratulations on the transaction.
Hey, thanks, Justin.
Two questions. First, on the 5-year EBITDA and 18 EBITDA numbers, I assume that those are straight out EBITDA, no adjustments?
Yeah, there's no add backs or anything like that in those numbers.
Okay. And then if I do the math and back out the $10 million-$12 million of synergies, that would sort of get me to an 8.5x EBITDA multiple on a trailing five-year basis, ex synergies. Just wanted to make sure that I'm not sort of out of line there.
That sounds... Yep. No, you're in line.
Okay, great. And then, the bigger sort of qualitative question is, I'm sure you were looking at a number of inland properties, and since this seems like the sort of big deal for the medium term, how did you end up with Higman versus some other properties that you might have looked at? What were sort of the considerations that caused you to do this particular set of assets?
Well, it just fits very well with our fleet. It's, you know, the towboat configurations, the quality of the fleet, it all fit well. I mean, we always look at multiple acquisitions. Some are closer to fruition than others, and this one just kind of came together, and frankly, it was just a great fit within Kirby. It's just right in our wheelhouse, if you will.
Okay. And I'll throw one more in, which is, you know, if I look at the synergies of $10-$12 million, you know, that only moves the sort of 18 EBITDA from sort of $30 million to $40 million plus. But to sort of get it to the EBITDA per barrel of capacity ratios enjoyed at Inland Marine, you'd have to sort of double the Higman EBITDA of 18 levels or maybe even more than double. So should I just think of the $10-$12 million of synergies as cost synergies, and then the improvement in the utilization is independent of those synergies?
... Yeah, that's exactly it. It's cost—the $10 million-$12 million is only cost synergies.
Okay, that's helpful clarification. Thanks so much.
Okay, next question comes from David Beard from Coker & Palmer.
Hey, good morning, gentlemen.
Hey, David.
I'll just squeeze one in here, and I don't know how much you could talk about the deal metrics, but given, you know, where we are in the cycle, did the seller want to take stock? Did—was that even an option from your standpoint? Can you just maybe talk a little bit about that?
Let me see. You gotta be careful here, but yeah, they had a fairly large debt payoff that they needed to do, so there wasn't a real desire for stock.
That is very helpful. Thank you.
Thanks, David.
Okay, operator, we'll take one more, one more question, please.
Okay, we have the next question comes from Lee Hicks with Park Presidio Capital.
Hey, guys, how are you doing?
Hey, good.
How are things at Presidio Capital?
Well, yeah. You guys dropped a sneak attack on us this morning, but congrats.
Yeah, we did that on purpose in the Super Bowl. Well...
Yeah. But you know, so on that note, I missed the first couple of questions in full disclosure, so I apologize if this was already asked, but the $10 million-$12 million in synergies, is that coming through in 2018 or all of it coming through in 2018? And then the follow-up to that, you know, it's so you guys say it's gonna be neutral this year. Are you guys assuming any price increases, you know, in the back half of the year? Because I think you guys said that with your prior guidance.
Yeah. So, the 10-12 is a run rate in terms of cost synergies. And so it'll take us a while to get there, and that's kind of factored into our 2018 number. If we got it in instantly on day one, that would be a different story. And then, you know, we have thought through the pricing inflection that we used for our guidance for 2018 earnings, kind of mid-year, back half, having a little better pricing. That's also in our thinking here.
Gotcha. Thank you.
Thank you.
Thanks, Lee.
Okay. Thank you, everyone, for joining us on our call today. If you have any additional questions or comments, you can reach me directly at 713-435-1545, or Brian Carey at 713-435-1413. Thank you, and have a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.